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Operator: Good morning, and welcome to the Darling Ingredients Inc. conference call to discuss the company's third quarter 2025 fiscal results. [Operator Instructions] Today's call is being recorded. I would now like to turn the call over to Ms. Suann Guthrie, Senior Vice President of Investor Relations. Please go ahead. Suann Guthrie: Thank you, and thank you for joining the Darling Ingredients Third Quarter 2025 Earnings Call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer; and Mr. Bob Day, Chief Financial Officer. Our third quarter 2025 earnings news release and slide presentation are available on the Investor page of our corporate website, and it will be joined by a transcript of this call once it is available. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's press release and the comments made during this conference call and in the risk section of our Form 10-K, 10-Q and other reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. Now I will hand the call over to Randy. Randall Stuewe: Okay. Thanks, Suann. Good morning, everyone, and thanks for joining us for third quarter earnings call. Our core ingredients business delivered its strongest performance in 1.5 years fueled by robust global demand and exceptional execution across all operations. While the renewables market is facing some short-term uncertainty as we wait for clarity on the renewable volume obligation, we're confident that momentum is building. We believe we're on the verge of a shift that will highlight the strength of Darling's integrated model, a competitive advantage that is unmatched in the industry. Our combined adjusted EBITDA for third quarter was $245 million as our Global Ingredients business performed strong with $248 million of EBITDA. As I mentioned, the renewables business continues to be challenged as we posted negative $3 million EBITDA for DGD, which included a lower of cost or market expense of $38 million at the entity level. Bob is going to discuss more details later in the call. But I will say that both LIFO and LCM were negative in the third quarter, which is unusual and does not typically happen for extended periods. In addition, uncertainty and continued delays in getting a final RVO ruling had a negative impact on the overall biofuel environment in the U.S. during the quarter. Now in our feed segment, in our Feed Ingredients segment, global rendering volumes margins were up both sequentially and year-over-year, driven by strong demand for fats and proteins and solid execution by our global operations and marketing teams. In the U.S., robust demand for domestic fats, supported by a strong national agriculture and energy policy helped boost revenue and margins. elsewhere in the world, our global rendering business, particularly in Brazil, Canada and Europe demonstrated stronger year-over-year performance. Export protein demand is showing signs of recovery with slightly firmer pricing trends emerging. Tariff implications, primarily China and APAC countries clearly have impacted our value-added poultry protein products, which serve to meet the needs of global pet food and aquaculture customers. Turning to our Food segment. Performance remained steady quarter-over-quarter sales dipped slightly in the quarter as customers responded to ongoing tariff volatility, but we offset that with strong raw material sourcing and disciplined margin management. We continue to see repeat orders for our next Nextida Glucose Control product and early studies on new formulations look promising. We're on track to launch our new next Nextida product in the back half of 2026. In our fuel segment, the renewables market continues to face headwinds. This quarter, we saw higher feedstock costs, lower RINs and LCFS pricing, which ultimately impacted margins. A scheduled turnaround of DGD3 led to reduced volumes of renewable diesel and sustainable aviation fuel and DGD1 remains idled until margins improve. We believe these pressures are temporary. As mentioned earlier, we're approaching the rollout of thoughtful public policy aimed at strengthening American agriculture and energy leadership, a shift that we believe will significantly enhance DGD's earnings potential. Now with that, I'd like to hand the call over to Bob to take us through some financials, and I'll come back at the end and give you my thoughts for the balance of 2025. Bob? Robert Day: Thank you, Randy. Good morning, everyone. As Randy mentioned, core business results for third quarter improved as expected, while DGD faced some challenges that we'll explain later in the call. Specifically, third quarter combined adjusted EBITDA was $245 million versus $237 million in third quarter 2024 and $250 million last quarter. Adjusting for DGD, the quarter was very solid at $248 million versus $198 million in 2024 and $207 million last quarter. Total net sales in the quarter were $1.6 billion versus $1.4 billion while raw material volume remains steady at 3.8 million metric tons and gross margins improved to 24.7% for the quarter compared to 22.1% last year. Looking at the Feed segment for the quarter, EBITDA improved to $174 million from $132 million a year ago. Total sales were $1 billion versus $928 million, Feed raw material volumes were approximately 3.2 million tons compared to 3.1 million tons and gross margins relative to sales improved nicely to 24.3% versus 21.5%. In the Food segment, total sales for the quarter were $381 million, higher than third quarter 2024 at $357 million while gross margins for the segment were 27.5% of sales compared to 23.9% a year ago, and raw material volumes increased to 314,000 metric tons versus 306,000. EBITDA for third quarter 2025 was up significantly compared to 2024 at $72 million versus $57 million. Moving to the Fuel segment, specifically Diamond Green Diesel. Darling's share of DGD EBITDA was negative $3 million for the quarter versus positive $39 million in the third quarter of 2024. While the environment for renewable fuels has been challenging, results were further impacted by 2 items. First, a catalyst turnaround at DGD3, Port Arthur, which included a pause in operations for approximately 30 days, limited staff production and the higher average margins associated with that product. And second, end of quarter market dynamics led to negative impacts on earnings from both LIFO and LCM which, in most cases, would move in the opposite direction and have an offsetting impact. Regarding LIFO, rising feedstock prices throughout the quarter and higher quarter ending values resulted in a negative impact to EBITDA, while LCM was impacted by lower heating oil and RIN values in the days after quarter end, resulting in an LCM loss of around $38 million at the entity level. After 3 quarters, the combination of LIFO and LCM has resulted in a wider than normal loss that should reverse course over time. In addition to those 2 items, the biofuel market in the U.S. has been challenged by policy delays, specifically delays in RVO enforcement dates for 2024 obligations, clarity around small refinery exemptions, SREs, SRE reallocations and the final RVO ruling for '26 and '27. However, the EPA made a supplemental proposal on September 18, that would be very constructive. In the first page of the appendix in the shareholder deck that we provided, we've shown a picture of the 2025 RIN supply versus demand, showing how these policy issues have led to an oversupply for 2025 and also showing what the balance looks like considering the EPA's proposal comparing 50% SRE reallocations and 100% reallocations for '26 and '27. In either case, a significant amount of additional U.S. biofuels would be needed to satisfy that RVO, suggesting higher prices for feedstocks, farm products and wider margins for biofuels. With lower biofuel margins and late in the year timing related to receiving production tax credit PTC payments, we contributed $200 million to DGD during the quarter. a total of $245 million year-to-date, which includes a $5 million contribution subsequent to quarter close. These contributions are offset by the $130 million dividend received in first quarter 2025 and payments from expected sales of around $250 million of PTCs that we expect to receive in the fourth quarter. To further clarify regarding PTCs, we expect to generate a total of around $300 million in 2025. During the third quarter, we agreed to the sale of $125 million. We anticipate an additional $125 million to $170 million of sales in the fourth quarter and we estimate receiving payment for around $200 million of the total $300 million we will expect to generate by year-end 2025, the balance of which we expect to monetize in early 2026. Overall, we are very pleased with how the market has developed for production tax credits. Demand is robust as potential buyers have become more familiar with the details surrounding the credit. Other fuel segment sales, not including DGD, were $154 million for the quarter versus $137 million in 2024 despite lower volumes of 351,000 metric tons versus 391,000 metric tons which were affected by animal disease in Europe. Combined adjusted EBITDA for the fuel segment was $22 million in the quarter versus $60 million in the third quarter of 2024. The difference was primarily due to lower earnings at DGD. As of September 27, 2025, total debt net of cash was $4.01 billion versus $3.97 billion ending December 28, 2024. The increase from year-end is minimal despite contributions made to DGD and a $53 million earn-out payment related to the FASA acquisition from 2022. Capital expenditures totaled $90 million in the third quarter and $224 million for the first 9 months of 2025. We expect total debt to decrease by year-end as we generate cash from the core business and receive payments from selling PTC credits. Our bank covenant preliminary ratio at the end of third quarter was 3.65x versus 3.93x at year-end 2024. In addition, we ended quarter 3, 2025, with approximately $1.7 billion available on our revolving credit facility. The company recorded an income tax benefit of $1.2 million for the 3 months ended September 27, 2025, yielding an effective tax rate of minus 6.3%, which differs from the federal statutory rate of 21% due primarily to recognition of revenue from the production tax credits. The company paid $19 million of income taxes in the third quarter and $52 million year-to-date and expects to pay approximately $20 million more in the fourth quarter. Overall, net income was $19.4 million for the quarter or $0.12 per diluted share compared to net income of $16.9 million or $0.11 per diluted share for the third quarter of 2024. Now I will turn the call back over to Randy. Randall Stuewe: Thanks, Bob. I couldn't be more excited about what's ahead for Darling Ingredients. And our conversations with the Trump administration, they followed through on everything they've committed to. The renewable volume obligation they've drafted is thoughtful and designed to support American agriculture and energy leadership. And we believe it will be a major catalyst for Diamond Green Diesel. The pieces are in place, and we believe it's only a matter of time before Darling's unmatched position in the industry becomes even more clear. As we look ahead, we remain focused on what we can control, given the current uncertainty around public policy and its impact on the fuel segment, we'll now provide financial guidance exclusively for our core ingredients business. For the full year 2025, we expect the core ingredients business EBITDA, excluding DGD to be in the range of $875 million to $900 million. With that, let's go ahead and open it up to questions. Operator: [Operator Instructions] The first question comes from the line of Thomas Palmer with JPMorgan. Thomas Palmer: Maybe just to start out, you gave some helpful scenario analysis for RIN balances and how that might proceed over the next couple of years in the earnings presentation. I wondered about what you think the most likely time line is that we might start to get clarity on some of these outstanding regulatory items, the RVO, the exemptions and then the reallocation. Robert Day: Thanks, Tom. This is Bob. Obviously, a difficult question to answer. As everyone is aware, the government has shut down. At the same time, we've heard that the RVO is considered an essential process. We have people there at the EPA that are working on this. So we're optimistic based on that view and the things that we're hearing, we expect sometime in the month of December to have the comment period closed or the EPA to submit to the Office of Management and Budget their proposal and to have something approved by the end of the year. But like I said, that's amid a lot of things going on, but that's our view. Thomas Palmer: Okay. I know it's a unique situation. And then I just wanted to clarify on the Feed outlook for the fourth quarter. The midpoint of the core ingredients EBITDA guidance implies for the kind of 3 combined segments that 4Q is comparable to what we saw in 3Q. At the same time, it does look like the price of waste fats and oils have dipped a bit in September. So do we need prices to rebound in order for 4Q to look similar to 3Q? Or are there other things we should be considering as we move from 3Q to 4Q? Randall Stuewe: Yes. I mean, Tom, this is Randy. I mean the $875 million to $900 million, the reason we put the range on there was exactly as you laid out. We have seen, given the uncertainty on policy waste fat prices come down a little bit here most of our material in North America is going to DGD. But remember, there's still Brazil and Canada and prices remain strong there. So ultimately, it's kind of -- it's a fairly narrow range for the business. As I look around the horn on DGD, I expect the Food segment to be stronger a little bit in Q4, maybe a little consistent, maybe a little on the Feed segment. But I think we'll come in close to that range. And hopefully, we can surprise you 1 day and be above it. Operator: The next question comes from the line of Conor Fitzpatrick with Bank of America. Conor Fitzpatrick: It looks like your RIN supply and demand table in the slides calls for significant biomass-based diesel feed imports through 2027. As a coastal operator, DGD may import feed and receive the RINs penalty on those gallons but could you maybe walk through the benefits to RINs policy protectionism on the feed side and maybe explain how that nets out within your U.S. fuel and feed businesses? Robert Day: Yes. Thanks, Conor. This is Bob. If I don't answer your question directly, let me know. I think the first thing I would say is, it's still not totally clear how the EPA is going to treat foreign feedstocks. That's a part of this process. As to whether foreign feedstocks are needed to meet the production and the obligations. It's going to depend on a lot of things. We do have a lot of crop -- crops and crop oils in the United States and overall North America that could be used as feedstock for biofuels. So until some of the rules around what -- if there are penalties for foreign feedstocks and how some of the crop oils are going to be treated, it's really hard to answer that question. I will say that I think when you look at overall supply and demand for fats and oils in North America and you include biofuels and food and this picture and this proposed RVO from the than probably some foreign feedstocks will be required to meet that mandate. And we're just not clear yet on how that will be accommodated. Operator: The next question comes from the line of Dushyant Ailani with Jefferies. Dushyant Ailani: Congrats on the quarter. I also wanted to note that we really appreciate the change in guidance approach that does help us. My first question was on the 3Q DGD margins. The capture was significantly better than expected. What are some of the drivers there? Robert Day: The third quarter capture was better? Is that what you said? Dushyant Ailani: Yes. Yes. For the DGD margins, it just came in better than expected. Was it like staff production or any export ARP that we can think of? Robert Day: Yes. I think the -- so I'm not sure I fully understand the question because the DGD result was maybe not as good as we hoped... Randall Stuewe: I'll help Bob here a little bit. I think, Dushyant, you're referring to the capture that Valero reports. And keep in mind here, this is a bit awkward in that they met their LCM against their other segments. So they had the same LCM we have. They just didn't put it against the renewables or DGD segment. So that's what makes the capture rate look better. Dushyant Ailani: Got it. Okay. That's helpful. And then maybe just staying on topic for the 4Q DGD margins. But we understand the nuance on removing the DGD guidance. It seems like fundamentals are still improving nicely. Indicator margins are up, again, Valero's indicator margins seem to be up $0.36 quarter-over-quarter. What are you seeing in 4Q? And how do you kind of think about that? What are some of the puts and takes, if you can share? Randall Stuewe: Yes. I mean this is kind of the challenge that's out there. I mean clearly, the 2 big units in Port Arthur and Norco are going to be operating at capacity. SAF is going to be at capacity yes, the capture indicator is stronger right now. The challenge for us is we thought by this time, we would have RIN values kind of starting to reflect the restarting of the industry and they really have it yet. So it's kind of hard. I mean we're the low-cost operator. We have enough feedstock to run our units. Our SAS margins are better than classic renewable diesel. And what else you want to add Bob? Robert Day: Well, I think we have seen an improvement in margins so far in the quarter. The question is just -- or the point here is until we get clarity on the final ruling on the RVO for '26 and '27, it's hard to it's hard to say with certainty that those margins are going to continue. But thus far in the quarter, yes, we've seen some improvement. That's for sure. Operator: The next question comes from the line of Manav Gupta with UBS. Manav Gupta: My first question is we saw a good improvement in your Feed segment margins. I think Randy, over the years, you had indicated that eventually those acquisitions coming in you would be able to drive improvement in those fronts. So help us understand some of the factors that drift help you drive a movement in the Feed segment margin? And also to an earlier question, yes, imported feedstocks might be needed, but domestic feedstocks will price at a higher premium because they'll get 100% win. So what would be the outlook for the Feed segment going into 2026. If you could talk a little bit about that? Randall Stuewe: Yes. I mean, clearly, as we've talked in Q1 and Q2, we've used the word building momentum. We were seeing feedstock prices come up what we've seen mostly is feedstock prices are flowing through now, although they've come off a little bit for Q4, but we're seeing protein prices improve around the world. It's -- I call it there's a tariff on 1 day, a tariff off 1 day. China needs to buy poultry proteins to feed aquaculture and whether it's China or Vietnam when the window opens, they trade. And so we've seen a pretty nice improvement. You can look sequentially, you can look year-over-year in the appendix of the supplier or the shareholders' debt there. and ultimately see the pricing movement. Clearly, fat prices were up sharply. The products we use at DGD and -- but protein prices were up 10%. So I think we're going to carry into Q4, remember, we're always about 60 days sold ahead. And so we'll carry some pretty strong prices into Q4. And I'm hoping that as we move into next year, we'll have kind of the same momentum. There's always a little bit of seasonality here, but really, that's kind of what I'm expecting as I look out there. Manav Gupta: Perfect. My quick question on the table that you have created. It's very helpful. But help me understand, here you're assuming a flattish capacity. We know there are facilities which are heavily dependent on foreign feedstocks at this point of time, and they are still struggling I think they will struggle even more next year if you decide to give only 50% RIN to imported feedstocks. So is there a possibility this RIN balance would look even more attractive if some of those facilities that are heavily dependent on imported feedstock actually decided to call it a day and shut down. Randall Stuewe: Yes. I think Bob and I will tag team this. My answer is we went into 2025 with the belief that the DGD margins would be no lower than they were in 2024. And we were wrong. And where were we wrong? Well, we didn't understand that the big oil guys would actually run at such significant losses to produce their own RINs. We believe that's changing as we come into 2026 and 2027. The losses at those plants are substantial. I mean it clearly shows how efficient and operationally effective DGD is. The RIN balance that Bob will talk about here in a minute, yes, it actually gets even more constructive if people behave rationally. Robert Day: Yes. And I'll just add, I think all of that is true. In addition, the proposed RVO for '26 and '27 is substantially larger than 2025. So even if we had similar production, as you noticed from the grid that we provided, then we will ultimately have a deficit in '26 and '27. And what this is intending to show is specifically that. And then beg the question, how much do margins need to improve in order for production to increase so that we can satisfy the mandate '26 and '27. You add a layer of complexity when you -- with the imported feedstock and if imported feedstock only generates half a RIN. I think that some of that is going to depend on what is the origin tariff placed on that feedstock -- if a feedstock, if a foreign feedstock only is penalized by getting half a RIN and then not being eligible for the PTC, then it's reasonable to expect a decent amount of foreign feedstocks to competitively come into the United States. It would just come in at a discount to the U.S. feedstock prices which, again, is constructive to the feed business and our core rendering business in the United States, but it would allow for satisfying the mandate for the RVO but it would -- again, it suggests that margins need to go up quite a bit in renewable diesel in order for that to happen. Operator: The next question comes from the line of Pooran Sharma with Stephens Inc. Pooran Sharma: I just wanted to maybe just peel into to that last answer you gave there, Bob. I know in the past, you have kind of walked through different RIN pricing scenarios and there are a little moving pieces here just with how foreign feedstocks will get counted. But just as it stands now, no PTC, half a rent for the foreign need stocks, are you able to quantify like what range RINs should be at in order for the industry to run, to meet the mandate in 2026? Robert Day: So this is going to be somewhat of a swag here because like you said, there are a lot of moving pieces. And if we assume that there's -- we have access to our origin feedstocks that don't face a significant tariff. And the primary source of the penalty is the half rent and lack of access to a PTC. Then we probably need RINs to go up $0.40 or so in order to incentivize enough production to satisfy the mandate for '26. If the SRE reallocation is only 50%. Pooran Sharma: Great. Great. Appreciate that. My follow-up, I just kind of wanted to focus on the balance sheet more specifically your debt and leverage. I wanted to revisit what your plans are to pay off debt. And I also wanted to ask, what are your restrictions? Like what leverage ratios do your debt restrictions, the covenants start kicking in at? Robert Day: We're nowhere near breaking any covenants. I think we've said before, we're committed to paying down debt. We've got a lot of headroom in our revolver due to circumstances around receiving cash payments from selling production tax credits we will be receiving more cash in the fourth quarter, and we didn't receive any cash from production tax credits in the third quarter. And so by the end of the year, we expect our debt coverage ratio as it's viewed by the banks, to be right around 3x. So that's really -- that's our position on that. Randall Stuewe: And long term, Pooran, we've got a financial policy agreed in the board room to go down to 2.5x. It doesn't take much for the restart of DGD to start to do that. We've not been in a capital deprivation or starvation mode of any of the factories globally. So we're in good shape here to continue to build this thing out and grow and delever at the same time. Operator: The next question comes from the line of Ryan Todd with Piper Sandler. Ryan Todd: Sorry, I know you talked a lot about this, but maybe one more follow-up on some of the regulatory uncertainty. I mean the -- as we wait for the final RVO, I mean, you've talked about the uncertainty around reallocation and a couple of other things. What are some of the other topics that you think are still being kicked around. Is there a possibility of any change in the approach to import of foreign biofuels? Are they still -- is there still a consideration in terms of the treatment of domestic feedstocks in terms of carbon intensity, like land use penalties and stuff like that? And what are some of the potential risks or positive things you think could come out of the final ruling there outside of just kind of the high-level RVO and the reallocation? Randall Stuewe: Well, I think, Ryan, this is Randy and Bob and I'll kind of tag it again here if I leave anything out. I mean, clearly, American agriculture is at the forefront of the discussions in D.C. right now. Clearly, when you lose your largest customer for soybeans, when you get beef prices as high as they are, you've got a lot of people in the room that have ideas on how to fix the situation. And so what we've been part of, as many of these discussions is, what's the easy button. The easy button here is a large SPO for RVO with a 100% reallocation. Now if you go back and you look, really, the ETA gave you a multiple choice test. It's at either 50% or 100%, but if you're really inclined, you can talk about something else you'd like. And so they've set the table there. Clearly, the PTC out there is -- doesn't encourage foreign feedstocks. So I mean that's a block in itself with a tariff on top of that even makes it more difficult. We've had discussions in D.C. and we said, well, the easy button is that, just remember, if you don't allow foreign feedstocks in here because they can't generate a credit then, oh, by the way, where are those feedstocks going to go and the room goes silent. They finally got it. They realize those stocks are going to go back to other processors, you can probably name who they are around the world in Singapore and Rotterdam and Porvoo, Finland. And then they're going to move finished RD on top of us and that's disruptive to what they're trying to accomplish. So they're trying to figure out right now how to manage that under the tariff code. So you've got the U.S. trade along with the EPA collaborating, trying to figure out how to put this together to accomplish the needs that are going to produce energy and be constructive to the U.S. farm community. Robert Day: Yes. And I'll just add that as we sit here today, the EPA has already proposed a 50% RIN generated for foreign biofuel, no access to PTC. So -- that in and of itself makes it more difficult. But as Randy said, there's a lot of momentum to preventing foreign biofuels to come in and participate in U.S. support programs. So we're pretty confident that, that's going to work out well as it relates to feedstocks, that is another thing that we're waiting for clarity on and whether they're going to enforce the 50% RIN concept or if we're -- foreign feedstocks are simply going to be limited by origin tariffs. Ryan Todd: Okay. And then maybe just -- I mean you talked about -- you provided a little bit of clarity around PTC monetization. You've had a couple -- you're a couple of quarters into the experience of a few quarters in the experienced production under the PTC regime, you're getting more consistency. Can you talk about how the monetization market seems to be working there? Have the discounts been fairly stable? And how should we think about the general ratability of the process at this point? Is the $125 million this quarter, $150 million at the midpoint next quarter? Is that like a -- are you in a fairly ratable place now in terms of monetizing the majority of your production? Robert Day: Yes, I think so. I think the context here is that there were 2 things that made it difficult earlier in the year to sell production tax credits. One is that not many counterparties were familiar with the credit itself. So there was lots of questions. The value of the credit is determined in part by carbon intensity. So you can just imagine for industries looking to buy tax credits that aren't familiar with our biofuel industry trying to understand all that is not an easy thing. And then the other is that most companies had -- it was pretty cloudy what their tax liabilities were going to look like at the end of '25 because of the Big Beautiful Bill and a lot of things that went on around that. So early in the year, it was difficult to get a lot of traction. That's obviously changed significantly. Both of those pictures are a lot more clear. And so yes, I think that for us, we're confident in our ability to sell a majority of the credits that we'll generate in 2025 and then it should be a pretty ratable process through 2026. Randall Stuewe: Yes. I think just one last piece to that is I would characterize the environment is there is more interested parties now. than there were earlier in the year. So it's now getting a chance to define terms, refine terms and pick the counterparty that we want to deal with, with timing respective to when to receive the cash. So it's a very constructive environment now. Operator: The next question comes from the line of Derrick Whitfield with Texas Capital. Derrick Whitfield: Regarding guidance, I appreciate the position you guys are taking with the more volatile DGD business segment. With that said, we are seeing better stop margins in 4Q for most feedstocks and specifically for tallow and yellow grease. Would it be fair to highlight that DGD could post the best quarter in 2025 at current margins which, again, will be a positive development as you enter 2026? Robert Day: Yes. Thanks, Derrick. I think that would be fair. I think one of the things we're sensitive to is just how uncertain policy has been and the impact that, that's had on margins. I mean, look, we're very optimistic about improvement in the fourth quarter and the outlook for next year. But we realized that the market at large really wants to see proof of that before estimates believing a lot of what estimates are out there. So I think that we are encouraged by what we've seen so far in the quarter, and we think the outlook is good, but we're just hesitant to define that with a lot of precision, just given the lack of clarity around policy that we're still facing. Randall Stuewe: Bob, can you comment on what it takes to trigger RIN and obligations and when that would happen? Robert Day: So with the enforcement dates and -- yes. I mean, I think one thing that has caused a real delay in the reaction of the RIN, has been the movement of the 2024 enforcement date from March 31 to December 1. Until we get the final ruling on the '26 and '27 RVO and clarification as to when the 2025 enforcement date is going to be. It's difficult for obligated parties to feel that they're incentivized to go and buy all their RINs, especially when so many small refinery exemptions were granted for the small refineries out there that are wondering whether they should buy RINs they have an incentive to wait when the obligation date is set at a later time in the event that they get an exemption. And so what Randy is alluding to is until some of those things are clarified, which we do think is going to happen around the end of the year. But until those things are clarified, the incentive to buy RINs and tighten up the RIN S&D doesn't exist the way that it's intended. And so it's just -- it gets a little bit difficult to forecast. But we -- to your point, Derrick, we have seen an improvement in margins so far in the quarter. The outlook is better, and we're very optimistic about 2026. Derrick Whitfield: Great. Understood. And as my follow-up, we've seen the RD market in Europe strengthen in recent months. If you guys work through the complex math of spreads, shipping and tariffs, to what extent could you access this market if it remains robust? Robert Day: We can access that market, but we pay a duty to access that market. So -- and that duty can fluctuate a bit, but it's typically over $1 a gallon. So we are selling consistently to that market. Our Diamond Green is. But it's just -- it's -- we're looking at it as a net of duties and comparing that to other markets we have available. Operator: The next question comes from the line of Matthew Blair with TPH. Matthew Blair: I was hoping you could talk a little bit about the feedstock mix at DGD. And I know that you're always looking to optimize and some of this is commercially sensitive. But just on a big picture basis, it looks like some of the indicator margins for RD made from vegetable oil are trending a little bit better than RD made from low CIP. So -- just overall, has DGD shifted to more of a veg oil mix? Or is it still pretty much all low CIPs? Robert Day: Yes. Thanks, Matthew. This is Bob. So I wouldn't -- DGD hasn't materially shifted its mix as I think you're aware, DGD1 is still down if DGD1 were to go back up and run, then that mix would shift more towards soybean oil. But as we sit here today, the mix hasn't changed a lot. Our best margins are on UCO and yellow grease and animal fats. And so we're going to maximize the opportunity we have to use those products. Randall Stuewe: Yes. The only thing that I would add, Matthew, is that clearly, in Q1 and Q2 as we were trying to figure out the rules around the PTC and 45Z redomesticating our supply chain was a pretty significant challenge. DGD is heavily reliant now on Darling's UCO and Darling's yellow grease and animal fat supply. And so we've got that up and running full speed now, and it's really visible now that you can see it in the earnings of our core ingredients business. And ultimately, it will translate into a better sales value within DGD. Matthew Blair: That's helpful. And then apologies if I missed this, but the contributions that Darling is making to DGD is that to help fund the DGD3 turnaround? Or why is Darling sending money back to DGD? Robert Day: Yes. And it's hard. So the answer to that question, some of that's timing, some of that is turnaround. Some of that is just the margin structure. So remember, that the PTC revenue that we will get as Darling, that flows directly to the partners. So that money doesn't stay inside of Diamond Green Diesel. That's number one. The other is, as you pointed out, in 2025, we've completed 3 catalyst turnarounds. And so our maintenance CapEx is higher in 2025 than normal. So it's really the timing of all those things that's led to the contributions that we've made. Operator: The next question comes from the line of Jason Gabelman with TD Securities. Jason Gabelman: I wanted to go back to something else that Bob had mentioned just around companies complying with their RIN obligations and that perhaps catalyzing stronger RIN prices. Can you talk about, I guess, more specifically the time line around that I think 2024 RINs are due December 1. And then at that time, the balances for 2025 should become more visible to the market. So do you expect that December 1st deadline to hold? And do you think that could be an initial catalyst to move RIN prices higher before we get the final RVO for '26 and '27? Robert Day: Yes. Thanks, Jason. So I do think that, that deadline will hold. I don't know that it will have much of an impact on RIN prices because all the RINs that have been procured so far in 2025 can ultimately be used to satisfy the obligation for 2024. And that's quite a long time and a lot of RINs. There may be some refiners who are waiting until the last moment to buy their RINs. But because we've had so much time in 2025 to do that, we're not expecting that, that's going to result in a significant lift to RIN prices at that time. If we have clarity around enforcement dates for 2025, going back to the March 31, 2026, as they normally would be. That would be a time when we would expect RIN values to probably see a lift. Jason Gabelman: Got it. That's helpful. And then my second one is hopefully a simple question. Just given on the screen, DGD margins have improved. It seems like it could be the margin signal could be there to restart DGD1, so wondering what exactly you need to see to have confidence to restart DGD1? Robert Day: So we've talked about this before. DGD1 went down for a catalyst turn around early in 2025. Given the changes in the PTC and the origin tariffs on so many of the feedstocks, our view is that DGD1 only makes sense to restart at least in the current environment with the current RVO under the current rules when soybean oil can be profitable, and profitable means a margin that's good enough for a long enough outlook that justifies burning up a catalyst. And so I think, certainly, we're a lot closer to that than we have been. We may get there, but it definitely looks a lot better than it did a few months ago. Operator: The next question comes from the line of Andrew Strelzik with BMO. Unknown Analyst: This is Ben on for Andrew. My first question is around the Food segment. And just a commentary there that when it's maybe some weakness exiting third quarter and into fourth quarter. So I was just hoping you could just walk us through your outlook for the next few months in the food segment. Randall Stuewe: Yes, I think what we were trying to put in the narrative is clearly tariff on, tariff off, up to 50, [ fentanyl ] tariffs, trying to figure out the supply chain was very confusing for our customers in Q3 and so the choice was to pull down domestic inventories. So remember, most of our Brazilian production comes into the U.S. that's in the hydrolyzed collagen peptide form, very successful product for us. . And so we had some delays in orders there. We think it will pick up and be a stronger Q4. That's about all the color that I can give you today on it. And what we've seen is a continued rebound of the hydrolyzed collagen business. And while our new Nextida products are making a foothold in the industry, they're still relatively minor in the contribution of that segment. But they are as we quoted in there, we're getting repeat orders, which is a great thing. By next summer, we're going to launch what I think will be called Nextida Brain, and that will be a brain health product and it's got a really great outlook, too. Unknown Analyst: Well, that's great to hear. And then on my next question, something that kind of, I think gets lost in the weeds sometimes or at least lately, California LCFS credit value, they've been generally stable at weak levels. Can you remind us of the expected time line of triggers that should propel these values higher eventually? Robert Day: Thanks, Andrew, this is Bob. I think as we know, there was quite a bit of a delay in the implementation of their step down to increase the greenhouse gas obligation, reduction obligation in California. And so -- as a result of that, that bank got built up so large that most of the obligated parties from our perspective had a sufficient number of credits where they -- even with the change in the ruling they didn't need to go out and immediately buy credits. Our view is that they are working their way through those credits and that sometime in 2026, we'll start to see that S&D come more into balance and steady increases in the LCFS credit premium. But it's hard to -- I think we believe it will be more steady than sort of a step-up in value. Operator: The next question comes from the line of Heather Jones with Heather Jones Research. Heather Jones: I had a question on your Feed segment and just thinking about the protein pricing. I know in the past that you have put in place and some of your fat pricing contracts, you had like minimum levels and if it went below that, what Darling received, it wouldn't go below that? And I was just wondering if you all had put any of those kind of things in place for your protein business in the U.S.? Robert Day: Heather, This is Bob. So all of our every contract is somewhat unique, and it really has to do with our approach towards accommodating our suppliers and trying to work with them on terms that make sense for their business as you're -- I think what you're pointing out is that we do have some contracts where Darling collects a minimum processing fee. And if prices get above a certain threshold, then we participate in some of the value of those prices. There are certain instances where protein prices are part of that as fat prices are. I think generally speaking, though, we see -- as you're well aware, we see a lot more volatility in fat prices and a lot more upside from time to time in fat prices. And so we tend to focus more on that than we do on the volatility in the protein markets. Randall Stuewe: Yes, I think to argument, what Bob said, is the thing that happened is the United States was heavily reliant on shipping low-ash poultry meal into the Asia countries for dominantly China for aquaculture. The offset was a strong domestic pet food demand in the U.S. And what we've seen twofold is, one, with the tariffs on, tariffs off with China and Vietnam, they're unable to take the risk, if you will, to buy that product. So it has to find as all commodities do the next best market. What you're seeing in the pet food business is post COVID, you've seen fluffy back to the shelter. And then you're not seeing a growth that's very significant right now on the pet food side. And then you're seeing that the consumer -- the CPG companies took prices up pretty drastically making those bags of brand name products with meat in them, really, really pricey and you're watching strong growth now in the green-based alternatives, namely old Roy. So it's essentially a disruption scenario right now, Heather, and we're off from where traditionally poultry high-end, low-ash poultry products have traded, although they're coming back. The second that Trump relieved the tariff on Vietnam for 30 days or whatever, big shipments and sales went out of here. That's our Eastern Seaboard plant that are heavily reliant on those products. So I think we've got a pretty good outlook. They've come back now and have improved quarter-over-quarter. And I think we're cautious on next year, but we think it's -- we think everything looks much better. Heather Jones: Okay. And then my follow-up is on Europe. So recently, they extended the tariffs on RD imports and biodiesel imports extended to staff. So as we're thinking about Q4, you'll have a full quarter of SAP production and SAP pricing in Europe is really strong. So will having a full quarter production more than offset the impact of them now imposing these tariffs on U.S. staff? Just wondering how to think about those moving pieces. Robert Day: Yes. Thanks, Heather. I think the way to look -- think about that is it will have if it's going to have an impact, the impact is going to be felt a bit later on. SAF is not -- we aren't selling market. The SAF that we're producing today was sold a while ago, and most of the SAF that we will produce in 2026 is already sold. So the tariff impacts will affect new contracts as they come about. We'll just have to see what those markets look like and supply and demand. But we still have access to voluntary markets in the United States. So we're optimistic about where we stand with SAF and SAF sales. Operator: The question comes from the line of Betty Zhang with Scotiabank. Y. Zhang: For my first question, I wanted to ask about broadly the core EBITDA guidance. It's been updated to that $875 million to $900 million range, and that's a bit lower versus the first number that you gave out at the beginning of the year, so I'm wondering if you could reflect on how the year played out and where it didn't quite meet your earlier expectations. And looking forward to 2026, do you think that this year's 12% to 13% growth is somewhat comparable to what you're seeing for next year? Randall Stuewe: Yes, Betty, this is Randy. I mean the $875 million to $900 million is the amalgamation of all 3 segments, net of DGD. Clearly, we're 2/3 of the way through October, we don't know really where October is going to finish. We don't have that type of visibility on a day-to-day basis here. So it's just -- this business when prices are steady, and volumes are steady around the world, you can give some guidance there. What we have tried to do is it's just too difficult to put a number out on DGD either for Q4 or next year. The core ingredients right now looks similar to stronger in 2026. But we won't know that and be able to give guidance on that until around -- till an RVO is published and then when we do our -- probably our February earnings call. Y. Zhang: Okay. Fair enough. And my follow-up question, I want to ask about the Fuel Ingredients business, the portion, excluding DGD. The margin there looked a bit the gross margin looked a bit higher quarter-over-quarter and also the segment earnings came in higher versus what we saw in the first half. Could you please share maybe some of the drivers there? Randall Stuewe: Yes, that business is made up, while Bob described it in his comments, a disease, it's really mortality destruction predominantly in Europe today. And then that's our green gas business, remind people that the green gas or green certification business in Europe, we're the one of the largest in all of Europe today producing gas over there. And then those are our digester businesses, and we added a small one in Poland now. So ultimately, that business ebbs and flows with what we call the Rendac business predominantly, and that's the 7 rendering plants in Europe that are geared towards mortality destruction. Anything you want to add there, Bob? Robert Day: I mean I think it's -- what you're alluding to is just sometimes the inputs, the price, the cost will change for the inputs energy prices that we're selling there remains strong. And so that's what you're seeing with these gross margins. Operator: There are no additional questions left at this time. I will hand it back to the management team for any further or closing remarks. Randall Stuewe: Thank you again for all the questions, today. As always, if you have additional questions, feel free to reach out to Suann. Stay safe. Have a great holiday season, and we look forward to talking to you after the first of the year. Operator: That concludes today's conference call. Thank you. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the Eagle Bancorp, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please be advised today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Eric Newell, Chief Financial Officer of Eagle Bancorp, Inc.. Please go ahead. Eric Newell: Thank you, and good morning. Before we begin the presentation, I'd like to remind everyone that some of the comments made during this call are forward-looking statements. We cannot make any promises about future performance and caution you not to place undue reliance on these forward-looking statements. Our Form 10-K for fiscal year 2024 and Form 10-Qs for the first and second quarter and current reports on Form 8-K, including the earnings presentation slides identify important factors that could cause the company's actual results to differ materially from any forward-looking statements made this morning, which speak only as of today. Eagle Bancorp. does not undertake to update any forward-looking statements as a result of new information future events or developments unless required by law. This morning's commentary will also include non-GAAP financial information. The earnings release, which is posted in the Investor Relations section of our website and filed with the SEC, contains reconciliations of this information to the most directly comparable GAAP information. Our periodic reports are available from the company online at our website or on the SEC's website. With me today is our Chair, President and CEO, Susan Riel; Chief Lending Officer for Commercial Real Estate; Ryan Riel; and our Chief Credit Officer, Kevin Geoghegan. I'll now turn it over to Susan. Susan Riel: Thank you, Eric. Good morning, and thank you for joining us. The third quarter reflected continued progress in addressing asset quality issues and positioning the bank for sustainable profitability. While our results remain below our long-term expectations, we are confident that we are nearing the end of elevated losses from decreased asset values. On credit, we've balanced appropriate urgency that is driven by our near-term view of the office market outlook with an approach that remains methodical and deliberate, we are directly addressing persistent valuation stress of office buildings. We believe that working directly with counterparties that have local knowledge leads to better execution. It is disciplined work but is the right path to long-term stability. Specifically, we moved $121 million of criticized office loans to held for sale in the quarter and are working with buyers to sell these assets. Importantly, in the quarter, we also took deliberate steps to reinforce confidence in our asset valuations and reserve levels. First, we engaged with a nationally recognized loan review firm to conduct an independent credit evaluation of our CRE and C&I portfolios. Additionally, we performed our own supplemental internal review of all CRE exposures of $5 million and above. We'll provide more detail on both initiatives later in our remarks, but I'm pleased to report that the findings from both outcomes support the adequacy of our current provisioning. Our core commercial and deposit franchises continue to improve. C&I loans increased by $105 million, representing the majority of our loan originations for the quarter. Average C&I deposits grew 8.6% or $134.2 million for the second quarter. This momentum reflects relationship growth, client retention and new account activity. These are clear signs that our brand, our service model and our people are earning and deepening trust in the marketplace because our decisions are made locally by bankers who know their clients and communities, we are able to respond quickly, tailor the structure for each loan, and deliver a level of service larger institutions simply cannot replicate, and we see opportunities to extend that same relationship-driven approach across all our client segments. We're executing on our strategic plan, addressing potential credit issues, diversifying the balance sheet, improving margins and aligning resources to protect and grow franchise value. These actions are positioning us to further improve funding quality, reduce wholesale funding reliance and drive toward a lower cost of deposits. Our pre-provision net revenue is believed to improve with time. Our priorities are straightforward: complete the credit cleanup, deepen core relationships, and deliver improved earnings performance, which should drive improved share value for shareholders. The fundamentals of this company are sound. Our strategy is working and we are focused on building long-term sustainable value. I'll now turn it to Kevin, who will talk more about credit. Kevin Geoghegan: Thank you, Susan. As discussed over the prior 2 quarters, we continue to take a disciplined approach to resolving loan challenges. Total criticized and classified office loans have declined for 2 consecutive quarters from a peak of $302 million at the end of March 31 to $113.1 million at September 30. During the quarter, we moved $121 million of loans held for sale. These loans are in different stages of disposition with potential buyers, and we expect to complete sales on a portion of them by the end of the year. Results for the quarter include a $113.2 million provision for credit losses, primarily related to the office portfolio. Our office overlay continues to be robust at $60.3 million or 10.4% of the performing office balance. Another $24.7 million is associated with individually evaluated loans and the model's quantitative component. Our reserve methodology incorporates those losses from evaluation impairments directly, among performing office loans, those rated substandard carry a reserve of 44.5%, and special mention carry a reserve of 22.2%. All pass-rated office loans greater than $5 million were reviewed in this quarter, resulting in just 1 loan migrating into special mention. Our allowance for credit losses ended the quarter at $156.2 million or 2.14% of total loans. That's down 24 basis points from the prior quarter, reflecting a decrease in criticized and classified office loan balances. At the end of the second quarter, nonperforming loans were $226.4 million. At September 30, they declined to $118.6 million, down $108 million from the prior quarter, reflecting transfers to held for sale, charge-offs and loan payoffs. You can see more detail on Slide 23 in our investor deck. Nonperforming assets were 1.23% of total assets, an improvement of 93 basis points from last quarter. We also transferred 1 $12.6 million land loan to OREO. Loans 30 to 89 days past due totaled $29 million at September 30, down from $35 million last quarter. Finally, total criticized and classified loans rose to $958 million, from $875 million last quarter. Within that total, Office declined $198 million, while multifamily, including mixed-use predominantly residential increased by $204 million. The increase in criticized and classified multifamily loans largely reflects the impact of higher interest rates on debt service coverage rather than any meaningful deterioration in the underlying property performance. Net operating income levels remain at or above underwritten expectations across most of the portfolio. There continues to be some pressure within the affordable housing segment, though it represents a relatively small share of the downgrades this quarter. As we indicated last quarter, we do not believe multifamily loans are affected by the same structural or valuation issues present in the office portfolio. The relative strength of multifamily continues to support stable collateral values, and we believe this pressure is largely limited to a near-term income rather than asset impairment. We will continue to be vigilantly monitoring these portfolios. Eric? Eric Newell: Thanks, Kevin. We reported a net loss of $67.5 million or $2.22 per share compared with $69.8 million loss or $2.30 per share last quarter. In the second quarter, we outlined a more proactive approach to accelerate the resolution of problem loans. This quarter's actions were deliberate as we address valuation risk. Even with this quarter's credit-related losses, our capital position remains strong. Tangible common equity to tangible assets is 10.39%. Tier 1 leverage ratio declined modestly to 10.4% and CET1 to 13.58%. Tangible book value per share decreased $2.03 to $37, reflecting the impact of credit cleanup rather than core earnings erosion. Continued deposit growth and an increasing proportion of insured balances reflect the depth and durability of our funding base. With $5.3 billion in available liquidity, we maintained more than 2.3x coverage of uninsured deposits, positioning us exceptionally well. Our teams have reduced brokered deposits $534 million year-to-date, and we expect continued progress in the fourth quarter. The improvement reflects coordinated efforts among our C&I teams, branch network, and the digital platform. From an earnings standpoint, preprovision net revenue was $28.8 million, down from the prior quarter. Adjusting for $3.6 million in losses from loan sales, PP&R was $32.3 million, a sequential increase, reflecting the underlying strength of our core operating franchise. Net interest income grew to $68.2 million, up $383,000 as the decline in deposit and borrowing costs outpaced a modest reduction in income on earning assets. NIM expanded 6 basis points to 2.43%, primarily driven by a reduction in interest-earning assets associated with a decline in nonaccrual loan balances in the CRE loan portfolio. Noninterest income totaled $2.5 million compared to $6.4 million last quarter, primarily due to $3.6 million in loan loss sales and a $2 million loss on sale of investments with proceeds used to reduce higher cost funding. We expect steady contributions from BOLI and a growing fee income as treasury management sales expand. Noninterest expense declined $1.6 million to $41.9 million, reflecting lower FDIC assessments and disciplined cost management. We remain focused on maintaining efficiency while supporting strategic priorities. We recognize that investors want certainty that credit risk is fully understood and adequately reserved. That's why in the third quarter, we engaged a highly experienced nationally recognized third-party loan reviewer to complete an independent credit review of our commercial portfolio. The goal was to provide us an independent perspective to quantify potential future losses under both baseline and stressed economic scenarios. The review is conducted separately from our internal risk rating control process and included over 400 individual loans representing 84.9% of the commercial loan book about $7.4 billion. It assessed potential losses over a 30-month horizon, a 6-month near-term view plus an additional 24 months based on Moody's baseline and stress scenarios. Each loan was evaluated for collateral liquidation value, cost to carry and dispose and borrower and guarantor liquidity to determine potential shortfalls. Utilizing Moody's baseline stress scenario, the independent loan review analysis concluded total potential commercial loan losses of $257 million as of July 31, the date of their review. Importantly, where the independent firm identified potential loss contract, it was in credits we had already flagged internally. Their conclusions validated our own view of the portfolio. This was confirmation and not discovery. Utilizing the Moody's S4 downside stress scenario, where there's only a 4% probability the economy performs worse than the baseline, potential losses increased by $113 million to $370 million. Between July 31, the date of the independent loan review and quarter end, we charged off $140.8 million and continue to hold $60.3 million in our qualitative office overlay and $24.7 million in individually evaluated reserves. Together, that totals $225.8 million, which represents approximately 88% of the total potential losses identified in the baseline scenario. The independent review assumed liquidation scenarios for consistency across institutions. Our reserve process, by contrast, reflects workout strategies that have historically resulted in better recoveries. That's a methodological distinction, not a difference in recognizing risk. Also during the quarter, we performed a supplemental internal review of all CRE loans greater than $5 million, covering 137 loans totaling $2.9 billion. Following this review, there were 5 downgrades of $158.2 million of special mention and 3 downgrades of $110.8 million to substandard. Together, these reviews give us a data-driven view of potential losses. They reaffirm our belief that we are adequately reserved and the bulk of loss recognition is behind us. With that foundation in place, let me turn to how these actions position us for improved performance heading into 2026. On Slide 11 of the investor deck, we presented our forecast for the full year of 2026. We expect net interest income to grow despite a smaller balance sheet, driven by mix improvements and lower funding costs. As Kevin noted, the total reserve coverage to loans declined primarily due to a reduction in the office qualitative overlay. Our qualitative overlay captures a rolling 12-month evaluation loss experience. As that period rolls off, it will naturally reduce the over life. All pass-rated office loans were reviewed this quarter to ensure current information and support our internal ratings framework. Looking ahead, we anticipate that loan growth in 2026 will continue to be concentrated in C&I, and we're pursuing that measured growth with a strong focus on disciplined credit standards. We're nearing our target investment portfolio range of 12% to 15% of assets, at which point we'll begin reinvesting cash flows to optimize earnings without compromising liquidity. Noninterest expenses are expected to remain well controlled. FDIC costs are expected to peak over the next several quarters and then decline as asset quality and liquidity metrics continue to improve, trends we've already seen reflected and lower premiums in the last 2 quarters. Finally, as mentioned last quarter, our capital return philosophy has shifted in line with performance and priorities. The dividend reduction to $0.01 per share was a proactive step to reserve capital flexibility is not in response to capital adequacy concerns. As earnings normalize and credit stabilizes, we will reassess the most effective forms of capital return. I'll now turn it over to Susan for a wrap-up. Susan Riel: Thanks, Eric. This was a pivotal quarter for Eagle Bank. We've made significant progress on the credit front, controlling valuation risk head on, completing an independent portfolio review and validating that our reserves are adequate. At the same time, we're seeing tangible positive outcomes across our commercial and deposit franchises. As we look ahead, we believe that in 2026, provisions will be manageable and earnings will improve and our focus on sustainable profitability will come through in our results. Lastly, before we turn to Q&A, we wanted to announce the voluntary resignation of our Chief Credit Officer, Kevin Geoghegan, who will be moving back to Chicago effect December 31. We have hired 2 seasoned veterans, William Parati, Jr. and Daniel Callahan to serve as Interim Chief Credit Officers and Deputy Chief Credit Officer respectively, until a permanent replacement can be hired. Bill spent the bulk of his career at Frost Bank in Texas and Dan at Commerce Bank in Missouri. Collectively, their leadership and very deep experience will facilitate the bank's continued focus on enhancing our overall credit risk management. Kevin was instrumental in both helping shape and implementing our credit strategies working tirelessly with the team to both proactively deal with the bank's problem loans and improve our credit risk management, governance and practices. We thank Kevin for his contributions and wish him well. Before we conclude, I want to express my sincere appreciation to our employees. Your dedication and professionalism make all the difference. With that, we'll now open the line up for questions. Operator: [Operator Instructions] Our first question today comes from the line of Justin Crowley of Piper Sandler. Justin Crowley: Obviously, a lot of steps taken this quarter. You had some of the losses on the sale of those 2 loans. But after all the charge-offs and marks keep taking moving credits into held for sale, and I know you had the independent review, which sounded pretty thorough. But can you talk even a bit more on just what gets you so comfortable or comfortable on when it comes time to close these transactions that further losses won't be there or at least hopefully not too significant. Ryan Riel: Thanks, Justin. This is Ryan Riel. I'd like to point out that in those 2 situations that the note sales that we -- or the property dispositions that we executed in the third quarter, the carrying value of those going into the third quarter was based on LOIs that ended up being traded down prior to execution of the transaction. In response to that, what we've implemented in our process to determine the carrying value of the loans in HFS and then just carrying values in general is we're getting brokers opinion, which, in our opinion, is a better valuation tool than appraisals in this marketplace. Brokers opinions give ranges of values. We've placed the carrying value at the bottom of that range in each case, along with consideration given to cost of disposition in an effort to make sure that, that situation that played out in those 2 examples does not happen again. Justin Crowley: Okay. And then as far as timing, and I imagine the sooner the better, but obviously, pricing is part of the conversation but can you get any more specific on the time line here for getting these assets off the balance sheet and maybe what a portion means? Ryan Riel: So it's hard to do that holistically. And each and every 1 of these cases, as Eric mentioned in his commentary, we are evaluating the circumstances of each individual asset in and of themselves and looking for that highest and best outcome, obviously, for the bank and for our shareholders. So in many of these cases, we have ongoing discussions in many of these cases, those discussions are far enough along that we can confidently say that disposition will occur during the fourth quarter of 2025. I don't want to -- a little bit superstitious. I don't want to jinx myself and put too fine a point on that, but there will be material action taken in that category during the fourth quarter. Justin Crowley: Okay. That's helpful. And then I know last quarter, you gave us a loose idea of where charge-offs could perhaps come in this quarter. And obviously, things changed and could maybe change more. But at the moment, where do you think those could come in that next quarter? And where does that leave things as we get into 2026. Eric Newell: Justin, this is Eric. I think what I would say about that in terms of next quarter and 2026, we're just not seeing early activity that would cause us to believe that there's continued impact on book value from credit, so in terms of charge-offs, I don't want to give you an estimate on that, but I just don't believe charge-off activity in the quarter will have a meaningful impact on provision expense, like it has in the last 2 quarters. Justin Crowley: Okay. So the idea would be you'd be more than comfortable with the reserve, taking those hits and not having to replace those losses through the provision? Eric Newell: Based on what we know right now, yes. And where our confidence comes from the 2 activities I talked about in the prepared comments, the independent loan review, which looked at 87% of -- or 88% of the book as well as that supplemental loan review that looked at almost $3 billion of pass rated CRE loans. Justin Crowley: Okay. And then with the pickup in total criticized balances? And obviously, despite the charge-offs taken on office, multifamily was again a driver after a similar trend last quarter. And I know potential losses have taken should be far less severe, but just wondering if you could spend just a little more time on that and provide any further detail on metrics just to help us get more comfortable with what we're seeing play out there. Ryan Riel: Sure. Justin, this is Ryan again. I'd like to point out that the transaction volume in our marketplace from a multifamily perspective, has sustained at prices that are still represent cap rates that are sub 6%. That is consistent with valuations that we underwrote to. I'd also like to point out that if you look at Slide 25, specifically and focus on the special mention and substandard categories where you're seeing debt service coverage be challenged. Many of those loans, the actual performance of the property is at or above our underwritten level. So the NOI is coming out at or above our expectation that was set at origination, the debt service coverage ratio that you see reflected is somewhat stressed based on the interest rate environment that we're in today. If you took that same NOI and compared it with where the permanent market is, you would get a better outcome in those debt service coverage ratios materially better outcome, frankly, because there's somewhere between 150 and 250 basis point gap depending on which permanent provider you look at. Justin Crowley: Okay. And then you pointed out on Slide 25, but somewhat related, but there is large $56 million specialty use loan in Montgomery that fell into special mention in the quarter. Can you just talk a little about what that credit is, what the collateral looks like? Just anything you could share? Ryan Riel: Yes. So that particular loan is a special use loan. It's actually a self-storage property at Montgomery County. The performance of that property has been impaired by higher-than-expected operating expenses, which are being disputed. The primary driver there is real estate taxes. They're being disputed by that customer and have seen a material drop over the last several quarters of that. It's an ongoing dispute that they're working there. Again, the top line performance of that property is at or above where we underwrote. Operator: the next question. the next question will be coming from the line of Christopher Marinac of Janney Montgomery Scott. Christopher Marinac: Just wanted to go through briefly the government contract business that you have and how that appears at this time? And does is there any kind of volatility to expect with the shutdown that's ongoing. Eric Newell: Yes. Chris, this is Eric. We haven't seen much of any concerns in the government contracting space because of the government shutdown. As a reminder, the bias of our portfolio is in defense and security. We looked at line of credit usage relative to earlier this year, it's actually down 30% that would be an early indicator of cash flow challenges to clients. And so we're not seeing that. But our relationship managers keep a constant flow of communication to understand anything that we might be to respond to. Ryan Riel: That's right. And obviously, Chris, the risk in that portfolio does increase as the shutdown looms. Friday, tomorrow would meet the first full paycheck of government workers not being met. And we're hopeful and some of the indications are that the shutdown, albeit prolonged at this point to be reaching conclusion, hopefully in the coming time. Christopher Marinac: All right. Great. And then just back to the kind of main credit issues. From the held for sale that you now have, is the timing on that going to be in the next quarter and can you just kind of walk through kind of how -- or maybe what the risk is that you have an additional write-off as those are finally disposed. Ryan Riel: I think I'll point back to the comments I made to Justin, that we've enhanced our process based on the experience we had in the third quarter with the 2 dispositions that we went through. So we are basing our carrying value at the lower end of the range of values that we've determined through third-party work, and I feel very confident based on conversations with market participants and potential buyers that our carrying value is better than where we'll do in many instances. Christopher Marinac: Great. And then I guess last 1 for me, just has to do with kind of the inflow in future quarters. I mean, do you have visibility about how the inflow may be the same or different in Q4 and Q1. And I guess part of that question is just sort of the ongoing maturity wall that you have in the portfolio. I presume that was addressed by the deeper dive that you just did. Kevin P. Geoghegan: Chris, it's Kevin. And just a clarification, did you mean the inflow into HFS or the inflow into criticized classified. Christopher Marinac: Really criticized and classified. Kevin P. Geoghegan: Yes, I just wanted to make sure that was the purpose of doing the additional review is to get as much current information as we could on the entire portfolio, so that in our parlance or wouldn't be surprises. So I think that inflow will -- that migration will slow down dramatically. Eric Newell: Yes. I would build on that. This is Eric, that our expectation is that you're going to see criticized classified decline into 2026. Operator: Next question is coming from the line of Brett Scheiner of Ibis Capital Advisors. Unknown Analyst: I'm just trying to understand, you talked about a temporary cash flow issue in the multifamily space versus a long-term impairment. I'm trying to understand the difference between the 2 and how do we square that? Ryan Riel: Okay. So the comments that I made before where the NOI, our underwritten NOI is as compared to the actual performance of many of these properties is at or below our underwritten NOIs at or below the actual performance. So the performance is better in many instances than we expected. The debt service driven by the floating interest rate structure that is on many of those loans is higher than anticipated and putting stress on that ratio. Additionally, there are some challenges, as we've mentioned in our comments in the affordable housing space that specifically within the District of Columbia, has put pressure on the performance. The bad debt expense in Washington, D.C., unfortunately, is well above the national average. The DC Council's passed the rental Act recently that will help alleviate some of that over time. And that's primarily where we see the short-term pressure and long-term relief. Unknown Analyst: Doesn't that higher debt service and the pressure that you talked about affect asset values? Ryan Riel: It certainly can. Yes. Unknown Analyst: But how do you think of that as just a temporary cash flow issue versus a valuation impairment? Ryan Riel: Because the cash flow will improve over time, and therefore, the valuation will improve over time. Unknown Analyst: Based on a refinance or some other issue? Ryan Riel: based on the passage of time and improved performance. Unknown Analyst: Okay. Well, I'll follow up offline on that. And then any other comments on Kevin's departure. I know that about a year ago, that was seems to be a big catalyst for a cleanup. Kevin P. Geoghegan: This is Kevin. Thanks for the question. As Susan talked about, I voluntarily resigned and I'm proud -- very proud of what I was able to contribute to the enhanced credit risk management processes and policies here. And I also want to take a second and just thank my colleagues as well. They all know who they are as they continue to manage through our asset quality challenges. Susan Riel: I would also add to that with Kevin's resignation and our desire to be deliberate in our process of finding a replacement and not miss a beat in continuing the strong credit risk management processes that we have put in place. We decided to hire Bill Parati and Dan Callahan on an interim basis so that we would have the time, the appropriate amount of time to seek a permanent replacement for Kevin. . Unknown Analyst: Okay. Great. And then only 1 other thought. As you go into 4Q, if you're at sort of peak marks and you don't think at this point, you'll need to be adding to reserves or charge-offs will leave through and then you'll have to rebuild into the provision. I assume that you'll be accreting capital in fourth quarter? Eric Newell: Yes. I would direct my -- this is Eric. Brett, I would reaffirm what I said earlier on the call in terms of the independent loan review as well as that supplemental loan review really helping validate management's view of credit and my earlier comment that I don't believe at this time that book value will continue to be degraded by credit. Unknown Analyst: Okay. So that's a yes. EPNR should exceed provision? Eric Newell: What I'm saying is that I believe that the credit costs will not be degrading book value. Operator: The next question is coming from the line of Catherine Mealor of KBW. . Catherine Mealor: Maybe just 1 follow-up on credit, and you've kind of touched on this, but I'm going to just add a little bit more directly. So as you did the independent loan review and the external loan review, what did you see as you did those reviews that was not maybe captured before and how you were categorizing some of these properties. So it was just seems surprising to me the big increase into special mention and then a few into substandard, again, particularly on the multifamily piece. And so just kind of curious what changed and what specifically you saw within that loan review that made you feel like it was now more appropriate to categorize the loans that way. . Ryan Riel: Katherine, thanks. That review was really putting all the current information that we had on every single loan in our lap at 1 point. And we do reviews annually on all these properties, all of our loans. But this was all at one time to make sure we really understood the depth of the portfolio. And with that current information, we saw some segments of deterioration, and we took according steps. . Catherine Mealor: All right. Okay. And then, again, as we think about part that I found really helpful that you brought out is the one on kind of movement in the office book that kind of shows you most where we are in the cycle from where we started and kind of the losses and write-downs and transfers out of the office book. And so it feels like from the office book, were really kind of far through the cycle and kind of working through those issues. The multifamily piece feels like we're a little bit more early. And so is there any way you can kind of articulate what you think the ultimate losses or write-downs in multifamily maybe relative to what we're seeing in this office book. Ryan Riel: Catherine, this is Ryan. I don't think they're comparable at all, right? The structural issues in the office market in the Washington, D.C. region are significant, and you see that in our performance over the last several quarters. structural issues just don't exist in the multifamily segment. If you look at transaction volume, it's a bit down, but investors are still very interested in Washington, D.C., well-located, high-quality Washington, D.C. region multifamily product. Some of the jurisdictional issues that I referenced are presenting some headwinds for the segment. We're facing those head on. We have good quality sponsorship in those situations. And some of the other issues that are shown on Slide 25, the special mention and substandard category are simply transactions that the interaction of the net operating income and the debt service coverage based on the interest rate structure that's in place in many of those presents a challenge that's below policy levels, sometimes below 1:1 in those situations in all of those situations, we have structural enhancements that allow us to qualify those as potential weakness is not well-defined weaknesses while we work to restructure, and we're in active discussions to restructure. As you know, in the office category, when we went into restructure conversations or workout conversations, the value of that collateral had diminished substantially. That is just not the case in the properties. Operator: Next question will be coming from the line of Nick Grant of North Reed Capital. Unknown Analyst: All right. I wasn't on mute. So I don't know what the IT issue was, but thanks for the question. So I mean, first off, I just want to applaud the proactive measures to work through credit like I mean when I step back to $37 a tangible book fells, I mean, much more reflective of the identified risk across your loan exposures, reduces future credit migration. And Susan, in your opening remarks that it here, improving franchise value is a focus, I mean, I really agree with that. I mean given industry activity on the M&A front, increasing activity like we should see more deals here. How do you feel about the franchise upstream optionality as a way to increase shareholder value? Eric Newell: Yes. I mean I can start with that and Susan and can finish. But I think from our perspective, we're focused on the strategic plan and building shareholder value through the diversification efforts in C&I, improving our funding profile and focused on improving pre-provision net revenue, which should drive enhanced or improved ROA and ROTCE. Susan Riel: But obviously, Nick, the Board will focus on anything that adds value to our shareholders, and we'll consider whatever other options come our way. . Operator: We have a follow-up question coming from Justin Crowley of Piper Sandler. Justin Crowley: I just wanted to hop back in and ask 1 quick 1 outside of credit. Just thinking about what will help out the margin looking forward here, you get better yield in C&I, but do you have any detail on how much in fixed loan repricings and adjustable that all reset maybe through the end of next year. I'm not sure if you can give some color on the magnitude and the yield pickup and I guess, maybe excluding anything that's set to hopefully move off the balance sheet. Eric Newell: Yes. I don't have that information in front of me, Justin, so I don't want to make assumptions for you there. But in terms of just more broadly with the NIM expectation, I think you have the similar phenomenon of investment portfolio rolling off, whether it's rolling back into investment portfolio, if we're getting close to that 12% to 15% with higher yields or the cash flows off the portfolio going as use loans, that's going to be helpful on the asset side. And then the -- on the liability side, it's the continued expectation in the fourth quarter as well as 2026 that we're going to be paying down wholesale funding, brokered funding which should be helpful in terms of cost of funds as well. About 40% of our loan book is fixed, but it's a short loan book growth. As Ryan has said in the call, a lot of our lending is value add. We're not the permanent financing takeout. So when you look at the average book, it's probably 3 to 4 years. Operator: Thank you. And that does conclude today's Q&A session. I would like to turn the call over to President and CEO Susan Riel for closing remarks. Please go ahead. Susan Riel: Okay. Thank you for your participation and questions during this call, and we look forward to speaking to you again next quarter. Thank you. . Operator: Thank you all for joining. You can now disconnect.
Operator: Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson-UTI Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Michael Sabella, Vice President of Investor Relations. Please go ahead. Michael Sabella: Thank you, Rebecca. Good morning, and welcome to Patterson-UTI's earnings conference call to discuss our third quarter 2025 results. With me today are Andy Hendricks, President and Chief Executive Officer; and Andy Smith, Chief Financial Officer. As a reminder, statements that are made in this conference call that refer to the company's or management's plans, intentions, targets, beliefs, expectations or predictions for the future are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties as disclosed in the company's SEC filings, which could cause the company's actual results to differ materially. The company takes no obligation to publicly update or revise any forward-looking statements. Statements made in this conference call include non-GAAP financial measures. The required reconciliation to GAAP financial measures are included on our website at patenergy.com and in the company's press release issued prior to this conference call. I will now turn the call over to Andy Hendricks, Patterson-UTI's Chief Executive Officer. William Hendricks: Thank you, Mike, and welcome to our third quarter earnings conference call. The performance of Patterson-UTI has continued to demonstrate resilience this year. And our teams have done a great job executing in a challenging environment and staying focused on optimizing our business in the areas that we can control. We are continuing to see success as we enhance our commercial strategies through additional service and product line integration and performance-based agreements, while at the same time lowering our cost structure, which is helping us to lessen the impact from moderating industry activity this year. Headlines over the past 6 months have highlighted cautionary signals, including oil supply growth from OPEC+, shifting demand patterns as trade policies evolve and overall global macroeconomic uncertainty. But the U.S. shale picture today is more constructive than many expected just a few months ago. Oil prices have fallen, but overall, have so far remained more resilient than many predicted, with long-term global demand growth continuing, and anticipated supply additions slower to translate into physical barrels than headlines have suggested. At Patterson-UTI, while the business environment this year has brought unique challenges, we are adapting with the market, both commercially and structurally, and we continue to generate healthy levels of free cash flow, while still investing to expand our technology edge. Our efforts and focus today center on driving improvements in our outlook for profitability and cash generation against a steady market backdrop. And each of our businesses are stepping up to this challenge. In the U.S., oil production does not yet fully reflect the impact of activity reductions over the past 6 months. And we believe current industry activity is already below levels needed to hold U.S. production flat. Any further activity reductions from current levels would likely result in additional pressure on future U.S. output, which could negatively impact global oil supply in 2026. On the natural gas side, the outlook as we move into 2026 appears to be favorable. Physical demand growth from LNG is now starting to come online, and our customers are beginning to make plans to satisfy the expected multiyear growth in demand, which is likely to require higher drilling and completion activity compared to current levels. Even as U.S. shale drilling and completions activity has moderated through 2025, our teams have delivered results that are far more resilient relative to prior periods of activity moderation. Our customers are sophisticated, and they are demanding innovative technologies from both our drilling and completions businesses, which is widening the performance delta among service providers. The increasing reliance on differentiated technologies puts Patterson-UTI in a strong position given the high quality of our operations. We expect this relative margin resiliency to continue as customers rely more on high-end service providers. Operationally, our teams are functioning at a high level in a competitive market. Our drilling team has seen activity stabilize, and our rig count today is slightly above where we were at the end of the third quarter. Our completion activity continues today at a similar level relative to where we exited September, and we expect completion activity will remain steady for most of the quarter, although typical seasonality is likely to impact the segment during the holidays. As the market steadies, we see opportunities in both our drilling and completions businesses to invest in technologies that are in high demand and short supply, with our expectation that any incremental investments will earn strong returns. As we prepare our 2026 budget, we are working with technology-focused customers on opportunities to deploy new technologies in both drilling and completions, and expanding our competitive edge should widen the advantage we believe we have over much of the industry. As we approach 2026, while we are not ready to give specific guidance for what we expect next year to look like, we are comfortable saying that we do expect lower capital expenditures compared to 2025. Even on lower CapEx next year, we expect to fully maintain the high demand portion of our fleet as well as invest in new technologies across our businesses, while still generating meaningful free cash flow for our investors. We remain committed to returning at least 50% of our annual free cash flow to shareholders through a combination of dividends and share repurchases. Moving to capital allocation. We are operating with significant flexibility, with the expectation for continued solid free cash flow and a strong balance sheet, giving us optionality for 2026 and beyond. Our leverage remains low, with net debt to EBITDA of just over 1x. We closed the quarter with $187 million in cash and an undrawn $500 million revolver. And the fourth quarter should deliver our strongest free cash flow quarter of the year, which should strengthen our capital flexibility as we head into 2026. We will continue to deploy capital only towards opportunities we believe will deliver high long-term returns, including the option to further accelerate our share repurchase program. Our U.S. contract drilling business saw activity stabilize as we exited the third quarter, and we expect this stability to continue through the rest of 2025. Recent revenue per day for drilling rigs remains in the low to mid-30s range. Our directional drilling business is performing exceptionally well, benefiting from strong service quality and new technology deliveries as well as further integrated offerings with both our drilling rigs and our drill bits. Today, we are focused on driving further improvement beyond relying simply on a recovery in industry activity. We are looking to expand our technology-driven commercial models by growing integration across our products and services and through additional performance-based agreements, as we also work to lower our costs. Our drilling team is delivering strong operational performance for our customers by utilizing our Tier 1 APEX rigs and our suite of proprietary Cortex digital services, including adaptive auto driller and predictive models, which become platforms for future artificial intelligence to enhance the quality of the service we are delivering for all of our customers. Our customers are seeing the benefits of using a Patterson-UTI rig and our suite of digital solutions and complementary services and products. The digital and technology package remains a key factor to delivering differentiated solutions for our customers, and the investments we have made have helped margins hold above what our drilling business has achieved in previous periods of activity moderation. Our Completion Services segment demonstrated strong relative performance in Q3, with activity holding steady compared to the second quarter. Our commercial team did an outstanding job managing the frac calendar and aligning us with high-quality customer base, while our operations team executed at an exceptionally high level. Pricing per horsepower hour in our frac business was steady compared to the second quarter, with lower sequential revenue, mostly a function of less sales of low-margin sand and chemical products. We also started to see benefit of cost reductions in the first half of the year. The completions market remains competitive, but our operational quality is proving to be a major differentiator. We recently set a record for continuous pumping for one of our customers in the Northeast, where we safely pump 348 hours straight on a single fleet. This record highlights the capabilities of our digital performance center in Houston to implement new operating techniques with the support of our local field teams. Our new proprietary EOS completions platform is advancing our technology edge through 3 primary products: Vertex automation controls, Fleet Stream and IntelliStim. This platform will allow us to further implement artificial intelligence and machine learning into the completions process. After successful deployment in the third quarter, we continue to deploy our Vertex automation controls across all company fleet, with projection for full deployment by year-end. This will allow us to implement closed-loop automation for all pump types to improve our operating efficiency and asset management, while delivering optimized completion designs for our customers based on real-time surface measurements. Fleet Stream will provide data visualization and analytics, a platform to acquire and analyze reservoir measurements and streamline data workflows for our customers and provide a new revenue stream for our Completion Services segment. Finally, in combination we worked on our drilling rigs and through modern machine learning, our IntelliStim reservoir technologies leverage artificial intelligence to provide real-time reservoir insights to better understand rock properties and optimize completion designs to maximize well performance. We see multiple ways to monetize our digital investments. We are already seeing the investments lower operating and capital costs through higher asset turns. Additionally, on the revenue side, we've already signed 2 customers to commercial deals for 2026, specifically for our EOS platform. And we think there is significant revenue opportunity as well as a path to create closer and more integrated long-term relationships with our customers. Our Emerald fleet of 100% natural gas-powered equipment remains in high demand, and we continue to strategically invest in new technologies that are driving accretive returns for the business. We've recently taken delivery of our first commercial direct drive pumps, which will allow us to deliver 100% natural gas-powered solutions for our customers with significantly less capital deployed relative to electric frac fleets. The direct drive pumps are scheduled to begin long-term dedicated work in the fourth quarter. We think recent advancements made in high horsepower direct drive natural gas engines have helped make this the most capital and cost-efficient solution for our business. Our Drilling Products business had another good quarter in North America, where our U.S. revenue per U.S. industry rig set another company record. Since we acquired Ulterra in 2023, we've seen a roughly 40% increase in U.S. revenue per U.S. industry rig, with a more than 10% increase in market share for our drill bit products on Patterson-UTI rigs. In Canada, we saw a strong recovery in revenue coming out of spring breakup even as total industry activity was slightly below expectations. International revenue declined, mainly in Saudi Arabia's drilling activity in that country slowed. Outside of Saudi Arabia, revenue was strong internationally, and we expect international revenue to increase in the fourth quarter. On the margin side, the quarter did see higher-than-normal bit repair expenses in July, which resulted in lower margins for the quarter, although margins recovered towards historical levels later in the quarter. Our fully integrated PTEN Digital Performance Center located in Houston is the backbone for the entire company. The digital center has been critical as we execute and optimize drilling and completion designs for our customers. The information that we can provide both our team and our customers has improved the efficiency of our operations and brought us closer to our customers as we strive to provide differentiated service. While U.S. shale activity has moderated this year, we have not stood still. We are focused on finding ways to make our business more competitive, even as industry activity appears likely to remain in a tight range for the foreseeable future. We're using this relative stability to prepare for what we think the industry will look like over the next several years, commit capital to the right areas and execute our own strategy to maximize shareholder value. We will continue to target profitable technology investments that we believe will drive strong cash returns for our shareholders, and we intend to be a leader across all of our business as shale evolves. I'll now turn it over to Andy Smith, who will review the financial results for the quarter. C. Smith: Thanks, Andy. Total reported revenue for the quarter was $1.176 billion. We reported a net loss attributable to common shareholders of $36 million or $0.10 per share and an adjusted net loss of $21 million. Adjusted EBITDA for the quarter totaled $219 million. Other operating expenses for the quarter totaled $23 million, of which $20 million resulted from the accrual of expenses associated with personal injury-related claims for incidents that occurred several years ago, partially offset by a favorable contract dispute resolution. Our weighted average share count was 383 million shares during Q3, and we exited the quarter with 379 million shares outstanding. During the first 3 quarters of the year, we generated $146 million of adjusted free cash flow. As expected, during the third quarter, we saw working capital benefits, and we expect working capital will be a tailwind again in the fourth quarter. During the third quarter, we returned $64 million to shareholders, including an $0.08 per share dividend and $34 million for share repurchases. Over the 2 full years since we closed the NexTier merger and Ulterra acquisition through September 30, 2025, we have repurchased 44 million Patterson shares in the open market. We have reduced our share count by 9% since that time. This is in addition to reducing net debt, including leases by nearly $200 million, and paying a dividend that is currently an annualized 5% of our share price. In our Drilling Services segment, third quarter revenue was $380 million and adjusted gross profit totaled $134 million. In U.S. contract drilling, we totaled 8,737 operating days for an average operating rig count of 95 rigs. Geographically, compared to the second quarter, activity was flat outside the Permian Basin, with Permian activity responsible for the sequential decline in our rig count. For the fourth quarter in Drilling Services, we expect an average rig count to be similar to the third quarter. We expect adjusted gross profit will be down approximately 5% from the third quarter. Revenue for the third quarter in our Completion Services segment totaled $705 million, with an adjusted gross profit of $111 million. We saw flat activity on a pump hour basis compared to the second quarter, with margins benefiting from improved operating efficiency and some cost reductions that were initiated in the segment during the first half of 2025. We saw improved efficiency as several of our larger fleets that saw gaps in the second quarter had more consistent schedules. Additionally, our power solutions natural gas fueling business saw an improvement as natural gas demand in the Permian continues to grow as customers look to take advantage of weak regional natural gas prices by using more of the commodity as fuel. Overall, completions revenue was lower on a decline in sales of low-margin sand and chemicals products. For the fourth quarter, we expect completion services adjusted gross profit to be approximately $85 million, with less seasonality compared to the fourth quarter last year. Third quarter Drilling Products revenue totaled $86 million with an adjusted gross profit of $36 million. Performance was strong in our U.S. and Canadian businesses, while international revenue was impacted by lower activity in Saudi Arabia, which is our largest international market. Margins were affected by higher bid repair expense in July, although they returned closer to historical levels by the end of the quarter. For the fourth quarter, we expect Drilling Products adjusted gross profit to improve slightly, with relatively steady results in the U.S. and Canada and higher revenue and gross profit internationally. As a reminder, roughly 70% of the revenue in our Drilling Products segment is generated in the U.S., with around 10% in Canada and 20% international. Other revenue totaled $5 million for the quarter with $2 million in adjusted gross profit. We expect other adjusted gross profit in the fourth quarter to be steady compared to the third quarter. Reported selling, general and administrative expenses in the third quarter were $62 million. For Q4, we expect SG&A expenses will be relatively steady sequentially. On a consolidated basis for the third quarter, depreciation, depletion, amortization and impairment expense totaled $226 million. And for the fourth quarter, we expect it will be approximately $225 million. During Q3, total CapEx was $144 million, including $47 million in Drilling Services, $81 million in Completion Services, $13 million in Drilling Products, and $3 million in Other and Corporate. For the fourth quarter, we expect total CapEx of approximately $140 million. Our full 2025 CapEx is now expected to be less than $600 million, even before considering the benefit of $33 million in asset sales we have realized through the third quarter. Our updated capital expenditure budget is lower than previously expected. We closed Q3 with $187 million in cash on hand, and we did not have anything drawn on our $500 million revolving credit facility, and we do not have any senior note maturities until 2028. Through the first 3 quarters of 2025, we have returned $162 million to shareholders through dividends and share repurchases. Free cash flow is likely to remain strong in the fourth quarter, which is expected to be our highest free cash flow quarter of the year. Our Board has approved an $0.08 per share dividend for the fourth quarter of 2025, payable on December 15 to holders of record as of December 1. I'll now turn it back to Andy Hendricks for closing remarks. William Hendricks: Thanks, Andy. I want to close the call with some comments on our company and the industry. I'm very pleased with our team's execution in the third quarter, where we are outperforming our competitors in many areas of our market. As well, we continue to make the necessary cost reductions to align the company with the projected levels of activity and maximize long-term free cash flow. This past year has been one of the most unique years since shale emerged as a major source of oil and gas over a decade ago. In many ways, the U.S. shale oil field services industry has outperformed each previous cycle. Our margins are holding up far better than what is typical in periods of activity moderation. Equipment bifurcation and capital availability is leading to disciplined behavior across our industry. And customer consolidation is leading to a more constructive environment at the high end of the oilfield services market relative to the overall market. Our third quarter results reflected a stabilization of industry activity as we exited the period. And absent normal seasonality in our completions business, we expect activity to remain relatively steady through year-end. We fully recognize and acknowledge that the macro outlook is a driving force and investment decisions. Lower commodity prices have slowed overall activity in the U.S. for the past couple of years. However, our business has remained resilient, and we are focused on investing in technology, maximizing our long-term free cash flow and returning cash to shareholders. And we think our strategy will create the most value for Patterson-UTI shareholders over the long term. There is much to be proud of with the way our teams are operating. But even as the outlook has stabilized, we are not content to simply wait for a market recovery. We intend to stay focused on our plan to maximize the value of our unique commercial model and technology offerings across drilling and completions. And we see evidence that customers are becoming increasingly receptive to more integration and performance-based pricing, as they too search for ways to improve their own returns. We are just at the beginning of realizing the benefits of that journey for the company. The goal for our business leaders is clear. We need to improve our position in the markets where we operate. We are confident that our teams are focused and up to the challenge, and we look forward to proving that out over the next year. As we start to prepare for 2026, what we see right now is another year of strong free cash flow. Our balance sheet is in great shape, our liquidity is strong, and we are operating with an extreme degree of capital flexibility. Our focus on capital allocation should allow us plenty of opportunities to use our free cash flow to maximize the long-term value for our shareholders, including through a potential acceleration of our share repurchase program. We are pleased with the quality of our operations, and we are confident that we can make our business even better. With that, I'd like to hand the call back to Rebecca, and open up for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Arun Jayaram with JPMorgan. Arun Jayaram: Andy, I wanted to talk a little bit about completion services. One of the narratives we've heard from your peers is pricing trends continue to moderate even at the higher end of the market yet. You highlighted how your trends on a horsepower basis were relatively flat. I was wondering if you could maybe elaborate on what you think is maybe driving that differential performance there. William Hendricks: Listen, I think our teams are just doing a great job out there and executing in the field, some of the really high-end work that we've done with large simul fracs and trimul fracs. We're burning significant amounts of natural gas. We're delivering that natural gas to location. We're maximizing displacement of diesel in some cases or on full electric jobs or full Emerald jobs, providing significant amounts of natural gas and fuel savings. And everything that we have to convert natural gas is out and working. And so we don't feel a lot of pressure to reduce pricing from where we're at. Now as you know, the industry discussed, there's been some big tenders over the last few months. Some of those are still in process. But I think, overall, the industry is showing a lot of discipline from where we are right now as well. Arun Jayaram: Great. Great. And maybe, Andy, you could talk a little bit about your fleet renewal programs as we think about kind of 2026, you highlighted how you expect CapEx to be down at a corporate level. But talk to us about planned investments in Completion Services. It sounds like you're pretty excited about the direct drive pumps in that. So how should we think about fleet replacement for PTEN on a go-forward basis? William Hendricks: Yes, the 100% natural gas direct drive Emerald systems that we've just taken delivery of this quarter and just deploying. We're excited about what we believe is a better use of capital -- better allocation of capital and trying to provide 100% natural gas services out in the field. And so we're excited to have a number of those out working this quarter after shaking that technology down for the last 2 years. When it comes to 2026, we certainly haven't finalized the budget yet. But what you've seen us do over the last several years is invest at the high end without investing at the low end and just letting the lower end of the equipment just move away from attrition. We've reduced the overall horsepower we've had over the last few years, from 3.3 million at a peak, down to 2.8 million just by letting that lower-tier equipment go away. And so I think there's a chance we'll make some similar decisions next year. We haven't finalized that yet, but we're not investing at the low end. And I think that helps keep the market tight. And if we see more demand next year for more of 100% natural gas equipment, we'll continue to invest because we're getting good returns on that technology. Operator: Your next question comes from the line of Scott Gruber with Citigroup. Scott Gruber: Yes. So power is a hot topic and Patterson has expertise in running microgrids for drilling. So Andy, if we see the data center market pull more megawatts for on-site generation, do you think that opens an opportunity for Patterson to enter the power market within the oil field? How are you viewing that opportunity today? William Hendricks: We have significant technical expertise in power. We have our electrical engineering division that can engineer and manufacture microgrids. On any given day right now, we're producing around 500 megawatts of power across drilling and completions. We operate generators from 1.1 megawatt recips, all the way up to 35-megawatt turbines. And so we have a lot of technical expertise. But when we look at some of the opportunities as you get into the larger power structures, the AI and data centers are demanding, you're at the 200-megawatt plus. And some, they're up to 1 gigawatt of power. That's not a mobile power solution, that starts to look more like an EPC contract where you've had a lot of big construction going on. So we're focused on what we can do and where we can bring value. We've discussed with some of our customers, and still do from time to time, to rely power for them in their own operations and production. And if we think that there's a reasonable market there, then we'll provide power for them. But we're very focused on delivering free cash flow. We don't want to spend a lot of capital on things that we don't think are going to bring immediate value for shareholders right now. Scott Gruber: So the oilfield production power opportunity for Patterson is still kind of TBD. Is that the right way of saying it? William Hendricks: I would say we have discussions with our customers. These are customers that we're close to. But there's a number of companies that provide PowerForm already and have historically. So it's still a competitive market. If we think we can get a good return doing it, we'll do it. Scott Gruber: Okay. And then I wanted to ask a question on the completion side. I know you guys have made some real strides in developing frac optimization software. Can you provide some more color on this, expanding opportunity -- sorry, expanding offering. How many fleets are deploying optimization software today? And is this contributing to the improvement in segment performance despite the micro headwinds? William Hendricks: Yes. So we're excited about what the team has done in terms of digital on the completion side. So they rolled out the EOS platform, and that's an evolving platform that constitutes a large number of products both at the digital center here in Houston, but also in the field. And one of those products is Vertex automation for the frac operations. And so we've already rolled that out in the field and we continue to deploy, and it's going to be on all fleets by the end of this year. And when we say all fleets, our automation can work on our Emerald, electric Emerald, 100% natural gas direct drive. It can work on our Tier 4 dual fuel. So we're not limited as to where we deploy the automation. And as we've discussed with a lot of you, sometimes we're running blended operations with Tier 4 dual fuel and electric or 100% natural gas direct drive combined. And so our automation controlled software allows us to be able to work across all those platforms and combined situations as well. And we have a number of customers that that's what they want to do. And so we don't have any limitations on the type of equipment we're deploying automation on, and really excited about what that's going to do for us. It's certainly a product we'll be able to charge for. As I mentioned earlier, there's a number of products coming out of the platform that we believe we can monetize, and this is one of them. It's going to probably provide some improvement to overall reliability of equipment. It's going to help us differentiate on how we deploy fracs in the well, and excited about what we can do with it. Operator: Your next question comes from the line of Saurabh Pant with Bank of America. Saurabh Pant: Great. Good. Andy, maybe I'll start with a bigger picture question as you talked about macro uncertainty, things seem to have stabilized a little bit where we see where they go from year-end. But as you talk to the customers, Andy, right, be it on the drilling side and the completion side, how does that uncertainty manifest? I'm just thinking on the drilling side, do they want shorter-term contracts to give them more flexibility on the completion side, maybe this more frequent pricing reopeners as an example, right? How are these discussions going, just given the uncertainty in the environment? William Hendricks: So yes, as we mentioned, activity is stabilized where we're at right now. The rig count for us has come down this year. And -- but the pricing has held up pretty well. There is some pressure. It's a competitive market, but we're still in the low 30s on average. And so if you compare that to what has happened in previous cycles of moderation, we're certainly in a better position today than we have been in the past with an industry. The industry is showing good discipline overall. In terms of what our customers are saying, our customers are trying to keep their production up. And the wells that we're drilling, while we're becoming more efficient, are also becoming more challenging, both on the drilling side and the production side. We're drilling deeper wells. We're drilling longer laterals. And our customers are dealing in the Permian with wells that have a higher gas ratio. And so all those things combined to where our customers are trying to keep up the production. And even though we're in a softer commodity environment right now, they're trying to keep their production up for their shareholders. And I think that you're going to see continuing intensity for what we do grow, and we're getting requests to add more technology to be able to meet the needs. Saurabh Pant: Right, right. No, that makes sense. That makes sense. And I agree, by the way, with your views on the activity levels. They seem like we are right at or below maintenance level, right? So if you want to keep up your production, you're going to keep up your activities. Okay. Makes sense. And then a quick follow-up, maybe, Andy Smith, for you on the 2026 shareholder returns. I don't know you'll give the framework over time, right? But at this stage, how should we think about share repurchases? It's good to see you spend that up a little bit this quarter versus last quarter, but just maybe refresh us on the framework as we think about 2026. C. Smith: Yes. I mean, look, it's a little early to be talking about 2026 and what our plans are. We're just on the beginning of our budget cycle. And as we get through that, we'll finalize. And we'll give more color around that going forward. Again, we've kind of given you the backdrop of the market. We're very focused internally, again, on our performance and making sure that we can be as efficient as we can be. And that's really where our focus is today, and we haven't really focused yet on kind of what our buyback program might look like next year. Operator: Your next question comes from the line of Ati Modak with Goldman Sachs. Ati Modak: Andy, you talked about the production impact of the activity changes. But I'm wondering if you see anything in the cycle times or efficiencies across the value chain that could potentially impact the response expectation you laid out? William Hendricks: Well, I think that what we're seeing, where activity is right now, it has the potential to negatively impact U.S. production a little bit. And just voicing that if oil were to stay in the upper 50s for a little while, that probably bring U.S. production down further. And if you're going to bring U.S. production down further next year, well, the next reaction is, you're going to have a commodity price reaction. And I think there'd be nervousness in the market. So I think it'd be self-adjusting and self-correcting. So when I think about the long term, I think we're in really good shape from a fundamental standpoint. We may have some changes in commodity prices over the near term, that may affect some activity levels. But over the long term, I think the fundamentals are still good. We're still seeing long-term demand for oil growth over a multiyear period. And the U.S. has to be part of that production as well. It has to be part of that equation. The discussion for OPEC+ to bring on physical barrels, they haven't really brought as much in terms of physical barrels as has been discussed. And I think that's baked into what we're seeing, too. So I think there's still a balance that we have right now between supply and demand. So -- and we see that with some of the decisions that our customers are making too. And like I mentioned before, we have customers that are trying to maintain production for their shareholders, but also balance capital spending in a little bit lower commodity environment. But we're staying relatively steady in our activity levels as a result of that. We have customers that are wanting to deploy more technology. They're willing to pay us for it. And to help them with their efficiencies in how they drill wells and how they complete wells in order to maintain their production. Ati Modak: Got it. So for '26, when you are guiding to steady activity levels but also highlighting that gas could drive some, is that -- should we think about that as gas potentially driving upside to that steady expectation? Or is that offsetting some softness in oil? William Hendricks: I think there's upside in gas activity next year. I don't think it's right away in the first quarter. I think that as we see more physical demand from LNG next year, that we've already been doing a lot of frac work in areas like the Haynesville. And there is -- there are wells that have gas behind the valves right now and ready to go. And so I think they're going to address the immediate physical needs in early '26, but eventually, it's going to drive activity later in the year. And I think that's upside for us even if oil is holding steady next year. Operator: Your next question comes from the line of Stephen Gengaro with Stifel. Stephen Gengaro: Two questions from me. Maybe I'll start with -- when we think about sort of RFP season and thinking about what E&Ps may or may not do next year, how are you guys thinking about pricing in the completion market next year? As I'm just sort of thinking about what margins may look like on a year-over-year basis. Any color you can provide around that? William Hendricks: I think that what you'll see is that most of us have already gone through a lot of the tenders that you're having to go through right now. And so what we're saying for projections in the fourth quarter have kind of already locked in some of that pricing. And there could be a little bit of movement in next year. But as I said, everything that we have that converted natural gas today is sold out, and there's still demand for equipment that can burn natural gas because our customers are getting a good fuel savings out of that. So I don't see pricing as a huge headwind. Are things still competitive? Sure. And if there's any white space in the calendar, which we all know happens from time to time, and we have to fill some dedicated work with some short-term spot work, maybe we take a little bit lower price to do that in the Midland Basin or something like that. But overall, I don't see like a huge headwind on the pricing because I think that the work is relatively steady outside of fourth quarter holiday slowdown. Stephen Gengaro: Great. And the other question just sort of ties into the capital allocation strategy. How do you think about -- you obviously have a view on the market, things seem to be stabilizing. But how do you think about capital returns versus balance sheet strength? And what sort of signs do you look for to give you confidence in accelerating or continuing to return capital in a market that has kind of disappointed us for 6 or 7 straight quarters? C. Smith: Yes, Stephen, this is Andy Smith. So as we look at it, again, our -- making sure that we have the equipment in both -- in all 3 of our major lines of business that is top of the market is probably the most important thing that we think about when we're thinking about capital. And then it really becomes what is the cadence of adding that equipment? What is the cadence of making sure that we're rightsized for the opportunity set that's out there? What are we looking at beyond that in terms of our balance sheet leverage? I don't think that we have any issues right now with leverage, to be honest. I'm very comfortable with where we are. And so that hasn't been as much of a focus, but then we look at the return to shareholders and whether or not we want to over step kind of our 50% commitment to our shareholder base. So that's kind of the order of operations. We will continue to high-grade our fleet. I mean, look, there are technology changes in all of our businesses over time. They won't be super lumpy, I don't think. They'll be pretty -- I think they'll be sort of pretty consistent over time, but we will continue to make sure that we're providing the best equipment and the best services out there because, again, we've had a lot of questions about pricing on this call, and pricing is going to follow performance. And we started the call today with a point that we're focusing on the things that we can focus on. And really, that's performance. I think we performed well in the field, and we did very well we have this quarter. And we have, for the past several quarters, and I think we will continue to, then pricing won't be quite the issue that it is if we were just thinking about this as a commoditized equipment business. So I really think that -- we don't have concerns around our balance sheet, if that's part of your question. I'm not concerned with where the leverage is from a capital allocation standpoint. And I think within our free cash flow, we have lots of opportunity to make sure that we're still providing the best services and the best equipment to our customers that we can. William Hendricks: Stephen, I'm just glad that we've committed to give back 50% of our free cash flow to shareholders, and we're on track right now to where it's almost 60% for the year. When we look at these capital allocation decisions, as Andy mentioned, we have opportunities for new technology, and we'll look at each of those on a project-by-project basis. And in some cases, it makes more sense for us to invest in these new technologies in drilling and completions versus buying back the shares. But we're certainly committed to at least 50% to shareholders, and we're running ahead of that right now. Operator: Your next question comes from the line of Derek Podhaizer with Piper Sandler. Derek Podhaizer: Andy, I just wanted to go back to Scott's question. I fully appreciate your views and discipline around power and what you can bring to the table currently. But just maybe -- can we have an EcoCell update? I know typically, that's replacing a diesel generator on the rate with the battery. But just given the outlook for this type of technology, are there potential opportunities outside of oil and gas for EcoCell within your subsidiary of Current Power? William Hendricks: Derek, so I think there could be, and we've had some of those discussions. I think for us, though, the way EcoCell is packaged, it's designed for hazardous environment operations and drilling. It could fit in a production environment. You don't need all those qualifications just to put it next to a data center or an industrial application. We're certainly open and our teams continue to explore those possibilities. Again, when you get into that space of EPC construction and you're over 200 megawatts and approaching 1 gigawatt of power, you're competing with a lot of different companies out there. And sometimes, when it's an EPC project like that, it's big, the winner is essentially the lowest bidder, and that doesn't necessarily bring value for us. And so we're going to focus on things that we think can produce strong free cash flow. So it's designed for as well as a variable load because drilling rig surges as you engage the draw works or you engage the pumps in ways that industrial applications don't see. And so we've written custom software to manage that. So it's just a little bit of a different configuration and setup versus what you do for industrial applications. Derek Podhaizer: Got it. That's very helpful. I wanted to ask a question around drilling. So you talked about Permian being a soft spot here, but obviously pockets of strength, specifically in the gas basin. So just thinking about the rig count, it's up a little bit from where you are, you're going to be steady. If you think about the upside to rig count next year, whether that's gas or even the Permian recovering, how should we think about the required OpEx or CapEx invested back into these rigs that have been sidelined? And just thinking about what that could mean for the future margin expansion once we've rolled through all this contractor and all this pricing and then you're on actually I'm going to reinvest back into these rigs that have been sidelined for quite some time now. Just maybe some updated thoughts how we should think about that with your rig count today. William Hendricks: Yes. We haven't done any of that math recently, but I can tell you, historically, when we reactivated a rig, it's been several million dollars to get a rig reactivated from a capital standpoint. And so we would take that into account any agreement that we're working out. But the other is that as we have some of these discussions with E&Ps for what they're going to need over the next couple of years, they're also wanting more technology on the rig, more capacity on the rig, longer laterals, deeper Haynesville gas, things like that. And so that's going to drive some larger conversations, but it's also going to drive larger day rates. And so we will look at them on a project by project basis like we always do when we restart a rig. And if we're adding more technology than we normally would or we're doing structural upgrades, then we'll get paid for that at a high return as well. Operator: Your next question comes from the line of Keith MacKey with RBC. Keith MacKey: Just wanted to start out first on the drilling services guide for Q4. I talked about a 5% decline in adjusted gross profit, though, on steady activity levels. So can you maybe just give us a little bit more color in terms of the drivers of that 5% decline? Is it more seasonal? Or is there a continued kind of lowering in average pricing on the rigs or something like that? William Hendricks: There's a little bit of decline in the pricing in general. It's relatively steady in terms of activity from where we are today, but we have seen a decline in the overall industry rig count and our rig count since the beginning of the year. So a little bit of a softening in the market that we're dealing with. But my expectation is going forward after Q4 outside of some seasonal things that we have in Q1 to be relatively steady. Keith MacKey: Got it. Okay. And Andy, just wanted to follow up on the last question about the rig technology and the incremental capacity that E&Ps are looking for. Can you give us a few examples of the types of things that your customers are asking you for as they look to drill longer wells in various areas across the U.S.? William Hendricks: Yes, we could talk about a few of those points. So first, the easy one is structural. So as we drill deeper wells in the Western Haynesville with the laterals that they're drilling, the casing loads are getting bigger, so the structural capacity is moving up from, say, what we've had over the last decade, which has been a 750,000-pound rig in general for the industry, up to 1 million pounds. And so we're seeing those request for the structural upgrades. But we have E&Ps that are wanting that as well for the Delaware where we're drilling deeper and longer laterals and they're using more drill pipe and they want to stay efficient, not have to lay down the drill pipe. So they want that structural capacity to be able to rack back more pipe just for those efficiencies in the Delaware. So it's a combination of the 2 and for those different plays, but it's a similar rig style and similar engineering that we have to do for that as well. The other piece is automation. I'm really excited about what's happening in the areas of automation and what our teams are doing with artificial intelligence. I'll just let everybody know, we had an update with the Board this quarter on all the different artificial intelligence projects that we're doing in the company, and we've let those grow up from our engineering teams and drilling and completion, and excited about the way they're looking at things. And when we say artificial intelligence, for us, it's not necessarily your traditional large language model that everybody uses on a daily basis. We do a lot with artificial intelligence and machine learning. And we feed data into our systems from our data science teams to allow our models to learn how wells have been drilled so that we can take that forward into the field and deploy those automation and machine learning models onto the equipment, whether it's drilling or completions, and so that the equipment can now function at a higher level with more efficiency, which improves reliability, longevity of the equipment and also brings benefit to the E&Ps as well. Operator: Your next question comes from the line of Jim Rollyson with Raymond James. James Rollyson: Andy, you've been through a lot of cycles and I think you've talked about a little bit on this call, this cycle has definitely been a bit different than typical cycles. And in that, I'm kind of curious, as you think through '26, '27, historically, we come down in a pretty violent manner. And when U.S. land balances, it kind of comes from both drilling and frac, and you ultimately get pricing leverage again after you've had -- they go in the wrong way for you. And this cycle has kind of played out differently in that pricing has held up better, there's a lot of technology you've kind of discussed. And I'm just curious, as you think through once we hit the bottom and the gas rig count starts to go up and oil rig count eventually starts to recover to replace production, how do you think about how this cycle unfolds? Because I'm assuming frac probably has better chance of getting pricing sooner just because [indiscernible] but then you've got the technology kind of benefits coming on both sides. So maybe lay out how you -- in your world, how you think this plays out as we get to the other side of this kind of dip. William Hendricks: Thanks, Jim, and thanks for reminding me that I've seen a lot of cycles. I appreciate that this morning. Yes. This one has been an interesting one where it's really been about 2.5 years of activity coming down across drilling and completions for various commodity reasons. And so we've had to look and say, okay, what's happening next, how do we adjust the company and the structure for where we are, where we think it's going. And we continue to do that. So even though we're saying we think activity is relatively steady from here, we continue to look at the structure of the company and make sure we're rightsized for where we are and where we're going. With it coming down in the pattern that it has this time, I think there's a chance that the reverse look similar, but there could be a little bit quicker inflection on the gas side. But either way, we see upside from where we are, whether it's continuing to adjust our company for where we are in the market or upside from gas activity later in '26 and '27, we still see upside. So we think we're in a great position. We've got strong balance sheet, lots of flexibility with the cash and continue to deploy technology and get paid for it. And so even though it's -- we're in this -- what do you want to call it, a softening market or moderating market or however you want to describe it over the last period, we're still upbeat about where we are and where the company is in the market. James Rollyson: Got it. That's helpful context. And then maybe lastly, just on the kind of digital suite that you laid out in the completion side that you've already started putting on, and I think you mentioned every fleet will have it by the end of the year. Maybe some goalposts around what is like the revenue and profit opportunity in that space if you get a high rate of customer adoption? Just when you think about how that maybe offsets the general activity trend that we've seen as we go forward. William Hendricks: Well, I think it's still early days. And on the completion side, we're still signing some contracts to do that and providing those digital services for next year. On the drilling side, it's millions of dollars a year in revenue that we're generating off the digital. We rolled out our Cortex operating system years ago, and we continue to add applications to that on the drilling side. And now those applications, through our data science team, are incorporating artificial intelligence, will be layered into those as well. And so that's just going to enhance the productivity of those applications. So I think it's still early days in the technology journey. We've built out the infrastructure. For those of you that have come to see our PTEN Digital Performance Center, you know we've made the investment. We've got the platform. And so now we've got teams that are building on top of that. And we're talking software. This is not heavy capital in terms of an investment, but yet there's revenue upside for us. Operator: Your next question comes from the line of Dan Kutz with Morgan Stanley. Daniel Kutz: So just wanted to ask on the kind of nameplate Emerald fleet side. I think last quarter, you guys that you had over 225,000 horsepower of capacity. And then you flagged the latest direct drive delivery at the end of this last quarter. Could you just update us on what kind of the Emerald fleet size is at the that latest delivery? William Hendricks: It's around that 250,000 level right now. We've still got some more of those Emerald 100% natural gas that are being delivered this quarter. We're deploying them this quarter and still have some more coming in, but it's still around that level. In the overall horsepower, which I think is even more interesting. Like I mentioned earlier, we had, had as much as 3.3 million, but we brought that down to 2.8 million. And I think there's others in the market that are doing similar. And that's why I'm constructive on the market for completions and pressure pumping just because I think that overall horsepower continues to come down in the market. Daniel Kutz: Great. And maybe just to close that out, after everything that has been ordered or you're still waiting for delivery. After all that's delivered maybe by the end of this quarter, what's kind of the capacity of the Emerald fleet at that point? William Hendricks: It will be a little over 250,000, and we'll update you on the next call when we have all those numbers. Daniel Kutz: Okay. Great. Understood. And then maybe -- you guys have already shared a lot of this, but maybe just to kind of ask directly if you could juxtapose some of the differences between the Emerald electric fleet and the direct drive fleet just on a relative basis, the build costs and maintenance costs, kind of fuel and operating costs, operating efficiencies and maybe a lot of that remains to be seen as you guys deploy the direct drive fleet and actually get the real-time data. But yes, wondering if you could just, at this point, how are you thinking the 2 types of technology would perform and the relative kind of build and maintenance cost between the 2? William Hendricks: Sure. Let me just explain it this way, and I'll give you some high-level round numbers on it. So our Emerald electric is performing really well in the field. We have customers that want to use that. We actually grew the amount of horsepower in our Emerald electric this year because we had customers that wanted to move from standard frac size to simul-frac and trimul-frac with the electric. When we do that, you also have to increase the power supply at the well site. And so we've gone from, for instance, on one job, a single 35-megawatt turbine up to a 35-megawatt turbine and combine it with some smaller turbines as well to generate enough power to run larger frac spreads than what we would normally do with a 35-megawatt turbine. The turbines are expensive. 35-megawatt turbine is generally talking about capital costs deployed in the field in the $40 million to $45 million range. And then when we put the smaller turbines out there as well, you're in the $15 million to $20 million range per turbine. So you're talking about a lot of capital costs tied up just on power, and you're also competing in the market for that power with everything that everybody else has talked about and where power is going to go over the next couple of years. So it's not just capital costs, but you're competing for those types of power-generating devices as well. When we look at the 100% natural gas to drive engines, and these are high horsepower engines, 3,600 horsepower. So it's a new technology that's being deployed versus other technology that may have been deployed in the past couple of years. We're excited about this. This is a great supplier, a well-known manufacturer of the engines and the transmissions and then we spec out the rest of it, including our own control systems on it. And we think that with our control systems on it, we can help manage it. When you look at the overall capital cost versus an electric with the turbines, I don't have the actual numbers and differentials in front of me, but it's certainly lower. Our teams have done all the work on that. When you look at the OpEx, the OpEx for a natural gas director of engine is going to be higher than in diesel, but the overall OpEx or 100% natural gas direct drive engine, in our projections, is lower than trying to maintain both electric pumps and the turbine generators at the same time. And so overall, when we look at the amount of capital deployed, you're talking about 25%, maybe 30% reduction in some cases to get the same amount of horsepower at location where you're still burning 100% natural gas. Does that help? Daniel Kutz: That was very helpful. Operator: Your next question comes from the line of Sean Mitchell with Daniel Energy Partners. Sean Mitchell: Can you hear me okay? William Hendricks: Yes, Sean. Sean Mitchell: But keep on hit it on the drilling guide, but I want to turn to the completion got a little bit trying to better understand the typical seasonal slowdown in budget shortfalls and hoping you guys might be able to offer some color on this? At this point, do you have any fleets which have been idled, where you know that fleet will go back to its prior customer in the first half of '26? And maybe any way you can frame the magnitude, that might be helpful. William Hendricks: So we haven't idled any fleet per se. And the way -- the best way I can describe that is quarter-on-quarter, we're still working the same amount of horsepower pumping similar horsepower hours in field, but we've grown some fleets to do more simul-frac and trimul-fracs. So there's been a shuffling of horsepower around to different places. The fleet count, at the end of the day, is really kind of hard to judge. It's not such a great metric because of the fluctuation in fleet size as we do more simul-frac and trimul-frac. And I think you'll see companies like ourselves where the actual horsepower per fleet grows a bit because we're doing higher intensity fracs. We're doing more volumes on pads, things like that. So -- but we -- to sum it up, we are working the same amount of horsepower, pumping similar horsepower hours quarter-on-quarter. So we didn't really stack any technology. C. Smith: Yes, Sean, I'll just add to that. When we look out at the fourth quarter and try to predict seasonality, I mean, we're giving a little bit of -- we take an assumption around kind of what we think we'll see in terms of some downtime around the holidays, maybe potentially some downtime around some weather. And sometimes it's better, sometimes it's worse. And so it's -- you just -- as you go through the quarter, you just have to kind of play it as it comes. Sean Mitchell: Yes. Maybe one more. Just as you talk about a lot of technology, some exciting stuff in the industry today, how much of the improvement initiatives that you're seeing are self-directed versus kind of maybe being requested or suggested by your customers? William Hendricks: I think it's kind of even balanced. We've got customers that request certain things, but we've also got a lot of smart engineers in the company that say, hey, if I deploy machine learning in this way, then we can do this, and it's going to improve our ability to drill a longer lateral or manage how we pump a stage into a well. And so I think it's a mix of both. Operator: Your next question comes from the line of Don Crist with Johnson Rice. Donald Crist: Andy, I wanted to first applaud you for sticking to your guns and which I'll do is a core competency, and not chasing the latest fad as some of your competitors, including very large competitors are doing. But in that vein, I kind of wanted to ask a question about M&A. We've seen a lot through the E&P side and investors keep on asking all the analysts, is there going to be another wave of M&A on the oilfield service side. And a lot of us don't really see it. But do you see some of your larger competitors that are chasing the power side actually freeing up some of that equipment that could be attractive to you all in the future, to where you could, number one, stick to your core competencies, but go into another kind of M&A transaction that would be accretive in the future, possibly overseas? William Hendricks: Okay. There were several different questions in that one, but let me try to take some of that. So first off, I'll say, we don't have to do any M&A. We're really happy with where the company is today, the cash production profile that we have with the company, the technology deployment that we're doing. So there's nothing that we need to do. We've got great segments that are doing great work and strong competitors in the market today and leading in a lot of areas. So happy with what we have. In terms of some consolidation, I think that, let's say, on the completion side, there's probably still some room for some smaller companies to get together. And I think that would shore up some of the completions market if that happens over time. When you look at drilling, it's already a disciplined market. And so not really anything to do there. And so -- we just don't see a lot. And we've looked at a lot of things. We tried to see if there's anything out there similar to Ulterra. We really like the profile of that company, where it's relatively low CapEx compared to our bigger businesses that are heavier in CapEx. And we like what we've done there, and that team is doing a fantastic job. But we're happy with what we have. We don't have to do anything. C. Smith: Yes. Don, I would just add. As it relates to some of our current competition or industry participants that would be pivoting away from maybe their core businesses, I kind of find that hard to buy today that there would be a wholesale pivot. And so to the extent they would be selling anything out of their sort of fleet, it's probably not going to be at the level of technology that we'd want to participate in or want to buy. So I think probably the likelihood of that is pretty low. Donald Crist: Would that include some international operations? Like I know Bakers sold something to Cactus recently and there may be some other opportunities there. Would something to get a stranglehold on the Middle East be kind of attractive to you all? C. Smith: Well, I mean I think we'd certainly be interested in looking at it. But I don't put a high likelihood of anything being separated out in terms of our core businesses right now that would come across our [indiscernible] that we probably look at. Operator: At this time, there are no further questions. I will now turn the call back over to Andy Hendricks for closing remarks. William Hendricks: Well, I want to thank everybody who dialed in this morning. It was a really strong third quarter for us. I want to thank all the men and women at Patterson-UTI across all of our segments for everything they're doing and all the great results they had in the third quarter. And just want to say thanks, appreciate it. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] A telephonic replay of this call and the presentation slides to complement today's discussion is available on the Investors section of our website. Please also refer to the disclaimers on Slide 2 of our presentation concerning forward statements and non-GAAP financial measures. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Jason Darby, Chief Financial Officer. Please go ahead, sir. Jason Darby: Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me today is Priscilla Sims Brown, our President and Chief Executive Officer. Additionally, Sam Brown, our Chief Banking Officer, is here for the Q&A portion of today's call. First, I want to note that we are introducing shorter prepared comments this quarter. By condensing this section of the call, we hope to transition to your questions faster and avoid repeating details you've already reviewed in the earnings materials. Let me now turn the call over to Priscilla. Priscilla Sims Brown: Good morning, everyone, and thank you for joining us. Well, it was another good quarter. Amalgamated delivered core earnings per share of $0.91 in the third quarter, and we experienced strength on both sides of our balance sheet, highlighted by across-the-board share gain in our deposit franchise, coupled with accelerating loan growth as our new lenders are already having an impact. Amalgamated has now delivered $2.66 year-to-date core earnings per share, which is about 3% growth, making our case for an implied value of our stock well above where we have been trading recently. One thing I'd like to remind us is that we are coming off of a 2024 year where we grew core EPS by over 18%, far exceeding most banks. So what we're doing in 2025 is just that much more remarkable comparatively speaking. So for Q3, what stands out to me, mainly that we keep delivering great results. And the quality and sustainability of our earnings allows us to handle problem situations with ease. Last quarter, Jason discussed a $10.8 million syndicated commercial and industrial business loan to an originator of consumer loans for renewable energy efficiency improvements that was under stress. I'm happy to report the quick, successful and final resolution of this loan during this quarter with the final impact all absorbed within our core earnings. I use the word successful to reflect on the decisive action we took to exit a problem credit, negotiate what we felt to be the best near-term recovery value and put the problem behind us so that our investors can see our overall credit portfolio quality with clarity. While, of course, we're not happy to absorb a loan loss every quarter charge-off, the flip side to that is a nice improvement to our nonperforming assets and overall credit quality metrics. Nonperforming assets decreased $12.2 million or 34.6% to $23 million or 0.26% of total assets and credit quality improved nearly $19 million to $79.2 million or 1.67% of total loans, which is our best ratio since I've been here. All that said, we recognize that the credit cycle is still in process, and we are acutely aware of some of the big reserves and charge-offs taken by some super regional banks recently. The best thing I can say is that you can be sure Amalgamated will be early in disclosure and decisive in our resolution. Now let's move on to some more fun stuff. Back in the first quarter with the change in administration, we said we were built for this moment, built to thrive. Nothing has changed there. We still are. Our mission, brand and values resonate with our customers, which can be seen in how our production team performed this quarter. Loans grew by $99 million across our growth mode portfolios of multifamily, CRE and C&I, about 3.3% growth, a nice acceleration from the second quarter's growth rate of 2.1%. This was in line with our quarterly targets and benefited from the addition of some C&I experts that added to our origination team in the second quarter. Our PACE portfolio also saw an acceleration as total assessments grew $27.4 million. The strength came from over 8% growth in C-PACE, where there is a rapidly growing range of opportunity and to capitalize on our new originator partnership. And then there's our deposit franchise. Wow, these folks are amazing. We just keep taking market share in our deposit gathering as all of our segments saw growth during the quarter, driving over $415 million of new deposit generation. Very few banks our size can do what we do. Looking at our segments, political was a standout with deposits increasing $235 million or 19% to $1.4 billion as fundraising begins to accelerate looking to the midterm elections, which are now only a year away. Our Climate and Sustainability segment was also a standout as deposits increased $86 million or 21%. Not-for-profit also grew $42 million. Labor grew $26 million. And overall, it was just another great quarter for our deposit gathering team. For the most part, I like what we see. We still have some work to do, no doubt, but the bank is firing on most cylinders, which provides real optimism as we look to the future. To support our growth and to ensure we efficiently scale our operations, we have been investing in a fully integrated digital modernization program, which will drive improved productivity, provide a holistic view of our customers to better understand their needs, provide more customized solutions and ultimately deliver more revenue growth. This platform went live in the third quarter, and we're already seeing the benefits across our organization as we continue to manage the business to key metrics. To close, I could not be more excited with what the future holds for Amalgamated. Our ability to deliver balanced and predictable contribution from our lending channels is starting to show, and I'm happy that we have geographic diversity, which will help us manage future loan growth targets. We are keeping a close eye on the policy debate playing out in New York City. But regardless, we feel very good about our current rent stabilization exposure. We've added some more disclosure for you this quarter in the presentation on Slide 14, and we're happy to take your questions on that. There's also more I could talk about, but we want to get to your questions sooner this time. So let me turn the call over to Jason. Jason Darby: Thanks, Priscilla. Starting off with some key highlights on Slide 3. Net income was $26.8 million or $0.88 per diluted share, while core net income, a non-GAAP measure, was $27.6 million or $0.91 per diluted share. Our net interest income grew by 4.9% to $76.4 million, which exceeded the high end of our guidance range, bolstered a bit by the recapture of some loan interest income from the payoff of one of our legacy problem assets. Additionally, our net interest margin increased 5 basis points to 3.6%. Margin expansion was partially offset by a 5 basis point rise in our cost of funds as we carried a higher average balance of interest-bearing deposits in the quarter. It's worth noting that our average spot rate paid on deposits declined 8 basis points after we repriced our deposits following the Fed's 25 basis point rate cut in September. Deposits were strong. Excluding $112.3 million of temporary pension funding deposits, total on-balance sheet deposits increased $149 million or 1.9% to $7.6 billion. We also held $265 million of deposits off balance sheet at the end of the quarter. Continuing to Slide 4, we look at some of our key performance metrics during the third quarter. Starting on the left, our tangible book value per share increased $0.98 or 4% to $25.31 and has grown over 46% since September '21, which was Priscilla's first full quarter as CEO. Tangible book value is a key component of management's long-term equity incentives, which tightly aligns management with our shareholders. Our leverage ratio was managed well at 9.18%. During the quarter, we used capital to improve our TCE ratio to 8.79%, absorbed $4.5 million of losses to improve our credit quality metrics, returned capital to shareholders through approximately $10.4 million in share repurchases and to pay our $0.14 quarterly dividend. Looking forward, we expect to continue our buybacks over the coming quarters until our share price rises to a level that we feel realistically reflects our forward earnings projection. Our core revenue per diluted share was $2.84, a $0.17 increase from the prior quarter. This increase was due to a combination of higher net interest income and the effect of our share repurchases. Importantly, this metric shows our balance sheet optimization and commitment to positive operating leverage. We're laser-focused on driving this message to the top of the broader industry peer group. Jumping ahead to Slide 9. Core noninterest expense was $43.4 million, an increase of $2.9 million from the linked quarter. This was mainly driven by a $2.2 million increase in employee compensation expense as well as an expected $0.5 million increase in technology spend due to continued investment in digital transformation development. Overall, we were pretty much right where we want to be with expense management, and we're able to add some additional compensation accruals for full year performance that is starting to look pretty promising. I'm also really happy with our core efficiency ratio of 50.17%, which places Amalgamated on average at the top of the pack from banks in the $5 billion to $10 billion range as well as banks in the $10 billion to $100 billion range. We'll continue to keep our target of approximately $170 million for annual OpEx, though there may be some upside to that number. Hopping to Slide 10. Net charge-offs were 0.81% of total loans. Obviously, this is an elevated number, but there is some good news within this metric. First, as Priscilla mentioned, was the final resolution of the problem C&I credit we talked about in the second quarter. That resulted in a $5.4 million charge-off, but the P&L impact this quarter was only $3.1 million due to prior period reserves. This credit situation is done. And thankfully, we don't have to speculate about it any further. Another bit of good news was the note sale of a legacy nonperforming leveraged loan. This resulted in a $1.5 million charge-off, but also a small recovery of $0.6 million that flowed through our net provision expense during the quarter. The remainder of the charge-offs related to normal activity from our consumer solar and business banking portfolios, although each showed some modest improvement from the prior quarter. One thing we thought would be interesting to note is the bank received a revised outlook to positive from KBRA during our annual credit rating surveillance report completed during the quarter as well. Turning to Slide 11. The allowance for credit losses on loans decreased $2.5 million to $56.5 million. The ratio of allowance to total loans was 1.18%, a decrease of 7 basis points from 1.25% in the prior quarter. The decrease was primarily the result of a $2.3 million net reserve release related to the resolution of the loan I just discussed and also by a $2.1 million reserve release related to the resolution of a legacy leverage loan credit. This was partially offset by a $1.6 million increase in reserves related to one $2.8 million multifamily loan that went nonaccrual in the quarter and a $0.2 million reserve increase for a nonperforming construction loan. Finishing on Slide 16, turning to our outlook. Today, we are raising our full year 2025 core pretax pre-provision earnings guidance to $164 million to $165 million and tightening our 2025 net interest income guidance to $295 million to $296 million, which considers the effect of the forward rate curve of 2025. Additionally, we estimate an approximate $2.2 million decrease in annual net interest income for a parallel 25 basis point decrease in interest rates beyond what the forward curve currently suggests. Briefly looking at the fourth quarter of 2025, we target average balance sheet size at approximately $8.65 billion and our net interest income to range between $75 million and $76 million. We expect our net interest margin to stay near flat relative to our Q3 mark as we believe our loan yields will drop due to repricing as we model the Fed to cut rates again by a total of 50 basis points in Q4. Based on these targets, we've gone ahead and done the implied full year math on the guidance page, so you can easily compare it to our 2024 results as well as our baseline 2025 performance targets. We're now happy to take your questions. Operator, please open up the line for Q&A. Operator: [Operator Instructions] Our first question comes from Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: First question I had, I was curious in the slide deck on Page 11, you mentioned that there was a $1.9 million specific reserve. What is that against? Jason Darby: Mark, this is Jason. The specific reserve that was built is related to one of our multifamily properties that we had an appraisal put against. It's one of the properties that we had already been through a refinance or a renewal about a year ago. It had a little bit of an equity infusion. We did a modification of terms. It had been paying and then we received an updated appraisal as part of our normal process for evaluating substandard credits that are real estate oriented and the valuation didn't look appropriate for the value of the property that we had originally been carrying on the books. So the reserve was put in place to effectively account for a change in the LTV. As of right now, the credit is moving to a nonaccrual status, and we're trying to figure out a path forward with that particular deal. But the [indiscernible] is pretty good at the moment. We just felt the reserve was appropriate. And as we've said before, when we see problems in the portfolio, you'll see our coverage ratios move, and that has been reflected also in the overall coverage for the portfolio moving up to 30 basis points from the 20 we had it at previously. Mark Fitzgibbon: Okay. And then, Priscilla, you had mentioned before your comments about changes to the rent-regulated multifamily market in New York and you guys feeling comfortable with that. I guess I'm curious, in the event that we do have a [ Mamdani ] and he freezes rents through the rent guidelines Board, would that change your outlook for that rent-regulated multifamily business? Is it likely that you'd sort of slow down growth in it or maybe exit and sell some of the portfolio? Priscilla Sims Brown: No. Thank you, Mark, for the question. I'm sure it's on the minds of a number of people, certainly those watching New York politics. By the way, this is why we're giving more disclosure. You see it on Page 13 and 14, and we'll continue to monitor the situation closely and update you as we learn more. But we don't expect that we're going to see impact in the next 18 to 24 months, certainly based on those changes. I do think it's important to think about the fact that, that's one tool, and it's one that's talked about quite a lot, this notion of rent freezes or stabilization. But there are other tools as well, zoning reform, public-private partnerships, community land trust, which Mamdani has spoken about, and certainly, office to residential conversion, social housing, all those things. And so keep in mind that there's real potential upside if a balanced approach leads to creation of more housing in New York, and that's one of the things we're looking at as well. Mark Fitzgibbon: Okay. And then sort of unrelated, it seems like we read every day that the Department of Energy is canceling or pulling funding from green energy projects. I think the Department of Energy has canceled something like $8 billion worth of projects and pulled funds back. And I know in the past, you guys have sort of said the funds were allocated, so you weren't concerned. But now that the administration is pulling those dollars back, I guess I'm wondering if you're concerned about any of your various projects related to that and how those are likely to sort of play out if federal funding evaporates. Sam Brown: Mark, it's Sam. I'll jump in on that one. So look, in the existing portfolio, we feel totally great about where we are. Those projects are already in the ground. And as we've talked about in the past, their funding streams, including their tax credit provisions, including any federal contribution is locked in. The other thing I'll mention is we talked about back in the second quarter call, the acceleration of projects and transactions in order to hit that deadline that will happen in 18 and 24 months. You certainly saw some of that pull-through happen in our C&I growth for the quarter, which we are very pleased about. And we're also seeing that in pipeline as well. The other thing I'll add just on the broader market spectrum, as you mentioned, about what does that mean kind of in general, as things change, you've heard us talk a lot about growing energy demand, citing a bunch of stats and figures from various well-respected authorities. Kind of the best thing I would throw out is this -- there is a new kind of base case assumption about what renewable energy deployment looks like being only 4% less than what it was before the budget was passed last year. So again, we feel good about that. And when you couple that with how energy demand is expected to continue to rise between 2.5% and 3.5% per year, getting up to 25% by 2030, 78% by 2050, the demand here dictates that there is going to be a need to finance these projects. And so while, yes, federal capital contribution might change, the reality is this industry is alive and well and is going to have a lot of participants in the financing these projects for years to come. Mark Fitzgibbon: It's hard to believe, Sam, that none of the projects you're involved in the fund -- federal funds have been pulled back from. And it's also -- it's hard to believe that if you don't have federal funding, the projects still pencil out financially. I guess I'm curious, just from the outside looking in, reading the media every day with money evaporating, it just seems a stretch to understand that. Sam Brown: Yes. And I think a lot of what is out there, Mark, is funds being pulled back for projects that haven't started yet. For example, I know that there was the largest project in Nevada was certainly a big headline recently. In our portfolio, everything we financed is already underway, has -- in an operating state, those projects are not in jeopardy because they are underway. Where there are projects that are still in pre-dev, I think that is a completely valid concern. That is not something we have present on our balance sheet and not an area we focused on as we've built out our portfolio. Mark Fitzgibbon: Okay. Last question I had. I guess I'm curious, we're in kind of unusual times with what's going on in Washington and all this sort of conversation around debanking. I know you guys have been written about in some articles in the journal and elsewhere. I guess I'm curious, how can you best position Amalgamated so that you don't become a target for the regulators given their aggressive debanking efforts? Priscilla Sims Brown: Thank you, Mark. Yes, there's a lot of noise in the news, and we certainly see it all as well, and we know you do. I guess the best way I can address that is to say we continue to be a bank that just follows all laws and regulations, and we always will. We focus on risk management, and we focus on solid, consistent performance. Organizations that manage with appropriate KYC and BSA requirements, they know we're open for business. And you've seen that on both sides of the balance sheet consistently since these concerns started to be manifested in the last -- this year, certainly. If you look at the core deposit growth, it's phenomenal. We continue to see growth across all of our segments, not just some. And so that -- those solid returns and strong profitability is really our best answer to what you're hearing. And we don't expect to see any material risk to our business model or our customer base based on the fact that we are a bank first and foremost. Operator: Our next question comes from [ Mark Shutley ] with KBW. Unknown Analyst: So on expenses, you mentioned you still target the $170 million a year, I think, but expenses came in a little higher than we were expecting in the third quarter. I know you've got the digital transformation underway. And so it sounds like a better run rate for quarterly expenses is probably somewhere in between this quarter and last quarter. Just trying to think about the moving pieces of the PPNR guide. Jason Darby: Yes. Sure, Mark. I'll take it. This is Jason. So on expenses, I think this quarter came in very much what we were expecting in terms of our overall progression towards our $170 million annual OpEx guidance. And we have been talking about for a couple of quarters, the ramping in expenses that was going to happen as we got to the back half of the year. And we were in a better spot than I was really expecting at the end of the second quarter. Here in the third quarter, we also did very, very well on the expense side. Now we were able to book a little bit of accrual in this quarter for some compensation-related expense that would be tied to year-end performance as it's becoming clearer and clearer that we're going to have a pretty strong year. So that really was the top off on maybe the expense expectation you had versus where we came in at about $43.3 million for the quarter. But if you look at it year-to-date, we're $125 million versus an average target of $127.5 million. So we're doing better there. The core efficiency is still really, really strong. And to your comment about what the fourth quarter ought to look like, I would expect it to look very similar to Q3. Now we've said that $170 million is still the target, but there's some potential upside there. If we hit expenses that looked a lot like Q3, we'd probably have some upside beat on our $170 million target. But we sort of leave that out there as a conservative marker because in the fourth quarter, occasionally, things pop up that require some additional expense to cure year-end processes relative to audits or other types of things that pop up towards the end of the year. So all things equal, I like a run rate of very similar to what we had for the third quarter as the projection for the fourth quarter. And in theory, if we hit that, there's some upside potential to the $170 million overall target. Unknown Analyst: Okay. That's helpful. And then maybe switching gears. You mentioned the loan yields. I think you expect that to come down next quarter. Obviously, those saw a nice increase this quarter and kind of drove the NIM. But with a couple of rate cuts expected, I totally get that. But I was just wanting to dig in a little bit more and see maybe what new originations were coming on at in the quarter and sort of any additional color you have there? Jason Darby: Yes. Perfect. Great question. Let me start off with the loan yield and the decline. I think, obviously, picked up on our projection of the 50 basis points of the total rate cuts, and that's obviously going to have an impact on some of the variable pricing we have in the C&I portfolio. And also, I did make a comment there was a bit of a one-timer that flowed through with the recapture of some interest income for a very long-dated problem credit that we have had on our books that we were able to get a full payoff from recovery on. So that accounted for about 9 basis points of loan yield in this quarter. So most of the drop will probably be just tied to the resetting of net interest income -- I'm sorry, noninterest income -- net interest income for the quarter, absent that onetime effect for the current period. Now in terms of the bring on, we had a pretty decent quarter in terms of overall bring on. I think where we were on the C&I side was in the high 6s, maybe even crossing to low 7s in certain places for the quarter. The real estate portfolio came in just above 6%, which are pretty strong yields given the credit quality that we're seeking. And then going forward for the fourth quarter, we're pretty much saying it's going to be about 30 to 50 basis points lower just as a result of the repricing. So figure somewhere in the 6.50% to maybe 6.75% range on your C&I deals and maybe close to 6%, maybe 5.75%. I'm kind of getting a little bit wrong there, probably about 25 basis point decline in the bring on yields from the current quarter. And then the only other thing to point out is that we still have a very strong origination on the PACE side, which drives a yield of about 7%. Now we'll see probably a little bit of erosion there, but those coupons are pretty strong, and they really help the margin from a rollover perspective on the yield side. Operator: We have reached the end of the question-and-answer session. I would like to turn the call back over to Priscilla Sims Brown for closing comments. Priscilla Sims Brown: Thank you, and thank you for those very good questions. I'm sure they will continue as we follow up today and in the future around the quarter. But I want to just take a second again, as we do every quarter, to thank our employees for their hard work and the dedication to the bank and our customers. We know our success would not be possible without the commitment and the determination of our talented team of bankers. To conclude, I'm very pleased with our third quarter results, which demonstrates our lending -- sorry, our leading deposit franchise, which is unique in the industry and when you combine that with our lending platform, which I also believe is unique, we are at an important inflection point. Taken together, we're poised to deliver continued organic growth as we further build the earnings power of the bank and as we focus on delivering long-term value for shareholders. I look forward to updating you on our progress on the fourth quarter call and taking your calls in the meantime. Thank you. Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation. Enjoy the rest of your day.
Ulrika Hallengren: Welcome to the presentation of Wihlborgs' 9-Month Report 2025. There's an old saying when you think you can see the light at the end of the tunnel, beware, it could be an oncoming train. We never know what will happen ahead, and we try to be prepared for whatever we can think of. But let us be clear, we see some glimmer here and there, maybe not the full ray of light yet, but nice glitters in the horizon. It's a very busy report week for all of you, so I will try to be short and precise. That means standard procedure about the last results of our continued growth and some new records, but also some figures regarding loyalty among our customers, how we can calculate retention rates and not at least our view on future occupancy. We start with a summary of the quarter, July to September. Rental income up 6%, a new record at SEK 1.101 billion; income from property management, plus 11%; net letting positive at SEK 6 million; net EBIT to EBITDA at 10.3x, good access to financing. And as said many times before, but this still stands, demand remains for good quality in good location, and we are proud to be able to continue with the project investment that gives continued good potential for growth. Looking at the whole period, first 9 months, rental income up to SEK 3.243 billion, plus 4%. The operating surplus increased to SEK 2.334 billion and income from property management increased by 12% to SEK 1.482 billion. The result for the period amounts to SEK 1.370 billion, corresponding to SEK 4.46 per share and EPRA NRV has increased by 10% to SEK 96.23 per share adjusted for paid dividend. A comparison of the rental income first 9 months '24 and first 9 months '25. Indexation gives plus SEK 30 million; acquisition, plus SEK 90 million; currency effect, minus SEK 21 million; additional charges, plus SEK 21 million; and completed projects, new leases and renegotiation plus SEK 8 million. And here is also a new higher property tax of approximately SEK 15 million included. So higher vacancy today than a year ago, but small improvement since last report and during 2026, the improvement from new leases will show. And the streak of positive net letting continues, plus SEK 6 million in the quarter, plus SEK 65 million for the period and in total, new leases at a yearly value of SEK 300 million signed in the period. For the third quarter, the volume of new leases of SEK 66 million is good. And maybe I expected the net letting to be a bit better than SEK 6 million, but we got a late termination of SEK 16 million from a tenant who I'm not sure if they really want to move or just renegotiate. Discussions are ongoing, but the total termination is registered. So a possible upside ahead, 42 quarters in a row with positive net letting. Here are some of the tenants that we have signed during Q3, a combination of expanding tenants and new tenants from many industries, health care, insurance, biomaterials and a company that manufactures equipment for land-based fish farms as examples. And here, we have the net letting in a historical perspective, lettings in green, termination in light blue and dark blue stacks are the net letting. And as mentioned, quite high volume of new leases for being a third quarter. And the list of our 10 largest tenants in alphabetic order, strong customers, and they contribute with 20% of our rental income. 7 out of 10 are governmental tenants and the public sector contributes with 23% of total rental income. Rental value as of 1st of October is SEK 4.889 billion per year, plus 7.2% and rental income, SEK 4.379 billion, plus 4.6%. Effects from acquisition, indexation and higher willingness to pay for the right quality. Looking at like-for-like figures, all the properties we owned a year ago, excluding projects compared with updated figures, we can see that rental value is up 2.4% and rental income is down 0.8%. The growth in the rental market is supported by indexation of 1.6% in Sweden and approximately 1% in Denmark last year. Indexation ahead in Denmark expects to be a bit higher, and that will be reflected in the rental levels for 2026. I think the September number was 2.3% or something. Lower rental income in like-for-like is an effect of higher vacancy than a year ago. And at least, it's encouraging to see that vacancy appears to have bottomed out in several areas. More on that topic later. Changes in the market value of our properties. We started the year with SEK 59.168 billion in accordance with the external valuation of 100% of our portfolio. We have made acquisition, which adds on SEK 2.552 billion; in investment, SEK 1.911 billion; divestment, minus SEK 114 million; changes in valuation, plus SEK 450 million. And together with currency translations of minus SEK 500 million, that summarizes to a value of SEK 63.457 billion. The valuation this quarter have no changes in valuation yields, indexation or other underlying parameters. Expectation ahead is more likely to be positive, if I may guess. These figures, the running yield show how we actually perform in relation to the valuation, so not the valuation yield. For the whole portfolio, the occupancy rate is 90%, excluding projects and land and with an operating surplus of SEK 3.326 billion, that gives a running yield of 5.6%. Fully let, the portfolio would give a running yield of 6.4%. Good earnings capacity in relation to the value of the portfolio and good cash flow generation is the foundation also ahead. Occupancy is slightly up looking at the decimals since the last quarter and at least that is in the right direction. In the office portfolio, the market value is SEK 50.394 billion with an occupancy rate of 91%, 92% in Malmö, improved to 90% in Helsingborg, 90% in Lund and 92% in Copenhagen. The improvement has started and will be clearer during 2026. Operating surplus from offices summarized to SEK 2.755 billion and running yield of 5.5%, 6.2% fully let. The demand for logistics and production continues to be good in Malmö with an occupancy of 93%, lower occupancy in Helsingborg at 83%, 91% in Lund with a small portfolio and 96% in Copenhagen. 87% occupancy rate as a whole with a running yield of 6.4%, 7.5% fully let at a total value of SEK 8.988 billion. As mentioned before, we continue to see harder competition in the third-party Logistics segment with very quick changes in needs. That also means that occupancy can improve quickly when the market changes. But I assume that vacancy in the southern parts of Helsingborg will be a bit sticky since the area will go through a makeover that would take a number of years. But as mentioned before, still a decent running yield of 6.4% even with the high vacancy and the market as such continues to be interesting. The development of our total portfolio running yield, 5.6% brings stability, not least since the portfolio overall has a high quality and good location. As noticed before, a high increase of the running yield since 2021. Some sustainability highlights from Q3. We have been appointed as Global Sector Leader by GRESB, completed a battery storage in Lund and actually one in Helsingborg as well. We have signed more sustainable -- sustainability-linked loans, also including Scope 3 carbon dioxide performance, and we continue to reduce our energy consumption. As a new example, we have reduced the electricity used for heating and cooling by 50% at Ideon Gateway in Lund, including both offices and hotel. New cooling technology and of course, the Janne solution is the answer. And something about what our customers think about us. Our latest customer satisfaction index from now in September shows an index of 79 and a loyalty score of 82, very high numbers. Tenants are especially happy with our personal service with 88% satisfaction, our competence scoring 86 and accessibility score 85. Let me just say that I totally agree with our customers. I'm also very satisfied with my competent and service-minded colleagues. I give them 100 out of 100. A catalog of our value and properties in our 4 cities in Q3, 39% of the value in Malmö, 23% in Helsingborg, 17% in Lund and 20% in Copenhagen. The region and especially these 4 cities continues to be of high interest for future growth, both in population growth forecast, which will otherwise be a challenge in many places and in a number of new workplaces. And time for financials. Over to you, Arvid. Arvid Liepe: Thank you very much, Ulrika. Looking at the income statement for the third quarter isolated. Are we on the right slide? There we are. Thanks. Rental income grew by 6% to SEK 1.101 billion, and operating surplus increased by 4% to SEK 790 million. There are a couple of things to bear in mind looking at those 2 numbers. First of all, we've been through a new property taxation, and we got the new taxation values this summer. The taxation values are higher, which means that the property tax also is higher. The property tax -- the new property tax is applicable from 1st of January. So we have, you could say, a catch-up effect. So we -- the changes for all 3 quarters are accounted for in the third quarter numbers. That means that on the rental income line, as Ulrika mentioned, that has been affected with plus SEK 15 million from increased property tax, and on the operating cost side, our operating surplus has been affected with minus SEK 20 million from the increased property tax for the first 3 quarters during this year. So the ongoing -- or the future effect of the increased property tax will be smaller on a quarterly basis than you can see in the Q3 numbers. It's also important to bear in mind that on the rental income line, we've had a negative effect from currencies of minus SEK 7 million, and that same currency effect on the operating surplus line has been minus SEK 5 million. The income from property management amounted to SEK 495 million. We've had a small positive impact there from FX since we borrow a lot in Danish kroner as well. Income from property management up 11% versus the same quarter in 2024. We had positive value changes in the quarter of SEK 103 million. And all in all, a profit for the period of SEK 487 million. Looking at the balance sheet. The value of our property portfolio is now SEK 63.5 billion, up SEK 5.6 billion versus 12 months previously. Equity stands at SEK 23.5 billion, up SEK 1.2 billion versus 12 months previously. And during that time, we have, as you know, also paid approximately SEK 1 billion in dividends to our shareholders. And our borrowings are SEK 33.2 billion, SEK 3.5 billion higher than 12 months previously. Translating that into key numbers, our equity assets ratio now stands at 36.2%. The LTV has gone down from the last quarter to 52.3% and the interest cover ratio for the period stands at 2.8x. Looking at some per share numbers, I'd just like to highlight the EPRA NRV value at SEK 96.23 per share, which is up 10% adjusted for dividends versus 12 months previously. On the next slide, you can see the historic development of EPRA NRV, a stable growth over many years and the average annual growth adjusted for dividend is actually 15%. Moving on to the historical development of our financial ratios. The equity assets ratio at 36.2%, as you can see, is well above the 30% that we have set as the minimum level for ourselves and also on decent levels in a long-term historical perspective. The loan-to-value in the perspective of approximately 10 years has come down from around 60% now to 52.3%. And the interest cover ratio, as we've talked about before, has been very variable, especially during the special period when we had almost 0 interest rates when we had an extremely strong interest cover ratio. The rate is now stabilized and 2.8x is a quite decent level to be at. On the next slide, you see the net debt in relation to EBITDA, also that's in a long-term historical perspective. The ratio stands at 10.3x. It varies with a couple of decimals up and down, but being at 10.3x is a comfortable level for us. Looking at our sources of financing, we still have approximately half of our loans from bilateral bank agreements with Nordic banks, about 1/3 from the Danish rail mortgage system and 17% from the bond market. I would say that the banks are definitely more proactive in their lending efforts than they have been for many years actually. And we do see bank margins gradually moving downwards. The bond market has also -- as we noted already in the Q2 report, the bond market is a lot stronger than it was a year ago, and we can issue unsecured bonds at quite attractive levels in this market. The structure of our interest rate portfolio, you can see on this slide. The average interest rate is 3.29%, 3.33% if you include costs for unutilized credit facilities. We have both in the past quarter, but also if you look over the coming couple of years, we will have some effects of attractive interest rate swaps expiring, but we also see an effect of the margins that we pay to banks and in the bond market coming down somewhat. So overall, over the coming few quarters, I would expect the average interest rate to be reasonably flat. And yes, we can move to the next slide and see the development of the fixed interest period, which has gone up a touch in the quarter. It's now 2.7 years. And the average loan maturity in the loan portfolio is 4.8 years. And lastly, from my side, looking at available funds, we have unutilized credit facilities plus liquid funds of SEK 2.9 billion at the end of the third quarter, which gives us, in our view, enough financial flexibility to manage operations and seize opportunities in a good way. With that, I hand the word back to you, Ulrika. Ulrika Hallengren: Thank you. And an update on our investment in progress and a quick overview of our largest project. During the period, we have invested SEK 1.911 billion, and it remains SEK 2.730 billion to invest in approved projects, good volume in all our cities, a reasonable yield on cost with 6% or a bit above 6% for new build offices and 7% or a bit above that for industrial and a good mix of refurbishment and new build in the portfolio. Let's start in Copenhagen with our project at Ejby Industrivej 41 in the beginning, planned as and decided for a multi-tenant transformation, but with a 15-year lease with Per Aarsleff turned into a single-tenant building. 24,000 square meters, investment SEK 231 million and yield on cost a bit above 6%. Completion is planned to February 2026. The large project at Amphitrite 1 in Malmö has started off really well, a bit about 20,000 square meters for Malmö University at a 10-year lease. We have started at site with deconstruction. And during September, we got the building permission from the municipality. Completion is planned to Q4 '27 and procurement will be completed shortly. In Malmö and Hyllie, we continue with Bläckhornet 1 VISTA, an SEK 884 million investment. The mobility hub has already been completed and the office will be completed in Q1 '26 and during '26. Yield on cost, 6.2% and today, approximately 40% pre-let. The best possible product and low competition from new build in the area, but we still need more activity and more decisiveness from our customers before we are satisfied. An example of top-level refurbishment in Malmö is Börshuset 1. This is an almost iconic building right beside the train station, 6,000 square meters, offices, restaurant and co-working and absolutely top rents in a Malmö perspective. Completion in Q1 '26 and moving in will continue during '26. Pre-let, 95%. At Kranen 7 in Malmö, we will invest approximately SEK 136 million in a preschool for the municipality, 2,900 square meter zoning plan approved and completion is expected to Q3 '27. Public procurement act starts now. And at Sunnanå 12:54, 17,000 square meter logistics, 100% pre-let in a 15-year lease will be completed 1st of December '25, SEK 280 million investment and yield on cost close to 7%. In Lund, we are building a new modern office right beside the Central Station, Posthornet, phase 2, 10,100 square meter, yield on cost, 6.5% and completion Q2 '26. Pre-let, a bit above 40% today. But together with ongoing discussions, I believe we can reach approximately 70% before year-end, keep our fingers crossed, and very attractive product. And at Vätet 1, also in Lund, we continue with refurbishment and adding on areas for our new tenant, Arm, 5,700 square meters and a 7-year lease, investment SEK 145 million, excluding value of the land, and yield on cost a bit above 10% and over 6.6% yield on cost, including ingoing property value. In the southern part of Lund, we continue to develop of Tomaten. This product for BPC, completion Q2 '26 and investment SEK 79 million, 3,600 square meters and yield on cost 7%. Next to that, at former Stora Råby 32:22, now named as Surkålen 1, we have been able to improve since the project started. Tenants will be both Note and Lund University. So well-used land area and long leases. In total, 14,500 square meter completion in Q2 for Note and Q4 '26 for Lund University. Investment, SEK 260 million and yield on cost 9.2%. In Hörsholm, Copenhagen, we invest in a new school for NGG, 25-year lease, 11,600 square meter and investment SEK 390 million. Completion in Q1 '26. And at Giroströget in Höje Taastrup, the refurbishment for Novo continues, 62,000 square meters. Our investment is limited to SEK 423 million and completion is expected in Q1 '26, but Novo also pays rent during the refurbishment period. That was some of the ongoing project and just to touch on future possibilities as a repetition. 4 possible projects in Lund and Helsingborg, where we can develop some 70,000 square meters in the future. Zoning plans are approved for the first few projects and ongoing at Västerbro in Lund and some of the office possibilities in Malmö in the area of Nyhamnen and Dockan. High interest for the future, of course. If you should ask me which projects of these will be the next one, my best guess today is that will be none of these. The Ideon site in Lund is developing very well, and we have building rights there that might be of high interest for the growing defense and tech industries. Early volume studies have started, but nothing I can show yet. And the summary of Q3 again. Rental income up 6%; income from property management, plus 11%; net letting positive, net debt to EBITDA at 10.3x and good access to financing. And we will continue with a focus on cash earnings and future growth. We have been able to grow every year during different economic environment since 2005. We know how to adapt, find new ways and we will continue with this knowledge and ambition. Growth and cash flow is our passion and the compound interest effect of stable growth is hard to beat from SEK 7 billion to SEK 63.5 billion without any new equity from our shareholders. We have been able to grow, thanks to continued investments. They contribute to upgraded attractiveness and new demands and what comes first, higher rents or investments, have no answer, but these factors have a relation. Here is a graph showing the market rents for prime offices in Malmö and our quarterly investments during the same period from 2010 to present. The green bars represent our investment and the green line represent rent levels. And finally, a market outlook. Employment growth in our region continues. Office rents show long-term growth. Wihlborgs' project investment increase over time. Tenants on average, stay in the premises for 14 years, which support the strong customer satisfaction score. And if we just take the largest leases we have signed, we have a volume of some SEK 320 million moving in from now until end '27 and during the same period, terminations of some SEK 190 million, a good gap. So possibilities for growth is in sight. And with that, we are open for questions. Operator: [Operator Instructions] The next question comes from Oscar Lindquist from ABG Sundal Collier. Oscar Lindquist: So firstly, on projects. The 2 projects completed in the quarter, Galoppen and Kranen, how much did they contribute in the quarter? And how much should we expect into Q4? Ulrika Hallengren: They didn't contribute in the quarter, but will contribute for the full Q4. Oscar Lindquist: And then on the Sunnanå project, from when should we expect contribution from that project? Ulrika Hallengren: Also from 1st of October. No, 1st of December, sorry. Oscar Lindquist: 1st of December. Okay. And then the Börshuset project was moved to Q1. What's the reasoning? Ulrika Hallengren: The tenant will start moving in there. So there's no delay in the project, but it's a difference between when the building is completed and when tenants moving in. So I think the -- we will have a ceremony there in February, but the rent will be started to pay in Q1. Arvid Liepe: However, everybody does not move in Q1 of the signed leases. Ulrika Hallengren: Correct. we have moving in during the whole '26. Oscar Lindquist: Yes. And then if we move over to net letting, you mentioned a late termination of SEK 16 million in the quarter. When do you think you will know if they terminate or extend their contract? Ulrika Hallengren: We have calculated as terminated and discussions are ongoing. So I guess now during Q4, there will be a decision if they stay or... Oscar Lindquist: Yes. And if they terminate the impact would be in 9 to 12 months or what's fair to expect there? Ulrika Hallengren: Just a minute. 2027, from 1st of January 2027. Oscar Lindquist: Okay. And then -- so if we adjust for that termination, net letting was positive SEK 22 million. What's the mix here between projects and existing properties? Ulrika Hallengren: In the quarter, I don't have that figure right away. But I think actually that the existing portfolio contributed very well this year and also in the quarter and also good contribution from all our cities, at least for the 9-month period. So I would say that we see positive signals in all our 4 cities. Oscar Lindquist: Okay. So effectively [indiscernible] Arvid Liepe: It's -- in the quarter, I would say, without -- I don't have the exact figure either, but I would say that more existing properties than projects during this quarter in the net lettings. Oscar Lindquist: Okay. Perfect. And then if we look on the Bläckhornet project and the Posthornet project, how is discussions going there? You improved the occupancy slightly in Bläckhornet now in the quarter. What's your sort of ambitions closing in on completion? Ulrika Hallengren: Our ambition is to improve, of course. It's a very good product. And -- but the volume is quite large. So something tends to take longer time when you can choose of good things in many levels, so to speak. So I can't give a figure when I think it's -- but I think we will continue with the work for letting also during 2026. That's reasonable to think that. But let me also mention that we see a good -- we have signed new leases in [indiscernible] in the same area. And also, actually, we -- the portfolio we bought 1st of April, there was some vacancy at [indiscernible], for example. And that is now, I think, 20%, 30% vacancy, and that is now fully let. So there is definitely activity out there. Oscar Lindquist: And would you say sort of the outlook or discussions with the tenants has improved in the quarter and going into Q4 or... Ulrika Hallengren: Yes, I think so. But it depends. One day, you think it's slow and one day you think it's very active. So -- but overall, I would say that there's more positivism out there. Oscar Lindquist: Yes. And then on occupancy, it's essentially flat Q-on-Q, and you sort of alluded or guided to improving occupancy in the second half. Could you quantify what you expect in -- or what we could expect in Q4? Ulrika Hallengren: I especially guided on occupancy in offices in Helsingborg, and that have improved 2% during the year. And otherwise, I think that we will continue to have some improvements, but not quick improvements since we also have -- I mean, for example, SAAB will move out the 1st of January '26, and that will take some time before we have entering new tenants there. But a very good example of that is that we have already signed new leases for that building with new tenant moving in a year. So only 9 months for refurbishment. And I... Arvid Liepe: For part of the building. Ulrika Hallengren: Yes, for part of the building. So they take -- yes, [ they'll likely ] take one part of the building, and we also have good discussions for more areas there which might also end up in moving in, yes, I mean, October next year or so. So quite quick period between moving out and new tenants moving in. And not for the total volume, but at a good part of it. So... Operator: The next question comes from Eleanor Frew from Barclays. Eleanor Frew: Just one question from me. So on rental growth, your chart clearly shows there's prime rental growth, but can you comment on the more secondary assets? What's the rental growth you're seeing there? And is there any negative re-leasing on those poorer-quality assets? Ulrika Hallengren: I mean, of course, when you look into the absolutely best location and top rent levels, that is one area. If you just take a small step from that and still good location and good quality, the rent levels continue to develop well. If you go to more poorer area, we have not a large amount of equity there. So I can't really give a good guidance. But of course, it's harder to find higher levels of rents in poorer area. There will be a larger difference there in the market as it is today. Operator: The next question comes from Lars Norrby from SEB. Lars Norrby: I'm a bit late into the call. So cut me off if I ask a question that somebody else has already asked. But I have a follow-up on a question I heard, and that was about the occupancy rate, once again, flat in the quarter. Just to be clear, I mean, you have some 6 projects or so being completed in the first quarter of '26 and then you talked about that SAAB moving out. But based on what you know today, has the occupancy rate bottomed out? And at what point in time do you expect it to improve, at what stage in '26? Ulrika Hallengren: I would say that for the whole portfolio, I think the vacancy has bottomed out, but we can see for a shorter time or period, higher vacancy in some areas, for example, when SAAB moves out and before we have new tenants in place. But we meet that well with new rental agreements. So yes, I think we have bottomed out and will improve, but the improvement isn't a quick shift. It will take some time. And especially during 2026 and end of 2026, as mentioned before, we have a quite large volume coming in. But also now in Q4, we have good volumes coming in from Galoppen and Sunnanå, for example. So yes. Of course, we want the occupancy to be even higher, but still, it's good to see that we have flattened out and are on the up-going way on the occupancy again. Lars Norrby: Second and final question. 2025 has been a year where you're growing through projects, but also through a quite substantial acquisition. Looking ahead, '26, '27, is it very much all about projects? Or are you considering adding additional size of any magnitude through acquisition as well? Ulrika Hallengren: I expect that we will see a combination. It's good with the project volume because you can manage that and plan for that. And acquisition is harder to plan for. But we continue to be active and trying to find the best premises for us. And of course, it's an interesting period we're in. Lars Norrby: And just a quick follow-up on that. In what geographic area? Are we talking primarily about Copenhagen then? Or is it more likely to be in Sweden? Ulrika Hallengren: I think there is interesting things going on both in Sweden and Denmark. So we try to be active on both places, both countries. And as mentioned, I mean, you can't plan for transaction if you want them to be the best things for you. So of course, you can be aggressive and try to buy whatever, but we will continue to be picky on what we want to go into, of course. Lars Norrby: Sounds good. I hope you don't buy whatever. Ulrika Hallengren: We will not. Operator: The next question comes from Oscar Lindquist from ABG Sundal Collier. Oscar Lindquist: So I just had a follow-up question on the property tax you mentioned weighing on the NOI margin. So the effect in this quarter was SEK 5 million, as I understand it. Is that correct? Arvid Liepe: On the operating surplus line, yes. A negative effect of SEK 5 million. Oscar Lindquist: Yes. But going forward, will you be able to sort of pass on the full increase in property tax to tenants? Arvid Liepe: Not 100%, but the very largest part. I mean, we do have some vacancies, for example, and we have a very small proportion, but still a few inclusive contracts, so to speak. Oscar Lindquist: But then significantly lower than the SEK 5 million we saw this quarter? Arvid Liepe: Yes. Operator: [Operator Instructions] There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments. Ulrika Hallengren: Perfect. Thank you. Have we got any written questions as you can... Arvid Liepe: Let me double check. Not that I can find. No. Ulrika Hallengren: No? okay. So of course, you're welcome to come back to us whenever with whatever asked questions. Thank you for this. Arvid Liepe: Maybe we should conclude. This may actually have been a record quick presentation. Ulrika Hallengren: Definitely, 42 minutes. It's our quickest [ version ] , I think. We try to be precise and quick, but that was part of it. Arvid Liepe: Thank you, everyone, for listening in. Ulrika Hallengren: Thank you.
Operator: Good morning, and welcome to CenterPoint Energy's Third Quarter 2025 Earnings Conference Call with senior management. [Operator Instructions] I will now turn the call over to Ben Vallejo, Director of Investor Relations and Corporate Planning. Mr. Vallejo? Ben Vallejo: Good morning, and welcome to CenterPoint's Q3 2025 Earnings Conference Call. Jason Wells, our CEO; and Chris Foster, our CFO, will discuss the company's third quarter results. Management will discuss certain topics that will contain projections and other forward-looking information and statements that are currently based on management's beliefs, assumptions and information currently available to management. These forward-looking statements are subject to risks and uncertainties. Actual results could differ materially based on various factors as noted in our Form 10-Q and other SEC filings as well as our earnings materials. We undertake no obligation to revise or update publicly any forward-looking statement other than as required under applicable securities laws. We reported diluted earnings per share of $0.45 for the third quarter of 2025 on a GAAP basis. Management will be discussing certain non-GAAP measures on today's call. When providing guidance, we use the non-GAAP EPS measure of diluted adjusted earnings per share on a consolidated basis referred to as non-GAAP EPS. For information on our guidance methodology and reconciliation of the non-GAAP measures used in providing guidance, please refer to our earnings news release and presentation on our website. We use our website to announce material information. This call is being recorded. Information on how to access the replay can be found on our website. Now I'd like to turn the call over to Jason. Jason Wells: Thank you, Ben, and good morning, everyone. On today's call, I'd like to address 3 key focus areas for the quarter. First, I will briefly touch on the 10-year financial plan update we introduced just weeks ago. Second, I will walk through our strong third quarter financial results. And lastly, I'll discuss our announcement from earlier this week regarding the sale of our Ohio gas LDC. Last month, we introduced an ambitious 10-year plan focused on supporting economic development, delivering strong customer outcomes, reducing O&M through operational efficiency and driving value for our investors. Our capital investment plan of at least $65 billion is supported by some of the fastest-growing demand for energy anywhere in the country. Importantly, we also have visibility to at least $10 billion of incremental capital investment opportunities over the course of the plan, particularly in Texas, given the dramatic growth the communities we serve continue to experience. Specifically, in our Houston Electric service territory, we forecast peak load demand to increase by 10 gigawatts in 2031. This forecasted growth would represent a nearly 50% increase in peak demand over the next 6 years. Additionally, through the middle of the next decade, we estimate the electric load demand on our system will double to approximately 42 gigawatts. This level of demand will continue to support a strong investment profile. Our capital investment plan through 2030 drives a projected rate base CAGR of over 11% through the end of the decade and the potential for double-digit rate base growth through the middle of the next decade. The Greater Houston area is thriving, powered by what we believe is the most diverse set of growth drivers in the sector. It is not relying on any single industry and the results speak for themselves. This growth isn't aspirational. It's already here. Notably throughput in our Houston Electric business were up 9% year-to-date. This strong growth is anchored by our surge in industrial customer class throughput, which are up over 17% quarter-over-quarter and up over 11% year-to-date. This incredible growth provides a solid foundation for our earnings guidance. Specifically, we have strong conviction in our ability to achieve non-GAAP EPS at the mid- to high end of our 7% to 9% annual growth guidance from 2026 through 2028, and 7% to 9% annually thereafter through 2035. I continue to believe we have one of the most differentiated plans in the industry because of our unique combination of the diversity and pace of electric demand growth, a derisked regulatory and financing profile and our ability to continue investing affordably for the benefit of our customers. These attributes set us apart from our peers and enable us to continue to deliver value for all our stakeholders over the next decade and beyond. Now moving to our strong third quarter financial results. This morning, we reported non-GAAP EPS of $0.50 for the third quarter, representing a 60% increase over the same period last year. As we signaled last quarter, 2025 earnings reflect a more back-end weighted profile for the year, consistent with our return to traditional capital recovery mechanisms now that the bulk of our rate case activity is behind us. I'll let Chris cover the details in his section, but we remain well positioned to execute on our recently increased 2025 non-GAAP EPS guidance. As such, we are reiterating our full year 2025 non-GAAP EPS guidance range of $1.75 to $1.77, which would represent 9% growth over 2024 delivered results of $1.62 per share. Additionally, we are also reiterating our 2026 non-GAAP earnings guidance we initiated a few weeks ago. As a reminder, we are targeting at least the midpoint of $1.89 to $1.91 per share. At the midpoint, this range would represent an 8% increase over the midpoint of our 2025 non-GAAP EPS guidance range. Further, we continue to expect to grow non-GAAP EPS at the mid- to high end of our 7% to 9% long-term annual guidance range from 2026 through 2028 and 7% to 9% annually through 2035. As a reminder, our guidance is based on actual delivered results as we continue to execute and deliver value for our shareholders each and every year. I'd now like to discuss the recent announcement regarding the sale of our Ohio gas LDC. Earlier this week, we announced the signing of our Ohio gas LDC transaction, which is expected to generate approximately $2.6 billion in gross proceeds, representing a significant milestone in executing our 10-year financial plan. The strong valuation of approximately 1.9x 2024 rate base underscores the exceptional demand for U.S. natural gas LDCs. This outcome once again demonstrates our ability to efficiently finance our growth investments, this time by recycling the transaction proceeds of a high-quality business at nearly 2x book value and reallocating capital into our remaining portfolio at 1x book value. The after-tax net cash proceeds of approximately $2.4 billion will be redeployed into higher growth jurisdictions to efficiently fund our capital investment plan. Importantly, the proceeds should also provide additional flexibility in funding for future incremental capital investments. The transaction is expected to close in the fourth quarter of 2026. Chris will go into the details of the transaction, including its structure, which will allow us to more smoothly redeploy capital while maintaining a strong earnings profile. It has been a privilege to serve the customers and communities in our Ohio gas business, and we are committed to a smooth transition for our customers. This is a tremendous business with fantastic employees, and we know they will continue to provide great service to the 335,000 meter customers in Ohio. This transaction reflects our continued commitment to disciplined capital allocation as we seek to further enable growth, especially in Texas and long-term value creation for all stakeholders. Our growing capital investment opportunities are supported by accelerating and diverse set of load growth drivers. This, coupled with our ability to efficiently finance our plan continues to support our conviction that we have one of the most tangible long-term growth plans in the industry. And with that, I'll hand it over to Chris. Christopher Foster: Thanks, Jason. This morning, I will address 4 key areas of focus. First, I will review the details of our third quarter results. Second, I'll discuss the transaction structure of the recently announced sale of our Ohio gas LDC. Third, I'll highlight our progress on the execution of our 2025 capital investment plan. And lastly, I'll provide an update on where we ended the third quarter with respect to the balance sheet. Let's now move to the financial results shown on Slide 5. On a GAAP EPS basis, we reported $0.45 for the third quarter of 2025. On a non-GAAP EPS basis, we reported $0.50 for the third quarter of 2025 compared to $0.31 in the third quarter of 2024. Our non-GAAP results removed $0.03 of charges, primarily consisting of tax true-ups related to the sale of our Louisiana and Mississippi businesses and transaction costs in connection with our announced Ohio gas LDC sale. In addition, it removes $0.02 related to our temporary generation units as these units are no longer part of our rate-regulated business. These strong results give us confidence in meeting our positively revised 2025 non-GAAP EPS guidance of $1.75 to $1.77. Now taking a closer look at the drivers of our third quarter earnings. Growth and rate recovery when netted with depreciation and other taxes were a favorable variance of $0.07 when compared to the same quarter of last year. This positive variance underscores the strength of our interim capital tracker mechanisms, which continue to support the efficient recovery of our investments. We expect these tailwinds to continue driving earnings through the remainder of the year. During the quarter, we filed for our second set of interim capital recovery trackers at Houston Electric, the TCOS and DCRF mechanisms, which support the timely recovery of transmission and distribution investments, respectively. Our TCOS filing, which included a $15 million annual revenue requirement increase was approved and reflected in customer rates on October 10. Our DCRF filing, which includes a $55 million annual revenue increase is on the PUCT open meeting agenda for later today with updated rates expected to take effect in December. Weather and usage were $0.01 favorable when compared to the comparable quarter last year, driven by fewer outages across our Houston Electric service territory related to storm activity. O&M was $0.12 favorable compared to the third quarter of 2024. This significant improvement in O&M is primarily driven by last August vegetation management and other storm-related costs, where we spent approximately $100 million to accelerate work and improve customer outcomes. Additionally, we had $0.03 of favorability in other, which is primarily driven by an income tax remeasurement. This reflects our continued efforts to optimize our tax structure to align with the evolving composition of our portfolio, which after the closing of our Ohio transaction, will skew more heavily towards Texas. These favorable drivers were partially offset by $0.04 of higher interest expense and financing costs, primarily due to incremental debt issuances since the third quarter of 2024. Next, I'll go through the details of our recently announced Ohio gas LDC sale. As many of you may have seen earlier this week, we announced the sale of our Ohio gas LDC, which is expected to generate gross sale proceeds of approximately $2.62 billion, garnering a multiple of nearly 1.9x 2024 year-end rate base. We anticipate total net proceeds of roughly $2.4 billion after taxes and transaction costs. This is an outstanding outcome. This result exceeds what was contemplated in our financing plans, underscoring the conservative approach we take to our planning process. As such, the transaction will be accretive to both our plan and alternative financing sources. In the near term, these proceeds will serve to further strengthen our balance sheet. And over the long term, as Jason alluded to, this transaction will allow for greater financing flexibility and may enable us to fund incremental capital investments with less equity than the 47% rule of thumb we provided at our September investor update. Transaction proceeds will be redeployed into higher growth jurisdictions to support near-term capital investments in our Texas Electric and Gas businesses. Notably, after the close of this transaction, Texas will represent 70% of our investment portfolio. In connection with the transaction, we will enter into a 1-year seller's note with a 6.5% annual coupon, which will help support earnings in 2027. As a reminder, last quarter, we announced an increase to our 2025 investment plan as we continue to make targeted system enhancements. These incremental investments will help partially offset the loss of Ohio investments upon the close of the sale. The transaction is expected to close in the fourth quarter of 2026, aligning with our financing plans and long-term value creation goals. Next, I'll touch on our capital investment plan execution through the third quarter, as shown here on Slide 7. For the quarter, we are right on track to meet our positively revised 2025 capital investment target of $5.3 billion. In the third quarter, we invested $1.3 billion of base work for the benefit of our customers and communities, which, combined with the $2.4 billion we invested in the first half of the year, represents approximately 70% of our total year target. In short, we remain well positioned to achieve our investment targets for 2025. Now moving to an update on our balance sheet and credit metrics. As of the end of the quarter, our trailing 12 months adjusted FFO to debt ratio based on the Moody's rating methodology was 14% when removing transitory storm-related impacts. We anticipate these credit metrics could be further improved by early next year as we expect to issue securitization bonds in connection with Hurricane Barrel in the first quarter of 2026. We continue to target 100 to 150 basis points above our Moody's downgrade threshold of 13% as we remain laser-focused on efficiently financing our robust capital investment plan. Earlier this month, we once again illustrated our commitment to a strong balance sheet through our $700 million junior subordinated note issuance, which provides 50% equity credit. Our common equity guide through 2030 remains unchanged at $2.75 billion. As a reminder, we have derisked over $1 billion of these equity needs through the forward sales we executed earlier this year, and we do not anticipate common equity needs beyond those forward sales from now through 2027. We believe we are well positioned to execute the remainder of the year and beyond, and we are reaffirming our 2025 non-GAAP EPS guidance range of $1.75 to $1.77, which equates to 9% growth at the midpoint from our delivered 2024 non-GAAP EPS of $1.62. Additionally, we are also reiterating our 2026 non-GAAP earnings guidance we initiated a few weeks ago at our investor update from the midpoint of our new and higher 2025 range. For 2026, we are targeting at least the midpoint of $1.89 to $1.91. At the midpoint, this would represent an 8% increase over the midpoint of our 2025 non-GAAP EPS guidance range. Looking ahead, we expect to grow non-GAAP EPS at the mid- to high end of our 7% to 9% range from 2026 through 2028. After 2028, we will target growing earnings annually at 7% to 9% through 2035. We look forward to executing our plan that delivers on the most diverse growth drivers in the country, fueling economic development for years to come. And with that, I'll now turn the call back over to Jason. Jason Wells: Thank you, Chris. I'm proud of the team's continued execution over the past quarter and the results that firmly put us on track to deliver our guidance this year. This management team will work to not only execute the ambitious targets we set forth in our new industry-leading 10-year plan, but we will also work to enhance the plan for the benefit of all of our stakeholders. Ben Vallejo: Thanks, Jason. Operator, I'd now like to turn it over to Q&A. Operator: [Operator Instructions] Our first question is from Nick Campanella of Barclays. Nicholas Campanella: I just wanted to ask, Chris, you talked a little bit about it in your prepared remarks on balance sheet capacity here from the Ohio transaction. How are you kind of viewing it on like an FFO to debt improvement basis versus the plan? You mentioned financing maybe less than the 47% equity assumption. Is that now 30% or 15%? Is there any kind of way to further quantify that? Christopher Foster: Sure. Nick, if I could just maybe take a step back. And as you look at the transaction, there's really a couple of things going on. One is, over time, you've seen us continue down this path of increasing really the focus on the portfolio where we're reducing also earnings and cash lag where we can. So maybe that kind of goes to your FFO to debt point. As you look at the total outcome as we do sources and uses, you'll probably see us initially step into reducing the OpCo debt that's there. So that's roughly $800 million if you base it on a year-end '26 rate base of $1.6 billion. And then as we look at our plan overall, you're probably looking on the order of $400 million of benefit net to plan. So ultimately, what this puts us in a position to do, as you can imagine, is we'll evaluate both the improvement to the balance sheet here in the near term. And then as we go forward, it could allow us to deploy additional CapEx to the plan in an accretive way. Nicholas Campanella: Okay. Great. Appreciate it. And then just maybe on the deal, just any update on how local feedback has been on the ground and reception to the deal from state leadership since it was announced? Jason Wells: Yes. Nick, it's Jason. Reception has been great so far, very supportive. Don't anticipate any challenges and obviously going to work with our counterparty to successfully transition this business and continue the track record of great service in Ohio. Operator: Our next question is from Steve Fleishman with Wolfe Research. Steven Fleishman: Just maybe, Jason or Chris, more color on the sales growth in Texas, which obviously that's very strong. Just what sectors are driving the industrial sales so much higher this year? Jason Wells: Steve, thanks for the question. I think the throughput growth quarter-over-quarter, year-over-year really reflects the diversity of drivers that we have here in the Greater Houston area. We've already connected this year alone over 0.5 gig of data center activity. Much of that is on the transmission sort of industrial rate side. We continue to see very strong demand from energy, refining, processing and exports. And I think what we really saw as a differentiator this quarter was the increase in activity at the Port of Houston. It's the largest port by waterborne tonnage in the world. And we saw about an 18% increase quarter-over-quarter in exports. So it's really just a diversity of drivers. This isn't growth that we're anticipating coming down the line. This is growth across a number of different industries that we're experiencing today. Steven Fleishman: Okay. Great. That's helpful. And then just any update on prospects of data center activity in Indiana. And I don't know if you want to share any thoughts on how you're feeling about the regulatory environment in Indiana. I know you don't have any cases there right now, but just thoughts there. Jason Wells: Yes. We continue to actively work on data center opportunities in Indiana and feel well positioned to deliver on that. As we've talked about in the past, I think we're pretty uniquely positioned in the fact that we've got excess capacity today in the system that allows us to move quickly. It's an area that is very constructive, both from a cost of and availability of land, water, et cetera. And we've just brought online our simple cycle plant that was built to be easily converted to combined cycle that would allow us to efficiently increase the level of capacity available. So we continue to feel good about the prospects of bringing data center activity to Southwest Indiana. Stepping back on kind of a broader basis, we are all focused on affordability of our service up there. We, like many of the other Indiana utilities had a fairly significant step-up in rates last year as a result of a long-term trend of closing some very old generating facilities. As we project forward, though, we don't -- we see our rates growing in line with inflation over the remainder of this decade. We've taken some steps to help kind of mitigate the impact. We've canceled about $1 billion of renewable projects and we'll push out the retirement of our third and final coal facility a few more years. And so I think at the end of the day, we, like other utilities, are taking proactive steps to make sure that we moderate the pace of rate increases, but working constructively to bring economic development activity to the state. And I think that's very much aligned with the state leadership goals. Operator: Our next question is from Jeremy Tonet with JPMorgan Securities. Jeremy Tonet: Chris, thanks for the comments there on the asset sale. I was just wondering if you might be able to expand a little bit more. It sounds like a nice credit accretive properties to the final deal terms versus expectations. I'm just wondering if you could expand a bit more, I guess, on whether you see this being accretive to the earnings over time or any thoughts on that side? Christopher Foster: Sure. I think, Jeremy, a couple of ways to look at this. We do see it as directly beneficial to the financing plan, as I mentioned, and helpful from an earnings standpoint, too. A thing to keep in mind is, as we looked at the sale here of Ohio specifically from a -- as we reallocate spend, we're going to be in a situation where we're experiencing 25% to 30% less cash lag just on a historical basis. So I think that's certainly helpful as well. Going forward, we'll be putting those dollars to work, as Jason mentioned, certainly heavily in our Texas Gas and Electric business, including in a set of Texas gas projects that we're excited about really for years to come, where it really is a great business, as you know, coming out of the rate case last year there. So I think well positioned both financing-wise and from an earnings standpoint. Keep in mind, I alluded to this in my prepared remarks, but I would just emphasize here, too, as we're stepping into making sure that we were managing any otherwise earnings impact, we've already deployed about $500 million this year that we expressed in our plan. And keep in mind, as I mentioned earlier, this is about $1.6 billion of year-end '26 rate base. So you should assume that we're also going to accelerate another roughly $1 billion in 2026. That means that here, we're going to fully replace that rate base by the beginning of 2027. So overall, positions us well going forward. Jeremy Tonet: That's very helpful. And just one more, I guess, on the seller's note as you guys are receiving in the deal as far as how you think about how that helps facilitate the plan and what value, I guess, that brings to CenterPoint here being able to layer that in and how that allows you, I guess, to manage earnings going forward, but it sounds like the capital plan, as you said, really is a big offset there. Christopher Foster: Yes. Certainly, from a capital allocation plan, we've been prefunding thoughtfully. What I would say on the seller note is it's a pretty straightforward instrument there where we'll have that opportunity for the second year to 2027, having that 6.5% coupon associated with it on just over $1 billion. And so it allows us, again, to have good clarity. It also settles on a quarterly basis, I think, which is nice, too. So there's no real lag there. So straightforward instrument, one that it's a helpful component of the plan as well. Operator: Our last question comes from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Jason, quickly, a couple of things to follow up on. First off, I know you alluded to it a few weeks ago here, but how do you think about the AMI and rollout and the time line on that front? I mean, certainly, it seems like this is a multiyear project here. But certainly, within the scope of the 5-year plan, how do you think about the cadence of that rolling in? When do we start to get some visibility around that and contributions? Jason Wells: Yes, Julien, thanks for the question. This next generation of AMI investments really will start to fold into the plan in '26. Maybe taking a step back for a second, as we released the new $65 billion 10-year CapEx plan we identified more than $10 billion of upside. I would consider one of these projects as one of the upside opportunities to that plan. I think coming back to the timing, the most important thing that we can do is run a pilot in '26 to prove the use case and benefits for our customers. And then I would really look at that once we have that pilot in hand, making a filing with the PUCT and really starting to kind of work this project in earnest beginning in 2027 and beyond. I think there are very real benefits for our customers. As we've talked about in the past, when we experienced Winter Storm Uri, because of the generation of meters we had at the time, we could not use those meters for load shed-related activities. Instead, we had to shed load at the circuit level. This next generation of smart meters would allow us to do that at the home and I think would allow us to be much more targeted and allow for even more rolling of power if an event like Winter Storm Uri was to occur again. So a number of benefits to our customers. We need to prove those out with a pilot in '26 and then look towards more fulsome deployment beginning in '27. Julien Dumoulin-Smith: Excellent. And then if I could pivot in a slightly different direction, obviously, kudos on the transaction here. The other item, if I were to think about like what's not in terms of included in the formal guidance on cash flows is mobile gen. I perceive that the economics and price points there continue to improve as evidenced maybe by some of the folks out there like Fermi talking about this. But how would you characterize today where you are around that and the opportunities that exist more in the longer term, obviously, is that it's less committed in terms of the existing units and your exposure to some of that improved market pricing? Jason Wells: Yes. There's really 2 aspects to that, Julien. There's first, we've got what we call medium-sized units, just a little bit larger than 5 megawatts a piece, 5 units, 5 megawatts a piece that currently we have the ability to market and are actively doing that. The market for those units remains very strong and would be a potential cash flow tailwind to the plan. On a larger basis, we have 15 units that are roughly kind of call them, 30 megawatts a piece that are now actively supporting the grid outside of San Antonio until either kind of late '26, early '27 at the latest, at which time then we'll be able to remarket those units. As you said, the market remains strong. If anything, it is improving modestly. That will become a cash flow tailwind when we can release those units from the support of the ERCOT grid in San Antonio and remarket those again probably likely around spring of '27. So we continue to work with brokers, third parties to keep a pulse on the market and think about how we can kind of derisk and take advantage of this growth. But obviously, more to come here as the quarters unfold and as we get closer to those -- the release of those units. Julien Dumoulin-Smith: Excellent. Sorry, nothing to, but one final detail here. HB4384, right? So that's -- your peers in the state, your peer gas utilities in the state have been talking a good bit about this. I know that you all in the interim have talked up even more gas investments in your plan a few weeks ago. Is the scope of the contribution from that legislation fully included in the plan? And to what extent is there anything else that we should be considering here given your expanded investment in gas in recent weeks? Jason Wells: Yes. We think that was a very constructive piece of legislation to help sort of reduce regulatory lag. What I would say is the benefit of that legislation is incorporated in the plan that we released with respect to the investments that we have identified as we continue to look at enhancing the plan, and we've alluded to the $10 billion plus outside, there is opportunity as we fold gas-related capital in that the plan could be enhanced further with the benefit of that legislation. So partially in the plan has the opportunity to be improved as we fold more capital in. Ben Vallejo: Thanks, Jason. Operator, this concludes our call. Thank you all for joining. Operator: This concludes CenterPoint Energy's Third Quarter 202 Earnings Conference Call. Thank you for your participation.
Torbjorn Skold: Welcome, everyone, to BONESUPPORT's Q3 2025 Results Call. My name is Torbjorn Skold, and since September 1, I'm the CEO of BONESUPPORT. With me here today is our CFO, Hakan Johansson. And together, the 2 of us will use the next 25 minutes to guide you through the Q2 report and then open the line for any questions. Before starting the presentation, I would like to draw your attention to the disclaimers covering any forward-looking statements that we will make today. Next slide, please. So let's look at the financial and operational highlights from the quarter. Q3 was another strong quarter with solid execution across the business. Net sales came in at SEK 294 million, corresponding to a growth of 24% versus Q3 2024. Sales growth at constant exchange rate was 34%, showing that there is continued strong currency impact on our figures for the quarter. Our operating results, excluding incentive program effects, was SEK 79 million, corresponding to an adjusted operating margin of 27%. Reported operating results was SEK 65 million, and we saw strong cash generation with operating cash flow reaching SEK 71 million, leading to a cash position at the end of the quarter of SEK 379 million. One highlight in the quarter was the publication of the long-awaited CeraHip study, which now kicks off our market penetration efforts in this market segment, revision arthroplasty. We will look deeper into this later in the presentation. We continue to see strong traction for CERAMENT G in the U.S., where both new accounts and increased use among current users contributed to the strong progress. CERAMENT G sales in the U.S. reached SEK 192 million for the quarter. Furthermore, the proposed NTAP for CERAMENT G in open trauma has now been decided upon as well as a 6% general increase in CERAMENT relevant DRG codes by CMS for orthopedics. So all in all, an eventful and successful quarter. As I've transitioned into my new role and reflect on the business, I find our strategy sound and that the business develops very well. What really stands out is the solid evidence base supporting the CERAMENT platform and the significant long-term opportunity of CERAMENT globally in several clinical segments. This spring, we're planning to host a Capital Markets Day, where we'll share a structured overview of our key initiatives and our path forward. We'll follow up with more details on the official dates later. Operator: This is the moderator speaking. We are having some technical issues, but we are going to try to get the speakers back as soon as possible. [Technical Difficulty] Håkan Johansson: So the speakers have connected again. Can the moderator please confirm whether the sound and technology is up again. Operator: Yes, everything is great. Håkan Johansson: Thank you very much. Torbjorn Skold: Thank you, moderator. Moderator, can you please inform us how long did you listen to us? Operator: We came to -- you were at like the third slide in the third quarter report. Torbjorn Skold: Okay. I assume that we have gone through Slide 3, and we move over to the sales development. This chart shows the last 12-month sales in Swedish krona by quarter since 2019 in stacked bars by region, by product category. As you can see, the launch momentum for CERAMENT G in the U.S. is exceptionally strong. However, in the last 2 quarters, we've seen strong influence from the U.S. dollar to Swedish krona depreciation. Last 12 months growth in Q3 of 37% in the graph corresponds to an even stronger 41% at constant exchange rates. So most of this quarter-over-quarter slowdown in last 12 months' sales is due to the strong currency impact. CERAMENT BVF last 12 months dropped 2% year-over-year in constant currency. In total, antibiotic eluting CERAMENT grew with 59% last 12 months in the quarter in constant currency. Next slide, please. In U.S., sales amounted to SEK 246 million, representing a growth of 40% at constant exchange rates. There was some general variability during the quarter due to the usual stop and go dynamics, a reflection of the strong pace of new customer recruitment over the past 6 to 8 months. As part of our mission to modernize an outdated standard of care in the U.S., we have successfully opened one market segment after another. We started with foot and ankle, then we followed with trauma, and now we're moving into revision arthroplasty. Revision arthroplasty and the subsegment of periprosthetic joint infections are areas we have not specifically focused on in the past. Each year, approximately 1.5 million primary joint replacements are performed in the U.S. with just over 70,000 revision procedures requiring bone graft. The CeraHip results are groundbreaking. Although the study is not very large, patients have been followed for an average of 3.3 years with no infections reported. I'll speak more about CeraHip on the next slide. We have expanded our U.S. organization, and we plan to recruit additional team members with specialized expertise in revision arthroplasty to support the market entry and the medical education programs. We are expanding our presence in the market to introduce CERAMENT BVF for use in spinal procedures in Q4 2025. Several distributors are now in place to begin engaging with spine surgeons. Some of these distributors are already our partners today on the extremity side, while others represent new collaborations. The spine segment is new for us, and we will begin generating clinical data during 2026 to establish a foundation for further market penetration. We have also made strong progress in evaluating and preparing the regulatory pathway for introducing CERAMENT G into the spine segment. We have reached a stage where guidance from the FDA on the regulatory path is required. We plan to meet with the FDA at the beginning of 2026. The path forward will be shared and communicated at the Capital Markets Day this spring in 2026. The team have been working diligently with assembling data in reply to FDA's question on CERAMENT V, and we expect to send in the supplementary data pack in November. The material relates mostly to clarifications and making sure that the evidence is presented in the way that FDA wants to have it. Being a pioneer technology, there is no template as how to bring forward the evidence. The thoroughness of the process testifies to the rigor of solid data required to qualify a product into the unique category of antibiotic eluting bone graft. And we should remember that this category is defined by another CERAMENT product, namely CERAMENT G. So let's turn to Europe. Next slide, please. Sales performance in Europe continues to be influenced by the same dynamics observed in Q2. The third quarter typically shows some volatility due to seasonal factors. Additionally, the contraction and disruption in Germany have persisted as anticipated. Sales in EUROW came in at SEK 48 million, representing 5% year-over-year growth and 7% at constant exchange rates. Hybrid markets in Southern Europe, Australia and Canada are performing strongly. We're beginning to see positive traction from the investments made during the first half of 2025, reflected in improved sales performance. In the U.K., the previously announced prioritization of hip and knee surgeries is gradually restoring procedure volumes, which bodes well for the future of BONESUPPORT in U.K. However, the pace of recovery varies by region and is largely dependent on staffing levels. During the quarter, the European Bone and Joint Infection Society held its annual meeting. Several podium presentations and posters highlighted the efficacy of CERAMENT G and CERAMENT V in single-stage procedures and demonstrated improvements in patient outcomes. A poster presentation by Dr. Meller from Charite showcasing results from the CeraHip study attracted significant interest and a large audience. We'll review the detailed findings from the now published study on the next slide. Also, Professor Ferreira from University Hospital, Stellenbosch presented results from his study involving 103 trauma patients with bone infections. These patients were treated with a single-stage procedure using CERAMENT G or CERAMENT V. After an average follow-up of 11 months, 96% remained infection-free and no amputations done. [Technical Difficulty] Operator: Sorry for having some technical issues again. The speakers will be back as soon as possible. Torbjorn Skold: Annual Meeting of the American Association of Hip and Knee Surgeons, AAHKS in Texas, which last year attracted over 5,100 participants. In fact, our U.S. team is actively preparing for the event at this very moment as it kicks off today. Now I'll leave a deep dive into the numbers to Hakan. Hakan, please. Håkan Johansson: Thank you, Torbjorn. And again, sorry for what seems to be a day of technical disruptions and hopefully, now the -- everything stabilizes. So into the financials. Well, net sales improved from SEK 237 million to SEK 294 million, equaling a growth of 24% reported sales growth of 34% in constant exchange rate. Torbjorn has already spoken about the solid performance in especially the U.S. and the major drivers behind the sales growth, but as the weak U.S. dollar somewhat hides a continued strong trajectory in the U.S., I would like to share the U.S. sales performance in U.S. dollar. This slide shows the quarterly sales in the U.S. and U.S. dollar with continued solid performance quarter-to-quarter. The growth in dollar in the quarter of 40% should be viewed in perspective of volatility on BVF sales being 1.7% below same quarter last year, whilst CERAMENT G continued to show solid performance with a growth of 59.2%. The contribution from the U.S. segment improved with SEK 31.9 million and amounted to SEK 111.2 million. The improved contribution relates to increased sales after the effect from increased costs. Sales and marketing expenses during the quarter amounted to SEK 123.6 million compared with SEK 102.6 million previous year, of which sales commissions to distributors and fees amounted to SEK 84.2 million compared with SEK 65 million in the same quarter last year. From the lower graph showing net sales as bars and gross margin as the orange marker, it can be noted that the gross margin remained stable and strong around 95%. In Europe and Rest of World, a contribution of SEK 12.5 million was reported to be compared with SEK 15.6 million previous year. Sales and marketing expenses increased with SEK 4.6 million, including SEK 2 million related to the previously communicated commercial investment in the EUROW booster program. From the lower graph and orange marker, the minor drop in gross margin is noted mainly impacted by market mix. The flat selling expenses compared with the same quarter previous year is due to a depreciated U.S. dollar, but also an effect of seasonality. As mentioned previously, the quarter also included SEK 2 million related to the EUROW booster program. R&D remained focused on the execution of strategic initiatives such as the application studies in spine procedures and the market authorization submission for CERAMENT V in the U.S. These initiatives have been progressing well during the quarter and, among others, leading up to the launch of our product, CERAMENT BVF in spine later this year. And administration expenses, excluding the effects from the long-term incentive programs, remain on a stable level. The reported operating result amounted to SEK 65.4 million despite unfavorable currency effects totaling SEK 5.7 million, and I will come back to this in a following slide. The newly introduced tariffs in the United States are not expected to have a material impact on cost in 2025 due to high safety inventories. The full effect of the current 15% tariff equals a 0.8% impact on U.S. gross margins and will come gradually with full effect from 2027. The difference between adjusted and reported operating results are costs regarding the long-term incentive programs amounting to an expense of SEK 13.2 million in the quarter compared with SEK 7.3 million previous year, as you could see from the previous slide. Cash conversion remains solid with a fifth consecutive quarter with strong cash flow and an increase in cash during the period with SEK 69.3 million. Despite unfavorable currency effect with this report with a strong adjusted operating result and a solid cash flow, we continue to confirm a strong operating leverage and the business scalability. During the period, the Swedish krona has continued to strengthen against the U.S. dollar. Other operating income and expenses, therefore, contain foreign exchange gains and losses from the translation of the group's assets and liabilities in foreign currency, amounting to a negative SEK 5.7 million. Simply put, the negative SEK 5.7 million is mainly driven by the operating assets in the U.S. such as inventories and trade receivables. These are originally valued in U.S. dollars and at quarter end translated into a much stronger Swedish currency versus last quarter. The graph on this slide shows with the gray bars how the relationship between the U.S. dollar closing rate and the Swedish krona has varied over time. This is read out on the right Y-axis. The blue dotted line read out to the left axis shows reported adjusted operating results. The adjusted operating result, excluding translation exchange effects is the orange line. To explain this, in Q4 2024, the U.S. dollar to SEK was above SEK 11, which gave a positive effect of SEK 20 million in the quarter. And therefore, the blue dotted line is above the orange line. In Q1 2025, the U.S. dollar to SEK rate was SEK 10.02, creating a negative impact of SEK 30 million. In Q2, the U.S. dropped down to SEK 9.49, creating a negative impact of SEK 11 million and in Q3, continuing down to SEK 9.41 with a negative impact of SEK 5.7 million, meaning that the blue dotted line dropped below the orange line for these 3 quarters. The orange line eliminates the translation exchange effects and gives a more comparable view of the underlying trend in operating profit. In the table below the graph, you can see the FX adjusted operating margin of close to 29% in the period compared with 23% in the same quarter last year. And with this, I hand back to you, Torbjorn. Torbjorn Skold: Thank you, Hakan. And if we take the last slide, so to summarize Q3 2025 for BONESUPPORT, sales grew 34% in constant currency, reflecting steady and consistent progress. Adjusted operating margin reached 27%. Cash flow remains robust, underscoring the health of the business and its scalability. With the publication of the CeraHip study, strong endorsement from leading surgeons at Charite and detailed procedural guidance for using CERAMENT in revision arthroplasty, we're unlocking a new avenue for market expansion. This marks a significant step forward in our ongoing mission to transform the standard of care. We maintain our guidance on sales growth above 40% in constant exchange rates for full year 2025. And to conclude, my first period at BONESUPPORT has been as rewarding as it has been intense. I'm convinced that the most exciting part of our journey still lies ahead. And as I said, to provide a clearer view of what that journey will look like, we will host a Capital Markets Day in the spring of 2026. Lastly, again, apologies for the technical issues that we've had during the call, but now we're happy to open the line for any questions that you might have. Thank you. Operator: [Operator Instructions] The next question comes from Erik Cassel from Danske Bank. Erik Cassel: Yes. So India has probably cut out 70% of what you said. So you have to excuse us if we repeat some stuff. But first, I just want to confirm the sales level for CERAMENT G in the U.S. Was that USD 19.9 million in, 59% organic growth? Or is it a completely different figure? Håkan Johansson: Again, as commented, CERAMENT G reported a 59% growth. Erik Cassel: Okay. Good. First, I then want to ask, what are you seeing for trauma now during the initial 3 weeks of NTAP for CERAMENT G in the U.S. Håkan Johansson: Again, as communicated previously, what we see is a slightly different market dynamics than what we experienced launching into when there is a bone infection. So when there is a bone infection, the surgeon was looking for treatment options and CERAMENT G fitted very well. With trauma surgeons, it's a bit of a timing issue. We meet the trauma surgeon and the trauma surgeon haven't had a patient coming back with a bone infection during the latest weeks or months, et cetera. It's a harder call to convince the surgeon to try a new product. However, if the surgeon had had a bone infection lately, it's an easier call to convince the surgeon to start trying. So what we see confirms what's been previously communicated. It's a big market potential in trauma, but market penetration to start with will be somewhat slower than when there is a bone infection. Erik Cassel: Okay. But just specifically on the NTAP, you haven't seen that in and of itself accelerate uptake anything? Håkan Johansson: Again, the NTAP, Erik, is valid from 1st of October. So it's too early to see whether this has any impact in the penetration of the trauma segment. Erik Cassel: Okay. And then U.K. down 5.5% year-over-year. Germany, you said was worse. Is it possible to give any sort of more specific numbers on how bad Germany is doing and sort of how much that represents of the European sales? Håkan Johansson: Again, we have always been precautious to disclose exact numbers on geographic level. But again, if there are structural challenges... Operator: Speakers have been disconnected again, but if you have to stay on the line, I hope they will. Erik Cassel: The speakers was not disconnected. We heard them. Håkan Johansson: So do you hear us now, Erik? Erik Cassel: Yes, I hear you loud and clear. Håkan Johansson: Thank you. So again, some of the challenges [Technical Difficulty] Erik Cassel: Okay. Now I don't hear the speakers. Operator: Yes, a second, we're trying to fix the connection problems. Håkan Johansson: So dear moderator, where are we now in terms of technology? Because it feels like things are going silent. Operator: Yes. Now you came back. So maybe, Erik, can you repeat your last question, so we can go back from there. Erik Cassel: Yes, sure. It was on Germany. U.K. down 5.5%. You said Germany was worse. And I asked for if we could add any more color on Germany. How much is it down? And how big is Germany in terms of Europe sales? Håkan Johansson: Well, Germany is our second biggest market. So of course, when we have a setting in a market like Germany, it impacts on the totals. Erik Cassel: Okay. And then just lastly, do you have any visibility on U.K. and Germany coming back? You're saying that you're seeing a gradual, say, recovery in the U.K., but when can you be back to sort of normal levels or normal growth rates in those markets, do you think? Håkan Johansson: Again, what is impacting in the U.K. is that U.K. is a market where a substantial health care backlog is impacting hospital priorities. Already before the pandemic, there was patients -- 5.5 million patients in queue that has increased to 8 million patients. And the political priorities has started to recruit or reduce that queue, but still from a very high level. So again, we will be fighting against hospital priorities from time to time. But in the environment, we start to see that patients that have been waiting for surgeries where CERAMENT G is a good fit are gradually coming back. But as Torbjorn said in the call, it will probably be a slow process for the market to return into a normal and steady situation. Operator: The next question comes from Viktor Sundberg from Nordea. Viktor Sundberg: I have 2. So I guess it's not your main product in the U.S., but I just wanted to dig into the BVF product in the U.S. a bit. We've seen a negative trend in the U.S. for that product here for a couple of quarters. I just wanted to understand a bit more what is driving that and how to extrapolate that negative growth we see at the moment into the coming quarters and into 2026. And then I have another question. Håkan Johansson: Again, I think that it's 2. Again, as you said, we've seen that the BVF has been soft in the latest quarters, but also then showing volatility with a few quarters where we have good BVF sales. And we see that when we look at sales and hospital levels that there is an underlying volatility in the volumes. What we also see, and this is important for the longer term is that with the extending customer base and with surgeons recruited thanks to CERAMENT V, we also see these surgeons starting to use BVF in such cases where there is a controlled infection risk, et cetera. So we remain with a belief that all the time, BVF will stabilize and BVF will, like we've seen in Europe, deliver a small organic growth, but the main driver will be our antibiotic eluting products. Viktor Sundberg: Okay. And just looking into 2026, if we see substantial cuts to Medicaid as part of the One Big Beautiful Bill Act, even if you're not particularly relying on Medicaid directly, I guess, hospitals could see an increase in uncompensated care and maybe strained overall budgets due to this. What's your thinking around how hospitals will look at CERAMENT G as it carries a bigger upfront costs? Our feedback just by speaking to some orthopedic surgeons is that price is the main barrier for wider adoption of CERAMENT G in the U.S. And I'm just thinking that if major cuts to Medicaid will materialize in 2026, hospitals might focus even more on price next year. But I just wanted to understand how you plan to mitigate some of those budget headwinds, I guess, for next year. Torbjorn Skold: Yes. No, I'll start and then Hakan can fill in. So I think the plan to mitigate that is just to follow the BONESUPPORT strategy where we focus on evidence. And I think it was very interesting to listen in on what was discussed and presented at European Bone and Joint Infection Society. And it's very clear from those presentations and the discussions that are ongoing, and it's similar also at OTA that happened last week, which is a big trauma meeting in the U.S. is that it's very clear that there is a paradigm shift in the market in orthopedics going from long systemic antibiotic regimes in orthopedic surgeries to move to shorter, if any, systemic antibiotic regimes and combining that with local antibiotics with, for example, CERAMENT. So that paradigm shift is happening. There is clear evidence already now on the market. The topic is clearly highlighted. And more evidence will come in the future, partly by BONESUPPORT and CERAMENT and partly because the market moves in this direction. So I think it's nothing new really. It's something that has been happening. It will continue and our plan to address this is just to focus on the strategy, continue to build really, really strong clinical and health economic evidence and make sure that, that evidence is right and center, not just in front of orthopedic surgeons, but also the other decision-makers that play a role in those conversations. Anything to add, Hakan? Håkan Johansson: No, I think you covered it quite well. And again, the pricing is something we meet as part of the dynamics that we have referred to. And we have hospitals that are becoming frequent users and hospital administration noticing that this drives a certain level of costs. But so far in those discussions, when we come with strong clinical evidence and health economic evidence, this is discussions that we're able to handle through. So we're confident in the evidence around the technology and the difference to standard of care it represents. Operator: The next question comes from Mattias Vadsten from SEB. Mattias Vadsten: I have 3 questions. I think I'll take them one by one. First, I think quite confident wording around Q4, if I read it correctly. You also reiterate guidance of at least 40% sales growth. This require a quite strong finish to the year, I guess, very close to 40% organic sales growth at least and an acceleration quarter-over-quarter. So just what brings this confidence? And yes, if you have any further color on sort of how the start of Q4 have looked for you? That's the first question. Torbjorn Skold: Sure. I'll start with that more from a, let's say, tactical operational side and then Hakan can hopefully back it up in the numbers. So as we reviewed both the U.S. business and as we've reviewed the EUROW business in detail and the outlook for the quarter, the fundamentals look very strong from my view in terms of the number of accounts that we have, the penetration in the accounts whether we are increasing penetration or losing penetration. So I feel very confident in the numbers on an account level and regional level that we've gone through. I think also very high level, and Hakan will speak to this also, if you look at the comparables Q3 versus Q4, that also gives me more comfort in the numbers. So yes, I feel pretty confident in hitting that guidance that we've provided with 40% sales growth above prior year on a full year basis in constant currencies. Hakan? Håkan Johansson: Again, I think you covered this quite well, Torbjorn. And again, to bear in mind that if we look at the U.S. dollar -- sales in U.S. dollars, for instance, in the U.S. Q3 to Q4 last year, Q4 was a bit soft after a strong Q3 and then followed by a strong Q1, et cetera. And with the momentum that we have and again, we believe that Q3 somehow gives us a lot of confirmation in that underlying momentum, we are confident that we [Technical Difficulty] Mattias Vadsten: I can't hear Torbjorn or Hakan anymore. Operator: Yes, just a second. We're trying to fix the issue here. I hope they will be back at us soon. Håkan Johansson: Moderator, do you hear us now over a mobile line instead of over the Internet? Operator: Yes, now I can hear you. Mattias Vadsten: I can hear you, Hakan. I heard the full answer from Torbjorn and I heard, I don't know, the first sentences from you, Hakan. Håkan Johansson: Okay. So what I said is that when we look at, for instance, the U.S. in U.S. dollars, last year, Q3 was strong and Q4 was a bit soft. And with the underlying momentum we see in the U.S., we see good opportunities to be well in line with the target we have set for the full year. Mattias Vadsten: Okay. That's perfectly clear. Then I have 2 more. So the next one is the revision arthroplasty segment. I mean, as you said, quite supportive data to say the least. Sort of what are the sales volumes of CERAMENT in this segment today? And could you talk about what you think is required to sort of achieve a meaningful uptake in this segment? Torbjorn Skold: Sure. So I think it's fair to say that currently, this is a segment that where CERAMENT, we've had -- it's been on label. It's been on label in the U.S., and it's been on label in Europe. But at the same time, without clinical evidence, very few orthopedic surgeons will pick it up. That's just how orthopedics works. Now over the last couple of years, the team has worked with Charite, which is, I would argue, top 3, top 5 hospitals in the world when it comes to revision arthroplasty. They've done a study and to be frank, the results could not have been better. So that's the first important step. But to answer your question, our sales in this segment, I would argue it is very, very limited. There is some, but very limited. And I think the potential, if we look at the number of procedures that are done in revision arthroplasty in general and specifically in periprosthetic joint infection, which is going to be our primary focus area. Those are pretty considerable volume numbers that we have at hand. And what is required is, of course, that we have a sales force that is in front of the customers that are in the ORs talking about this and that we promote the evidence and the application techniques that we already have today. But also, let's be frank, we will continue to invest in education. We will continue to invest in further evidence in this space. And this is work that we've kicked off, and that's something that I foresee will continue for several years ahead because this is such an interesting and important segment for us strategically for many years. Mattias Vadsten: Very clear. Then I have a final one. I think it will be quite quick. If you take away the effects of incentive program and sales commission costs, the OpEx look a bit low, I would say. I know quite substantial FX effects year-on-year, but I think down SEK 5 million versus Q2. So question is, is this just usual seasonality? Or is it anything you would mention here, Hakan? Håkan Johansson: It's primarily that relates to normal seasonality in outside the U.S., people tend to have vacation and during vacation period, there's a lower level of activities, et cetera. So just normal seasonality. Operator: The next question comes from Kristofer Liljeberg from Carnegie. Kristofer Liljeberg-Svensson: Three questions. First, just a follow-up on the previous one on implant revision. Is this something you think will start to generate revenues for you already in 2026? Or will that be later? Torbjorn Skold: On revision arthroplasty? Kristofer Liljeberg-Svensson: Yes. Torbjorn Skold: Yes. I mean it will generate revenue in Q4 this year. And it will, for sure, generate revenue in 2026. If it doesn't, then we do something fundamentally wrong. Kristofer Liljeberg-Svensson: Okay. So -- but do you think you could see a faster uptake in this indication than for open fracture trauma, for example? Torbjorn Skold: So really good question. And I don't have any solid data points on that because of my somewhat limited history in BONESUPPORT. But if you think about the segments and how surgeons generally work and how they take decisions and you compare revision arthroplasty, which is an elective procedure and trauma and especially open trauma, which is acute trauma. So it's not an elective procedure. It's always easier to sell into a segment where you have elective procedures. So only looking at those sort of characteristics, you could argue that, well, it should be easier and faster to enter revision arthroplasty than it is trauma. So I think there's something in that, that you're absolutely right on, but I have a hard time quantifying it, to be perfectly honest. Kristofer Liljeberg-Svensson: Okay. And then I don't know whether we missed that due to the technical problems, but did you say anything about expected launch timing for CERAMENT V in the U.S. Torbjorn Skold: So CERAMENT V in the U.S., we follow the plans. So we deliver on the plans and the plans that were previously communicated was that we submit additional data to the FDA in November, that is according to plan. And then we feel comfortable that we have the right data in place and expect a positive outcome of that review with the FDA. Exactly when FDA will come with an answer, it's hard for us to predict. But typically, historically, what we've seen is that there's a 90-day period following the submission of the supplemental data until an FDA decision is taken. So that's typically the guidance that we give on the CERAMENT G for the U.S. Kristofer Liljeberg-Svensson: Great. And then finally, just on R&D costs, should we expect that to be more stable now quarter-over-quarter or year-over-year before you start the CERAMENT G spine study? Håkan Johansson: Yes. I think that's a fair comment. And again, you've seen quite a solid stable level over the last year, et cetera. And it's a fair estimate to assume that, that level continues. High activity level remains, but there is no true acceleration until we would start a clinical study preparing for getting CERAMENT G approvals. Operator: The next question comes from Sten Gustafsson from ABG Sundal Collier. Sten Gustafsson: I think most of it has been covered already, even though there were some technical issues here. So I just want to confirm that I heard it correctly. Did you say that you had CERAMENT G sales in the U.S. of -- was it $19.9 million in the quarter? Håkan Johansson: We did not confirm the dollar amount, but we say that we confirm that the growth in constant exchange rate was 59%. Sten Gustafsson: Okay. That's good. And then the number of procedures in the U.S. related to this hip joint infection category. Did I hear it right, 70,000 or... Torbjorn Skold: So what we say is that the number of primary hip and knee arthroplasty as per previously communicated data from BONESUPPORT is estimated to 1.5 million. So that's the number of primary arthroplasty. Revision arthroplasty is a smaller number, of course. But the initial focus that we have on revision arthroplasty is the subsegment that is called periprosthetic joint infection. The previous numbers from BONESUPPORT that has been communicated related to the size of that segment is 70,000 for U.S. only. So those were the numbers that we refer to. So we're not communicating any new numbers on this call compared to what's been communicated earlier. Sten Gustafsson: And that was 17, 1-7? Torbjorn Skold: No, 70. And the 70,000, just for absolute clarity, those are revision arthroplasties with bone infection where a bone graft is needed. Sten Gustafsson: Okay. Excellent. And then on NTAP finally, and I heard it, I think correctly that you expect the trauma NTAP will be more challenging than when you got it initially on osteomyelitis, which makes perfect sense. But do you think that the net impact here short term with the sort of -- will be then a negative driver? Or do you expect the underlying osteomyelitis procedures to carry on even though you don't have the NTAP on those particular procedures? Håkan Johansson: Well, sorry, I think that to clarify, I think we were talking about what the market dynamics and the differences between there is a bone infection and in trauma. When we talk the value of the NTAP specifically, I think that it showed to not have so much impact when penetrating the market when there is a bone infection, et cetera. But when we are talking trauma, open trauma and the surgeon has the patient in front of him, there's always a consideration between risks and costs. And here, the NTAP is taking away the cost aspect. So potentially, the NTAP for open trauma has a bigger value. But again, it remains to be seen over time. So it's been valid from 1st of October, so that after Q3, and we don't have the data to back that up. But we honestly believe that it has the potential of having a bigger impact than for bone infection. Operator: The next question comes from Maria Vara from Stifel. Maria Vara Fernandez: Just a couple of them. I think we, of course, see extremities as the near-term opportunity, what's going to be driving growth for the company for many years. But of course, I think we haven't dedicated much time to the opportunity in spine during the Q&A session. So I just wanted to maybe get some thoughts on how this recruitment of sales reps is going? And any kind of guidance on contribution we could see from the first quarter launch as well as from 2026? Torbjorn Skold: Yes. No, good question. And I think to put spine in perspective, spine is clearly a very interesting area for BONESUPPORT for the long term, but we also want to be realistic in the short term, we will likely see much bigger uptake from revision arthroplasty than we will see in spine. But spine is an important strategically and large opportunity for us. The approach that we take is that we first launched spine with CERAMENT BVF to build the market. So we are going to have a relatively focused launch. So we're not going to go fully and nationwide to all the accounts everywhere at the same time. We want to take a focused approach with certain distributors that we already work with, some new distributors that are specialized in spine. And we want to make sure that we build the right clinical evidence and the right and validated surgical techniques over time. And then, of course, the big strategic play for us is to go into spine with CERAMENT G. But that, of course, requires a market approval. But we see a couple of good scenarios ahead of us. So the question is not if, it's about how and when. And that's why we engage with a discussion with FDA in the near term to make sure that we feel comfortable on the right way to market and that we are also able to execute on that. Maria Vara Fernandez: Okay. That's helpful. And then if we think about the profile of the sales commissions in the U.S. we see a little bit of an increase with respect to the U.S. revenue for Q3, if I'm not wrong, 35% with respect to the U.S. sales. How should we think about this percentage changing over time, especially as of the U.S. launch in spine? I mean, there's not much of an investment there, but still with something. So if you can guide whether we could think about the same range with respect to revenue or any major changes here will be appreciated. Håkan Johansson: Well, thank you, Maria. And again, in the short to midterm, you can expect the increase in Q3 is mainly related to short-term volatility, the commission level remains stable. There is no change in commission levels. There are a few performance-related aspects in the commission structure, and that's why it can be some volatility between quarters. But in general, it should keep itself the commissions plus other fees that is involved around -- I mean, between 34% and 35% over time. And we don't see the inroads into spine with BVF changing that structure. Operator: The next question comes from Oscar Bergman from Redeye. Oscar Bergman: Torbjorn and Hakan, I know you've answered a lot of questions, but I only have a few more to you guys. So first off, on your current base of U.S. CERAMENT G users, is there any noteworthy crossover to spine surgery among these? Håkan Johansson: Very limited type of sales. Of course, when we have hospital accounts where ultimately you have both surgeons on the extremity side and on the spine side. Torbjorn Skold: Yes, but it's very... Håkan Johansson: Yes. And again, coming back to as we communicated, our strategy of launching into spine will be very focused. We have a list of hospitals and list or surgeons that we are addressing so that we reach the right surgeons to build additional clinical data and validation, et cetera, before we go wider. So with that, we also work very focused with what distributors and what sales reps we're contracting. Oscar Bergman: Okay. And just wondering if you can elaborate a bit more on the situation on eventual pushback on price, both for customers in the bone infection segment and in trauma. Has this been sort of a driver of customers either not signing up or perhaps even signing off during this quarter? Håkan Johansson: Well, Oscar, price is always a discussion. We're living in a commercial environment and so on. And -- but so far, it has had no impact in terms of listing and continued growth of listed hospitals. We meet that also, as I mentioned in the call, as part of go stop go, we have hospitals where we have surgeons becoming frequent and high users and not seldom, there is a reaction from hospital administration where we have them to involve with our med and health economic specialists to help explaining the data that is backing up the price level and the savings that is enabled by the clinical and health economic benefits by using CERAMENT G. So of course, that's part of daily life. But so far, we don't see a general pushback on price. Oscar Bergman: Okay. So those efforts in training and education on the health economic benefits, they are holding back customers from perhaps signing off them essentially? Håkan Johansson: As for now, and again, that's also the reason why we're confident with the approach that we're using, and that's why we also will continue to invest in additional med and health economic resources. Oscar Bergman: All right. And what do you say in terms of user rate at the existing customers? Are they at desirable levels in bone infection? Or is there still plenty of room to grow in the existing number of CERAMENT G surgeons? Torbjorn Skold: From my perspective, what I see is that there's plenty of room to grow in current markets, in current products, in current clinical indications. Now I might be wrong on that, but all the data that I've seen so far after a couple of weeks indicate that we're just scratching the surface on these 3 main segments that we prioritize short term, which is foot and ankle, trauma and revision arthroplasty. And then, of course, longer term, we're entering spine. So I think there's plenty of room to grow going forward. Oscar Bergman: All right. Just 2 more quick questions. I suspect you're in a hurry. The geographic reach in the U.S., are you at a good capacity already in the different key regions? Or are there any initiatives that you will accelerate on? Torbjorn Skold: I mean the U.S., as you well know, that's our most important market, both from a growth and profitability point of view. So it has priority #1. I think we have good coverage, but that doesn't mean that we will not continue to invest. We're investing in Q3. We will continue to invest because if we're not investing, we're not taking advantage of the potential that we have. So I don't think it's a coverage issue. It's about making sure we invest to address the potential we have in terms of increasing the penetration. Oscar Bergman: Okay. So there's no specific region in the U.S. where you feel like, okay, we should really focus on this specific region. Torbjorn Skold: I mean, when we look at the map, of course, we have certain regions where we think our penetration/market share is lower, but that's not something that we disclose on this call. But on a high level, we will continue to invest to make sure that we increase the penetration in the U.S. and certain regions have higher priority than others. Oscar Bergman: Okay. This is my final question. You are quickly accumulating a lot of cash over SEK 220 million since Q3 last year. Will you perhaps present some sort of plan on how you aim to deploy this growing amount of cash in your CMD in the spring? Håkan Johansson: Oscar, I think that, as Torbjorn mentioned during the call, and sorry for all the technical breakout is that, that's an area where we own the market, some clearer communication and the Capital Markets Day in spring time is a good opportunity to do that. In the shorter term, again, this gives us the comfort of continue to investing in the business. We believe in the business. We think we do the right things. We see strong confirmations also in the Q3 report on the work that we're doing and the cash just helps us to continue investing in this. Torbjorn Skold: And gives us the freedom to operate in a way to take advantage of all of the opportunities that we see in the 3 priority segments plus spine as well as on more longer-term strategic initiatives and scenarios that we, of course, also work on. But more on that in the Capital Markets Day this spring. So unfortunately, now we have to close this call. We're coming to an end. Again, thank you all for attending. And also from our side, we apologize for the technical issues that you guys have experienced, and we thank you for your patience with us. Thank you.
Operator: Welcome to Dometic Q3 Report 2025. Today, I am pleased to present CEO, Juan Vargues; CFO, Stefan Fristedt; and Head of Investor Relations, Tobias Norrby. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead. Juan Vargues: Good morning, everybody, and welcome to the presentation of this third quarterly report. I would like to thank you all for participating today. We know that this is a very busy morning for many of you. And with that said, let's move rapidly to the highlights. Starting obviously with still tough market conditions where the most effect is really by consumer confidence still staying at pretty low levels all over the world. We see also retailers, dealers, OEMs being keeping to be still today being very, very careful in building up inventories. At the same time, we also see encouraging signs of stabilization in order intake, and we see few quarters. We see improvements already in Q2, clear improvements as well in Q3. Looking at performance, a decline of 6% organically with Service & Aftermarket showing an improvement in comparison to Q2, moving from minus 12% to minus 4%. Distribution declined by 6%, very much driven by Mobile Cooling Solutions, and we will get back to that. There are some aspects or some reasons for that negative decline. And then OEM also showing negative minus 8% organically, which is a good improvement versus first quarters. and where we see Land Vehicle Americas moving in a positive manner as well as Marine after many quarters being positive in the quarter. Strong EBITDA margins landing at 10.4% versus 8.6% for last year, a combination of one side of the margin improvements led by cost reductions. As you all know, we are running a restructuring program that has been kicking in since day 1, and we see very positive effects out of that at the same time as we are working in many different areas. And at the same time, we also see that all segments with exception of Mobile Cooling are improving our margins in comparison to the last quarters as well. And again, we will comment specifically on Mobile Cooling Solutions. And strong cash flow, free cash flow, EUR 527 million and a leverage landing on 3.2% (sic) [ 3.2x ] in comparison to 3% -- to 3x last year. Looking in more detail to the numbers, almost SEK 4.9 billion in revenues with 6% organic decline -- 6% decline driven by FX and then 1% decline led by the portfolio changes that we have been doing, leaving some of the businesses that we have been into before. EBITA, just a little bit over SEK 0.5 billion over an EBITA margin of 10.4%. Looking at adjusted EPS, we ended up at SEK 0.64 and again, a free cash flow of SEK 527 million. And leverage, I already commented, landed at 3.2. Looking at the year-to-date numbers, almost SEK 17 billion in revenues with a decline of 9% organically, 5% led by FX and the same 1% led by portfolio changes. And EBITA just below SEK 2 billion. And good to see, obviously, that we are getting closer as well on the EBITA margin where we landed exactly the same level as 1 year. So we have seen a recovery in recent months in comparison to the first half of the year. Adjusted EPS, SEK 2.90 and a strong free cash flow of SEK 1.4 billion. Looking a little bit deeper into the sales evolution over time, Land Vehicles ended up at minus 9%, which is a clear improvement versus Q2 with Americas showing 3% negative growth, which is a substantial improvement in comparison to the situation we saw in Q2. EMEA showing a degradation as well as APAC in comparison to last quarter, very much led still today by the OEM side. Marine positive, was great to see after many quarters and also showing a positive order intake, which is positive for us, obviously, Mobile Cooling, 8% and then Global Ventures, minus 6%. When looking at the different channels, no major changes in reality, perhaps to point out that the OEM side is for the first time in many, many, many years below 40%, while both Distribution and Service & Aftermarket are moving 100 basis points upwards. And just as a reminder, looking at the RV OEM situation, we are just now -- RV OEM stands for 18% of total business in comparison to the 49% in 2017. So obviously, we are a less sensitive company to the cyclicality that we have seen on the OEM side. Looking a little bit more in depth into the different channels. We see a clear improvement in Service & Aftermarket. Still, we see that -- we see volatility month-to-month, but again, moving in the right direction. Distribution, very much affected by Mobile Cooling Solutions. And the main reason for that is really inefficiency in Katy, Texas since we had to employ above 200 new employees and by that training, a lot of training cost us inefficiencies, we will see this negative effect in Q3. We will also see that in Q4 and then it's going to be gone. And then -- so we will come back to Mobile Cooling, but we have a double effect on one side that had a negative impact on the growth and that had also a negative impact on the margins. Looking at OEM, we see a clear path moving forward, different segments. So we see LVA turning positive in the quarter, and this is the second quarter in a row that OEM in LVA has been positive, and we also see Marine turning positive, while we see still -- LVE and LVC being negative. Positive to see, obviously, when looking at our results, strong margin recovery in comparison to last year. We see strong gross margins, almost 30% compared to 27.3% last year, very much driven by cost reductions. Again, on one side, we have restructuring program, but we also have contingencies driven in all segments simply because we still see negative growth coming in. And we also have a positive impact on the sales mix. When looking at operating expenses, another area where we are working very, very hard. We see a decline of 6% in constant currencies despite the fact that we continue to invest in a number of areas. We see product development, one of the areas where we are investing the most, but also building up our sales organizations in a number of segments where we see a stronger growth moving forward. We see, again, margin improvements in all the segments with the exception of Mobile Cooling in the quarter. When looking at tariffs, not much new here to comment in comparison to last quarter. As you know, we have good protection in the U.S., having 9 of 12 factories that we have in North America based in the U.S. In the short term, obviously, and this is still carrying a lot of uncertainties moving forward. We -- it's very much about passing prices to the market, something that we have done in a pretty good way, and we have compensated for everything, but for a few customers in the Mobile Cooling Solution area. And that's really the impact that we see negative in the quarter of SEK 35 million that will be compensated by the pricing. We implemented prices already twice in all of the areas, by the way. But in the specific case of Mobile Cooling, we had a couple of customers where we prolong the time for kicking in with the new prices. This is going to have also a negative effect in Q4. And from Q1, We will not see any more negative effects. Looking at the different segments, starting with Land Vehicles. Total organic growth, negative organic growth of 9% with soft distribution on sales and aftermarket, while we see as well a double-digit decline in OEM in both EMEA and APAC, but positive growth in Americas. We see also a pretty strong recovery of margins for the entire segment, 6.3% versus 3.7% with clear profitability improvements in EMEA, a decline -- a slight decline in APAC, but still showing very robust margins. And then we see as well reduced losses in Americas. And we will continue, as you know, to drive the recovery on the Americas situation. And as we informed a couple of times during the last quarters, the most of the restructuring program that we are driving, it will have an impact on LVA and LVE. Moving over to Marine. Positive Q3 quarter with organic growth of 1%. We see OEM coming back to growth. We still see a single-digit decline in Service & Aftermarket, but we also see a positive order intake that should help us as well in coming quarters. EBITA recovered as well. We are again over 20% in EBITA margin, 20.8%. And as a consequence of the mix and also the cost reductions that we are driving in the segments. Then Mobile Cooling Solutions, a double hit, I would say. On one side, we didn't manage to see growth due to the labor constraints that we had in the factory that are costing us in efficiency. At the same time, we also saw a negative effect on the margins coming from both the tariffs. Again, that will be gone in Q1 next year at the same time as we have the labor ineffeciencies. And we also have negative wage impact simply. The Mobile Cooling business is highly seasonal. Historically, we always had a couple of hundred of non-immigrant foreigners working on our factories to keep up with the capacity needs. And the U.S. administration did some changes on forcing us to increase the salaries. Again, we are compensating on prices, but we have a time lag. And those negative effects will be gone from Q1, as I commented before. Moving over to Global Ventures, where we see also a negative growth of 6%, with growth in Other Global Verticals, very positive in some of the areas and then still decline in Mobile Power Solutions driven by the soft RV industry. Good margin improvements, 11.5% versus 9.2%, very much driven by Other Global Verticals. Happy to see as well our progress in the sustainability area with injuries well below target, 1.5. We see as well that we are on target in regards to female managers, and we'll keep working hard in that area moving forward as well. We see renewable energy also quite a bit already now above the target for the year. We keep assessing our suppliers, our vendors, and we ended up at 60%, slightly below the target for the year. And of course, we will reach the target at the end of December. and we see also progress in innovation where we landed at 22%, a couple of percentage points above last year. We are talking a lot about sales decline. We are talking a lot about cost reductions, but we keep investing in the product area and product innovation. This is for the first time. It's the first time that as the Dometic brand, we have soft coolers. It's a totally new area for the Dometic brand. We have soft coolers under the Igloo brand, but we're also launching a new series of soft coolers under the Dometic brand for the first time and we have great expectations. Also from a branding perspective to help us to reinforce the Dometic brand among consumers. Then if we move over into the gyro. We have very, very positive reception by customers. We have been introducing the products in a number of different shows around the world. We see order intake kicking in, in many different areas. I'm happy with the results. And on top of that, we are getting a lot of awards, which is always helping us when visiting new customers offering a totally new product area for us as well. And again, we are getting awards, a lot of awards, not just for the gyro in the Marine industry, but also for many other products that we have been launching in the last 12 months. So positive to see that our investments are paying off both in terms of awards and order intake. And then on the restructuring program that we initiated 1 year ago, as you all know, will generate savings of SEK 750 million when it is completed at the end of 2026. We closed down so far 1 factory and 3 distribution centers affecting 250 people altogether. And we are running just now at annual savings of SEK 250 million as the running rates. We had a cash out in the quarter of SEK 35 million and year-to-date a little bit above SEK 100 million. We keep continuing on our portfolio, and we discontinue one of the product areas that we had before. This is leading to a negative organic growth of 1% and we keep investing on -- sorry, keep spending time on the divestments. Still, we have not seen the finalization of any of them, but we keep working and are convinced that we will see the results moving forward. And with that said, Stefan, let's go a little bit deeper into the results. Stefan Fristedt: Okay. Thank you, Juan. Starting off by summarizing the P&L for the third quarter. we are very satisfied how the gross profit margin continues to develop, 29.6% versus 27.3% (sic) [ 27.4% ] last year. And the increase is driven by sales mix. We also have the restructuring program and other efficiency measures that are taking effect. Then we also need to mention here that Juan has mentioned a couple of times of the effects, especially in Mobile Cooling, where we have a time lag between the tariff cost as well as labor cost increases versus the mitigating price increases, and that has had a negative effect in the quarter of approximately 0.7%. And we expect that to continue in Q4, as was mentioned before. But from Q1 next year, we expect that the price increases are done to fully mitigate this development. Moving over to operating expenses. We have reduced operating expenses in constant FX due to the decline in net sales, it has increased somewhat in percentage of net sales. We keep on investing in strategic growth areas, as we have mentioned, and you have seen some of the results of that in terms of product development, Mobile Cooling and Marine are definitely 2 areas where we keep on investing deliberately. Other operating income and expenses, SEK 18 million, a small number in the quarter, and it's mainly related to a part of the FX effect. Net financial expenses is up a little bit in the quarter. However, the net interest on bank loans and financial income is down SEK 197 million versus SEK 214 million, and then we have a negative FX revaluation effects and other items leading towards that. On tax, we have an effective tax rate of 32%, which is equivalent to SEK 54 million in tax in the quarter. Moving over to the summary of our cash flow. Operating cash flow-wise, we see that we are continuing to drive efficiencies in working capital, coming back to that in a second. Then we have cash out related to restructuring of SEK 35 million in the quarter. And then as you can see, we are carefully managing our capital expenditure and where we spend. Free cash flow before M&A, as we mentioned before, paid and received interest is spending down and then we have been paying lower tax. Then cash flow for the period has also been impacted by that we did a bond issue of EUR 300 million in Q3. Coming back to that. At the same time, we also did a tender offer of EUR 100 million, so -- which was then a partial repayment of the bond that is falling due in May 2026. And then I would also like to underline that we are going to see further debt repayments in Q4 and in 2026. Moving over to more of how has the free cash flow developed over time. And as you can see, I mean, SEK 527 million. It's not on the same level as last year, which I did not expect either, but still solid level, I must say. And then you can also compare it to the other periods before that. So satisfied with the level of free cash flow in the quarter. Moving over to the working capital components. You can see that working capital over the last 12 months is starting to come down 26% compared to 30% in relation to net sales. And if we look on the quarter stand-alone, it was down to 21%. So we are moving in the direction that we have been talking about, where the target is to reach around 20% of net sales. And you can see on the inventory balance, we are SEK 4.6 billion now compared to SEK 6.3 billion 1 year ago, and the number of days is down to 124 versus 139. So things are moving in the direction that we have been planning for and expecting. As you can see, accounts payable level is staying stable as well as accounts receivables. Then moving over to CapEx and research and development. We are prioritizing among our CapEx project, and we have been spending a little bit less than SEK 100 million in the quarter. It's 2% of net sales versus 1.7% in the last 12 months, that's equal to 1.3%. If we look on R&D, as I said, we continue to keep up that level very deliberately because we believe in that this is important for the future. And the R&D expense to net sales is now 3% compared to 2.7% 1 year ago and 2.8% last 12 months. And as I mentioned before, it's a strategic important growth areas for us, example being Mobile Cooling and Marine. Next is going to talk about the debt maturity. As I mentioned, we did a EUR 300 million bond on a 5-year maturity with a fixed rate of 5% in the quarter. And the proceeds are going to be used to refinance our debt portfolio. We already did EUR 100 million in connection with this transaction by doing a tender offer on the 2026 bond. So there is EUR 200 million left on that one. And then as I mentioned before, you will see further debt repayments here in Q4 as well as in 2026. We have a USD loan that matures in '28, but it can be prolonged 1 year to 2029. And the average maturity is 2.8 years, which is obviously a longer average maturity compared to last year. Average interest rate is 4.8%, and we still have an undrawn revolving credit facility of EUR 300 million maturing in 2028. So moving over to our leverage. Maybe we can -- I mean, leverage went down 0.1 versus Q2 and which is obviously positive. And you can see in the table down below that it is mainly our cash flow development that has contributed with that development. We are obviously having a high focus across the organization on protecting margin and reducing working capital, as you know. And we just keep on repeating that we are committed on achieving our leverage target of 2.5. That is important to us. and it's -- but it is difficult to give an exact timing of when we will achieve it. So with that one, I hand back to you to give a summary of the quarter. Juan Vargues: Thank you, Stefan. So I mean, in tough times like we are going through and we have been going through now for 4 years, we have to control what we can control. And from that perspective, I feel good that we are improving our margins. We had a tough first half. We saw improvements at the end of the quarter. We have seen more improvements in Q3. And our intention is obviously to keep showing improvements moving forward as well. We see -- even if it's still tough and difficult to predict, we see a market stabilization. I'm happy to see the order intake improving and happy to see the backlog becoming stronger for every month. I have been spending a lot of time on the marketplace. I have been visiting a lot of shows. I have been meeting a lot of customers. And again, it's still tough out there, but the sentiment in the value chain is slightly better than it was 3 months ago and much better than it was half a year ago. So that's kind of sending some positive signals and some faith that we are getting closer and closer to positive territory. I'm happy to see cash flow. We are working extremely hard on our working capital on driving down inventories, but not just on inventories. I think we do an excellent job on receivables and we do an excellent job in payables, trying obviously to improve as much as we can our capacity of releasing cash and improving our leverage. Tariffs situation, lots of uncertainties, of course, but we are dealing with that in a good way. We had a negative effect in the quarter. But again, in comparison to what we expected on the 4th of April, I believe that the organization has done a terrific job landing the situation with our customers and our customers are also keeping faith in what we are doing every single day. Moving forward, difficult to predict, as I said, but the starting point in Q4 from a top line perspective is a little bit better than we had 3 months ago. And hopefully, we will see that even in the future. And then from a strategic perspective, we keep investing despite all the cost reductions that we are doing in a number of areas. There are 2 areas that where we are not cutting. The other way around, we keep investing in product development, innovation, and we keep investing in building up our sales organizations. And of course, we need to finance that, and that's why we are driving a restructuring program, which is clearly paying off. And with that said, I would like to open for a Q&A session. Please. Operator: [Operator Instructions] The next question comes from Agnieszka Vilela from Nordea. Agnieszka Vilela: I will ask them one by one. So on growth, Juan, you sound cautiously optimistic about the OEM business now in Marine and in RV in the U.S. But when I look at some of the peers commenting on the market development such as Malibu Boats or Winnebago, they do point to still flat wholesale volumes in 2026 in RVs and even declining both retail and wholesale in Marine. So can you give us an explanation why you are relatively a bit more optimistic on that? Juan Vargues: I mean everything is relatively in line, right? I mean we are coming from a situation where we have been kind of shrinking 11%, 12% quarter after quarter after quarter. For the first time, we see order intake moving upwards. We see the fact that we delivered 1% organic growth, and we have a different backlog situation that we have seen. I fully agree with you that we are not going to fly. I don't see the market turning back anytime soon, but I see an improvement. I see obviously that we are launching new products. I see that we are taking orders. I still believe that we might be seeing as well what we saw on the American RV industry, growth for a number of quarters and then slowing down for a couple of quarters, stabilizing the market. So that's the expectation. I don't see that we are dropping 11%, 12% again from where we are. So that's on the Marine side, Agnieszka. On the other side, Americas, I think, it's pretty stable, just now. I think that, again, retail is still coming down slightly at the same time as manufacturing is adapting again, as you have seen in the last couple of months and expectation is that it will be balanced between retail and wholesale in Q -- sorry, in 2025 and expectation for 2026 is a growth of some 3% versus 2025. Agnieszka Vilela: Perfect. And then the second question is on EMEA and profitability in the business. When I look what we expected in Q2, you beat our expectations quite significantly. Now in Q3, you missed a bit. So just if you could give us some factors that are affecting profitability right now in EMEA. What are the tailwinds, maybe savings and less logistics costs? And what are the negative impacts in EMEA right now for you? Juan Vargues: So you have a couple of questions. I mean, first of all, we had a better mix in Q2 than we have in Q3. So after OEM, the balance of the aftermarket and OEM was different. Then we have a second issue. We -- as you know, in EMEA, we have also an important business for us, which is the CPV, the Commercial Passenger Vehicles. We have the situation of one of the main customers we have, JLR, did suffer a cyber attack. In that business, we have decent margins and that had a negative impact, both from a sales perspective, but also from a margin perspective. So those are the 2 main differences that we have in EMEA. Stefan Fristedt: So on JLR, I mean, their factories have been closed for a big part of the quarter. Agnieszka Vilela: Okay. Can you quantify the impact on your EBITA in the quarter? Juan Vargues: No, not on EBITA, but it had quite an impact on the EMEA numbers specifically. Stefan Fristedt: On sales. Juan Vargues: On the sales, absolutely. Stefan Fristedt: I mean, CPV is generally a more profitable -- or yes, it's an over-average profitable business. Operator: The next question comes from Daniel Schmidt from Danske. Daniel Schmidt: A couple of questions. And then maybe turning back to Marine. I appreciate that it's quite difficult to exactly know if this is a longer turnaround or not. But I think given that sort of retail is not super strong, but it's also a function of the fact, I guess, that it's been quite hefty underproduction in Marine over the past 4, 5 quarters. So I guess there's some catch-up to be done there. Is that your feeling as well? Juan Vargues: Yes, it is. But at the same time, I need to comment as well, Daniel, that we might be seeing what we saw on the RV side that we had a couple of positive quarters and then might slow down before getting stability. So again, I do believe that we need just now to be super agile, right, on the way up and the way down as we have been on the RV side. I mean, the good news, when I perceive still, Daniel, I mean, again, you can take it from a negative perspective or a positive perspective. The positive perspective is obviously that I don't see the market coming down 12% again, that even the decline in retail is becoming smaller than what we have seen. At the same time, as you are totally right, production has been very, very low in comparison to retail. So there is a catch-up. So my feeling is that some manufacturers, they have started to produce again. But then, of course, if retail doesn't come in Q2 when the high season starts in the U.S. specifically, then we might have a slowdown again. And then you have another factor, which I would like to comment because, obviously, a lot of the questions that we get are always about the U.S. market simply because it's 75% of the market, the world market. But we have positive growth in EMEA that was pretty nice in the quarter, and we had positive growth as well in APAC. So as a matter of fact, for us, the growth in Marine in the quarter was not negative, but we want to fly in Q1. And just again, 75% of the business is in the U.S. So I was telling you that the rest of the world, we performed better. Daniel Schmidt: Okay. And could you say something about the pace? This is very detailed and sorry for that. But given that you are shifting from decline to growth now in Marine after 8 quarters in a row of decline, could you say anything about the pace you saw from July until now basically when it comes to Marine on a year-over-year basis in order intake or in sales or anything? Juan Vargues: It has been pretty stable in sales. We have seen improvements on the order intake. So our intake was positive -- the order intake was more positive than sales in the quarter. Stefan Fristedt: But keep in mind, Dan, that the part of that order intake is obviously for delivery also next year. So not everything is going to be delivered now. Juan Vargues: In the coming weeks. Stefan Fristedt: In the coming weeks or in the coming quarter. Daniel Schmidt: Yes. But even though there's no sort of big meaningful improvement in top line in Q3, it is back to growth, but the margin is up quite a bit, and of course, it comes back to the savings. But is there anything -- has there any impact at all when it comes to the gyro that you've talked about? Is that selling. Has that been delivered in Q3? Is that having an impact? Is that going to have a bigger impact in the coming quarters? Juan Vargues: We are delivering the gyro. It doesn't have any substantial impact on the margins. On the contrary, you have, as I commented, the geographical mix, which is benefiting us just now. Daniel Schmidt: Okay. And then when we -- as you mentioned, if you look at OEM on Americas on the LVE side, it is the second quarter in a row that you are performing better than the market. Is that the function, you think, of the work that you did last year in trying to get back to on certain customers that have been maybe discarding you a little bit and you're back to the model year '25 and '26 now. Is that what we're seeing because the market was -- it looks to be a little bit down on shipments so far in Q3 and the same was -- I think it was flat in Q2, the market and you were up a couple of percent. Is that what we're seeing? Juan Vargues: We have a lot of activities ongoing. We have -- so that's what I can tell you is that we are working very, very close to our customers just now. We're spending a lot of time. I am visiting quite a few of the customers myself, getting the feeling. We see positive -- we get positive comments in the recent shows as well, both in the U.S. as in Europe. So I'm optimistic. I mean we are not there, obviously. As you know, we shrunk more than the market for a couple of years. And of course, our intention is to recover part of what we lost. Daniel Schmidt: Yes. And then on EMEA, if you look into the last quarter of this year, I think there was quite substantial production shutdowns, especially from one of the bigger players. Do you see the same development happening in this year? Or will there be less shutdowns, you think? Juan Vargues: I think that we will see improvements versus last year simply because last year was brutal, right? I mean Q4 last year was very, very, very healthy. So I don't expect -- I mean, as you know, this industry is always kind of correcting by running shortened weeks, still to be seen what's going to happen in connection to Christmas, but I'm not expecting the same negative effect that we saw in Q4 last year. You're reading and you are talking to more or less the same people as I'm talking. I mean the positive is more optimistic today than we had 1 year ago. I mean 1 year ago is really when all these massive shutdowns took place, right? Now we have seen very low production numbers for 9 months basically. Stefan Fristedt: And registrations are bit higher than production. Juan Vargues: Absolutely. I mean registrations, if you look at registrations, registrations after 9 months are down to minus 4% in Germany, minus 2% for Europe, right? So of course, that after 1 year, you will get more and more into balance. Daniel Schmidt: Yes. And then sorry for missing the very early part of this call, but you did refer to labor irregularities impacting Mobile Cooling in the quarter, and you said something about needing to hire 200 people. Is that coming back to immigration policy in the U.S.? Is that -- was that the reason? And what was the impact in terms of impact on profitability? And is that continuing into Q4? Is that ending now? Juan Vargues: It's Q3 and Q4 and then we are going to be done. Stefan Fristedt: Yes. So I mentioned that the impact for Q3 was approximately 0.7% on the profit margin as a whole. And then it will continue into Q4 somewhere 1% to 1.5% units on the margin. And then from Q1, we expect these effects to be fully compensated by price increases. So it's... Daniel Schmidt: And that impact, is that both the tariffs and the labor irregularities combined? Stefan Fristedt: Yes. It is mainly tariffs and the labor efficiency/labor cost. There is also some currency effects in there as well. But the majority is related to the 2 first ones. Daniel Schmidt: Okay. And also, sorry for dwelling here. But Juan, you mentioned at the end of your remarks, I think that the starting point on -- from a top line perspective is a little bit better. Was that referring to the start of Q4 compared to the start of Q3? Or what was that comment relating to? Juan Vargues: Yes. So we have seen order intake improving quarter-by-quarter, right, since Q4 last year. So we had a pretty low Q4. Backlog situation was pretty low at the end of Q4 last year. Then we saw a further deterioration in Q1. We saw a clear improvement in Q2, and we saw an additional improvement in Q3. So our backlog situation at the end of the quarter is much better on the backlog situation than we have had at the beginning of Q3, which is positive. Operator: The next question comes from Gustav Hageus from SEB. Gustav Sandström: If I can ask a question on the organic growth in the quarter down with 6%? You mentioned customers trading down in aftermarket. You mentioned some price increases, but more to come. So it would be very helpful if you could try to sort out the components in organic decline here in respect to price mix and volume and what you expect in terms of prices now, if you can quantify that a bit with your new price hikes going into 2026, that would be helpful. Juan Vargues: I mean the vast majority of the prices is going to take place from a Service & Aftermarket perspective. And then the other one is really on Mobile Cooling, what we have seen. We compensated for the tariffs in both Marine and LVA. We almost compensated for the tariffs in Mobile Cooling. But again, we had a price time lag for a couple of customers, and they are major customers for us. So that's where we have the difference. And then, of course, we are doing minor price adjustments depending on the market, depending on the product and depending obviously on the competitive situation. So I would not expect massive price increases moving forward as far as the market looks as it does. I think we need to be careful just now, and we also need to find the right balance, obviously, between keep improving our margins, but also starting to recover some volume now when the market seems to move into a little bit easier situation. Gustav Sandström: Sure. But the negative organic growth in the quarter, is it fair to assume that the volume growth was bigger than that number? So we had... Juan Vargues: No, but I wouldn't overestimate how much bigger. I think we are a little bit bigger, not much. Gustav Sandström: Do you think single-digit volume decline in the quarter. Is that a fair assumption? Juan Vargues: Yes, it is. Gustav Sandström: Okay. Okay. And you mentioned the order intake improving sequentially. Do you see any trends in terms of mix, what type of products that are sold. And in terms of price versus competitors, if you can have a comment on that given that you have quite a lot of exposure from internal production versus some peers? Juan Vargues: Yes. So we see -- let me say, there were 2 questions. The first 1 was -- the second one is competition. The first 1 was? Gustav Sandström: Sort of did you see any improving mix sequentially? Juan Vargues: Yes. So we have seen very clear improvements on the OEM side. We have seen very clear improvements on the distribution side. And then on the contrary, Service & Aftermarket has been a [ second ] month. Gustav Sandström: And that comment relates to mix, so gradually improving mix in those 2 first? What was that comment on? Juan Vargues: But again, if we think about the 3 channels, we have seen very clear improvements on the Marine side, right, is on the OEM altogether, but especially on the Marine side and LVE, we still see that LVE and LVC are tough still today from an OEM perspective. But again, altogether, the OEM channel is improving quite a bit. We see the distribution channel also improving. And there, we have, as you know, a number of businesses where the biggest one is Mobile Cooling. So as I said, Mobile Cooling order intake is improving quite a bit as well. and then Service & Aftermarket has been pretty flattish in comparison to where we are coming from. So still a negative order intake, less negative, but still negative. Gustav Sandström: Okay. And in terms of pricing in U.S. versus some competitors, I guess, in particular, in Mobile Cooling and so forth, are you following also nondomestic producers in terms of price? Or are you -- yes. Juan Vargues: No, I think the difference -- the main difference is that we were pretty early. I feel some of our competitors were pretty late, but we see that all of them are increasing prices step by step. So I feel the difference, obviously, that most probably they built up a lot of inventories just in case as soon as Mr. Trump was elected, while we implemented the prices in connection to the tariff implementation. Gustav Sandström: Okay. And then final one for me, I guess it's a bit speculative, but on the net debt-to-EBITDA gearing target, what you chances are that you'll come below 3 as we end the year? Stefan Fristedt: I think we are now moving into the part of the year where cash flow is a little bit less strong, right? Q2 and Q3 is the 2 strongest cash flow quarters that we have. So it's -- I would probably say that 3 years would be nice, but I would still feel that I think we are still going to end above. Operator: The next question comes from Fredrik Ivarsson from ABG. Fredrik Ivarsson: Sorry, I got in a bit late, so excuse me if you already discussed this, but I'll try. First one on Mobile Cooling. We've seen sales declining, I guess, for 3 years now, and we've been talking about inventory reductions among retailers for quite some time now. Do you guys have a view on the inventory levels at the moment where you're at, especially Igloo in the U.S.? Juan Vargues: Inventories are not bad on the channel, what we can see, right? I mean then, of course, you have -- we have seen 2 months pretty nice inventories coming down and then you get major orders and then all of a sudden, the sell-through is a little bit worse. So I mean, something that we didn't comment on the report is that the last month, meaning September was pretty rainy in the U.S. And for the Mobile Cooling business, that has a lot of impact. So we cannot say that we perceive inventory levels in the Mobile Cooling channel being high just now. They are gone. I think people on the contrary are very, very, very careful in not building unnecessary inventories. So everybody is placing the orders in the very last minute. And that's a change from where we are coming from pre-pandemic, where people were building up inventories in advance. Now people are -- I don't know if we can talk about Just In Time manufacturing, but retailers are as much Just In Time as they can and putting on us being ready. Fredrik Ivarsson: Very clear. And then staying on Mobile Cooling, it seems to me like the margin is almost set to expand in 2025 despite all the issues you mentioned and then obviously, sales being down 20% organic over the last 3 years. So my question is, where do you see the margin in this business under more, say, normal circumstances? Juan Vargues: I mean we commented from the beginning, right, that we expect Mobile Cooling to be 15-plus EBITA. That's where we -- and that's still below, so to say, what the Dometic brand is coming from, right? But we believe that lifting from where we acquired the company to 15% is a pretty nice achievement. If you look at what we have been delivering during the last year, we have seen an improvement year-by-year, and that's our expectation. Stefan Fristedt: And I mean if you look on the product launches that we have been showing here over the last couple of quarters in Mobile Cooling, I mean, that is products that is certainly going to contribute to that development. Juan Vargues: So I mean this is one of the areas, clearly, where we are investing a lot in product development. We are investing in building up our sales organizations. And despite all the investments that we have, still, we see margin improvements. Now we have a couple of one-offs this quarter, and then we had also the production issues in Q2, right? But apart from that, we see an underlying improvement year-by-year, a clear improvement year-year. Fredrik Ivarsson: Yes. Yes, I appreciate that. And a follow-up just on the one-off you mentioned just now. Juan, did I hear you right? Do you guide for 1% to 1.5% on the group margin impact in Q4? Juan Vargues: Yes, based on both the tariffs and the wages and the labor efficiencies. Fredrik Ivarsson: Okay. So like SEK 40 million to SEK 60 million. Juan Vargues: It will be gone again from Q1. Fredrik Ivarsson: Yes, absolutely. Good. And maybe last one from my side. I saw the Igloo lawsuit trial moved to March from September. Do you have anything to comment on that? Juan Vargues: No. I mean from our side, the sooner, the better since we feel very, very confident that we are going to win the case. So there is not -- we have not provoked that delay. It's not us trying to delay. It's the other way around. We would like to get it done. the discussion beyond us. Operator: The next question comes from Rizk Maidi from Jefferies. Rizk Maidi: Sorry if this has been tackled. So I'll start with tariffs and Section 232 extension in August. Just wondering if this drives you to -- if there's any impact direct or more importantly, indirectly on the business, and I'll start there. Stefan Fristedt: I think that we will have to see where this ends in the bidder end. But I mean, with the price increases and other measures we have taken, we believe that we have -- when the time lag has closed, we believe that we have taken the measures to compensate for the increased tariff cost. Rizk Maidi: Okay. And then secondly, on Service and Aftermarket, I mean, the decline now, as you said, Juan, was less than before. Historically, you talked about this bullwhip effect. Maybe if you could just talk about sort of sell-in versus sell-out here. This market has historically been quite resilient. This is exceptional. Do you actually expect to recoup those big, call it, destocking years sort of -- does that need to reverse at some point in your view? Or that's basically you see it as a post-COVID buildup in inventories that would never go back to? Juan Vargues: No, I think that we are human beings. I think that's going to come back. But in order to get into that point, we need to get consumer confidence. We need to see the traffic and the foot traffic into the stores, the foot traffic, both physically and digitally to increase for the dealers to there to build up more inventories that they are doing today. Just now it's in the very last minute. But again, I'm fully convinced. Remember, if you go back 5 years ago, we -- the flight industry would never come back, right? The carriers would never recover, and you know where they are today, right? I think it's time. Rizk Maidi: Understood. And then perhaps last one on my side, just perhaps an update on divestments of noncore assets. How much has been achieved? How much is left? I don't know if you can communicate on this? And how do you see the appetite from potential buyers at the moment and the valuations you're able to get? Juan Vargues: So you have 2 different areas. One is product areas that we are leaving that we are discontinuing, low margins, we don't see that we can get into a #1, #2 position globally, and then we don't want to be part of that. As you know, we have already left 1% and is more to come. We will see changes over time. And then we have the divestments where we are working extremely hard. We are in discussions with a number of partners. But obviously, we still have a gap between the sell side and the buy side. And as we said, I mean, we want to create value. We don't want to give things away. And if we need to wait until the market looks in a better way, then we will do it. But again, all those discussions keep on going. Operator: The next question comes from Johan Eliason from SB1 Markets. Johan Eliason: Juan and Stefan, just a few questions here at the end, maybe on the cash flow again, you already alluded to where you sort of think net debt will end up to. But are there any particular issues we need to bear in mind when modeling the final quarter cash flow? Or are there any sort of higher charges from the restructuring programs or tariffs being paid out, et cetera, that could potentially impact the fourth quarter cash flow? I guess, otherwise, the pattern this year has been a decent cash flow, but a bit weaker than last year. And I thought that would be the case for Q4, but I just wanted to see if there's anything to bear in mind there. Stefan Fristedt: I think that you should look on the seasonal pattern, right, of our cash flow. That's number one. Then we were talking about that we had SEK 35 million in payout in Q3. I think you should expect that to be a little bit higher in Q4. And that will then, of course, also give you an indication that the cash out has been a little bit lower for 2025 compared to what we did believe in the beginning. But that's more related to the timing of certain activities. So that will be a little bit more that is flowing over to 2026. So -- but I think you should expect the payouts of that to be a little bit higher. So I think that's what I should comment. I mean it's like I've said, I mean, '23 was the best year ever. '24 was the second best year. And then I think 2025 is coming thereafter. So it's probably a good way of thinking about it. Johan Eliason: Good. And then you are leaving some areas where you see are not competitive. You have seen some competitive pressure. I think you talked about the big fridges over in the U.S. previously. Are you seeing any changes in the competitive picture now after tariffs and all what you have out there? Juan Vargues: Not much that far. I mean what we have seen is that we were pretty early increasing prices on the tariffs. Most of our competitors in the U.S. were slower, I guess, that they built up inventories in connection with the election. And -- but we have seen that all of them are increasing prices step by step. So I do believe that we need to wait a little bit longer to see what happens. I think that a lot of people have been living on inventories. Unknown Executive: And we have one question from the webcast audience. Could you please give some color on the inventory situation in the different distribution channels? Juan Vargues: We commented before. We see inventories in both APAC and EMEA coming down stepwise simply because of the difference between retail and manufacturing in the last 12 months. We see the U.S. LVE side. So the RV side in the U.S. is in balance, total in balance. We see Marine still unbalanced. In the marine side, 70% of dealers, American dealers still feel that they are carrying too high inventories. We are talking about distribution, we don't see any inventory buildup. I think that what we see there is that dealers and retailers are carrying as little as they possibly can. They rather lose business than they carry inventories. So everything is in the last minutes. And then on the Service & Aftermarket, it's exactly the same. So wholesalers nowadays, bigger distributors are not carrying inventories. They want manufacturers like us to carry the inventories. And dealers and smaller dealers, they are gone. So I believe we got a question before. Do you think that this kind -- the typical inventory buildups are going to come back? I'm fully convinced that they will. But in order for that to happen, we also need to see consumers starting to spend more money. I think we have been suffering the entire industry or industries. It's not just this industry. I mean we see that everything having to do with consumers with the exception of food is behaving in a very similar way. Unknown Executive: And we have one question remaining in the queue, I believe. Operator: The next question comes from Daniel Schmidt from Danske. Daniel Schmidt: Yes. Just 2 short follow-ups. On the savings program, it sounds like you're quite happy with the progress so far and a run rate of SEK 250 million by the end of Q3. How should we view that going into '26? Because it's quite meaningful steps that are supposed to be taken in terms of savings in '26. I think you've said run rate SEK 750 million as we leave 2026. And of course, it comes back to the actions that you need to take, how are they sort of scheduled for '26? Or how should we view that? Is that back-end loaded or even through -- evenly distributed through the year or... Stefan Fristedt: I would probably say that it's a little bit more back-end loaded because you're obviously going to get the full effect is coming -- going to come gradually after the implementation. But we have some bigger projects, right, that is going to take until like mid next year before they get fully implemented. But on the other hand, we also have some other activities that is going to be completed now in Q4. So -- but I would probably say it a little bit twisted towards the second half. But I mean, we still confirm SEK 300 million run rate saving at the end of this year and SEK 750 million by the end of next year. Daniel Schmidt: Yes. Okay. And then just maybe coming back again to the CPV incident in EMEA, you got the question and you said that it had an impact on sales, sounded meaningful. Would you dare to estimate how much that was in top line impact for you guys? Juan Vargues: It was -- well, in terms of krona, we are doing about SEK 30 billion for EMEA. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Juan Vargues: Thank you very much to all of you for your attention. As we commented at the beginning, we know that it's a very busy day for many of you. We will keep working hard to protect our margins, but also to keep investing in the areas where we see the growth moving forward. And we are fully convinced that we are going to get down our leverage to the target. We cannot say when, but that's our firm intention, and we will get there. So thank you very much for your attention, and have a great day, all of you. Thank you. Stefan Fristedt: Thank you.
Operator: Good morning, and welcome to Ladder Capital Corp.'s Earnings Call for the Third Quarter of 2025. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter ended September 30, 2025. Before the call begins, I'd like to call your attention to the customary safe harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. In addition, Ladder will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. These measures are reconciled to GAAP figures in our earnings supplement presentation, which is available in the Investor Relations section of our website. We also refer you to our Form 10-K and earnings supplement presentation for definitions of certain metrics, which we may cite on today's call. At this time, I'd like to turn the call over to Ladder's President, Pamela McCormack. Pamela McCormack: Good morning. During the third quarter, Ladder generated distributable earnings of $32.1 million or $0.25 per share, delivering a return on equity of 8.3% with modest adjusted leverage of 1.7x. Credit performance remained stable and the quarter was marked by 3 notable developments, a significant acceleration in new loan originations, continued progress in reducing office loan exposure and the successful closing of our inaugural investment-grade bond offering. These results reflect our disciplined business model and conservative balance sheet philosophy, positioning Ladder for continued earnings growth and greater capacity to capitalize on investment opportunities across market cycles. Loan portfolio activity. Origination activity accelerated in the third quarter with $511 million of new loans across 17 transactions at a weighted average spread of 279 basis points, our highest quarterly origination volume in over 3 years. The spread reflects the mix of assets originated, which were predominantly multifamily and industrial, consistent with our focus on stable income-producing collateral. Net of $129 million in paydowns, the loan portfolio grew by approximately $354 million to $1.9 billion, now representing 40% of total assets. Year-to-date, we originated over $1 billion in new loans with an additional $500 million under application and in closing. Notably, the full payoff of our third largest office loan, a $63 million loan secured by an office property in Birmingham, Alabama, reduced office loan exposure to $652 million or 14% of total assets. Approximately 50% of the remaining office loan portfolio consists of 2 well-performing loans secured by the Citigroup Tower in Downtown Miami and the Aventura Corporate Center in Aventura, Florida. Securities portfolio. As of September 30, our securities portfolio totaled $1.9 billion, representing 40% of total assets. During the quarter, we acquired $365 million in AAA-rated securities, received $164 million in paydowns through amortization and sold $257 million of securities, generating a $2 million net gain. Paydowns and sales exceeded purchases, resulting in a modest net reduction in securities holdings this quarter. This reflects our disciplined approach to capital allocation as we did not replace certain securities that ran off, consistent with our view that spreads may widen in the mortgage market given recent volatility and the Federal Reserve's ongoing runoff of mortgage-backed securities. Consistent carry income from our real estate portfolio. Our $960 million real estate portfolio generated $15.1 million in net operating income during the third quarter. The portfolio primarily consists of net lease properties with long-term leases to investment-grade rated tenants and continues to deliver stable, predictable income. Capital structure and liquidity. During the third quarter, we closed our inaugural $500 million 5-year investment-grade unsecured bond offering at a rate of 5.5%, representing 167 basis point spread over the benchmark treasury, the tightest new issuance spread in Ladder's history. The offering was met with strong demand and the bonds have since traded tighter in the secondary market, reaching spreads as low as 120 basis points. This transaction validates the strength of our conservative balance sheet philosophy and disciplined business model. As one of our premier debt capital markets bankers noted, it also firmly planted Ladder's flag in the investment-grade market. The continued tightening of our bonds positions us for lower borrowing costs, stronger execution and improved shareholder returns. As of quarter end, 75% of Ladder's debt consisted of unsecured corporate bonds and 84% of our balance sheet assets remain unencumbered. We maintained $879 million in liquidity, including $49 million in cash and $830 million of undrawn capacity on our unsecured revolver, which provides same-day liquidity at highly competitive rates. Outlook. Ladder's unique investment-grade balance sheet, disciplined use of unsecured debt and robust origination platform positions us to capitalize on investment opportunities, while maintaining prudent credit risk management. We expect fourth quarter loan originations to exceed third quarter production. Recent credit rating upgrades and our successful inaugural investment-grade bond issuance have lowered our cost of debt and expanded our access to a deeper, more stable capital base that remains consistently available across market cycles. Over time, we expect our strong balance sheet, modest leverage and reliable funding profile to position Ladder alongside a broader set of high-quality peers, including equity REITs rather than solely within the commercial mortgage REIT space. As investors increasingly recognize the strength of our senior secured investment strategy and conservative capital structure, we believe our equity valuation will reflect this alignment. Combined with our disciplined credit risk management and ability to deploy capital with speed and certainty, these attributes reinforce our capacity to deliver strong, stable returns for shareholders across market cycles. With that, I'll turn the call over to Paul. Paul Miceli: Thank you, Pamela. In the third quarter of 2025, Ladder generated $32.1 million of distributable earnings or $0.25 per share, achieving a return on average equity of 8.3%. In the third quarter, we closed our inaugural investment-grade bond offering of $500 million 5-year bond at 5.5%. The proceeds were partially used to call the remaining $285 million of bonds that were maturing in October and fund loan originations. As of quarter end, $2.2 billion or 75% of our debt is comprised of unsecured corporate bonds across 4 issuances with a weighted average remaining term of 4 years and a weighted average coupon of 5.3%. Our next corporate bond maturity is now in 2027. The offering strengthened our balance sheet and affirmed our commitment to the investment-grade bond market as our primary source of capital. We're encouraged by the bond's strong trading performance in the secondary market and believe our bonds offer attractive relative value to fixed income investors with [ meat on the bone ] to tighten further as the market continues to recognize Ladder's distinct long-standing investment strategy, anchored by conservative lending attachment points, AAA-rated securities and high-quality real estate equity investments. As of September 30, 2025, Ladder's liquidity was $879 million, comprised of cash and cash equivalents and our undrawn capacity of $850 million unsecured revolver. Total gross leverage was 2.0x as of quarter end, below our target leverage range. Overall, our balance sheet remains strong and primed for continued growth as our investment pipeline continues to build. As of September 30, 2025, our unencumbered asset pool stood at $3.9 billion or 84% of total assets. 88% of this unencumbered asset pool is comprised of first mortgage loans, investment-grade securities and unrestricted cash and cash equivalents. As of September 30, 2025, Ladder's undepreciated book value per share was $13.71, which is net of a $0.41 per share CECL reserve established. In the third quarter of 2025, we repurchased $1.9 million of common stock or 171,000 shares at a weighted average price of $11.04 per share. Year-to-date in 2025, we've repurchased $9.3 million of common stock or 877,000 shares at a weighted average price of $10.60 per share. As of September 30, 2025, $91.5 million remains outstanding on Ladder's stock repurchase program. In the third quarter, Ladder declared a $0.23 per share dividend, which was paid on October 15, 2025. As of today, our dividend yield is approximately 8.5% with a stock price that we believe has been pulled down by the broader market concerns around private credit. We'll note that our dividend remains stable and our asset base continues to turn over into freshly originated loans, AAA securities, high-quality real estate equity investments. With a stable earnings base complemented by our investment-grade capital structure, we believe there's ample room for our dividend yield to tighten, specifically when compared to other investment-grade REITs with similar credit ratings to Ladder. We continue to expand our investor outreach efforts now as an investment-grade company, and we look forward to further educating the market on our story. Building on Pamela's overview of our performance, I'll highlight a few additional insights to how each of our segments fared in the third quarter. As of September 30, 2025, our loan portfolio totaled $1.9 billion with a weighted average yield of approximately 8.2%. As of quarter end, we had 3 loans on non-accrual totaling $123 million or 2.6% of total assets. In the third quarter, we resolved 2 non-accrual loans, first through the payoff at part of a $16 million loan through the sale by a sponsor of 2 mixed-use properties in New York City; and the second be a foreclosure of a loan collateralized by an office property in Maryland with a carrying value of $22.7 million. No new loans were added to non-accrual in the third quarter. Our CECL reserve remained steady at $52 million or $0.41 per share. We believe this reserve is adequate to cover any potential losses in our loan portfolio, including consideration of the ongoing macroeconomic shifts in the U.S. and global economy. As of September 30, 2025, our securities portfolio totaled $1.9 billion with a weighted average yield of 5.7%, of which 99% was investment-grade and 96% was AAA-rated, underscoring the portfolio's high credit quality. As of quarter end, approximately 80% of the portfolio of almost entirely AAA securities were unencumbered and readily financeable, providing an additional source of liquidity, complementing our same-day liquidity of $879 million. In the third quarter, our $960 million real estate segment continued to generate stable net operating income. The portfolio includes 149 net lease properties, primarily investment-grade credits committed to long-term leases with an average lease term of 7 years remaining. For further information on Ladder's third quarter 2025 operating results, refer to our earnings supplement presentation, which is available on our website and our quarterly report on Form 10-Q, which we expect to file in the coming days. With that, I will turn the call over to Brian. Brian Harris: Thanks, Paul. The third quarter was a particularly gratifying one, highlighted by the successful completion of our first corporate unsecured issuance as an investment-grade issuer. We now have access to a much larger investor base in the investment-grade market than the high-yield market where we had issued our prior 7 offerings over the last 13 years. Having access to this larger pool of capital should allow us to further optimize our liability management in the years to come. We believe that by being a regular issuer in the investment-grade corporate bond market, we will be able to lower our overall interest expense to a greater extent than what we could expect in the secured repo and high-yield markets. We prioritized getting to investment-grade ratings several years ago. So having that distinction today from 2 of the 3 major rating agencies is very satisfying, and we plan to maintain or improve our ratings over time. While Ladder has historically been grouped into a peer group of other commercial mortgage REITs, we believe we are more properly comped against other investment-grade rated property REITs who finance their operations like we do, primarily with the use of corporate unsecured debt and large unsecured revolvers. If we succeed in curating an equity investor base that views us more in line with investment-grade property REITs, we think our stock price will start to reflect a lower required dividend yield more in line with how these investment-grade property REITs with lower leverage are valued. In the fourth quarter and beyond, we expect to continue adding to our inventory of higher-yielding balance sheet loans, while staying nimble enough to pivot into securities acquisitions during periods of high volatility when these investments provide extraordinary opportunities to add safer, more liquid investments as market turbulence flares up. We are hopeful that the yield curve will steepen much more next year as the Fed makes good on market predictions of several cuts to the Fed funds rate. This in turn should pave the way for more regular contributions to securitizations. We are always on the lookout for opportunities to own more real estate, but we expect most of the lift to earnings next year to come from organic growth of our loan portfolio. We're expecting to finish this transformational year on a positive note as market conditions do appear to favor our business model as we head into 2026. We can take some questions now. Operator: [Operator Instructions] Our first question comes from the line of Jade Rahmani with KBW. Jade Rahmani: I'm interested to know if you're doing anything differently on the origination side from prior to the IG rating. Perhaps that has opened you up to deals that are closer to stabilization or perhaps larger in size. Clearly, the IG rating might give you a competitive advantage over non-bank lenders. So if you could provide any color on that, it would be helpful. Brian Harris: Sure. Thanks, Jade. Yes, I would say, we're looking at some slightly larger transactions and it's just a lot more stability around it financing it this way. You don't have to go about trying to figure out if an individual lender will see the assets the same way you do. But I wouldn't call it anything wholesale indifference. Slightly larger, yes, everything is a little bit more profitable when your cost of funds go down. But for the most part, the one real change that I see in this part of the cycle versus the last time is the assets on which we're lending are of much, much better quality than the garden apartment buildings and older warehouse properties. So we seem to -- when I take a look at the assets that we're lending on, they're really newly built Class A apartment complexes, resort style almost. And a lot of the industrial portfolios are also quite new as a result of all the onshoring that took place. Jade Rahmani: And on the origination side, I noticed a difference between fundings and commitments upfront that seemed, at least from the outside, a little larger than historically. Were there any construction loans in there or any large CapEx projects in those deals, if you could provide any color? Brian Harris: I wouldn't say as a rule, but we generally don't write construction loans. So there are no construction loans in that portfolio that you're looking at. And as far as heavy CapEx work, I think if you're gravitating towards a slightly wider spread than maybe you're expecting, I don't think it's as a result of a higher construction component or a lot of TI hammer swinging. It really is just -- we're just getting a little bit better. I think the portfolio doesn't look like it's changing meaningfully. Right now, it's most of the assets are industrial and multifamily. I'm not sure it will stay that way. And we haven't been avoiding hotels. We put one under app recently, but we just haven't run across too many of them. And as I said, a lot of the -- we try to focus more importantly rather than property types is on acquisitions where the borrower is buying something usually at a reset basis. Some of these resets are quite remarkable. But as opposed to cash out refinances. The only real cash out refinances that we're doing is if a guy is coming off a construction loan on an apartment building, and he's only 50% leased now. So those oftentimes have 30% or 40% equity in them. And sometimes there's a cash out refi because the property is now complete and half leased. So other than that, it's pretty straight down the middle lending on apartments and industrial properties. Operator: Our next question comes from the line of Steve Delaney with Citizens JMP. Steven Delaney: Congrats on the strong quarter. Curious, let's start with lending. You seem to like the market. You have plenty of capacity. But let's talk about just the $1.9 billion rather than the $5 billion overall portfolio, focusing on the loan portfolio because you appear to be increasingly active there. Do you see -- looking at that portfolio, if we were to look out over the next year, do you see further growth and meaningful growth in that $1.9 billion loan portfolio? And can you give us some idea of a range with your current capital base, how large the loan portfolio might be able to grow? Brian Harris: Sure. Thanks, Steve. let's start with capital first because if you remember, in the second half of 2024, we took in over $1 billion in loan payoffs. And while we began originating loans more frequently, we were not originating at that pace. So what was happening is each quarter, the loan book would get a little bit smaller. This is really the first quarter in a while where we've originated more than has paid off, and we expect that to continue. So the fourth quarter is off to a very good start. I would expect or as I said originally, the organic side of growth will come from just building up the bridge book. I think that's the place where we're focused right now. And we're pretty happy with where spreads are. They're a little bit less competitive than they were really, I would say, just a couple of months ago, which tends to happen after you hit the midpoint of the year. But -- so I would expect that $1.9 billion portfolio to go up by $1 billion in all likelihood. Maybe I would -- if I had to take the over-under on that $1 billion, I would take the over. We're quite active right now and business begets business. So I think that when we had a pretty strong origination quarter, that gets noticed by borrowers as well as brokers and the phone rings a little bit more. As Pamela mentioned, we have over $500 million in loans under application right now. You never really know how many of these are going to close depending on what happens with the volatility sometimes coming out of the political picture as well as the geopolitical side of things. But generally, I would expect that we -- I think we had that loan book up to around $3.4 billion a couple of years ago, and I would like to get back there. And I think that will come from a few places. One, we have a larger revolver that's mostly undrawn. We have a lot of securities. Securities are paying off at a much more rapid clip than loans right now. And I think that's a testimony to the payoffs that have been coming in and the capital markets becoming more welcoming to single asset transactions. So as you pay down those AAAs in a CLO, the financing becomes quite unpopular. So they've been calling a lot of those bonds, and we'll expect that to continue. I think that our securities portfolio will, through attrition pay off, but also we will sell them. As we said in the quarter, we sold a little over $250 million. We own over -- I think we own over $2 billion today. I would expect that number to go down, but I would expect the loan inventory book to go up. Steven Delaney: That's really helpful color, Brian. In terms of [ specialty ] comparison, you mentioned the property REITs and their valuation is something that you would be envious of on a -- whether it's on a PE or a dividend yield. Looking at the ROE at 8.3%, I would say, it kind of strikes me as being solid, but in terms of valuation and where the stock is trading relative to book that some improvement to that, maybe something in the 9% to 10% range might be very beneficial to the stock price, and therefore, your valuation relative to book. Is that improving the ROE in a prudent manner? Is that part of your vision for the next 1 to 2 years? And do you think the strategy you have in place will necessarily take your ROE some higher? Brian Harris: I would say yes to all of those parts of that question. The game plan is to write more loans and we'll get through the cash component of our liquidity. As you remember, we had a lot of T-bills when T-bills were yielding 5.5%, and that kept us away from very tight mortgage loans because if it wasn't at the margin worth sacrificing the liquidity and safety of the securities, we really didn't do it. But now with the Fed cutting rates and promising to cut further, we have a nice mix of floating rate and fixed rate liabilities. So we would expect our cost of funds to be going down. That revolver, I'll remind you, is now priced at SOFR plus 1.25%. So if I am of the opinion the Fed is going to cut rates 100 basis points, usually probably bridging over Powell's last few stance as well as the next Fed official that comes in. And if that happens, you get SOFR down around 3% we can borrow unsecured at 4.25% at that point. So that should all bode well. We've got floors in our bridge loan portfolio up around 6%, 6.25%. And so the loan -- the rates we're able to write loans at these days have actually gone up not down in the last quarter anyway. So we're going to continue doing that. And after we get through the cash component of our liquidity, we'll then begin to sell down or pay down the securities. And the way it comes out on paper, we're hoping to add $1 billion to $2 billion of assets net on the balance sheet and we're hoping to pick up 3% to 4% of profit margin. So if we can take a security that we're earning 5.5% on and get it and pay that loan -- pay the security off and then redistribute, reinvest that money into a loan portfolio that's earning 8.5%, we think that bodes very well for dividend, ROE as well as earnings. So it's not a hard ping-pong ball to follow. That is going to be what we're going to do. It's what we've been saying we're going to do. The one thing that has really masked all the work that we've done has been the very rapid pace of payoffs. And those are high-yielding instruments and we hate to see them go. But when they've been around a little bit past their expiration date, you do want them to pay off, and we've been pretty successful at that. So credit, very stable. We like what we're seeing. The quality is good. The borrowers are good. They've been patient. They're not in difficult financial binds as a result of owning too many over-levered properties. So it looks strong. And you got the stock market at an all-time highs, you got spreads low, rates low, Fed cutting. These are all good conditions on the weather map for a successful lending business at Ladder. Operator: [Operator Instructions] Our next question comes from the line of Tom Catherwood with BTIG. William Catherwood: Brian, I just wanted to go back to something that you said in response to Steve's question, and I want to make sure I heard it right. Did you mention that -- I thought you said rates we can get on loans have gone up, not down. Did I hear that right? Brian Harris: The ones we're looking at, yes. I think -- well, you're seeing -- I mean, I'm not immune to looking at corporate spreads, credit spreads, mortgage spreads. But there's a couple of things going on more recently in the -- literally the last 60 days, I would say. The Fed is letting the mortgage-backed securities portfolio run off. So the agency securities market is actually not as tight as you would think on spread. And the reason why is the Fed is effectively letting $30 billion roll off. I think it's $30 billion. I'm not a Fed watcher. So if I have that wrong, please don't send me a bunch of e-mail. But the other -- after April, when the tariff talk started and now the back and forths that go on, the commercial sector was -- as it always does, and I've said this to you probably several times. In January, every year, we go to a convention down in Miami called CREFC. Everyone is a bull. Everyone comes out, it's going to be its best year ever, and they put a carry trade on until the middle of June. Around the middle of June, they think maybe we paid too much for these things and they start to sell them and they're less aggressive. At Ladder, we have found a nice little theme I think in loan sizes. We traditionally like loans at $25 million to $30 million on middle market lenders by choice. However, we dabbled occasionally in larger loans. The banks are not really writing loans in the $100 million range. That's a little too small for them to put on their balance sheet and then try to securitize. They'll write $1 billion loan with a consortium of banks, but $100 million loan is under their radar and $100 million is probably a little too big for a lot of the CLO issuers that are out there that we mainly compete with. So we're actually very happy in our $50 million to $100 million range right now and we'll try to stay there. And so don't think that we've changed our stripes if we start picking up loans that are a little larger than average. We're still doing plenty of smaller loans, too. But the $100 million type loan is a better asset. It's newer. It's got better financial characteristics to it. And it is higher rate because the competitive landscape is just not as bad as it was. And keep in mind, I'm talking about the last 60 to 90 days. The first half of the year was very, very tight and we were not originating a lot for that reason. In fact, we were buying a lot of securities. Another good proxy, Tom, if you want to take a look at it, is the CLO market. So there's a lot of CLOs coming to market. And they're in the 145, 155, 160 area for AAAs. That's wider than they were just a few months ago. It's not extraordinarily wider. But you're also seeing the VIX tick up. I think it was around 25 the other day after being at 15 for a month. So when you see the VIX ticking up like that and all the volatility around the rhetoric and the political circles, we're able to find things that are pretty attractive. Again, I also think we have a reputation as being very reliable. So as we get to the year-end here, we tend to do -- we always do better in the second half of the year than the first year -- first half of the year when it comes to production. That has been something that has followed me around through my whole career. And I think it has more to do with seasonality and what happens. As you know, insurance companies, they allocate money into fixed income. Usually, by June or July, they're fully invested. So even that competitive force kind of backs off a little bit, too. So we actually prefer to fatten up going into the end of the year. William Catherwood: Got it. Really appreciate that answer, Brian. And then if I think about then sources and uses -- and again, I know you laid it out before, how you think about funding things. But if the spreads and securities are somewhat widening and the revolver is priced at S plus 125, wouldn't it make sense to then just put everything on the revolver and then term it out with unsecured once you get to $400 million, $500 million and just keep wash rents repeat that? Or is -- do you think selling down securities along with using the revolver gives some other benefit? Brian Harris: Well, I think it's almost like we have several companies at Ladder with the products that we dabble in. But on the floating rate side -- I'm sorry, on the securities side, I mean, if you take a look at the rating agency REITs, the agency buyers like AGNC and Annaly and a couple of others, these guys are throwing off dividends of 14%, 15%. And they're levered, I don't know, 7x, 8x in many cases. That's way too hot for us on leverage, but with government-guaranteed paper, with a lot of duration, I think your risk is in the duration side of that. But at where we are, these securities, there -- if we levered them up and easily can, the financing cost is around SOFR plus 50 on a AAA. If we're buying things at 150, you can figure out that there is a pretty good spread in there. So we can lever those up to about 15%, but it's a lot of leverage. And the road we're on is not to just have a low cost of funds so we can lever things up. The game plan is to focus more and more in the years ahead on unsecured debt that we extend. But the game -- the change at Ladder versus before we were IG, we would normally be thinking about issuing another bond here because we're growing rapidly, we're going to need more capital. We've got sources of ability to get capital, but we might think about that. But if you really think the Fed is going to cut rates by 75 or 100 basis points, it would not go out and do a bond deal right now because that revolver is going to get down to a low-4% rate. And that's what we think will happen. It doesn't have to happen. But if it does, that's probably the first thing we'll do is draw that. We don't want to draw all of that because that's not what the agencies and investors want to see on the bond side. So -- but my guess is we'll probably -- I don't think securities were ever meant to be a long-term hold for us. They're kind of a parking spot for us while we're waiting for better opportunities to come by on the loan side. And I think our patience has been rewarded because I think Paul mentioned that our spread on the loans we wrote in the $500 million or so was around $279 million. I think the spread on what's coming in the fourth quarter is going to be wider than that. Operator: Our next question is a follow-up from Jade Rahmani with KBW. Jade Rahmani: Just curious if you would contemplate launching a securities fund, if you can deliver 15% type returns with leverage, you could put the leverage in the fund, not on Ladder's balance sheet and create value for investors looking for that type of return profile. And of course, comparing to residential mortgage securities, commercial has a lot more predictable duration. So you don't have the prepayment volatility that the agency REITs deal with. Brian Harris: Yes. I mean, we've done that before. When we first opened, we ran a few investment portfolios even some individuals that we knew because sometimes securities get cheap, but most people with the first and last name don't know how to go buy them. And so oftentimes, we'll get a call and say, why don't you buy these? So we have an asset that's yielding, as I said, a levered yield of around 15% I think. So that's generally attractive, but it does come with a lot of leverage. We've historically looked -- we've looked at that. We've looked at stapling on a residential mortgage arm of things because we all understand that business also, but haven't done it. And the last thing we've looked at too is possibly spinning off our triple net portfolio because we don't get much for that in valuation. So this is going to be -- 2026 is going to be a year about really fine-tuning the columns and what the right cap rate should be on those things. We have an internal manager that has no value apparently. So there's lots of things we can do now around the edges, but the first step is going to be becoming an investment-grade company. And we still like the -- given where we are in the cycle right now, we like the commercial mortgage business better than the residential side. The residential side could get very interesting though, not from a loan, but from a standpoint of if there's too much supply due to the absence of the Fed. So those are very attractive, but as I said, they do have a lot of duration on them. So -- but we're probably -- we're agnostic as to holding on to things that yield 15% or selling things that make 1 to 2 points and then recycling the money. And I think that, that is an option open to us right now, as you saw in the small sales that we did in the third quarter. Jade Rahmani: And then the New York office equity investment you made, how are you feeling about that? Is that a long-term hold? It looks like it was pretty prescient in terms of timing. But could you also remind us the size of that? Brian Harris: Sure. Our investment -- we're a minority participant in the equity on that. But we may very well get involved in the debt side of that situation later on, but we have a loan from an insurance company for now. But that building, 780 Third Avenue, by the way, if anybody cares, is -- we put in a $13 million or $14 million investment. At the time, the building was about 50% occupied. I don't know where we are on free rent, but I do believe we've now -- the building is leased over 90% in just a short -- under 1.5 years. So we do like that one. Again, that's a very high-quality building. Third Avenue is not known for high-quality buildings, but a lot of the lower quality is becoming residential. And a lot of those poorly occupied office buildings that are becoming residential, those tenants are looking for space. The real benefit we picked up was between JPMorgan and Citadel, Park Avenue is being just gobbled up on space and a lot of those tenants are also moving. So we didn't -- we thought we were going to get Third Avenue tenants looking for an address. We wound up getting Park Avenue tenants that were being displaced by JPMorgan's expansion. So all going well. I wish we had done more of that. And do we like that? We are looking at another situation right now of larger size than the one we did at 780 Third Avenue, and we like it. These transportation hubs in New York City tend to do better. They come out a little bit quicker, especially when people have concerns around safety on mass transportation. I think that situation has largely corrected itself with the return of people. Our offices are full. We haven't ordered anybody to be in 5 days a week, but most of them are. So we generally like pockets of the office market, but we do understand the obsolescence associated with some of the older ones. So yes, we like where we are. We're happy to do more of those investments. And that long-term hold is the last part of your question there. I would say, we're going to hold that for a while, yes. Operator: We have no further questions at this time. Mr. Harris, I'd like to turn the floor back over to you for closing comments. Brian Harris: Thanks, everybody, for listening and those who dialed in afterwards. And good year 2025, we're in the fourth quarter. The reason I say that now is because we're not going to talk again until after the new year comes and we get through the audited financials. But a lot of this is just falling into place the way we largely expected it. The only real surprises were the rapid paydowns that took place in the second half of last year, but we're catching up quickly. We've had an inflection point here in the last quarter where we originated more than paid off, and we think that, that is going to be a consistent theme over the next 4 or 5 quarters. So thank you for tuning in, and we'll catch up with you after the new year. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
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.
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.
Operator: Hello, and welcome to the FirstEnergy Corp. Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Karen Sagot, Vice President of Investor Relations. Please go ahead, Karen. Karen Sagot: Thank you. Good morning, everyone, and welcome to FirstEnergy's Third Quarter 2025 Earnings Review. Our earnings release, presentation slides, and related financial information are available on our website at firstenergycorp.com/ir. Today's discussion will include the use of non-GAAP financial measures and forward-looking statements, which are subject to risks and uncertainties. Factors discussed in our earnings news release during today's conference call and in our SEC filings could cause our actual results to differ materially from these forward-looking statements. The appendix of today's presentation includes supplemental information, along with the reconciliation of non-GAAP financial measures. Please read our cautionary statement and discussion of non-GAAP financial measures on Slides 2 and 3 of the presentation. Our Chair, President and Chief Executive Officer, Brian Tierney, will lead our call today. He will be joined by Jon Taylor, our Senior Vice President and Chief Financial Officer. They will discuss the team's continued strong execution and performance on key financial metrics as well as our bright outlook and positive momentum as we close the year. Topics include raising our full year 2025 guidance midpoint and narrowing the range, increasing our 2025 capital plan, our expectations for incremental investment opportunities, and our progress and time frame on regulatory activities. Now it's my pleasure to turn the call over to Brian. Brian Tierney: Thank you, Karen. Good morning, everyone. Thank you for joining us today and for your interest in FirstEnergy. We are having a great year with strong results across all of our key financial metrics. Yesterday, we reported third quarter GAAP earnings of $0.76 per share compared to $0.73 in the third quarter last year. Core earnings were $0.83 per share for the quarter compared to $0.76 in the third quarter of 2024. For the year-to-date period, our core earnings were $2.02 per share compared to $1.76 in 2024, an increase of 15%. Our results benefited from strong execution of our customer-focused investment plan, Pennsylvania base rates that went into effect in January and strong financial discipline. Through the first 9 months of 2025, we invested $4 billion of capital in our regulated utilities. This is a 30% increase compared to last year. We are pleased to be in a position to put even more resources into system reliability and resiliency for our customers. Today, we are announcing a 10% increase to our 2025 capital investment program to $5.5 billion. With our strong year-to-date results, we are raising our 2025 guidance midpoint and narrowing our range to $2.50 to $2.56 per share. We remain positive about the opportunities ahead. We are reaffirming our core earnings compounded annual growth rate of 6% to 8%. And early next year, we expect to roll out a higher CapEx plan for the 2026 through 2030 planning period. Turning to Slide 6. Load growth from data centers continues to transform our industry. FirstEnergy service territory, expertise, and assets are ideally positioned to support the remarkable demand growth and economic opportunity within and adjacent to our footprint. Within our operational area, data center interest remains high. Our long-term pipeline of demand, which includes interconnection requests from serious and reputable customers has nearly doubled since our fourth quarter earnings call in February. Our contracted customer demand increased by over 30% during the same period. The impact of this demand will be tremendous. Based on data center customers who are contracted or in our pipeline, we expect FirstEnergy's system peak load to increase 15 gigawatts or nearly 50% from 33.5 gigawatts this year to 48.5 gigawatts in 2035. Across PJM, peak load projections are forecasted to increase by nearly 48 gigawatts by 2035 or 30% of the current peak load of 162 gigawatts. FirstEnergy is uniquely situated to support this growing demand through customer-focused investments, specifically in our transmission system. This system is located in the heart of PJM, interconnecting with a broad number of neighboring utilities and encompassing strategic high-voltage corridors that are a vital part of the transmission grid. Turning to Slide 7. Earlier this month, we submitted our integrated resource plan in West Virginia that lays out our recommendations to keep power affordable, accessible, and reliable over the next decade. The IRP indicates a capacity need in West Virginia beginning in 2027. Our preferred plan provides the flexibility to adapt to the rapidly changing energy landscape while delivering reliable and cost-effective energy to West Virginia homes and businesses. Key aspects of the plan include adding 70 megawatts of utility scale solar in 2028, adding 1.2 gigawatts of dispatchable gas combined cycle generation around 2031, keeping our Fort Martin and Harrison coal plants operational through the planning period and using short-term power purchases to bridge the gap until new resources are online. The proposed gas and solar investments are aligned with Governor Morrisey's 50 by 50 initiative, which aims to boost West Virginia's energy capacity to 50 gigawatts by 2050. We are pleased to pursue generation projects in a state with strong executive, legislative, and regulatory support. To provide the best outcomes for West Virginians, we plan to issue a build-to-own transfer RFP for up to the full 1.2 gigawatts of natural gas resources. We are also evaluating building a portion or the entirety of this generation on our own. In the first quarter of 2026, we plan to file with the Public Service Commission seeking approval of the new gas generation. The proposed assets represent a 35% increase to our current regulated generation portfolio. This is an exciting opportunity for FirstEnergy, and we are pleased to support customer needs and economic growth in West Virginia. Turning to Slide 8. As I mentioned earlier, our transmission system will require significant incremental investments to ensure reliable electric service. At our stand-alone transmission and integrated segments, we need to ensure our critical infrastructure is resilient and reliable, especially as demand is projected to increase in the region. This includes investments to replace aging infrastructure, improve system performance, and increase operational flexibility. We are also participating in regional network upgrades, which are the investments awarded through PJM's RTEP open window process. This includes required system upgrades and improvements to address reliability, security, and load demands of the bulk electric system. Over the last few years, we have been awarded $4 billion of capital investments through the PJM open window process. We recently submitted proposals of capital investments through the 2025 open window to support increasing demand in Ohio, Pennsylvania, and Virginia. These proposed investments include several new and upgraded substations and high-voltage lines needed to support the increasing customer demand. The PJM Board is expected to award transmission projects in this open window by the first quarter of 2026. Any projects awarded to FirstEnergy in this open window will be included in our new 5-year plan. We now expect transmission investments included in the 2026 to 2030 capital plan to increase by 30% versus our current 5-year plan. This includes increases from reliability enhancements and regulatory required investments to improve the overall health and performance of our most critical assets on the system and to address growing demand and changes in generation in the region. Our company-wide transmission assets are a terrific growth engine. Our investments are expected to result in a compound transmission rate base growth of up to 18% per year through 2030. This means total transmission rate base would more than double through the planning period. On the generation side, we have a significant incremental investment opportunity associated with adding the 1.2 gigawatts of natural gas generation in West Virginia by 2031. This project at an initial estimate of $2.5 billion will be included in our long-term plan after we receive regulatory approval. Moving to Slide 9. We're in a strong position to make all of these investments that benefit our customers while keeping affordability a top priority. Today, our bills are on average 2.5% of our customers' share of wallet and on average, are 19% below our in-state peers. Even with an increasing investment plan, we will be below our in-state peers for the foreseeable future. However, we recognize that affordability is top of mind for our customers and that, on average, electric bills have increased 11% for our customers in our four deregulated states over the last year. As we drill into this, the generation component of the bill is driving 85% of this increase. This type of increase is not sustainable and needs to be addressed with new dispatchable generation. In that regard, we are advocating on behalf of our customers and working with state leadership in our deregulated states on how they can take the lead to drive meaningful change and attract new generation. It's a different story in West Virginia, our one traditionally integrated state. Total customer bills remain flat from 2024 to 2025, and the state is taking proactive steps through its IRP process and 50 by 50 program to maintain and expand its generating capacity. We are also working to protect current customers as demand increases from data center developers. This includes utilizing volumetric commitments and customer credit support as needed. Our approach leverages the balance sheet of the data center developers to protect existing customers. Turning to Slide 10. We are on track to have a successful year and look forward to a strong finish. Our updated earnings guidance of $2.50 to $2.56 per share is in the upper half of our original range. We are reaffirming our 6% to 8% core earnings CAGR through 2029. We are on pace to execute our 2025 to 2029 capital investment plan. And looking ahead, we see significant increase in our next 5-year investment plan. Most of this growth will come from high-quality transmission investments backed by forward-looking rates with constructive ROEs. We're also excited about new opportunities to invest in generation in a state that is supportive of these efforts. Our value proposition remains strong, encompassing robust growth, consistent financial discipline, and attractive risk profile and a 10% to 12% total shareholder return opportunity with upside potential. We are on course, and we are committed to achieving our goals and realizing our bright future as a premier electric company. Now I'll turn the call over to Jon. Jon? K. Taylor: Thanks, Brian, and good morning, everyone. We had another strong quarter and continue to make excellent progress this year. We delivered on each of our key financial metrics, including core earnings, capital investments, base O&M and cash from operations. You can review more details about our results, including reconciliations for core earnings and business segment drivers in the strategic and financial highlights presentation posted to our IR website yesterday afternoon. We delivered third quarter core earnings of $0.83 per share, a 9% increase versus 2024. This improvement was largely a result of new distribution base rates in Pennsylvania that went into effect earlier this year and total transmission rate base growth of 11%, including 9% for our ownership in stand-alone transmission rate base and 16% in transmission rate base within our integrated business. Additionally, as a result of our strong performance this year, especially with our controllable operating expenses, we were able to move a modest amount of maintenance work into the third quarter from future years, which gives us flexibility within our plan. Through the first 9 months of the year, core earnings improved to $2.02 per share, a 15% increase from the first 9 months of 2024. Again, our strong year-to-date results largely reflect the execution of our regulated strategies, stronger customer demand, and transmission rate base growth. I want to take just a second to highlight the financial performance and growth in each of our regulated businesses. In our distribution business, the $0.20 improvement in year-to-date earnings is a result of the $225 million annual rate adjustment in Pennsylvania that supports the capital investments and operating expenses we are deploying back into that business as well as higher customer demand and lower operating expenses as we execute on continuous improvement initiatives. In our Integrated segment, earnings improved $0.05 per share or 7% for the year-to-date period, resulting primarily from formula rate investments in the transmission system in New Jersey, West Virginia, and Maryland and higher customer demand, partially offset by higher depreciation. And finally, in our stand-alone transmission business, earnings increased approximately 7%, resulting from our strong capital investment program, delivering owned rate base growth of 9%, which was partially offset by the impact of new debt at FET Holding Company and the full year dilution impact of the FET minority interest sale. As you can see, our performance year-to-date at our regulated businesses is a testament to the execution on our regulated strategies, the constructive rate designs we have in each of our businesses, our strong customer-focused investment programs and a focus on financial discipline. Through the first 9 months of 2025, sales were 1% higher than last year and essentially flat on a weather-adjusted basis. For our industrial class, based on ramp-up schedules of some of our data center customers, we expect to see more meaningful increases in industrial load beginning in Q4 and into next year. As Brian mentioned, through September, we deployed $4 billion of customer-focused investments, which is a 30% increase as compared to the same period of 2024. The majority of this increase was associated with transmission capital, both at our stand-alone transmission and integrated businesses, which in total was $1.9 billion of CapEx through the first 9 months of the year, representing a 35% increase as compared to 2024. For 2025, we are increasing our planned investments from $5 billion to $5.5 billion. Over half of the increase is in transmission CapEx with the remaining on the distribution system, largely reflecting reliability and storm restoration investments. The team continues to do a nice job ensuring that our capital investments are targeted at improving reliability and the customer experience. Additionally, even though our CapEx programs have increased significantly over the past few years, we have strong confidence in our ability to deliver, if not exceed these plans, given our capital planning process, which is based on known and specific projects with resiliency built into the portfolio and our broad and deep relationships with our vendors and suppliers. For O&M, we continue to track better than planned and largely in line with last year despite executing additional maintenance work this year that will enhance reliability and give us flexibility as we finish this year and look to 2026. Our financial performance resulted in a consolidated return on equity of 10.1% on a trailing 12-month basis, which is slightly above our targeted ROE of 9.5% to 10% and represents a 70 basis point improvement from our 2024 consolidated return of 9.4%. Through September 30, to support our capital investments of $4 billion, cash from operations was $2.6 billion, which is better than our internal plan and an increase of more than $700 million as compared to 2024. And we successfully completed our 2025 financing plan with eight subsidiary debt transactions totaling nearly $3.5 billion at an average coupon of 4.8%, including a $450 million transaction at FirstEnergy Transmission and a $1.35 billion financing at JCP&L in the third quarter. Including the successful $2.5 billion FE Corp. convertible debt offering in June, our 2025 capital markets program encompassed close to $6 billion of debt financing, all significantly oversubscribed at a weighted average rate of 4.4%, demonstrating the attractive credit profile of our utilities and business mix. And finally, to close out my updates, we do expect an order in the Ohio base rate case in November. As soon as practical after that, we plan to file a multiyear rate plan to ensure timely recovery of the important investments needed in the state. We are very pleased with our progress as we close out 2025. As I mentioned earlier, we are ahead of plan on all of our key financial metrics and look to carry this momentum in the final months of this year and as we begin 2026. In closing, the team is extremely focused on the value proposition that we offer to shareholders. We are focused on delivering enhanced customer experience through strong customer-focused investments, which in turn will allow us to provide solid risk-adjusted returns to our investors. The future is bright for FirstEnergy, whether it be industry-leading transmission investment opportunities significant reliability investments in the distribution system or the build-out of regulated generation in a supportive state like West Virginia, we have a strong business plan and the right team to execute. We are committed to continuing our positive momentum and delivering value for our shareholders. Thank you for your time. Now let's open the call to Q&A. Operator: [Operator Instructions] And our first question comes from the line of Nick Campanella with Barclays. Nicholas Campanella: I was just wondering on the West Virginia generation, you kind of talked about build and transfer versus self-build. Can you maybe kind of talk about how you've recovered the capital in either scenario and how we should kind of think about the impact to earnings '28 through 2031. And I guess if you're just kind of thinking about a build and transfer for 2031, is there really no earnings attribution until then? Or could there be milestone payments? Maybe you can kind of expand on that. Brian Tierney: Yes. So the build-own transfer, I think, is fairly straightforward. On the we build it side, we, of course, would file for CWIP during construction. And so we'd expect at least the recovery of that, if not the earnings component during the pendency of construction. But the real significant earnings component for that will come after the assets online. Nicholas Campanella: Yes. Okay. And then just maybe how you're thinking about rate case strategy for '26, mostly asking on Maryland, West Virginia, New Jersey, where the ROEs are trending a little lower than authorized? K. Taylor: Nick, it's Jon. Yes. So I think as we look to '26 and beyond, if you look back to the cadence that we went through, when we first started filing cases a few years ago, we started with Maryland, New Jersey, West Virginia. We'll start to look at that kind of cadence as we move into 2026. Obviously, it's going to be important for our utilities to earn close to their allowed returns. And so as they're deploying capital, we need to make sure that we get timely recovery through increases in base rates. Operator: The next question comes from the line of David Arcaro with Morgan Stanley. David Arcaro: I was wondering just any thoughts you could give on as you're talking about these increased CapEx opportunities from both transmission and potentially on West Virginia generation. How does that impact the earnings growth outlook and the range that you've got as you consider out closer to the end of the decade? Brian Tierney: Yes. David, we think of it as firming up the ability for us to be in that 6% to 8% earnings per share range over the planning period. People don't traditionally think of utilities as growth investments. But as we look at the opportunity to invest in our system, increasing CapEx over the period, it gives us real confidence that we'll solidly be in that 6% to 8% earnings per share growth range. David Arcaro: Okay. Got it. And then I guess looking at the data center pipeline, I was wondering if you could refresh us on just the activity seems to continue to be very strong. And as you see more gigawatts maybe come in and firm up, I guess, is there a way to give any rule of thumb for how much increased transmission CapEx you could see going forward, like on a per gigawatt basis? I think you've given that rule of thumb in the past, but the CapEx that you're adding to the plan here seems to be quite a bit stronger. So just wondering your current thoughts on as more and more data center activity continues to come to your service territory, what that could mean going forward? K. Taylor: Yes. David, it's Jon. So in total, right now, as we look at what's contracted and just our transmission CapEx program in total, I think you could say there's probably easily $1 billion of CapEx associated with transmission interconnection requests, whether that be direct connection projects or network upgrades to support large loads. So that's what we see now based on the contracted and active large load customers that we have. But I think that will vary as we move into the future. And we've seen a wide range of capital deployment based on interconnection request depending on the location and the size. Operator: The next question comes from the line of Carly Davenport with Goldman Sachs. Carly Davenport: Maybe just a quick follow-up on the transmission CapEx point. Just as you continue to raise sort of the upside opportunity there now at 30% this quarter. I guess, can you talk a little bit about kind of what's giving you the confidence to do that? And ultimately, if we should be thinking about that as a floor looking into the 4Q update or if there's potential for further upside there? Brian Tierney: Yes. I think the upside that we mentioned that 30% for the next 5-year plan is what we feel comfortable with at this point. And again, we're going to come out with that full CapEx plan early in '26, but I think that's what we would guide to be the number right now. As we think about that and where we're spending the transmission CapEx, about 60% of it is associated with reliability enhancements, upgrade health of system, replacing aging reliability type investments. And the 40% of it is what we call regulatory required. That's transmission interconnection requests and things like the PJM open windows. So we have some pretty good insight into where we're spending those dollars and what the increase will look like for the next 5-year plan. So I'd expect it to be very, very close to that number. Carly Davenport: Great. Okay. That's really helpful. And then maybe just on the data center pipeline. I appreciate all the updates on that front. I guess just as we think about that contracted bucket, are you able to share how much of what is contracted is under an ESA versus another type of contractual agreement? Brian Tierney: Yes. So that's a great question. Thank you, Carly. The ESA is usually the last thing that happens before power starts flowing. So that happens very late in the process traditionally. But making sure that they're contracted to either build the facilities that are needed to happen, that we put in place the credit support that they're going to need to make sure that they show up and take what we're spending. Those type of things happen earlier in the process. So we feel really confident once we have put them in that contracted category that they're going to show up even if we don't yet have an ESA signed. Operator: The next question comes from the line of Jeremy Tonet with JPMorgan. Jeremy Tonet: You touched on in your comments, I guess, the bill increases and the impact generation has had on that. And I was just wondering if you could expand a bit more there, I guess, on the appetite to build new generation elsewhere across PJM, if there is the proper underpinnings to it? And how do conversations look on that? And anything new to report there? Brian Tierney: Yes. So nothing new to report there, Jeremy. I mean, the place where we have a clear window, a supportive governor commission and legislature is in West Virginia. And so that's how we're able to move forward so quickly with those plans. The idea that we'd be building in any of the other states on a long-term basis would really just be speculative at this point. Jeremy Tonet: Got it. Understood. And turning to Ohio. I was just wondering if you could expand any more there on the backdrop and talking about filing as soon as practical there, what that could look like? Brian Tierney: Yes. So we expect the order on the base rate case during the fourth quarter. And we need to get that to see what the treatment of various aspects are in that base rate case. But given that we've been making investments in the state and want to continue making investments in that state since that test year, which ended in May of '24, we're going to have to go in right away given that we don't have trackers and riders in the state anymore. And so given the forward-looking nature of the multiyear rate plan, we think that's the perfect avenue to do it. And as soon as we know what our situation is coming out of that base rate case, we'll know what we need to file for, and we'll be going in right away. Operator: The next question comes from the line of Ryan Levine with Citi. Ryan Levine: Regarding the 30% CapEx upside in the prepared comments, what regions in PJM are you seeing the majority of the investment opportunity? And is there any cost inflation associated with the labor or equipment that is a component of that 30%? Brian Tierney: Yes. I'd say most of that 30% is really associated with incremental work rather than inflationary proceeds -- impacts. And it's across the system in terms of where we're investing. It's in all five of our states, and I'd say fairly evenly distributed in those five as well. So -- it's broad-based. It's that reliability type investment. It's the regulatory required. It's the new customer hookups. It's the open windows. It's really broad-based, but it's incremental work that's driving that 30% increase. Ryan Levine: Okay. And then in terms of the load forecast embedded in your planning, do you have a lot of confidence in the visibility of those forecasts in light of some of the FERC and other PUC recent commentary on that front? Brian Tierney: We do, Ryan. So as we're looking at the planning period, the next 5-year period. A lot of that is associated with what is contracted, not necessarily in the pipeline. So we have pretty good visibility into what the load forecast is going to be in that time frame. When you get out a little bit farther is when you're starting to look at the significant increases that we talked about with data center load and up to the 15 gigawatts. As we're looking at those load increases, we're looking at things, various criteria, like does the developer own and control the land? Do they have building permits? Do they have development plans? Do they publicly announced what the project is going to be, who the customer is, all those things. We look at those factors to get a comfort level in is the customer actually going to show up and does it make sense to put them in the pipeline? And it's that level of confidence that we have in that 15 gigawatts that we're talking about in the next 10 years. Operator: The next question comes from the line of Ross Fowler with Bank of America. Ross Fowler: Just maybe circling back to West Virginia. This is going to be a self-build. I think that's what you said on the call, if I caught it correctly. So as you file for CWIP and you go through that, how are you thinking about the supply chain connected to that 1.2 gigawatts? Do you have a turbine in the queue? Do you have a queue position? And kind of what are you seeing for pricing there? Because I know the turbine prices have increased over time. Brian Tierney: Yes. So that's all factored into what we've forecasted in the IRP, assuming it's going to be about $2.5 billion. And we haven't made a determination yet as to whether or not it's going to be build-own-transfer or self-build. We're going out with an RFP for the build-own transfer, and we'll see what that brings in. But we're also seeing things come in a little bit. So we're not seeing that 4- to 5-year that people have been talking about. We're seeing more of the 3- to 4-year lead time on major equipment. But the pricing remains pretty strong on that. We've not secured a space yet, but we think that we'll be able to do that given the regulatory framework that we have for getting approvals and getting the facility up and running in the 2031 time frame. Ross Fowler: And then -- and Jon, as you kind of talked about rate case cadence, you talked about sort of New Jersey. I mean, obviously, Ohio is coming very soon as soon as practicable, but New Jersey might be next in that cadence as you wind through it. How are you thinking about sort of the affordability pressures in that state? Obviously, it's been an issue in the governor's race. Is it well understood from your perspective in that state that most of that is coming from the generation portion of the bill or kind of contextualize that for us a little bit? Brian Tierney: We think that's well understood that generation is really what's driving so much of that increase. At the end of the day, as a political issue, though, that doesn't much matter. People see their bills going up and are concerned about that. And we're trying to do everything we can in our power to keep those bills as low as possible for the portions that we control. And so we're being very thoughtful about how we're spending our O&M. We're advocating on behalf of our customers to stop the madness that is these PJM capacity auctions right now, which are paying for new generation that's just not showing up, and we don't think it's appropriate that our customers bear that kind of burden. So we're doing everything we can to try and mitigate the impact of the higher generation costs, but we think it's well understood that that's where the increases in those rates are coming from. Operator: The next question comes from the line of Steven Fleishman with Wolfe Research. Steven Fleishman: Just a quick follow-up on the transmission upside, the 18% rate base growth. When we're going to get these open window outcomes and such over the next few months or start seeing them, should we assume those are embedded in there already? Or would those be upside to that? Or how should we think about as we see these announcements? Brian Tierney: Steve, we put a very modest amount in there, but it's our practice to not put things in the plan until we have the approvals that are needed from PJM. But in this case, we put a very modest amount in there. K. Taylor: Yes. And I would say, as I mentioned in my prepared remarks, the portfolio is what we call resilient. So we have hundreds and hundreds of projects that we can fill in as needed, all needed for reliability purposes. So depending on how things shake out with the open window, which, quite frankly, we feel really good about the solutions that we submitted in the open window process, our track record, where the congestion constraints are, and we feel really good about our prospects there. But to the extent that anything varies from our plan, we have a resilient portfolio. Steven Fleishman: Okay. And then just to clarify that answer because there's the plan right now, then there's the upside plan or the next plan we're going to get. So when you made your comments, Brian, is that relative to the next plan or the current plan, I guess. Brian Tierney: That makes sense. The 30% increase that we talked about, there is a very modest amount from the pending PJM open window that's in there. So if we get significant incremental awards from that, we'll be refreshing that plan. Operator: The next question comes from the line of Andrew Weisel with Scotiabank. Andrew Weisel: First, a question on the CapEx update, and this is sort of a high-level question, but you're talking about very meaningful upside to the transmission CapEx. The West Virginia IRP is calling for a lot of spending there, plus you have the Ohio rate case. My question is, when we look at the update coming in a few months, are you expecting to reallocate some spending away from the other segments and businesses? Or do you think the balance sheet and the labor force could handle what might be a pretty sizable increase for the plan overall? I don't know if the whole $28 billion plan is going to go up by 30%, maybe it will. But how do you think about limiting factors for the upcoming increase? Brian Tierney: Yes. We don't see taking from one jurisdiction at this point and giving to another. We see increases across the jurisdictions. But Andrew, we've already factored in the needs of the various jurisdictions, the opportunities in the various jurisdictions. And to be honest with you, they're all different. And that's why we put in place the management structure that we have with the presidents, five presidents overseeing those five properties that we own so that they're very thoughtful about what's going in. Do we need energy efficiency in one jurisdiction that we don't need in another. Just things like that so that our CapEx plan is very, very tightly tailored to each of the jurisdictions that we serve, and that's what goes into how we put our plan together. We're not -- we don't view the plans that we're talking about, the West Virginia and the incremental transmission is taking away from another jurisdiction, but we view that as all expansive across our five jurisdictions. Andrew Weisel: Okay. Great. And then I think on the industrial load, Jon, you made a comment about that accelerating in the fourth quarter and into next year. I think you said that was specific to some data center customers ramping up. Can you speak more broadly? I think I may have asked you this on prior calls as well, but it sounds like generally flattish for the industrial customers. Maybe you can talk about trends in the outlook outside of the specific data center ramping. K. Taylor: Yes. I think we -- yes, we are starting to see a little bit of rebound in fabricated metals and steel manufacturing. So that has been kind of a headwind for us over the past few quarters. We're starting to see that come back a little bit. But I think as we move into the fourth quarter and especially into next year, you'll start to see meaningful increases in industrial load, mainly from data centers. And I'm talking like mid-single digits by the time we get to maybe Q2 to maybe even higher than that, significantly higher than that by the time we get to the fourth quarter of next year. Operator: The next question comes from the line of Sophie Karp with KeyBanc Capital Markets. Sophie Karp: How do you envision a response on the state level from policymakers to these rising consumer energy costs? Brian Tierney: I think people are concerned about it, as are we, and that's why we're engaging with regulators, legislators, and others to both, a, point out what is causing the increase and, b, trying to work with them on mitigating those increases and what are things that we think makes sense for our customers. And so again, we are not advocates of continuing this madness of the PJM capacity auctions that are paying people for new capacity that they're not getting and look for other mechanisms like a 2-tiered structure, one that would pay existing capacity one price and have another structure that would attract incremental capacity and any other ways that we can attract new capacity and have customers actually get what it is they're paying for. But we're concerned about increases in customer bills and again, making sure that customers get what it is they're paying for and with the capacity auctions, that's not happening. Sophie Karp: And do you think there's enough, I guess, momentum behind these efforts now for them to come up in the next legislative sessions? Brian Tierney: Yes. I think there's certainly a lot of attention being paid to it across all of our unregulated jurisdictions. And so yes, I think we'll see people starting to take notice, have plans for mitigation and start enacting those in the near term. Operator: The next question comes from the line of Anthony Crowdell with Mizuho Securities. Anthony Crowdell: I just wanted to -- and I apologize, I just may have not understood it. A response to Carly's question and a response to Steve's question. On Carly's question, and when I think you were talking about CapEx, it seemed that you were more looking at these additional projects are going to strengthen and lengthen the current 6% to 8% plan. And again, I don't want to front-run your fourth quarter call. But then on Steve's question, I think you talked about your current plan is very modest with very little of this additional CapEx in there, leading that there's actually potential for a big change in that growth rate. I wonder if you could help me connect the two dots there. Brian Tierney: Yes. So thank you for the question, Anthony, if there was any confusion around this. This increase in CapEx that we're talking about gives us extreme confidence in the 6% to 8% earnings per share growth range. So we would like to be in the upper end of that, but we're not at a point today where we are going to change that growth rate. But it gives us considerably more confidence to be in the upper part of that range. So in response to Steve's question, the increase that we're talking about is in the 6% to 8% growth. The specific part that I was talking about with Steve was the PJM transmission open window component that's pending. We have a very modest amount for that, that we think that we will be awarded. If it's higher than that, that will be incremental to the plan. But in any event, we don't see us changing the earnings per share growth rate that we've guided to, but the CapEx plan that we talked about and the increase in it gives us confidence to be in that range and targeting the upper end of that range. Does that answer the question? Anthony Crowdell: Yes. So if you're better than your plan in the PJM open window, there's more of a bias towards the upper end of the range of the 6%. Is that fair? Brian Tierney: No, no, no. Let me -- again, I don't want you to put words in my mouth. The existing plan and the increase that we're talking about is in the plan and gives us the confidence to be in the upper end of that range. If we get something more than what we talked about in the open window, we'll factor that into the plan, and we don't expect us to take it out of the plan, but we're already expecting to be confidently in the 6% to 8% range, and we're targeting the upper half of it, regardless of what happens with the PJM open window. Anthony Crowdell: Great. Got it. And then just one housekeeping item. On large load tariffs, are you guys -- I just apologize, I'm not familiar with every state you're operating in. But are you guys applying for large load tariffs? Or are they all in place as this growth is hitting the PJM service territory? Brian Tierney: Yes. So we don't see the need for them the way our tariffs work. We think that we can enter into terms and conditions that make the data center developers responsible for the incremental investment that we're making and protect our existing customers. So we see others doing that, and they may not have the flexibility that we do in our existing tariffs and contract structures. And it's not something that we see the need for today. If that changes going forward, we'll evaluate that and make changes at the time. Operator: This concludes the Q&A session. I'd like to turn the call back over to Brian Tierney for closing remarks. Brian Tierney: Great. Thank you all for joining us today, and thank you for your interest in FirstEnergy. We look forward to seeing many of you at the EEI conference in a few weeks, and we hope you have a safe and enjoyable rest of your week. Take care. Operator: This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.
Operator: Good morning, and welcome to the United Rentals Investor Conference Call. Please be advised this call is being recorded. Before we begin, please note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control. And consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2024 as well as the subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company's recent investor presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Ted Grace, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin. Matthew Flannery: Thank you, operator, and good morning, everyone. Thanks for joining our call today. I apologize in advance for my voice. As I'm fighting through a little cold here, but I'm sure we'll get through it okay. Yesterday afternoon, we were pleased to report our third quarter results. The hard work of our nearly 28,000 employees enabled record revenue and adjusted EBITDA. The year is playing out better than we originally expected our updated guidance reflects the demand environment we continue to successfully serve. In short, our unique value proposition, experience, and ability to support a broad range of our customers' needs distinguishes us from the competition. Last quarter, I spent a lot of time on the road visiting branches, job sites and meeting with customers. And while this is nothing new. It did make the quarter's results and our subsequent guidance update, no surprise from my perspective. Our branches are very busy, and the team is working hard to serve customer demand. Our people are true differentiators in the rental industry and their professionalism and knowledge, their expertise and their commitment day in and day out shows. We often talk about putting the customer at the center of everything we do as it feeds our flywheel of growth. Without the dedicated United Rentals team members safely executing our customer-centric model, we could not generate the success we continue to deliver. And from where I sit today, I expect this momentum to carry into 2026. In the third quarter specifically, we again saw growth across both our General Rental and Specialty businesses with optimism from the field and our customer confidence index, reinforcing our expectations going forward. The demand for used equipment also remains healthy. Now with that said, let me get into the review of our third quarter results and our updated 2025 guidance. And then Ted will review the financials in detail before we open the line for Q&A. Let's start with the quarter's results. Our total revenue grew by 5.9% year-over-year to $4.2 billion. And within this, rental revenue grew by 5.8% to $3.7 billion, both third quarter records. Fleet productivity increased 2%, contributing to OER growth of 4.7%. Adjusted EBITDA increased to a third quarter record of over $1.9 billion, resulting in a margin of 46%. And finally, adjusted EPS came in at $11.70. Now turning to customer activity. And as I mentioned, we saw growth across both our Gen Rent and Specialty businesses in the quarter. Specialty continues to post double-digit increases with rental revenue up 11% year-over-year driven by growth across all our product offerings and an additional 18 cold starts. Year-to-date, we've opened 47 cold starts as we continue to fill out our specialty footprint. We see this combined with the power of cross-sell and the addition of new products to our portfolio as critical points of competitive differentiation, which benefit our customers while also providing important drivers of long-term growth. By vertical, our construction end markets saw strong growth across both infrastructure and nonresidential construction, while our industrial end markets saw particular strength within power. We continue to see new projects kicking off. And while data centers are certainly 1 area of growth, we also saw new projects across infrastructure, semis, hospitals, LNG facilities and airports to name just a few. Our end market exposure by vertical is intentionally diversified and our equipment is fungible to ensure we can serve demand no matter where it presents itself. Now turning to the used market. We sold $619 million of OEC at a recovery rate of 54%. The demand for used equipment is healthy, and we're on track to sell approximately $2.8 billion of fleet this year. As I mentioned in my opening remarks, the year is playing out better than we initially expected. To meet this demand, we spent nearly $1.5 billion of CapEx in the quarter and now expect to spend over $4 billion on fleet this year. This positions us not only to capitalize on the current environment, but also for the anticipated growth in 2026. Our customers and the field remain optimistic, particularly around large projects and key verticals. And thanks to our go-to-market approach and one-stop shop value proposition, we believe we're well positioned to be the partner of choice for these projects. Year-to-date, we've generated free cash flow of $1.2 billion, with the expectation to generate between $2.1 billion and $2.3 billion for the full year, including the impact of our higher CapEx spend. As a reminder, the combination of our industry-leading profitability, capital efficiency, and the flexibility of our business model enables us to generate meaningful free cash flow throughout the cycle, and in turn, allocate that capital in ways that allow us to create long-term shareholder value. Speaking of capital allocation, we always start with ensuring the balance sheet is in a good place, and it is. We then fund organic growth reflected through our CapEx and complement this with inorganic growth that makes financial and strategic sense. In the remainder, we returned to shareholders. This quarter specifically, we returned over $730 million to shareholders through a combination of share buybacks and our dividend. For the full year, we remain on track to return nearly $2.4 billion to shareholders. Our leverage of less than 1.9x leaves plenty of dry powder to support disciplined M&A, where we continue to pursue opportunities to put capital to work and attractive returns. Our M&A pipeline remains robust within both Gen Rent and Specialty and across the spectrum of deal sizes. And while it's difficult to predict the timing of M&A, this is an important capability we've built over our company's history. And we'll continue to use it to enhance our business and drive shareholder value. As we enter the final months of 2025, we're focused on execution, and delivering the results outlined in our updated guidance, including total revenue growth of 5% or 6% ex use, strong profitability, robust free cash flow and returns above our cost of capital. Although our growth is coming with some additional costs, which Ted will cover in his remarks, we're working through these challenges and are taking proactive measures, including bringing in additional fleet to help mitigate fleet movement costs. I'm very pleased with 2025 and how it's playing out ahead of our initial expectations and see good momentum heading into next year. Based on what we see today, 2026 will be another year of healthy growth. We believe the tailwinds we've discussed throughout this year will carry over and our unrelenting focus on being the partner of choice for our customers, positions us very well to win this business and to outperform the industry. For now, we won't get into the specifics about '26 as we're in the middle of our planning process, but we will share more details in January as we always do. In closing, I'm pleased with the outstanding job the United Rentals team is doing to support our customers. And that's the starting point for everything we do. Not only do we have the scale, technology and value proposition to make us the preferred partner, but we have a history of execution our customers can rely on. By working together with our customers to meet their goals to drive safety, productivity and efficiency, we ensure we build a relationship with trust that positions us to win in the marketplace. Subsequently, our strategy, business model, competitive advantages and capital discipline allow us to generate compelling shareholder returns for the long term. So with that, I'm going to hand the call over to Ted, and then we'll take your questions. Ted, over to you. William Grace: Thanks, Matt, and good morning, everyone. As you just heard, the year continues to progress well with third quarter records across total revenue, rental revenue and EBITDA. More importantly, based both on what we're seeing and hearing from customers, we expect the strong demand to continue, which is supporting our increases in both rental revenue and CapEx guidance. More on that in a minute, but first, let's go through this quarter's numbers. As you saw in our press release, rental revenue increased $202 million year-over-year or 5.8% to a third quarter record of $3.67 billion supported again by growth from large projects and key verticals. Within this, OER increased by $133 million or 4.7% and driven by 4.2% growth in our average fleet size and fleet productivity of 2%, partially offset by some fleet inflation of 1.5%. Also within rental, ancillary and re-rent grew over 10%, adding a combined $69 million of revenue. Consistent with our first half results, third quarter ancillary growth again outpaced OER as we continue to focus on supporting our customers. Moving to used, we generated $333 million of proceeds at an adjusted margin of 45.9% and a 54% recovery rate, while OEC sold set a third quarter record at $619 million. Combined, these results speak to the continued strength and health of the used equipment market. Turning to EBITDA. Adjusted EBITDA increased $42 million year-on-year to an all-time record of $1.95 billion. Within this, a $69 million increase in rental gross profits was partially offset by a $6 million decline in used gross profit dollars. SG&A increased $23 million, which is in line with revenue growth, while other non-rental lines of businesses added $2 million. Looking at profitability. Our third quarter adjusted EBITDA margin was 46.0% implying 170 basis points of compression on an as-reported basis and 150 basis points ex used. At a high level, margin dynamics in the third quarter were similar to what we've discussed the last several quarters. This includes the impact of ancillary, the strategic investments we're making in the business and still relatively elevated inflation. An area I might call out again this quarter was delivery, which was impacted both by higher fleet repositioning costs in support of large projects and our use of third-party outside haul to serve the stronger-than-expected demand seen during our seasonal peak. To try to put this in perspective, our third quarter delivery costs increased 20% year-on-year versus a roughly 6% increase in rental revenue. Simply assuming that these costs increase proportional to revenue. This gap implies over $30 million of additional cost year-on-year and translates to an almost 80 basis points drag in our EBITDA margins. Now I'm sure we'll talk more about this during Q&A. But this provides a great example of the balance we are constantly managing between capital in the form of fleet and costs, both fixed and variable with the goal of serving customers as efficiently as possible. Shifting to CapEx. Third quarter gross rental CapEx was $1.49 billion. I'll speak more to this in a moment, but this included the acceleration of some purchases to help us support the stronger-than-expected demand we are experiencing. Moving to returns and free cash flow. Our return on invested capital of 12% remains comfortably above our weighted average cost of capital, while year-to-date free cash flow was $1.19 billion. Our balance sheet remains very strong with net leverage of 1.86x at the end of September and total liquidity of over $2.45 billion. All note, this was after returning $1.63 billion to shareholders year-to-date including $350 million via dividends and $1.28 billion through repurchases. In total, between dividends and share repurchases, we still plan to return almost $2.4 billion in cash to our shareholders this year. This equates to a little better than $37 per share or a return of capital yield of almost 4%. Now let's shift to the updated guidance we shared last night, which reflects our confidence in delivering another year of solid results. As you've heard us say a few times this morning, we are seeing stronger-than-expected demand. In response, we accelerated the landing of some fleet into Q3 while also raising our full year CapEx guidance by $300 million at midpoint to a range of $4 billion to $4.2 billion. In turn, we are increasing our total revenue guidance by $150 million at midpoint, while narrowing the range to $16 billion to $16.2 billion, implying full year growth of roughly 5% at midpoint. Within this, our used sales guidance is unchanged at around $1.45 billion, which implies total revenue growth ex used of 6% at midpoint. I'll note that the additional CapEx accounts for roughly half of the increase to our revenue guidance, given we'll only realize a partial year of OER benefit with the balance coming from ancillary. On the EBITDA side, we are narrowing our range to $7.325 billion to $7.425 billion while maintaining the midpoint of $7.375 billion. Ahead of Q&A, I'll quickly mention that the lack of implied pull-through from this additional revenue reflects our expectation that, as I just mentioned, a portion of the increase will come from lower-margin ancillary while we also expect to manage through similar cost dynamics in Q4 and especially delivery. Turning to cash flow. We reaffirm the midpoint of our guidance for cash flow from operations at $5.2 billion, while our revised free cash flow guidance of $2.1 billion to $2.3 billion simply reflects the additional investment in CapEx that we plan to make. Importantly, our updated free cash flow guidance does not impact our share repurchase program. I'll remind you that we intend to repurchase $1.9 billion of shares this year, which highlights our strategy of both investing in growth and returning access capital to our shareholders. So to wrap up my prepared remarks, overall, we were pleased with how the quarter played out, especially on the demand side. And while our margins were burdened by the cost mentioned, we remain focused on supporting our customers' growth as efficiently as possible as we lean into their demand. So with that said, let me turn the call over to the operator for Q&A. Operator, please open the line. Operator: [Operator Instructions] We'll take our first question from David Raso with Evercore ISI. David Raso: Obviously, we have the demand positive and the cost negative here. So I just wanted to dive into the demand side first. The cadence of the CapEx, when I think about '26, and the comment you accelerated equipment for the third quarter. But just so we're clear, when you're thinking of the demand profile that you said was better than you expected, is any of this '25 CapEx increase pulling forward 2026. And if not, just thinking about the cadence of sort of the CapEx for '26, obviously, when you bring this much fleet on the third quarter, people wonder how do we go into '26 with a level of fleet just given the seasonal weakness? So that's a demand question. I'll follow up with a quick cost question. Matthew Flannery: Sure, David. I'll take that. This was not a pull forward from 2026. This accelerated CapEx in Q3 was to meet the demand that we were already seeing and to be responsive to specifically some large project wins throughout the year, but that put a little more need for fleet here in the back half. Then we let the Q4 CapEx flow through as normally would. Some of that's seasonal. And to your point about 6 all of this, although not a pull forward, is supported by being very comfortable that we expect 2026 to be a growth year, which is why we felt comfortable raising this full year CapEx. As far as CapEx cadence for next year, we haven't finished our planning process, but you can expect there to be the standard, let's say, we're going to sell $2.8 billion, maybe a little bit more in CapEx next year. The replacement for that is going to be $3 billion, $4 billion plus depending on how much more we sell. And then there'll be growth on top of that. That's the part that we're going to work through in the planning process this year. But to be clear, we certainly expect to have some growth CapEx here in 2026. And then we'll let you know about the cadence of that as we see how the demand plays out. David Raso: Okay. And then on the cost side, I mean, it's easier for me to say, but ancillary revenues are up to close to 18% of total rental revenue. How do we think about pricing for those services? I know -- I appreciate the comment, providing those services is partly why you win more than your fair share, let's say, of the major projects. But it's it went from sort of an afterthought to, again, if you want to throw in a re-rent, it's 20% of rental revenue. So is there a way to rethink that pricing, some kind of annual contracts, something where it doesn't continue to be a drag. And related to that, the fleet productivity number, I know you don't like going into the details, but can you give us some sense of the components of fleet productivity. Were both utilization rate up 1 up, 1 down. Just trying to get a sense of those components as we sort of push against the cost. Matthew Flannery: Yes, I'll take the latter part there, David, on fleet productivity, and then Ted can add some color on the ancillary. But on the ancillary, I do want to remind you that A big portion of this is delivery, which is basically a pass-through fuel, which is not a large markup. So there's just some things there that have historically been. And it's a fair point about the pricing. But as we think about that, and Ted can get into the detail of the math of how that impacts us, there's nothing new other than we're doing more of it as we continue to serve more products and services. And the fleet productivity, as I stayed true to telling you qualitatively. We're very pleased with how rate and time have performed throughout the year and specifically in Q3. I would say the gap, the difference between what you saw in Q2 at 3.3% fleet productivity, and Q3 at 2% was mix. Mix was a good guide for us in Q2 and not in Q3. So we would see that as normal variability. And it's important for us to remind you all that mix is just -- we're catching that. We're not driving that. That's a result of who you rent to, how you went to, what your rent, how long, what geography. So it's not anything that we have any capability to predict, quite frankly, because it's reactive and responsive to where the demand is. And then we just let you know that. But to be clear, rate and time are both up this year, and we feel good about it. William Grace: And on the margin side within ancillary, David, obviously, the thought there is you want to be responsive to the customers all kind of ties back to this concept of being the partner of choice. Frankly, it's hard for us to predict what that mix will look like between something like pickup and delivery or installation breakdown, setup, fueling, et cetera. The margins themselves don't fluctuate a tremendous amount, but they are what they are. So delivery to Matt's point is probably the thinnest of that. That's really kind of just the convention of the industry. Others are certainly not going to have the kind of margins that we have in rental. But as we've said, they're definitely positive and they add GP dollars with very little capital coming along with that. So we think they benefit us both strategically and financially, but it's going to drive kind of variability depending on what that composition looks like. Operator: We'll take our next question from Rob Wertheimer with Melius Research. Robert Wertheimer: You've mentioned a few times across the call solid demand indicators kind of driving some of the CapEx move. Could you talk a little bit qualitatively about what that looks like in the field? Is this mega projects that we all knew about but are probably coming online? Is the share gain as people appreciate? Is this interest rate intensive construction having what's kind of going on? Matthew Flannery: Sure, Rob. As we've talked about really for the past year plus -- there's some feedback there from somebody. But as we talk about large projects are really carrying the ball here. So we feel really good about that. And when we asked, what surprised us, we had a higher win rate than maybe we had originally planned for, and that's what the additional CapEx was for. As far as the local markets, the local markets, we would call flattish. It's very choppy in certain markets. There's a little bit more opportunity than others, but I'd call it net across the network probably flat on the local and really the growth coming from major projects, which are robust and we expect to do well, and I'm glad to see the teams executing on it. Robert Wertheimer: And then the fleet repositioning that's been there this quarter and before, related to that shift in demand. Does that have an end date to it? Where you've kind of got stuff moved around where you want it? Or is that just a new world where projects are bigger and in different places? I'll stop there. Matthew Flannery: So part of that is think about the disbursement of revenue, right? Think about a couple of years ago when we talked about broad-based demand and our network was a real advantage for us because we could just serve more demand out of our same cost basis basically with some variable costs. Now as these major projects are throughout our network, but there are chunks of revenue that we have to move fleet to from certain places. And in many instances, has some additional cost with these mega projects of building an on-site and a support team there. So I'd say that's a dynamic and the part that surprised us the most, and we've been very upfront about this is the delivery of mobilizing that fleet to these sites. Whether they be remote or not, it's -- you're mobilizing it from multiple areas. So that's a little bit different cost that we have to absorb that when we were spreading it throughout the network in the local markets just didn't have that additional cost burden. Outside of that, I wouldn't call out anything different. When you look at these decisions on their own, the math makes sense. They're good decisions. It's just some additional costs that you don't have to incur when you're not so weighted on the large projects. Operator: We'll take our next question from Michael Feniger with Bank of America. Michael Feniger: Matt, just on the local market, it seems like you're signaling 2026 as a growth year. Is that inclusive of the local market? Or is that more on the larger progress? And if we see rate cuts, is that alone get the local markets back. Historically, there's been a delay between rate cuts and construction picking up, but those rate cuts happen in deep recession. So I'm curious if you feel the feedback loop from rate cuts is a little shorter than normal in terms of when that pipeline might fill up. That's more of the second half next year type of event. Matthew Flannery: Yes. We don't pretend to know, right, how that -- and I think if you look at history, there's different outputs. So if you can't even look at history and hope it will repeat itself because it's been different during different cycles. But sentiment feels a little bit better with there being a rate cut and talk of more rate cuts, but you don't take sentiment to the bank. Right now, we call local markets flat. We're going to go through our planning process for the balance of this quarter. That will inform our guidance. And we'll get a little bit closer to the local market as we talk to the branch managers and the district managers that are much closer to that and they'll give us their feedback on what do they think their growth potential is locally, outside of large projects. And then we'll have a better idea, but I agree with the tone of the sentiment. We just got to see does our team think when that's going to manifest and how we're going to capitalize that growth. But we'll be excited for that to happen. We do think it's potential upside, whether that's to '26. The back half, '26, '27, we're not even sure yet. So it's something that we'll communicate when we give out guidance. Michael Feniger: Perfect. And Matt, you mentioned accelerated the CapEx to meet the demand. Did large projects -- did you see anything that got green lit that maybe was on the fence? Or are you seeing your typical win rate starting to inch up versus prior years? And just a tag on that, Ted, if there's any way you could help quantify where you think that power vertical for you guys? How big you think that is today for you guys versus maybe where it was a few years ago? Matthew Flannery: Yes, I would just say it's -- we just had greater success and the customers that rely on us have had greater success in these large projects, and the pipeline is robust. So I would say that's what drove the extra demand. It's really just good execution from the team, and I'll let Ted talk to the power vert. William Grace: Yes, Mike, thanks for the question. So it's currently in low double digits, say, 11%, 12%. It's probably a reasonable area. And if you go back to when we introduced what we called our power vertical strategy. And just to be clear, this is really a focus on investor-owned utilities, whether it's generation, transmission, distribution. At the time in 2016, it was probably 4%. So we're probably coming up on nearly tripling that relative exposure to what we think is, at the time, we thought it would be a very large stable business it's very large. It's obviously seen a lot of investment, and we expect that to certainly continue for the long foreseeable future. So I feel like we're really well positioned there. and we've spent the better part of a decade building what we think is a lot of competitive advantages to serve those customers in that market uniquely. Operator: We'll take our next question from Steven Fisher with UBS. Steven Fisher: I just wanted to ask about the -- come back to the margin dynamics here. Just looking at the Q2 versus Q3 year-over-year specialty going from 220 basis points to 490 basis points headwind. It sounded like qualitatively, the drivers weren't really that different categorically, but just curious what accounts for that difference in year-over-year? Was there sort of faster growth in Yak that was driving more of that delivery impact? Or what just accounts for the 220 versus 490. William Grace: Yes, absolutely, Steve. Thanks for the question. So overall, I would say the cost dynamics within specialty and frankly, the whole business has been pretty consistent across the year. When you look specifically at specialty 2Q versus 3Q, the big difference was the increase in depreciation we had in that, and that spoke to kind of the aggressive investment we're making in Yak more than anything in matting. I mean those assets get depreciated at a far faster pace than any other asset class we have in that business. So when you look at kind of the 490 basis point decline, 200 basis points of that was depreciation, so call it 40%. The other pieces were the same things we've talked about like delivery and really ancillary being the other big piece. Steven Fisher: Okay. That's helpful. And I think you are on track or planning to do 50-ish cold starts this year. I think you're pretty close to that already. Do you think that momentum is likely to kind of continue into the fourth quarter? And any sense of having done 70-plus last year and maybe on track for 50 plus this year, directionally, where you see the cold starts heading for next year? Matthew Flannery: So we haven't finished the planning process yet, as I said earlier, and that's where we'll make those decisions. As far as with the balance of the year, we're in a small period here in Q4. Maybe there'll be another 10 to a dozen in Q4. It really depends on the timing of if the team finds the real estate and the bodies to be able to do it. So as far as '26, stay tuned. They've executed. The teams executed real well on cold starts here in '25, and they'll propose the plans for '26 in the next 6 weeks. Operator: We'll take our next question from Jamie Cook with Trust Securities. Jamie Cook: I guess just 2 questions. The setup for 2026. Obviously, ancillary is just becoming a larger part of the business, it just sounds like structurally, that will be a headwind on margins. But I guess, Matt or Ted, I'm just trying to think about, obviously, you're seeing demand or demand is starting to improve or maybe your share is just improving. But I'm just wondering, the setup in 2026 with a lot of the inflationary pressures in particular with tariffs and Section 232. And you have the ancillary business becoming larger. To what degree do you think we can start to push through higher rental rates. Is the market strong enough that they could absorb that just given some of the cost headwinds that we could see continuing into 2026? William Grace: Yes, good question, Jamie. We don't want to get too far ahead of ourselves. But certainly, if you just take a step back and you decompose what's happened in 2025 as a starting point. A lot of the margin dynamics have been being responsive to customers. You touched on ancillary, but obviously, that is dilutive. And you could ask yourself why are you doing that? And again, it's to really be this partner of choice and be responsive and frankly, use that as a tool to be a better partner and take share. We think that's absolutely worked out. And while it is dilutive to margins, as we've talked about, there are a lot of benefits to it. So how does that play out next year? Time will tell. We don't think that's a bad business. But we'll have a sense for what that's going to look like over the next 6 weeks as we get through the business planning process. Then you think about things like cold starts and investments, and I don't think anybody would dispute the logic, strategic or financial of the cold starts we're doing in specialty. To your question on inflation, broader inflation, it's still elevated, as I said in my prepared remarks, is it going to subside in '26? Time will tell, but certainly, we are very aggressively managing our costs in any environment, but certainly in this one. So then you come to the delivery piece. And that's obviously been kind of the biggest discrete challenge we faced this year, and that's driven a lot by being responsive to customers. That's what just helped support the demand and the growth you've seen. We're trying to figure out that piece next year, what is the growth? What does it look like from a physical footprint standpoint? And then how do we most effectively serve it. Matt talked about the idea of managing CapEx differently such that you could mitigate some of that incurred cost moving fleet. We're working through that, but that again is being responsive to where demand is and supporting our customers. So all that is to say that we're looking at those things, they will all affect 2026 margins and flow-through. But the focus, as always, is on profitable growth. And from that standpoint, we think the team is managing the business really well. Operator: We'll take our next question from Ken Newman with KeyBanc Capital Markets. Kenneth Newman: So maybe to follow up on that answer, that response now, Ted. I think, Matt, you mentioned growing the fleet for both stronger demand, but also maybe to better address the fleet movements. I know you don't want to talk about '26 yet, but just higher level, how do you think about balancing those 2 dynamics, right, to keep time yet strong into next year? And just how long do you think it takes to tackle some of these cost inefficiencies. And maybe to that point, do you need to accelerate cold starts in order to tackle the movements or the fleet repositioning costs? Matthew Flannery: Yes, it's a great point, Ken. And one that we're talking about. First off, and getting together with our partners, our customers and fleet planning, right, a little more accurately. But to be fair to them, these big jobs are dynamic and all of a sudden, any 50 units that we weren't given a heads up on and they need to make up. So we have a choice to make in that -- to give you that example in that instance. So first, it starts with me challenging our team in the field, hey, let's make sure we're communicating. The earlier we know, the more efficient we could be. And then there is a component of why there are some categories in our desire to drive high time -- high fleet productivity, we've been running hot for a while, for quite a few years. There's certainly some categories that we're going hand to mouth again. And we just got to be careful about that. So we are going to look at that. There's a balance between operational efficiency and that capital efficiency. But both are important. So that's something we'll look at as we're going through the planning process. So these are all, like I said earlier, individually, when you look at the decisions to ship this stuff through third parties, it's the right decision, mathematically. It's just how can we avoid that incremental cost? How can we minimize it as best we can. And that's something that we'll have some learnings from this year, and we'll work on it. But that will all be embedded in our guidance for 2026. Because I don't think the dynamic of big projects carry and evolve is going to change a lot in '26. We'll see if the local market gets some more growth. But big jobs, we already have that visibility. We know that's going to be a big part of the opportunity. Kenneth Newman: Right. No, that makes sense. And then just for my follow-up, I appreciate all the color around the drags on the fleet repositioning costs. When we think about core profitability, ex some of these higher ancillary and delivery mix, is there anything -- is there any reason to think that you can't drive flow-through kind of in line with your more normalized type of margins, right? Because you're kind of signaling a growth year for next year ex some of these more volatile mix impacts. Anything to suggest that you can't kind of get back to that 40% plus type of flow-through ex those items? William Grace: I guess what I'd say is the core profitability of the business, we think, is performing well, right? And we've talked about the impact of delivery this year, which is just a function of serving our customers as efficiently as we can. And to Matt's point, it's balancing operating efficiency with cost efficiency or call it capital efficiency with margin. So we think we're doing those things well, and we think the underlying business is actually performing as expected. In terms of what it looks like going forward, again, we would expect the core to perform well. A lot of this, and I hate to repeat myself, but it is being responsive to what customers ask of us and how demand is evolving. And so when you think about it, that again explains a lot of what we're doing with ancillary, what we're doing with cold starts. And so I come back to what I just said to Jamie, we feel really good about that core profitability, and our goal is always to be as efficient as possible serving demand. That doesn't change. But when you look at kind of what those margins look like when we talk about updated guidance or whatever, we would say that this is really being responsive to the market itself. Operator: We'll take our next question from Tami Zakaria with JPMorgan. Tami Zakaria: I have just 1 question. It sounds like customer demand has accelerated on the large project side. So is it fair to assume your raised equipment purchase plans would be across Gen Rent and Specialty equipment? Or is there -- are there any specific categories where you're seeing better demand? Matthew Flannery: No. I think you raised a good point. It is -- historically, we've been putting a lot more growth into specialty. And you see that in the results. This -- think about these large projects are taking our full portfolio. So the incremental investments would be more broad than maybe our earlier growth expectations of mix. So we know where the high time categories are and we'll continue to make sure that we're running a good balance of capital efficiency and responsiveness in those. So I'd say it's more looks like our overall portfolio. It's what these investments look like. Operator: And we'll take our next question from Sabahat Khan with RBC Capital Markets. Sabahat Khan: So your earlier commentary indicated that the larger project side of the business is continuing to trend well. Some of these really took on as the IIJA really got going. I guess when you look ahead 1, 2 years, 3 years, do you think the business or the industry needs some sort of a renewal to that IIJA program? Or is the industry just generally inflecting towards these larger mega projects, just some thoughts there. William Grace: Yes, absolutely. Certainly, infrastructure broadly has been a very strong market for us. And certainly, the IIJA has helped support that. Our best sense is there's still a healthy amount of that initial or that money left. So that should support it. The thing we've always talked about infrastructure, there's certainly not a lack of demand in the sense of the need to reinvest in infrastructure, we certainly expect that, that will continue, whether it's funded by state initiatives or local initiatives or federal dollars. So we'll see ultimately what that funding looks like. But there's no question that the country on the whole needs to continue investing aggressively in reinvigorating infrastructure. And the other thing we've talked about, just maybe as a corollary to that question is, infrastructure has been a great market for us. It's an important part of our business, but we've got a lot of these tailwinds. And certainly, we're writing a lot more than just 1 wave of infrastructure. When you think about a lot of the onshoring, a lot of the remanufacturing in the U.S. and power and other things in technology, all those come together to give us a really optimistic outlook for the foreseeable future on demand. Sabahat Khan: Great. And then just as a follow-up, I think there's been commentary in the past that it may not necessarily be a larger project, lower margin type of a setup. But as you think about larger projects becoming a bigger part of your mix, and it sounds like you're ramping up that side, you're moving fleet around to meet these large projects. Is there sort of an inflection point that you see in your business at which, look, larger projects are going to be stable at this space and now we'll get operating leverage on the sort of the cost base that we install to perhaps meet that demand that the larger customers looking for? Just any view on how -- as that business grows, is there a view on sort of an inflection point on overall margins and operating leverage? Matthew Flannery: Yes, it's a good point. What we've talked about historically is when you think about large projects versus our base margins, we have always. And still believe, by the way, that although some of those large projects do get some discount as they leverage the bulk spend with us, that we get to serve it more efficiently on site versus spreading that overall. The 1 area that has changed as it's become a bigger part of the portfolio that, quite frankly, we didn't anticipate was the repositioning of the fleet. So it's a little bit of where the jobs are, where you're positioned, and what I said earlier, how well you can plan with the customers to position the fleet, that's going to decide that. Just to put it in context, in the relative scheme of things, we're talking about small numbers, right? You're talking about 1% of your operating costs, but it does make noise within the metrics, which is why we explain it to you all. So even with this extra burden transportation costs, it's still relatively close to the same. It's just the challenges where the fleet is versus where the need is and how you continue to improve that operating efficiency is what will make that decision. But I wouldn't see it as terribly different even in its current environment with these extra costs because in the scheme of a $15 billion company and the cost base we have, it's not a big number. Operator: We'll take our next question from Tim Thein with Raymond James. Timothy Thein: Maybe just the first question is maybe for you, Matt, just in terms of the customer dialogue and what you're hearing from -- in terms of some of the national account customers, it's been a couple of months since we've had the tax reform passed. And if you -- and some of the sentiment readings have kind of been all over the board, but it doesn't seem to be much change in terms of kind of forward-looking CapEx and other growth plans. But I'm just curious, have you detected or seen any change in terms of -- again, just kind of thoughts around big project spending and now that some time has elapsed since the OBBBA has passed? Matthew Flannery: Yes. Our customers remain optimistic. And when we look at our customer confidence index, we get that feedback when we talk to our national account teams which are dealing with the largest contractors in North America, we get positive feedback, and we're getting it from the field as they're asking for more support from a fleet perspective throughout the year. So we don't see any negative trend there at all or any kind of need for a reboot of any kind of spending. And the pipeline that we have visibility to it looks pretty good for '26. And the feedback from our customers and our field teams matches that sentiment. Timothy Thein: Okay. And maybe looking a little bit further out, the 2028 goals that you outlined at the Investor Day back in '23, you obviously wouldn't have kept it in the slides if you didn't think it was still realistic. But the elements of it is, specifically around what the implied flow-through look to be a bit more challenging. Does that -- do those targets maybe rely a bit more on M&A from here? Or maybe just kind of an update as to how we're tracking towards those. Again aspirational -- go ahead. William Grace: Yes, absolutely. So starting with the growth. I mean we feel like we're tracking well, right? We talked about this aspirational goal of $20 billion by '28. And I think if you do the simple math, you need to keep compounding something like 7%. And so we feel like that is still very much in play, I feel good with that. The margins, frankly, will be more challenging to hit that kind of roughly implied margin and the corollary to flow-through. But when we look at kind of why, there are a few things that we point to. You mentioned about acquisitions. Frankly, acquisitions tend to pull us in the opposite direction to getting there. We've long talked about this Tim, you and I have talked about this and probably Matt and I have talked to the entire investment community about this, but acquisitions tend to be dilutive to our margins. And that's why we take the time to explain what that margin profile looks like, but we really talk about the returns and most specifically, those cash-on-cash returns because that's how we think about allocating capital. But if you look at the acquisitions we've done since '22, they've virtually all been dilutive. That doesn't mean they weren't good deals. We would say strategically, they were all 10s, and I'd say financially, they've all been 10s but they're going to have that dilutive effect. So just to put some numbers around that, I've looked at the math. The acquisitions probably account for 70 or 80 basis points of margin dilution since 2022 in isolation. I think if Matt and I could go back in time, we would have done every one of those deals. And frankly, we probably would have done -- we would have loved to do twice as many deals if they had the same financial profile. But the margins are also impacted by the ancillary. This is -- if you think about that evolution of being responsive to customers and how ancillary has grown from, let's say, 15% of our rental revenue mix to now approaching the very high teens. That's probably not something we would have anticipated back then. It's had this dilutive effect. We've talked about it today. We've talked about it for a while. But again, these are really beneficial things we're doing to take care of customers to frankly use its competitive advantages over incumbents, and they've helped support the growth you've seen us achieve. So there, again, like we would not go back and do things any differently with ancillary. And certainly, I would just say the broader inflationary environment has been worse than probably anybody expected since '22. That being said, we feel like we've managed it really well on an underlying basis. And so again, the margins, it will be a stretch. I'll say that. I don't think that surprises anybody. That doesn't mean we're not going to keep pushing for it. And it doesn't mean we're not incredibly focused on driving better core profitability of the business. So Matt, I don't know if you'd add anything. Matthew Flannery: I think that's right. It was an aspirational plan, and I think it was the right one. There's been some dynamics that have changed in the construct of the business. And we'll keep informing everybody as it goes along. So -- but we do feel good about basically the core profitability of this. Operator: We'll take our next question from Scott Schneeberger with Oppenheimer. Scott Schneeberger: A couple from me. First one is just if you could speak to -- I know it's early and you're not giving guidance for next year. But your conversations right now, it's that time of year where you're speaking with the OEMs on pricing looking forward. Just with tariffs hovering, what are the conversations like is it's going to be anticipated as a normal pace of rate increases for the upcoming year? Or might there be something that could surprise us? Matthew Flannery: Yes, Scott. As I said before, we try not to share information with our partners and suppliers on open mic, but we feel like we're in a good position. The consistency of the scale of spend that we've shown just to support our partners with, I think it's valued as much today as it ever has been, specifically in this past year. And we think we'll be in pretty good shape for purchases in '26, both from a cost perspective and from being able to support perspective. And our partners have done a really good job when you go back a few years ago when supply chain disruption. Getting back to normalized expectations, and we're very pleased with how they've responded. Scott Schneeberger: Thanks, Matt. And then on the theme of the day, just want to ask the question kind of in a different way. If you have a strong demand, the seasonal uptick next year, which it looks like you are expecting with the elevated level of re-rent, ancillary and large projects and need for probably still delivery, you're addressing it with some CapEx. But -- and it's -- you guys have mentioned on these earlier questions, hey, we're going to look and see what we can do to improve. But are there some ideas with regard to relationships with transportation providers on the outside, maybe where you can get some bulk pricing? Are there operational execution initiatives that you're looking at, is one part of this question. And then the second part of the question is, you haven't done -- obviously, H&E stepped away, but haven't done an acquisition in a while. What is the appetite there? I just heard Ted's response to Tim's question, but curious on where that may be applicable on this issue or just general appetite for M&A overall? Matthew Flannery: Sure. So on the outsourcing, we obviously already do a lot of outsourcing. And we do have some partnerships within that spend. It is something we look about -- look at, whether it's in-sourcing or outsourcing more for that flexibility. I think we lean more towards -- we seem to do things more efficiently when we can in-source, but that's a little bit harder when you're talking about some of these longer hauls. So that is something that we're wrestling with, and it's a great point, something that we're talking to people about in the space. As far as M&A, listen, we've built a great capability throughout our history as good purchasers and good integrators. And we do feel one of our mantras is can we make this business better, when we make that decision. So we continue to work a pretty robust pipeline. We just haven't found the right deals yet. I think we did $20 million of M&A this year. We did 1 small deal. We don't predict forecast or even planned M&A because I think that's how people end up doing bad deals. So we talk about our organic growth and we look at M&A as opportunistic. But to be clear, if we are always work in the pipeline, both in Specialty and Gen Rent, and if we find something that fills out our footprint better or a new product that our customers can rely on us for, like we've done in the last couple of big deals, matting and mobile storage, we're going to lean in. It's just a matter of finding that right deal where the -- where it meets all 3 legs of that stool we talk about of cultural, strategic and most importantly, financial. Operator: And there are no further questions on the line. I'll turn the program back to Matt Flannery for any additional or closing remarks. Matthew Flannery: Thank you, operator. And to everyone on the call, I appreciate your time. I'm glad you could join us today. Our Q3 investor deck has the latest updates. And as always, Elizabeth is available to answer your questions. So until we speak again in January. I hope you all have a safe and happy holiday season and a happy new year, and we'll talk soon. Take care. Operator, you can now end the call. Operator: Thank you. This does conclude today's program. We appreciate your patience. We appreciate your attendance. You may now disconnect.
Operator: Greetings, and welcome to the Tri Pointe Homes' Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce David Lee, General Counsel at Tri Pointe Homes. You may proceed. David Lee: Good morning, and welcome to Tri Pointe Homes earnings conference call. Earlier this morning, the company released its financial results for the third quarter of 2025. Documents detailing these results, including a slide deck, are available at www.tripointehomes.com through the Investors link and under the Events and Presentations tab. Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating performance, are forward-looking statements that involve risks and uncertainties. A discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the company's SEC filings. Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call the most comparable GAAP measures can be accessed through Tri Pointe's website and in its SEC filings. Hosting the call today are Doug Bauer, the company's Chief Executive Officer; Glenn Keeler, the company's Chief Financial Officer; Tom Mitchell, the company's President and Chief Operating Officer; and Linda Mamet, the company's Executive Vice President and Chief Marketing Officer. With that, I will now turn the call over to Doug. Douglas Bauer: Good morning, and thank you for joining us today as we review Tri Pointe's results for the third quarter of 2025. I want to begin by recognizing our entire Tri Pointe team, their dedication and focus allowed us to deliver strong results in a period that continues to present challenges to the housing industry. In the third quarter, we exceeded the high end of our delivery guidance, closing 1,217 homes at an average sales price of $672,000 generating $817 million in home sales revenue. Our adjusted homebuilding gross margin, excluding $8 million of inventory-related charges, was 21.6%, while adjusted net income was $62 million or $0.71 per diluted share. We remain focused on creating long-term shareholder value. During the quarter, we spent $51 million repurchasing 1.5 million shares, bringing our year-to-date total spend to $226 million, representing a total of 7 million shares. This activity has reduced our share count by 7% year-to-date and by 47% since we initiated the program in 2016, underscoring our disciplined approach to enhancing shareholder returns. Additionally, we also strengthened our liquidity by increasing our term loan by $200 million with optionality to extend the maturity into 2029. We believe this incremental leverage is prudent, supporting capital efficiency, funding for our community count growth and continued flexibility to return capital to our shareholders. We ended the quarter with $1.6 billion in total liquidity, including $792 million in cash and a debt-to-capital ratio of 25.1% and a net debt to net capital ratio of 8.7%. Market conditions remained soft throughout the third quarter. Home buyer interest remains somewhat muted with lower confidence driven by slow job growth and broader economic uncertainty. However, we continue to see underlying demand homeownership among needs-based buyers. We anticipate that home shoppers are preparing to reengage when conditions stabilize, leading to more normalized absorptions. Our management team has successfully navigated multiple housing cycles, and we remain focused on near-term execution while staying aligned with our long-term growth strategy. In the short term, we are prioritizing inventory management, disciplined cost control and the sale of move-in ready homes while steadily increasing the mix of to-be-built homes over time. For long-term success, we continue to invest in both our core and expansion markets with the goal of scaling our operations, consistently growing community count and increasing book value per share to drive sustained shareholder returns. We are encouraged by the progress of our new market expansions in Utah, Florida and Coastal Carolinas. Development activity is well underway and strong local leadership teams are in place. While initial contributions will be modest, we expect these divisions to generate meaningful growth beginning in 2027 and beyond as they gain scale. During the quarter, we are pleased to open our first two communities in Utah, a key milestone for that region. A cornerstone of our strategy is to invest in well-located core land positions close to employment centers, high-performing schools and key amenities. We currently own or control over 32,000 lots, position us well for community count growth in the years ahead. We expect to end 2025 with approximately 155 communities, and we anticipate growing our ending commuting count by 10% to 15% by the end of 2026. The majority of this growth will be driven by expansion in our Central and East regions. This disciplined growth strategy enhances our operating scale, increases geographic diversification, and positions Tri Pointe for sustainable, profitable growth as demand improves and our expansion divisions mature. At Tri Pointe, our product is primarily targeted to premium move up buyers with financial strength, seeking better locations, larger homes, curated finishes and elevated lifestyles. This segment has demonstrated resilience even amid shifting market conditions, supported by strong income profiles, down credit and larger down payments and our backlog reflects this strength. Homebuyers financing through Tri Pointe Connect, our affiliated mortgage company have an average household income of $220,000 FICO score of 752, 78% loan-to-value ratio, an average debt-to-income level of 41%, consistent with recent quarters. These strong characteristics have reinforced the financial stability and quality of our customer base and the durability of our future deliveries. As consumer confidence improves, we expect pent-up demand to grow the pool of move-up buyers attracted to our premium communities and design-driven offerings that align with their lifestyle aspirations. Our premium brand community locations and innovative product design continue to differentiate Tri Pointe in the marketplace. We have the financial strength and operational discipline to invest through the cycle while returning capital to shareholders. Together, these strengths, along with an experienced management team, positions Tri Pointe to drive long-term performance and value creation. With that, I'll turn the call over to Glenn to provide additional detail on our financial results. Glenn? Glenn Keeler: Thanks, Doug, and good morning. I'd like to highlight key results for the third quarter and then finish my remarks with our expectations and outlook for the fourth quarter and full year. The third quarter produced strong financial results for the company. We delivered 1,217 homes, exceeding the high end of our guidance. Home sales revenue was $817 million for the quarter with an average sales price of $672,000. Gross margin adjusted to exclude an $8 million impairment charge was 21.6% for the quarter. SG&A expense as a percentage of home sales revenue was 12.9%, which is at the lower end of our guidance, benefiting from savings in G&A and better top line revenue leverage as a result of exceeding our delivery guidance. Finally, net income for the year was $62 million or $0.71 per diluted share, also adjusted for the same inventory related charge. Net home orders in the third quarter were 995 with an absorption pace of 2.2 homes per community per month. Regionally, our absorption pace in the West was 2.3, with the Southern California markets outperforming and the Bay Area experiencing softer market conditions. The Central region averaged 1.8 absorption pace for the quarter, with increased supply of both new and resale homes in Austin, Dallas and Denver impacted pace during the quarter, while Houston continued to outperform in the region. In the East, absorption pace was 2.8 led by strong results in our D.C. Metro and Raleigh division, while Charlotte was consistent with the company average. We invested approximately $260 million in land and land development during the quarter and ended with over 32,000 total lots, 51% of which are controlled via option. Looking at the balance sheet. We ended the quarter with $1.6 billion in liquidity, consisting of $792 million of cash and $791 million available under our unsecured revolving credit facility. As of the end of the quarter, our homebuilding debt-to-capital ratio was 25.1%, and our homebuilding net debt to net capital ratio was 8.7%. As Doug mentioned, we increased our term loan by $200 million to a total outstanding amount of $450 million and added extension rights that if exercised could extend the due date to 2029. The term loan is an effective source of additional liquidity to help fuel our future community count growth and other capital needs. Now I'd like to summarize our outlook for the fourth quarter and full year of 2025. For the fourth quarter, we expect to deliver between 1,200 and 1,400 homes at an average sales price of between $690,000 and $700,000. We anticipate homebuilding gross margin percentage to be in the range of 19.5% to 20.5%. We expect our SG&A expense ratio to be in the range of 10.5% to 11.5% and we estimate our effective tax rate for the fourth quarter to be approximately 27%. For the full year, we expect deliveries between 4,800 and 5,000 homes with an average sales price of approximately $680,000. We anticipate our full year homebuilding gross margin to be approximately 21.8%, which excludes the inventory-related charges recorded year-to-date. Finally, we anticipate our SG&A expense ratio to be approximately 12.5% and we estimate our effective tax rate for the full year to be approximately 27%. With that, I will now turn the call back over to Doug for closing remarks. Douglas Bauer: Thanks, Glenn. In closing, I want to thank our team members, customers, trade partners, and shareholders for their ongoing trust and support. We're proud to have been recognized once again as one of Fortune 100 best companies to work for in 2025. A reflection of the culture and values that drive our performance. While the near-term environment remains uncertain, our long-term outlook is very positive, and we are confident that our strategy, our people and our financial and operating discipline, position Tri Pointe Homes to deliver sustainable growth and long-term shareholder value. With that, I'll turn the call over to the operator for any questions. Operator: [Operator Instructions] Our first question is from Paul Przybylski with Wolfe Research. Paul Przybylski: I guess, first off, could you provide some color on the monthly cadence of your orders and incentives through the quarter? Glenn Keeler: Sure, Paul, this is Glenn. The monthly cadence was pretty consistent actually through the quarter. If you look at absorption, it was roughly the same each month, with September being a little bit better than August. And then on incentive, incentives were also consistent throughout the quarter. Incentive on deliveries were 8.2% for the quarter. Paul Przybylski: And then I guess your absorptions are getting down close to the 2 level. Is there an absolute floor that you want to maintain on your sales pace, i.e. increase incentives to keep a level? Douglas Bauer: Paul, it's Doug. It's a good question. I mean the industry is kind of working through a big -- it's like tudging through mud right now. And somewhere between 2 and 2.5 is kind of where everybody seems to be landing and if you're looking at -- we're really looking at a very strong community count growth in '26. So as we look towards that, and even under similar market conditions, we've got some pretty nice growth in orders going forward. Operator: Our next question is from Stephen Kim with Evercore. Stephen Kim: If I could just follow up on Paul's question here on the incentives, you said 8.2%, I think, of revenues or home sales. Were -- how much of those were financial incentives, if you sort of include closing costs and rate buydowns for purchase commitments and that sort of thing? Glenn Keeler: Stephen, it's Glenn. You're correct. It was 8.2% of revenue in the quarter and about 1/3 of those were financing related, including closing costs. Stephen Kim: Okay. And what do you -- how about forward purchase commitments specifically, do you use them very much? Linda Mamet: Stephen, this is Linda. Yes, we do. We primarily use forward commitments for advertising purposes and they do have good value in driving additional interest in traffic. But ultimately, as Glenn said most of our customers really don't need to have a significantly lower interest rate to qualify for the home, so they prefer to use more of their incentive dollars and design studio personalization. Stephen Kim: Yes. So like if you think of 1/3, let's say, the 35% or whatever that are financial incentives, how much of that 1/3 would you say is forward purchase commitments? Linda Mamet: It's very small, under 1%. Douglas Bauer: Yes, very small number. Stephen Kim: Yes. That's great. And then your average order ASP, not your closings ASP but your order ASP has come down to, call it, a 654, I think, this quarter. Last quarter, it was like about 665. So is it reasonable to think that eventually your closings ASP is going to be at roughly that kind of level, 650, 660? Glenn Keeler: It is, Stephen. I mean the mix within the quarter does play a part. But when you look at our growth next year of a lot of Central and East regions, and those do carry a little bit lower of an ASP versus the West. And so just -- it's really just mix for us more than anything else. Operator: Our next question is from Jay McCanless with Wedbush Securities. James McCanless: First one, the SG&A guide for the fourth quarter, it looks like you guys are getting much better leverage than what the top line would suggest. Are there some onetimes in there? Can you talk about how you're able to potentially get this figured SG&A to sales number? Douglas Bauer: No. We're all specific onetime there, Jay. It is just a little bit more revenue in the quarter with a higher delivery number, and that's what's really driving it. James McCanless: Okay. And then kind of -- that was actually going to be my next question. The gross margin guide is better than we were expecting. Is there some mix in there, more move up? Anything you can give us on that? Glenn Keeler: A little bit of mix. I think some of the divisions that continue to outperform our strong margin divisions like when you look at like Houston, Inland Empire and Southern California things like that have driven the mix of margin to our benefit. So that plays a little part into it, Jay. James McCanless: And then one more, if I could. Just kind of thinking about the newer markets you all discussed and just wondering what you all think ASP might look like next year, just given some of the smaller medium price markets that you're going to be expanding into? Glenn Keeler: We'll give that guidance next time, Jay, as we kind of roll out the plan and see what that looks like. But I don't think you're going to be too different than where we're at this year. Douglas Bauer: No, we're not getting significant contributions out of our new expansion divisions yet next year. So it should have a minimal impact. Operator: Our next question is from Alan Ratner with Zelman & Associates. Alan Ratner: Can you just update us on your spec position and strategy and how you're thinking about spec just in terms of the contribution to the business? And I guess just thinking forward to '26, you're going to enter the year with a backlog that's down quite a bit. So -- are you going to lean heavily on spec next year to kind of bridge that gap? Or is that kind of a TBD based on what happens in the spring? Douglas Bauer: Its Doug, Alan. We've got about 3/4 of our orders are running at specs as into the end of the year. All the builders have a little bit more inventory than what they anticipated. So we'll burn through that inventory going into the first quarter or so of next year and then get to a more balanced approach. Again, demand is very inelastic and we're going to continue to focus on price over pace as we go into the new year. We're just assuming similar market conditions. What we're really focused on is that strong community count growth even at similar market conditions, as I mentioned earlier, we'll have a really good order growth going into '26 and then '27. So we're really looking to the future while we've been dealing with some of the obviously, the challenges the market has posed to the entire industry. So that's kind of how we're looking at our approach. Linda Mamet: And just to add to that, Alan, we did reduce our total spec inventory by 17% quarter-over-quarter. Alan Ratner: Got it. Linda, is that total specs under construction or completed homes specifically? Linda Mamet: Both together. Alan Ratner: Got it. That's the total number. Perfect. Doug, you mentioned community count growth next year several times. I'm just curious, when you think about the pricing strategy there. Obviously, you guys have been very steadfast in your approach. When you open up communities, how do you think about pricing on those? Is the intention to kind of maybe come out of the gate with more attractive pricing and build up a backlog as you -- and then raise prices through the life cycle of the project? Or are you kind of maintaining a similar strategy to your active communities like you have an idea of what the value is and you're going to come to market with that price and whatever the absorption is, that's what it's going to be for the time being. Douglas Bauer: Yes. No, Tri Pointe, as you know, Alan, is more of a premium brand proposition. So we look at our value proposition as it enters the market. Sure, you'd love to start with some momentum, but there's not a any sort of material pricing thought process there because we're building along Main and Main, great locations, close to employment and great amenities. So the value proposition is what we're looking at. And frankly, as you said, I'm really -- my lens is to the future. We've been dealing with choppy market conditions, in my mind, for about 18 months. So -- and if it's more of the same next year, so be it, but we're going to have a strong community count and we'll price the product appropriately to the marketplace to have the right value proposition that we propose. Operator: Our next question is from Mike Dahl with RBC Capital Markets. Unknown Analyst: Is Chris on for Mike. Can you just talk through your initial thoughts around the administrations, affordable housing push? What conversations have you had to date? And how are you thinking about the opportunities and risks to your operating and capital allocation strategy? Douglas Bauer: Yes. No, obviously, several builders have already made comments on that, and we're kind of the tail wagging the dog here, so to speak. But we share the administration's goal of providing more housing in the U.S. As Duly noted, I mean, the industry has been underbuilt and been doing this for 35 years. It kind of started out to the great financial crisis that makes me very old. But we welcome working with the relevant stakeholders at the federal, state and local levels. It's a very complicated interrelated discussion. Most of it happens at the local and state level but we look forward to working with the administration wherever Tri Pointe can help. We will build -- I mean we've got 32,000 lots that we own and control. We're opening very strong community count growth of up to 15% next year. So we'll be doing our share of bringing in more communities that will be attainable for our buyer profile. Unknown Analyst: Makes sense. Yes, the community count growth was definitely encouraging. And just shifting to the 4Q gross margin guide. Could you just help bracket some of the big moving pieces moving pieces around the sequential step down in gross margin? How much of that is incremental incentives, mix, stick and brick, just help frame that for us. Glenn Keeler: Yes. This is Glenn. Good question. And it's not really stick and bricks or anything like that. I think it's a little bit of mix but also just we've increased incentives as we've gotten through the year. We have spec homes to sell and close within the quarter, and those generally carry a little bit higher of an incentive. So all that kind of goes into that margin guide. Operator: Our next question is from Ken Zener with Seaport Research. Kenneth Zener: I am hoping you can walk us through kind of the logic, not giving guidance or anything, but just kind of understand the cadence. So looking at starts and orders, it looks like you guys did about 500 starts this quarter in the third quarter versus orders that were higher than that. So as we exit the year, how are you thinking about starts versus orders because your inventory is down -- units are down about 30% year-over-year. So I'm just trying to understand, since you're talking about opening communities, And Doug, I think you just said upwards of 15%? Or is that what you had said as well community growth next year potentially? Douglas Bauer: We indicated that community count growth will be 10% to 15%... Kenneth Zener: So I'm just trying to see how we actually get these right, the units in the ground, which could portend future closings. So that's why I'm focusing on the starts versus the order and how you're thinking about that. Thomas Mitchell: Yes, Ken, this is Tom. It's a great place to focus on as we've been focused on it as well. As Doug mentioned earlier in the Q&A, we're focused on getting our business back to a more balanced approach of spec to be build. And you're right on with our starts for Q3 was about 577 and that's down significantly from where we were in Q1 and Q2. But again, it's relative to that balanced approach. I think you'll see Q4 starts more comparable with what Q3 was just because of the amount of in-process under construction homes that we have available, and that's our #1 goal to move through that inventory. And then after that, we'll move to a more normalized strategy, which takes into account absorption on a community-by-community basis. Kenneth Zener: What I heard you say 4Q starts is going to be similar to 3Q. Is that right? I mean that means you're ending inventory. I'm just trying to imagine the growth you're having in community count with the actual contraction in your inventory units. I guess I'm trying to -- is that -- I think if there's some greater inflection that I don't understand. Thomas Mitchell: No, I don't think you're missing anything there. I mean as you look at it on a community-by-community basis, obviously, when we're moving into new communities, we're making the necessary starts relative to our anticipated demand. But where we have existing communities, obviously, we have excess inventory that we're going to be working through before we move to a more normalized balance start strategy. Kenneth Zener: Appreciate it. And then on the community count growth, most of that G&A, the fixed G&A already kind of loaded in there. Is there any big lift we should expect there? Glenn Keeler: Not too much of a lift on the G&A side, maybe some incremental -- that's more field than sales that will exceed to open those communities, but... Operator: There are no further questions at this time. I'd like to turn the floor back over to Doug Bauer for closing remarks. Douglas Bauer: Well, thank you, everybody, for joining us today. We're looking forward to sharing our growth plan and strategy for 2026 and beyond with you at our next quarter's call. And as we go into 2026, we're very excited and bullish about the future for housing. So thank you, and talk to you next quarter. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Rogers Communications, Inc. Third Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Paul Carpino, Vice President of Investor Relations with Rogers Communications. Please go ahead, Mr. Carpino. Paul Carpino: Thank you, Galyene, and good morning, everyone, and thank you for joining us. Today, I'm here with our President and Chief Executive Officer, Tony Staffieri; and our Chief Financial Officer, Glenn Brandt. Today's discussion will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's earnings report and in our 2024 annual report regarding the various factors, assumptions and risks that could cause our actual results to differ. With that, let me turn it over to Tony to begin. Anthony Staffieri: Thank you, Paul, and good morning, everyone. It's been quite a week for our Toronto Blue Jays, American League Champions, so I just wanted to say a few words about Canada's team. We're thrilled. The Blue Jays are in the world series, and it all starts north of the border tomorrow. As owner, our job is to give leadership the tools and resources to win. And as Canada's communications and entertainment company, we're about providing Canadians with the best sports and entertainment experiences. This is one of those moments, and this is what Rogers is all about. Let me now turn to the quarter. Q3 was another strong quarter for Rogers. We delivered industry-best combined mobile phone and Internet customer additions. We continue to grow our Cable business anchored by Canada's most reliable Internet. We again delivered the best Wireless and Cable margins in our sector, and we're seeing healthy revenue growth from our Media operations through organic growth and through now including MLSE revenue in our results. Overall, we executed with discipline and a clear focus on driving growth across our three main businesses. Let me start with Wireless. In the highly competitive Wireless market, we saw some pressure on service revenue and ARPU. Our priority continues to be on the consistent delivery of results. We added 111,000 total mobile phone net additions in Q3 and year-to-date, we added 206,000 mobile subscribers with the vast majority on the Rogers postpaid brand. We are leading the industry with innovative, transparent, feature-rich add-a-line plans. These plans meet the dual objective of providing customers with simple value-add options while targeting revenue growth opportunities to support strategic investments in our network. We are also leading the industry with satellite to mobile. This new groundbreaking technology connects Canadians in remote areas, and we now deliver 3x more coverage than any other carrier in Canada. Since launching our beta trial in July, we have seen terrific response from both our customers and Canadians. We recently extended the beta trial and will launch even more capabilities in the coming months. The launch of satellite to mobile reinforces our 65-year history of leading the industry and innovating for Canadians. Our customers are embracing the strategic approach. Our postpaid churn in the quarter was 0.99%, down 13 basis points year-on-year and the lowest churn in over two years. We are leading in innovation and delivering more value for our customers while maintaining industry-leading Wireless margins of 67%. In Cable, growth remains positive, reflecting a clear reversal of the negative trends seen in previous years. Retail Internet additions were 29,000 in the quarter, and we have delivered approximately 80,000 new Internet subscribers year-to-date across the country. This is in part driven by Rogers leading 5G home Internet technology. 5G Home Internet is one of many areas where we're leading. With the Xfinity road map, we're rolling out new features and plans that drive value and deliver new innovations on our world-class entertainment platform. We've launched Rogers Xfinity StreamSaver to bring together popular streaming services at a price point that's attractive to the consumer. We've launched more smart home devices and new features for Rogers Xfinity self-protection. We were the first Canadian Internet provider to introduce WiFi 7, the latest generation of WiFi technology. Our focus on execution, efficiency and discipline continues to drive industry-leading Cable margins of 58%. Finally, in Media, revenue growth was up 26% driven by a strong Blue Jays regular season and the consolidation of MLSE results. We are in the early stages of transforming our Sports & Entertainment business into one of the best sports businesses globally. This is our third pillar of growth beyond Wireless and Cable and will be meaningful to Rogers over time. With the acquisition of the additional stake in MLSE, we have added revenue and profitability growth to our core business. Taking a step back, in calendar 2025, we project Media revenue and adjusted EBITDA, including MLSE for the full year to be $4 billion and $250 million, respectively. Our collection of Sports and Media assets has a value in excess of $15 billion and is among the most impressive in the world. This value is not currently reflected in our share price. We are well positioned to surface this significant unrecognized value for Rogers shareholders over time. In 2026, we expect to acquire the outstanding minority state in MLSE as part of this process, so more to come on this. We are building a sports business at scale, and we are assessing multiple options to unlock additional value. We will take the time to be thoughtful, deliberate and get it right. In the meantime, we will continue to operate with financial discipline while providing team leadership with the tools and resources to build championships. Finally, on balance sheet and capital spending, we are effectively managing leverage down even as we scale up our exceptional asset base. In Q3, we continue to execute on our commitment to maintain a strong balance sheet. We reported a debt leverage ratio of 3.9x. This was achieved after completing the acquisition of the additional stake in MLSE. As you saw this morning, we now expect CapEx for the current year to come in at $3.7 billion. This is below our previous target of $3.8 billion and reflects the current regulatory environment. Free cash flow is now expected to be between $3.2 billion and $3.3 billion, higher than our previous target. In the coming quarters, we will maintain our laser-like focus on preserving a strong, investment-grade balance sheet even as we complete our transformational investments. As we pursue growth in our three core businesses, we will continue to align capital spending and free cash flow growth to the best growth opportunities and balance sheet deleveraging priorities. As we get ready for peak selling in the fourth quarter, we will remain focused on balancing execution discipline with revenue and subscriber growth. Thank you to our exceptional team for their continued commitment to drive growth long term. I will now turn the call over to Glenn. Glenn Brandt: Thank you, Tony, and good morning, everyone. Thank you for joining us. We are pleased to report that Rogers' Third Quarter results reflect another quarter of strong, disciplined and leading financial and operating performance. Once again, we have delivered industry-leading margin performance in Cable and Wireless, and our Wireless churn is the best we have seen in over two years. We have delivered positive Cable revenue and adjusted EBITDA growth, and we expect that our combined Internet and wireless loading will once again lead our peers. Media has once again delivered sector-leading growth driven by our added Warner, Discovery media content and by our Toronto Blue Jays' very strong regular season performance. As well, this is the first quarter in which MLSE results are now fully consolidated with our Rogers Sports and Media business segment. And so we are pleased to report that Rogers is delivering solid results across all three core businesses against the backdrop of a competitive environment and slower growth economy. Starting with Wireless. We continue to deliver solid market share supported by disciplined financials. Wireless service revenue was flat and adjusted EBITDA was up 1% year-over-year, primarily reflecting the ongoing competitive intensity in the marketplace, continued lower immigration and lower international roaming and wholesale revenue. Our sustained emphasis driving cost efficiencies has moved our industry-leading Wireless margin to 67%, up 60 basis points against the prior year and near our all-time high of 68%. As well, we have maintained strong market share for mobile phone net additions, adding 111,000 net new subscribers, consisting of 62,000 postpaid and 49,000 prepaid mobile customers. Across the entire sector, Wireless subscriber additions continued lower versus prior year, reflecting continued lower immigration levels. Against this lower growth backdrop, we have added a sector-leading 206,000 net new mobile phone customers year-to-date, with the majority of these subscribers added on our feature-rich Rogers premium service plans. Continued emphasis on responsive customer service and improved customer base management has lowered customer churn to a very strong 0.99%, our best churn performance in over two years. Blended mobile phone ARPU of $56.70 is down 3% from the prior year, reflecting the ongoing impact from competitive intensity, combined with lower international and wholesale roaming revenue, as mentioned earlier. Moving to Cable. Cable service revenue has once again grown 1% year-over-year, driven by retail Internet subscriber growth, combined with continued discipline in the face of ongoing market competition. Cable adjusted EBITDA is up 2% year-over-year, driven by the flow-through of modest service revenue growth combined with our ongoing cost efficiency initiatives. As a result, Cable margins have reached an industry-leading 58%, an increase of 70 basis points over the prior year. Internet net additions of 29,000 customers reflect our continued success expanding subscribers throughout our national footprint and includes our continued success with 5G Home Internet, expanding our bundled service offerings into every region from coast to coast. And finally, Rogers Sports & Media revenue of $753 million, was up by 26% over the prior year, reflecting the combined contributions of three key initiatives: Our added Warner Discovery suite of media content; stronger results for Sportsnet and the Toronto Blue Jays, particularly through September to close out the regular season and the consolidation of MLSE effective July 1. Media EBITDA was $75 million compared to $136 million last year, reflecting both the positive flow-through of Warner Discovery and the Blue Jays regular season, offset by the seasonally low third quarter EBITDA loss for MLSE, which is consolidated in 2025, but not in 2024. We expect MLSE will be substantially accretive to earnings in Q4 and for the second half of 2025. As well, the Blue Jays' very successful MLB playoffs and World Series run will provide further added growth in the fourth quarter. In terms of unlocking additional value from our Sports & Media assets, let me recap our current view on process and timing. To be clear, we remain determined and committed to delevering our balance sheet and to unlocking the significant unrecognized value in the RCI share price from these world-class sports assets. With the current estimated value of more than $15 billion for our Sports & Media properties, we continue our work to identify and execute on the best long-term strategy to surface value. And the way our Toronto Blue Jays World Series run is captivating this country is a very clear demonstration of the power of our iconic sports teams. We anticipate a transaction could occur over the next 18 months or so, likely coincident with or subsequent to us acquiring the remaining 25% minority interest in MLSE. In the meantime, as we assess multiple options, our Sports & Media operations remain highly successful. They operate at scale and are delivering sector-leading and growing financial results and investment returns. Finally, rounding out my comments on the third quarter. Our consolidated service revenue is up by 4% to $4.7 billion and adjusted EBITDA is $2.5 billion, down 1%. As mentioned earlier, the year-over-year changes in both service revenue and EBITDA reflect the flow-through of modest growth in Wireless, Cable and Media combined with consolidation of MLSE results starting this quarter. Capital expenditures were $964 million, which is relatively flat to last year, even as we absorbed some additional capital spending from consolidating MLSE. Free cash flow of $829 million was down 9%, driven by increasing taxable income and the timing of tax installment payments. We continued to delever in Q3 even as we acquired our additional stake in MLSE for $4.7 billion, roughly a 0.5 turn increase in leverage at acquisition. Immediate execution on driving operating synergies and MLSE EBITDA growth, combined with ongoing application of free cash flow and capital initiatives to delever, allowed us to close the quarter with debt leverage of 3.9x, down roughly 10 to 20 basis points in the first three months of the MLSE acquisition. Notwithstanding this notable progress, our third quarter leverage is up by 0.3x as a result of the MLSE acquisition. And so here, I will emphasize that we remain committed to strengthening our balance sheet further and to improving our investment-grade credit ratings. We are in regular contact with each of the credit rating agencies to communicate our plans and progress. This will be driven by continued prudent capital priorities together with earnings and free cash flow growth to pay down debt and lower leverage. Unlocking value from our Sports & Media Holdings is a very substantial part of that exercise. At quarter end, we maintained our very strong liquidity position with available liquidity of $6.4 billion. This included $1.5 billion in cash and cash equivalents and $4.9 billion available under our bank and other credit facilities. As you have seen in our Q3 cash flow -- free cash flow statement issued today, we are now reporting distributions paid by subsidiaries to noncontrolling interest, reflecting the distribution payment associated with the minority investment and a portion of our Wireless network infrastructure. The $14 million amount reflects the prorated timing for the transaction, which closed in late June, and so the Q3 distribution is for a partial prior quarter. In our Q4 results and going forward, the full quarterly amount of the distribution will be reflected, which we anticipate will be approximately $100 million per quarter. And as we discussed last quarter, a very substantial portion of this quarterly distribution is offset by the lower interest expense generated from using the proceeds from this transaction to pay down debt. The last piece I will touch on before we open up the call for Q&A is for affirmation and updates to our 2025 guidance, where we have improved our outlook for both capital expenditures and free cash flow for the rest of the year, reflecting our ongoing efforts to drive more efficient capital allocation and also reflecting the current regulatory environment. We now expect to end 2025 with capital expenditures of approximately $3.7 billion, which is a further $100 million reduction to our previous adjusted target of $3.8 billion and a full $300 million improvement from the previously anticipated high end of our guidance range announced in January, when we were targeting $3.8 billion to $4 billion. Notably, we are improving our targeted capital outlook even as we absorb the additional capital expenditures associated with MLSE. We have driven careful prioritization of our capital investments in 2025 and you should expect this determined prioritization to continue in 2026. As well, we now expect our 2025 free cash flow to be in the range of $3.2 billion to $3.3 billion compared to the $3.0 billion to $3.2 billion range previously estimated at the beginning of the year. As we prepare for 2026 and beyond, you should expect that we will continue to drive more efficient capital investment, improve free cash flow and further strengthen and delever the balance sheet. And so in summary, our Q3 results demonstrate that Rogers continues to successfully execute on its core Wireless and Cable strategies. We have achieved consistent strong performance for almost four years now, and we will continue to build on this track record in the quarters and years ahead. In Sports & Media, we continue to make progress on our very unique opportunity to surface significant unrecognized value from these assets for our shareholders. And in the meantime, we continue to pursue sector-leading growth and improved profitability for Rogers Sports & Media. Let me close by extending a very sincere and appreciative thank you to our employees who are the engine driving and sustaining our strong execution and who play a critical role in driving our future success. Thank you for your tremendous pride and determination. And finally, Go Jays. I will now ask Galyene to open the call for our Q&A session. Thank you. Operator: [Operator Instructions] First question is from Stephanie Price with CIBC. Stephanie Price: I was hoping you could talk a little bit more on the Wireless competitive environment as we head into the holiday season? And if you think the current pricing environment can be sustained here? Anthony Staffieri: Stephanie, thanks for the question. In terms of -- we approached back-to-school, with a view of having a very simple redefined value propositions for the customer. And so we streamlined our price offerings. We made it more clear on the differentiation amongst the plans with features that are beyond just data bucket sizes. And what we found is it resonated well. We focused on add-a-line construct so that we could increase the number of lines per customer, and that's trending well for us as well. And we recently introduced tiered hardware promotional discounts so that the amount of discount on our hardware is graduated depending on the plan that the customer comes in on Verizon, if they're in currently customers today. And what we're finding is that's resonating extremely well with customers, and you're seeing that in our subscriber performance. And that's been continuing throughout October as well. And so we think we've got the right value proposition as we head into Black Friday and to the end of the year. And so that's what you should expect to see from us. We'll see how the marketplace responds. And to the extent we need to pivot based on the market dynamics, then we'll do so. But right now, we're feeling pretty good about the pricing constructs that we have in the marketplace. Stephanie Price: And then maybe a follow-up on churn. Your churn has been down over the past 2 quarters. Great to see and hoping you can give us some thoughts on churn management and where there's further opportunities potentially. Anthony Staffieri: What you're seeing is a very concerted effort. We've always focused on base management, but we've taken a much more holistic approach to base management and employing tactics that are resonating with customers in terms of what's important to them, drilling down on customers that we think might have a propensity to churn and dealing with the issues in advance of them calling us. And so there are a number of tactics that we've been going through, and the team is executing extremely well in base management. We expect to continue to see good churn performance across our entire base. Operator: The next question is from Aravinda Galappatthige with Canaccord Genuity. Aravinda Galappatthige: I wanted to start off with Wireless. Obviously, the lag effect of the historical promotional activity, it continues to show in the service revenue numbers. But just looking at the sequential trend in service revenue growth, I wanted to sort of clarify whether that was sort of items around roaming or external customers that would have had an impact on that number? Glenn Brandt: Thanks, Aravinda. Yes, the part of that decline really is lower roaming volumes as well as a reference to some wholesale revenues that, I'll shortcut and simply say, moved to another carrier. And so you're seeing that roll through. That's a very substantial part of what you've seen in the revenue. Aravinda Galappatthige: And just maybe just a bigger picture question on operating leverage. I mean with the progress that's made on the AI side of things, the latest generation being agentic AI and so forth. Can you talk about the magnitude of the opportunities that you have to potentially deploy those technologies within the firm and potentially drive streamlining efforts within Rogers, whether it's in CX or even on the network operations side, marketing, et cetera? Just to get a sense of how material that could be from an operating leverage perspective to the company. Anthony Staffieri: Thanks for the question, Aravinda. Really good question and something we've been spending quite a bit of time on, not just historically, but as advancements in AI tools and technology continues to grow exponentially, we continue to look at ways to capitalize on it. And we see three main areas. One is the customer experience, as you indicated, combining with a completely digital experience, and that's the journey we're on. It's going to allow us to give the customer a more consistent, streamlined experience to address whatever issue they have. And we're really looking forward to that and are much more cost effective -- on a much more cost-effective basis. The second relates to efficiency and the ability of these AI tools to make us much more efficient and some of which you're seeing already in our industry-leading margins in both Wireless and Cable. And then the third really relates to security and the ability to continue to enhance security for our customers and for our own data. And so it's all three of those categories that we're very much focused on, and we'll continue to deploy. So the opportunity for this is significant for us in this sector and we'll continue to follow in many ways the large players globally and the tools that they've deployed successfully, so that we're a fast follower in many of these areas and implementing them efficiently. Operator: The next question is from Drew McReynolds with RBC. Drew McReynolds: Maybe extending the network revenue question, I think from Aravinda. Maybe, Glenn, can you talk about just, let's level set expectations about how that trends just given all the moving parts whether you want to talk about Q4 into 2026, just how are you thinking of the puts and takes and the trajectory? And then second question, obviously going to fit in a Jays one here. On the sports assets, I mean, clearly, incredible to see the whole country alive here. Maybe, Tony, you've talked about kind of how these three businesses have to stand on their own, but clearly, there's a branding and cross-promotional aspect to this all. Just wondering if we would see or have seen direct impacts on your telecom business in terms of subscriber growth or benefits that are coming your way on the telecom side that we'd see in either Q3 or Q4 or just maybe longer term? Glenn Brandt: Thanks, Drew. Let me start with the first part of that. I'm not going to take the opportunity to start guiding for '26. I will say the trends you see, I'll say, through the first 3 quarters of 2025 and the trajectory of hitting growth on the year for service revenue, we remain firmly committed to and expect. And so for the year, you'll see positive service revenue growth for Wireless. We all know the competitive framework that we operate in and the slower subscriber growth. That's why you see us leaning in on base management and churn improvement. That's a very efficient way of finding, if not revenue growth, certainly sustaining the base of operations. And so we remain committed to that. Q4, I expect, you'll see strong execution. Part of our Q3 backdrop as we are lapping a very strong Q3 in the prior year, and we have sustained and held the very fast part of that growth that you saw in '24 through the first 3 quarters of '25. So I'm pleased with that progress. So Q4 will be another strong quarter. I won't comment further on guiding for that or beyond in '26, but pleased with progress for sustaining that base management through the 3 quarters. Anthony Staffieri: Drew, with respect to your second question, as you pointed out, we're looking to each one of our pillars of growth being Wireless, Cable and now Sports & Entertainment to stand on their own and drive value, profitability and growth in their own respect. But we also look to ensure that we're capitalizing on the cross synergies amongst all our assets. And the run of the Toronto Blue Jays and heading into the World Series, you can see that in spades in terms of the ability to enhance our brand, the ability to showcase our Cable and Wireless products and services to viewers of the game, and we've seen that throughout the year. If you think about some of the key events in 2025, Four Nations, the playoff run of the Toronto Maple Leafs, and then the Toronto Blue Jays and there are others as well. But you see the power of live sports, and it's good to see, and it's been a benefit for us, as I said, in and of itself, but also in terms of helping the broader Rogers. Operator: The next question is from Vince Valentini with TD Cowen. Vince Valentini: I assume you're getting a lot of favors and requests for tickets for the World Series. I'm wondering if you can compare that. How many requests are you getting for this versus the Taylor Swift concerts. You don't have to answer that. Anthony Staffieri: These are the most World Series requests we've had in 32 years. Vince Valentini: Thanks, Glenn, a very accurate answer as always. The more serious question. Look, you've been asked this several times. I want to hit this head on. Given pricing is improving in Wireless, your front book is now above your back book. And we've seen the CPI stats showed a material improvement in September to basically flat for Wireless pricing versus double-digit declines earlier in the year. All that should mean that Q3 is the trough quarter for Wireless ARPU at minus 3.2%. Can you not confirm that, that it won't get worse than that and should gradually get better over the next 5, 6 quarters? Glenn Brandt: Succinctly, I agree with your sentiment. I think we are seeing some strong initiatives around a large number of initiatives to sustain the base, low churn and sustain revenue. And so broadly, yes, I think you are seeing us continue solid Wireless growth on a full year as well as quarter-to-quarter. You saw a dip in the third quarter, but all of the elements that you've pointed out are true Vince. Vince Valentini: If I can just sneak in one more. Wireless equipment margin was pretty positive contributor to EBITDA again this quarter. In the past, it hasn't always been a positive. Has something changed in terms of handset subsidies and the amounts you're giving out to or something changed with your deals with the vendors to allow that to be a sustainable source of positive EBITDA? Anthony Staffieri: That's -- the driver for it in the third quarter was really our shift to the tiered promotional discounting that I spoke about. Although we implemented it later in the quarter, it came out of time with higher volumes with back-to-school. And so it was extremely and continues to be very effective in reducing our net hardware costs, but also in incenting the customer to move up tier. And so when we look at our ARPU in, we're really pleased with the effect that it's happening. You see ARPU in up very nicely year-on-year. So we like what we see there. And so it is, we believe, the beginning of a trend in terms of net hardware cost for us. Operator: The next question is from Maher Yaghi with Scotiabank. Maher Yaghi: Glenn, I just wanted to double check on something. You -- in the previous question, you said in your response that you agreed with all the assumptions based on the basis of the question. But I'd just be very specific. Are you saying that you confirm that the back book of your Wireless service customers is above -- sorry, is below the current front book? Glenn Brandt: I'm answering from a general sentiment of whether or not we are troughing whether or not Wireless service revenue is growing. I'm not getting into the detail of front or back book. You've heard me answer these questions consistently, Vince, when -- or Maher, when we're asked on what's ARPU trajectory, I focus on service revenue growth and EBITDA growth. And on service revenue growth, I expect Wireless service revenue to grow each quarter and each year. We had a slight and it's a very slight decline just below 0 or flat in the third quarter. For the year we'll be positive, and I expect will be positive going forward. It's a mix of subscriber additions, pricing initiatives, service plan initiatives, simplifying our service plan offerings and trying to move customers up through premium plans. I could go on and on. So I don't want to talk about front and back book because it makes it seem like there's a difference between new and long-standing customers. It's really working with our service plans and our initiatives all around that to drive service revenue and EBITDA growth. So don't read too much into that. I'm answering from a general sentiment we expect Wireless Service revenue to grow period. Maher Yaghi: Perfect. Thank you for answering this question more precisely because I think there's still some gap left to be closed, but I agree that there's upside for next year. So I just wanted to ask you, I know it's not much visible in your results. And I'm not surprised because in Canada, we have a lag to the U.S. in terms of new product introduction, but results from AT&T yesterday and T-Mobile this morning are showing a significant increase in jump balls coming from customers looking to get their hands on the new iPhones. So I wanted to just see if you're noticing thus far in Q4, a slight pickup in jump balls in Canada yet? Or if not, why not? And how are you positioning yourself for Q4 for -- if we do see the same trend occurring in Canada, do you think handset subsidization will become a bigger factor in overall economics of floating customers in Q4 versus prior quarters? Anthony Staffieri: A couple of things that you touched on, and I'll work backwards from your question. In terms of Q4, the demand for new devices and the subsidy and cost for us, what you see in market for us is how we intend to approach the marketplace in the fourth quarter. We think we have a very good value proposition, and our promotional incentives are really going to be centered around hardware rather than rate plans. But we're also going to be very disciplined in the tiering constructs that I spoke about earlier, so that higher promotional discounts come with our more premium plans and vice versa. In terms of, to use your term, jump ball that we're seeing with the launch of the new iPhone device, we've seen good demand for it. Our bigger constraint has been supply, frankly, on that front. And so that's been a limiting factor for us, but I would say at the margin. But we're seeing the same type of industry constructs for our business that you described. Operator: The next question is from Batya Levi with UBS. Batya Levi: Can you talk a little bit about the competitive environment in terms of, if you're seeing any pickup in go-to-market strategy with converged offers? And from your perspective, can you give us a sense of maybe what percent of your broadband base takes the Rogers services as for mobile? And what are some benefits you see beyond just churn reduction? Anthony Staffieri: Thanks, Batya, for the question. Converged offering is something that we spoke about in previous calls and continues to be competitive advantage for us, frankly, given our Wireline and Wireless converged footprint. And now with FWA, we're essentially converged on 100%. And so our go-to-market strategy has been to leverage our distribution channels, which are the strongest and frankly, the best in the industry here in Canada and leverage those to offer customers a converged home solution as well as their wireless products, and we're seeing good pickup in that. In terms of the percentage, we don't disclose that, but it continues to rise rather rapidly and customers looking for that solution. And there are a number of benefits beyond. The converged offer is a bundled discount, a modest discount for it, but there are other benefits the customer sees in terms of simplified servicing, having to deal with only one provider. And the convergence of the technologies as that evolves, they see benefit in that. Batya Levi: Got it. And just a quick follow-up on the lower CapEx for this year. Can you just provide a bit more color on where it's coming from and also how we should think about capital intensity going forward? Anthony Staffieri: We've been very focused on efficiency throughout our operations. You've seen it and continue to see it in our operating margins across our Cable and Wireless businesses. And you'll see it in our Media business as well going forward at scale. But we've also continued to focus on capital efficiency. And that's what you're seeing play out there. There are projects that we decided not to invest in as a result of government decision on TPIA. Certain projects were just not viable and carried too much uncertainty and it's disappointing. We're a company that wants to invest in this country and in infrastructure. And when faced with uncertainty that those types of decisions create for us, we have no choice but to pull back on capital investment, and you see that impacting the total dollars. In terms of going forward, you should expect us to continue to look for improved efficiencies and ways of continuing to reduce our capital intensity across our businesses. Operator: The next question is from Jerome Dubreuil with Desjardins. Jerome Dubreuil: The first one, I just wanted to hear maybe more about the financing plan for the Kilmer deal, which we understand is coming. Glenn, you mentioned that there's been credit agencies discussion. I'm sure they're aware but if you can comment on the plan maybe to bridge a gap just so the market is ready, and we don't have to start over with the balance sheet questions when the Kilmer deal comes. Glenn Brandt: So the -- what we're focused -- thank you, Jerome. What we're focused on is, first, acquiring the remaining 25% minority stake, combining the operations and then proceeding with recapitalizing the combined Roger Sports & Media, including MLSE and Blue Jays entity. That could happen very shortly on the heels of acquiring the minority stake or it could happen sometime following that. And so we're guiding towards -- within the next 18 months. I do anticipate it could well be in 2026, which is just inside 18 months now that we're standing in October. But it's over a timeframe that is going to take some time to work through the acquisition of the 25% stake. And over the course of that exercise, we are working with our analysis to figure out how best to capitalize that combined entity. It's going to depend upon the arrangements that we strike with the minority shareholder on buying out their stake and just when that comes. Tremendous interest being expressed by institutional -- potential institutional investors. They are an extremely attractive set of assets. We are working with the credit rating agencies, so they are aware of our timing. You mentioned -- you heard me mention on the second quarter call, critical for us was getting our arms around the Shaw delevering at midyear before and then embarking on this MLSE consolidation with RSM and recapitalization that allows the calendar to be reset, gives us time to fill in those details. So I'll quickly draw to a conclusion then, Jerome, that I'm not going to give you the roadmap on exactly how much we're selling down into whom because we -- I don't want to pre-announce. I don't have anything to pre-announce. I do know we have assets that are worth more than $20 billion once we combine it all and tremendous interest in buying in. We have shown time and again, most recently, with the Shaw acquisition, our ability to delever. We are absolutely focused on that exercise, and we have a tremendous value of assets here to do that with. So I'm highly confident on our execution. Jerome Dubreuil: Great, Glenn, and if I can just go more specifically on this if I can summarize there is that credit agencies are aware we're not going to need any equity to bridge a gap and probably -- I know the answer to that question, but it would be great to have it out there. Glenn Brandt: The -- yes, succinctly, yes, they are aware we have time to execute. They know we are committed to executing on this. I have been managing our credit ratings and our capitalization and capital structure and funding as a primary part of my role for coming up on 34 years now, I've been working with these credit rating agencies throughout that 34-year period. They're well aware of our intentions and our capabilities. Paul Carpino: Galyene, we have time for two more questions, please. Operator: The next question is from Matthew Griffiths with Bank of America. Matthew Griffiths: Just on the Sports, in the past, if I'm not mistaken, it's been a priority to consider control of the assets following the transaction. That hasn't been brought up this morning, but I just wanted to see if that remains kind of one of the priorities that you're factoring in, in addition to the kind of shareholder return maximization from any potential deal 18 months down the road? And then separately, just on Wireless. On the cost side, in the release, it was mentioned kind of the satellite -- launch of the satellite service was one of the items called out for increased cost. And I just was curious if that was mostly a marketing-related comment or if it's related to kind of the payments to the partner or a combination of both? Just kind of what was -- what exactly is that referring to? Because I know so it's early days. So I just wanted some clarity, if it's possible. Glenn Brandt: Thank you, Matt. Let me start with the Sports side of it. I'll answer it quickly with just a reference back to the asset value within our sports holdings is, as I've said, somewhere in the range of once we own 100% of everything, Blue Jays and RSM operations today plus MLSE. We've indicated we think the value of that is over $20 billion if we were to sell a majority stake that would be raising north of $10 billion. I don't need $10 billion of equity improvement in the RCI balance sheet. And so I do expect we will maintain control simply because the exercise is not that large, and these assets are very valuable. We do anticipate we will control these assets. Anthony Staffieri: And the second part of your question, Matt, in terms of our Wireless operating costs, you're referring to the comments made in the press release. Year-on-year, we've had a very modest increase in operating costs, and you see it in the disclosures of about $8 million. It's a combination of several factors. One of those factors that is described is the satellite to mobile initiative. And as you rightly point out, it does encompass both the marketing as well as the fee paid for the service under our contract. And we are currently in the beta trial mode. We've extended the beta trial mode to allow the commercial launch to be coincident with the launch of new feature capabilities of the satellite. Right now, it is just texting, but very soon, we're pleased to announce and see that it will include data as well. And so that's the reason for extending the beta trial before we get to commercial launch. And so you don't see any of the revenue pickup in our Q3 results, and you won't see it until we move to commercial launch. Operator: The next question is from David McFadgen with Cormark Securities. David McFadgen: So maybe just following on the Rogers Satellite for a second. So right now, this texting, do you expect to add data, I guess that would be a light data plan. And then do you have any ideas when you'd be able to offer text, voice and just full data? Anthony Staffieri: Thanks for the question, David. So on launch, again, to reiterate, it was texting, including 911 texting in terms of capability. We are extremely pleased with the advancement of the roadmap. Data wasn't going to come until next year and voice was planned for the year after that. As a result of the work that our partner has been doing at a very rapid pace, we're pleased that this quarter, what we will have for our customers is the ability to use data and apps. As you describe, it will be somewhat light data. We'll see the capability in terms of bandwidth once it's into production. But we're really excited about that. And then the next to follow is voice. We don't have something we can disclose on that. But you should expect it at some point in 2026. David McFadgen: Okay. And then can you give us any idea on the number of people that have signed up for the trial so far? Anthony Staffieri: It's received terrific demand from our customers and Canadians broadly in signing up for it. As you can imagine, just given our topography and landscape here in Canada, there are significant areas that weren't covered by any wireless network, including some major highways. And so the use case for it is significant. And what we're seeing is a very good pickup. So it's a material amount. What I can tell you, it's over $1 million, but we're not disclosing the specific number because we don't want to get too far ahead of ourselves in trying to extrapolate what kind of revenue that means. Glenn Brandt: One of the real opportunities here for us, David, is that it covers the very remote regions of the country, it covers virtually every road and highway. And so there's the individual Canadians that are signing up the enablement of this for businesses is tremendous and the opportunity for us is tremendous. David McFadgen: Well, the fact that you've had over 1 million sign-ups, that's pretty very good. And then just one, if I could squeeze in one more. Just on the Wireless side. So if we don't see any change in immigration, immigration stays at the current levels, do you think your Wireless net adds would be similar next year or higher or lower? Glenn Brandt: Right. I think let me avoid guiding for next year. But I would say if I look at 2025, even with very, very low immigration our growth is in the range of 3% for the sector, for the industry and 3% growth is roughly 1 million adds for the industry. And so I would expect that to continue until immigration turns up again. It will at some point. I don't expect that in '26, would be wonderful if it did, but it will come back at some point. We will look to growing the population. Again, I expect that's a key part of economic growth for any country, but 3% growth in the base is certainly something we can still build on. Paul Carpino: Thanks, everyone for joining us. If there's any follow-up, please feel free to reach out, and have a great day. Glenn Brandt: Thank you all. Go Jays. Operator: This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Henrik Sjölund: Good morning, and welcome to the interim report presentation for the Holmen Group. Today, it's me, Henrik Sjölund and Stefan Loréhn. We will go through the presentation, and then we're happy to take any questions you might have. I know it's a busy day for you, so a special thank you for taking the time also to discuss with us. Well, the third quarter, challenging market conditions, a bit the same message as we actually had after the second quarter, this quarter, well, low demand for wood products. We also have -- despite low utilization rate and very expensive wood, we have, again, a very good result from wood and paper. All in all, a bit over SEK 700 million, a decent result when it comes to Holmen. If you look at our industry, not only wood products, but also wood and paper together, so far this year, during the first 9 months, we've been able to deliver 15% return on capital employed. And if we look at our financial position and what we have done, Stefan, we have distributed a bit over SEK 3 billion in dividend and buybacks during January to September. And if you look at 5-year period, we have roughly the same debt-to-equity ratio today as we had 5 years ago. We have distributed SEK 13 billion in total during the 5 years. Changing subject to forest and wood market. This time, we do see that pulpwood prices start to decline due to lower activities from the mills. We don't see that sawlog prices still or have started to come down. On this chart, it looks like they have. But in our case, it's because we -- there are also big differences in price still between southern parts of Sweden and northern parts of Sweden. And when we buy less in South and a bit more in North, then it has an effect on the graph, which is what we mean by mix effect wood cost. Pulpwood, on the other hand, the prices are going down. In our case, it's a lag before lower cost reaches our industry and our P&L sheets. Prices are high, Stefan? Stefan Lorehn: Yes, they are. And the result from the Forest division was SEK 538 million during the third quarter. That is an increase by some SEK 20 million compared to second quarter and some SEK 50 million compared to the first quarter this year. The gradual higher profit is due to price increases during the year. Looking at the harvesting levels, we harvested 660,000 cubic meters during the third quarter this year. That is approximately 100,000 cubic meters higher than the corresponding period last year. Year-to-date, the harvesting levels is still 100,000 cubic meters lower than what we saw last year at this point in time, but we anticipate that we will be on par with last year when we closed the books for 2025. Henrik Sjölund: So back on track soon. Stefan Lorehn: Hopefully. Henrik Sjölund: All right. Changing to renewable energy. A very special situation or we've had this situation for quite some time now where we see that prices in northern parts of Sweden, where we have not all, but almost all our production of electricity, well, prices are simply very, very low. And it's not easy to make money when prices are that low. And I think we can just -- well, we know that electricity is locked in, in the northern parts of Sweden, and there is a lack of transmission capacity. How long it will be like that? That's difficult to answer. There are so many things affecting whether the price should go up or if it will stay where it is, tables to, for example, Finland, Norway, et cetera. Stefan, we have said that we have produced with premium to market price. Does it help? Stefan Lorehn: Not that much when we have these low prices in the northern part of Sweden, as you mentioned, Henrik, but still we got some premium above the market price. Maybe we can also comment on the wind power production that we have curtailed during the third quarter, and that is due to the low prices that we see and also the high risk for imbalancing costs. So when we add up the financials, we are still loss-making in this segment, and it's, of course, due to these low prices that Henrik mentioned. Can also comment on the hydropower station in Junsterforsen that is now back into production after the rebuild that we have done there. Henrik Sjölund: Yes. Thank you. Okay. Moving on to Wood Products. I said in the beginning, weak demand, and that's obvious when we look at some charts. If you look at U.S., it's not picking up. It's quite weak. China, very clear, even going down, I would say. And if you look on the production side, well, especially Western Canada, producing less, Eastern Canada, more or less on the same level. Germany coming down quite a lot after we have the spruce bark beetle infestation that had an effect on how much that was produced a couple of years ago, but now on quite low levels. It's only one place where people seem to run the sawmills more or less full still, and that's in Sweden or in the Nordics, but especially in Sweden, but not in the southern parts of Sweden where we have our sawmills, we have curtailed production, especially at the Braviken sawmill. And I think that part of Sweden has also been the most affected by, well, the drought we had and also later on, the infestation from bark beetles. Tough situation for sawmills in south of Sweden, and I think especially where we are. Price-wise, well, in the beginning of the year, as it normally happens, prices went up a bit during spring time. And now when we came into the third quarter, we see that there is price pressure and prices are down some 5% to 10%, depending on which market you look at. And as we speak, it's still some price pressure on wood products prices. A lot of negative things, Stefan. Stefan Lorehn: Yes. And it can also be seen in the result, which deteriorated to SEK -91 million during the third quarter. That is due to the lower selling prices that Henrik mentioned. They are down 5% to 10% quarter-over-quarter. That also meant that we needed to adjust the value of our finished good stocks, which had an impact on the result by some SEK -30 million during the third quarter. Henrik Sjölund: Thank you. Clear. Changing to Board and Paper. Finally, something positive to talk about, Stefan. Now to be honest, if you look at demand, it's not so rosy. We are hovering on a level where we are quite far below actually where we were during the pandemic, and we are still below where we were before the pandemic. And also at the same time, we know that there is more capacity in the market. So it's quite challenging when it comes to board. In this case, it's board. We take paper afterwards. When it comes to prices, well, they are always stable, at least in our segment, we used to say, of course, there are changes over time, but it takes time to change the price. In this case, prices are stable. But when you look for marginal volumes to fill up your order books, then there is quite a lot of price pressure. In our case, our order books are -- they are okay, but not even we are running absolutely full. We take some market-related downtime and in line with most players in the market right now. And as I said in the beginning, cautious consumers not spending to fill up order books in the industry. Paper, we have been used to a low utilization ratios. They are really low in board now with all the new capacity. But here, we have been more -- we talked about it for so long. Capacity has been partly closed and converted, but still also here, it's quite a lot of overcapacity. We have been doing well in this market for a long time. Also now we are doing, I would say, really well. We are not running full. The idea is not to run totally full either, but maybe 80%, 85% suits us better given the situation with very volatile electricity prices we think we use to our favor as well. Prices also here, roughly the same, fairly stable. But when you look for marginal volumes, there is a lot of competition for the volumes and some price pressure in the market. Stefan? Stefan Lorehn: Yes. The result for the third quarter were on par with what we reported in the second quarter. In Q3, we had the annual maintenance shut in the Iggesund mill that took a toll on the result by some SEK 150 million. Despite a small increase in energy cost, our energy cost in the division is still very much lower than normal this quarter, and that is due to our ability to adjust to the volatility in the electricity market, as Henrik mentioned. We also had some tailwind from seasonally lower personnel costs in Q3. Henrik Sjölund: And given the circumstances, a really good result, I must say. All right. Just remember what kind of a company we are. We are a forest-owning company or land-owning company, and we do everything we can in order to extract as much value as possible from the land we own in different ways. Thank you. And by that, we are happy to take on any questions you have. Operator: [Operator Instructions] The first question comes from the line of Charlie Muir-Sands with BNP. Charlie Muir-Sands: I had a few short ones. Firstly, on the timing of the pulpwood costs coming down, can you just clarify, was that a -- that was clearly a headwind to profitability of the Forest segment. Was that already simultaneously a tailwind to profitability in the consumption segments like board and paper? Or does that come through with a lag? And can you give any sort of quantification for what you're seeing kind of right now on a kind of year-on-year basis, for example? And then secondly, you mentioned on board and paper, lower energy costs. Can you just clarify, were you talking both year-on-year and quarter-on-quarter? And then just finally, on the tax ruling, can you clarify, would that create a cash inflow? Or does that just release a provision for you? Henrik Sjölund: I think it's all questions for you [indiscernible]. But maybe the first one, yes, there is a lag when pulpwood prices come down. It takes like 6 months before it reaches the industry. Stefan Lorehn: Yes. And if we take the other one when it comes to our lower electricity cost, it's approximately in Q3, SEK 250 million lower than normal. In Q2, we had even lower electricity cost than we had in Q3, but still much lower than normal in Q3. Regarding the tax item, we anticipate that, that will turn into cash flow during the fourth quarter. Charlie Muir-Sands: Okay. Great. Sorry, just going back to the first one. So you said a lag when prices come down on pulpwood but you already face that headwind in the forest segment? Or there's a lag -- further lag and those further headwinds come in the forest segment and further tailwind in the industrial segment? Stefan Lorehn: The prices are moving quite slowly in the forest segment as it does for the industry, as Henrik mentioned. So we have not seen that kind of headwind yet in the forest. How it will turn out, we'll see going forward. Charlie Muir-Sands: Okay. And yes, is there any quantification you can put around the scale of the movements you've seen so far? Henrik Sjölund: Maintenance? Stefan Lorehn: No, I think it's too early -- the wood cost. I think it's too early to comment on and quantify the effects going forward. We've just seen that the pulpwood prices are starting to come down, and we need to come back on the quantification in the next quarter, I think. Henrik Sjölund: But there is quite a big difference how you -- how the market feels when it comes to pulpwood and sawlogs where it's still quite a lot of competition, as you saw on the slide for sawlogs in Sweden. But pulpwood definitely on its way down. Operator: Mr. Linus Larsson with SEB, can you hear us? Linus Larsson: I can hear you now. Could you please dissect the Wood Products result in the third quarter that you already mentioned the SEK 30 million of impairment? And also what to expect in the fourth quarter in terms of product price and sawlog cost delta and other moving parts, please? Henrik Sjölund: Can you take... Stefan Lorehn: The first one with the write-down of the stock, maybe didn't catch you right there, Linus. But we did a write-down of SEK 30 million in the third quarter, and that is due to the lower prices that we've seen in the market. Then we needed to adjust the stock value. So it's as simple as that. Henrik Sjölund: And when it comes to the pulpwood prices and the sawlog price, as I said before, pulpwood prices, well, they are on the way down. But remember, it takes some time before we get a lower cost in our industry. And we buy roughly half of what we make use of comes from our own forest. But also remember, we have a lot more forest up in the north where prices are, especially for sawlogs, they are lower than in the south of Sweden. But also when it comes to sawlogs, still a lot of competition. And so far, prices have not come down, at least not as we see it. Linus Larsson: Okay. So I mean, in terms of direction for the fourth quarter compared to the third quarter, are you still expecting higher sawlog costs and lower finished product prices? Or what's the direction, if you don't want to quantify what's the direction of the both? Henrik Sjölund: Sawlog prices are more or less flat from where we are now. Stefan Lorehn: And selling price is hard to comment, but the market is quite soft. So we need to see where things are going when we sum up the fourth quarter, Linus. Henrik Sjölund: Wood Products in general, still, Linus, it's -- I'd say it's price pressure in the market. Linus Larsson: Right, right. Okay. And maybe a similar question for Board and Paper, what you're seeing in terms of delta Q4 and Q3 in terms of price and cost, at least directionally? Stefan Lorehn: It's -- we don't comment that often going forward, Linus. What we had in Q3 that is exceptional is, of course, the maintenance shut in the Iggesund mill and as always, lower personnel cost during Q3 that will increase then quarter-over-quarter when we look into Q4. But comment on pricing and other cost factors we did. Henrik Sjölund: It's always more difficult to fill up the order books at the end of the year when the new contracts are being negotiated at the same time. Normally, demand is a bit lower, but that you know from before. Linus Larsson: And any initial thoughts on price negotiations going into next year? Stefan Lorehn: No. We don't comment on that, Linus. But as I said before, both when it comes to Board and Paper, our prices are fairly stable. But when you look for new volumes that you don't have a contract with right now, then also now we feel a bit of price pressure. It's not easy to get marginal volumes. Regarding discussions for next year, it's too early. We'll see what happens. Linus Larsson: And maybe just one final on the market dynamics and pricing and like we've now been discussing geopolitics and tariffs for the past couple of quarters. What's the latest on that in your market segments? And how are you seeing that? And how are you feeling that? Henrik Sjölund: If you take the tariff question, I think you already know. But for wood products now, there is a 10% tariff on wood products going into the U.S. And for Board and Paper, it's 15%. We don't have that much volumes going to the U.S. And of course, it's also an ongoing discussion who should take the cost, the one selling into the market or the one importing to the market. And right now, in board, it's roughly 50-50 and paper roughly the same. It's something that's ongoing. Linus Larsson: Got it. And also like dynamically in terms of trade flows, et cetera, are you seeing that whole discussion impacting supply-demand balances in your various segments? Henrik Sjölund: If you look at indirect effects, for example, Chinese board coming into Europe, we cannot see it yet. Might happen, but so far, we don't see any drastic or big volumes coming into Europe. Operator: The next question comes from the line of Ioannis Masvoulas with Morgan Stanley. Ioannis Masvoulas: Three questions left from my side. The first, when it comes to the graphic paper segment, we've seen several curtailments across the industry in Europe year-to-date, but mostly on the mechanical grades, less so on chemical grades. Can you talk about the dynamic? What do you think is driving that? Is it more of a different demand dynamics between the 2? And also, can you talk about how you see that materializing, whether we're going to see more capacity cuts in the coming months or majority of what you expect in the short term is already announced? And then secondly, again, on Wood Products, which was, I guess, the main weakness on the results today, you've only trimmed deliveries by 2% quarter-over-quarter. Is that a function of potentially destocking and production is actually lower? And how should we think about deliveries going into Q4 and early '26? And lastly, you mentioned curtailments on the wind side, given the challenging margin dynamics. Can you give an indication on maybe the yield that your wind mills are running at or maybe a mix between wind and hydro generation and how that's evolved over the past 12 months? Henrik Sjölund: So let me start with paper and graphic papers. We are in the mechanical segment, but we also compete with wood-free paper with some of our products. So we see everything from newsprint to wood-free uncoated more or less as one market when we look into the business we do. It's overcapacity. Demand is dropping. You are absolutely right. There are some capacity taken out. Whether there will be more taken out in the future, we don't know. We only look at what has been officially stopped, taken out or at least announced. And to have a good balance, we need to do, but the market need to take out a lot more capacity, a couple of more million tonnes, to be honest. But on the other hand, it's also -- as we have -- we are quite flexible and we have learned to also operate in an environment where you can't run absolutely full. Nobody can run absolutely full. You have to be a bit more flexible today. So I think the rules of the game have changed a bit as well. But we need to take out more to have a good balance. That's clear. And we are fairly happy with our operating rates, slightly higher than average in the market at least. Stefan, next one... Stefan Lorehn: Trying to remember them. I think it was about the delivery volumes from the Wood Products segment in Q3. Yes, there is a destocking, but that is mainly due to seasonality, lower production in Q3 during vacation periods. If we look at production volumes so far this year compared to last year, we are down some 10%, which partly is explained by the rebuild in the Iggesund sawmill that we did in the first quarter. But also, as Henrik mentioned, we've taken down production in the southern part of Sweden due to the high log cost that we see there. Then I think it was curtailment on wind towers. We have used our wind power turbines to approximately 50% during the third quarter, and that is due to both low prices in combination with high risk for imbalancing cost when you run the wind farms. Hydropower stations, we run as normal, try to maximize the profit we can get from them producing when the prices are as high as they can be for the moment and reduce production when prices are low. Henrik Sjölund: Which wasn't very high. Which wasn't very high. No. Stefan Lorehn: No, I think it was -- hopefully, Ioannis. Did we catch it all? Ioannis Masvoulas: Yes. That was very clear. Maybe a quick follow-up on the graphic paper side. So you mentioned the SEK 250 million, again, gain from better electricity management and therefore, lower power costs. If we were to add it to assume that you didn't have that gain, can you talk about profitability in the graphic paper segment for Q3, like leaving boards aside, just looking at graphic, would it be EBIT positive? And would it be EBITDA positive? Just to get a sense on the underlying profit trends. Henrik Sjölund: Yes, it's -- the underlying business is EBIT profit, even if you extract the effect from the electricity. Stefan Lorehn: Maybe we would have been running it slightly different, but yes. For sure, profit. Operator: The next question comes from the line of Lars Kjellberg with Stifel. Lars Kjellberg: Most of them have been answered, but I just have a couple of follow-ups. On China specifically, of course, we have a significant excess supply, and I appreciate your comments about not reaching European shores. But we did see, for example, Brazil now asking for tariff protection from China. So I guess, directly for the European perspective, how are you seeing the Asian markets in general as an export destination? You do have some volumes going into that market. And I can only assume it's not great. So are you seeing sort of repatriation of tonnes back to Europe and equally so, given the tariff situation and weak demand in the U.S., is that an issue with, again, repatriation of tonnes that normally would have been exported from Europe? Is that a topic that you're seeing in your business and in general for the industry? The last point is really on sawlog pricing. You've commented many quarters now, of course, that they're insanely high relative to the underlying demand trends and pricing for wood products and the pressure is pretty acute as we can tell from your numbers. So what does it take for this market to give on the log price side? Henrik Sjölund: So we start with geopolitics and how it affects our business. You almost answered the questions, I think. Yes, it's much more difficult to sell into Asia, especially for marginal business to find add-on business, so to say, because it's a lot of competition. If you compare to a number of years ago, we have had capacity in China for a long time, but they are both good, and it's more now than before. And the market is not picking up, as we have said. So that's more difficult. When it comes to how much of the volumes that will come into Europe, according to statistics I see and when I speak to our people, I don't see a big change, at least not yet. But you're right, there is a risk, of course, that it could be shifts in volumes between different parts of the world. And then with U.S., you are right again, yes, we are a bit dependent as Europeans on exporting not only to Asia, but also to the U.S. to have a decent supply-demand balance. Roughly 20% when it comes to board should be sold somewhere else than in Europe. That's kind of the European business idea. Second? Lars Kjellberg: And on the specifics around European volumes returning, you can't sell it abroad. Does that put incremental pressure on Europe? I can only assume that the pricing still is better in Europe than it would be overseas. Henrik Sjölund: So far, not much has happened, but there is a risk that, that could be the case, absolutely. But we haven't really seen it yet, to be honest. I think the big issue here is whether we can export as much as we need to export to different parts of the world because the total capacity in Europe is simply too big for Europe. It needs to be shipped both to the U.S. and to Asia in different ways. We ship more to Asia than -- let's say, we do the business in the U.S., for example, but we've shipped the volumes to Asia to be converted, et cetera. So it's different kind of business also in Asia. Not all of them are up to competition with the Chinese producers. Stefan Lorehn: Second question about the sawlogs and the dynamics, I think it was what needs to be -- to happen to the sawlog prices to come down. Well, we have done what we can do so far. We have taken down production in the southern part of Sweden, where the log costs are simply too high for us to get the financials in line with our expectations. How other people will treat their sawmills, we will see going forward. Not much we can do about it in the short term. Henrik Sjölund: Normally, the sawmills when they -- you need to come down quite a lot in profitability also to variable cost more or less before they stop. That's what has happened in the history. And then the wood market changes, sawlogs become cheaper. But obviously, right now, they are simply too expensive and prices for wood products is under pressure. So very tough situation. Different though in northern parts of Sweden, where sawlogs are cheaper. Lars Kjellberg: There's no downward pressure on logs today at all. Henrik Sjölund: Of course, all of us try to get it down. But so far, we haven't seen it happening, to be honest. That's what we had to. That's where we are right now. And in our case, to take down production if it's too expensive, that's the first thing you do. Operator: The next question comes from the line of Christian Kopfer with Handelsbanken. Christian Kopfer: Just 2 questions from my side. Firstly, you talked a little bit about the power prices, the big differences in the North versus the South and maybe it has been even more substantial differences in the last couple of quarters. From your perspective, I mean, you are active in both areas, especially in the North and maybe [ Area 3 ], right? So the big differences, are those only driven by the bottlenecking in transmission? Or what do you see? Henrik Sjölund: That's the main cause. But also, we have seen quite a lot of water in the system up in the north that have put pressure to produce hydropower during the first 9 months of this year. Now the situation is a bit more normal when we look at the levels in our reservoirs at least. Stefan Lorehn: Yes. But if you look at third quarter, I think you answered the question more or less because if there would have been sufficient transmission capacity, situation would have been different as well with lower prices in SE3 and higher in SE2 and 1. That's clear. Christian Kopfer: Has it been bigger differences with the new flow base, you think? Stefan Lorehn: It's quite a short period of time, and it's a combination of factors when it comes to cables being out of operation, lots of water in the system. So it's quite early to say that it's the flow base that has created this situation. Also, when you have revision of nuclear, you have to take down the transmission capacity a bit, which has had an influence, that's clear. But exactly, there are so many different factors now to understand how things are going to be. So let's wait and see a bit. Christian Kopfer: And then we heard from another paper producer or packaging business this morning mentioned that they start to see some, call it, light in the end of the tunnel when it comes to customer behavior, not exactly for Q4, but maybe a little bit better on the demand side going into next year. Is that something that you start to see on your customer base as well? Henrik Sjölund: You mean consumption in general for forest industry products? Christian Kopfer: Yes, demand from your customers -- starting to be a little bit better or how do you see it? Henrik Sjölund: It could be. But if you look at the statistics so far, what has happened and also if I look into our order books, I can't really say that things have changed. I'd say that we have more overcapacity, especially in board than what we have been used to for many years. So demand really needs to pick up quite a lot before we get a healthy demand -- supply-demand balance again. I think it will take some time. Operator: The next question comes from the line of Cole Hathorn with Jefferies. Cole Hathorn: Just a follow-up on the pricing commentary being stable. I mean we're seeing a lot of the folding boxboard price indices and graphic paper price indices decline. So I'm just wondering how Holmen sits within that. Could you talk a little bit around on the paper side, the book paper business, which I imagine is kind of longer contracts and slightly different to the index pricing? And then on your folding carton business, could you just remind us how much is more premium longer-term contract versus traditional folding carton of your business? And when you look into 2026, you talked about spot pressures, but should we be assuming that some of the annual contracts, there will be a little bit of pressure on those into 2026? Henrik Sjölund: Would you like to start? Stefan Lorehn: I leave that to you, Henrik. Henrik Sjölund: First of all, when it comes to negotiations for next year, we don't want to comment that. We are starting to negotiate soon. But -- and when it comes to prices in Europe in board, as I said, especially you mentioned folding boxboard, and we are a lot -- we have bigger volumes in solid bleach board where you are even more into a niche where prices tend to be very stable over time. They do change, but it takes time. And that's the case also right now for us that most of our business, they are stable when it comes to board, slightly more pressure in general in folding boxboard than a solid bleached board. The challenge is more when you need marginal volumes to take on new business, then there is price pressure. What that means for next year, it's too early to say. And then it was how many of our contracts are longer term for 2, 3 years, et cetera? Stefan Lorehn: It's a mixture. Some shorter ones, some 1- to 2-year tenders. Henrik Sjölund: We have some slightly longer contracts, but not that many. And when it comes to paper, we don't have any long-term contracts, maximum 1 year. It's gone the other way, some contracts quarterly or half year as well. Book paper is a good segment where we've been extremely -- we have done well, and we are doing well. Prices have been a bit more stable than graphic paper in general. But also there, a lot of contracts will be renegotiated from 1st of January and second quarter, et cetera. It's no big difference in that sense, but a more stable segment, both when it comes to demand development and also pricing and fewer producers, of course. Cole Hathorn: And then maybe just a follow-up on the Canadian producers in wood products. They're under a lot of pressure considering the duties that have impacted them, and you've showed some good charts on wood staff, particularly around British Columbia sawmills coming down. Are you starting to see better ability to compete with the Canadians in the U.S.? Or any commentary you can provide on the Canadian sawmill side and how that's impacting your business? Henrik Sjölund: Normally in the U.S., they consume like 100 million cubic meters. 20 of those come from Canada and roughly 5 from Europe. And now when the Canadians have 35%, 40%, 45%, well, they have a different wood cost as a base. So it's not really comparable to tariffs we have with 10% in Europe. But normally, when you have increased tariffs and you have that much of import into U.S., you would see prices going up in the U.S. But so far, we haven't seen much of that. And if you look at the future prices, well, they go up and down quite a lot week-to-week almost. Right now, if I would say something, I would say, well, they are up 5% something, but that's last week, et cetera. So, so far, demand and the balance in the U.S. has not made prices come up to cover for the tariff cost, not for the Canadians, not for the Europeans, not to be fully compensated. No, it hasn't happened yet. Cole Hathorn: Fair enough. So in absence of housing demand, is it really kind of sawmill closures in Canada, which might be the supply trigger? Henrik Sjölund: Supply is down, but not enough. Demand is even lower as it looks right now. Operator: The next question comes from the line of Pallav Mittal with Barclays. Pallav Mittal: Most of my questions have been answered. A couple of follow-ups. So firstly, can you comment on the number of transactions in the Swedish forest and how our transaction pricing looking this year because last couple of years, it has been flat to down. So any comment on that would be helpful. And then secondly, can you just talk about the profit split for the Board and Paper business? Is it still broadly 50-50? Stefan Lorehn: Well, if we start with the forest transaction market, most of the transactions are being done during the second half of the year. There's also a lag in the system when they are to be registered, et cetera. So it's quite limited of transactions so far this year as we can see. So it's hard to draw the conclusions for the full year already now. But what we have seen so far is no major changes in the property prices in Sweden. The next question is the split of profitability between Board and Paper. Well, board is heavily affected by the maintenance shuts that we have had both in Q2 and Q3. So it's hard to comment on the exact numbers in Q3. Henrik Sjölund: But both profitable. Stefan Lorehn: Both profitable, of course, yes. Operator: [Operator Instructions] Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to management for any closing remarks. Henrik Sjölund: Thank you very much for good questions, good discussion. Look forward to see you soon again. 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.
Ryan Mills: Thank you, and good morning, everyone. Welcome to our fourth quarter and fiscal year 2025 earnings call. Erik Gershwind, Chief Executive Officer; Martina McIsaac, President and Chief Operating Officer; and Greg Clark, Interim Chief Financial Officer, are on the call with me today. During today's call, we will refer to various financial data in the earnings presentation and operational statistics documents, both of which can be found on our Investor Relations website. Let me reference our safe harbor statement found on Slide 2 of the earnings presentation. Our comments on this call as well as the supplemental information we are providing on the website contain forward-looking statements within the meaning of the U.S. securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks are noted in our earnings press release and other SEC filings. Lastly, during this call, we may refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to Erik. Erik Gershwind: Thank you, Ryan. Good morning, everyone, and thank you for joining us today. I'll begin the call with some perspective on our recent performance and a view into our mission-critical path forward. I'll then offer some commentary on our end markets and overall economic conditions. Greg will cover our results for the fiscal year before passing it over to Martina to provide her perspective on our recent performance and our expectations for fiscal year 2026. I'll then wrap things up by providing some additional color on today's announcement regarding our upcoming leadership transition. As we turn the page on fiscal 2025, I'm encouraged by the progress that's happening inside of our company. We entered the year with 3 top priorities, and those were to maintain momentum in our high-touch solutions, to reenergize our core customer and to optimize our cost to serve. We're making strides on all 3 fronts and are doing so in the face of an uncertain environment. While there is still plenty of work to be done, our recent progress is beginning to evidence itself in our financial performance as we return to daily sales growth, and we're poised for operating margin expansion once again. First, our high-touch solutions, including vending and implant, continue the strong track record that we've seen all year long. Martina will provide more details shortly. Second, and most notably, we've begun to see our core customer average daily sales growth rate inflect and turn positive. As you recall, we launched 4 initiatives aimed at reenergizing our core customer base. And those were realigning our public-facing web pricing, which was completed during our fiscal 2024, upgrading our e-commerce experience, accelerating our marketing efforts and optimizing seller coverage. The largest milestones occurred at the end of our fiscal second quarter as we launched our upgraded website and our enhanced marketing efforts. Since that time, we've seen a steady improvement in core customer performance. Third, we've made progress in optimizing our cost to serve. We're on track with the supply chain productivity improvements that are yielding between $10 million to $15 million in annualized savings. We improved seller coverage and effectiveness by leveraging an enhanced data-driven territory model and tools that help reps more easily identify white space opportunity. And we have a growing pipeline of additional productivity programs that we expect to fuel more gains in fiscal 2026. I'll now turn to the specifics of our fiscal fourth quarter on Slide 4, where you can see average daily sales performed better than expected and improved 2.7% year-over-year. The return to growth in our core customer base, along with continued strength in the public sector, resulted in better-than-expected volumes and was the primary driver of the beat. Benefits from price came in as expected during the quarter, contributing 170 basis points to growth year-over-year and 90 basis points sequentially. As a reminder, we took a broad-based low single-digit pricing action towards the end of our fiscal June. That said, gross margin came in below our expectations at 40.4%, declining 60 basis points both year-over-year and sequentially. The primary driver here was tariff-driven purchase cost escalation, which came in faster and hotter than we expected during July and August. We also saw some other headwinds such as public sector-related customer mix. We have since taken action with pricing moves in the fiscal first quarter and have begun to see gross margins improve. Operating expenses in the quarter were approximately $306 million on a reported basis. And on an adjusted basis, operating expenses stepped up approximately $8 million year-over-year to $305 million for the quarter, but remained flat on a percentage of sales basis. The primary drivers of the year-over-year increase were driven by higher personnel-related costs and depreciation expense. Sequentially, adjusted operating expenses performed slightly ahead of expectations and declined approximately $6 million compared to the fiscal third quarter. Reported operating margin for the quarter was 8.6% compared to 9.5% in the prior year. An adjusted operating margin of 9.2% declined 70 basis points compared to the prior year. This did, however, exceed the high end of our outlook by 20 basis points. We delivered GAAP EPS or earnings per share of $1.01 compared to $0.99 in the prior year's quarter. And we also saw year-over-year improvement on an adjusted basis. With EPS growing nearly 6%, coming in at $1.09 compared to $1.03 in the prior year. The positive trend we saw in the fiscal fourth quarter has continued into the first couple of months of fiscal 2026 as our daily sales growth rate ticked up further to 5% in September, and it's we're expecting to grow between 4% and 5% in October despite impacts from the government shutdown. As we look ahead, we expect the step up in operating expense to moderate and productivity to build. All of this positions us well in our efforts to restore profitable growth and operating margin expansion in fiscal 2026 and beyond. Turning to the environment. We characterize conditions as stable with some pockets of improvement, while the ongoing overhang of uncertainty remains. Tariffs have moved from a possibility to a reality as we're now experiencing meaningful price inflation across many areas of the business. Customers are generally understanding of price increases, as long as we provide sufficient transparency into tariff-related impacts. That said, the need to provide customers with offsetting cost savings measures is very real. And this plays well into our high-touch and technical value proposition. Our suppliers are describing continued cost pressures on certain raw materials that are heavily China-based or influenced. And if this sustains, it could lead to further price inflation in the coming months. From an end market perspective, we've seen stabilization and even firming up in some of our larger verticals. Aerospace remains strong, while end markets such as heavy equipment and agriculture, which have been particularly weak over the past 2 years, or at least stabilizing. Some areas of acute softness do remain such as heavy truck. Looking at Slide 5, I I'm encouraged to see how MSC is faring in this environment. Average daily sales in the quarter began to outpace the Industrial Production Index once again, supported by our improved customer performance and continued strength in the public sector. With that, I'll now pass things over to Greg for an overview of our financial results for the fiscal year. Gregory Clark: Thank you, Eric. Good morning, everyone. Please turn to Slide 6, where you can see key metrics for the fiscal year on both a reported and adjusted basis. Average daily sales declined 1.3% year-over-year primarily due to softer volumes in the first half of the fiscal year and the slight FX headwind. These headwinds were partially offset by positive price that contributed 60 basis points to growth and some carryover benefits from acquisitions in the prior year. Moving to profitability for the year. Gross margin of 40.8% contracted 40 basis points compared to the prior year due to negative price cost and customer mix. Operating expenses stepped up approximately $56 million and $55 million on an adjusted basis as expected. Combined with slightly lower sales, this resulted in a 190 basis point increase in adjusted operating expense as a percentage of sales. However, we exited the fiscal year with adjusted operating expenses as a percentage of sales performing in line with the prior year. Reported operating margin for the fiscal year was 8% compared to 10.2% in the prior year. On an adjusted basis, operating margin declined 230 basis points compared to the prior year. Together, this resulted in GAAP EPS of $3.57 or $3.76 on an adjusted basis, compared to $4.58 and $4.81 in the prior year, respectively. Now let's turn to Slide 7 to review our balance sheet and cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately $430 million, representing roughly 1.1x EBITDA, continue generating healthy cash flow in the quarter despite the increase in receivables through lifts and sales, we delivered free cash flow of $58 million during the fourth quarter, representing 104% of net income. This resulted in free cash flow conversion of 122% for the fiscal year ahead of our annual target. Turning to capital allocation on Slide 8. Our highest priorities remain organic investment to fuel growth and advancing operational efficiencies across the business. Returning capital to shareholders also remains a priority. We purchased approximately 496,000 shares throughout the year. Combined with our quarterly dividend, which we increased by approximately 2% this month, we returned $229 million to shareholders in the fiscal year. I will now turn the call over to Martina for a deeper dive into our quarterly performance and expectations for the new fiscal year. Martina McIsaac: Thank you, Greg, and good morning, everyone. Turning to Slide 9. We're encouraged by our daily sales trend that continues to improve across all customer types. During the fiscal fourth quarter, we were most pleased by the return to growth of the core customer with daily sales improving 4.1% year-over-year, driven by both price and volume. National Accounts declined 0.7% year-over-year. This customer base continues to see a greater impact from the macro environment as only 44 of our top 100 customers showed growth in the quarter. However, on a sequential basis, national accounts performed in line with core customers and improved a little more than 1%. And Public sector continued its strong trend in the quarter with daily sales growth of 8.5% year-over-year and 10% sequentially. While this business has been impacted by the government shutdown, with sales growth turning negative in October compared to up low double digits in September, we view this as temporary. Let's now dig a little deeper by looking at some of the key initiatives and KPIs supporting the daily sales improvement in the quarter on Slide 10. First, I continue to be pleased by the ongoing expansion of our solutions footprint. Our installed vending count grew 10% year-over-year or 3% sequentially to more than 29,600 machines. Average daily sales in the quarter for vending were also up 10% year-over-year and represented approximately 19% of total company sales. With respect to implants, our program counts at 411 expanded 20% year-over-year and grew 3% sequentially. Daily sales from customers with an implant program grew 11% year-over-year and represented approximately 20% of total company sales. Improvements to our core customer growth rate have been driven by several programs, which Erik mentioned earlier. The first is sales territory optimization. Moving to the middle of the slide, you can see the increase in coverage effectiveness, which enables us to be more present at customer sites. The number of customer location touches locked by field sales were up double digits year-over-year and mid-single digits sequentially. This increase was achieved with fewer sellers illustrating the potential that still lies in our sales effectiveness efforts. As we have shared, we've also invested in website upgrades and enhanced marketing efforts to restore core customer growth. In the fourth quarter, average daily sales on the web turned positive year-over-year with growth in the low single-digit range. We experienced similar improvements in the trend of certain KPIs such as direct traffic to the web and conversion rates of our top channels. Our streamlined checkout experience drove declining abandonment rates in the quarter and enhancement to the search function of our site also started showing early positive signs. The percentage of users adding to cart within the first 0 to 5 minutes, improved in the low single-digit range, giving us confidence that users are finding what they're looking for more efficiently. Before I move past our quarterly results, I would like to spend a few moments on gross margin. Q4 gross margins came in about 50 basis points lower than our expectations. 20 basis points of the miss can be attributed to mix and other factors. 30 basis points of the miss was due to price cost. While our price realization performed as planned, cost realization did not. A combination of a rapid surge in the number of supplier increases, compressed supplier notification period, higher sales volume and a greater mix of direct ship orders all led to higher cost realization than planned during the quarter. In response, we've made further pricing moves during the fiscal first quarter and are seeing gross margins improve off of 4Q levels. Before we get into our outlook, I want to highlight some exciting changes made to the leadership team that will strengthen our commitment to growth and the customer experience. You turn to Slide 11. We First, we welcome [indiscernible] to MSC as our new SVP of Sales. [indiscernible] brings 2 decades of engineering and field sales management experience from her time at Hilti with a proven track record of consistently delivering above market growth. In this role, she will build on the progress made by MSC towards sales excellence. With Gida's arrival, Kim [indiscernible] will be taking on the newly created role of SVP customer experience. Leveraging Kim's 30 years in the industry, this new team will be dedicated to ensuring that every interaction a customer has with a is seamless and memorable, driving customer retention and share of wallet growth. I would like to congratulate both [indiscernible] and Kim on their new roles and look forward to sharing their future success. As for the rest of the management team, John Reichelt is settling in his role as Chief Information Officer. He and the team continue making progress on the evaluation of our systems design. And lastly, our search for a permanent CFO is underway, and we have begun discussions with both internal and external candidates and hope to fill the role in the next quarter or 2. Let's now move on to our expectations for fiscal '26 by starting with our outlook for the fiscal first quarter on Slide 12. We expect average daily sales to grow 3.5% to 4.5% year-over-year. The lower end of the range assumes the government shut down less through the remainder of the quarter, whereas the higher end of the range assumes that the shutdown ends before the end of our fiscal quarter. Our expected range also takes into consideration quarter-to-date sales with September up 5.1% and October trending towards 4% to 5% growth. As a reminder, we returned to growth last fiscal November, making it our toughest comparison to the prior year for the fiscal first quarter. We expect adjusted operating margin to fall within the range of 8.0% to 8.6%, which takes into consideration the following: gross margin to improve from 4Q levels, and to be 40.7%, plus or minus 20 basis points and an increase in adjusted operating expenses compared to the fiscal fourth quarter of approximately $7 million to $10 million primarily driven by an annual step-up in depreciation and amortization from fiscal year '25 to fiscal year '26, a step-up in incentive compensation expense, 1 month of the merit increase and an increase in marketing investment, partially mitigated by continued productivity. The increased marketing investments are the result of the progress we're seeing in our core customer and are all directed towards high-return areas of our accelerated marketing program. Turning to Slide 13 for our expectations of certain line items for the full year. We expect depreciation and amortization costs to be roughly $95 million to $100 million, representing a year-over-year increase of approximately $5 million to $10 million. This largely reflects carryover from the investments made in technological and digital capabilities as well as continued growth in vending. Other underlying assumptions include interest and other expense of roughly $35 million, capital expenditures of $100 million to $110 million and a tax rate between 24.5% and 25.5%. Free cash flow is expected to be approximately 90% of net income. And lower than the previous year, driven by working capital needs to support top line growth. To assist in modeling the cadence of sales for the remainder of the fiscal year, the bottom of the slide provides historical quarter-over-quarter averages and key considerations for the second quarter and the back half of the fiscal year. And lastly, we have 1 extra business day year-over-year in the fiscal fourth quarter, as shown at the bottom of the chart. Looking beyond the fiscal first quarter, we expect incremental margins of approximately 20% at mid-single-digit revenue growth as gross margin restores to expected levels as we exit the fiscal first quarter and the benefits of our productivity initiatives build through the fiscal year. And with that, I will now turn the call back over to Erik for closing remarks before we get into Q&A. Erik Gershwind: Thank you, Martina. I'd like to close out the call on a more personal note. It has been an honor and a privilege to serve as MSC's leader for the last 1.5 decades. And while I'm stepping away from day-to-day leadership, I will continue to serve MSC as Non-Executive Vice Chair of the Board. As I prepare to transition I've taken some time to reflect on my 30-year history at MSC. Working alongside such an exceptional team has been 1 of the greatest privileges of my career. We have, together, grown and transformed this company from a traditional spot by distributor into the trusted mission-critical adviser and industry leader that you see today. Most importantly, we achieved this while living up to the values set forth by my grandfather, when he began selling cutting tools from the trunk of his car all the way back in 1941. Succession planning and leadership development have been pillars of MSC's values since its inception over 8 decades ago. Leaders are chosen carefully, and they're thoughtfully developed over time. Like my grandfather, like Mitchell and David before me, 1 of my most important responsibilities is developing our next leader and then stepping aside when that person is ready. And so it is with great pleasure that I hand the baton to Martina who will succeed me as MSC's fifth CEO. As you all know, Martina has been with MSC for over 3 years, and she knows every operational corner of the company. We've worked hand-in-hand during a critical phase at MSC, and she's been instrumental in shaping our operational improvements and our strategic growth initiatives. The board and I have the utmost confidence in her and we look forward to seeing her build on the momentum that's seen in our recent results and to provide a very bright future for MSC. I'd like to thank everyone on the call for your friendship and your support over the years. It's been a pleasure working with each and every 1 of you. Martina, I'm going to turn it back over to you to close the call. Martina McIsaac: Thanks, Erik. First and foremost, on behalf of all of us at MSC, I would like to take a moment to acknowledge your extraordinary leadership and the lasting impact you've had on the company. Over our nearly 30 years here, you've guided us through remarkable growth in transformation. And Erik, your leadership means a great deal to all of us. It has shaped the company we are today. Personally, I would also like to thank you and our Board of Directors for your confidence in me and for this opportunity to continue driving MSC's growth and operational performance. During my time leading our day-to-day operations for the past 3 years, I've been deeply engaged listening to our associates, our customers, our suppliers and our shareholders and this has helped shape the strategic initiatives, which are starting to be reflected in our results today. With these building blocks and a strong leadership team now largely in place MSC is set to achieve new levels of growth and further strengthen its leadership position. I could not have asked for a better opportunity. As I look ahead and prepared to step into the CEO role on January 1, our focus will be on value creation, maintaining our recent growth momentum and delivering a balanced capital allocation strategy. all while living up to our core values. I believe this is possible by turning our attention to 3 key areas. First, we must harness the incredible commitment of MSC's talented associates to strengthen our culture. We want to raise our own expectations and inspire curiosity, self-responsibility and a spirit of continuous improvement. Second, we must build on the momentum from the initiatives that have resulted in a return to growth you see today. We do this by executing on our recent organizational changes to drive disciplined sales excellence and a relentless commitment to customer experience. And third, MSC needs to deliver on its commitment. We must bring productivity and consistency to our everyday work and use data to drive speed and accountability through our operating system. I could not be more excited to step into this role, and I look forward to building stronger relationships with everyone on today's call. And with that, please open the line for questions. Operator: [Operator Instructions] Your first question for today is from Ryan Merkel with William Blair. Ryan Merkel: And great to see the inflection in the business and, of course, to Erik and Martina congrats on the new roles. My first question is just on gross margin, the 30 basis points of the negative price cost. I don't recall ever hearing Erik, a surge in supplier price increases and costs working through the P&L sort of faster. Can you talk about what sort of happened there? And then how you addressed it. It sounds like you raised prices a bit more. Erik Gershwind: Yes, Ryan, so I'll start, and then I'll turn it over to Martina just to provide some historic context. You are correct that this is unusual. And obviously, you and I together have seen in this industry a lot of inflation cycles. This 1 was has been a fairly unique we look back, the concentration of increases that we saw really in a very short window of time was unusual, even unusual relative to a post-covid inflation period, which had also been historic. So I do think it's played out a little differently from prior cycles. I'm going to turn it over to Martina to talk about how we're handling that, and we're encouraged about what we're seeing in a bounce back in Q1. But I'll let Martina talk in a little more detail. Martina McIsaac: Yes. So Ryan, the 30 basis points, I was price behaved exactly as we expected. We were very pleased with the work that our team did. Price contributed 170 basis points right on our forecast, and we were able to work with customers. I think you heard in Erik's prepared remarks, customers are understanding of what we're doing and why we're doing and we're helping them navigate a very uncertain time. Cost, to give you a little bit of context of what Erik just said, we took a price increase at the end of June. So sort of between mid-June when we lock that increase in the end of August, in those weeks, we took more inflation than we took in 9 months post COVID in 2022. So that kind of gives you a feeling for scale. And it was both the number of increases, the changes in these increases, the changes in supplier behavior compressed lead times. So we amassed this amount of inflation in the business, and we had committed to pricing stability, so we did not plan to take another increase until Q1. So we didn't react and we have now since taken, I think, the right actions in Q1 gross margin is restoring. We headed into the quarter with a headwind on price cost. We will exit the quarter in a much better position. And I think we have taking a hard look at our processes. When you think about where we want to take the company, I think good, we're happy with the accountability and the way our team reacted in September. But this is a great example of where our operating system where we could have where we need increased visibility because we would have taken more price in the quarter. Ryan Merkel: Got it. Okay. Very helpful. And then for my follow-up, I heard you say mid-single-digit revenue growth was achievable this year if you just use the sequential and then 20% incremental margins. So that's great to hear. On the 20% incremental margins, I know you're not giving specific guidance, but are you expecting to have gross margins sort of up year-over-year given initiatives and then SG&A as a percent of sales, do you think that you can work that down year-over-year because you talked about some productivity and then maybe leveling off of the cost increases. So a little more color there on what your expectations would be helpful. Martina McIsaac: Yes. So let's start with gross margin. I think we've taken the price increase actions now in the first quarter. We expect to be price cost stable over the cycle and stable through the rest of the year. I think, obviously, our best opportunity is to accelerate growth and leverage our cost structure, but we do have a very healthy pipeline of productivity projects that will continue to build through the year. And so we're looking we're expecting incremental margins in the teens in the first quarter, and we expect that to build through the year. Ryan Mills: And Ryan, just to give a little bit more perspective on that incremental margin commentary, if you look at where we ended up at the fiscal year and at a mid-single-digit growth assume gross margins stay stable. It implies roughly a $30 million to $40 million step up in OpEx. We feel pretty comfortable achieving that where the business currently sits today. Operator: Your next question is from Tommy Moll with Stephens. Thomas Moll: I wanted to ask about some of the seller effectiveness KPIs that you updated us on today. customer touches sales per rep per day both moved up significantly this quarter. What's behind those inflections? And what inning are we in, in terms of some of the operational changes that you've made and the improvement that they can drive going forward? . Martina McIsaac: Yes, absolutely. So we're in the I'd say we were in about the third inning. So we've got taken the first steps, and I'm really excited about [indiscernible] join the team to take the next steps we have a sales management process in place now that looks at a whole range of leading and lagging indicators, and that is different by role and by level. If you boil it up, the 2 things that we look at are how often are we in front of the customer as a leading indicator, we need to be on the plant floor in order to drive growth. And then we're measuring sales per rep per day. So we'll continue. I I believe sales is a science. There are fundamentals that need to be in place. We've taken the first step, which is really around good territory design. We have to make sure our sellers are pointed at the right potential, and we'll continue to optimize as we move forward. Thomas Moll: I wanted to follow up with a question on macro. Erik, I'm looking back at some of your comments. I think you talked about some of your verticals you're seeing some firming up, maybe even some pockets of improvement. It's hard to parse though because clearly, you have some internal initiatives that are helping on the core customer side that may not apply ex MSC. And if we look at the national account data, down again quarter-over-quarter. And I think the comment there was that's primarily a macro phenomenon. So there's a lot of speculation in the market about where we have potential for some kind of short-cycle recovery. I'm just curious on your thoughts about how we can parse the results today and better understand the macro environment. Basically, the question is, how much of this is self-help where you're clearly benefiting versus a broader macro, where there's still some acute challenges. Erik Gershwind: Yes, Tommy, it's a really good question in a very murky environment. I think the headlines that we were trying to get across this morning are a couple. One is, I would say, I wouldn't necessarily call things firming up, but we have pockets and end markets that are meaningful to us that we would refer to as stabilizing. So take heavy machinery and equipment, ag-related end markets where things have been really soft for the last couple of years. And it's not like things have inflected that much positively, but they're at least stable. So that, in a sense, is up from where we've been. What I would say is you then have pockets, Tommy, of, look, there continue to be pockets of strong growth, i.e., aerospace but also there remains some pockets of acute softness. So a great example of that. I actually think you called this out in your note, is heavy truck. That would be an example of an end market that when we talk about the influence on our national accounts program would be weighing us down. So as it relates to national accounts. I would say we're seeing some encouraging signs here in September and October. We definitely so the numbers we shared slightly down year-on-year for have turned positive in September and October thus far. You can imagine October, especially with public sector moving from healthy positive to negative with the shutdown, core and national accounts actually are doing better and better. So I think that's turning. But overall, stable look, an overhang of uncertainty that's there. If you're trying to parse out how much of this is macro versus micro, there's probably some of both going on, Tommy. I would say, hopefully, you could hear in our prepared remarks, we're encouraged by what's happening in the core customer and particularly is probably more self-help and micro than it is macro. Obviously, there's a little bit of price benefit, too. But clearly, when we track back the inflection in the improvements, they do go right back to the initiatives that we've been talking about now and what got put in place sort of midway through our fiscal year with the website upgrades and marketing. So I think that part of it is a good deal of self-help. And then I described the rest as stabilizing with still an overhang of uncertainty. Ryan Mills: And Tommy, maybe where you can see a little bit of that self-help if you think about the core customer consecutive months of year-over-year growth. And then you look at the MBI, it still remains below 50. So that's starting to break that trend a little bit might show some of that self-help and that shining through. Operator: Your next question for today is from Chris Dankert with Loop Capital Markets. Christopher Dankert: I guess I just have the congratulations to both Erik and Martina here. I guess, Martina, on your comments around the level of price increases we've taken here being on par with 2022, I guess, does that imply that we're talking about 5 points or more of pricing in 2026. Can you kind of give us some context for how we think about pricing into the new year? Martina McIsaac: Yes, I think it's so uncertain. I don't know that I can give you a good answer on that. I think we our intention is obviously to meet the inflation as it comes. I think we've done that now with our actions in Q1 but it's so uncertain, I really I don't know what to tell you. Ryan Mills: And Chris, what I would say is if you think about where we the price increase we put at the end of June, low single-digit range, we talked about another low single-digit increase in in 1Q. So if you assume 1.5%, 2%, you're in that 4% range. And as we said, we'll make additional pricing moves as warranted. . Christopher Dankert: Got it. That color that's really helpful. And then I guess just on the kind of $30 million to $40-ish million of SG&A growth in the new year, and again, obviously, that's something to change, but does that assume digital investment and marketing investment are kind of leveling off here? Maybe kind of walk through some of the components of what you're thinking about for SG&A growth? Erik Gershwind: Yes, Chris, so when Ryan referenced that, that sort of ties back to the idea of how we get to a roughly 20% incremental margin and mid-single-digit growth. And really, what that's reflective of is the variable expense to service the growth, the normal inflation we experienced in the business, the investment spending that we do and then offset by the productivity that Martina is driving through the business. It does. So there are certain pockets of investments that we'll be leveling. So e-commerce is a good example of that, although we are we talked about a DNA step-up, that's part of it is our digital investments that are now value and improving core customer growth. I will call out, Martina mentioned in Q1, part of the OpEx build is a step-up in marketing expense so that would be an area where we're actually increasing investment, and we're doing it because we like the returns that we're seeing, quite frankly, it's part of the driver behind core customers. So as Martina mentioned, we're channeling those investments where we're seeing the highest return. Operator: Your next question for today is from Ken Newman with KeyBanc Capital Markets. Katie Fleischer: This is Katie on for Ken. I wanted to dig in a little bit more on the supplier price notifications. What's the risk that it's more difficult to pass these on to customers as we go through the year, especially if they accelerate, like I know tungsten prices are up a lot year-to-date. Just curious how you're thinking about that in the context of further increases from your suppliers? Martina McIsaac: Yes. Thanks, Katie. So far, we have been really pleased with the price realization. So I'm not I'm not worried that we're going to be able to pass it on in a constructive way with our customers. We're obviously working with them always to optimize their costs as part of our technical value proposition, and I think we're in a great place right now. So we were happy with price realization, and we continue to be we do see more inflation coming, obviously, and it is it will put pressure on us. But that part of the equation, I'm not worried about. Erik Gershwind: And maybe I'll just chime in Katie, funny, you mentioned 1 of the raw materials that obviously, we're keeping our eye on and we're hearing about from suppliers in tungsten. So's it's almost like there's a knock-on effect here from the tariffs which is out of the gate, what we've been experiencing from our suppliers is direct tariff-related inflation, and we do see bubbling, the knock-on effect being impacts on certain raw materials that are drivers of the products that we sell. So tungsten is a great example for cutting tools. As Martina said, our experience with price realization has actually been quite good. Should there be further inflation? If tungsten pricing sustains, I think you're right, we would expect more pricing from suppliers, it's an unknown. But if it does, we would and we'd expect to pass it along. One of the things we tried to highlight in the prepared remarks, customers are understanding right now because the headline everything is going up. The key is, number one, we have to be transparent about it, which is why Martina and team made the choice to stick with our pricing cadence and not react in Q4, being clear and transparent. And the other is the other side of the conversation is how are we as a distributor, bringing productivity to our customers. And that's something that's right in our sweet spot. So for all those reasons, if the inflation does sustain in this uncertain world, we do feel confident in the ability to pass it along. Katie Fleischer: Great. That's really helpful color. My follow-up is regarding the government shutdown. How do we think about any impact year-to-date from this? I know the lower end of your guide implies that it should last through the remainder of 1Q. But any way to think about what you've seen year-to-date within the business? Martina McIsaac: Yes. I'm sorry, you broke up in the middle, Katie, but I think you're asking how do we see the government shutdown impacting the business? What are we forecasting? So we had as you heard in the prepared remarks, we had a very strong fourth quarter in the public sector, and that growth continued into September. We've seen some softening now with the shutdown. That will have a positive a small positive mix effect. We don't expect that to be more than about 10 basis on our margin. And the outlook that we gave really is predicated on both ends of the scenario. So the high end of our growth range if the shutdown ends and the low end of our growth rate if the shutdown continues to the end of the quarter. Erik Gershwind: And then, Katie, the additional color I'll add there is just who knows when the shutdown is. But 1 thing we can be pretty sure at some point, it will end. And as I look back on my career in some of my recent years here, 1 of the things really proud of is the performance of the public sector team. I mean, they continue to deliver and to outgrow markets and to take market share. And we don't see any of that changing. Obviously, Martina mentioned, we went from double-digit growth in September to negative in October. That's just a reduction in spend. So the exciting thing for us is, at some point, that restores. We expect our share capture to continue. And then if our momentum in core and national accounts continue and public sector goes back to doing what they've been doing for a while, it creates a potentially encouraging picture. Operator: Your next question is from Patrick Baumann with JPMorgan. Patrick Baumann: I'll echo comments from others, congrats Martina on the new role. And good luck, Erik, it's been great working with you over the years. I appreciate all the help. So on the OpEx side, maybe I missed this, but it looks like the head count that you report in the earnings deck came down a bit at year-end. Just wondering what drove that? And then what's the outlook for head count in, I guess, fiscal '26. And then on the marketing side, wondering if you could give some perspective on where your spend levels are today and where you think you might need to take that to sustain better results that you're seeing currently in the core? Martina McIsaac: Okay. Thanks, Patrick. I'll take the head count piece. So our cost structure is too high right now for the size of our business. So obviously, the best and the highest way to remedy that is for us to accelerate growth, and we're at full speed ahead on those initiatives. But in the meantime, we're taking a look at how we perform work, and we're taking a look at performance. And so what you see in those head count numbers are 2 sets of actions. One of them was a reduction force in our sales force. I believe strongly that we owe our sellers good territory design. So we point them at the right potential we owe them a strong sales management process with clear expectations and good coaching and when you put those 2 in place, you can fairly and quickly assess performance. So we took out our underperformers and our sales territory optimization, just moved right in. And that's why in the prepared remarks, we told you we're actually covering more customers more effectively with fewer people. I'm very happy about that. And then on the other side of the business, which is the rest of the head count change, we have an operating system, same thing. We're setting clear expectations. We know how to measure performance, and we action. Asking me about head count for the rest of the year. I mean, we will continue to self-help, and we'll continue to look at our processes as we go forward. Erik Gershwind: And then maybe Yes, I'll take the marketing, Pat. So what I'd say there is we're at our Q1 levels, obviously, we're going to be at a level that's up from where we were running in fiscal '25. And Hard to say, to give you a clear outlook. And the reason it's hard to say is our investment in marketing, the beauty about the way we're investing, number one, it's been a driver of the core customer we see the return profile on our investments relatively quickly. And so that number will be fluid based upon the returns that we see. So put another way, if we continue to see the returns in the form of improving growth rates with core customers, will continue to ratchet up marketing. And if for some reason, those returns subside, you'd see us tone it down. But either way, it would be captured in our outlook on incremental margins. Patrick Baumann: Got it. And then a couple of cleanups. Just a follow-up on the government shutdown impact. Can you remind me like your federal exposure? I didn't think you had like a big exposure to federal government. So I'm just wondering why you saw the slowdown in sales in public sector from, I think you said double digit to negative in the October period. Ryan Mills: Yes, Pat, our government exposure is about 2/3 of federal and more weighted towards military and defense, just to give you some color around that. Patrick Baumann: So are you seeing pullback in military like where in federal are you seeing pullback. Erik Gershwind: We're seeing so the pullback from September to October was pretty much all in federal, Pat. And what I would say, it was not I mean I won't get too specific here. It was not across the board. But there were pockets the negative in October is an average across our roughly if we're a 10% public sector, I'm rounding here, but around 7% being federal. It wasn't down consistently across the board, but we saw pockets of federal that are off like 50%, 60%, where there's clearly no sign of market share loss. So yes, we did see a pretty quick drop. And look, again, at some point, that's going to reverse end and reverse. Patrick Baumann: Yes. That makes sense. And then last cleanup, just on price. Can you give any color on any particular product categories that stand out in terms of the increases you're taking, whether it's are you seeing more inflation in metal working in certain MRO products and exclusive brands? Any color on the pace of price inflation among those different categories. Erik Gershwind: Yes, Pat, I would say it wouldn't be shocking to you as to where basically the more you get to things that come out of China and the more you get to things that are made of steel the more inflation we're seeing. So for instance, fasteners and our OEM business are seeing really high levels of inflation. Some categories like safety, if we've done a lot of sourcing Asian sourcing, China sourcing, we'd be seeing it. So it wouldn't surprise you. Interestingly, some, of course, in our private brands. But remember, 1 of the things that we've been talking about, a good percentage of our private brands particularly in cutting tools are made in U.S.A. So those have been shielded and that's been another kind of quiver in our marketing arsenal, if you will, is focused on our maiden USA offering. But it wouldn't be shocking where we're seeing the increases. Operator: Your final question for today is from David Manthey with Baird. David Manthey: Congratulations to Martina. Erik I'll for my fair well I see you in Chicago in a few weeks here. Yes. So my first question is, you mentioned direct ship orders. And I guess, I'm just trying to get a read on what percentage of your sales does that represent today? And maybe if you could outline the types of products that are primarily affected by direct ship. Erik Gershwind: Yes, Dave, I'll take it. So we don't really break out specifically direct ship orders as a percentage of sales. I'll tell you it is the minority but particularly, it's grown in recent years as we've penetrated customers more and more. whether it's our implant program, whether it's some of our public sector relationships where we're doing more and more sourcing and value add for a customer. So typically, as those programs ebb and flow, so goes our direct ship volume. So I don't think there's anything sort of structural systemic that I call out, like if you're looking forward, is something to note as a major headwind or tailwind, but we did see and look, the team mentioned that sequentially from Q3 to Q4, our public sector business was up considerably. There's a correlation there. So when it comes in the form of public sector, you can imagine it's a lot of MRO product. more so than metalworking. And so that's a little color. But I wouldn't make that much of it for the future, but it did we brought it up because it was a piece of the 50 basis point gap versus where we thought it was a piece of the story. David Manthey: Okay. But it sounds like it's measurable. And if you're saying it's driven by government and implant or things like that, it does sound like we should see that continue to at least gradually move up over time, right? . Erik Gershwind: Yes, I guess, I mean, it has been certainly. But the 1 thing I would say to counter it is, remember, this is really if I look back over the past few years, you've had areas like implant and public sector growing and core or at least core growing at less than the company average. So counterbalancing would be if the traction we're seeing on the core customer continues, that would be somewhat of an offset. Ryan Mills: And Dave, if you're getting if I think what you're getting at, I don't think you would hear us call out the rec ship going forward when it comes to our gross margin performance. David Manthey: Okay. Fair enough. And then second, reshoring, are you seeing any benefits for reshoring at this point? And when you talk to your core metalworking job shops, are they relaying any optimism on that front? Or it's still vaporware at this point? . Erik Gershwind: So I would say if Dave, if the definition of reshoring is new plant build out, we're not seeing it. If the definition of reassuring is an existing global manufacturer that has capacity in multiple locations inclusive of the U.S. shifting manufacturing to the U.S. that we are there's tangible data points there, some of which were releases, I think, this week and last week. So that we're seeing, we're not seeing new greenfield build out. David Manthey: Right. Yes, I was thinking that if not necessarily that you're selling directly to that factory that's reshoring or expanding in the U.S., but your machine shops and the metalworking job shops might be seeing an increase in business as they're selling more product to domestic manufacturers. But yes, I don't know, I was just seeing if you're hearing anything along those lines. Erik Gershwind: I don't think we're seeing it like we're not seeing it in the numbers yet. I would say that there is there does remain some optimism about more production coming to the U.S. though. That headline is still there, right. Ryan Mills: Dave, I think about areas about auto. You heard some from some releases this week shifting more capacity manufacturing capacity into the U.S. I think as that comes to fruition, you'll start to hear some of that optimism trickle through into the job machine shops. Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Ryan Mills for closing remarks. Ryan Mills: Thank you, everyone, for joining us on today's call. Our next earnings call will be on January 7. In the meantime, we look forward to seeing you all at upcoming investor conferences. Have a good day. Bye. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to the First American Financial Corporation's Third Quarter Earnings Conference Call. [Operator Instructions] A copy of today's press release is available on First American's website at www.firstam.com/investor. Please note the call is being recorded and will be available for replay from the company's investor website and for a short time by dialing (877) 660-6853 or (201) 612-7415 and enter the conference ID 13756641. We will now turn the call over to Craig Barberio, Vice President of Investor Relations, to make an introductory statement. Craig, please go ahead. Craig J. Barberio: Thank you. Good morning, everyone, and welcome to First American's earnings conference call for the third quarter of 2025. Joining us today on the call will be our Chief Executive Officer, Mark Seaton; and Matt Wagner, Chief Financial Officer. Some of the statements made today may contain forward-looking statements that do not relate strictly to historical or current fact. These forward-looking statements speak only as of the date they are made, and the company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. For more information on these risks and uncertainties, please refer to yesterday's earnings release and the risk factors discussed on our Form 10-K and subsequent SEC filings. Our presentation today also contains certain non-GAAP financial measures that we believe provide additional insight into the operational efficiency and performance of the company relative to earlier periods and relative to the company's competitors. For more details on these non-GAAP financial measures, including presentation with and reconciliation to the most directly comparable GAAP financials, please refer to yesterday's earnings release, which is available on our website at www.firstam.com. I will now turn the call over to Mark Seaton. Mark Seaton: Thank you, Craig, and thank you to everyone joining our call. Today, I will provide a brief review of our earnings and share our outlook on the market. Today, we announced adjusted earnings per share of $1.70 for the third quarter, another strong result that highlights the resilience of our business. We continue to see 2 distinct market dynamics. Our commercial business delivered outstanding performance, while the residential market remains in a period of transition. Even so, our adjusted consolidated revenue grew 14% and adjusted EPS increased 27%. Commercial revenue increased 29%, and we set a record for average revenue per order at just over $16,000 per closing. The rebound in the commercial market began in the third quarter of 2024, which means the year-over-year comparisons are becoming more challenging. Nonetheless, even against tougher comps, we delivered another strong quarter with a 29% growth rate. We continue to see broad-based strength in commercial, led by the industrial sector which includes data center transactions, a consistently high-performing sub-asset class. Even excluding data centers, the industrial market remains robust, driven by sustained e-commerce demand for logistics and warehouse space. Multifamily was our second strongest asset class with solid performance across a wide range of geographies. Investment income grew 12% this quarter. Our investment portfolio, and particularly our bank continues to serve as a countercyclical earnings driver. The residential side of our business continues to navigate challenging market conditions. Purchase revenue declined 2%, primarily due to reduced demand for new homes. The purchase market has remained soft over the last 3 years, largely driven by affordability challenges and elevated mortgage rates. However, when purchase volumes begin to normalize and return to long-term trends, we are well positioned to capture growth, thanks to our operating leverage and strong relationships with local real estate professionals who play a critical role in driving purchase activity. Refinance revenue was up 28% this quarter. Although we've seen an uptick in volumes, the refinance market remains at historically low levels. Our home warranty business continues to post very strong earnings. Our pretax income was up 80%, driven by a lower loss rate, and we continue to grow our direct-to-consumer channel, which is offsetting the ongoing weakness in real estate. I'm optimistic about our long-term outlook. We're at the early stages of the next real estate cycle and our industry-leading investments in data, technology and AI position us to outperform as the market strengthens. By modernizing our platforms and integrating AI across our operations, we expect to drive significant productivity gains, reduce risk and unlock new revenue opportunities. further extending First American's leadership in the industry. Now I would like to turn the call over to Matt for a more detailed review of our financial results. Matthew Wajner: Thank you, Mark. This quarter, we generated GAAP earnings of $1.84 per diluted share. Our adjusted earnings, which exclude the impact of net investment gains and purchase-related intangible amortization was $1.70 per diluted share. Adjusted revenue in our Title segment was $1.8 billion, up 14% compared with the same quarter of 2024. Commercial revenue was $246 million, a 29% increase over last year. Our closed orders increased 6% from the prior year, and our average revenue per order was up 22%. Purchase revenue was down 2% during the quarter, driven by a 5% decline in closed orders, partially offset by a 3% improvement in the average revenue per order. While refinance revenue was up 28% compared with last year, it accounted for just 6% of our direct revenue this quarter and highlights how challenged this market continues to be. In the Agency business, revenue was $799 million, up 17% from last year. Given the reporting lag in agent revenues of approximately 1 quarter, these results primarily reflect remittances related to second quarter economic activity. Information and other revenues were $276 million during the quarter, up 14% compared with last year, primarily due to refinance activity in the company's Canadian operations, revenue growth in the company's subservicing business and higher demand for noninsured information products and services. Investment income was $153 million in the third quarter, up 12% compared with the same quarter of last year, primarily due to higher interest income from the company's investment portfolio partly offset by a decline in interest income from operating cash due to lower balances and lower short-term interest rates. Net investment gains were $6 million in the current quarter, compared with net investment losses of $308 million in the third quarter of 2024, which were primarily due to losses realized from the company's investment portfolio rebalancing project. Personnel costs were $543 million in the third quarter, up 10% compared with the same quarter of 2024. The increase was primarily due to incentive compensation expense resulting from higher revenue and profitability and higher salary expense and employee benefit costs. Other operating expenses were $276 million in the quarter, up 9% compared with last year, primarily due to higher production expense driven by higher volumes and increased software expense. Our success ratio for the quarter was 62%, which is in line with our historic target of 60%. The provision for policy losses and other claims was $42 million in the third quarter or 3.0% of title premiums and escrow fees, unchanged from the prior year. The third quarter rate reflects an ultimate loss rate of 3.75% for the current policy year and a net decrease of $11 million in the loss reserve estimate for prior policy years. Pretax margin in the title segment was 12.9% on both a GAAP and adjusted basis. Looking at October, we are seeing a similar pattern in opened orders to what we have experienced so far this year with a strong commercial market and sluggish residential market continuing. For the first 3 weeks of October, commercial orders are up 14%, while purchase orders are down 6%. The strength in commercial order activity is positioning us well for the remainder of the year and into 2026. Turning to the Home Warranty segment. Total revenue was $115 million this quarter, up 3% compared with last year. The loss ratio was 47%, down from 54% in the third quarter of 2024. The improvement in the loss ratio was primarily due to lower claim frequency, largely driven by favorable weather conditions. Pretax margin in the Home Warranty segment was 14.1% or 13.5% on an adjusted basis. The effective tax rate in the quarter was 23.1% and which is slightly below the company's normalized tax rate of 24%. Our debt-to-capital ratio was 33.0%. Excluding secured financings payable, our debt-to-capital ratio was 22.5%. This quarter, we raised our common stock dividend by 2% to an annual rate of $2.20 per share. We also repurchased 598,000 shares in the third quarter for a total of $34 million at an average price of $56.24. Now I would like to turn the call back over to the operator to take your questions. Operator: [Operator Instructions] And our first question comes from the line of Mark Hughes with Truist Securities. Mark Hughes: On the commercial ARPO revenue per order, obviously, 3Q is very strong. Could you talk about that, the sustainability, perhaps what you're seeing so far in 4Q? Mark Seaton: Thanks for the question, Mark. Yes, I would say it's sustainable. I mean typically, in commercial, there is some seasonality to ARPO, right? It usually builds throughout the year. And we think it will continue to build in Q4. We're just seeing a lot of momentum in commercial. There's a lot of big transactions. We track 11 asset classes. 10 of our asset classes were up in the third quarter year-over-year. The only one that wasn't up was energy, which has historically been a really good asset class for us, but Q4 is typically a big energy quarter. We've got some big deals in the pipeline. So just in terms of Q3, it exceeded our expectations. And we're really optimistic about what we see in Q4. So it's been a really good story for us. Mark Hughes: Yes. How about the outlook currently for investment income? I know you've talked about some historically some sensitivities, but kind of what should we anticipate in Q4? Matthew Wajner: This is Matt. Thanks for the question, Mark. So for Q4, we continue to see -- we think it will be down slightly sequentially just due to kind of some of the headwinds from rate cuts. But it should be modestly down sequentially. It's the expectation right now. Mark Hughes: Okay. And then when we think about the refi orders, what's the kind of recent trend in refi per day? Matthew Wajner: The -- so for the first 3 weeks of October, we're opening about 875 open orders per day in refi. Operator: The next question comes from the line of Terry Ma with Barclays. Terry Ma: I was hoping you could give an update on maybe just Sequoia and Endpoint in terms of the time line for the pilots. I think last quarter, you said Endpoint pilot was going to roll out December. Is that still on track? And then for Sequoia in the markets that you're piloting currently, any kind of early results? Mark Seaton: Yes. Thanks, Terry. Well, first of all, in terms of Endpoint, yes, we're still on track with everything we talked about in the third quarter. We -- the product is ready for testing. In fact, we got people here on campus last week and this week testing the product and testing is going well, and we are still on track to roll it out in our first office in December. And we're -- right now, we're planning on sort of a broader rollout in the springtime to kind of start rolling it out throughout the country. It's going to take us roughly 2 years or so to get it national, but it's something we're really excited about. Our current system, which we call FAST, we rolled it out in 2002, and so we've been on the system for 23 years. It's been a good system for us for a long time. But obviously, technology has changed and AI is here and we're really excited about Endpoint. It's going to give us productivity improvements we haven't seen before. It's going to be a great user interface for our escrow officers and it's really going to amplify their talent. It's going to reduce the mundane task or part of the escrow transaction and free up more time for our escrow officers to spend more time with the client. We're really excited about it. And we're really on track with everything since last quarter, since we talked about last quarter. So that's we keep hitting our milestones. In terms of Sequoia, we're also very optimistic about Sequoia. We really started Sequoia with the vision of having instant title for purchase transactions. It's never been done in the industry. There's instant title for refinance transactions. We've got a solution for that. Our competitors have solutions for that. Nobody has it for purchase transaction. And we're continuing to make milestones with Sequoia too. We have rolled out our AI engine for Sequoia and we're running live refinance orders through Sequoia today, and that's a big milestone. The product is out there. It's in production. It's in 3 counties. We've sort of exceeded our expectations in terms of the hit rates that we can get. And as of right now, the plan is to have our first purchase transaction go live in the first quarter. And so we -- that's been our plan, and it continues to be our plan, and we see really good progress with Sequoia as well. So we're going to start testing the purchase product in the first quarter. And that's similarly, it's going to take us roughly 2 years or so to do a national rollout. But when we do, we'll be able to produce a commitment faster arguably with more accuracy and cheaper than anything that's out here in the market. So we're really excited about really both Endpoint and Sequoia. Operator: The next question comes from the line of Bose George with KBW. Bose George: Just sticking to Sequoia and Endpoint, can you remind us just what the margin impact of those programs are of just running the 2 platforms and just the way to think about the time line for that kind of rolling off? Mark Seaton: Yes. Thanks a lot, Bose. One thing I would say is we initially broke out our -- we call it our margin drag from Endpoint and Sequoia early on because we really wanted investors to be able to evaluate the performance of our core title business without these investments that we were making with Endpoint and Sequoia. And at the time, we didn't know if they were going to work or not. There were big technological hurdles. We weren't sure it was going to work. Well, now we're -- we know it's going to work. I think there's still -- there's always questions on the timing of things, but we know that they're both going to work. And so we are integrating them into our core operations now. It's just part of our title segment. So we're not going to disclose the drag with endpoint Sequoia anymore. A, because we don't feel like it's fair to back that out. We want investors to judge us on our core operating performance, including those. And b, is because they're being integrated in their core operations before they were really stand-alone entities. But now it's just being -- it's harder and harder for us to track it just because they're being more integrated into what we're doing. So we're not going to give that anymore. Bose George: That makes sense. But I guess I'm just trying to think about -- but there will be a benefit as once they rolled out and your old platforms are shut down, right? So I guess because it's hard to quantify at the moment, but there is going to be that sort of benefit at the end of this process. Mark Seaton: There's no question about that, Bose. The last time that we have talked about the drag, it's been roughly 100 basis points. And so you don't spend 100 basis points just to get nothing. I mean, you spend 100 basis points to get more than 100 basis points, right? And so there's a few different ways to get value. The first is we're really supporting 2 different systems. I think for both Endpoints and Sequoia, we've got our old system where our business is running on the old systems. And then we have the new systems which are showing a lot of promise, but they have very little volumes, right? So we're really double paying with technology right now. And eventually, we'll get everything on the new systems, and there'll be some savings by shutting down the old systems. That's the first thing. The second thing is -- the thing we're excited about is it's not just a copy and paste in terms of productivity. I mean the new system is going to create a lot more productivity, and we'll see that. And the third is I really believe that we can gain market share for both of those products. And that remains to be seen. It's tough to gain market share in our business, but I think there's a lot of reasons to believe that more customers are going to want to do business with First American because of this modern platform that we have. And so I think there's 3 different levels of value creation and that will happen over -- gradually over time, you'll see incremental improvements. Bose George: Okay. That's helpful. And then actually just on the order count, the default and the other -- that line item has gone up quite a bit again. Is that -- I mean, are those like you sort of clients allocating product? Or just curious what's going on there. Mark Seaton: Just so you're looking at the default and other, Bose? Bose George: Yes. Just -- yes, the order count, just the increase in the order count in that other line item. Mark Seaton: I would just say, first of all, it's -- of all of our order counts, we look at purchase commercial refi and then of course, what you're referring to is the other. We have seen an increase in default activity. It's there, but it's -- I wouldn't say it's material and it's really not a material part of our business right now, but we have seen it. And there's like -- it's not necessarily like foreclosures. There could be some foreclosures. A lot of it is like loss mitigation work that we do in some alternative products. Operator: The next question comes from the line of Geoffrey Dunn with Dowling & Partners. Geoffrey Dunn: Mark, back on Sequoia, it doesn't seem like there's a demand for instantaneous title. So it really sounds like it's more about efficiency gains. But then obviously, you have political pressure picking up every so often according to the cost of title. So as you think about the longer-term profile of the business, is this just naturally where the business is evolving to and maybe you struggle to keep those gains? Or do you think that there's something more sustainable in those efficiency gains over time? Mark Seaton: Well, I think it's -- well, there's a few things there, Jeff. And I want to make sure I answer your questions, if I don't call me back, call me out on it. But first of all, I think for Sequoia, I don't know, I would take issue that the demand isn't there for instant title. I mean I've heard that, but I'll tell you, I've talked to customers and our sales team that think that instant title for purchase transactions is a big deal. And so maybe it is, maybe it isn't, but we're going to test it. We're going to be the ones that test it. And even if it's not, even in the worst case that it's not helpful to have an instant purchase transaction, right? And you can have an instant purchase transaction when the transaction won't close in 55 days. Even if it's not, we're really turning a labor product into a data product. And it gives us a lot more flexibility and innovation to create new products out there. So I think that it will be at advantages. And I think particularly on the agency side, if you can have a lower cost to produce your products, you're going to have an advantage out there. In terms of like the title waivers and where the market is going and are these sustainable? I mean we're in the title insurance business. We're not in the title waiver business. I think we've got a responsibility to consumers to not only a, protect consumers and lenders, but also to do it at a reasonable price point, too. And so there's been a lot of talk about the title waiver pilot. I just think the title insurance is going to be here, it's necessary. And the title waivers, we all, as an industry, have an obligation to do what's best for the consumer, both in terms of protection, protecting their property rights, but also we've got an obligation to make it affordable, too. And so we'll see what happens -- we'll see what happens and how the market develops. But I think particularly with Sequoia it just gives us a lot of strategic optionality going forward once it's naturally rolled out. Geoffrey Dunn: Okay. And then I thought it was interesting, you brought up AI directly in your press release, you mentioned again on the call. Can you give some examples of how you're using AI? And I guess, in particular, how much is AI coming into play with your kind of living title initiatives? Mark Seaton: It's a huge deal for -- well, okay, for both Endpoint and Sequoia, which we were reading a lot of questions on this call. And for good reasons, we're spending a lot of time talking about it internally and focusing on it. We started both of those initiatives and without AI. We started to reimagine the title production process through Sequoia and the settlement process through Endpoint, and it wasn't AI-driven at first. We wanted to build modern platforms. And really about 6 to 12 months ago, these AI models came out. These new LLM models came out, Agentic AI has come out, and it's really changed our thinking on how to do things. And so we pivoted -- and both of those are AI-native platforms. Now both Endpoint and Sequoia, they leverage AI at the core to build a better product than we were on pace to build just because these technologies have become available to us in the last year. So those are AI-driven and AI-native products that we're very excited about. And they're going to be -- they're just going to be better than the track that we were on. So we have this top-down approach with leveraging AI, but we also have a bottoms-up approach with leveraging AI. And we've got ChatGPT enterprise for all 19,000 of our employees. We just rolled it out in October -- October 1. And I'm very excited to see what that produces to. And I have anecdotes of us keeping customers because of AI, us reducing risk, us thinking about new ways to do our process. And so we have a top-down and bottoms-up approach. And I think the gains are going to happen over time. We're not going to wake up 1 quarter and see 300 basis points up margins because of AI. But I think over time, gradually, we will start to become more and more efficient as we as a company, learn how to use these technologies. Geoffrey Dunn: Okay. And then just specifically to the living title efforts, is AI a big part of that? Mark Seaton: It is, yes... Geoffrey Dunn: Or is that still... Mark Seaton: No, it's -- so the living title it is AI. And so I could go into more details on this. I'll just say that when I think of Sequoia now, it's an AI-driven product that is producing an automated title commitment for refis today and purchase tomorrow using AI. Operator: The next question comes from the line of Mark DeVries with Deutsche Bank. Mark DeVries: Looks like you only purchased about 20,000 shares after you reported 2Q results. Is there any color you can provide on why you pulled back and what you need to see to get more active? Matthew Wajner: Mark, thanks for the question. This is Matt. So yes, I mean we're continuing to focus on returning excess capital to shareholders. During the quarter, we raised our dividend. And like you mentioned, we repurchased some shares during the quarter. We purchased $122 million worth of shares this year. But at the time -- at this time, we paused our buyback program to just evaluate how things develop and consider whether there may be better uses for the capital. But we continually evaluate it, and we will be buying back shares opportunistically. Mark DeVries: Okay. It looks like you ended up delevering a little bit in the quarter. Could you just kind of discuss the range of debt-to-capital ratios you'll look to operate in and kind of where you'd expect to get more aggressive on using excess capital? Matthew Wajner: Yes. So over the long term of the cycle, we targeted debt-to-capital of 20%. Right now, we're a little bit over that at 22.5%. And which we feel very comfortable and because we're at the lower part of the market right now, lower part of the cycle. So it's okay for us to have a little bit of a higher debt-to-cap. And when you say we did levered, we didn't pay down any debt. We just -- as we generate earnings, we obviously generate additional capital. So it went from, I think, 23% to 22.5%. So we're comfortable where we're at. As the market continues to increase in the cycle turns, we look to get back towards the 20% over time. Mark DeVries: Okay. And are you guys seeing more of potential interest on the M&A front that could be a use of some of that excess? Mark Seaton: Yes, we are. We are seeing it. When the market initially fell in the first half of 2022, I think we were really hopeful that there would be acquisitions and deals to do. And we just really didn't see much. And over the last couple of years, we've really kind of leaned into the buyback, and we were -- felt really good about that. But now there are more things that are coming across our desk. And so we'll see if those deals close or what happens, but they're both on the title side and the non-title side. And there's just more opportunities today than there have been in the last couple of years. Mark DeVries: Yes, it makes sense. I mean is it fair to say that some of the weakness in the residential side is creating more and more pressure from potential sellers at this point? Mark Seaton: Yes, we're seeing that. We're definitely seeing that. So we're disciplined. I mean I would just say just on the M&A side, too, Mark, is we don't feel like we have to do anything. We're not just trying to grow for the sake of growing. The deal has to make sense and it has to be strategic, and we have to make sure we have a good expected outcome in terms of the financials. So if we don't do any deals, we're fine with that. But we do think what we know, there's just more and more opportunities that are rising because the sluggish market has lasted a long time. And I think more and more people are calling us now. Operator: The next question will come again from the line of Mark Hughes with Truist Securities. Mark Hughes: Yes. Mark, you'd mentioned the title waiver, you're proposing a title solution. Anything new on the regulatory front, either on the demonstration project or maybe even on the rate front at the various states, anything new? Mark Seaton: I would say there's nothing new since last quarter. I mean, the title waiver pilot is still going on, and we're just on the sidelines waiting to kind of -- and we're sort of monitoring results and seeing where that goes. There's been nothing new on that front. On the state front, I would say there's nothing new. I mean the most material thing that is the Texas rate issue. And again, that's not new from the last call, but there's -- the industry now is expecting a 6.2% rate cut in Texas in March. It's not final yet. There's still another hearing that needs to happen, but I think that's the -- that's what we're sort of expecting internally. That's probably the biggest news on the rate side. But again, that's not new since the last call we had. Mark Hughes: Yes. And then when we think about net investment income for 2026, any early thoughts there? Matthew Wajner: Yes, Mark, from an early thought perspective, when I look out into '26, right, the obvious headwinds for interest -- for an investment income are the expected rate cuts and then we've already gotten a rate cut this year. So as a reminder, each 25 basis rate cut -- basis point rate cut impacts us by $15 million on an annual basis. So each rate cut will reduce investment income by approximately $15 million based on kind of current balances. I would say the offsets that we have potentially for next year that could help that are, one is we are expecting growth in kind of all of our markets that matter to us, specifically commercial and moderately in purchase. And if we get growth in transaction levels and transaction volumes, we can -- we'll get growth in deposit balances. So we'll have a higher balance rate or a higher level of balances, which will be helpful. The other thing that we did recently towards the end of Q3 is we made some operational enhancements at our bank, which now allows us to put 1031 exchange deposits at our bank. So historically, we had to put those positive third-party banks, and now our bank can handle those deposits, which will just increase the economic value of those deposits. And that will be a tailwind going into next year. That will hopefully offset any impacts of rate cuts. Mark Hughes: And just a follow-up on that. So the -- is the kind of takeaway message, the balances, the operational enhancements, maybe offsetting the rate cuts and so therefore, kind of a more stable outlook for '26? Matthew Wajner: I'd say it's too early to say, right? And it's dependent on the level of activity and the level of rate cuts. But right now, where we sit, we would probably see investment income being down year-over-year. Operator: Thank you. There are no additional questions at this time, and this will conclude this morning's call. We'd like to remind listeners today that today's call will be available for replay on the company's website or by dialing (877) 660-6853 or (201) 612-7415 and enter the conference ID 13756641. The company would like to thank you for your participation. This concludes today's conference call. You may now disconnect.
Operator: Good morning, and welcome to the Darling Ingredients Inc. conference call to discuss the company's third quarter 2025 fiscal results. [Operator Instructions] Today's call is being recorded. I would now like to turn the call over to Ms. Suann Guthrie, Senior Vice President of Investor Relations. Please go ahead. Suann Guthrie: Thank you, and thank you for joining the Darling Ingredients Third Quarter 2025 Earnings Call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer; and Mr. Bob Day, Chief Financial Officer. Our third quarter 2025 earnings news release and slide presentation are available on the Investor page of our corporate website, and it will be joined by a transcript of this call once it is available. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's press release and the comments made during this conference call and in the risk section of our Form 10-K, 10-Q and other reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. Now I will hand the call over to Randy. Randall Stuewe: Okay. Thanks, Suann. Good morning, everyone, and thanks for joining us for third quarter earnings call. Our core ingredients business delivered its strongest performance in 1.5 years fueled by robust global demand and exceptional execution across all operations. While the renewables market is facing some short-term uncertainty as we wait for clarity on the renewable volume obligation, we're confident that momentum is building. We believe we're on the verge of a shift that will highlight the strength of Darling's integrated model, a competitive advantage that is unmatched in the industry. Our combined adjusted EBITDA for third quarter was $245 million as our Global Ingredients business performed strong with $248 million of EBITDA. As I mentioned, the renewables business continues to be challenged as we posted negative $3 million EBITDA for DGD, which included a lower of cost or market expense of $38 million at the entity level. Bob is going to discuss more details later in the call. But I will say that both LIFO and LCM were negative in the third quarter, which is unusual and does not typically happen for extended periods. In addition, uncertainty and continued delays in getting a final RVO ruling had a negative impact on the overall biofuel environment in the U.S. during the quarter. Now in our feed segment, in our Feed Ingredients segment, global rendering volumes margins were up both sequentially and year-over-year, driven by strong demand for fats and proteins and solid execution by our global operations and marketing teams. In the U.S., robust demand for domestic fats, supported by a strong national agriculture and energy policy helped boost revenue and margins. elsewhere in the world, our global rendering business, particularly in Brazil, Canada and Europe demonstrated stronger year-over-year performance. Export protein demand is showing signs of recovery with slightly firmer pricing trends emerging. Tariff implications, primarily China and APAC countries clearly have impacted our value-added poultry protein products, which serve to meet the needs of global pet food and aquaculture customers. Turning to our Food segment. Performance remained steady quarter-over-quarter sales dipped slightly in the quarter as customers responded to ongoing tariff volatility, but we offset that with strong raw material sourcing and disciplined margin management. We continue to see repeat orders for our next Nextida Glucose Control product and early studies on new formulations look promising. We're on track to launch our new next Nextida product in the back half of 2026. In our fuel segment, the renewables market continues to face headwinds. This quarter, we saw higher feedstock costs, lower RINs and LCFS pricing, which ultimately impacted margins. A scheduled turnaround of DGD3 led to reduced volumes of renewable diesel and sustainable aviation fuel and DGD1 remains idled until margins improve. We believe these pressures are temporary. As mentioned earlier, we're approaching the rollout of thoughtful public policy aimed at strengthening American agriculture and energy leadership, a shift that we believe will significantly enhance DGD's earnings potential. Now with that, I'd like to hand the call over to Bob to take us through some financials, and I'll come back at the end and give you my thoughts for the balance of 2025. Bob? Robert Day: Thank you, Randy. Good morning, everyone. As Randy mentioned, core business results for third quarter improved as expected, while DGD faced some challenges that we'll explain later in the call. Specifically, third quarter combined adjusted EBITDA was $245 million versus $237 million in third quarter 2024 and $250 million last quarter. Adjusting for DGD, the quarter was very solid at $248 million versus $198 million in 2024 and $207 million last quarter. Total net sales in the quarter were $1.6 billion versus $1.4 billion while raw material volume remains steady at 3.8 million metric tons and gross margins improved to 24.7% for the quarter compared to 22.1% last year. Looking at the Feed segment for the quarter, EBITDA improved to $174 million from $132 million a year ago. Total sales were $1 billion versus $928 million, Feed raw material volumes were approximately 3.2 million tons compared to 3.1 million tons and gross margins relative to sales improved nicely to 24.3% versus 21.5%. In the Food segment, total sales for the quarter were $381 million, higher than third quarter 2024 at $357 million while gross margins for the segment were 27.5% of sales compared to 23.9% a year ago, and raw material volumes increased to 314,000 metric tons versus 306,000. EBITDA for third quarter 2025 was up significantly compared to 2024 at $72 million versus $57 million. Moving to the Fuel segment, specifically Diamond Green Diesel. Darling's share of DGD EBITDA was negative $3 million for the quarter versus positive $39 million in the third quarter of 2024. While the environment for renewable fuels has been challenging, results were further impacted by 2 items. First, a catalyst turnaround at DGD3, Port Arthur, which included a pause in operations for approximately 30 days, limited staff production and the higher average margins associated with that product. And second, end of quarter market dynamics led to negative impacts on earnings from both LIFO and LCM which, in most cases, would move in the opposite direction and have an offsetting impact. Regarding LIFO, rising feedstock prices throughout the quarter and higher quarter ending values resulted in a negative impact to EBITDA, while LCM was impacted by lower heating oil and RIN values in the days after quarter end, resulting in an LCM loss of around $38 million at the entity level. After 3 quarters, the combination of LIFO and LCM has resulted in a wider than normal loss that should reverse course over time. In addition to those 2 items, the biofuel market in the U.S. has been challenged by policy delays, specifically delays in RVO enforcement dates for 2024 obligations, clarity around small refinery exemptions, SREs, SRE reallocations and the final RVO ruling for '26 and '27. However, the EPA made a supplemental proposal on September 18, that would be very constructive. In the first page of the appendix in the shareholder deck that we provided, we've shown a picture of the 2025 RIN supply versus demand, showing how these policy issues have led to an oversupply for 2025 and also showing what the balance looks like considering the EPA's proposal comparing 50% SRE reallocations and 100% reallocations for '26 and '27. In either case, a significant amount of additional U.S. biofuels would be needed to satisfy that RVO, suggesting higher prices for feedstocks, farm products and wider margins for biofuels. With lower biofuel margins and late in the year timing related to receiving production tax credit PTC payments, we contributed $200 million to DGD during the quarter. a total of $245 million year-to-date, which includes a $5 million contribution subsequent to quarter close. These contributions are offset by the $130 million dividend received in first quarter 2025 and payments from expected sales of around $250 million of PTCs that we expect to receive in the fourth quarter. To further clarify regarding PTCs, we expect to generate a total of around $300 million in 2025. During the third quarter, we agreed to the sale of $125 million. We anticipate an additional $125 million to $170 million of sales in the fourth quarter and we estimate receiving payment for around $200 million of the total $300 million we will expect to generate by year-end 2025, the balance of which we expect to monetize in early 2026. Overall, we are very pleased with how the market has developed for production tax credits. Demand is robust as potential buyers have become more familiar with the details surrounding the credit. Other fuel segment sales, not including DGD, were $154 million for the quarter versus $137 million in 2024 despite lower volumes of 351,000 metric tons versus 391,000 metric tons which were affected by animal disease in Europe. Combined adjusted EBITDA for the fuel segment was $22 million in the quarter versus $60 million in the third quarter of 2024. The difference was primarily due to lower earnings at DGD. As of September 27, 2025, total debt net of cash was $4.01 billion versus $3.97 billion ending December 28, 2024. The increase from year-end is minimal despite contributions made to DGD and a $53 million earn-out payment related to the FASA acquisition from 2022. Capital expenditures totaled $90 million in the third quarter and $224 million for the first 9 months of 2025. We expect total debt to decrease by year-end as we generate cash from the core business and receive payments from selling PTC credits. Our bank covenant preliminary ratio at the end of third quarter was 3.65x versus 3.93x at year-end 2024. In addition, we ended quarter 3, 2025, with approximately $1.7 billion available on our revolving credit facility. The company recorded an income tax benefit of $1.2 million for the 3 months ended September 27, 2025, yielding an effective tax rate of minus 6.3%, which differs from the federal statutory rate of 21% due primarily to recognition of revenue from the production tax credits. The company paid $19 million of income taxes in the third quarter and $52 million year-to-date and expects to pay approximately $20 million more in the fourth quarter. Overall, net income was $19.4 million for the quarter or $0.12 per diluted share compared to net income of $16.9 million or $0.11 per diluted share for the third quarter of 2024. Now I will turn the call back over to Randy. Randall Stuewe: Thanks, Bob. I couldn't be more excited about what's ahead for Darling Ingredients. And our conversations with the Trump administration, they followed through on everything they've committed to. The renewable volume obligation they've drafted is thoughtful and designed to support American agriculture and energy leadership. And we believe it will be a major catalyst for Diamond Green Diesel. The pieces are in place, and we believe it's only a matter of time before Darling's unmatched position in the industry becomes even more clear. As we look ahead, we remain focused on what we can control, given the current uncertainty around public policy and its impact on the fuel segment, we'll now provide financial guidance exclusively for our core ingredients business. For the full year 2025, we expect the core ingredients business EBITDA, excluding DGD to be in the range of $875 million to $900 million. With that, let's go ahead and open it up to questions. Operator: [Operator Instructions] The first question comes from the line of Thomas Palmer with JPMorgan. Thomas Palmer: Maybe just to start out, you gave some helpful scenario analysis for RIN balances and how that might proceed over the next couple of years in the earnings presentation. I wondered about what you think the most likely time line is that we might start to get clarity on some of these outstanding regulatory items, the RVO, the exemptions and then the reallocation. Robert Day: Thanks, Tom. This is Bob. Obviously, a difficult question to answer. As everyone is aware, the government has shut down. At the same time, we've heard that the RVO is considered an essential process. We have people there at the EPA that are working on this. So we're optimistic based on that view and the things that we're hearing, we expect sometime in the month of December to have the comment period closed or the EPA to submit to the Office of Management and Budget their proposal and to have something approved by the end of the year. But like I said, that's amid a lot of things going on, but that's our view. Thomas Palmer: Okay. I know it's a unique situation. And then I just wanted to clarify on the Feed outlook for the fourth quarter. The midpoint of the core ingredients EBITDA guidance implies for the kind of 3 combined segments that 4Q is comparable to what we saw in 3Q. At the same time, it does look like the price of waste fats and oils have dipped a bit in September. So do we need prices to rebound in order for 4Q to look similar to 3Q? Or are there other things we should be considering as we move from 3Q to 4Q? Randall Stuewe: Yes. I mean, Tom, this is Randy. I mean the $875 million to $900 million, the reason we put the range on there was exactly as you laid out. We have seen, given the uncertainty on policy waste fat prices come down a little bit here most of our material in North America is going to DGD. But remember, there's still Brazil and Canada and prices remain strong there. So ultimately, it's kind of -- it's a fairly narrow range for the business. As I look around the horn on DGD, I expect the Food segment to be stronger a little bit in Q4, maybe a little consistent, maybe a little on the Feed segment. But I think we'll come in close to that range. And hopefully, we can surprise you 1 day and be above it. Operator: The next question comes from the line of Conor Fitzpatrick with Bank of America. Conor Fitzpatrick: It looks like your RIN supply and demand table in the slides calls for significant biomass-based diesel feed imports through 2027. As a coastal operator, DGD may import feed and receive the RINs penalty on those gallons but could you maybe walk through the benefits to RINs policy protectionism on the feed side and maybe explain how that nets out within your U.S. fuel and feed businesses? Robert Day: Yes. Thanks, Conor. This is Bob. If I don't answer your question directly, let me know. I think the first thing I would say is, it's still not totally clear how the EPA is going to treat foreign feedstocks. That's a part of this process. As to whether foreign feedstocks are needed to meet the production and the obligations. It's going to depend on a lot of things. We do have a lot of crop -- crops and crop oils in the United States and overall North America that could be used as feedstock for biofuels. So until some of the rules around what -- if there are penalties for foreign feedstocks and how some of the crop oils are going to be treated, it's really hard to answer that question. I will say that I think when you look at overall supply and demand for fats and oils in North America and you include biofuels and food and this picture and this proposed RVO from the than probably some foreign feedstocks will be required to meet that mandate. And we're just not clear yet on how that will be accommodated. Operator: The next question comes from the line of Dushyant Ailani with Jefferies. Dushyant Ailani: Congrats on the quarter. I also wanted to note that we really appreciate the change in guidance approach that does help us. My first question was on the 3Q DGD margins. The capture was significantly better than expected. What are some of the drivers there? Robert Day: The third quarter capture was better? Is that what you said? Dushyant Ailani: Yes. Yes. For the DGD margins, it just came in better than expected. Was it like staff production or any export ARP that we can think of? Robert Day: Yes. I think the -- so I'm not sure I fully understand the question because the DGD result was maybe not as good as we hoped... Randall Stuewe: I'll help Bob here a little bit. I think, Dushyant, you're referring to the capture that Valero reports. And keep in mind here, this is a bit awkward in that they met their LCM against their other segments. So they had the same LCM we have. They just didn't put it against the renewables or DGD segment. So that's what makes the capture rate look better. Dushyant Ailani: Got it. Okay. That's helpful. And then maybe just staying on topic for the 4Q DGD margins. But we understand the nuance on removing the DGD guidance. It seems like fundamentals are still improving nicely. Indicator margins are up, again, Valero's indicator margins seem to be up $0.36 quarter-over-quarter. What are you seeing in 4Q? And how do you kind of think about that? What are some of the puts and takes, if you can share? Randall Stuewe: Yes. I mean this is kind of the challenge that's out there. I mean clearly, the 2 big units in Port Arthur and Norco are going to be operating at capacity. SAF is going to be at capacity yes, the capture indicator is stronger right now. The challenge for us is we thought by this time, we would have RIN values kind of starting to reflect the restarting of the industry and they really have it yet. So it's kind of hard. I mean we're the low-cost operator. We have enough feedstock to run our units. Our SAS margins are better than classic renewable diesel. And what else you want to add Bob? Robert Day: Well, I think we have seen an improvement in margins so far in the quarter. The question is just -- or the point here is until we get clarity on the final ruling on the RVO for '26 and '27, it's hard to it's hard to say with certainty that those margins are going to continue. But thus far in the quarter, yes, we've seen some improvement. That's for sure. Operator: The next question comes from the line of Manav Gupta with UBS. Manav Gupta: My first question is we saw a good improvement in your Feed segment margins. I think Randy, over the years, you had indicated that eventually those acquisitions coming in you would be able to drive improvement in those fronts. So help us understand some of the factors that drift help you drive a movement in the Feed segment margin? And also to an earlier question, yes, imported feedstocks might be needed, but domestic feedstocks will price at a higher premium because they'll get 100% win. So what would be the outlook for the Feed segment going into 2026. If you could talk a little bit about that? Randall Stuewe: Yes. I mean, clearly, as we've talked in Q1 and Q2, we've used the word building momentum. We were seeing feedstock prices come up what we've seen mostly is feedstock prices are flowing through now, although they've come off a little bit for Q4, but we're seeing protein prices improve around the world. It's -- I call it there's a tariff on 1 day, a tariff off 1 day. China needs to buy poultry proteins to feed aquaculture and whether it's China or Vietnam when the window opens, they trade. And so we've seen a pretty nice improvement. You can look sequentially, you can look year-over-year in the appendix of the supplier or the shareholders' debt there. and ultimately see the pricing movement. Clearly, fat prices were up sharply. The products we use at DGD and -- but protein prices were up 10%. So I think we're going to carry into Q4, remember, we're always about 60 days sold ahead. And so we'll carry some pretty strong prices into Q4. And I'm hoping that as we move into next year, we'll have kind of the same momentum. There's always a little bit of seasonality here, but really, that's kind of what I'm expecting as I look out there. Manav Gupta: Perfect. My quick question on the table that you have created. It's very helpful. But help me understand, here you're assuming a flattish capacity. We know there are facilities which are heavily dependent on foreign feedstocks at this point of time, and they are still struggling I think they will struggle even more next year if you decide to give only 50% RIN to imported feedstocks. So is there a possibility this RIN balance would look even more attractive if some of those facilities that are heavily dependent on imported feedstock actually decided to call it a day and shut down. Randall Stuewe: Yes. I think Bob and I will tag team this. My answer is we went into 2025 with the belief that the DGD margins would be no lower than they were in 2024. And we were wrong. And where were we wrong? Well, we didn't understand that the big oil guys would actually run at such significant losses to produce their own RINs. We believe that's changing as we come into 2026 and 2027. The losses at those plants are substantial. I mean it clearly shows how efficient and operationally effective DGD is. The RIN balance that Bob will talk about here in a minute, yes, it actually gets even more constructive if people behave rationally. Robert Day: Yes. And I'll just add, I think all of that is true. In addition, the proposed RVO for '26 and '27 is substantially larger than 2025. So even if we had similar production, as you noticed from the grid that we provided, then we will ultimately have a deficit in '26 and '27. And what this is intending to show is specifically that. And then beg the question, how much do margins need to improve in order for production to increase so that we can satisfy the mandate '26 and '27. You add a layer of complexity when you -- with the imported feedstock and if imported feedstock only generates half a RIN. I think that some of that is going to depend on what is the origin tariff placed on that feedstock -- if a feedstock, if a foreign feedstock only is penalized by getting half a RIN and then not being eligible for the PTC, then it's reasonable to expect a decent amount of foreign feedstocks to competitively come into the United States. It would just come in at a discount to the U.S. feedstock prices which, again, is constructive to the feed business and our core rendering business in the United States, but it would allow for satisfying the mandate for the RVO but it would -- again, it suggests that margins need to go up quite a bit in renewable diesel in order for that to happen. Operator: The next question comes from the line of Pooran Sharma with Stephens Inc. Pooran Sharma: I just wanted to maybe just peel into to that last answer you gave there, Bob. I know in the past, you have kind of walked through different RIN pricing scenarios and there are a little moving pieces here just with how foreign feedstocks will get counted. But just as it stands now, no PTC, half a rent for the foreign need stocks, are you able to quantify like what range RINs should be at in order for the industry to run, to meet the mandate in 2026? Robert Day: So this is going to be somewhat of a swag here because like you said, there are a lot of moving pieces. And if we assume that there's -- we have access to our origin feedstocks that don't face a significant tariff. And the primary source of the penalty is the half rent and lack of access to a PTC. Then we probably need RINs to go up $0.40 or so in order to incentivize enough production to satisfy the mandate for '26. If the SRE reallocation is only 50%. Pooran Sharma: Great. Great. Appreciate that. My follow-up, I just kind of wanted to focus on the balance sheet more specifically your debt and leverage. I wanted to revisit what your plans are to pay off debt. And I also wanted to ask, what are your restrictions? Like what leverage ratios do your debt restrictions, the covenants start kicking in at? Robert Day: We're nowhere near breaking any covenants. I think we've said before, we're committed to paying down debt. We've got a lot of headroom in our revolver due to circumstances around receiving cash payments from selling production tax credits we will be receiving more cash in the fourth quarter, and we didn't receive any cash from production tax credits in the third quarter. And so by the end of the year, we expect our debt coverage ratio as it's viewed by the banks, to be right around 3x. So that's really -- that's our position on that. Randall Stuewe: And long term, Pooran, we've got a financial policy agreed in the board room to go down to 2.5x. It doesn't take much for the restart of DGD to start to do that. We've not been in a capital deprivation or starvation mode of any of the factories globally. So we're in good shape here to continue to build this thing out and grow and delever at the same time. Operator: The next question comes from the line of Ryan Todd with Piper Sandler. Ryan Todd: Sorry, I know you talked a lot about this, but maybe one more follow-up on some of the regulatory uncertainty. I mean the -- as we wait for the final RVO, I mean, you've talked about the uncertainty around reallocation and a couple of other things. What are some of the other topics that you think are still being kicked around. Is there a possibility of any change in the approach to import of foreign biofuels? Are they still -- is there still a consideration in terms of the treatment of domestic feedstocks in terms of carbon intensity, like land use penalties and stuff like that? And what are some of the potential risks or positive things you think could come out of the final ruling there outside of just kind of the high-level RVO and the reallocation? Randall Stuewe: Well, I think, Ryan, this is Randy and Bob and I'll kind of tag it again here if I leave anything out. I mean, clearly, American agriculture is at the forefront of the discussions in D.C. right now. Clearly, when you lose your largest customer for soybeans, when you get beef prices as high as they are, you've got a lot of people in the room that have ideas on how to fix the situation. And so what we've been part of, as many of these discussions is, what's the easy button. The easy button here is a large SPO for RVO with a 100% reallocation. Now if you go back and you look, really, the ETA gave you a multiple choice test. It's at either 50% or 100%, but if you're really inclined, you can talk about something else you'd like. And so they've set the table there. Clearly, the PTC out there is -- doesn't encourage foreign feedstocks. So I mean that's a block in itself with a tariff on top of that even makes it more difficult. We've had discussions in D.C. and we said, well, the easy button is that, just remember, if you don't allow foreign feedstocks in here because they can't generate a credit then, oh, by the way, where are those feedstocks going to go and the room goes silent. They finally got it. They realize those stocks are going to go back to other processors, you can probably name who they are around the world in Singapore and Rotterdam and Porvoo, Finland. And then they're going to move finished RD on top of us and that's disruptive to what they're trying to accomplish. So they're trying to figure out right now how to manage that under the tariff code. So you've got the U.S. trade along with the EPA collaborating, trying to figure out how to put this together to accomplish the needs that are going to produce energy and be constructive to the U.S. farm community. Robert Day: Yes. And I'll just add that as we sit here today, the EPA has already proposed a 50% RIN generated for foreign biofuel, no access to PTC. So -- that in and of itself makes it more difficult. But as Randy said, there's a lot of momentum to preventing foreign biofuels to come in and participate in U.S. support programs. So we're pretty confident that, that's going to work out well as it relates to feedstocks, that is another thing that we're waiting for clarity on and whether they're going to enforce the 50% RIN concept or if we're -- foreign feedstocks are simply going to be limited by origin tariffs. Ryan Todd: Okay. And then maybe just -- I mean you talked about -- you provided a little bit of clarity around PTC monetization. You've had a couple -- you're a couple of quarters into the experience of a few quarters in the experienced production under the PTC regime, you're getting more consistency. Can you talk about how the monetization market seems to be working there? Have the discounts been fairly stable? And how should we think about the general ratability of the process at this point? Is the $125 million this quarter, $150 million at the midpoint next quarter? Is that like a -- are you in a fairly ratable place now in terms of monetizing the majority of your production? Robert Day: Yes, I think so. I think the context here is that there were 2 things that made it difficult earlier in the year to sell production tax credits. One is that not many counterparties were familiar with the credit itself. So there was lots of questions. The value of the credit is determined in part by carbon intensity. So you can just imagine for industries looking to buy tax credits that aren't familiar with our biofuel industry trying to understand all that is not an easy thing. And then the other is that most companies had -- it was pretty cloudy what their tax liabilities were going to look like at the end of '25 because of the Big Beautiful Bill and a lot of things that went on around that. So early in the year, it was difficult to get a lot of traction. That's obviously changed significantly. Both of those pictures are a lot more clear. And so yes, I think that for us, we're confident in our ability to sell a majority of the credits that we'll generate in 2025 and then it should be a pretty ratable process through 2026. Randall Stuewe: Yes. I think just one last piece to that is I would characterize the environment is there is more interested parties now. than there were earlier in the year. So it's now getting a chance to define terms, refine terms and pick the counterparty that we want to deal with, with timing respective to when to receive the cash. So it's a very constructive environment now. Operator: The next question comes from the line of Derrick Whitfield with Texas Capital. Derrick Whitfield: Regarding guidance, I appreciate the position you guys are taking with the more volatile DGD business segment. With that said, we are seeing better stop margins in 4Q for most feedstocks and specifically for tallow and yellow grease. Would it be fair to highlight that DGD could post the best quarter in 2025 at current margins which, again, will be a positive development as you enter 2026? Robert Day: Yes. Thanks, Derrick. I think that would be fair. I think one of the things we're sensitive to is just how uncertain policy has been and the impact that, that's had on margins. I mean, look, we're very optimistic about improvement in the fourth quarter and the outlook for next year. But we realized that the market at large really wants to see proof of that before estimates believing a lot of what estimates are out there. So I think that we are encouraged by what we've seen so far in the quarter, and we think the outlook is good, but we're just hesitant to define that with a lot of precision, just given the lack of clarity around policy that we're still facing. Randall Stuewe: Bob, can you comment on what it takes to trigger RIN and obligations and when that would happen? Robert Day: So with the enforcement dates and -- yes. I mean, I think one thing that has caused a real delay in the reaction of the RIN, has been the movement of the 2024 enforcement date from March 31 to December 1. Until we get the final ruling on the '26 and '27 RVO and clarification as to when the 2025 enforcement date is going to be. It's difficult for obligated parties to feel that they're incentivized to go and buy all their RINs, especially when so many small refinery exemptions were granted for the small refineries out there that are wondering whether they should buy RINs they have an incentive to wait when the obligation date is set at a later time in the event that they get an exemption. And so what Randy is alluding to is until some of those things are clarified, which we do think is going to happen around the end of the year. But until those things are clarified, the incentive to buy RINs and tighten up the RIN S&D doesn't exist the way that it's intended. And so it's just -- it gets a little bit difficult to forecast. But we -- to your point, Derrick, we have seen an improvement in margins so far in the quarter. The outlook is better, and we're very optimistic about 2026. Derrick Whitfield: Great. Understood. And as my follow-up, we've seen the RD market in Europe strengthen in recent months. If you guys work through the complex math of spreads, shipping and tariffs, to what extent could you access this market if it remains robust? Robert Day: We can access that market, but we pay a duty to access that market. So -- and that duty can fluctuate a bit, but it's typically over $1 a gallon. So we are selling consistently to that market. Our Diamond Green is. But it's just -- it's -- we're looking at it as a net of duties and comparing that to other markets we have available. Operator: The next question comes from the line of Matthew Blair with TPH. Matthew Blair: I was hoping you could talk a little bit about the feedstock mix at DGD. And I know that you're always looking to optimize and some of this is commercially sensitive. But just on a big picture basis, it looks like some of the indicator margins for RD made from vegetable oil are trending a little bit better than RD made from low CIP. So -- just overall, has DGD shifted to more of a veg oil mix? Or is it still pretty much all low CIPs? Robert Day: Yes. Thanks, Matthew. This is Bob. So I wouldn't -- DGD hasn't materially shifted its mix as I think you're aware, DGD1 is still down if DGD1 were to go back up and run, then that mix would shift more towards soybean oil. But as we sit here today, the mix hasn't changed a lot. Our best margins are on UCO and yellow grease and animal fats. And so we're going to maximize the opportunity we have to use those products. Randall Stuewe: Yes. The only thing that I would add, Matthew, is that clearly, in Q1 and Q2 as we were trying to figure out the rules around the PTC and 45Z redomesticating our supply chain was a pretty significant challenge. DGD is heavily reliant now on Darling's UCO and Darling's yellow grease and animal fat supply. And so we've got that up and running full speed now, and it's really visible now that you can see it in the earnings of our core ingredients business. And ultimately, it will translate into a better sales value within DGD. Matthew Blair: That's helpful. And then apologies if I missed this, but the contributions that Darling is making to DGD is that to help fund the DGD3 turnaround? Or why is Darling sending money back to DGD? Robert Day: Yes. And it's hard. So the answer to that question, some of that's timing, some of that is turnaround. Some of that is just the margin structure. So remember, that the PTC revenue that we will get as Darling, that flows directly to the partners. So that money doesn't stay inside of Diamond Green Diesel. That's number one. The other is, as you pointed out, in 2025, we've completed 3 catalyst turnarounds. And so our maintenance CapEx is higher in 2025 than normal. So it's really the timing of all those things that's led to the contributions that we've made. Operator: The next question comes from the line of Jason Gabelman with TD Securities. Jason Gabelman: I wanted to go back to something else that Bob had mentioned just around companies complying with their RIN obligations and that perhaps catalyzing stronger RIN prices. Can you talk about, I guess, more specifically the time line around that I think 2024 RINs are due December 1. And then at that time, the balances for 2025 should become more visible to the market. So do you expect that December 1st deadline to hold? And do you think that could be an initial catalyst to move RIN prices higher before we get the final RVO for '26 and '27? Robert Day: Yes. Thanks, Jason. So I do think that, that deadline will hold. I don't know that it will have much of an impact on RIN prices because all the RINs that have been procured so far in 2025 can ultimately be used to satisfy the obligation for 2024. And that's quite a long time and a lot of RINs. There may be some refiners who are waiting until the last moment to buy their RINs. But because we've had so much time in 2025 to do that, we're not expecting that, that's going to result in a significant lift to RIN prices at that time. If we have clarity around enforcement dates for 2025, going back to the March 31, 2026, as they normally would be. That would be a time when we would expect RIN values to probably see a lift. Jason Gabelman: Got it. That's helpful. And then my second one is hopefully a simple question. Just given on the screen, DGD margins have improved. It seems like it could be the margin signal could be there to restart DGD1, so wondering what exactly you need to see to have confidence to restart DGD1? Robert Day: So we've talked about this before. DGD1 went down for a catalyst turn around early in 2025. Given the changes in the PTC and the origin tariffs on so many of the feedstocks, our view is that DGD1 only makes sense to restart at least in the current environment with the current RVO under the current rules when soybean oil can be profitable, and profitable means a margin that's good enough for a long enough outlook that justifies burning up a catalyst. And so I think, certainly, we're a lot closer to that than we have been. We may get there, but it definitely looks a lot better than it did a few months ago. Operator: The next question comes from the line of Andrew Strelzik with BMO. Unknown Analyst: This is Ben on for Andrew. My first question is around the Food segment. And just a commentary there that when it's maybe some weakness exiting third quarter and into fourth quarter. So I was just hoping you could just walk us through your outlook for the next few months in the food segment. Randall Stuewe: Yes, I think what we were trying to put in the narrative is clearly tariff on, tariff off, up to 50, [ fentanyl ] tariffs, trying to figure out the supply chain was very confusing for our customers in Q3 and so the choice was to pull down domestic inventories. So remember, most of our Brazilian production comes into the U.S. that's in the hydrolyzed collagen peptide form, very successful product for us. . And so we had some delays in orders there. We think it will pick up and be a stronger Q4. That's about all the color that I can give you today on it. And what we've seen is a continued rebound of the hydrolyzed collagen business. And while our new Nextida products are making a foothold in the industry, they're still relatively minor in the contribution of that segment. But they are as we quoted in there, we're getting repeat orders, which is a great thing. By next summer, we're going to launch what I think will be called Nextida Brain, and that will be a brain health product and it's got a really great outlook, too. Unknown Analyst: Well, that's great to hear. And then on my next question, something that kind of, I think gets lost in the weeds sometimes or at least lately, California LCFS credit value, they've been generally stable at weak levels. Can you remind us of the expected time line of triggers that should propel these values higher eventually? Robert Day: Thanks, Andrew, this is Bob. I think as we know, there was quite a bit of a delay in the implementation of their step down to increase the greenhouse gas obligation, reduction obligation in California. And so -- as a result of that, that bank got built up so large that most of the obligated parties from our perspective had a sufficient number of credits where they -- even with the change in the ruling they didn't need to go out and immediately buy credits. Our view is that they are working their way through those credits and that sometime in 2026, we'll start to see that S&D come more into balance and steady increases in the LCFS credit premium. But it's hard to -- I think we believe it will be more steady than sort of a step-up in value. Operator: The next question comes from the line of Heather Jones with Heather Jones Research. Heather Jones: I had a question on your Feed segment and just thinking about the protein pricing. I know in the past that you have put in place and some of your fat pricing contracts, you had like minimum levels and if it went below that, what Darling received, it wouldn't go below that? And I was just wondering if you all had put any of those kind of things in place for your protein business in the U.S.? Robert Day: Heather, This is Bob. So all of our every contract is somewhat unique, and it really has to do with our approach towards accommodating our suppliers and trying to work with them on terms that make sense for their business as you're -- I think what you're pointing out is that we do have some contracts where Darling collects a minimum processing fee. And if prices get above a certain threshold, then we participate in some of the value of those prices. There are certain instances where protein prices are part of that as fat prices are. I think generally speaking, though, we see -- as you're well aware, we see a lot more volatility in fat prices and a lot more upside from time to time in fat prices. And so we tend to focus more on that than we do on the volatility in the protein markets. Randall Stuewe: Yes, I think to argument, what Bob said, is the thing that happened is the United States was heavily reliant on shipping low-ash poultry meal into the Asia countries for dominantly China for aquaculture. The offset was a strong domestic pet food demand in the U.S. And what we've seen twofold is, one, with the tariffs on, tariffs off with China and Vietnam, they're unable to take the risk, if you will, to buy that product. So it has to find as all commodities do the next best market. What you're seeing in the pet food business is post COVID, you've seen fluffy back to the shelter. And then you're not seeing a growth that's very significant right now on the pet food side. And then you're seeing that the consumer -- the CPG companies took prices up pretty drastically making those bags of brand name products with meat in them, really, really pricey and you're watching strong growth now in the green-based alternatives, namely old Roy. So it's essentially a disruption scenario right now, Heather, and we're off from where traditionally poultry high-end, low-ash poultry products have traded, although they're coming back. The second that Trump relieved the tariff on Vietnam for 30 days or whatever, big shipments and sales went out of here. That's our Eastern Seaboard plant that are heavily reliant on those products. So I think we've got a pretty good outlook. They've come back now and have improved quarter-over-quarter. And I think we're cautious on next year, but we think it's -- we think everything looks much better. Heather Jones: Okay. And then my follow-up is on Europe. So recently, they extended the tariffs on RD imports and biodiesel imports extended to staff. So as we're thinking about Q4, you'll have a full quarter of SAP production and SAP pricing in Europe is really strong. So will having a full quarter production more than offset the impact of them now imposing these tariffs on U.S. staff? Just wondering how to think about those moving pieces. Robert Day: Yes. Thanks, Heather. I think the way to look -- think about that is it will have if it's going to have an impact, the impact is going to be felt a bit later on. SAF is not -- we aren't selling market. The SAF that we're producing today was sold a while ago, and most of the SAF that we will produce in 2026 is already sold. So the tariff impacts will affect new contracts as they come about. We'll just have to see what those markets look like and supply and demand. But we still have access to voluntary markets in the United States. So we're optimistic about where we stand with SAF and SAF sales. Operator: The question comes from the line of Betty Zhang with Scotiabank. Y. Zhang: For my first question, I wanted to ask about broadly the core EBITDA guidance. It's been updated to that $875 million to $900 million range, and that's a bit lower versus the first number that you gave out at the beginning of the year, so I'm wondering if you could reflect on how the year played out and where it didn't quite meet your earlier expectations. And looking forward to 2026, do you think that this year's 12% to 13% growth is somewhat comparable to what you're seeing for next year? Randall Stuewe: Yes, Betty, this is Randy. I mean the $875 million to $900 million is the amalgamation of all 3 segments, net of DGD. Clearly, we're 2/3 of the way through October, we don't know really where October is going to finish. We don't have that type of visibility on a day-to-day basis here. So it's just -- this business when prices are steady, and volumes are steady around the world, you can give some guidance there. What we have tried to do is it's just too difficult to put a number out on DGD either for Q4 or next year. The core ingredients right now looks similar to stronger in 2026. But we won't know that and be able to give guidance on that until around -- till an RVO is published and then when we do our -- probably our February earnings call. Y. Zhang: Okay. Fair enough. And my follow-up question, I want to ask about the Fuel Ingredients business, the portion, excluding DGD. The margin there looked a bit the gross margin looked a bit higher quarter-over-quarter and also the segment earnings came in higher versus what we saw in the first half. Could you please share maybe some of the drivers there? Randall Stuewe: Yes, that business is made up, while Bob described it in his comments, a disease, it's really mortality destruction predominantly in Europe today. And then that's our green gas business, remind people that the green gas or green certification business in Europe, we're the one of the largest in all of Europe today producing gas over there. And then those are our digester businesses, and we added a small one in Poland now. So ultimately, that business ebbs and flows with what we call the Rendac business predominantly, and that's the 7 rendering plants in Europe that are geared towards mortality destruction. Anything you want to add there, Bob? Robert Day: I mean I think it's -- what you're alluding to is just sometimes the inputs, the price, the cost will change for the inputs energy prices that we're selling there remains strong. And so that's what you're seeing with these gross margins. Operator: There are no additional questions left at this time. I will hand it back to the management team for any further or closing remarks. Randall Stuewe: Thank you again for all the questions, today. As always, if you have additional questions, feel free to reach out to Suann. Stay safe. Have a great holiday season, and we look forward to talking to you after the first of the year. Operator: That concludes today's conference call. Thank you. You may now disconnect your lines.