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Operator: Good afternoon, ladies and gentlemen, and welcome to Norfolk Southern Third Quarter 2025 Earnings Conference Call. [Operator Instructions] And I would like to turn the conference over to Luke Nichols, Senior Director, Investor Relations. Please go ahead. Luke Nichols: Good afternoon, everyone. Please note that during today's call, we will make certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or future performance of Norfolk Southern Corporation, which are subject to risks and uncertainties and may differ materially from actual results. Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties we view as most important. Our presentation slides are available at norfolksouthern.com in the Investors section, along with a reconciliation of any non-GAAP measures used today to the comparable GAAP measures, including adjusted or non-GAAP operating ratio. Please note that all references to our prospective operating ratio during today's call are being provided on an adjusted basis. Turning to Slide 3. I'll now turn the call over to Norfolk Southern's President and Chief Executive Officer, Mark George. Mark George: Good afternoon, and thank you for joining us. With me today are John Orr, our Chief Operating Officer; Ed Elkins, our Chief Commercial Officer; and Jason Zampi, our Chief Financial Officer. We delivered another quarter that demonstrates the team's ability to deliver a quality railroad. Throughout the year, we have highlighted our continued commitment to focus on what we can control, running a safe, efficient network, improving processes, delivering solutions for our customers' most pressing needs and supporting our people. That remains the approach today of our 20,000 Thoroughbreds who deserve thanks and credit for our performance. On safety, our train accident and employee injury rates continue to improve. That's the result of disciplined execution and continued emphasis on training. Safety is a core value, and we will never compromise on it. On service, our network is running well. Terminal dwell and car velocity remain stable, and we once again saw fuel efficiency gains, attaining a new quarterly record. These improvements are integral to delivering reliable, high-quality service for our customers, and they position us to sustain performance over the long term. Safety and service together form the foundation of our ability to serve customers at the highest level. And what truly powers this progress is our people. Across the railroad, the Thoroughbred team shows up every day with focus and determination. We are committed to building the next generation of railroaders because careers in rail continue to be among the best in the country. As we noted at recent conferences, the third quarter volume surges forecasted by partners didn't materialize as expected, and the truck market remains oversupplied. Ed will detail this. So while revenues were short of where we expected, the continued success on productivity was evident in the quarter. We also had a large land sale at the end of the quarter that helped neutralize other adverse impacts that Jason will cover. While not big in Q3, we started to see some of the revenue erosion from competitor reactions to the merger announcement. We expect the impact to grow in the fourth quarter and continue to be a challenge over the near and medium term. As we make progress towards getting approval for the proposed merger with Union Pacific, our focus remains squarely on ensuring momentum on safety and service while executing on our strategy and delivering for our customers. We've got a lot to be optimistic about. We're on a good path, and we're doing what we can on the controllable side to prepare for growth. I'm proud of the progress we've made, and I'm even more excited about what's ahead. With that, I'll turn it over to John and the rest of our leadership team to walk through the quarter in more detail. John? John Orr: Thanks, Mark, and good afternoon, everyone. Turning to Slide 5. I want to recognize the deliberate transformation Norfolk Southern has delivered in safety, service and cost structure from 2024 and throughout 2025. This progress reflects a culture of accountability and disciplined execution, powered by generational leadership investments that position us for long-term success. We're creating a network that is safer, more reliable and more efficient, shaping the future of rail and setting the standard for what rail service can and should be. Our PSR 2.0 transformation is delivering measurable outcomes that matter to every customer and stakeholder. For example, Amtrak host delays across Norfolk Southern improved 26% year-over-year, underscoring our progress and unwavering commitment to precision, reliability and the standards that define Norfolk Southern. In Q4, we're going live with clarity camps, the next cornerstone of the Thoroughbred Academy. The curriculum elevates PSR 2.0 business excellence. And importantly, as we transform safety and service standards, we're simultaneously delivering productivity gains, creating a clear and steady direction across the organization. All these efforts are aligned to our broader commitment to deliver meaningful expense controls while operating a reliable and more resilient railroad. Relative to 2024's full year results, our year-to-date safety figures demonstrate FRA personal injury ratio has improved 7.8%, and our train accident ratio has improved 27.7%. Our team will never be satisfied with our safety results. We always strive to improve on our best performance. That's why my team and I are spending more time in the field this quarter, staying close to the work, staying close to our people and staying focused on what drives results. Turning to Slide 6. We achieved stronger service and volume growth this quarter while operating with fewer assets and resources. That discipline is clearly reflected in our financial outcomes. GTMs increased 4% year-over-year, which were accurately delivered with 6% fewer qualified T&E. Our revolving zero-based train service plan continues to drive cost control, precision and productivity. Key highlights include a 19% reduction in recrews, a 12% decrease in intermodal train starts since the beginning of the year, alongside a sequential improvement in intermodal service composite and a 5.5% merchandise carload growth. Turning to Slide 7. These results reflect decisive actions to balance quality service and efficiency. We're on track to exceed our expense reduction and broader financial commitments. And we're not stopping there. The team is stretching for more, raising our efficiency targets to a 2026 cumulative goal in the range of $600 million. Operational metrics confirm the effectiveness of our fuel management strategy, which delivered an all-time quarterly record of 1.01, a 5% year-over-year gain. This reflects both immediate savings and a durable path to greater efficiencies. Sequentially, train speed rose 3%, allowing us to store more locomotives while running a leaner, more reliable fleet. Turning to Slide 8. Rapid deployment of next-level field technology is part of a broader strategy to transform inspection, reliability and overall performance. In the photos, you can see a new state-of-the-art wheel integrity system being installed near Burns Harbor, one of our busiest corridors. We're advancing machine vision at speed across our network. In the quarter, we deployed a new inspection portal in Virginia, bringing the total now to 8. We positively identified over 40-wheel integrity defects, and we've launched 6 new algorithms with 9 more already in development. The data from these field technologies feed our war room that are staffed with craft employees, managers and senior executives, facilitating real-time problem solving and cross-functional collaboration. We're leveraging digital tools, operational analytics and ecosystem level coordination to elevate our capabilities and operation and safety excellence. Wayside stops are down 6.7% year-over-year and 36% year-to-date, even as we expect 5% more axles daily. This quarter reflects that our operational fundamentals are sound and are supporting a strong service offering. This is made possible by the commitment and resilience of our railroaders across the entire enterprise. At Norfolk Southern, results matter, and our people continue to deliver with confidence and momentum. With that, I'll turn it to you, Ed. Ed Elkins: Thanks so much, John. Now let's go to Slide 10, where you'll see that we achieved 2% year-over-year growth in both revenue and RPU in the quarter. We see several dynamics at play in the business portfolio. We have strength within our merchandise markets, partially offset by meaningful declines in export coal markets. We see reduced fuel surcharge revenue and softer-than-expected intermodal volumes. Overall, our volume for the third quarter finished flat despite gross ton-mile growth of 4%. Let's look inside of merchandise. Volume grew 6% from a year ago, driven by our auto, chemical and metals and construction markets. Revenue less fuel grew 7%, which underscores our pricing discipline and our volume performance. However, we had mix headwinds from growth in commodities such as natural gas liquids, sand and scrap metal, which diluted our overall RPU performance. In Intermodal, we're navigating the complexity of ongoing trade and tariff uncertainty, persistently abundant highway truck capacity and outside factors, including competitor responses to our merger announcement, which caused volumes to decrease 2%. Intermodal revenue less fuel and RPU less fuel both grew, reflecting the overall stable pricing environment right now. Now here, I have to note that year-over-year RPU comparisons benefited from an abnormally high volume of empty shipments ahead of the East Coast port disruptions last year. Let's turn to coal, where weakening seaborne coal prices drove RPU less fuel lower by 7%, and this was the most significant revenue headwind for the quarter. We enjoyed stronger demand in our Utility segment, but it didn't offset the sustained weakness in export. This interaction has been playing out throughout the year, and we expect it to persist. Let's go to Slide 11 and talk about the market outlook. Like the third quarter, we continue to navigate a dynamic economic environment, along with competitive cross currents. For our merchandise markets, we forecast vehicle production will be challenged in part due to recent disruptions at a key material supplier to our customers. We expect this will have a meaningful impact to production at several NS-served automotive plants in the fourth quarter. At the same time, overall manufacturing activity remains mixed with output expected to grow despite the backdrop of trade and tariff uncertainty. Strong fracking activity in the Marcellus/Utica Basin is supporting demand in NGLs and sand in our merchandise markets. Looking into our intermodal markets, we expect softer import demand in the near term. This reflects the impact of tariff volatility and growing trade pressures. Warehousing capacity remains tight as inventory levels expanded at the beginning of the year ahead of tariffs and truck capacity remains oversupplied. Coal prices have remained pressured with significant uncertainty surrounding export trade. And at the same time, we're expecting utility demand to see continued support from growing electricity demand and lower existing coal stockpiles. Now these dynamics should be considered against the backdrop of our recently announced merger, which has intensified competitor activity across the industry. And as a result, we anticipate volume pressure, particularly in our Intermodal segment. And so we're maintaining a cautious outlook for the remainder of 2025. Lastly, as always, we want to thank our customers for their continued partnership and business. The entire NS team is aligned around delivering the service that our customers need every day, building trust as a vital partner in their supply chains. Now with that, I'll hand it over to Jason to review our financial results. Jason Zampi: Thanks, Ed. I'll start with the reconciliation of our GAAP results to the adjusted numbers that I will speak to today on Slide 13. Total costs attributable to the Eastern Ohio incident were $13 million, which included $16 million of recoveries under our property insurance policies. In addition, we recognized a $12 million restructuring charge in the quarter as we continue to rationalize our technology projects. Finally, we also recorded $15 million in merger-related costs, consisting primarily of legal and professional services as well as employee retention accruals. Adjusting for these items, the operating ratio for the quarter was 63.3%. And from a bottom line perspective, we earned $3.30 per share. Moving to Slide 14, you'll find the comparison of our adjusted results versus last year and last quarter, both comparisons reflecting a 10 basis point improvement in the operating ratio and the sequential comparison basically even with the current quarter. On a year-over-year basis, revenue was up, as I just discussed, but we were expecting approximately $75 million more revenue as we had guided to within the second quarter materials. Continued macro headwinds, a surge that never materialized and competitor responses from the merger announcement that started to really ramp up at the end of the quarter, all were barriers to the attainment of that expectation. Expenses were up 2% on a 4% increase in GTMs, but there are a lot of puts and takes within OpEx, and those year-over-year expense drivers are laid out on Slide 15. You'll note that the quarter benefited from higher land sales, which were $65 million more than last year. In fact, the entire variance was driven by one large sale that closed at the very end of the quarter. Another quarter of strong productivity gains also helped to mitigate both inflationary and volumetric pressures in addition to the absence of benefits recorded last year in the form of cancellation of stock awards and fuel recoveries. I'd also point out that claims expense was elevated in the quarter despite the outstanding progress we're delivering on our safety initiatives as we react to unfavorable developments on claims from several years ago in addition to claims inflation on a few incidents that we have experienced this year. So as I think about our 63.3% operating ratio for the quarter, clearly, that was aided by outsized land sales. However, we were short on revenue from our latest guidance, and we dealt with higher claims expense than what we had been experiencing. And as we move into the fourth quarter, revenue will continue to be challenged, but we are focused on what we can control, and we expect to maintain our cost structure in the $2 billion to $2.1 billion range. I'll hand it back to Mark to wrap it up. Mark George: Thanks, Jason. As you can see, there were a lot of moving parts in the quarter, but as a Thoroughbred team, we are successfully controlling the controllables. Looking ahead, macro environment remains uncertain, and we acknowledge that over the next several quarters, unpredictable demand and unique competitive dynamics will create some abnormal fluctuations in our top line. We are not standing still. Our recent Louisville announcement will create attractive volume growth as it builds out. Additionally, once the merger closes, we can provide attractive solutions for our customers, unlocking faster, more reliable service, streamlined shipping experiences and expanded access across a unified coast-to-coast rail network. These improvements will strengthen our value proposition and help drive long-term growth in our combined railroad through highway conversion. While the regulatory review process is ongoing, we remain laser-focused on maintaining strong safety performance while running a fast and resilient network. That is delivering great service that our customers have now come to expect from us. Meanwhile, we will continue to maintain a sharp focus on optimizing our cost structure. As you saw in John's section, we are making excellent progress on the productivity front and are raising our 2025 efficiency target to roughly $200 million, and this follows the nearly $300 million we achieved in 2024. I am really proud of our team for the work they've done on this. And while revenue in this environment is proving difficult to guide, you can expect that our fourth quarter cost in absolute dollars will be in the $2.0 billion to $2.1 billion range. So with that, let's open the call to questions. Operator? Operator: [Operator Instructions] First, we will hear from Scott Group at Wolfe Research. Scott Group: So Ed, if I heard right, I think you said a 2-point drag in Q3 from some business losses related to the merger. And it sounds like it gets worse going forward. Is this just intermodal? Are you seeing it in any other places? And ultimately, how much business do you think is at risk until we see merger closing? Ed Elkins: Thanks for the question, Scott. We saw that start to really manifest itself toward the tail end of the quarter, call it, September-ish. And so it's going to manifest itself until we wrap around it year-over-year. It's a minority of -- certainly a minority of the business, and it's really focused geographically to this point in the Southeast. We're working really hard to do 2 things. Number one, to make sure that we're providing a fantastic service for everybody that wants to use us. And number two, we're really leveraging the network that we have, the route structure and the terminal structure to bring freight back to Norfolk Southern that may have left for whatever reason. And so I'm pretty confident that, yes, while this is going to be a headwind for a while going forward, over the next couple of bid cycles, you'll see it start to iterate itself back toward what I would call the high-value, low-cost solution, which is Norfolk Southern for the beneficial cargo owners. Mark George: And that's independent of a merger, Scott, yes. Scott Group: And then maybe just, Jason, I think that the $2 billion to $2.1 billion of cost, it's a relatively wide range on a quarterly basis. Any sort of more help in terms of where you think we could be in that range in Q4? I don't know what is -- maybe the right way to think about it is excluding the gains was a 65.5% OR in Q3. Do you think that gets worse in Q4? Just any thoughts there? Jason Zampi: Yes. Thanks, Scott. So when I think about the expense profile going from third quarter to fourth quarter, as you mentioned, you've got to kind of normalize for those outsized land sales that we had in the third quarter. And then historically, as we move from third to fourth quarter, if you look at the 5-year average expenses are up about 1.5%. And that's kind of really what brings us into that $2 billion to $2.1 billion range, so kind of moving with that seasonality. A couple of drivers that I'd point you to. We've talked about headcount in the past, guided you to the fourth quarter 2024 exit rate, which was about [ 19,500. ] We're a little bit below that in third quarter. So that should step up a little bit as we move into the fourth. Depreciation expense always steps up as we move into the fourth quarter just as we get more capital work done and get those projects in service. And then finally, we talked a bit before about what we've done on the technology front, and we've really gone to that managed services model. So you'll see some higher purchase services expense in the fourth quarter that are being driven by that. Eventually, you should see that come out of comp and ben, but it will definitely be a driver in the fourth quarter. Operator: Next question will be from Brandon Oglenski at Barclays. Brandon Oglenski: Maybe this is for Mark or John, but how do you guys think about managing the cost structure in this environment where maybe there's some share loss and obviously some headwinds just given the trade environment, especially as you look out further, if the deal gets approved, then maybe you want to maintain some excess capacity as well. So how do you balance these differing needs as you look out over the near term and medium term? Mark George: Yes. Great question, Brandon. I think you're right. We've got to be really careful how we address this. I mean as you see, we have been trading down a bit and driving some productivity with regard to moving 4% more GTMs this quarter, while we saw headcount kind of drift down 3%. So that's a 7% spread, we're really happy with that outcome, and we're seeing actually better service and better safety performance while we do it. So we're going to be really careful here. And I think, John, maybe you can talk a little bit about the next step of cost reduction. But the other element I'd point you to, Brandon, we continue to focus on fuel efficiency, where we had a 5% gain year-over-year in fuel efficiency from all the initiatives that John has put in place. So we continue to get these mid-single-digit improvements in fuel efficiency. So labor productivity, fuel efficiency, we've been attacking purchase services, although we are making a deliberate shift to outsource some stuff in IT that will yield benefits in comp and ben. So that's why it's a little bit of an odd quarter because you do see zero volume growth on the carload side, but there is actually GTM growth. So that does require resources. And also, remember, 18% growth in autos this quarter year-over-year, huge growth. And that, of course, has some incremental volumetric costs that come with it that you'd see manifest in equipment rents. So those are the kind of things where it's a complex P&L, and we're going to be really mindful of really trying to drive those areas for productivity and efficiency while not undermining our ability to move volume at all. But John, chime in, please. John Orr: Yes. Mark, you're speaking like an operating -- Chief Operating Officer with all the detail, gives me the chance to talk a little high level. So I appreciate that. Let's just start with the fundamentals. We're moving more volume with more yield on our trains, slightly heavier trains with less crews and more overall fluidity. So using that train speed that we're generating to reduce our locomotive fleet, increase our car miles per day, decrease the number of cars it takes to create a load and doing all those fundamental things that show through to the customer and give Ed the chance to sell aggressively in whatever market he's in at the time. So those fundamentals are very sound. We are -- we have restructured a number of things, including how we manage fuel, which is showing through in sequential fuel improvement and flowing through to the bottom line. But it doesn't stop there. We've restructured how we hire people, the speed to and the quality to which they enter the workforce. So that gives us the opportunity to be more responsive, even longer lead resources and assets. So we're ready for those things. And we'll continue to improve locomotive fluidity by revamping our train service plan. I'll just say that our zero-based plan version 3 has just come out. And year-to-date, we've reduced our intermodal crew starts by 14%. Our shipments per crew start have improved by 11%. We've simplified our lean offerings and our blocking complexity. And as a result, we're really energizing how we service that product and delivering it with more resilience and capability. So that's what gives me confidence that we're going to not only stretch ourselves this year and the remainder of the year in that overall cost takeout and that financial improvement from an operating perspective and overall enterprise perspective, but even continuing that momentum into 2026 and stretching ourselves in the range of $600 million cumulative takeout. So it's going to be hard work, which is in our DNA, and we're ready for it. Operator: Next question will be from Jonathan Chappell at Evercore ISI. Jonathan Chappell: Ed, you mentioned in your prepared remarks that the coal RPU was one of the single biggest impacts on revenue. And you also said you expect the headwinds to persist. If we look at export benchmarks and even your Eastern peer last week made it seem like the coal RPU pressure would stop at least sequentially, maybe you were referring to year-over-year. Can you give us any sense to how much that may continue to step down from the third quarter level? And when you think that headwind may begin to stabilize? Ed Elkins: I think you got that right. And thanks for the question, so I can clarify. I think the export met benchmark is something like 175 right now. And I don't necessarily anticipate any material degradation from that. So on a sequential basis, maybe you go sideways, which on a year-over-year basis is still double-digit down. Same is true on the utility side for export, probably going sideways, but still on a year-over-year basis, double-digit down. And I think that's going to persist certainly through the quarter and maybe into early next year before it hopefully starts to climb out. There's a lot of uncertainty around export coal when it comes to both the met and utility side, who's going to get it or who's going to take it and where it will come from. So we're keeping a really close eye on that. Thank you. Jonathan Chappell: Great. So that revenue headwind and mostly volume, we should stop looking for RPU deterioration overall. Mark George: Well, I think persist year-over-year. Ed Elkins: Yes. Year-over-year RPU deterioration will continue. Sequentially, it should be pretty stable. And this quarter, we did start to see volume degradation as a result of the poor pricing environment. Operator: Next question will be from Tom Wadewitz at UBS. Thomas Wadewitz: I wanted to ask a little more on the topic of the competitive responses. I guess the kind of name that comes out and seems most prominent in Intermodal would be J.B. Hunt. And I just want to get a sense if you could help us think about to the extent that BN is going to exert some control here and push more business over to CSX, how much of the business do you think should be sticky to Norfolk? I recall back quite a long time ago, you had some corridor initiatives that I think are differentiated like the Crescent Corridor, just lines that maybe CSX isn't going to serve markets as well. So I just want to see if you have some high-level thoughts on what can make business with JB or Intermodal in general sticky in terms of network differences? And how much kind of risk is there of kind of BN forcing some business over to CSX? Mark George: So I think we talked about it before that more than half of our business with J.B. Hunt originates and terminates here in the East. And we continue to provide a really excellent service product to them, and we feel comfortable and confident with that, retaining that business. I think for the balance and particularly in certain geographies, perhaps in the Southeast, that's really what's at risk right now that Ed can go in and talk about. But I just want to reemphasize that one thing. About 2 decades ago, we started investing hundreds of millions of dollars to build out our intermodal franchise. We built out that premier corridor and a Crescent Corridor. We built terminals, and we have an unrivaled intermodal franchise in the East. And it's a franchise that people want to be on because it provides the fastest route for the major markets and with a terminal footprint where customers want it to be. So with time, cargo owners are going to want that business back on the NS, and we are going to work aggressively to help them get that cargo back on the NS. So Ed, please chime in. Ed Elkins: Well, gosh, I think you pretty much summarized it, but let me say this, there are a number of key lanes where Norfolk Southern offers exceptional value for customers that really can't be replicated anywhere. There's -- I would say this from experience, there's a reason why we have the second largest intermodal franchise in North America, and it's because of the superior route structure that we've built out that Mark just referenced and also a terminal network that gets you with your freight landed closer to the consumer than any other network out there. So there's lots of things that can happen in terms of pushing freight around that what I would call be unnatural. But over time, we're very confident, John and I are that we put our heads together, make sure our service is exceptional, the way it is now. We continue to partner with the right folks, we're going to be in good shape. Thomas Wadewitz: But I guess one component of that as well is just that CSX has had this major construction project and debottlenecking with their Howard Street tunnel. And so that makes them a lot more efficient North, South along the East. Is that -- like is that a significant competitive impact? Or do you think that's not -- that's kind of an impact on a modest portion of your domestic? Ed Elkins: I can't really comment on that project for them. I hope it makes them a lot more competitive with truck. Operator: Next question will be from Brian Ossenbeck at JPMorgan. Brian Ossenbeck: First, just a quick follow-up maybe for Ed. I think you mentioned that, that business -- and we're talking about here, it would come back to the network even without the mergers. Maybe you can just elaborate exactly what would have to change if it's better service or competing more on price. And then just maybe for -- on the ops side for John. When you think about fuel efficiency, I mean we've always heard it was going to be a challenge at Norfolk because of length of haul and mix and a bunch of other things, weight, but it looks like you've clearly broken through. Is that something you feel like you can get to sort of best-in-class levels with your peers? More thoughts on that would be helpful. Ed Elkins: All right. I'll go first before I forget the question. When I think about service from the West Coast into the Southeast, I think about UP and NS utilizing the Meridian Speedway as the fastest, shortest route between those 2 regions, period. There's not a better ride out there when it comes to that kind of freight for intermodal. So that's one thing. The second thing is the exceptional amount of terminal capacity that we have and expertise to back it up, both in the Carolinas, Florida as well as in Georgia, that's just going to be a force multiplier and has been. So we're confident that over time, cargo owners are going to make the right decision about where their freight is routed. I'll hand it off to you, John. John Orr: Well, I'm glad you're noting the hard work the team has done on fuel. And I won't comment on what the art of the possible may have been thought through back then, but I'll tell you right now, and as we go forward, it's a big part of the strategy that includes all of our strategic sourcing and logistics approach, including the assessment of distribution, use and consumption of the product like fuel. And the current efficiency represents a significant dollar value. And if you look at the mosaic of measures that we present to you all, we're balancing speed, locomotive productivity, the fuel burn. And we're looking at it, not how fast can we go just to get faster and to get to point A to point B quicker. We will, if that means we can use a crew at the end of that trip to use them within the yard and save money somewhere else. But as we work through fuel consumption, we want to make sure that how we manage our fuel resources is aligned to what our train service plan is. And we're always looking at that service plan. We're taking more detailed approach on each element of it, what resources we need, how much fuel we need to move the tonnage, how soon we need to get to a customer. So on a product level view, we're satisfying the contractual obligations and elevating our service metrics and how they face the customer. And we're taking that -- the nice thing is we're taking that approach in mechanical, how we service our locomotives, how we maintain our parts inventory, how we're putting stress on our engineering team through Ed Boyle and his great leadership in managing ties, plates, rail, ballast, all of those things. So across all of those things, whether it's fuel and operational resources, we're taking a really hard line approach on it. So I think we've got room to grow on fuel. I don't have any end in sight to the value we can create managing all of those components. But I can tell you, it's the tip of the iceberg as we move forward against all our enterprise resources. Mark George: And I would just add one other thing, Brian, is when I look back 6 years ago when I came in, we had roughly high teens percent of our locomotive fleet that was AC. And through those investments that we've been making every year systematically to upgrade our locomotive fleet from DC to AC, we're now approaching 80% AC. So that is definitely helping, provide more runway for the future that John is extracting, using the method that he's talking about. So that definitely is a driver as well, right? John Orr: Yes. And that gives us the -- just look at 2019, which was one of the bellwether years from a financial and service perspective. And right now, we're running year-to-date 23% less horsepower per ton. When you have that discipline in managing locomotives, the utilization of your power, your crews, you're reducing your stops, you're creating more fluidity, it shows up in fuel and shows up in so many other P&L items. So you're right, Mark, those investments, those wise investments are paying dividends. Mark George: But the discipline you're bringing now for the things you're just talking about is really what's accelerating the benefits and providing more runway into the future. So congratulations on that. Operator: [Operator Instructions] Next, we will hear from Chris Wetherbee at Wells Fargo. Christian Wetherbee: I guess I wanted to sort of ask about what you think is possible from an OR improvement perspective, particularly as we're thinking about 2026. So you came into this year, I think there was a revenue target around 3% with 150 basis points of productivity and then 150 basis points of OR. Obviously, the revenue side has been more challenging because of volume. We'll see how much OR you get this year. But I guess maybe the question as we go into next year, how much sort of OR opportunity do you think there is that you can control and maybe how much is more revenue dependent? So obviously, it's an uncertain environment out there. I want to get a sense of out of the $600 million of productivity, how much do you think can be translated from an operating ratio perspective as we think about next year? Mark George: Chris, thanks for the question. Look, I think what we're going to do, which is very similar to what we're doing this year is we're going to focus really hard on the controllables, in particular, those elements on the cost side. So we're going to maintain a lot of discipline on our employment levels and try to drive labor productivity for sure. We're going to focus on the fuel efficiency in every single line item in the P&L that we can control. Obviously, we get things like claims that surprise us, and Jason has talked a little bit about that and can talk to you some more about that, some of the social inflation we're seeing. But there's a lot we can control, and that's where we're going to put our focus. On the revenue, obviously, we've got some headwinds. And mathematically, that's going to probably put some short-term pressure on the OR that we're going to have to deal with. But Ed and his team are doing a great job fighting every way they can to preserve every single unit that's out there and try to grow every single unit with the value offering that we have, thanks to the great service John is providing. So we're going to do that. But I think at the end of the day, the OR is going to be an output of those 2 elements. Jason, do you want to add anything? Jason Zampi: Yes. And I would just say it's really -- if you look at our -- kind of our cost profile over the last couple of years and think about the inflation that we've taken on and the volumetric expenses, really, and thanks to what John and the team have done from a productivity standpoint, harvesting almost $500 million of productivity. That's what's enabled us to kind of keep that cost profile flat over these last couple of years. So I think you hit it right on, Mark, as we move into next year. I did just want to, for a second, talk about claims because you had mentioned it, Mark. But John, you can maybe jump in and talk a little bit more about what you guys are accomplishing from a safety perspective, which I think is really remarkable progress. But on the cost side, claims is always very volatile, and we see that quarter-to-quarter. But what we're seeing right now is the resolution of some older claims. And while the frequency is going down, we're experiencing higher cost per incident to close out those claims. So over recent years and quarters, we've seen pressure on that claims line as both the insurance rates increase, but also we're facing the same type of social inflation that you're seeing across the transportation sector. But John, maybe a little color on what you guys are doing to mitigate the number of incidents. John Orr: Yes. And we've said it. Our safety from an injury and accident perspective are taking on a really strong momentum. And we're continuing to invest in our safety camps. I've mentioned it before on these calls, our Thoroughbred Academy has got a component of safety and safety leadership. We've processed over 2,500 leaders through that program who have now had a more capable way of approaching our workforce, building the environment and skills that are necessary. And you couple that with the investments we've made in technology and, yes, a great story. We had broken wheel derailment with a train that had come on us for 1 mile. And we, as a leadership team said, there's got to be a better way. And very rapidly through the work we do with Georgia Tech and our portal systems, we created a wheel detection device that gives us -- identifies wheel integrity on all of our trains that pass through those portals. It was so effective that we made a suitcase version, a mobile version, and we're putting it into the ingress and egress of our hump yards and other high-density corridors to give us a good view to insulate ourselves from something that is not ours. Most of it is on foreign cars. And it's been really effective so far. We've -- I would say using my own language that we've prevented over 40 derailments by the detection that we've had with these wheel inspection devices that didn't exist a year ago. That ability to take ideas, understand the business, convert them into actionable items and then put them into field use at scale is a testament to the commitment we've got on safety and how we can really influence line items that you're talking about and solve them at the root cause. Mark George: And Chris, I just want to come back to one other thing as we look to '26. So obviously, we're going to work on controlling the controllables on the cost side. But of paramount importance in 2026 is for us as an enterprise to continue this quest toward improving and preserving a very safe railroad. We cannot have a misstep. Similar to that, we have to maintain outstanding service for our customers. We cannot step back from that. Those are the 2 most important things. We're going to control costs, but those 2 things are of paramount importance. And I would say the other thing is really the preservation of employment and retention because we have to go into this merger with talent to ensure that it succeeds. So that's where our focus is. And like I said, we're going to fight like health for every unit and every dollar that's out there, but let's not lose focus on the safety and service elements, which are high, high priorities for us. Operator: Next question is from Richa Harnain at Deutsche Bank. Richa Harnain: So sorry to beat a dead horse, but I also wanted to talk about the revenue erosion you expect from competitor reactions. First, I wanted to confirm that this was ring-fenced to intermodal. And then I guess, what is really hindering your ability to compete? I know you enhanced your partnerships with UNP in interim, for example. Mark, you just reminded us today about the hundreds of millions of dollars invested in Intermodal over the past 2 decades to make for a very strong product. So I guess I'm just confused on why you would be challenged just because you're pursuing a merger. And then is your competitor winning on price? Or is it something else? I mean you said it's not Howard Street. So maybe just elaborate a little bit more there. Mark George: That's a great question. Ed? Ed Elkins: Sure. Well, let me start with your first question, which is, yes, it is confined to intermodal and specifically to domestic non-premium intermodal. And I can't talk about or address why other entities contracts may or may not allow for certain things to occur. But I can tell you that we're competing vigorously, both from a price perspective in a market that's been down for 40 months, but also from a service perspective. And John and I are laser-focused on the route coming out of L.A. across Shreveport, Meridian Speedway and into the Southeast. And we have a great team operating our 2 terminals in Atlanta, our 1 terminal in Charlotte, our other terminal in Greensboro and the one in Jacksonville that are not only poised to handle the freight we're getting today, but can accept more frankly. So that's the landscape. And again, like I said, I think over the next couple of bid cycles, as those beneficial cargo owners look at the value that they're receiving from the service that they are getting from whoever they're getting from, we're going to offer a very compelling case for them to come back to a network that makes the most sense for them. John, do you have anything to add there? John Orr: I would just emphasize that our customer-facing composite standards are extremely high. We're committed to delivering them. And we've got resources, we've got assets, and we've got a corridor that's poised and ready for growth. And we're going to deliver regardless. Ed Elkins: Yes. For every customer that is able to use Norfolk Southern, we're open for business. Mark George: And look, again, I'll get back to the fact that when we control the relationship entirely with our customer base in our region, we're doing great. But when it's an interline arrangement and the contract may not be specifically through us, that's where we're seeing some of these challenges. So this is really kind of interline only. That's where it's -- that's where we're seeing it. Operator: Next question will be from David Vernon at Bernstein. David Vernon: I guess, Ed, sticking on this topic, can you put a finer number on kind of what the quarterly run rate should be down, assuming nothing else changed in the business from where we're exiting kind of 3Q, just to help us kind of better understand what's in that model. And it sounds like you're saying you guys can go market that against that service and maybe get some of that traffic over time. What's the risk that this gets worse, right? I mean it sounds like you're saying you're going to go back and try to go direct to the BCOs presumably with another IMC to pull back some of that volume. Is there -- do you get worried at all that maybe there's another shoe to drop as far as kind of the volume that's been lost? Ed Elkins: Well, it's a lot like my golf game. It could always be worse. But I would say this, we're working really close with all of our partners, including ones that may be affected with this to make sure that we're offering exceptional value for them in places where we can do that. And there are places across our network that I would argue we offer services that really no other railroad can replicate. Quantifying, it's probably a little bit difficult. You saw what the effect kind of was really on a portion of a quarter. So we'll see from here. And again, it's not like we're in a super healthy truck freight environment where there's a lot of lift right now. So the whole world is struggling when it comes to freight. This is one other -- one more headwind being applied to the portfolio, but we're very confident in the service... Mark George: We should reiterate, it's in the third quarter, it wasn't the majority of the challenge in intermodal. It was on the margin, so therefore this -- this will build in the fourth quarter and in the first quarter. And that's where it will take us like you said, a couple of big cycles, we should end up getting it back. But we're going to feel the pain here for the next handful of quarters, yes. Operator: Next question will be from Stephanie Moore at Jefferies. Stephanie Benjamin Moore: Maybe talking a bit about your plans currently or your strategies to mitigate potentially any integration risks that we should see with the integration of the 2 networks. Clearly, you've made tremendous efforts from a service standpoint over the last several years and UNP, as we all saw earlier today, also at a really strong point. So I wanted to just talk, again, hear your view how to early on mitigate any of that integration risk or network disruption that could come as a result of the merger. Mark George: Yes. I think that's one thing Jim and I are very, very aligned and clear on is that we cannot afford to have any integration hiccup or challenge. So we're going to take our time and do this the right way. We're going to learn from the lessons of the past, and we're going to study that carefully. And we're going to kind of do a lot of benchmarking and leverage the talent we have on both teams to start planning when that's appropriate and observing what it is we can do from a systems perspective, and then even from a technical perspective. We're going to do this very, very deliberately. It's an ultra-high priority for us when we do bring these companies together to ensure that the integration is done right. John? John Orr: Yes. Mark, I've been through these potential mergers before, and I'll let those results speak for themselves. But merger or no merger, leadership matters since early 2004 and through to -- throughout 2025. This team has successfully delivered our PSR 2.0 transformation, which has been building the momentum and producing irrefutable value. And we had to navigate complexity, ambiguity and even adversity. It works in all business environments. And we're going to continue to invest in our generational leaders, elevate our service. We're going to continue to stress the plan, remove waste and deliver more volume with fewer people, fewer locomotives, fewer cars and less fuel. So really, it comes down to the fundamentals. As I said in my prepared remarks, the fundamentals are sound. And from that stability lends the opportunity for the development of an integration [ plan. ] Mark George: Yes. I think, again, it gets back to my response to Chris. We've got to go into this merger, both of us really operating well. And that will certainly ensure a good foundation for integration. And right now, we're both in strong positions in the way our safety and our service metrics are yielding. And that is important to maintain because once we come together, we're coming together from a foundation of strength, we can integrate a lot easier. Operator: Next question will be from Bascome Majors at Susquehanna. Bascome Majors: As you think about the competitive response, what conviction do you have that some of what's happening in intermodal doesn't bleed into the carload side of the business? And maybe aligned with that, 3 months in post announcement, like what conversations are you having with your large industrial carload customers? And do those skew optimistic or cautious? Ed Elkins: I appreciate the question, Bascome. I would categorize it in a couple of different ways. Number one, we've built a firm runway of success here when it comes to our carload service. And of course, that's the #1 thing that our customers are looking for on that side. They want that conveyor belt that moves at the same speed all the time with little variation. And John and his team have done a really good job of building that resiliency back into it. Number two, and I think this is kind of tooting your own horn but I can't help it. We're known for being in a relationship business. We are a relationship company, and we've built strong partnerships across the board with our big industrial customers. They know us, we know them. And I can say hi to them on this call. We -- they know us and they know the way that we do business. And I will tell you that they are curious, of course, to learn more about what's going to happen in the future, but they're confident that with us being a part of the equation that they're in good hands, so to speak. Now in terms of any other erosion, it's a competitive landscape. We'll see what happens. We're competing every day to try to get more, so is everyone else. We'll see where that part goes. But I think that combination of relationships and good service is a very good defense for us. Operator: Next question will be from Jordan Alliger at Goldman Sachs. Jordan Alliger: Just wanted to -- you gave some good color around the coal yields, intermodal. But maybe thinking through sort of like total yields or revenue per carload as we look ahead to the fourth quarter, maybe talk about some of the puts and takes overall, whether it be core price, mix, et cetera. Ed Elkins: I appreciate it. I'm very pleased with where we've landed with our price plan this year so far, and I fully expect that to continue for the rest of the year. So our pricing plan is intact. And I would say that we're in good shape there, particularly versus inflation. When I look at the mix piece, we're going to see more utility. We'll probably see a little bit less on the export side, and then you got erosion in the RPU for the coal piece because of that seaborne price. There's going to be a little bit of a mix headwind. On the merchandise side, we've already highlighted that natural gas liquids, sand, even some metals markets in terms of scrap, that's diluted the RPU some. But I will tell you that probably the biggest challenge we're going to have from where we've come from might be on the automotive side, where we've seen that one big supplier to one of our big customers have an issue. And so we expect that there'll be a little bit of wind taken out of the automotive side, so to speak, when it comes to the volume piece, and that's to go along with everything else. I hope that helps. Operator: And at this time, ladies and gentlemen, I'd like to turn the call back over to Mark George. Mark George: Okay, everyone. Really appreciate you dialing in this evening. Just to summarize, we're running a really good railroad right now despite the uncertain macro environment that's ahead and obviously, the increasing competitive pressures. So our top line may be volatile going forward, but we are absolutely committed to safety, to service and maintaining our cost structure. And we are going to fight like hell over every available unit and dollar rest assured. There's a lot of opportunity on the horizon with our proposed merger with UP, and that's going to yield huge benefits to our customers as well as our country. So we thank you for your time this evening, and take care. Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the West Fraser Third Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 23, 2025. During this conference call, West Fraser's representatives will be making certain statements about West Fraser's future financial and operational performance, business outlook and capital plans. These statements may constitute forward-looking information or forward-looking statements within the meaning of Canadian and United States securities laws. Such statements involve certain risks, uncertainties and assumptions, which may cause the West Fraser's actual or future results and performance to be materially different from those expressed or implied in these statements. Additional information about these risk factors and assumptions is included both in the accompanying webcast presentation and in our 2024 annual MD&A and annual information form as updated in our quarterly MD&A, which can be accessed on West Fraser's website or through SEDAR+ for Canadian investors and EDGAR for United States investors. I would like to turn the conference over to Mr. Sean McLaren. Thank you. Please go ahead. Sean McLaren: Thank you, Inna. Good morning, and thank you for joining our third quarter 2025 Earnings Call. I am Sean McLaren, President and CEO of West Fraser. And joining me on the call today are Chris Virostek, Executive Vice President and Chief Financial Officer; Matt Tobin, Senior Vice President of Sales and Marketing; and other members of our leadership team. On the earnings call this morning, I will begin with a brief overview of West Fraser's Q3 2025 financial results and then pass the call to Chris for additional comments before I share some thoughts on our outlook and offer concluding remarks. West Fraser posted negative $144 million of adjusted EBITDA in the third quarter of 2025 as we continue to operate within an extended cycle trough. Of note, this quarter included a $67 million out-of-period duty expense related to the finalization of Administrative Review 6 or AR6. New home construction remained relatively stable during the period, albeit at uninspiring levels, with annualized U.S. housing starts averaging just 1.31 million units through August on a rolling 3-month seasonally-adjusted basis as mortgage and interest rates continue to present headwinds to U.S. housing demand and affordability. And as we've noted for several quarters, repair and remodeling demand was subdued once again this quarter. Despite the tough Q3, our balance sheet continues to demonstrate strength as we exited the quarter with nearly $1.6 billion of available liquidity and a healthy cash position that remains positive net of debt. A strong balance sheet and liquidity profile, along with our investment-grade rating remain key elements of our defensive capital allocation strategy, which allows us to invest in our business countercyclically and take advantage of investment opportunities if and when they arise. With that brief overview, I'll now turn the call to Chris for additional detail and comments. Christopher Virostek: Thank you, Sean. And a reminder that we report in U.S. dollars and all my references are to U.S. dollar amounts, unless otherwise indicated. The lumber segment posted adjusted EBITDA of negative $123 million in the third quarter, inclusive of the previously mentioned $67 million out-of-period duty expense. This is in comparison to $15 million of adjusted EBITDA reported in the second quarter with the sequential change driven largely by lower pricing and the AR6 duty expense. Of note, operations at our old Henderson site are winding down and the new mill is entering its commissioning phase. Our North America EWP segment posted negative $15 million of adjusted EBITDA in the third quarter, down from $68 million in the second quarter, with the sequential change largely driven by lower OSB pricing. The Pulp and Paper segment posted negative $6 million of adjusted EBITDA in the third quarter compared to negative $1 million in the second quarter, with the sequential change largely attributable to Cariboo Pulp's annual maintenance shut that occurred in the third quarter. Prior to and following the maintenance outage, we are seeing improved operating performance from Cariboo Pulp in terms of daily output. Finally, our Europe business generated $1 million of adjusted EBITDA in the third quarter similar to the $2 million reported in the second quarter. In terms of our overall Q3 results, lower product prices for our lumber and North American OSB products were the largest contributing to tractors as compared to Q2. We were also buffeted by a number of major maintenance activities during the quarter, most significantly the Cariboo maintenance shut. Cash flow from operations was $58 million in the third quarter with our net cash balance at $212 million, down from $310 million in the prior quarter. The relative decrease in our net cash balance reflects lower earnings offset by -- in part by a reduction of working capital plus the impact of $90 million of capital expenditures and approximately $65 million of cash deployed towards share buybacks and dividends. In terms of our 2025 shipments guidance, with the demand softness, we continue to experience across our lumber product portfolio, we are narrowing our outlook by reducing the top end of the guidance range for both SPF and SYP 2025 shipments, while maintaining the North American OSB and EU OSB shipment guides for 2025. We are also confirming our 2025 CapEx guidance range of $400 million to $450 million. All updated views on our 2025 outlook are presented on Slide 8. Regarding softwood lumber duties. Earlier in the third quarter, the U.S. Department of Commerce released final CVD and ADD rates for AR6 which are based on the year 2023. These rates were largely as we had anticipated and at a combined rate of 26.5%. West Fraser has the lowest duty rate in the Canadian industry. More recently, the U.S. administration issued a proclamation that imposed Section 232 tariffs of 10% on imported softwood timber and lumber into the U.S., which came into effect on October 14, 2025. This tariff is in addition to the existing softwood lumber duties. With that financial overview, I'll pass the call back to Sean. Sean McLaren: Thank you, Chris. Looking forward, we continue to monitor macroeconomic conditions complicated by shifting trade policies. Despite such a backdrop, the company remains well positioned to navigate the dynamic and difficult business environment we face today, backstopped by a strong financial position. As a reminder, we acted early in this down cycle, optimizing our portfolio of assets to create a more resilient company. This included permanently removing 170 million board feet of capacity in our Canadian lumber business in 2022 and 650 million board feet of capacity in 2023 and 2024, through the permanent or indefinite closure of 5 of our leased economic lumber mills in the U.S. and Canada. Combined, these capacity removals account for 820 million board feet, representing approximately 12% of the company's lumber capacity prior to the actions taken. Considering our shipment guidance for 2025, our implied Q4 operating rate reflects the curtailment of approximately 20% to 25% of that capacity. Furthermore, we divested 3 pulp mills for $124 million in 2024 and acquired high-quality lumber and OSB assets. In the aggregate all these actions to high-grade the portfolio have made us better at the bottom of the cycle. Going forward, we will continue to take this approach of managing our asset portfolio to do what is both prudent for the long term and necessary in the short term. Also expect us to continue to be flexible in our operating strategy, meeting the needs of our customers and operationalizing the benefits of our strategic capital to drive down costs, all while keeping our focus on a safe working environment for our employees. We are wrapping up a number of capital projects that have been in progress during the current market and expect the start of these projects will continue to lower cost as they are operationalized. We will also continue to pursue a balanced capital allocation strategy that includes investment in value-enhancing projects, pursuit of opportunistic investments in growth, and the return of capital to shareholders as we leverage the competitive advantage of our balance sheet strength and available liquidity. In terms of our more general medium- to longer-term outlook, we will continue to lean on our industry knowledge and experience to make the decisions that we believe will not only keep the company resilient in the trough of the cycle, but will also allow the company to be better prepared for the next industry demand recovery whenever that may be. North American support lumber supply has been trending lower in recent years, with a material proportion of that capacity closed permanently due to factors including high-cost fiber supply, legacy technology, shrinking residual markets and now more recently, increased duties and tariffs. When lumber supply demand dynamics eventually find balance and demand cyclically improves, we expect our ability to add material new supply will face the same significant obstacles, access to economically viable fiber, high capital costs that challenge returns on investment and long-term viable outlets for residual products. Shifting briefly to tariffs. Regardless of what may happen on this front, as we have said before, we continue to monitor the Canada-U.S. trade situation closely and remain agile and ready to respond as needed, and we will continue to work closely with our federal and provincial governments to support discussions when called upon as they relate to softwood lumber. In closing, at West Fraser, we aim to deliver strong financial results through the business cycle. We achieved this leveraging our product and geographic diversity, modern, well-capitalized assets and the dedication of our people and culture rooted in cost discipline and a commitment to operate responsibly and sustainably. We remain steadfast in the strategy. Although we continue to have a challenged near-term outlook, we are optimistic about the longer-term prospects for our industry and for West Fraser, and we look forward to continuing to build one of the world's leading sustainable buildings products companies. Thank you. And with that, we'll turn the call back to the operator for questions. Operator: [Operator Instructions] And your first question comes from the line of Ketan Mamtora from BMO Capital Markets. Ketan Mamtora: Maybe to start with and recognizing that this is a pretty tough backdrop right now. I'm just curious sort of your approach to managing production in both lumber and North America OSB, particularly in this environment, which increasingly looks like that demand is likely to remain soft here in the near term. Can you sort of just give us some part on sort of how do you approach sort of managing production, particularly as we are looking at sort of another year where EBITDA could be kind of negative in lumber? Sean McLaren: Ketan, happy to touch on that. And maybe I'll just start with -- by reinforcing a few things that -- the actions we took early in the cycle, which we're closing permanently or indefinitely a number of our mills adjusting our shift configurations. And we have remained nimble in our lumber portfolio against after those actions. And as sort of -- you have seen in our guidance as the year has unfolded. So we maintain in both of our main -- all of our product lines, but in particular, lumber and OSB, a variable kind of operating strategy that first runs to our economics and our customer demand needs. So that's how we manage that, and we make those decisions all the time within our platform. Ketan Mamtora: Understood. And then on OSB, what was sort of the implied Q4 operating rate looked like based on what you all have discussed. You talked about sort of 25% temporary curtailment in lumber. How does that look like in... Sean McLaren: Yes. I'll let Chris touch on that one. Christopher Virostek: Yes. I think, Ketan, as you'll recall, I think when we've discussed this before, right, Q4 is always very heavy for us on maintenance shuts. We strategically take that maintenance downtime in Q4 because it is a weaker seasonal period. So I think our -- with the shipment guide that is out there, that would imply an operating rate of somewhere around 80% in the fourth quarter. Ketan Mamtora: Understood. And then just last one from me. On the balance sheet side, clearly, the balance sheet is very strong. You've got a net cash position. Curious about sort of how you think about M&A opportunity in this kind of down cycle at the moment? And where do you think you've got the most opportunity for inorganic growth? Christopher Virostek: Yes. Sure. I'll jump in there, and then Sean, you can add if you like. I think we're very consistent the last several years in how we've talked about M&A. And for us, it's quality first, right? And I think clearly, an environment like we're in today necessitates that -- it just shows how important that quality-first approach is around all those things that Sean mentioned that are challenges, whether that's residual supply or asset quality or workforce availability or timber availability. So I think the way that we have the balance sheet we have flexibility to pursue our -- the strategy that we've always had, and growth has always been part -- inorganic growth has always been part of the company's DNA going back decades. So -- but we're going to be guided first and foremost by quality and things that make the company stronger. And I think you can see that certainly in the actions that we've taken over the last several years where we've added to the portfolio, it's been very selective and high quality, and we've also removed things from the portfolio that we don't think make us stronger at the bottom of the cycle. So I think that will be the guide as to what we consider as opportunities is there's got to be -- we got to be satisfied with the quality that's out there. Sean? Mark Wilde: No, that's perfect, Chris, all quality and enhancing our strength at the bottom of the cycle. Those are the priorities as we think about what might be next for West Fraser. Operator: And your next question comes from the line of Ben Isaacson from Scotiabank. Ben Isaacson: Just two questions for me. Sean, I think last conference call, so 3 months ago, the federal government was starting to talk about a possible support and conversations around that when it comes to lumber. So it's been 3 months and things have not really improved in terms of the macro backdrop. Can you talk about what you're willing to share in terms of how those conversations are going and how federal support for lumber is starting to stack up. Sean McLaren: I can't remember, I don't have the exact date in front of me. I believe it was in early August, and it was in British Columbia, which was encouraging at a small business in -- a small lumber business for the premier rolled out some different support measures. I don't have all the details are all in the public domain, but they were providing some level of support for the industry, some level of funding for exploring different markets. But that would all be in the public domain. I think we, as a mandatory responded, we continue to and frankly, with a balance sheet that we -- that remains strong. We continue to support those measures for the industry with the government. And at the same time, are kind of maintaining our own balance sheets, which is reinforcing our operations. So I probably wouldn't add more than that Ben. Ben Isaacson: Okay. That's fair. And then just a second question is perhaps for you or for Matt. With respect to your own customers that you talk to regularly, can you give some kind of sense in terms of how many months or days or weeks of inventory is in the U.S. channel, again, when it comes to your customers only relative to normal conditions for mid-October. Sean McLaren: Go ahead there, Matt. Matt Tobin: Sure. I can answer that. I would say we don't really have visibility into our customer supply chain or their inventory levels. What I can speak to is our inventory levels and they're lean in both SYP and SPF which has been intentional in this uncertain market to run our inventories lean. Ben Isaacson: Okay. So just to be clear, I mean, from the rate of reorder, you don't have a sense as to -- in terms of planning when your customers are going to come back and what their needs will be in the next kind of 2 to 3 months. Matt Tobin: No, I'd say they're buying as their needs come to them, and we're ready to service them in whatever regions they're in. But I would say no fundamental change or visibility to their inventory levels. Sean McLaren: One thing I might add to that, Ben, is our customers are -- products readily available. So they're buying what they need as they need it. And I think our guidance would -- we're maintaining our inventories in a below average position. And so our guidance would -- things are flowing through based on that guidance. Operator: Your next question comes from the line of Sean Steuart from TD Cowen. Sean Steuart: Sean, I want to follow up on the M&A question, and I appreciate your comments around all the assets and building strength at the bottom of the cycle. I guess the follow-on is, we're 3 years into this lumber downturn in North America. Have you seen more opportunities coming to the surface. And if so, would those opportunities include the types of assets you're looking for? I guess I'm trying to gauge what the opportunity set looks like now and how that's changed over the last 3 to 6 months. Sean McLaren: Sean, probably not -- I think we maybe had this question on a prior call. Probably not a lot of change this year. I think there -- what you typically see is early in an upswing as people are thinking about if a quality asset to sell, people would then maybe look to market that. And then I would say in the pipeline, I don't think there's anything any more than normal and for sure, higher quality assets typically are being held to a better time to market them. So all those things saying that we wouldn't be -- there wouldn't be anything that is jumping out today, that is high quality and available that fit. Sean Steuart: And I also wanted to follow up with your comments on North American supply management on the lumber side and appreciating you've done a lot of work on permanent and indefinite closures over the last 3 years. Is a part of the decision making for you at this point in the cycle, we're arguably closer to the end of this downturn than the start at this point, hopefully. Is there reluctance to take more permanent or indefinite shuts at this point when maybe we can see the light at the end of the tunnel as affordability headwinds start to ease. Is that part of the thinking and the thought process when you're gauging sort of rolling downtime versus further definite or permanent closures. Sean McLaren: Yes. No, it's a good question. I think we always look at it against the backdrop of how is that asset holding up during the current down cycle, and do we have a clear path for the next down cycle. And we make kind of decisions against that backdrop, it's really hard to predict. I mean, I agree with your comments that hopefully, we're here closer to the end than in the middle or the beginning, but we really don't know that. So I think we always have to really challenge ourselves, especially in this environment. Is there a a better operating model that lowers our cost here at the -- and makes us more competitive at the bottom of the cycle. And I would look across our SPF business, Southern Yellow Pine, OSB major business lines and volume is coming out of those businesses and costs are lower. So that's really the way we look at all those decisions and -- but they really -- every asset gets pressure tested in this environment. Operator: And your next question comes from the line of Matthew McKellar from RBC Capital Markets. . Matthew McKellar: I appreciate all the details so far. First from me, could you maybe just share with us how conditions in the Canadian markets have evolved in the last few months, is there anything to call out in terms of differences with the band between the U.S. and Canada? And then are you seeing any of your competitors behave any differently in the Canadian market since higher U.S. duties or the tariffs took effect? Matt Tobin: Yes, I can take that. I would say that the Canadian market remains competitive. It's a much smaller market than the U.S. market. So while it's an important market for us and we service those customers, it generally doesn't drive demand. And I would say it remains competitive just with where we are in the cycle and all the other things you've mentioned going on, but I would say nothing unusual, just having to compete every day to service our customers in that market. Matthew McKellar: And then just a couple of cleanups. If we're in an improved, but still, relatively soft wood products market next year, how should we be thinking about CapEx? I appreciate that Henderson will fade year-over-year. How does that evolve into '26 in your view? And second would be just the fire of the Cowie facility, can you help us understand what the state of that facility is today? Christopher Virostek: Sure. Yes. Thanks. So on CapEx, as we look forward, I think as we said in the comments, right, like we've spent a lot of capital. And I think that's one of the advantages of our strong balance sheet is we've been able to be durable with our capital allocation strategy and invest for the future in what have been pretty difficult market in the last couple of years, considering that, as Sean said, we're wrapping up a lot of fairly major projects here, and our focus is shifting to operationalizing those. So I think you can sort of think about what that means relative to 2026. We'll be out in February with our 2026 CapEx guidance. We have had 2 pretty busy years with with big projects going on. With respect to Cowie, I think, flagged in the materials, right, that incident happened about 5 weeks before the end of the quarter. Facility has been repaired back up and running, and I think we're pretty pleased with what we're starting to see in the European segment in terms of maybe some green shoots of things starting to turn around there. Operator: [Operator Instructions] And your next question comes from the line of Hamir Patel from CIBC Capital Markets. Hamir Patel: Sean, we don't have access to the U.S. trade data at the moment during the shutdown. But on the ground, are you seeing any signs of European lumber imports increasing just given that their competitive position has improved relative to Canada with all the duty and tariff changes since August. Sean McLaren: Ask Matt, if there's -- I don't think we have a lot of visibility to that, Hamir, without the data coming in. But Matt, would you add anything to that? Matt Tobin: No, I'd say like you said, not a lot of visibility and no meaningful change that we can see in them. Hamir Patel: Okay. Fair enough. And I just want to ask in Europe, if you have any comments on -- with respect to OSB demand, how things are faring on both the new res and R&R side? Sean McLaren: Yes. And Chris sort of touched on that as unfortunate incident at Cowie, our team did an excellent job of making the repairs and getting the mill back up and running and it kind of shadowed that event really did shadow some progress in Europe, and we are seeing -- hard to say how much is kind of demand driven, some of it still may be supply driven, but kind of sequentially quarter-over-quarter, we are seeing some price improvement in OSB and seeing some demand improvement there. So we're looking more optimistically in Europe over the next few quarters, and we'll see how all that unfolds. Operator: And we have a follow-up question from Mr. Sean Steuart from TD Cowen. Sean Steuart: Chris, you guys have done a good job on working capital management. And yes, I appreciate the seasonality in Q1 you'll update big log deck builds in Canada. Can you speak generally though, to, I guess, the changes you've made in terms of how you're managing working capital, over the mid- to long-term room for more reductions there, ability to pull more cash out of that, just broader perspective on how you're thinking about that item. Christopher Virostek: Yes. Look, I got to give a lot of kudos to the operations teams across the company on this front, right? I think it spans all elements of the working capital, we manage our credit and receivables very tightly, while still maintaining good relationships with our customers. The cycle there is pretty short. I think as Matt indicated in his comments, in many of our businesses were at or below target levels and operating with fairly lean inventories, which, look, presents some challenges from time to time in terms of filling orders. But the teams are doing a remarkable job of managing through that and learning how to operate with lower inventories. And then lots of work, I'll say, going on in terms of on the procurement side as well as vendors and vendor selection and things like that. So say it spans all aspects of this. And I'd say it's not just something that because of the environment that we're in, that it's getting any more focus than it ordinarily does, think the teams work hard on this stuff all the time. They're probably tired of hearing me talk about working capital. But it's really been, I think, a source of strength for us here in the last while, really releasing on, frankly, all aspects of the balance sheet, and it helps run a more efficient and effective business. So what does that translate into going forward? Hard to say on the way out, but I think some great learnings across the business and a deep focus on strong execution. Operator: And there are no further questions at this time. I will now hand the call back to Mr. Sean McLaren for any closing remarks. Mark Wilde: Thank you, Inna. As always, Chris and I are available to respond to further questions as is Robert Winslow, our Director of Investor Relations and Corporate Development. Thank you for participation today. Stay well, and we look forward to reporting on our progress next quarter. Operator: And this concludes today's call. Thank you for participating. You may all disconnect.
Operator: Greetings, and welcome to the MaxLinear Q3 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Leslie Green, Investor Relations. Leslie Green: Thank you, Alicia. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss MaxLinear's third quarter 2025 financial results. Today's call is being hosted by Dr. Kishore Seendripu, CEO; and Steve Litchfield, Chief Financial Officer and Chief Corporate Strategy Officer. After our prepared comments, we will take questions. Our comments today include forward-looking statements within the meaning of applicable securities laws, including statements relating to our guidance for the fourth quarter of 2025, including revenue, GAAP and non-GAAP gross margin, GAAP and non-GAAP operating expenses, GAAP and non-GAAP interest and other expense, GAAP and non-GAAP income taxes and basic and diluted share count. In addition, we will make forward-looking statements relating to trends, opportunities, execution of our business plan and potential growth and uncertainties in various product and geographic markets, including without limitation, statements concerning future financial and operating results, opportunities for revenue and market share across our target markets, new products, including the timing of production and launches of such products, demand for and adoption of certain technologies and our total addressable market. These forward-looking statements involve substantial risks and uncertainties, including risks outlined in our Risk Factors section of our recent SEC filings, including our Form 10-Q for the quarter ended September 30, 2025, which we filed today. Any forward-looking statements are made as of today, and MaxLinear has no obligation to update or revise any forward-looking statements. The third quarter 2025 earnings release is available in the Investor Relations section of our website at maxlinear.com. In addition, we report certain historical financial metrics, including, but not limited to, gross margin, income or loss from operations, operating expenses, interest and other expense and income tax on both a GAAP and non-GAAP basis. We encourage investors to review the detailed reconciliation of our GAAP and non-GAAP presentations and the press release available on our website. We do not provide a reconciliation of non-GAAP guidance for future periods because of the inherent uncertainty associated with our ability to project certain future changes, including stock-based compensation and its related tax effects as well as potential impairments. Non-GAAP financial measures discussed today are not meant to be considered in isolation or as a substitute for comparable GAAP and GAAP financial figures. We are providing this information because management believes it is useful to investors as it reflects how management measures our business. Lastly, this call is also being webcast, and the replay will be available on our website for 2 weeks. And now let me turn the call over to Dr. Kishore Seendripu, CEO of MaxLinear. Kishore? Kishore Seendripu: Thank you, Leslie, and good afternoon, everyone. We are excited about our strong Q3 2025 results and the strengthening momentum of our overall business over the last 12 months. Our Q3 2025 revenue of $126.5 million represents 16% sequential and 56% revenue growth year-over-year and drive a substantial increase in non-GAAP net income, both sequentially and year-over-year. Our focused investments in data center, optical interconnects, wireless infrastructure, PON broadband access, Wi-Fi 7, Ethernet and storage accelerator products are enabling us to lay the significant groundwork required for broadening customer traction, new and increased content opportunities and sustained growth in 2026. In our infrastructure end market, in Q3, revenues were up 16% sequentially and up 75% on a year-over-year basis. We also expect strong revenue acceleration in 2026 as new design wins begin to ramp across our portfolio. In high-speed data center optical interconnects, we are on track to deliver $60 million to $70 million in revenue in 2025 and accelerating growth in 2026. As evidenced, our Keystone PAM4 DSP family is now qualified at several major data centers in the U.S. and Asia for 400-gig and 800-gig deployment starting 2026 as part of their AI infrastructure build-out. We also made significant progress with our Rushmore family of PAM4 TIAs and 200 gigabit per lane DSPs for 1.6 terabit interconnections and are on track for production ramp in 2026. Rushmore advances our DSP road map and provides foundational technology for emerging optical connectivity trends such as active electrical cable, LROs, LPOs and co-packaged optics for 200 gigabit per lane and 400 gigabit per lane implementations. In wireless infrastructure, we expect increases in carrier CapEx spending to drive demand later this year and throughout 2026. Our Sierra 5G wireless access single-chip radio SoC and our millimeter wave and microwave backhaul transceivers and modems are seeing a significant increase in design activity and customer traction. In Q3, 2 major North American telecom providers launched new Sierra-based 5G macro remote radio unit products, which will continue to ramp through the end of 2025 and in 2026. At the IMC conference earlier this month, we also jointly announced and showcased Pegatron's next-generation 5G Open RAN macro radio unit powered by our Sierra product. As we look ahead, we project sustained growth in 5G wireless access and backhaul as the needs for cloud and edge AI functionality continue to grow in 2026 and beyond. Beyond wireless infrastructure, within our infrastructure category, we continue to see strong design win success for our Panther family of hardware storage accelerator systems-on-chip solutions across Tier 1 network appliance and cloud service providers. In Q3, we announced our Panther 5 storage accelerator that delivers ultra-low latency, 450 gigabits per second throughput and PCIe Gen 5 connectivity. The announcement coincided with a joint keynote address with Advanced Micro Devices at the FMS 2025 Storage Conference on the transformation of enterprise data storage. Panther delivers significant advantages over traditional software-based compression, including a 4x improvement in power savings and more efficient usage of CPUs and CPU cores and AI accelerators. Moving to broadband and connectivity. We saw another exceptional quarter of growth for the combined portfolio of fiber PON, cable DOCSIS and Wi-Fi solutions, driven by the early increases in service provider CapEx spending that has contributed to continued booking strength and incremental demand. Broadband was up 80% year-on-year and connectivity was up 50% year-on-year. This quarter, we are beginning ramp of our single-chip integrated fiber PON and 10 gigabit processor gateway SoC plus tri-band Wi-Fi 7 single-chip platform solution with a second major Tier 1 North American carrier. In cable broadband, we are seeing the initial commercial rollouts of DOCSIS 4.0 led by smaller MSOs. We expect DOCSIS 4.0 ramp to accelerate in 2026, which in turn drives content opportunities for our Wi-Fi 7 and Ethernet solutions. In the Ethernet market, we continue to see the adoption of our innovative high-functionality, low-power consumption 2.5 gigabit Ethernet switch and PHY portfolio into commercial, enterprise and industrial applications. This market continues to grow as demand for higher data rates and increased bandwidth intensifies and 2.5 gigabit Ethernet is well positioned to bridge the gap between gigabit Ethernet and costly higher-speed options of 10-gigabit Ethernet. In conclusion, in the last 12 months, we delivered significant and sustained improvement in our business, driven by strong revenue growth, growing profitability and positive cash flow generation. Through our strategic investments in high-value end markets such as high-speed data center optical interconnects, wireless infrastructure, multi-gigabit PON access, storage accelerators, WiFi connectivity and Ethernet, we're driving strong product traction with Tier 1 customers and partners. Our success in these areas, combined with the incremental tailwind from the ongoing recovery in our core markets, strongly positions MaxLinear for exceptional growth in 2026 and beyond. With that, let me now turn the call over to Mr. Steve Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer. Steven Litchfield: Thank you, Kishore. Total revenue for the third quarter was $126.5 million, up 16% from $108.8 million in the previous quarter and up 56% from $81.1 million in the third quarter of 2024. Infrastructure revenue for the third quarter was approximately $40 million, broadband revenue was approximately $58 million, connectivity revenue was approximately $19 million and our industrial multimarket revenue was approximately $9 million. GAAP and non-GAAP gross margin for the third quarter were approximately 56.9% and 59.1% of revenue. The delta between GAAP and non-GAAP gross margin in the third quarter was primarily driven by $2.6 million of acquisition-related intangible asset amortization. Third quarter GAAP operating expenses were $113.2 million and non-GAAP operating expenses were $59.5 million. The delta between GAAP and non-GAAP operating expenses was primarily due to stock-based compensation and performance-based equity accruals of $32.5 million combined, restructuring costs of $11.3 million and acquisition-related costs of $9.6 million. GAAP losses from operations for Q3 2025 was 33% and non-GAAP income from operations in Q3 was 12% of net revenue. GAAP and non-GAAP interest and other expense during the quarter was $2.1 million and $1.8 million, respectively. In Q3, net cash flow provided in operating activities was approximately $10.1 million. We exited Q3 of 2025 with approximately $113 million in cash, cash equivalents and restricted cash ahead of our 2025 plan. Our day sales outstanding was down in Q3 to approximately 39 days. Our gross inventory was approximately flat versus the previous quarter with inventory turns improving to 1.8x. This concludes the discussion of our Q3 financial results. With that, let's turn to our guidance for Q4 of 2025. We currently expect revenue in the fourth quarter of 2025 to be between $130 million and $140 million. Looking at Q4 by end market, we expect to see some seasonal moderation in broadband and connectivity coming down from Q3, but expect growth from infrastructure and the industrial multi-market. We expect fourth quarter GAAP gross margin to be approximately 56.0% to 59% and non-GAAP gross margin to be in the range of 58% and 61% of revenue. We expect Q4 2025 GAAP operating expenses to be in the range of $92 million to $98 million. We expect Q4 2025 non-GAAP operating expenses to be in the range of $57 million to $63 million. We expect our Q4 GAAP interest and other expense to be in the range of approximately $2.2 million to $2.8 million. We expect our Q4 non-GAAP interest and other expense to be in the range of $1.9 million to $2.5 million, with FX volatility being the primary risk. We expect a $2.5 million tax benefit on a GAAP basis and a non-GAAP tax provision of approximately $2 million. We expect our Q3 basic and diluted share count to be approximately 87.5 million and 91.1 million. In closing, it's gratifying to see some strong improvement in our business over the past 4 quarters, marked by continued growth in customer orders, expanding traction across product portfolio and our solid return to profitability. Our focused investments in strategic high-growth areas such as optical, high-speed interconnects, wireless infrastructure, storage, Ethernet, WiFi and fiber PON gateways are beginning to generate exciting business opportunities that we expect to further grow in revenues in 2026. This reinforces our confidence in our sustainable growth and profitability into '26 and beyond. With that, I'd like to open up the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Tore Svanberg with Stifel. Tore Svanberg: Congratulations for the results. So I had a question for you, Kishore. So with the Q4 guidance, the company is pretty much tracking to 30% year-over-year growth in '25. You did say you expect exceptional growth in '26 and beyond. I know you typically don't give guidance, obviously, more than a quarter out, but can you maybe put some context on that comment in relation to the about 30% that the company is going to grow here in '25? Kishore Seendripu: Thank you, Tore. Obviously, 2025, if you compare it to 2024, was exceptional growth overall and the return to profitability now is pretty solid. So -- and that's quite a significant growth in the overall in the semiconductor company. You look forward, if you look at the Street numbers, they are about 20%-odd into 2026. And that, I think, is about 2x what the industry is expecting. Having said that, we have a lot of optimism based on the design win activities across our product portfolio, be it infrastructure, inside infrastructure, the optical customer wins and the timing of the volume ramps. And then we have our wins in wireless infrastructure. Those are accelerating and also our storage accelerator business. We do expect broadband to moderate somewhat. If you look at how strongly broadband has grown as the recovery has set in, but we still see growth with taking market share in these areas. So overall, we try to be very cautious because a big part of the growth is coming through the infrastructure markets, and these are pretty large complex systems and there's a lot of customer concentration in some of these big markets. So we are just -- we are being conservative, but we also are, at the same time, displaying optimism in terms of the sheer breadth of the acceleration that we are seeing based on design win and customer activity and what I call booking strength that we are seeing. So I would like to tell you more, but at this point, let's continue to deliver the numbers is the way I look at it. Tore Svanberg: Yes. No, that's fair. And as far as the infrastructure segment, so obviously, we know what's going on, on the data center side and the optical business you have there. But I think the one with the more surprising thing is all the strength that you're starting to see on the wireless side. Obviously, you have some company-specific product cycles there, but it also sounds like the service providers are starting to spend some more CapEx again. So just hoping you could add a little bit more color there. And how should we think about the wireless part of the infrastructure segment for calendar '26? Kishore Seendripu: Absolutely. I do see the wireless infrastructure, there's -- the telecom operators are beginning to spend on their infrastructure now. So I know 3 years ago, that was the topic du jour, but really now they're spending coming from a period of lean investment and we are seeing a lot of traction for our Sierra product line. And we are the only single-chip solution provider for the remote radio units for the RAN network. So we're getting pretty strong traction. And I talked about -- and the quality of the product speaks for itself with the 2 big North American telecom operators who are actually Q3 qualified it are in the ramp phase. Now how much do we expect it to grow? If you combine our millimeter wave, microwave backhaul infrastructure and wireless access is still in its initial ramp with Sierra. I think we see a pretty strong growth, maybe in the same order of as optical, let me put it that way, in the same order of magnitude. But I do want to emphasize this point, right, is that infrastructure is a category where MaxLinear now you're seeing is getting substantially as a big percentage of overall revenue. That was the growth that we had invested strategically for the last 5 years. And now I still remain by my position that in the next 2 to 3 years, this infrastructure revenue should be in the $300 million to $500 million range. And I feel really very proud of our team that we stick with the plan and they're executing to it. Operator: Our next question comes from the line of David Williams with Benchmark Company. David Williams: Congrats on the really strong progress here. It's great to see. So if you kind of think about the optical side of the business and the strength that you've had there, you've got some qualification. You talked about some ramps. Just kind of wondering if you maybe could give us some insight into how you think that will trend for next year? Could it be another doubling of that revenue or maybe how do you think about just that infrastructure piece or the optical piece in infrastructure? Kishore Seendripu: I would like to say everything is a possibility given where the traction is right now. But we have also seen movements in the shifting of where we think a certain particular data center is going to ramp or a large enterprise customer. Currently, a big part of the revenue in this year on the optical -- the data center connectivity is coming from 400 gigabit solutions, but now towards the end of the year in '25 and into 2026, 800 gigabit is beginning to grow. So that kind of gives you a sense of our momentum in terms of which data centers what we are tracking. And I feel that the 800 gigabit side, we are not any different than any -- and the normal course of where the data center guys are in terms of the various rollout. So I think I would have liked to see even more traction than I'm speaking about, but I am also now -- while we are very proud of where we are, but we battered against pretty entrenched 2 other competitors, and that's taken a while to start cracking open, and it is definitely cracked open. And as far as OEM is concerned, all the major OEMs, we are part of their solution portfolio. And I hope we are their favorite one, and if not today, in the future, right? That's our goal here, okay? David Williams: Perfect. And then maybe, Steve, just kind of thinking about the gross margin guidance. I think just the 30 basis points there that you're guiding to, it would imply maybe a 64%, 65% type of incremental margin. Does that seem fair? And what are maybe the moving pieces there for that margin improvement for next quarter? Steven Litchfield: Yes, David, I think we're kind of finally starting to see things improve a little bit. I mean, as revenue really starts to ramp back up to some more material levels and naturally the mix, as we've talked about a while, I mean, you're seeing our infrastructure business continue to grow at a faster rate than the rest of the business, has a little higher gross margin mix. And so pleased with the progress. Looking into next year, hopefully, we can continue to see that. Kishore Seendripu: And the growth is picking some momentum and the lead times on the fabs that we have dramatically increased as well. We're not the only one looks like who needs capacity. And the fabs have been increasing prices as well. And so we are not where we wanted to be on gross margins, but all the good work our team does seems like the fabs are consuming it. So yes, we are making good progress, but not as much as I'd hope on the gross margin front. Operator: Our next question comes from the line of Joe Quatrochi with Wells Fargo. Joseph Quatrochi: Maybe another one on the data center optical side. Just trying to take another stab at your expectations for '26. I mean, we've seen a lot of -- a number of AI data center announcements over the last few weeks. Just curious how your visibility or pipeline of opportunities has changed since a quarter ago. Kishore Seendripu: Look, a quarter is a long time, but also it's a very short time in the data center world, right? These interops, one of the biggest learnings for me is the interops always take longer than they tell you and they're always juggling their current build-outs versus qualifying new players. So having passed the threshold with the major data centers on the interops, it has a way of generating its own momentum of MaxLinear's product. So naturally, you can tell by our tone, we are very, very excited and we're getting a lot of what I call pull now in terms of design win activity and such. So obviously, we're feeling very, very better. And like I told in response to Tore's question, we feel very, very good. And the growth that we expect for optical or wireless infrastructure is of the same order and infrastructure will grow very, very nicely next year. Joseph Quatrochi: Got it. And then on the broadband connectivity side, I appreciate that it's typically seasonally down in the December quarter. Any sort of help in just terms of kind of framing this year relative to normal seasonality, just given I think there's been some inventory kind of things at play there? Kishore Seendripu: Okay. So maybe Steve will give you a little bit more color. Normally, we see seasonality that sometimes December sometimes is the Q1. So we have always had an uncertainty for the ones who have followed us historically. So I would say this year is a little bit different in the sense the core recovery was happening. But the big growth came through what I'd call cable recovery. And -- but we are winning designs on the PON side. We're very excited about the major telecom provider. Hopefully, you'll get one of our boxes at your home, so to speak. So PON is poised for very strong growth, but we do expect moderation. Look, we grew 80% year-over-year. So I think by any means, the broadband market is not naturally that kind of a growth vehicle, but it will moderate. Steven Litchfield: Yes. I think the only thing I would add, Joe, is maybe speak a little bit broader in '26 and '27. I mean, we are seeing nice CapEx spends over the next 2 years. You're seeing the telco guys rolling that out right now. We're certainly participating, as Kishore stated. And that's exciting because it's new business for us. At the same time, you still got kind of this DOCSIS upgrade that's happening and has a meaningful content improvement, and that's going to start kind of late '26 and even into 2027. I think some of the cable operators have been delayed a little bit with some of the amps and the node upgrades that are happening. So maybe to the earlier point, yes, a little bit of moderation in the short term with regard to seasonality, but I think our outlook continues to be strong over the next couple of years. Operator: Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Timothy Savageaux: My congrats as well on the strong results. I kind of want to come back and touch on a couple of questions that have already been asked. But -- and I guess it has to do with the accelerating growth commentary, which I don't know if that first comment was relative to the entire business, '26 over '25, but I think I definitely heard that comment made with regard to the optical data center piece. I just wanted to kind of clarify that and get, I guess, a little more color on where you guys are headed with those comments. Kishore Seendripu: So clearly, it's not related to where the business was '24 versus '25. It's really related to the new opportunities that we had in front of us. Obviously, the new opportunities will grow much faster than what the overall business that it's pointing to based on Street's numbers around 20% growth or so for the company. So the acceleration we're talking about is really in terms of the various opportunities here, okay? The first one is the data center connectivity, then I told wireless is in the same order, infrastructure. And then we have storage accelerators. Those are all brand-new or exciting data center type-driven markets. Those are where the exciting growth is, very, very strong growth, well above the company's overall growth rate. Then we said broadband will moderate to its potentially normal level. But within broadband, with the puts and takes, PON is going to grow strongly because there's a large North American operator coming online. And so those are the buckets I would look at as strong growth opportunities that are accelerating. And at the overall company level, that translates to a pretty robust growth that I referred to earlier. Okay? Timothy Savageaux: Yes, okay. Let me try one more time. So if we take AI optical in particular, somewhere in the middle of your range. And I'd be interested as an aside as to whether you have any thoughts about the higher or low end of that $60 million, $70 million range as we stand here in October. But assuming we're mid-range, that's 80%, 90% growth, something like that. So accelerating growth there would be up toward triple-digits. And from an absolute dollar standpoint, I think what you're telling us is that growth you should see on the wireless side as well. I want to make sure I got that right. And I have one more very quick one. Steven Litchfield: Yes. So Tim, since nobody likes Kishore's answers, I'll try. Joking aside, look, I think we're very excited about the outlook on the infrastructure side. I mean, optical is clearly where we've been spending a lot of time and efforts. And we're seeing that potential that you're referring to, I think we're having a great year this year. It's very back-end loaded. And looking out into next year as these new data center wins ramp into production, yes, I mean, these numbers go up meaningfully and we're very excited about that. Are there other pieces in infrastructure that continue to do well? Yes, absolutely. And we're excited about those also. But data center is going to lead the way from a growth number, nonetheless. Timothy Savageaux: Great. And that's actually very relevant to my very brief final question, which is on the Q4 guide. Looks like infrastructure is doing most of the work there, maybe up 20% plus sequentially. Could you break that down between optical or wireless or any other big drivers for that sequential growth in Q4? Steven Litchfield: Yes. Look, it's a good question. I guess, I would just say with regard to some of that end market guidance. So you're right, infrastructure is the biggest contributor in Q4. I think that was, for the most part, expected that you would see that particular end market growing the most. I mean, some of the moderation that we spoke of earlier on broadband and connectivity is modest. I mean, indeed modest. It's not that big. Industrial multi-market is on the mend, I would say, and we're starting to see some improvements there. But I'll keep from going into specifics on all the line items that drive infrastructure growth. But suffice it to say, we're very excited about some strong back-end and infrastructure growth that will lead to nice revenues in 2026. Operator: The next question comes from the line of Christopher Rolland with Susquehanna International Group. Christopher Rolland: Congrats, guys. So this one is probably for Kishore. So Kishore, I felt like I sensed a bit of hesitation to really extend yourself in the optical guide or comments for next year. You did mention stuff like competition, and there's a lot to this beyond just kind of pure DSP performance, like laser availability and/or bundling and other dynamics. So I was wondering if you could kind of expand a little bit more there on your outlook and what gets you to like a hyper growth outcome for next year for MaxLinear versus like just a solid growth outlook? Kishore Seendripu: That's a very complicated question with lots of dynamics there. I would -- yes, availability will be a big issue, whether it is optics or silicon even, for example, that's a big factor. And the other factor is also the timing of our wins and when they translate to actual revenue growth. So at this point, our growth assumptions are based on what's already started ramping, right? So based on that, I can qualify that it will be very solid growth, very solid growth. Hyper growth is a very hyperbolic question. So it will take things that are already ramping to be much more -- we get even more share than we planned for is one way to look at it, okay? So whatever growth we are referring to, we are not referring to based on many more new design wins, right? We can only project growth based on what we have won and what has started ramping, okay? So I think that kind of sets the stage. So hyperbolic growth would be based off getting much more share than we thought and solid growth would be based on the shares we assume at this stage in our play in the data center, okay? Christopher Rolland: Perfect. And then also probably following up on your broadband comments. Just as we -- you had some comments around DOCSIS 4 as well. Like is this going to be a big driver of new upgrades here and for this business finally or do you think like the fiber opportunity and growth there is more meaningful for you guys as we look forward? Kishore Seendripu: As the Professor always said, it depends. It depends on a number of things. One of the things that it depends upon is DOCSIS 4.0 ramp. And clearly, the main players have delayed their DOCSIS 4.0 ramp because the network upgrades that they planned for, they have sort of slowed down for whatever reasons, right, due to the complexity of it or not. So that could make a huge meaningful difference on the cable growth. So that brings the question, as you rightly pointed out, on the fiber side. So we have a lot of North America operator ramping. We are winning a bunch of shares right now and the timing of those. So at this point, when I think of broadband, there are 2 factors that would make for a meaningful broadband growth and not overly moderated as we were alluding to. One is the DOCSIS 4.0 ramp and rollout. And we are very confident of the North American telecom operator ramping, the second one, the big one. And there are a couple of others that if the timing is right, that could also set up a nice growth for broadband. Operator: Our next question comes from the line of Ananda Baruah with Loop Capital Markets. Ananda Baruah: Congrats on the steady progress here. It's good to see. Look, this is a bigger picture growth question. We're all thinking the same way. Let me just ask you this, Kishore. Coming out of COVID, you've put up a good growth year coming out of COVID, not dissimilar to 2025, the growth rate. And then you had an amplified growth rate coming off of that year as well with the first year coming out of COVID off of a negative comp, too. So the similarities, I think, is why people are probably focused on it. What would be the things -- are there any meaningful differences with the business? Any meaningful differences with the supply chain? Any meaningful differences with inventory right now that would have the pattern coming out of this time around be different than COVID? Obviously, I understand COVID was unique, but the growth rates are actually similar. And you guys have more incremental punchy opportunities, market opportunities that you've been preparing for coming out of this pause than you actually did back then. So let me ask that. And then I have a quick follow-up as well. Kishore Seendripu: Ananda, let me try to take a stab at your question. There's a fundamental difference between what we are talking today versus what you saw in the COVID phenomenon, as I call it. That was a very broadband-driven growth. And now it's really infrastructure being a huge part of the growth. And secondly, as always, these events happen, businesses change, legacy businesses. And so right now, the infrastructure growth, there are components of it that are really primarily brand new revenues. And they have a huge TAM and massive TAMs, much more than anything we were looking at before, where our share of that market is very tiny. So there's a large growth in front of us as we become successful and continue in our strategic focus and investments. That's, I would say. Secondly, the inventory situation is totally different. Nobody is doing excess stocking whatsoever, right? So now we are in a place where sell-through and sell-in, if you will, are kind of in balance equilibrium, let's call it, right? So there's no unusual sort of events of that nature. So on the supply chain side, it's dramatically different. There are geopolitical issues that are in play now. And then there's a large dependency on the foundry choices one can have in the SoC markets versus non-SoC markets. So very, very different. And the advanced nodes are much more entrenched now than they used to be before. So if you look at 16 nanometer and beyond, it's all FinFET-based versus previously it was older nodes than 16 nanometer. So I just want to leave it there. And the fabs have now completely muscled on their pricing power. So you have to be incredibly more innovative to maintain your margins than it's not a one-trick scenario that you can charge margins because you were there at the right time for the right market. But if you're going to be a company like MaxLinear across portfolios, you really have to have a sustainable, consistent execution and value proposition to maintain or grow your gross margins. I would say that with the comprehensive color. Okay. So let me allow you to ask your second question. So let's see, maybe Steve is better positioned for that. Ananda Baruah: Awesome. That's awesome. Yes, just real quick on neoclouds. With more hyperscale workloads, AI workloads moving to neoclouds, large AOIs moving to neoclouds, does that necessitate you guys -- this is really an infrastructure question, a DSP question. Does that necessitate you guys having to broaden out your relationship set to participate in those? Just what's -- fill out that sort of whole paradigm for us, that would be great. And that's it for me. Kishore Seendripu: Okay. That's a very, very broad generic question, right? We have to broaden our relationships, but we also have to deepen our relationships which is a very challenging proposition. Unless you are in the revenues, conversations get -- are difficult. Now that we are in the revenues, those conversations get -- it's like a natural spontaneous defrictionization of the system. So what I would call acceleration. I'm just worried about acceleration word, but yes, I'll use it here. So as we start generating revenue and win their confidence, they naturally lead to more dialogues. That's just part for the course. So where you're successful, you have more and more conversations and you can broaden those conversations. Where you're trying to get in, you really have to narrow and deepen those conversations first because the general question to you is, prove yourself first before you want to talk about everything in the world. So that's the -- but that's pretty standard in the new market and the data centers are much more challenging because they are a well done to themselves. So that's how I would describe it. And the amount of money you have to spend on marketing and support and all is incredibly higher even before you have any revenue. So that's been the other mitigating experience trying to get into these markets. Operator: Our next question comes from the line of Quinn Bolton with Needham & Company. Quinn Bolton: I guess, maybe I'm a little just thick headed, but I just wanted to come back on the broadband comments. You're talking about moderating or a moderation in that business. Are you talking about the growth rate is going to moderate from something like 80% year-on-year to a lower percentage, but still growing or are you talking about the business actually potentially declining next year? And if it declines, is it simply just maybe normalization in cable, the DOCSIS 4 ramp really not ramping until late calendar '26. And so the moderation in cable kind of offsets the growth in PON. Is that the right way to be thinking about it or do you think the overall business just still grows. It's just not going to grow at 80%? Kishore Seendripu: Quinn, nobody accused you ever of being thick headed. I just want to clarify that first, okay? The second part of it is you're absolutely right. We're talking in absolute terms and not in percentage terms. We don't see overall decline. But on the broadband side, we just see sort of growth through the next year, so to speak, range we are thinking about. Can it grow? I think it was asked by Chris Rolland that you've got the fiber PON design wins that are in place and the DOCSIS 4 ramp has to set in to see some good growth beyond this year. That's fairly correct. So Steve, do you want to add anything more? Steven Litchfield: No, no. I mean, look, the moderation comment is around Q4. That was the guidance. We just talked about Q4. We haven't given any guidance beyond that. But my comments about the market and the CapEx spend, I mean, kind of to Kishore's point, PON is picking up. There's lots of great opportunities. These are all market share gains for MaxLinear, a market we haven't been in. So really exciting times from that standpoint. And then I think the excitement around DOCSIS is a 50% content increase, right? So you got the DOCSIS rolling out. We're shipping products this year, but it will kind of pick up next year and even into 2027. So that content increase is exciting. Quinn Bolton: Got it. Makes sense. And then maybe a longer term question for you, Kishore. I think it's pretty well known that optical modules are somewhat supply limited in the near term by supply of EML lasers. You mentioned silicon as a potential constraint as well. And I think your Keystone product being manufactured at Samsung instead of TSMC, where all your competitors manufacture their DSPs. How much of an advantage do you think that could become if the market for 3 to 5 nanometer stays tight? Kishore Seendripu: Our Keystone, I think it is public information is the first -- probably the only 5 nanometer CMOS solution for 100-gig lane product that's in production. And our Rushmore, which is the 1.6 terabit solution, 200-gig per lane is in Samsung. So that gives you some level of natural diversification because the biggest demand between 800-gig and 400-gig and 1.6 terabit will center around those 5 nanometer node process. And the tightness comes in, in the supply there because there's a lot of GPU vendors, et cetera, that are really in mass production in 5 nanometer and moved into 3 nanometer moving there. So these are the 2 nodes that are the most highest occupancy where scale is super, super important for getting more capacity. So while that was a generic comment, it also shows that we have to be cautious about growth. We are constrained the what I call the hyperbolic growth. There are all kinds of factors. So it should help in the long run, but in the short run, we are in production in 5 nanometer with our Keystone product line, and that's the node we are in. And we're very happy with the support we are getting, of course. Will we need more? There is more growth that just comes our way? Absolutely. It's very hard to plan at this point because everybody has allocated the capacity and then you have to fight for the extra, if you will. Operator: Our next question comes from the line of Richard Shannon with Craig-Hallum. Richard Shannon: A couple of questions here. First one is probably for Kishore on DSP here. On the last earnings call, you talked about the potential with your Rushmore family to potentially have some level of incumbency being the first one to be a supplier in any one particular situation. Wondering if that's playing out here. You're expressing certainly a lot of enthusiasm for how things are going there. I would love to get a sense of the degree to which that is happening or you think there's a good chance of it happening? Kishore Seendripu: So obviously, we talked about Keystone, which is what is driving the revenues, the Keystone family of products. But Rushmore is our 200 gigabit per lane that we demoed at OFC. As you are all aware, the incumbent announced that product maybe a few months before us, and so they're a little bit further along. But our product is highly more differentiated is our view and our belief. So we hope to be -- we not hope. We know we'll be in production in 2026. But at this point, we are not baking any revenues associated with, in my mind, based on what we have been through on the 200-gig per lane. And there's also a rollout issue on 1.6 terabit at the data centers as well. That's really -- 800-gig is not fully rolled out yet, too. I know we like to get ahead of it and focus on road map. I think there's time for 1.6 terabit and -- but we're in a very good place. So Rushmore, yes, best case will be the end of '26, but I'm not -- I'm being realistic. And -- but Keystone, Keystone, Keystone. Rushmore would be -- is a good plan for '27? Absolutely. Okay? Richard Shannon: Okay. My second question in an effort to express some love for all of our children. Let's ask one quick question here on the industrial multi-market business here. Obviously, it's come down a lot the last few years. It looks to be kind of bumbling along the bottom here so far this year. How do we think about the potential scale of this business in the next 1 to 2 years? Is this something where you're applying much effort here from a product and sales and marketing point of view to grow it nicely or is this just more of an afterthought relative to some of the other dynamics in your business? Kishore Seendripu: Look, there are some business, how much of a money you put in, they take their own time. So I would call that we are doing what I'd call sustainable growth rate investments as you should in this marketplace. I think the big hit happened because of geopolitics issues and then -- and generally, in the industrial market space itself, it's distant memory now, but we lost significant revenue when we were hit with the expiry of our licenses for the government to ship to certain customers in Asia. So the drop was associated with that. And then at the same time, when the market went down, we exercised pricing discipline to maintain a healthy gross margin business. So you could argue that some of those are very deliberate decisions and some of them were really, really -- we were recipients of things out of our control. Having talked to you about investments, even on our industrial multi-market investments are really, really focused around edge, cloud, data center level of investment. There's a lot of new ways of doing old things inside a data center. I don't want to get into the details into that stuff. And those are giving us opportunities to reposition our portfolio and investments really focused on edge and cloud data center. And we are investing in those elements of it. As a company, our focus right now is a huge focus is on the hugest dollars that are going are really on the edge and enterprise and cloud infrastructure and they consume so many components even in the industrial analog space, and that's where our focus of our investment is. So in short, we are investing, right? That's the statement. Operator: Our next question comes from the line of Karl Ackerman with BNP Paribas. Karl Ackerman: I have 2 as well. First question, as we think about your ability to see the broadband segment revenue returning to $100 million a quarter, could you help us frame the opportunity from your -- I guess, your gateway opportunity within that now that it is broadening beyond the single carrier today? Steven Litchfield: Well, okay, a couple of things. So the PON business is new for us, right? This business has been growing over the last, call it, 1.5 years. We've gotten a lot of traction. Kishore spoke earlier about the 2 big North America guys that are now using our products. So that's very exciting. But we have several other customers that we're either in production with or designed into on the PON front. If you -- maybe I'm not sure if this is exactly your question, Karl. But if I think of content opportunities inside of the gateway from a dollar constant standpoint, a PON gateway or even a cable gateway, I mean, you're talking could be $40 to $50 of content. A lot of that comes from WiFi, Ethernet, the SoC itself. So those are the bigger drivers. We continue to see content increases. So that's a big part of the opportunity. It's not necessarily just about unit growth or share gains, which we're seeing both of right now and expect to see over the next 2 years. But then that content gain is, I think, the other big driver of revenue. Karl Ackerman: Got it. Understood. Shifting gears a bit, could you speak to the breadth of design engagements you have in optical DSPs for 800-gig? And second, when should we expect the revenue from 800-gig to cross over your revenue from 400-gig? Kishore Seendripu: Okay. Let me try to answer the question on the breadth of design engagements. There is -- the breadth of the design engagements from our point of view, from our -- where we are is really all the OEMs or module makers, if you will, we're engaged with all the major module makers in Asia and in America, whether they're headquartered or not. And so that's a massive engagement across all variations and configurations of not just transceivers, but beyond optical transceivers. And so you have to take that into perspective. Now if you go to the data centers, every data center has got their own road map and time line when they're transitioning. For example, Google is well gone beyond 800 -- that's well past loss, let's call it that. We never even engaged with them. I don't think anybody else is engaged except one player. And then there's NVIDIA, which is a whole different new magnitude and size of themselves. We are not participating with that. We talked to you about -- then the remaining guys are going at their own different cadence on and they're lagging, if you will, in the terms of the deployments. So each engagement, how broad it is, it depends on when you ask the question. At this point, we are engaged with them. Where are we shipping? That's a subset of the hyperscalers between the U.S. and Asia. Operator: Our next question comes from the line of Suji Desilva with ROTH. Sujeeva De Silva: Congrats on the progress here. Kishore, you talked about DOCSIS 4 having adoption delays or push-outs. Are there technical issues that you could talk about in a little detail to help us understand what is maybe gating larger flagship adoption of DOCSIS 4? Kishore Seendripu: Okay. Great question. No news. It's as expected versus what you guys think it should be. We know the cable world incredibly well. As I suspected, as we told that there will be a lot of DOCSIS 4.0, but most of the deployments will be Ultra DOCSIS. So because the network upgrade, whether it is the node, whether it is the amplifiers in the amps in the system, it's a lot of work. And they just have stability issues in the network to get there. So it's a very slow process. And so they're doing the incremental approach where they hurry us all to invest and be ready, but the deployment is taking the way it does. So that's the only reason. And so I still will conjecture that Ultra DOCSIS 3.0 will be the massive deployment. And yes, that would be one statement. And that will go across continents. It's not just -- because you just want to keep in mind, 4.0 is a very North American phenomenon. So Steve, do you wanted to say something? Steven Litchfield: No, I was just -- it was 3.1. You said 3.0. It might have been 3.1. Kishore Seendripu: Okay, great. Sujeeva De Silva: Okay, great. And then perhaps for Steve, any update on the arbitration? I know that we're approaching the time for that to commence. Steven Litchfield: Sure, sure. Yes, no big update. I think we're on track, arbitration this quarter. So -- but that's going to extend next year. So hopefully, we see some resolution sometime in the first half of next year. So on track. I think we're feeling very positive about it. Operator: Our last question comes from the line of Tore Svanberg with Stifel. Tore Svanberg: Yes. Two quick follow-ups. I promise real quick. First of all, so when I look at your various segments, it looks like broadband right now is running about 10 percentage points above infrastructure. But given the moving parts in calendar '26, it sounds like infrastructure will potentially be slightly bigger as a percentage of revenue. Do I sort of have that direction right? Kishore Seendripu: Well, so certainly, I think we've been consistent in saying infrastructure is going to be quite a bit bigger, and I think it's on its way. I think you're heading in the right direction. Tore Svanberg: Very good. And then the last one for you, Steve. So OpEx is coming in a little bit higher than where it was. I mean, obviously, your revenues are $6 million higher for Q4. So that's probably expected. But I was just wondering how we should think about OpEx, especially in relation to the restructuring you had early in the year. Does OpEx come down a little bit in the first half or is this sort of the new baseline? Steven Litchfield: Yes. So I think we feel -- so you're right, it was a little bit higher in the quarter and the guidance a little bit higher as well. I mean, look, you can see the revenue ramps that we guided to or we delivered and guided to. I think as you look into next year, that's going to continue. And so I think we've got a lot of big customers that are asking, hey, we need software, we need platform support. Those are the type of efforts that we have to make. And so there's probably a little bit of an adjustment there versus what we had started the year at. I wouldn't say there's much. I think you -- I think as you look into next year, you start to see some nice operating margins developing throughout the year, and we're really starting to see the leverage in the model that we're excited about. Operator: I'd like to turn the floor back over to Dr. Kishore Seendripu for closing comments. Kishore Seendripu: Thank you, operator. And also, thank you all to those who joined this Q3 quarterly call -- earnings call. There are a number of investor financial conferences that are both in person and virtual that we'll be attending this year and the details of which will be posted on our Investor Relations page. So we look forward to seeing you there, and thank you for joining today as well. And yes, with that, happy Halloween guys. Okay. Talk to you later. Thank you. Bye. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Hello, and welcome to Newmont's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Newmont's Group Head of Treasury and Investor Relations, Neil Backhouse. Please go ahead. Neil Backhouse: Thank you, and hello, everyone. Thank you for joining Newmont's Third Quarter 2025 Results Conference Call. Joining me today are Tom Palmer, our Chief Executive Officer; Natascha Viljoen, our President and Chief Operating Officer; and Peter Wexler, our Chief Legal Officer and Interim Chief Financial Officer. Together with the rest of our executive leadership team, they will be available to answer your questions at the end of the call. Before we begin, please take a moment to review our cautionary statement shown here and refer to our SEC filings, which can be found on our website. With that, I'll turn the call over to Tom for opening remarks. Tom Palmer: Thanks, Neil. To begin today's call, I'd like to take a moment to acknowledge the important leadership transition we shared a few weeks ago. Announcing my retirement at the end of this year and appointing Natascha as Newmont's next President and Chief Executive Officer. When I joined Newmont more than a decade ago, I could not have predicted the remarkable transformation our company would undertake. Over these years, we have not only grown as a business, but redefined what it means to be the world's leader in gold mining. We have successfully navigated some of the most significant transactions in mining history, fundamentally changing the landscape of our industry and what it means to be a gold company. Today, we stand as the benchmark for responsible gold mining with an operating portfolio that has meaningful copper production and a project pipeline that is the envy of our industry. During my time with Newmont, the mining industry has undergone profound change. Newmont has responded to these changes and actively shaped its destiny. Rather than simply riding the commodity cycle, we have built a long life, globally diversified portfolio, one that will sustainably deliver shared value to our host communities and governments, shareholders, employees and all of our stakeholders. It has been a privilege to serve as Chief Executive. And as I pass the baton, I am confident that Natascha, who has demonstrated exceptional leadership throughout her 30-year career in our industry, will seize the many opportunities that lie ahead for our business. And with that, I'll turn it over to Natascha to take you through our third quarter operational and financial performance. Natascha Viljoen: Thank you, Tom, and thank you also for your leadership and support since I met you the first time 3 years ago and for your leadership of this great company over the past 10 years. Your contributions have helped shape the strong foundation we stand on today, and I look forward to leveraging that experience to further unlock the value that we all know this business can deliver. Before diving into the details about our operational and financial performance, I'd like to highlight a few notable milestones and record achievements from the quarter. First and foremost, in July, we safely recovered 3 teammates at our Red Chris project, a result of robust procedures and systems in place, the swift and trained actions from individuals involved and strong collaboration across the mining industry. As an organization, we are taking a hard and honest look at the findings from the investigation into the circumstances that led to the incident, and we are fully committed to applying and sharing those learnings across our business and the broader industry. Second, we've received nearly $640 million in net cash proceeds from equity and asset sales since the start of the third quarter, marking the successful completion of our asset divestment program and the further streamlining of our noncore equities portfolio. Third, from our portfolio of world-class gold and copper assets, we generated record 3 quarter cash flow of $1.6 billion, enabling us to reach an all-time annual record of $4.5 billion, with 1 quarter still remaining. And we made significant progress on the cost discipline and productivity work we announced at the beginning of the year, which has allowed us to meaningfully improve our 2025 guidance for several cost metrics, whilst maintaining our outlook for production and unit cost in a rising gold price environment, a notable success in today's market. We achieved this by establishing a smaller senior leadership team with a decentralized organizational structure that is designed to sharpen accountability and simplify how we work. This includes consolidating our structure to 2 business units, giving our 12 operating sites greater decision-making authority and enabling faster, more agile execution. In addition, we further strengthened our balance sheet and enhanced our financial flexibility, ending the quarter in a near 0 debt position after successfully retiring $2 billion of debt. And Moody's upgraded Newmont's issuer credit rating to A3 with a stable outlook, a clear reflection of our improved credit profile, strengthened balance sheet, excellent liquidity position and prudent financial management. We have also continued to share our success with our shareholders, returning $823 million since the last earnings call through a stable dividend and ongoing share repurchases. On top of this financial discipline and excellent performance from our operations, we will also declare commercial production by the end of today at our new exciting mine, Ahafo North, which expands our existing group footprint in Ghana and adds profitable gold production over an initial 13 years of mine life. With this strong momentum from our operations and projects, we are well positioned to continue creating long-term value for years to come. Building on our cost and productivity work and solid foundation from the first half of the year, our third quarter operational performance reflects our continuous focus on safety and optimization. Our third quarter production was largely in line with the second quarter, primarily driven by a step-up in production due to higher grades of Brucejack, improved productivity at Cerro Negro and continued success from our patented injection leaching technologies at Yanacocha. As previously signaled, Peñasquito delivered a lower proportion of gold and steady lead, silver and zinc production in the third quarter, consistent with the planned sequence at this polymetallic mine. And at Ahafo South, we completed mining at the Subika open pit during the third quarter as planned, shifting mining activities to lower grades from the Awonsu open pit. And finally, at Lihir, we completed the construction of the engineered wall of the Phase 14a layback, preparing the site to efficiently reach higher grades in the future years. Consistent with our stable production in the third quarter, our unit costs remained largely in line with the second quarter. Our continued focus on cost discipline and productivity has enabled us to offset higher cost from profit-sharing agreements, production taxes and royalties resulting from the stronger gold price environment. In addition, we continue to progress the projects we have in execution and reached several significant milestones during this third quarter. As I mentioned, we poured first gold on September 19 and will be declaring commercial production at our new mine, Ahafo North, by the end of today. At our second expansion at Tanami, we have fully completed the concrete lining of the 1.5 kilometer deep production shaft and are equipping the shaft and completing construction of the underground crushing and associated materials handling system. At Cadia, tailing from PC2-3 has continued according to plan as we advance the underground development for PC1-2, along with a critical tailings remediation and storage capacity work, which I will touch in a little bit more detail in a moment. Moving on Newmont's operational strength in the third quarter, we delivered another solid financial performance. Newmont generated $3.3 billion in adjusted EBITDA and adjusted net income of $1.71 per share for the third quarter, a 20% increase from the second quarter and more than double last year's results. Also during the third quarter, Newmont generated $2.3 billion of cash flow from operations and $1.6 billion of free cash flow after working capital, marking a record third quarter performance. This achievement represents the fourth consecutive quarter with free cash flow exceeding $1 billion, underscoring Newmont's scale and leverage to favorable gold prices. So far this year, we have generated $4.5 billion of free cash flow, an all-time annual record already, with 1 quarter still remaining. And since the last earnings call, we have received $640 million in after-tax cash proceeds from successful asset divestitures and further equity sales, bringing our total 2025 proceeds to over $3.5 billion in cash to support Newmont's disciplined capital allocation priorities. These priorities remain unchanged and include maintaining a strong balance sheet, steadily funding cash generative capital projects and continue to return capital to shareholders. Looking ahead to the remainder of the year, strong execution across all our managed operations during 2025 has positioned us to achieve our full year production guidance. In the fourth quarter, mining at Yanacocha is expected to conclude, and we will continue to evaluate the opportunities in the surrounding regions of Peru. Additionally, we are looking forward to adding new low-cost ounces during the fourth quarter from our new mine, Ahafo North, and we are anticipating higher ounces from Nevada Gold Mines in the fourth quarter, as indicated by our joint venture partners. From a cost perspective, we are already seeing that our savings initiatives are bearing fruit this year, and we have reduced our absolute cost guidance in 2025 for G&A, Exploration and Advanced Projects by approximately 15%. This improvement in G&A expense is the direct result of our deliberate efforts to simplify the organization and drive down labor and contractor costs. And on the back of progressing labor reductions, our Exploration and Advanced Project guidance is also reflecting the optimization work we are doing to ensure we are managing cost efficiently, including how we deploy resources and equipment, sequence studies and focus exploration on areas that will generate the highest value. Turning now to unit cost. It is important to note that our 2025 guidance was established using a $2,500 per ounce gold price assumption at the start of the year. With sustained high gold prices, our fourth quarter all-in sustaining cost outlook includes increased cost from profit sharing, royalties and production taxes. However, through ongoing optimization and cost improvements, combined with supportive macroeconomic tailwinds, we expect to largely offset these impacts, enabling us to maintain our guidance for cost applicable to sales and all-in sustaining cost per ounce. Finally, now shifting to capital spend. Sustaining capital spend in the current year is tracking below our guidance published in February 2025, primarily due to the timing of spend related to our investments in the tailings work at Cadia. The team has done outstanding work this year, thoroughly assessing every option to ensure we're deploying capital in the most efficient way. Our focus continues to be maximizing capacity in the current in-pit storage facility, repairing the southern wall of the Northern facility and then rising the wall of the Southern facility. With this plan in place, we are ramping up our spend, ensuring that we achieve the right balance between responsible capital management and the tailings capacity needed to support this very long life mine. Similarly, development capital spend is also tracking below our initial guidance, primarily to a deliberate shift in the timing of spend related to the study and underground development work to support the potential expansion project at Red Chris. Taking everything into account and looking ahead to 2026, gold production from our managed operations is expected to be within the same guidance range we provided in 2025, but towards the lower end due to the planned mine sequence at our world-class operations. As previously indicated, lower ounces from Ahafo South next year will be largely replaced by new low-cost ounces from Ahafo North mine. In addition, the decrease in expected production next year will be driven by a lower proportion of gold production from Peñasquito as we transition into the next scheduled phase of mining at the Peñasco pit, while slightly increase our output of silver, lead and zinc. Lower leach production at Yanacocha as we conclude the mining activities at the Quecher Main pit and lower gold and copper production from Cadia as PC1 and PC2 come to an end and we transition to the next panel cave, PC2-3. In addition, following the anticipated $200 million improvement to capital guidance in 2025, we expect capital spending to be elevated in 2026 as a result, keeping our 2-year average largely in line with expectations. Lastly, building on cost and productivity improvements achieved in 2025, we expect to realize the full benefits of our cost saving initiatives, which will be reflected in our 2026 guidance to be provided in February next year. However, if elevated gold prices persist into next year, increased profit sharing, royalties and production taxes could offset a significant portion of the benefits we expect to realize from our cost savings initiatives in 2026. These ongoing efforts demonstrate our disciplined approach to cost control and our continued commitment to driving margin expansion, with more work underway to capture additional efficiencies even in a rising price environment. With our guidance reflecting continued operational and financial discipline, I'll next turn to capital allocation, where our focus remains on striking the right balance between financial flexibility, reinvestment in the business and returning capital to shareholders. We remain committed to our shareholder-focused capital allocation strategies, which are 3 key priorities and remained unchanged. Beginning with our strong and flexible balance sheet, we ended the quarter with $5.6 billion in cash, and we reduced gross debt to $5.4 billion, ending the quarter in a near 0 net debt position and reinforcing our financial resilience in today's unpredictable environment. Secondly, we continue to steadily reinvest in our business, in line with our long-term planning cycle and external guidance, with a goal of generating sustainable free cash flow. And finally, we continue to return capital to shareholders. We declared a fixed common quarter dividend of $0.25 per share. And we repurchased $550 million of shares since our last earnings call in late July. This year, we executed $2.1 billion in share repurchases, bringing the total to $3.3 billion in share repurchases since February of last year, with approximately $2.7 billion remaining in our $6 billion program. We will continue to be disciplined and balanced in our capital allocation priorities. Despite the record level gold price environment, ensuring that Newmont is well positioned to drive consistent long-term shareholder value. With another strong quarter behind us, we remain well positioned to continue delivering on our commitments to our shareholders. Driven by the consistent operational performance we have seen so far this year, we are firmly on track to achieve the improved 2025 guidance that I outlined earlier. And from this stable and efficient operational performance, we have generated $4.5 billion in free cash flow so far this year, achieving a full year record in just the first 3 quarters. From this position of strength, we have focused our time and attention towards optimizing our assets, taking deliberate actions to improve our cost structure and unlock the full value of our world-class portfolio. Alongside our operational strength and financial discipline, we will declare commercial production at our Ahafo North project at the end of today, setting us up to deliver new low-cost ounces for many years to come. In addition, we have successfully completed our asset divestment program and the further streamlining of our noncore equity portfolio, generating greater than $3.5 billion in after-tax cash proceeds from asset divestitures in 2025 to support Newmont's disciplined capital allocation priorities. Over the last 2 years, we have repaid $3.9 billion of debt and have returned over $5.7 billion to shareholders through our common dividend and share repurchases, delivering approximately $250 million in annual savings from these actions alone. Even amid unprecedented gold prices, our commitment remains to disciplined, balanced capital allocation, cost management and productivity improvement, driving long-term shareholder value and financial resilience. As we look to the future, Newmont is well positioned to continue generating industry-leading free cash flow, strengthening our business and rewarding shareholders through a predictable dividend and ongoing share repurchases. Lastly and most importantly, I would like to sincerely thank Tom for his leadership and contributions that helped to put Newmont on such a strong footing. And with that, I'll turn it back over to you, Tom, one last time for closing remarks. Tom Palmer: Thanks, Natascha. As only the 10th CEO in Newmont's 104-year history, it has been a privilege to serve this great company. I'd like to thank our Board for its guidance and partnership throughout my time in the role, our executive leadership team and all of our teams across the world for their support in shaping our business into the industry leader that it is today. And with that, I'll hand the line back to the operator to open the call up for questions. Operator: [Operator Instructions] The first question comes from Daniel Major with UBS. Daniel Major: Congratulations, Natascha. And Tom, good luck in the future. So yes, a couple of questions. The first one, just on capital allocation and the balance sheet. You've been returning cash to shareholders at a healthy rate, but the balance sheet is effectively net debt 0, well below your net debt target. How do you see that going into 2026 if gold prices stay at this sort of level, would you look to build cash? Or would you look to accelerate the rate of buybacks and cash returns to get closer to your net debt target? Natascha Viljoen: Thank you for that question, Daniel. As we've said in our prepared remarks, we remain firstly committed to, I think, a very well-defined capital allocation framework. Within that framework, we've made some good progress, and we will continue to review our returns to shareholders within the flexibility that we have in the capital allocation framework, and we will remain disciplined towards that. And of course, just to add, we do review that on a quarterly basis with our Board. Daniel Major: Okay. So if prices stay here, would it be fair to assume you would accelerate the rate of cash returns rather than move into larger net cash -- or move into a net cash position, is that fair? Natascha Viljoen: Daniel, I would rather steer towards we'll remain disciplined within that framework. And we will continue to review that as we have greater certainty of what the gold price do in the future. What's in our control, certainly, is to continue to focus on our operational performance, our safety, cost and productivity work. Daniel Major: Okay. And then the second question is just on the project pipeline, previously indicated that Red Chris block cave would be the next project that would potentially be approved. Has there been any delays to that potential timeline with the incident last quarter? And is there any other updates on the other kind of longer-dated projects, Yanacocha, Wafi-Golpu, et cetera? Natascha Viljoen: Daniel, firstly, on Red Chris, we remain on track to deliver a proposal to the Board towards the middle of next year. And we have, as we said earlier, done quite a bit of work to do a thorough investigation on the incident that we had. And we are building all of those learnings into the work that we're doing through the feasibility study. We are -- the progress remain on track. In terms of longer-dated projects, those are part of our projects in our -- that's part of our studies pipeline. And all of them will have to earn their right in the portfolio and for us to allocate capital to any future decision. Operator: The next question comes from Matthew Murphy with BMO. Matthew Murphy: Congratulations, Tom, on retirement and Natascha on the appointment. When you described giving the sites more autonomy and just some of the restructuring, I'm interested, what that means for your team? Are there key appointments that you're still looking to make? Or do you feel like you have the team to carry out that strategy already? Natascha Viljoen: Matthew, as you know, in our executive leadership team, we do have a vacancy in-house for our CFO, who is -- and currently, we have our team very capably led by Peter Wexler and a very capable team supporting him in that finance -- in the finance function. So that would be a key appointment that we are focusing on. We have a deep bench across our operational teams that we are leveraging from. We've redefined or reshaped our business into 2 business units, who will be -- that will be led by 2 very strong managing directors, each having authority over 6 of our assets. We also have a very strong group head in our projects and studies and another group head looking off to health, safety, security and environment. So all 4 of them absolutely focused on operations and projects at the core, making sure that we can deliver on our objectives in a sustainable and safe manner. And then, of course, we continue within the framework of the restructuring, we have a very strong functional team across all of our important functions that will continue to support the work that we've defined in this restructuring. So very comfortable that we have a very capable team across our operations, projects and functions. Matthew Murphy: Okay. Great. And then just any color you can share on the ramp-up of Ahafo North? How -- you've got it into commercial production. Has that gone as planned? And how is the ramp looking in Q4? Natascha Viljoen: Yes. So we will be -- we will officially declare and it's absolutely a matter of timing. By the end of today, we'll be able to declare commercial production. What that means is that we have, on average run for 30 days at more than 65% of the design, which gives you about 300 tonnes per hour. And that ramp-up is going -- is running on schedule. So we're very, very excited about this new mine. I think Tom and I, will be heading out there next week. I think particularly, that's a big legacy for Tom as well for us to get this operation up and running. And -- but we will be celebrating with the team that brought this asset online next week to officially open it. But we're really excited about having this new mine as part of our portfolio. Operator: [Operator Instructions] The next question comes from Josh Wolfson with RBC. Joshua Wolfson: I recognize it might be a bit early to ask, but is there any sort of perspective you can provide on reserve pricing, gold assumptions for next year? And then also in that context, whether we should expect a growth in the reserves? Natascha Viljoen: Josh, you're right. It is a little bit early. As you would expect, we're right in the middle of our budgeting cycle, right, also busy with our resource and reserve review. And we will definitely give you an outcome of that work in February next year. Joshua Wolfson: Okay. Got it. And then just back to some of the comments on 2026 guidance. And I guess, there's sort of 2 parts here. One is, I think you had mentioned earlier the average CapEx over '25 and '26 would remain unchanged. If the CapEx declined in '25 by $200 million, should we assume the number next year is the same as '25, so -- or $3.2 billion and then add $200 million to it? And then the other question is just on AISC. I recognize there's a bunch of moving parts here. Directionally, there wasn't any indication provided there. But is the suggestion in the text that the AISC cost should remain stable? Or is one of the optimization and synergies outweighing the other of higher gold prices? Natascha Viljoen: Josh, yes, firstly, starting off with capital. I think you're accurate. And if you consider that over the 2 years, '25 and '26, that we will remain within the guidance that we've given. 2026 will be higher. So you can assume that, that will flow through into 2026. If we look then at all-in sustaining cost, the 2 elements that will impact our all-in sustaining cost, firstly, would be the guidance that we've given or the indication of that we've given for the guidance next year of where our ounce profile will be for our managed operations. I want to just add that. And the impact would be predominantly from Ahafo South, where we -- our Subika open pit operation has stopped, and we've moved into a Awonsu pit with lower grades. But our Ahafo North would largely offset that. The reductions then further will be Yanacocha from the Quecher Main pit, that where we stop mining, and we will only be focusing on leaching activities. Peñasquito, we see a move into GEOs and our goal just due to where we are from the mining profile and Cadia as we wait for PC2-3 to ramp up. So the combination of what we think would be on the lower end of our guidance for ounces and moving of sustaining capital into 2026. Saying that, however, despite the good progress that we've made on our cost and productivity work and we start to see that benefits flowing through, that work will continue with a focus on cost and productivity. So to help offset any increases due to higher gold prices or what we've seen in the higher capital or lower ounces next year. Operator: The following comes from Lawson Winder with Bank of America. Lawson Winder: And Tom, congratulations on concluding your very notable career at Newmont. And then Natascha, I just want to say congratulations on your appointment as CEO. I do look forward to following this next chapter in Newmont's history. If I could, I'd like to ask about capital allocation again, but just from a slightly different point of view. Obviously, there's a lot of extra capital for which Newmont can consider allocating in a variety of different ways. It sounds like capital return is a priority. The balance sheet is already very strong. How do you think about acting on asset or company acquisition opportunities? Is that something that's still within the wheelhouse of potential capital allocation? When you think about growth and investing in growth assets, is that on the docket? Natascha Viljoen: Lawson, thank you for that question. Firstly, we believe that with the -- with this wealth of the portfolio that we have, that the best investment for us is in our own assets and in share buybacks. So definitely, we will remain disciplined around that. And just as a reminder, those 3 elements, you've touched on it. The one is certainly strengthening our balance sheet and our resilience. We've made some good progress there, the investments that I've just touched on. And the progress that we are making on bringing Tanami 2 and the 2 block caves at Cadia still online, disciplined in making sure that we spend our money well in those projects and bringing them online in time. And then lastly, we still have our ongoing share buyback program and our fixed dividend policy. So we will remain committed, and that investment will only be made where we know that it's value accretive. Lawson Winder: Okay. Fantastic. And in that same vein, I mean, there will be an opportunity to consider a significant investment into Nevada Gold Mines from the point of view of Fourmile, which is now 100% controlled by Barrick. I mean, there's also a demonstrated significant upside at Goldrush as a result of the work that's been done at Fourmile. I mean, how do you think about those 2 investment options? Is one preferred over the other? And when you look at Fourmile potentially coming into the portfolio several years down the road, do you think of it as another project to which to allocate capital? Or is that a separate decision from the project allocation? Natascha Viljoen: Thank you, Lawson. Firstly, on Goldrush, is already part of Nevada Gold Mines. So already included in that portfolio, and the capital required is included in the capital forecast as we have it from Barrick today. From a Fourmile point of view, and if you look at that Nevada Gold Mine district, we know that it's a district that is -- still has a wealth of resources and a long future in terms of mining. And as Barrick has concluded their pre-feasibility last year and from the results that we have seen, which is the same results that you have seen and just from what we know from that district, we're very excited about the opportunity that we have that's included in the current agreement for us to have an option to continue our share of that project as well. So we are waiting for Barrick to give us more information so that we can make an informed decision. And as you would have indicated a little bit earlier, it will be a project that will compete for capital against all of our other projects, and we will be disciplined in also making this capital decision when we have the information available as our JV agreement. Operator: The next question comes from Anita Soni with CIBC. Anita Soni: And congratulations, Tom, on your retirement and Natascha, on your appointment as CEO. . Just a further question, a couple of detailed questions, I guess, on Yanacocha, I think the tapers in -- you said it's closing in the fourth quarter. They had a really, really strong quarter this quarter. Is that expected to continue into the fourth quarter? Natascha Viljoen: So Anita, yes. Thank you for that question. Into the fourth quarter, we do see slightly lower than the third quarter. And that is as we in the mining, in Quecher Main pit. And then we will be fully focused on the injection leaching through those in the heap leaches that they have. And that's where our main production source would be. Sorry, Anita. Anita Soni: That's fine. As you indicated that you're going to be at the lower end of the -- if you -- you said it was -- similar levels to 2025 for your managed operations, but at the lower end, I assume that means the lower end of the plus or minus 5%. Within that, are you assuming Cadia is going to drop off in grade next year? Or could you see some positive surprise on that side as well? Natascha Viljoen: Anita, it's a really good question. We have -- we are planning according to the best estimates from our models. We have seen upside in this year so far. And we will continue to monitor PC1 and PC2 as they come to the end. So the models predict that we will see a decrease going into next year. And that's what we've certainly incorporated into our planning for next year. Anita Soni: All right. And then last question on cost. So I think this quarter, you indicated CAS of about -- or sorry, in fourth quarter, CAS about $1,260. Is that -- I mean, just as a proxy to next year, is that a good -- if you're using current gold prices and the kind of operational efficiencies that you've already achieved, is that a good run rate on average for next year, assuming obviously higher gold prices and some great declines, as you mentioned? But on average, would that be a reasonable assumption for CAS for next year? Natascha Viljoen: Anita, our fourth quarter CAS -- G&A is normally cyclical by nature. So I think that's the first assumption that you need to consider. And we do not see that, that is the run rate going into next year. And then from CAS point of view, CAS is impacted by our -- will be mainly impacted by our normal inflation. And then depending on where we are with gold prices, increases in taxes, royalties and worker participation. But it's very much still work in progress as we work through this last quarter and getting ready for the guidance in February. Anita Soni: All right. And then one last quick one for me. On the Ahafo North, my prior assumption was production of around 300,000 ounces for next year as it ramps fully. Does that mean that Ahafo South would decline by the same amount? Or is 300,000 ounces too aggressive for the first year of operations at Ahafo North? Natascha Viljoen: I think if we look at the 2 operations, you could assume a similar kind of run rate that we've had for this year between the 2 operations. Operator: The next question comes from Tanya Jakusconek with Scotiabank. Tanya Jakusconek: Natascha, congratulations on your new appointment. And Tom, congratulations on the retirement, and hope it's going to be a good one and a great adventure. . 3 questions, if I could. Just Natascha, starting off on Nevada Gold Mines, you said you're waiting for Barrick to provide you with information so you can make your decision. Just trying to understand, is that information the feasibility study that we need to wait on? Or is there something else before that? I think the feasibility study is not until 2029. Natascha Viljoen: Yes. That's right, Tanya. We're waiting for that feasibility study. Tanya Jakusconek: Okay. That's helpful. And just on the capital returns to shareholder, you focused a lot on share buyback. Should I be assuming that in February, our $1 per share dividend remains intact and constant? Natascha Viljoen: Tanya, as you know, and again, within the -- in the framework, in the capital allocation framework, we -- as we have it today, we have a fixed dividend, and it is -- something that the Board review on a quarterly basis. Tanya Jakusconek: Okay. So it could be possible, I guess, that part of your return to shareholders could include an increase in dividend in addition to your share buyback? Natascha Viljoen: Yes. Tanya, it's absolutely not something that I think I can give you any indication on, I think. I think the commitment that we have is to remain disciplined within the framework that we're very familiar with. Tanya Jakusconek: Okay. Maybe on the restructuring then, if I could. Understand that you flatlined a lot. I'm just trying understand, I'm trying to draw an organizational chart. Natascha, how many people do you have reporting or divisions do you have reporting to you at this point? Natascha Viljoen: So Tanya, we have restructured the organization to have 2 business units, each of them fixed assets. So it's a good spread of -- an equal spread of operations and also a good spread from a jurisdiction point of view. So if I look at a future structure where I have the operations and the 2 managing directors, the group head for projects and the group head for safety, health, environment still reporting to me, it would be a team of 8 people. Sorry, Tanya, just want to correct that. If I add the CFO, it would be 9, yes. Operator: The next question comes from Fahad Tariq with Jefferies. Fahad Tariq: Maybe just first, just to clarify on 2026 production guidance. I think I heard 2 different things. I just want to make sure I'm getting it right. . You're saying it's within the same guidance range for the core portfolio as 2025, which would be 5.6 million ounces. But that -- but you're also saying it could be lower. So is the right way to think about it potentially 5% lower than 5.6 million ounces? Natascha Viljoen: Fahad, I think the first thing is the 5.6 million is obviously the managed and non-managed operations. So non-managed, we are waiting for -- like normal. We will be getting that guidance from Barrick. And the focus for the managed operations would be we normally guide within a range of plus or minus 5%. And we do see that next year's production would be on the lower end of the managed portion of the guidance, which is in the order of 4.2 million ounces. Fahad Tariq: Okay. That's very clear. And then in all the cost commentary, I didn't hear anything about cost inflation. You mentioned that some of the cost saving initiatives at the unit cost level are being offset by higher royalties, profit sharing, taxes, but that's all gold price driven. Are you seeing any underlying cost inflation on labor, consumables, fuel, anything? Natascha Viljoen: It will be part of our budget, Fahad. There will be a normal increase in that we normally do for our labor increases. And then we'll, obviously, there would be economic factors from some of our major consumables. I think the biggest challenge that we normally have around inflation would be taxes, royalties and worker participation. And that we've been able to offset a large portion of through the cost savings initiatives. Operator: The following question comes from Daniel Morgan with Barrenjoey. Daniel Morgan: Just a follow-up on the 2026 qualitative guidance chart. So to clarify, your managed guidance, 2025 is 4.2 million. You say today that it's expected to be similar but close to the bottom end of the range, which implies 5% lower at -- a roll down of 4.0 million ounces. Is that too conservative a view for the market to take as the midpoint for 2026 guidance? Natascha Viljoen: I think, Daniel, considering that you very rightly commented that it's indicative from where we are going for the next year. We're in the middle of that work. So it is directional. And just to remind you, the impacts that we are having, firstly, I think probably just to take a step back. At the beginning of the year, we've given a clear indication of the work that we're doing to support the long-term profile through the projects and the projects that's in delivery. And those like Ahafo North that we just delivered, they are all on track for delivery. Then we have other production improvements that we're working on, amongst others, with the laybacks that we are doing at Boddington and Lihir, all of those underway for that long-term guidance and making sure that we're consistent with around that 6 million ounces for next year. However, the areas that we are focusing on that we have seen come down is Yanacocha because we have stopped production at the Quecher Main pit. So we're absolutely now required and reliant on the injection meeting. Peñasquito, where we're seeing that we're taking another layback. And that's just due to the normal sequencing of that pit, we'll see lower gold and slightly higher ounces, GEO ounces. And then Cadia, as we work to bringing PC2-3 online, which is well on track to deliver on time, we see a period for where we see PC1 and PC2 lower grades as they come to an end. So the impact on 2026 is very much driven by those dynamics. Daniel Morgan: And just on -- I know it is still early, but just on the reserve discussion that's coming up. There's obviously a fair degree of discretion, which you would be debating. I imagine about the gold price is up a lot. What do you do with thinking about reserves, versus -- do you try to maintain higher margins, et cetera? Just wondering how collectively you're thinking about that debate internally right now. Natascha Viljoen: So from a reserve and resource pricing point of view, that is as you're right, we're in the middle of that debate. Independent of how we think about resource and reserve price, firstly, the focus for us is to always put to prioritize high -- the highest grade ounces through the capacity available to us, first. A very important factor for us as we see the cost of tailings. And that's probably one of our biggest bottlenecks is to ensure that it's economic ounces from a tailings point of view as well. So that is the important factors for us to consider as we make any decisions on resource and reserve impact prices. And again, Daniel, I'll probably just double down on -- as we think about margins. We -- independent of what gold price does, we will continue to focus on our underlying cost and productivity to drive margins in that way. So that is absolutely the focus for us. I think the only additional mention for us around resource and reserves is probably just the divestments that we've done through the year. But you need to -- that you can consider. Operator: The next question comes from Hugo Nicolaci with Goldman Sachs. Hugo Nicolaci: Just going from previous comments, congratulations. Tom, on your tenure at the helm and Natascha, as you take the baton. I wanted to ask a more strategic question on the project pipeline. How do you maximize the value of your currently longer-dated projects here? Does the gold price let you accelerate some of these given the reduced balance sheet risk from your position now? Or is there maybe room to monetize additional assets like the stakes in some of these multimillion ounce projects like Galore Creek and Nueva Unión as you go forward if they're not medium-term priorities? Natascha Viljoen: I think Hugo, you have heard me say this probably 5 times on the call so far. So we're going to remain disciplined in terms of that capital allocation. So we have these projects in study phase in various sizes in the pipeline. They will all, as per the Fourmile comments a little bit earlier, all compete for capital within the profile or within the portfolio. I think it's important to consider that we have many opportunities, both brownfields and greenfields. And the most value-accretive projects will have the benefit of capital allocation. Obviously, within that framework of maintaining a resilient balance sheet and returning capital to shareholders through share buybacks and dividends. So that remains the focus. And as we develop those projects, when the time is right, we will make those decisions. Hugo Nicolaci: Got it. So to clarify, the projects not competing for capital in, say, the next 5 years is a divestment an option? Natascha Viljoen: We continue to evaluate our portfolio. That's something we should be doing to continually look at what is the value that we can get from these assets. And if we have a view that we cannot get value out of them, then they will be -- that will be an opportunity for us to reconsider its position in the portfolio. Hugo Nicolaci: Got it. Fair enough. And then lastly, if I could, Tom, as you take a step back, maybe what excites you the most about the future of Newmont? Tom Palmer: Thanks, Hugo. Thanks for giving me a chance to use my voice. Hugo, this portfolio we've built is unsurpassed in the gold industry. The long life operations, the project pipeline you were just asking about, that can be developed with discipline over time to be able to make decisions and lay out a portfolio of gold production, supported by copper and a few other metals coming through. Never been seen before in this industry. What I'm going to be looking forward to watching from [ Cottesloe Beach ] is in the years to come, '27, '28, '29, '30, 2035, looking at Newmont sustaining the sorts of production levels and margins that no other gold company can compete with. That's the thing that excites me, Hugo. Operator: The final question comes from Ralph Profiti with Stifel. Ralph Profiti: Best wishes and congratulations on the management changeover and transition. Just one question from me, Natascha. When I look at this $450 million in Exploration and Advanced Projects, how much of that reduction is due to rationalization and asset sales, and it's just sort of catch-up adjustments versus the original guidance? And how much was from strategic capital allocation decisions aimed at say, cost savings where exploration was either pulled back or advanced at certain assets? Natascha Viljoen: Thank you, Ralph. Over the last 18 months and as we had clear line of sight of our go-forward portfolio, we have done a material amount of work on all of our assets to understand the full potential around each of these assets, considering not only where we are with every asset today, but the long-term potential, including any exploration upside in these -- all of these assets. And that, in addition to the advanced projects, basically made up the baseline for how we reconsidered the work that we need to do going forward for Newmont. Making sure that, that work is targeted towards delivering the value out of each and every one of these assets. That is what then and also underpinned our organizational structure and the decentralized design. I know that's not your question, but I think it's an important context because in that same framework within that same context, we are also targeting our exploration dollars where we are clear on where the best next exploration work is and where we can expand our understanding and future of these assets. So when we see a reduction, it wasn't a hiccup. It was a deliberate review of doing the right work for the assets and targeting our dollars towards that. So it's been a very deliberate piece of work. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Tom Palmer for closing remarks. Tom Palmer: Thank you, operator. I was expecting that to go to Natascha. Thank you, everyone, for your time, and please enjoy your evening or the rest of your day. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Christoffer Stromback: Good morning, everyone, and welcome to this presentation of Castellum's Q3 report. My name is Christoffer Stromback and I'm Head of Investor Relations. There will be a Q&A session in the end of the webcast. [Operator Instructions]. Let's start. Please go ahead, Pal Ahlsen. Pal Ahlsen: Good morning. The mission from the owners and from the Board to all at Castellum is crystal clear. Castellum needs to become more profitable. I think that's an exciting and fun assignment, fun mission, but I don't think it will be a walk in the park. I think everyone knows that the heydays of real estate is over for this time. So now it's back to basics for Castellum in the day-to-day business. So instead of yield compression, it's leasing. Instead of interest rates, which are -- which were almost 0 it's turning over every stone to find ways to become more efficient and more cost efficient. But it's also in the day-to-day business making sure that we are owning the right properties in the right locations and consequently seizing the opportunities we see in the transaction market. It means that we will become a more entrepreneurial company, I would say, a less democratic company. Although the net leasing in the first quarter -- the third quarter, this quarter, was positive with SEK 16 million. We know that the net leasing for the previous quarters have been negative. So in terms of vacancy rate, we know that our performance will become slightly worse going forward than it is right now due to this negative net leasing in previous quarters. So in the property management for us right now, it's mainly 1 focus, and that's leasing, leasing and leasing, means that we have to become more flexible and faster in our leasing activities. At this stage, I've been CEO now for almost 2 months. I've seen almost all properties, not all our properties yet. And just a personal reflection, I think what I've seen so far of the property portfolio is actually a bit better than I had expected. Of course, that statement has to do with what I thought before I started. But at least, this is slightly better than I thought, and I'm very happy about that. The locations are good and suits the type of purposes the buildings have. We have nice locations for office in inner cities, but also nice locations, but in B locations in the office segment. And then we have lots of industry and warehouse and logistics, also in the right locations given the purpose of those buildings. And I also think that the property portfolio is a bit more well kept than I had thought before. So that's a nice starting point, I think, for my new assignment here in Castellum. And the other reflection I would like to do is, I met most, but not all, of the staff, and I'm meeting quite competent staff that know their property portfolio by March. So I think we have a nice starting point for not turning the ship around, but really to get to where the owners and the Board want us to more profitability. As I suppose most of you know, we are commercial real estate company with most of our holdings in southern part of Sweden, but we also have properties in Copenhagen and in Finland and mainly in Helsinki. Most of our assets are office properties. We have lots of public tenants, governmental tenants and then we have a large proportion also of office -- of warehouse and light industry. And most of you also know that we have a significant share of the bid in Norway called Entra, which owns mostly AAA located office buildings in Oslo, and we own almost 40% of that company. So all in all, we have almost, and including Entra, we have almost properties for SEK 160 billion and directly own SEK 137 billion. Jens Andersson: Thank you, Pal. I'm jumping into the summary of the results. The results compared with the same period last year is negatively affected by divestments and higher vacancies. In addition, income from property management is impaired by higher financial costs due to one-off profit from our bond repurchase last year. Net leasing in the third quarter is positive SEK 16 million and minus SEK 166 million for the period, still happy to report 2 consecutive quarters with positive net leasing. Occupancy rate stands at 90%, which is somewhat lower than last quarter. Net investments of SEK 3.5 billion compared with minus SEK 327 million in the same period last year. Going into details, looking at development of income during the period, the like-for-like portfolio income is unchanged. Indexation contributes, but is offset by higher vacancies. The vacancies is coming quarters will continue to increase due to our weak net leasing in the first quarter. The direct property costs for the like-for-like portfolio is increased by SEK 40 million, equivalent to 2.5%. Direct property cost decrease at the beginning of the year due to the warm winter, low increase in the second and third quarter, primarily due to the higher rental losses, which increased by SEK 25 million. Divestments decreased income with SEK 125 million, however, partially mitigated by acquisitions in the second quarter, contributing to the income with SEK 29 million. Central administrative and property administrative cost is in line with previous years. On an aggregate debt level, NOI decreased by SEK 226 million with divestments, increasing vacancies and one of insurance claims recorded during second quarter previous year as key drivers. Looking at renegotiations. Corresponding to an annual rent of SEK 197 million, which translates to 9% of total lease stock up for negotiation were conducted during the period with an average positive change in rent of 1.6%. Limited investments on average to secure the renegotiated leases. Additionally, contracts with an annual rent of SEK 1.345 billion were extended during the period with no change in terms, equivalent to 60% of total lease stock up for negotiation, which is up from 50% in the second quarter, indicating that a good portion of our tenants are comfortable continuing paying their current rent of the indexation. Net leasing for the quarter amounts to SEK 16 million for the period, the net leasing amounts to SEK 166 million minus. The economic occupancy rate amounts to 90%, a decline of 1.2% since third quarter '24. The decline is driven by increasing vacancies corresponding to 0.8% and a general review of vacancy rents, which explains additional 0.4%. Looking at property values. During the period, Castellum has written down property values with approximately SEK 1.4 billion, equivalent to 1%. The value change is partly driven by the default of Norrköping, the fact that offer will leave approximately 24,000 square meters in Solna and generally lower cash flow expectations in our valuations due to a downward pressure on rental levels and/or increasing tenant investments to uphold lease levels in some of our markets. The valuation yield is in all essence, the same as the second quarter 2025 at 5.63%. In addition, our projects continue to show positive value add. Looking into the transaction market in Sweden, the investment volume in the Swedish real estate sector ended up at approximately SEK 104 billion in the period, compared with SEK 82 billion in 2024 and SEK 83 billion in '23. Our investment volume -- of the investment volume approximately 20% was office properties, which is higher than '24 and '23, indicating growing interest into the office segment however, on aggregate, a bit lower than historical average. Looking at financial highlights, market conditions are very favorable credit margins at historically low levels and with attractive term premium, current credit spreads in the domestic market for a 3-year bond is at around 90 bps and for a 5-year bond around 120 to 125 bps. European market is at the lower end of this range. Nordic banks continue to offer competitive pricing and are willing to increase volumes. S&P confirmed our BBB rating with stable outlook during the quarter, also hold a Ba2 rating with stable outlook for Moody's. Low refinancing activity during the quarter. In total, we refinanced SEK 1 billion in secured debt on a 10-year tenor, no activity in the bond market and limited bond maturities in the coming 6 months. Average interest rate currently at 3.1%, down from 3.2% during the second quarter. We see a potential to further reduce the average interest rate in our debt portfolio by refinancing loans and bonds on better terms. Looking at financial key ratios, very small changes in financial key ratios compared to the previous quarter. Loan-to-value now at 36.5%, an ICR currently at 3.2x, comfortable headroom against policy levels and covenants. Average debt maturity in average fixed interest term stable at 4.6 and 3.6 years, respectively. We would like to highlight that our interest rates hedging exclusively comprises plain vanilla interest rate swaps. Interest-bearing liabilities amounts to SEK 57.5 billion, down by SEK 1 billion since the beginning of the year. Over to you, Pal. Pal Ahlsen: Thank you, Jens. As most of you know, we have a very sustainable portfolio and a high focus on sustainability. And here, I would like to highlight the energy efficiency, which has improved by 7%. And that's what I meant previously that we have a very good staffing in the company because it's not easy to reduce the energy consumption with 7% which is needed since the costs of energy are normally increasing quite heavily from the municipalities as we buy lot of energy from them. So this is a very good performance, I would say, reducing energy efficiency. We're improving in energy efficiency. We have made some acquisitions this year. We bought a couple of properties from Corem during the summer, also sold some properties, mostly single assets and we made the investments. And I think going forward, we will have -- as I foresee it at least, we will have more transactions going on in Castellum, even if the net investments may remain the same, we will have higher figures, both on the acquisition and property sales side of things because that, I think, is one driver of profitability for a company -- for a property company in owning exactly the right properties at the right moment in time. And I think that sums up our presentation, and we are happy to answer questions. Christoffer Stromback: [Operator Instructions]. And the first question comes Fredrik Stensved of ABG. Fredrik Stensved: Firstly, Pal, when you took the CEO position in almost 2 months ago in the end of August, I believe you stated that the management and the Board of Directors would sort of formulate a strategic update or a strategic review. Would you say that the communication today where it's back to basics, it's focused on leasing, leasing, leasing, et cetera. Is that the strategic review all said and done? Or should we expect anything more in sort of a formal strategy update going forward? Pal Ahlsen: I think that's what I've said regarding back to basics is certainly part of the day-to-day business of commercial real estate company. But we are still working and thinking a bit about how to exactly formulate the strategy. So we will come back to that in a more formal way than this. Fredrik Stensved: Okay. Perfect. Sorry. And then on -- I think -- it's mentioned in the CEO letter that maybe Castellum will be more about entrepreneurship, decreased bureaucracy and selling and buying when good opportunities arise and so on. Is it possible to make any more concrete comments about what this means, which type of properties are you looking to sell and buy, et cetera? Pal Ahlsen: No, not at this stage. I would say. What I can say, though, is that I'm also surprised by this of our colleagues in the industry has reached out to see if there are any swaps we could make the properties or that they are interested in buying certain parts of our portfolio or in general, making transactions. So there's definitely opportunities in the market. Fredrik Stensved: Okay. Final question from me, for what's your view on share buybacks, given where your share is trading an implied deal as you see it in the direct transaction market versus buying shares? Pal Ahlsen: Personally, I'm all in favor of that. We're not there yet in our discussions internally, but I'm in favor of buying back shares, at least when we have such a huge discount as we have today. Christoffer Stromback: Thank you. Next one is John Vuong, Kempen. John Vuong: In the media, there were talks about you considering splitting up the company or at least the shareholder is talking about that. What are your thoughts on that now? Pal Ahlsen: It's too early to answer that specifically, but that's obviously, something many people are speaking about, the possibilities of splitting Castellum into smaller parts, and that would sort of show value in -- on the stock market. But that's obviously 1 option that we have, but we are looking on continuously all options we have for driving profitability. So I can't really say more than that at this stage. John Vuong: Okay. And then when you're talking about owning the right proposition in the right locations, how do you see the current pace of noncore asset sales? And is there a change in what you designate as noncore? Also following up on that how do you assets outside of Sweden as well? Pal Ahlsen: Yes. What I mean with owning the right properties in the right locations is owning those properties that will contribute to our mission to over the business cycle giving a return on equity on 10%. That's exactly what I mean with that. That doesn't mean that we should have specific locations, only AAA locations in downtown cities or that we should only have office buildings. I think we will have a mix of different type of properties that we believe that in the long term will support us in our mission to get 10% return on equity. John Vuong: Okay. That's clear. And you were talking about asset swaps, that's colleagues of your view in the industry are considering asset swaps with you. What's your view on nonyielding assets in your portfolio like the Säve Airport. Could you consider swapping down into, say, a higher-yielding assets? Pal Ahlsen: This was more a comment that there are transactions being made in the market and that is big interest for our portfolio in the market. All our business -- all our activities here at Castellum are aiming to reach our target of 10% return on equity. If a swap with some other owners is supporting that, we are -- we'd obviously look into that and acquisitions as well and disposals as well. Christoffer Stromback: Next one is Lars Norrby, SEB. Lars Norrby: Just follow up on the strategy and the portfolio composition in particular. When you're looking at it, are you particularly thinking about parts that are subscale in terms of achieving efficiency, are those most likely to be on the divestment list? Pal Ahlsen: I mean, efficiency that ends up in the cash flow from the property, right? But when we are looking at this, we are not looking at efficiency in that manner. A property can be very inefficient in some sense but very profitable. So we are not saying that just because this property is a bit messy to deal with or expensive in some sense, that's reflected in the cost of the property, right? So looking at this from a strict expected return on equity perspective. Lars Norrby: So in that sense, just still thinking about, let's say, the portfolios in Finland and in Denmark, are they big enough or are they efficient enough to warrant the position within Castellum? Pal Ahlsen: I can answer generally on that question. I think more important than size and more important than efficiency in some sense is the markets as such. Other markets that will support rental growth are the markets where vacancy in 10 years from now or 5 years from now, will be lower or higher than today. Those questions are significantly more important than if we can reduce the cost of property management by [ SEK 10 or SEK 15 ] per square meter per year. The rental growth and the demand are significantly more important. And I think that's something that shows up very well when you do a portfolio analysis like this. That it's the long-term vacancy and the long-term growth possibilities in rents that are the most important factors when owning real estate. So when -- and obviously, the price of the properties. That's the starting point, obviously. Lars Norrby: Okay. Final question from my side, while I brought up Finland, brought up Denmark, let's talk about Norway just briefly. I'm thinking about Entra, you're holding in Entra some 37%. And at the same time, Balder is close to 40%. Are you -- I mean, my impression is that Balder may be interested in looking for some kind of solution to that ownership situation, what's your view on Entra going forward? Pal Ahlsen: I think what I can say regarding Entra, I think they are facing somewhat of the same challenges that we are facing in Castellum. And they also have a financial target of trying to reach 10% return on equity over the business cycle. And to reach that in an environment where needs are not compressing, you need to have significantly better growth in the net operating income to as low investments as possible. So they are facing, I would say, the same challenges as us, how can we be growing net operating income on a like-for-like basis with as low investments as possible to come close to the target. So they are facing the same challenges as we do. Regarding our position there, we haven't discussed that much and I have no further to say rather than that we, as owners really want to see profit, obviously, in the company to increase. And the only way forward is increasing net operating income by working by leasing, optimizing costs and not just -- and minimizing CapEx -- making smarter CapEx... Christoffer Stromback: Next one is Nadir Rahman from UBS. Nadir Rahman: It's good to hear from you, Pal, on your first conference call. Looking at the like-for-like rental growth, I know that was, I think, around minus 0.3% on a total basis and minus 3.4% on a net basis. So could you give a bit more color on the contribution from indexation versus vacancy given that the vacancy did reduce slightly -- sorry, the vacancy increased slightly during the quarter. That's my first question. Pal Ahlsen: I think the -- we managed to increase sort of the rental levels in the portfolio. But the vacancy increase is sort of wiping that away. And I think the rental levels have increased somewhat around 2% in the portfolio. But the vacancy effect is bigger plus that we have a bit more rent losses than we've had in previous periods, and that explains the sort of flat like-for-like growth in rental income. Nadir Rahman: And your indexation, what kind of percentage were you seeing during the quarter? Pal Ahlsen: During the quarter, we get it once every year. And what we see right now is if the CPI, if we get 0.8%, we believe that from the first quarter, we will achieve slightly below 1%. So we have fixed step-ups in some of our contracts. And of course, some of our public sector tenants have below 100% CPI indexation. But on average, when CPI is low, we usually get a bit higher. Nadir Rahman: Okay. That's very clear. And my second question is on the net lettings. So like you mentioned, it's been positive in Q3 and I know that for the year-to-date, it's been negative overall. But how do you see this trending in Q4? And I know that Q4 generally is a more active quarter for lettings and general transaction activity in the Nordics and in Sweden in particular. Pal Ahlsen: I'm reluctant to speculate. But what I can say is that this is our main focus. It's leasing, leasing, leasing to get to turn this around, so to say. We don't want to present flat like-for-like growth rate. We don't want to present an increasing vacancy. So this is our focus. It's leasing, leasing, leasing to turn that ship around, so to say. Lars Norrby: And in order to achieve all the leasing that you need to maintain vacancy and prevent that from rising any further. Do you feel like your -- wouldn't you change for rental strategy and perhaps offer more rent freeze or incentives to tenants? Or do you think you need to compromise on rents in order to achieve a higher level of... Pal Ahlsen: I think we need to use all the tools in the toolbox being faster and more flexible. It's very dependent on the specific squaring about, but we really need to use all tools in the toolbox in a market where -- in some markets, there's a slight oversupply of offices, for example. There, you have to be faster and smarter and more flexible than your competitors. And at least in the long term, having the right locations where there actually is a long-term demand for the square meters. But using all the tools in the toolbox being faster, more flexible than our competitors, then we can turn this around. Nadir Rahman: Okay. That's very clear. And final question from me direct to Pal. You mentioned earlier on the call that the situation at Castellum and the portfolio and so on, where "better than you expected when you came in." What was the expectation before you joined Castellum? Pal Ahlsen: Well, that's a good question. But as I said, I think what I've seen so far, I think the locations are slightly better than I thought they were. And I think that the upkeep of the buildings are slightly better than I thought. And as I said, it's difficult to -- it's just my feelings around this, it's difficult to put words on it. But it is a bit like 100 meters sprinter with the targets running below 10 seconds on 100 meters. I thought we were started at 103 meters with the goal of running below 10 seconds, but it's actually starting from 100 meters. So to give some color on that. So slightly easier than I thought, given a slightly better portfolio and a very dedicated staff in the company. Christoffer Stromback: Next is Stefan Andersson, Danske Bank. Stefan Erik Andersson: Three quick ones from me. First one on reducing costs. You're talking about that, and we see that in your -- in the report as well. You mentioned that -- just trying to understand the magnitude of this. I mean it's one thing to cut newspapers and be prudent of whatever you do. But is there any -- do you see any bigger opportunities here? I mean is there still synergies from Kungsleden merger to take out? Or is it -- I mean I'm just trying to understand if we're talking about small, small things here and there or if there's any bigger ones. Pal Ahlsen: I'm sorry I have to ask this, but could you repeat the question and speak a bit louder? Because I didn't hear the full question. Stefan Erik Andersson: Okay. Sorry. I hope this is better. So my question is really on reducing costs. You talk a little bit about that. But just to understand the magnitude, is there any bigger things that could be done with efficiency, heritage from Kungsleden merger, I don't know. But was it just smaller items here and there and [Foreign Language], as we say in Swedish, daily? Pal Ahlsen: Okay. I got the question now. Your question in regards if I could give any estimate how much costs we could cut when we are turning over every stone. I cannot give a forecast cost about that. But what I can say is that we are really turning on over every stone. And that's why I mentioned the newspaper subscriptions. I think I mentioned that in the CEO letter, and when you're turning over every stone, you will find things like that. And just to be specific when it comes to newspaper subscriptions, I think we can save SEK 0.5 million there. And that's perhaps not money. But a large, many stones being turned over, I think we can save a lot of money, but I cannot give an estimate on that at this stage. Stefan Erik Andersson: Okay. Good. And then on -- we talked a little bit about the renegotiated rents that I imagine there is some investment in CapEx associated to that. Could you maybe give us a flavor of what kind of direction you have on the spot market? I mean, is that -- do you actually see rents coming up? Or is it actually going down? Pal Ahlsen: I mean looking at the renegotiations, I must admit that I was actually surprised myself when we dug into it and we do not invest that much money into the renegotiated deals, and we do not see any clear sign that it's increasing or decreasing. Stefan Erik Andersson: Okay. And then the final 1 is Säve, which -- I mean it's -- I thought -- I've seen it as a very attractive asset that you have within a very nice segment and all. I understand that you've had some planning issues there with other potential use of the airport and all that. Maybe could you maybe elaborate on your hopes for that now with the new situation if you could get compensation somehow? Or if you could alter the use in some way, whatever you might have on that? Pal Ahlsen: I cannot give so much details, but it's, in my mind, a very valuable asset going forward, especially given the huge investments that will be done in the defense industry. So I think that's an extremely valuable asset as it is. It's not yielding too much right now. I think not too much, but that's more of a value play than anything else. That is a very valuable asset. Christoffer Stromback: Next one is Adam Shapton from Green Street. Adam Shapton: Good morning. Hope you can hear me. Okay. A couple of questions. Pal, coming back to your comments on buying and selling of assets. I just want to be -- I just wanted to ask you to be clear. Are you talking about 1 strategic repositioning of the portfolio and then sort of back to business as usual? Or do you mean to say that the business model will permanently shift to much higher asset trading over the cycle? And I have another question, but maybe we can start with that one. Pal Ahlsen: We can start on that one. No, what I mean is that a property has a life cycle. You build it, you manage it and then you have a phase where it's degrading and then you have an upgrade phase. And I think Castellum is depending on market and depending on which type of asset type are good in all of these phases, but perhaps not good in all cities and all markets, and all markets are a bit different. And Castellum has had a tendency to own properties over the full cycle. And I think we need to be a bit more smarter in owning the properties in the lifespan of a property where we are the best. And that may vary over time, that may vary over markets and that may vary over asset types what properties that suits us. This means that we may very well own a property during 1 phase of the life cycle of a property in Stockholm but choose not to own it in another market, and that will trigger a higher asset rotation pace than we've had historically. So that's actually what I'm meaning with this. But also perhaps ceasing a bit more opportunities than we've done historically, when prices are right, either to sell or to buy. So it's not -- you should not read into that strategic that we are down because we are not there yet, downsizing office or increasing whatever, it's just the fact that we cannot be -- it's not perfect from a return perspective to own properties forever and ever. We need to -- we are not a perfect custodian of properties in all their faces everywhere. Adam Shapton: Okay. So that's -- so it will be management's acumen and understanding of the cycle and each individual market that will drive better returns after transaction costs according to that. Okay. And then second question is on CapEx. You mentioned one of the things you'd like to do is, I mean, you said spend less on CapEx, but then I think you sort of corrected yourself to smarter CapEx. Is your assessment that Castellum has been deploying CapEx in the past in a way that doesn't meet suitable return hurdles? Is that what you found and you think you can change that in the future? Pal Ahlsen: That's a good question, and I appreciate that. I think perhaps that was true if we go back 5 or 10 years ago that we -- when money was a bit more cheap and the target actually in Castellum was to invest at least 5% of the property value each year. So it might be some merit to that going back a bit further. I don't think that, that has been the case for the past years. But I do think that there are potential to improve where we put in our money. In some cases, we should perhaps invest slightly more. And in some cases, we should perhaps not invest anything right now. And there, I think, and looking forward to having discussions with management, where our capital makes the most -- where we get the most bang for the buck. I'm sure that there are potential there for improvement. I would be very surprised if it wasn't because that's probably the case everywhere in all real estate companies. Christoffer Stromback: Thank you. Back to Fredrik Stensved of ABG. Fredrik Stensved: Yes. And apologies for jumping in twice. I just have a follow-up on the leasing strategy. Listening to this presentation and what you're saying, Pal, it's pretty obvious that you're not happy about sort of the leasing this year. You're not happy about the lower occupancy in the past couple of years. I think at the same time, you're saying asset quality or the portfolio quality is better than you were thinking and the organization is better. They know the properties by heart and so on. So maybe in order to get sort of a feeling about upcoming changes and strategy in terms of leasing, asset quality is better, organization quality is better. What's your view on why Castellum has underperformed peers in terms of occupancy and which are sort of the concrete actions you believe are the most important in order to improve going forward? Pal Ahlsen: I'm not sure that we have been worse than peers. No idea that's the case on that. But for a company, for a real estate company, the main mission is obviously to have as many square meters rented as possible. And we have roughly 10% at least economic vacancy. That's a huge, huge potential. I think that amounts to roughly SEK 1 billion in rental revenue, and we must do everything we can to catch as much as possible of that potential rental revenue. And we are discussing internally in what measures makes sense here. And here, it's different depending on what type of assets. So I wouldn't say that we have underperformed, but I've said that we have perhaps increased the discussions around how can we reduce vacancy faster than given the measurements we've done historically. Fredrik Stensved: Okay. Thank you. Christoffer Stromback: Thank you. And that was actually the last question for today. So thank you all for listening. Bye-bye.
Operator: Good day, and thank you for standing by. Welcome to the Dime Community Bancshares, Inc. Third Quarter Earnings Conference Call. Before we begin, the company would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contained in any such statements, including as set forth in today's press release and the company's filings with the U.S. Securities and Exchange Commission to which we refer you. During this call, references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP measures and for reconciliation to GAAP, please refer to today's earnings release. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Stuart Lubow, President and CEO. Please go ahead. Stuart Lubow: Thank you, Diane, and thank you all for joining us this morning for our quarterly earnings call. With me today, as usual, is Avi Reddy, our CFO; and also Tom Geisel, who we hired earlier this year to continue growing our commercial bank. In my prepared remarks, I will touch upon key highlights for the third quarter of 2025. Avi will then provide some details on the quarter and thoughts for the remainder of 2025. Our core earnings power continues its significant upward trajectory. Core pretax pre-provision income was $54.4 million for the third quarter of 2025 compared to $49.4 million in the second quarter of '25 and $29.8 million a year ago. We had an increase in loan loss provision in the third quarter, primarily tied to charge-offs on loans in the owner-occupied and nonowner-occupied real estate segments. While NPAs were up slightly on a linked quarter basis, they are up off a very small base and represent only 50 basis points of total assets, which compares favorably to commercial bank peers. On a linked-quarter basis, we did see a decline in criticized loans in the third quarter of approximately $30 million and also saw a 33% decline in 30 to 89 days past due. Core deposits were up $1 billion on a year-over-year basis. The deposit teams hired since 2023 have grown their deposit portfolios to approximately $2.6 billion. We have a core deposit funded balance sheet with ample liquidity to take advantage of lending opportunities as they arise. Our cost of total deposits was 2.09% in the third quarter, which was unchanged versus the second quarter. By maintaining a strong focus on cost of funds, our NIM has now increased for the sixth consecutive quarter and has surpassed the 3% mark. Following the Fed rate cut in September, we were able to meaningfully lower deposit costs while maintaining loan yields. As mentioned in the press release, since the Fed rate cut, the spread between loan and deposits has increased approximately 10 basis points, and this will continue to drive NIM expansion in the fourth quarter. Outside of rate cuts, we continue to have several additional catalysts to continue to grow our NIM over the medium to long term, including a significant back book loan repricing opportunity. Avi will get into more details on the margin in his prepared remarks. On the loan front, we continue to execute our stated plan of growing business loans and managing our CRE concentration ratio, which is now 401. Business loans grew over $160 million in the third quarter compared to $110 million of business loan growth in the second. On a year-over-year basis, business loan growth was in excess of $400 million. Loan originations, including new lines of credit increased to $535 million. The weighted average rate on new originations and lines was approximately 6.95%. Our loan pipelines continue to be strong and currently stand at $1.2 billion. The weighted average rate on the pipeline is between 6.50% and 6.75%. Next, I will touch on our recruiting efforts. Disruption in our local marketplace remains very high, and we continue to execute on our goals of building out our C&I businesses. As outlined in the press release, we hired a number of talented bankers in the third quarter. Once they settle in, we expect them to meaningfully contribute to our business loan growth. In addition, we recently opened a branch location in Manhattan. The grand opening was actually yesterday, and we are on track to open our New Jersey location in Lakewood in the first quarter of 2026. Additionally, we have identified a new location in North Shore of Long Island that we expect to open in early 2026. In conclusion, the momentum in our business continues to be very strong, and we are executing our business plan of growing business loans and core deposits. We have clearly differentiated our franchise from our local competitors as it relates to our growth trajectory, our ability to attract talented bankers. We have an outstanding deposit franchise, strong liquidity -- and a strong liquidity position and a robust capital base. We expect more meaningful NIM expansion in the fourth quarter and significant opportunities in 2026 based on loan pricing opportunities, organic growth across deposits and loans. I'm looking forward to closing out the year strong. I want to again thank all our dedicated employees for their efforts in positioning Dime as the best commercial bank in Europe. With that, I will turn the call over to Avi. Avinash Reddy: Thank you, Stu. Core EPS for the third quarter was $0.61 per share. This represents 110% year-over-year increase. Core pretax pre-provision net revenue of $54 million represents approximately 1.5% of average assets. The reported third quarter NIM increased to 3.01%. We had around 2 basis points of prepayment fees in the third quarter NIM. Excluding prepayment fees and purchase accounting, the third quarter NIM would have been 2.98% -- as a reminder, the second quarter NIM, excluding prepayment fees and purchase accounting was 2.95%. Total deposits were up approximately $320 million at September 30 versus the prior quarter. We continue to see strong inflows across our branch network and across the Private and Commercial Bank. Core cash operating expenses, excluding intangible amortization, was $61.9 million, which was marginally above our prior guidance for the third quarter of $61.5 million. The variance versus the prior guidance was due to the additional hires we made in the third quarter. Noninterest income of $12.2 million was inclusive of a $1.5 million positive benefit tied to a fraud recovery that dates back to Legacy Bridge. We had a $13.3 million credit loss provision for the quarter, and the allowance to loans increased to 88 basis points. As Stu mentioned, criticized loans were down approximately $30 million linked quarter and loans 30 to 89 days past due were down approximately 33% on a linked-quarter basis. We continue to grow and our common equity Tier 1 ratio grew to over 11.5% and our total capital ratio grew to over 16%. Having best-in-class capital ratios versus our local peer group is a competitive advantage and will allow us to take advantage of opportunities as they arise and speaks to our strength and ability to service our growing customer base. Next, I'll provide some thoughts on the fourth quarter. As I mentioned previously, excluding prepayment fees and purchase accounting, the NIM for the third quarter would have been 2.98%. We would use this as a starting point for modeling purposes going forward. As Stu mentioned, we expect more substantial NIM expansion in the fourth quarter as we have been successful in reducing deposit costs and maintaining our loan yield, which has been helped by the pace of new originations. The spread between loans and deposits is approximately 10 basis points higher currently than what it was at September 15. While we have a larger cash position than we did in prior quarters that will eat into some of the NIM benefit from the spread differential between loans and deposits, we do expect more pronounced NIM expansion in the fourth quarter compared to the second and third quarters. In addition, we expect the asset repricing story that we've been talking about for a while to unfold with more vigor in 2026 and 2027. To give you a sense of the significant back book repricing opportunity in our adjustable and fixed rate loan portfolios, in the full year 2026, we have approximately $1.35 billion of adjustable and fixed rate loans across the loan portfolio at a weighted average rate of 4% that either reprice or mature in that time frame. Assuming a 250 basis point spread on those loans over the forward 5-year treasury, we could see a 20 basis point increase in NIM by the end of 2026 from the repricing of these loans alone. As we look into the back book for 2027, we have another $1.7 billion of loans at a weighted average rate of 4.25% that will lead to continued NIM expansion in 2027. In summary, assuming the market consensus forward curve plays out, we continue to have a path to a structurally higher NIM and enhanced earnings power over time. Now that we've crossed 3% on the margin, the next marker in front of us is 3.25% and after that, 3.50%. With respect to the balance sheet, we expect a relatively flat balance sheet for the remainder of this year as planned attrition in transactional CRE and multifamily masks the growth in our business loan portfolio. As we've typically done, we will only provide guidance for 2026 once we get into the new year. Next, I'll turn to expenses. As you are aware, we've added a significant amount of talented individuals to the organization, and we continue to have opportunities to selectively add more. We expect fourth quarter core cash operating expenses to be around $63 million. We don't expect any more wholesale additions of production staff until bonuses are paid in the first quarter, so we can treat the new fourth quarter expense run rate of $63 million as a good placeholder for now. Turning to noninterest income. For the fourth quarter, we do not expect a repeat of the fraud recovery item that we saw this quarter, meaning the run rate for noninterest income would be around $10 million to $10.5 million. Factors that will determine the eventual outcome will be swap fee income, which can be hard to predict as well as SBA fees, which are being impacted by the government shutdown. As has been our typical practice, we won't be providing guidance on 2026 until we report earnings in January. Suffice to say, we are very positive on the NIM trajectory as we exit 2025. Our efficiency ratio continues to improve, and we expect to continue driving that down with NIM improvement. With that, I'll turn the call back to Diane, and we'll be happy to take your questions. Operator: [Operator Instructions]. And our first question comes from Steve Moss of Raymond James. Stephen Moss: Maybe just starting off on credit here. Just curious with regard to the NPA formations and the charge-offs. Were the charge-offs related to this quarter's new nonperforming loans? And then was it weighted more towards owner-occupied CRE or nonowner-occupied CRE? And maybe if any of it was multifamily related? Avinash Reddy: Yes. So none of it was multifamily related, Steve. It was owner-occupied and nonowner-occupied. The split was around 20% owner-occupied, around 80% nonowner occupied over there. Like Stu said, criticized were down around $30 billion linked quarter. The 30- to 89-day bucket got better. And we're pretty confident that we should see some resolution of legacy NPAs in the fourth quarter, probably amounting to around $15 million to $17 million that we have a good line of sight into. So I wouldn't characterize the formation as anything out of the ordinary course of business. We're operating at 50 basis points of NPAs. We probably could be range bound around that between now and the end of the year. And we're seeing a very strong credit overall on the multifamily side. Stephen Moss: Okay. Appreciate that. And then maybe on the multifamily payoffs this quarter, those accelerated here. It kind of sounds like you're going to expect that similar pace into the fourth quarter. Is that kind of maybe how you guys are thinking about 2026 as you guys just have greater repricing and we're going to see just a continued step-up in the multifamily paydowns? Stuart Lubow: I think that I can see a continued paydowns in the multifamily. I think this quarter was a bit outsized, and we knew that we had some big prepayments or payoffs coming in. But I wouldn't expect it to be at this level of prepayment going forward, more normalized. But we are seeing maturities. When we do have maturities, there is a relatively high percentage that is refinancing out. Operator: Our next question comes from Matthew Breese of Stephens Inc. Matthew Breese: Avi, Stu, I wanted to follow up on the credit question just for a moment. On charge-offs specifically, Avi, I think in the past, you've discussed kind of, hey, look, we're building out a business bank. There's going to be some more normalized, call it, charge-offs than historical Dime, especially in the higher rate environment. Could you just reframe for us what you define as normalized? And I'm trying to kind of triangulate the comments. Is there a path back to normalized over the next couple of quarters? Avinash Reddy: Yes. No problem, Matt. I appreciate the question. So I think at the start of the year, our guidance for charge-offs was around 20 to 30 basis points. That's what we said before we start building out the specialty verticals, really. That was my comments back in January, right? So you look at on a year-to-date basis right now, we're basically at 31 basis points. So we're basically within the range of what we have. The new businesses that we're building out, fund finance, for example, we expect 0 losses in those new businesses, right? So I don't think the new businesses per se are going to add to the level of future charge-offs because we're making good loans and we're being very conservative in what we do. What it may change, though, is the reserving methodology because for C&I loans, we are reserving somewhere between 125 and 150. So if you think about the model going forward, we do expect the reserve to build and us to be in that 90% to 1% area, and that could gradually build over time. It will be a function of what we're putting on. But in terms of charge-offs, I mean, we're in probably the late cycles of a high rate environment. And it's our goal with increased earnings power to exit some criticized assets here and there. So that's probably a couple more quarters of that probably that we see. But I would expect as we get into '26 to get to more of a historical Dime level, if that's what you're asking on the charge-off level. But I think on the provision level, it's going to be a function of the new business, right? And we're reserving at a higher level for the new business. Matthew Breese: Great. And then going back to the multifamily reduction, I am curious, within that, was there any selection bias? -- stuff that's rolling off the book, was it more market rate multifamily versus rent regulated? And I would love just to hear what the market appetite is for those products refined away. Is it nondiscriminate and both are being refined away? Or are you seeing more of the market rate stuff get refined away than rent regulated? Avinash Reddy: Yes. So I think we're setting our new rates slightly above market, Matt. I think at a reprice, some of the customers are staying with us. But at maturities, we're not seeing any delineation between free market and historical rent-regulated items just because the LTVs are so low, and we've been pretty conservative in the underwriting. So I think there's a difference at the reprice. If something is repricing and still has 5 years left, you probably would see more of the rent-regulated stuff staying on with the books. But at maturity, we're seeing the same 80% to 90% of the loans are basically going away at this point. And there's really no delineation between that at this point in time, at least. Matthew Breese: Okay. And then 2 others for me. Just one, we may be in the process of getting some short order successive rate cuts. It feels like 2 by the end of the year and then maybe 1 earlier next year, so call it, 3 or 4 -- another 3 or 4 25 bps cuts. Can you give us some idea for expectations on deposit betas as a lot has changed on year-end than previous cycles? Avinash Reddy: Yes. I'll start with this cut, Matt. So I think you asked the question last quarter, I mean, rate cuts obviously help us and gradual rate cuts help us more than probably big rate cuts because that's sometimes it's hard to cut depositors by the full amount. So we kept the deposit cost at 2.09% this quarter, consistent with the last quarter, but we continue to grow deposits, right? So we're bringing on new deposits in the low 2s. Right now, our cost of deposits is in the low 190s. Prior to this rate cut, it was 2.09%. And so we were pretty much able to pass the full 100% on. I mean we do have 30% DDA. So that is what it is. So I'd say for this 25 basis points, we're very happy with where we ended up. So we started at 2.09%. We're at 1.90% right now. So we were able to cut and that's on total deposits. We're able to cut by 19 basis points. So I think for anything going forward for the next 2, we'd expect something similar, but it's going to depend on the competition. And look, the luxury that we have is we have a lot of new deposits coming in with -- from our branch network, from our municipal deposit bankers, from our private banking teams and from some of the commercial lending teams that we've built on. So we can be more aggressive with the existing deposit base that we have. And I don't think that's a luxury that a lot of other peers in our geography have. So while I think the models would say 50%, 60% beta, I mean, we're trying to pass everything on going forward on the way down. And if you remember, when rates were at 0, our cost of deposits was 7 basis points back then, right? We're not getting back there, but we did pay up on the way up, and there was industry events with Signature and some of the other stuff that happened where there was a bit of retention going on. But I think on the way down, our goal is to benefit from that. And again, the NIM guidance that we gave going forward, I mean, that's absent any rate cuts, right? I mean -- so for every rate cut, we should have 5 basis points plus or minus over there, and that's kind of primarily from cutting the deposit side of the business. Matthew Breese: Great. I appreciate all that. And then just my last one. There's been some larger banks that have identified Long Island as a market folks want to be in. And I know in prior calls, we've asked you about M&A as a buyer. And I'm curious your thoughts there. But I'm also curious to what extent you've thought about all strategic alternatives, including a potential sale if bids were to come in and some of these larger banks were to make a more pronounced effort in Long Island. That's all I had. Stuart Lubow: Yes. Thanks, Matt. Look, we're focused on organic growth. We have -- we've just brought on all these talented bankers and these teams on the loan side. We had already done that on the deposit side. We think we're really well positioned to deploy the excess liquidity that we have over the next 6 months to a year with all these teams coming on board. Our pipeline is very strong with very good yields. So I'm excited about the fact that we're going to start to see NIMs in the mid- to high 3s in a relatively mid- to long term, which is going to benefit the bottom line and our shareholder value. So really focused on that. As far as the other, look, everyone knows me. I've been around a long time. I'm always interested in maximizing shareholder value. But for now, we're really focused on organic growth. Operator: And our next question comes from Mark Fitzgibbon of Piper Sandler. Mark Fitzgibbon: I was wondering, with the capital ratios building nicely, and it sounds like no balance sheet growth in the fourth quarter. What are your thoughts on stock repurchases? Avinash Reddy: Yes, Mark, so we've started having those conversations in earnest at this point. I think last couple of quarters, we said early 2026, we will revisit it. I mean the common equity Tier 1 is over 11.5%. Total capital is over 16%. I mean the one thing we were trying to do is to get the CRE concentration ratio down to the low 400s, and we are there, right, at this point in time. I will say when you look at the peer groups, Mark, and more nationally because I mean, we've really broken out of the local peer group here. Our business model is completely different from a lot of the other banks here. And you look at TCE ratios or you look at common equity Tier 1 ratios, it's gone up industry-wide. And so I don't think we're an outlier when you compare us to the rest of the industry. We obviously have a lot more capital than historical Dime used to run the balance sheet. So I think the first and best use of capital, obviously, is putting into work on all of the existing lending teams that we have, a lot of the new teams that Tom has hired and putting that to work. I mean you've seen in the press release a number of new verticals that we've brought on board. And each one of them should be a $0.5 billion business for us over 2 to 3 years, right? So we'd like to deploy that. At the same time, the CRE runoff, the multifamily runoff is going to stop at some point relatively soon, and we'll be back in that market in a bigger way. So I think we're trying to balance a lot of those items, Mark. From a corporate finance perspective, obviously, we see the stock is very undervalued, especially as you start projecting out NIMs in '26 and '27. So from that perspective, we do want to be back in the market for that. If you remember, after the merger, we returned around $100 million of capital to shareholders. So we have been aggressive on that. But I think the limiting factor was the CRE ratio more from an optics perspective. And I think as we get below $400 million, that will go away, and it will probably help us be back in the market. So hopefully, that provides you a bit of perspective on the different dynamics there. Mark Fitzgibbon: It does. And also, I was curious, Avi, you mentioned there was a fraud recovery in the quarter. I guess I'm curious how much was that? And was that in other -- the other income line? Avinash Reddy: Yes, yes. So that was in other income, Mark. If you remember, this probably dating back to 2018 or 2019, Legacy Bridge had a fraud with a bus company. It was around an $8 million noninterest expense hit that they had more of an operational item. So we've been going through the legal process, and we were able to recover $1.5 million this quarter, and that's in the other -- other noninterest income line. Mark Fitzgibbon: Okay. Great. And then I guess just sort of a bigger picture and maybe not even necessarily relating to Dime, but just industry-wide. Stu, you and I have been through a few credit cycles. I guess I'm curious where you feel like we are and what inning are we in? How does the cycle play out? Does it get markedly worse? Does it sort of just muddle along? Are we -- have we seen the worst of it? I guess I'm curious of high-level thoughts. And again, not specific to Dime per se. Stuart Lubow: Yes. No, I think we're kind of in the later innings at this point. I think we're going to muddle along a little bit going forward. Look, we -- the issues of 2023 and the 2 years thereafter kind of exacerbated some of the situations with the higher rate environment. So I think overall, the industry has done very well. And I think we're at the point now where you got a lower rate environment coming. And I think generally, at least locally, the economy remains relatively strong. So I think that the industry has kind of worked through the process and managed the credit issues very well. I think as some of the issues come up with improved earnings, there might be a little bit more aggressive approach to resolving items. But I think generally, I think the industry has done well. And I don't see us entering a significant stress environment in terms of credit. Operator: I'm showing no further questions at this time. I'd like to turn it back to Stuart Lubow for closing remarks. Stuart Lubow: Thank you, operator, and Diane, and thank you all for -- thank all our dedicated employees and our shareholders for their continued support. We look forward to speaking to you in early 2026 after our fourth quarter. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Welcome to today's Covenant Logistics Group Q3 2025 Earnings Release and Investor Conference Call. Our host for today's call is Tripp Grant. [Operator Instructions] I would now like to turn the call over to your host, Mr. Grant. You may begin, sir. James Grant: Good morning, everyone, and welcome to the Covenant Logistics Group Third Quarter 2025 Conference Call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subsequent to risks and uncertainties that could cause actual results to differ materially. Please review our SEC filings and most recent risk factors. We undertake no obligation to publicly update or revise any forward-looking statements. Our prepared comments and additional financial information are available on our website at www.covenantlogistics.com/investors. Joining me today are CEO, David Parker; President, Paul Bunn; and COO, Dustin Koehl. Our business remained resilient in the third quarter, although margins were compressed, particularly in our Asset-Based Truckload segment due to an inflationary cost environment, persistently high claims expense, headwinds from excessive unproductive equipment and continued pressure on volume and yields in our Expedited and Dedicated segments. Year-over-year highlights for the quarter include consolidated freight revenue increased by 4% or approximately $10.2 million to $268.9 million. Consolidated adjusted operating income shrank by 22.5% to $15 million, primarily as a result of year-over-year increases within our combined Truckload segment. Our net indebtedness as of September 30th increased by $48.6 million to $268.3 million compared to December 31st, 2024, yielding an adjusted leverage ratio of approximately 2.1x and debt-to-capital ratio of 38.8%, as a result of executing our share repurchase program and acquisition-related earn-out payments. The average age of our tractors at September 30th increased to 23 months compared to 20 months a year ago. On an adjusted basis, return on average invested capital was 6.9% versus 8.1% in the prior year. Now providing a little more color on the performance of the individual business segments. Our Expedited segment yielded a 93.6% adjusted operating ratio. While this result falls short of our expectations for this segment, we've been pleased with the resilience of this segment over the prolonged downturn. Compared to the prior year, Expedited adjusted operating ratio increased 160 basis points. The average fleet size shrunk by 31 units or 3.4% to 861 average tractors in the period. We expect the size of this fleet to flex up and down modestly based on various market factors. As market conditions improve, our focus will be on improving margins through rate increases, exiting less profitable business and adding more profitable business. Dedicated's 94.7% adjusted operating ratio also fell short of both the prior year and our long-term expectations for this segment. We were successful in growing the dedicated fleet by 136 tractors or approximately 9.6% compared to the prior year as we have continued to win new business in specialized and high service niches within our Dedicated segment. Going forward, we plan to reduce certain of our fleet in this segment that is exposed to more commoditized end markets, where returns are not justified and continue to invest in areas that provide value-added services for customers. Managed Freight exceeded both revenue and adjusted operating income compared to the prior year. but fell backwards sequentially due to the loss of a short-term customer that scaled up in the first half of 2025 and rolled off in Q3. Our team showed resilience through this difficult freight cycle with their ability to bring on new freight, handle overflow freight from Expedited and reduce costs to offset lost business. Over the longer term, our strategy is to grow and diversify this segment. And we know that an operating margin in the mid-single digits generates an acceptable return on capital given the asset-light nature of this segment. Our Warehouse segment experienced freight revenue and adjusted operating income that was slightly below the prior year quarter and yielded an adjusted operating ratio of 92.1%. The adjusted operating profit and adjusted operating ratio in this segment was a solid improvement sequentially. Going forward, we anticipate top line revenue growth and operating income growth, as a result of a large customer start-up scheduled for November. Our minority investment in TEL contributed pretax net income of $3.6 million for the quarter compared to $4 million in the prior year period. The impact of incremental bad debt expense in the quarter compared to the prior year reduced TEL's pretax net income. Although TEL's overall business remains strong, exiting capacity from the general freight environment is expected to impact them again in the fourth quarter and potentially beyond. Regarding our outlook for the future, we anticipate the fourth quarter of the year to remain challenging. with the continuation of the soft freight market, combined with the impact of company-specific factors that will result in what we believe to be an unseasonably soft quarter despite a slight positive impact from peak. Company-specific factors within our line of sight include the negative impact of increased claims accruals, the negative impact the U.S. government shutdown is having on volumes of freight we carry for the Department of Defense and accelerated customer bankruptcies with TEL will all prove to be challenges for the quarter. In addition, as capacity exits accelerate within the general market, we anticipate the cost to procure transportation will likely lead our ability to capture rate increases from our customers in our Managed Freight segment, resulting in constrained margins. Despite both the general market and company-specific challenges over the short term, we are increasingly optimistic about the pace at which the freight market should recover. Recent enforcement of government policies concerning English language and non-domicile drivers have seemed to accelerate the pace of capacity exiting the market. We believe the impact of this trend is being masked by consumer pause and uncertainty as a result of elevated interest rates and volatility of global trade policy. Our belief is that consumer demand will improve with the continuation of monetary easing and the eventual settlement of trade tensions. In addition, the impact of recent tax policy will further facilitate demand. Regardless of when the market environment turns, our team is ready to move quickly to execute with urgency to capture additional market share and the appropriate amount of operational leverage that returns appropriate levels of capital to our shareholders. Thank you for your time, and we will now open the call for any questions. Operator: [Operator Instructions] And our first question comes from Scott Group of Wolfe Research. Scott Group: So I want to start where you wrapped up just talking about the capacity backdrop and maybe just give us some color on what you're actually seeing in the market with respect to capacity exits? How big of a deal do you think this is going to have? And then I don't know maybe just like -- there's certainly more talk in the market about this. Why don't you think we're seeing any impact on like national spot rates? I know there's a lot of talk about local markets getting tighter, but why do you think this isn't showing up necessarily in national spot rate data? David Parker: Scott, it's David. Yes, I mean, this is something that didn't drive me crazy trying to figure out where all this is going. And I would say a couple of things because great first question. From a standpoint, I'm more excited. I've been in this thing 53 years. I'm more excited right now than I've ever been in my entire career for the next 2 to 3 years. I see some things that we've never ever been in a position, where we are starting to get the government that is now starting to get concerned about who's driving trucks and why should they be driving them, and you are sensing that, and I just see an avalanche that's in the process of happening. And as I think about from spot rates, I mean, we have seen compression on margins on our brokerage side in the last 3 weeks when all this stuff started. And it is right now defined to a lot of individual states. And I met yesterday with our brokerage group and California, Texas, Oklahoma, Chicago, those are states and cities that keep coming up over and over. And you have got third parties that are scared to go to those states, right, wrong or indifferent. And that's the reason why you are seeing instead across the board that you are seeing, I believe, spot areas of the country, where it's becoming tighter and rates have gone up in those areas because a lot of these truckers are still going to go. I'm not going to Oklahoma. I heard Oklahoma pulling over 135 trucks and [ sending by the ] jail and all those stories that we're all hearing. I'm not going to Laredo, Texas. They're going to stop everybody that can't speak English. And so that is really leading the effort. Now that said, will it be a red versus blue states, red being aggressive, blue not being as aggressive. But I'm here to tell you that if they continue to have -- if we all continue to wake up every day, with another fatality accident by illegal immigrant, it is going to spread throughout the United States. And as I look at this, as I look at non-domiciled CDLs, as I look at the English-speaking issue, as I look at ELDs, there is more cheating going on and toggling is unbelievable guys to what's going on with ELDs. And so far, the government has suspended 5 or 6 companies. I'm here to tell you there's going to have to be hundreds -- there's about 950 that are approved ELD suppliers, and they need to look at every one of these ELD suppliers. We all thought that when we went to ELDs that everything was going to be legal and you're not going to have log books and everybody is not going to be cheating. Well, I'm here to tell you, us big guys, we love the ELDs. We love not having log books. But when you got toggling going on, it's rampant cheating that is happening. I run a truck 100,000 miles, they're running trucks 140,000 miles. And so the government is just now for the first time ever that it's starting to go down this road And so, I feel very confident that over the next 6 months, 1 year, 2 years, whatever it's going to be, it's going to be a snowballing effect that we are going to have less drivers on the road. We're going to have safer drivers on the road. We're going to have English-speaking people that can have the ability to speak English and understand it. We are going to have ELDs are going to be in much better shape, get rid of the multiple MC numbers. Guys, it's rampant with shutting down this, opening up that one. Today, I shut down tomorrow, I open up another one. We're just now learning about this and just now starting to do anything about it. So as I look at capacity, one of the things that strikes me is this is coming to a head. It's going to be -- it's in the process of exiting. But as good as anything, I'm here to tell you the funnel is stopping coming in. whatever that number is, that's leaving, whether it's 1,000 or 200,000, they're going to leave, but there's not going to be a flood of entries coming in And so, that is extremely encouraging that for the first time in my 53 years, there's actually a constraining of supply that's happening. And there's not going to be a bunch of new drivers from all over the world that's entering the truck driving workforce. I looked at that, Scott, and I'll shut up here in a minute. You asked the first question of what I've been [ alive ] with for the last month. But as I look at this supply, then I start looking at what the Fed is doing on interest rates. They're going to continue to lower interest rates. They're going to continue to pump the economy up. This physical -- the stimulus package that we all hear Trump talk about $17 trillion, $20 trillion [indiscernible] I don't know what the number is. One thing I do know it's gigantic. And there is a lot of freight on these plants that are being built in America, even if it takes 2 years, there is a lot of business that's coming to America that's got a lot of freight in it from these new plants that are going to be coming up. So as I look at supply, I am more excited than I've ever been. There is no doubt. I think we and the industry, we got some jump to go through. What do I mean by that? Brokerage, margin compression is happening now. I see it in our business. All the brokers are going to see it in their business. As I look at used truck market as we speak today, it's less than what I want, but I believe it's going to turn around fairly soon, maybe next year because nobody is going to buy a Class 8 truck. We don't know what we're going to pay for a Class 8 truck. I'm at ATA next week in San Diego, and I can't tell you what a price of a truck is right now or if I'm even going to buy one. So it's going to drive up the used truck prices. So that I'm happy about that. This government shutdown. It hurt me on my Department of Defense business, but I'm a month into it. We'll see what happens there, but it's not helping. Eventually, it will -- eventually will go back to work and everything will be good there. But -- and lastly, I was just telling the guys here before we got on here, one of the things that I'm really excited about, as we all know, our industry has not raised rates in 4 years. I haven't raised rates virtually at all in 4 years. And I was in a meeting in the last couple of days with sales and both on our legacy dedicated and on our expedited, we got 8 or 10 accounts that we have asked for rate increases and actually have been given 2.5% to 4% in the last couple of weeks. That excites me. Is that something that's going to happen on every customer I got? I don't know, but I haven't seen it in 4 years, and I'm starting to see it. I'm starting to see bids at all-time highs. So you're seeing the customers -- our bids are up 17% since August. Well that don't happen. That's a November, December, January, February event, and it started happening in August and September. Why is that? It's because our customers are concerned about capacity, even though we all need freight right now. So Scott, I'll shut up. As I look at it, I'm more excited than I've ever been about '26, '27, '28. If anybody is ever going to buy a trucker, it's now. If they don't buy truckers now, they don't need to be buying truckers. So that's where I'm at. James Grant: Thanks, Scott. Let me give you a couple of things. David talked a lot about the regulation, and there's no doubt that we're sensing it. And then we've given some color on maybe demand freight going forward. I would say there's a couple of words we're using internally right now. One is patience. I think we're all going to have some patience, and I'll get a little bit into that. The other is there's going to be some pain before there's some gain and pain in used truck prices and [ see ] smaller guys go bankrupt and flood the market, pain with some brokerage compression. But every time in history in this business, there has to be pain before there's gain. And I think that's where we're at. On the patient side of things, specific to your spot market question, the week after Secretary Duffy came out and talked about the non-domiciled CDLs, I think you did see spot rates go up and especially in those markets David was talking about. And what happened was a lot of those folks just stayed home. A lot of these non-domiciled CDLs have been issued in a -- they're concentrated in a handful of states. I mean there's some in every state, but there's some West Coast states that had a lot of these non-domiciled CDLs. The reason you hadn't seen the spot rates jump up is that the 2 largest West Coast states that have the non-domiciled CDLs, they have not -- they're in the process of trying to figure out what are they going to do with the people that have the non-domiciled CDLs. And so I think California is supposed to decide in the next 5 days, they're supposed to direct carriers what to do with those drivers. And so the first 5, 6, 10 days, you had some people that maybe had those type licenses stay home. Well, they've had to get back to work. So they're still out there running around. In the next 5 to 10 days, you're going to -- California is going to tell the carriers, here's what we want you to do. Here's the process to do that. And so I think that's when you're going to start seeing some of that capacity exit. And I think on that side, it's probably sooner than later. And then to David's point, the other is you're stopping filling the bucket with new entrants into the market. So I don't know if that helps paint a picture on maybe why the spot rates haven't jumped. But you had some of them stay home right when it came out, then they've gotten back to work. But I think in the next 5 to 10 days, you're going to see some of these states roll out the policies that here's what you do. And I think over 30 days after that is when you'll start seeing some of this capacity exit. Scott Group: Okay. Super helpful. David, at the risk of getting your blood pressure any higher. I'd like to ask a follow-up if I can. How do I think about like how many of these drivers do you have from just your perspective on enforcement, like it's always been easier to enforce large fleets than mom-and-pop truckers. Like how do you change this? And then like -- but is your perspective here that ultimately, like this is going to be a big help for large fleets? And is it a risk to a brokerage model in general? David Parker: Yes. Yes. I mean, we got a $200 million brokerage, and it does concern me because I think led by Duffy at DOT, I think that they're going to -- I think there's going to be enough leading from DOT that is going to go after more of the small carriers that are illegal than it is the big carriers. So yes, I think that I'm concerned about compression on my margins, on my brokerage. But I think after a period of time, whether that's 3 months, 6 months, I don't know, but a period of time that you'll start seeing the asset rates rise very nicely that will offset any of the brokerage compression. James Grant: Yes. I think, Scott, when I was referring to there's going to be some pain before there's gain. I think that, that was probably more on the brokerage side because there will be some pain going through this with a lot of brokerages. And to your point, it should help asset companies more. Brokers make money -- brokers make money when rates are rising hard, when rates are falling hard. And so, where they are getting troubles in the middle and if you got contract rates and hadn't [ reset ]... David Parker: And if the government was not doing nothing, if the government was just going to be on the sidelines, it all go back to the way it's always been for 40 years. But I don't believe that's happening. There's unbelievable amount of pressure, that the government is putting on it, but I think constituents are putting back to the government now saying, am I going to wake up every day to a fatality accident. Scott Group: Okay. And then just last one, if I can, just turning to your business. You talked about near-term pain in Q4. Any way to sort of size sort of what you're thinking about for Q4? And I know you've got a lot of like that linehaul LTL business. How is that performing right now? David Parker: Yes. The LTL is down, and it's interesting because forever, LTL would slow down in November, December, that was typical, to be honest with you, from COVID for 2, 3 years, say, '21, '22, '23, we really didn't see the LTLs really slow down a lot. But the LTL guys are slow. I mean, their business has been hit. And I think overall, the volumes are down, and I don't know when that is necessarily going to come back. It will, but I don't know when it's going to be. So yes, I look at that, that concerns me. I look at how long is the government shutdown going to be on my DoD business because it's only half of what it was. And so, we got to deal with that and then compression on the brokerage side of the business. So I think we got to go through that junk. In our TEL business, I'm happy about a couple of things. They've grown more business, more sales, more leases is what I'm trying to think of. The customers so far in the last 6 weeks, which is a good sign, but they also had to take back more trucks than they've had. So I'm seeing some sloppiness in the TEL business that concerns me. And so, I think all that adds up to fourth quarter that it isn't going to be third quarter. It's going to be less than third quarter, and I'll let [indiscernible]. James Grant: Yes. I think it's too early to put a number on it, Scott, but I would say it's softer than what it seasonably will be for all of the reasons that David talked about, mostly on the truckload side and also on the TEL side. I think from our line of sight and what we have seen, even though it's early in this quarter and then the visibility that we have into the peak, which there's some -- a little bit of good peak in freight in there, but it's not enough to offset some of the negatives that we've seen over the last first 2 or 3 weeks of October. So I do think it's unseasonably softer, but I'd be hesitant to put up. David Parker: That's interesting because I am somewhat optimistic about what I'm seeing about peak business. And some of our customers have already gotten back with us saying that carriers have given back freight to them, which is on the brokerage side. And so that's also interesting to me. So yes, peak is not going to take care of some of the reductions, but I am optimistic that peak seems like it might be a decent peak for us. Scott Group: Guys, I don't know if you can still hear me, but just so we can hear you. James Grant: Okay. Thank you. We're going to put it on mute. Our operator has disappeared. David Parker: Yes, we're trying to see if there's any other questions. Scott Group: Maybe you convince the operator who's busy buying trucking stocks. David Parker: He is busy. The market is open. We're trying to get the operator to see if they can facilitate any questions. So we'll see what happens. Scott Group: Just so there's [indiscernible], do you want me to ask more questions? David Parker: Yes, please. Scott Group: So sure. I mean, let's talk pricing a little bit. You -- I think you said you're starting to have some bid activity. Just what you're seeing from a pricing standpoint, early thoughts on '26 bid season. James Grant: Scott, it's early. As David said, we're going out to some customers. And I think low single digits is kind of the norm. I mean, we need a lot more than that. Inflation has been significant in '22, '23, '24, '25. And I'm betting the price of trucks is going to go up next year and health insurance and casualty insurance is going to go up. And so, we need a lot more. But I think low single digits, there are customers that are willing to have good active discussions around those numbers just from the recent experience we've had. Scott Group: Okay. And you made a comment that no one wants to buy trucks right now. What -- you're going -- and you'll be at ATA next week, but what are you doing from a fleet perspective? What are you thinking about from a CapEx standpoint James Grant: So a couple of things. Yes, I'll speak to it and then let David follow up. First off, nobody's pricing -- most years, most of the large fleets already have pricing by this point. But with all the questions around tariffs and there were some announcements in early -- late September, early October about additional potential big truck tariffs. And is that on the whole truck? Is that on parts of the truck? Is that which vendors? There's a lot that's been up in the air. Hopefully, by next week, we'll know more. We're meeting with all the OEMs while out in San Diego. And so I think nobody has been placing orders because you don't know what the price is, a; b, the order boards at all these OEMs are very slack right now. I mean, in the fourth quarter, going into next year, order boards are very, very slack on truck and trailer equipment. As far as our fleet numbers, I think our total fleet size in total, it's probably be about the same. We may rationalize a little bit of business if we can't get the margin out of it. From a net CapEx standpoint next year, I'll let you give a math. David Parker: Yes. I think, one, it's a big question mark. It is going to be somewhere probably net in the neighborhood between $70 million to $80 million, but I would be hesitant to commit to that. I would say that could be subject to change. We have a number of new trucks that we have financed and are sitting on the fence that are ready to go into service. And so we have quite a bit of unproductive equipment right now, whether it's new or used. We don't want to fire sell it. We don't -- I think we're in the position to kind of sit on it for a little bit longer and take advantage of a market swing. But at the same time, our fleet, although it aged probably 2 or 3 months compared to the prior year, it's a little bit of a misnomer because we've got a lot of new equipment that hasn't gone into service. So our fleet is very, very healthy. Our balance sheet remains very, very healthy, and we're going to buy some equipment. We just -- it's hard to commit to a number when you don't have pricing on it. And I think that gives us a little bit of an advantage over some of the other peers in our group, as we've been pretty consistent about replacement and replacing our fleets in bad times and having a good healthy fleet with the latest and greatest safety equipment on it and the best MPG, if you will, so fuel economy. And so that's what we're going to continue to do. We're going to continue to operate that playbook. And I think we've got a little more flexibility than maybe some of the others in the market to whether it's either delay purchase or reduce purchases next year, but we're just kind of in wait and hold mode in terms of absolute volumes. Scott Group: Have you guys tracked on the operator yet? James Grant: No [indiscernible]. Operator: Our next question comes from Jason Seidl from TD Cowen. Jason Seidl: I appreciate you joining the fray again. David, one of the things I love about you, you're just so calm about the markets and not really ever enthused. So [indiscernible]. I wanted to touch a little more on 2 different things. Can you talk a little bit about the government shutdown in the DoD? You said that business is down about half. Sort of how should we expect that to flow through the P&L? And once the government does reopen, whatever that may be, how quickly do you expect that freight to come back? And then I have a question on sort of capacity. M. Bunn: Yes. So Jason, this is Paul. A couple of things. On the DoD business, I would say about half that business will kind of just be lost. There's kind of the way they move that freight. Some of it is just inventory movements and then some of it is vendor type freight. And so, it's not like the -- some of it will build a backlog that has to be moved eventually and some of it won't. It will just be kind of lost freight. We've moved a lot of those trucks onto a lot of Expedited loads just to keep the trucks moving and keep the drivers getting paid and that kind of stuff. And so I think you'll see a little bit of a spike whenever the government opens back up. But I don't know that it's not going to be a one-for-one makeup. As far as it flowing through the P&L, I think the question is, does if it lasts the whole quarter, it's going to be pretty impactful on Expedited's results. If it's -- if they get something done first week of November, which I guess that's next week at this point, then maybe it will be a little muted. I hate that we've lost the month of October because a lot of these bases shut down around Thanksgiving, a lot of them shut down around Christmas. And so, October is a month that we really, really run hard in that fleet. I mean, really, October 1 to about November 15th is when that fleet is really flowing. And so the government shutdown could come at a less opportune time. I mean it's going to hit us. As David said, it kind of stinks, and that's another one of my -- there's pain before the game, but that business will come back. Jason Seidl: And I guess turning back to capacity, as Scott mentioned, we're really not seeing much of an impact in the spot market. But I think, obviously, you've seen what we've written. I think that eventually comes back as we keep sort of rolling through the months here. But my question is, what could accelerate this? Is there -- we've heard some smattering that some insurance companies have talked about taking some actions and then some customers have talked about taking some actions in terms of exposure to carriers who might have non-domiciled drivers. How should we sort of frame that up? And what are you hearing in the marketplace? David Parker: I think everything you just said there, Jason, is in the process of happening. I think you're going to see insurance companies that are not going to insure non-domiciled CDL license. I think that, that will be happening. And as Paul is saying, of course, California is leading it. We're going to hear next week or so what California is planning on doing about it. But I think you got insurance companies that are in the process of saying, we're not going to insure this. I guarantee they're sitting around in their offices right now, looking at their book of business, saying, what do we have on the books, and they're going to have to get their hands around that. But the process will be that there's going to be a bunch of folks, who aren't going to have no insures. So I think that, that is one thing that is definitely going to be transpiring, but then it's just going to be pressure from the government owned all the stuff. We didn't talk about cabotage. I mean, that's unbelievable how much cheating is going on in cabotage. And these people coming out of Mexico and going to Canada and going to the United States is supposed to go straight back and they sit here for a month going back and forth. The government is under that. That's under [ Christy Dan ] 39:57. They are under that, and that is coming to the top that I think will bring more freight back to us, U.S. carriers. There's just a lot of stuff that whether it takes between now, if I was going to throw one it's April, I don't know, only because fourth quarter is virtually over with here. It is what it is. And first quarter gets into the weather. But with the government's heavy hand, of which I agree with, their heavy hands, you are going to see capacity leaving the market, but better than anything, no new capacity coming. I don't know if you saw this, Jason, but we look at a number that is a plus and minus of MC numbers on a weekly basis. And to give you an idea, for the last few months, that number has been negative 50 to 100 MC -- less MC numbers a week, 50 to 100. Last week, it was over 400 -- 400 less. That was powerful. I look at another number that I keep an eye on. Look at total volume, a report that we look at that has taken all the reports that are coming out on whether it's cash or truck stop this and they accumulate them all and volume is down 17%, but rejections are up almost 2%. What is that saying? This is -- this week volume is down 17%, but rejections are up almost 2%. It's telling you something about capacity. And so that's the kind of stuff that we're looking at as we go forward. Jason Seidl: Well, David, let's say you're right and the recovery is in April with the start of spring shipping season because you finally get the volume back. Bid season, we're going to be well into that already and probably not at exceedingly favorable rates at this stage. What's your ability to go back to the customers and say, "Hey, look, it's June, the market is different, right? David Parker: 100%, not 99%, 100%. I mean, I love my customers. Nobody love my customers like I love my customers. But at the same time, if I've not raised you in 4 years, if I cannot make an argument that says 3 months into a pathetic rate, then I don't have the ability to be able to get a rate increase when the market allows me, then we have no relationship. And I don't want them in my portfolio. And so that, you will -- but it won't be me. It will be the entire industry. So as I look at that on the rates, Jason, that we talked about in DoD, and we got a margin compression on this, and we got to go through some difficult times that I think -- I think it is -- I'm happy with it. I'm very pleased with it because as I step back from this junk that we're having to go through and -- or the negatives or whatever word you want to use, and I look at how much positive demand opportunities, foreign investments, accelerated depreciation, as I look at rate cuts from the Federal Reserve, as I look at all this domestic investment that Trump is bringing, as I look at the Bill Back America Beautiful or whatever they're calling the -- whatever that bill is called. I mean, it is going to be -- and with ISM being down below 50 for 3 years, with what Trump is doing on bringing back plants, I promise you, interest rates going down, it is going to feed the economy with capacity leaving. So that's why I'm excited. A perfect storm. Jason Seidl: [ I can ] certainly see it. And listen, I don't have 50 years in trucking, but I have just over 30 years. So it's -- it's definitely one of the more interesting times I've seen for sure. But listen, gentlemen, I appreciate the time as always, and I want to stay safe out there. Operator: And our next question comes from Reed Seay from Stephens. Reed Seay: You've given a lot of good color, but I wanted to come back and touch on some of this government business. You mentioned like the volume will come back once the government comes back. But here in the fourth quarter, let's say maybe we get a shutdown here at the end of the month. Could we potentially see a catch-up of these volumes in 4Q? Or how would you expect maybe the cadence following a return of these volumes? David Parker: Yes. Reed, here's what I'd say. That's then to go and I speak to that. It won't be a full catch-up. It'd be a partial. There could be a partial catch-up. And part of what handcuffs the catch-up is these bases are -- they're going to shut down around Thanksgiving and they're going to shut down around Christmas. And so just the way the calendar is going to fall, it's going to hamper a full recovery and just some other things just around the nature of the freight. I mean, it's still moving. It won't be a full catch-up. You can have a partial catch-up if the government reopened sooner than later. Reed Seay: And then it looks like during the quarter, costs were moving in the right direction. Can you talk about maybe some actions that you've taken on the cost side here in 3Q? And maybe is there any more to come in 4Q if we have demand continue to be weak in the LTL or in certain parts of the business? M. Bunn: We've continued to try to make sure our headcount matched our -- was matching our freight volumes and tried to make sure we weren't getting frivolous on overhead. We've really shut down any significant growth in overhead. We did that earlier in the year, maybe even the end of last year, knowing this market was continuing to drag out. We saw -- I would say we're happy with maintenance costs, some things we've done on those and to really manage them down. And so I would say it's just more of blocking and tackling Reed and trying to make sure that we're battening down the hatches for the -- we've been in this storm for 36 to 40 months now. You can't be getting that over your skis on costs. James Grant: Yes. Yes, I agree. There were some call-outs. I'll just add on to what Paul was saying. There were some call-outs to some pretty hard cost-cutting decisions in the quarter for which we provided a table in there that kind of reconciled those. But those were difficult decisions. But I would also say that throughout the year, we've been very cost conscious and some of the headwinds that we saw probably earlier in the year, whether it's first quarter or second quarter, were equipment-related costs. And just as we grow certain of our dedicated fleets and we start to expand geographies, and it takes a while to begin to optimize your cost profile in those geographies and within those fleets and -- we're trying to find the sweet spot. We're trying to develop the amount of density needed to efficiently operate that equipment. And there was some cost in the quarter in Q3 related to some start-up costs, I would say, for shops and new hires, shop salaries and things like that, that we think will make us more efficient in the long run. So we continue to invest in the things that are going to return the right capital to our shareholders. It's just clunky. And I will say there was some clunkiness in the quarter. But I think longer term, as we continue to grow that business, you're going to see some efficiencies from it. Operator: And our next question comes from Jeff Kauffman from Vertical Research Partners. Jeffrey Kauffman: Just some quick kind of look ahead here. What are you expecting to hear from the other carriers at ATA that might be a little different than what you were thinking a couple of weeks ago? David Parker: I think it's just going to be an add-on Jeff; of everything we've talked about today. I think you've got motor carriers that are mad at. I think you got motor carriers that are happy with what the government is doing. And I think that, that's going to be the tone at ATA. I really do. Then the side note is going to be OEMs, what are we going to do about trucks. I think that will be -- I think that's going to be the 2 pressing issues. Don't you, Paul? M. Bunn: Yes, truck. I think it's going to be government regulation. It's going to be how bad has inflation been over the last 36 to 42 months that you haven't been able to get in rates and regulation trucks and inflation that has been a recovery in rates. That will be the 3 big talking points. Jeffrey Kauffman: And then just one follow-up question because I know a lot of questions were asked by Scott Group. The shares are about 9x earnings right now, give or take. I know it frustrates you. It just is what it is. I know the balance sheet is in good shape, but what are you thinking in terms of share repurchase here? I mean, you don't want to get over your skis and buying them in a tough environment. On the other hand, shares appear like a bit of a gift at these valuations for a buyback. David Parker: No, I agree with you. I think our shares are highly discounted. And I think there's a lot of potential value there. To your point, the balance sheet is in good shape. Our debt today in terms of EBITDA leverage is just over 2x. We -- for a variety of reasons, we bought back a ton of stock. In the first half of the year, we had an earn-out payment, and we front-loaded to avoid some tariffs on almost all of our equipment. And so I do think our margin -- our debt potentially, just call it, free cash flow, if you will, maintenance CapEx and cash from ops, cash flow from operations will improve in the fourth quarter and will allow us opportunities. And I don't want to commit. We do have some availability under our share repurchase program that was approved by the Board. But I don't want to commit to say that we're going to buy back any of that, but we have a full range of options that we've exercised in the past, whether that's M&A or whether that's share repurchases and continuation of dividends. And we feel like our formula is working, and we're going to stick with that. Operator: At this time, there are no further questions. I'll turn the call back over to Tripp for closing remarks. James Grant: All right. Well, thank you, everybody, for joining us for the third quarter earnings call for Covenant Logistics. We look forward to talking to you next quarter. Thank you very much. Operator: This concludes today's conference call. Thank you for attending.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International First Quarter Fiscal Year 2026 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference call over to George Price, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir. George Price: Thanks, Tina, and good morning, everyone. I'm George Price, Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning. We are providing presentation slides, so let's move to Slide 2. There will be statements in this call that do not address historical fact and as such, constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night's press release and are described in the company's SEC filings. Our safe harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let's turn to Slide 3, please. To open our discussion this morning, here is John Mengucci, President and Chief Executive Officer of CACI International. John? John Mengucci: Thanks, George, and good morning, everyone. Thank you for joining us to discuss our first quarter fiscal year '26 results. With me this morning is Jeff MacLauchlan, our Chief Financial Officer. Slide 4, please. CACI's strong first quarter results are a great start to our fiscal year 2026. We delivered free cash flow of $143 million, driven by revenue growth of 11% and an EBITDA margin of 11.7%. We also won $5 billion of contract awards, which represents a book-to-bill of 2.2x for the quarter and 1.3x on a trailing 12-month basis. Over half of our awards were for new business to CACI, and we also continued our excellent track record of winning recompetes and securing sole-source extensions. Our first quarter performance gives us increased confidence in achieving both our full year guidance, which we are reaffirming and our 3-year financial targets. Jeff will provide additional details shortly. Slide 5, please. Turning to the macro environment. The federal government continues limited operations under a shutdown. However, our business remains resilient given our national security focus with most of our work funded and deemed essential. Looking beyond the shutdown, we continue to see enduring needs, good demand signals from our customers and prospects for a healthy funding environment for national security priorities. In addition, we are starting to see early indications of how reconciliation funds available to DoD and DHS may be used. For DHS, the focus is likely to include modernization and border security, which we expect will benefit programs like BEAGLE and drive demand for our Counter-UAS technology. For DoD, in addition to areas we have previously discussed, we also expect reconciliation funds, including those for Golden Dome, will benefit some of our intelligence programs as we focus on left-of-launch situational awareness. Our ability to reaffirm our guidance and deliver on our commitments even in the face of a government shutdown demonstrates the resilience of our business and as a result of deliberate choices and investments we have made over many years. Our actions have positioned CACI for success in any environment, including this one. Slide 6, please. Let me discuss some examples of awards, program performance and investments that highlight our competitive differentiation in several areas. First, in Counter-UAS escalating drone threats and increasing incursions globally are driving strong demand for our capabilities, including from our international partners. In fact, during the first quarter, we received a follow-on order from the Canadian government for additional manpack software-defined Counter-UAS systems. This follows the initial order we received in fiscal '24 as well as in order for vehicle-mounted Counter-UAS systems were received from Canada last quarter. But the threat is no longer just abroad, it is here at home as well, and the administration has made it clear that the defense of the homeland is the top national security priority. That's why CACI has been investing ahead of need to develop Merlin, our latest Counter-UAS detect and defeat system. Merlin's Counter-UAS capabilities are extremely differentiated and particularly well suited for defending the homeland for many reasons. It is based on technology that has been operationally proven across the globe for years, focused on real missions, real threats and delivering real kills with non-kinetic capabilities that include low to no collateral damage defeat modes with a detection range of up to 75 kilometers and providing industry-leading wireless capabilities that address Counter-UAS threats utilizing cellular networks. Our Merlin system has outperformed competitors in several government-sponsored demonstrations against a wide range of UAS systems utilizing our software-defined technology, tipping and queuing a third-party kinetic system to defeat a drone and also integrating with [indiscernible] platform, which was recently selected as the Army's Counter UAS fire control system. These results are what is driving strong customer interest, both in the U.S. and abroad. A second area is Counter-Space. Modernizing our nation's capabilities is crucial to address peer threats in the increasingly contested space domain. We are seeing increasing customer interest and demand for CACI's capabilities. This includes a $240 million award in the first quarter to sustain and modernize the Tactical Integrated Ground Suite (sic) [ Support ] or TIGS Counter-Space program for the Army. Additionally, a few days after quarter end, we received an initial production order from the U.S. Space Force for a Remote Modular Terminal or RMT. RMT is a broadband counter satellite electronic warfare system that leverages our existing Counter-UAS software to provide our customers with enhanced counter space capabilities. Both TIGS and RMT are great examples of how we can leverage our differentiated software-defined technology and our strong past performance to help war fighters execute critical missions across the entire electromagnetic spectrum. Slide 7, please. Third is network modernization, a foundational dependency for many critical national security priorities. Without modernized networks, DoD priorities like NGC2 and [ Gen C2 ] either won't be as effective or just won't be possible. Given this reality and the administration's focus on modernization across the government, we continue to see good demand and a strong pipeline of network modernization opportunities. For example, Air Force recently awarded CACI task orders #2 and #3, on the base infrastructure modernization program, previously known as EITaaS Wave 2. CACI will modernize networks for the U.S. Indo-Pacific Command and the U.S. Space Force, ensuring more efficient and more secure network operations. Together, these task orders represent approximately $400 million of awards this quarter. Additionally, we continue to execute on our existing network modernization programs. On our SIPRMOD program, we received NSA authorization for use of our software-defined CSfC technology, allowing for the processing to classify data through our framework. This accelerates our ability to test and field devices on the network and positions us to make the network operational in 2026. The final area is digital application modernization. Our customers were seeking greater efficiency, effectiveness and speed of delivery as they modernize software applications. CACI continues to lead the industry with our use of commercial agile software development processes and DevSecOps. For example, our BEAGEL program for Customs and Border Protection is one of the largest agile software development programs in the federal government. Our exceptional performance on this program recently yielded us our second 1-year contract expansion, a strong indication of the value we deliver to CBP and a further indication of how well positioned CACI is with our customer base. The combination of our leading agile development capabilities and strong past performance has enabled us to win the $1.6 billion JTMS award this quarter. The Joint Transportation Management System is [ TransCom's ] enterprise modernization initiative to unify end-to-end transportation and financial processes across the DoD on a commercial software platform. CACI will leverage our agile software development and AI capabilities, combined with SAP's S/4HANA off-the-shelf commercial platform to significantly improve visibility, collaboration and [ auditability ] for the command. It's yet another example of the federal government selecting CACI to modernize at scale to enable mission success, while generating long-term value for the government and taxpayers. It is also important to note that as we continue to win in the marketplace, we also continue to invest ahead of customer need and our industry-leading agile capabilities to ensure that CACI remains well positioned to win and execute these critical modernization initiatives. We are now expanding our use of AI tools to increase the speed, efficiency and scalability of our agile software development processes and continuing to innovate to stay at the forefront of utilizing commercial software development tools and processes to address critical national security priorities faster and more efficiently. These are just a few examples of the many successes we are seeing at CACI, thanks to our focus on critical national security priorities, software-defined technology, commitment to investing ahead of customer need and unwavering focus on superior execution. With that, I'll turn the call over to Jeff. Jeffrey MacLauchlan: Thank You, John. Good morning, everyone. Please turn to Slide 8. As John mentioned, we're very pleased with our first quarter performance. The continued strong performance once again underscores the deliberate positioning of the portfolio and the differentiation of our business. In the first quarter, we generated revenue of nearly $2.3 billion, representing 11.2% year-over-year growth, of which 5.5% was organic. I'd also like to call your attention to the revenue by customer disclosure in our earnings release, where we are now breaking out revenue from intelligence community customers. This additional transparency aligns our revenue disclosure with the national security focus that is a foundational element of our strategy. EBITDA margin of 11.7% in the quarter represents a year-over-year increase of 120 basis points, driven primarily by strong program execution, timing of some higher-margin software-defined technology deliveries and overall mix. First quarter adjusted diluted earnings per share of $6.85 were 16% higher than a year ago, greater operating income along with a lower share count more than offset higher interest expense and a higher income tax provision. Finally, free cash flow was $143 million for the quarter, driven by our strong profitability and increasing cash generation from working capital management. Days sales outstanding, or DSO, were 56 days. Slide 9, please. A healthy long-term cash flow characteristics of our business are modest leverage of 2.6x net debt to trailing 12-month EBITDA, and our demonstrated access to capital continued to provide us with significant optionality. We remain well positioned to continue to deploy capital in a flexible and opportunistic manner to drive long-term growth in free cash flow per share and shareholder value. Slide 10, please. We're reaffirming our fiscal '26 guidance. We continue to expect revenue between $9.2 billion and $9.4 billion, EBITDA margin in the mid-11% range adjusted net income between $605 million and $625 million; and finally, free cash flow of at least $710 million. One item I'll note is that our strong Q1 performance has helped us derisk the EBITDA margin step-up from the first half to the second half that we discussed last quarter. To help with modeling, we expect EBITDA margin in the second quarter to be about 11%. Slide 11, please. Turning to forward indicators, all metrics provide good long-term visibility into the strength of our business. Our first quarter book-to-bill of 2.2x, and our trailing 12 months book-to-bill of 1.3x reflect strong performance in the marketplace. The weighted average duration of our awards in Q1 was over 6 years. Our record backlog of $34 billion increased 4% from a year ago and represents nearly 4 years of annual revenue. And finally, our funded backlog grew nearly 26% year-over-year, some of which was likely driven by our customers preparing essential programs for the government shutdown. For fiscal year '26, we now expect more than 92% of our revenue to come from existing programs with less than 4% coming from recompetes and 4% from new business. Progress on these metrics, specifically on recompete revenue, which was 11% just last quarter, reflects our successful business development and operational performance and yields increased confidence in our expectations for the year. In fact, I'd like to point out that in the past 10 years, this is the second highest amount of revenue from existing programs that we've had at this point in the year. In terms of our pipeline, we have $6 billion of bids under evaluation, around 80% of which are for new business to CACI. We expect to submit another $13 billion in bids over the next 2 quarters with about 75% of that being for new business. In summary, we delivered outstanding first quarter results, derisked fiscal year '26 and continued to demonstrate our differentiated position in the marketplace. We are winning and executing high-value enduring work that supports long-term growth increased free cash flow per share and additional shareholder value. With that, I'll turn the call back over to John. John Mengucci: Thank you, Jeff. Let's go to Slide 12, please. CACI delivers distinctive and differentiated expertise and technology to address our nation's critical national security priorities. We help customers address their biggest challenges and their most important priorities. We help them succeed in their missions. And because of that, our customers increasingly rely on us. We are the company that consistently gets things -- gets the hardest things done when our customers need it most. Because of this, our business continues to perform well, and we continue to meet our financial commitments even in this dynamic and somewhat uncertain near-term environment. The strength of our strategy, our differentiation and our execution is borne out by our consistent performance. Our outstanding first quarter results represent a great start to fiscal year '26. We are successfully executing our strategy winning and ramping significant new work, capturing our recompetes and driving additional on-contract growth from our large contract portfolio. As a result, we are pleased to reaffirm our fiscal '26 guidance and we remain confident in achieving our 3-year financial targets. We are well positioned in the right markets with the right capabilities, and we are confident in our ability to drive long-term growth in free cash flow per share and shareholder value. As is always the case, our success is driven by our 25,000 employees who are ever vigilant and expanding the limits of national security. To everyone on the CACI team, I am proud of what you do each and every day for our company and our nation. And to our shareholders, I want to thank you for your continued support of CACI. With that, Tina, let's open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Colin Canfield with Cantor Fitzgerald. Colin Canfield: Perhaps we could shed some light on early expectations for the FY '27 request. I think we have kind of 2 camps forming up in terms of buy-side sentiment, one being that the step down from kind of reconciliation plus base implies -- it implies a step down year-on-year. And then another camp is that it's pretty insane to think that Congress would kind of imply a cut on defense budgets into a rising national security environment. So if you can shed some light on kind of where you expect kind of high-level budgets to go. John Mengucci: Yes, Colin, thanks. That's a meaty first question. Look, we're very, very focused strategically on critical national security priorities and we've always talked about those priorities have deep and enduring funding streams, and we have great bipartisan support. That bipartisan support is why we vectored this portfolio over the last decade to be 90% focused on national security. But we've also said before that we're really focused on the top line budget, budget growing. But at the end of the day, we're a $9.3 billion company in a $280 billion total addressable market. So we look at that tone as we have plenty of room to grow. And then where is the money going? So if you look across the areas like electromagnetic spectrum, software-defined tech space, Counter-UAS, border security, that's where current budget dollars and reconciliation dollars go. So I think we're in the right spot. We continue to have a great book-to-bill greater than 1 and our software-defined tech continues to deliver growth for us. So there's a lot of what-ifs as we get into '26 and into '27. But the fact is we're winning a lot of long-term business that really draws across a number of year budgets. So with the level of backlog we have with the duration of contracts, we just put into backlog right around 6 years. It does allow our company to endure and allows us to continue to grow regardless of what some of those top line numbers are. Colin Canfield: Got it. And then in terms of like Counter-UAS cyber electronic warfare contracts, I think investors have traditionally been conditioned to kind of large multiyear vehicles, but it seems like contracting officers are taking a more agile approach. So maybe if you can kind of talk about how you expect those contracts to be awarded as well as kind of the level of agility that is rewarding within folks like yourselves, [ Epirus ], AeroVironment, folks that kind of have commercially developed solutions in that domain. John Mengucci: Yes, thanks. So look, I think it's safe to say that the U.S. government has been buying capabilities in very different ways as of late. It was about 3 years back, we started to hear about OTAs. It's within the last year, we heard about how advantageous is to be a commercial company. And look, we've double the amount of OTA work that we've done in the last 2 years from the last 5. We're a company that is both [ cash ] compliant, which means we have a rate-based business like traditional government vendors, but we also have a portion of our business that's truly commercial as commercial accounting and commercial practices. So that sort of lays that groundwork that should tell everybody. CACI is a unique company within our space and that we're very well positioned to address how the government buys. Most of our software-defined technology work has actually been purchased over the last few years in a very different manner. So it is true that some of our technology is funded by large multiyear programs, but it's also more the norm that we receive our awards on purchase orders in a very commercial-like manner. You can now buy from CACI just about anything across the electromagnetic spectrum whether it's SIGINT or it's EW, and it allows us to provide an item number, a part number and a price. And so we're very used to supporting those types of ordering vehicles. At the end of the day, it's also what moves our financials around, right? I mean if we're sitting here getting purchase orders that come in, in quarter, quarter 1, and we turned that around in the first quarter, that's going to move our financials around. So true that the government is buying different. I love the fact that the government is buying different. I love the fact that we saw that coming 7, 8 years back, we positioned this company very well. And then I'll sort of end, Colin, with TLS Manpack is a perfect example. That went from an OTA to a program of record where that customer continues to buy 250, 300, 500 units. So better for us to put a program in place and that allow our customers to buy in a manner that supports their budgets. Operator: And your next question comes from the line of Scott Mikus with Melius Research. Scott Mikus: Very nice result. John, CACI was ahead of the game when it came to investing in Counter-UAS solutions, but we've seen in Ukraine, both sides are now using fiberoptic cables to prevent their drones from being jammed. So how are you thinking about that challenge when it comes to developing more Counter-UAS offerings? Is it an opportunity for you? Just wanted to get your thoughts on that. John Mengucci: Yes. Thanks a lot, Scott. Look, I'm going to sort of step back on this whole Counter-UAS story. I guess, first of all, we've been doing it for a really long time, a couple of decades. And I've covered a lot of the basis in some of my prepared remarks with the creation of Merlin that frankly allows us to quickly bring different phenomenology in, so we can better find drones. The drone threat is really unique in some ways but very much the same in other ways. Time is going to be the differentiator for this threat. Most other solutions that are out there, look at simple drones within 1 to 3-kilometer range, Merlin and other of our systems detect up to 75 kilometers away. And what that does is it gives the operator time. So in some instances, up to 15 minutes of time versus about 8 seconds of time by those who were looking at Group 1 or maybe Group 2 drones within a 1 to 3 kilometers space. We're already in the U.S. government inventory. We're already pushing at the scale, already battle hardened with hundreds of confirmed kills. So it's true that there are drones that are trailing fiber. There are drones that are operating in the cellular infrastructure. So if you look at what the homeland fight is going to be, we may have drones from people who are not our friends, flying their drones on our networks. So at the end of the day, I think we have an outstanding solution. I know we have an outstanding solution. But I'm also going to end with to most companies, Counter-UAS is like the new AI, right? Everybody does it now that it's popular and the difference between the AI stock-pop hype and the Counter-UAS stock-pop hype is if you have a Counter-UAS solution, you say it does and it does so much and it doesn't, at the end of the day, somebody dies. If you've only deployed your kit at demos around the AUSA floor, it's very telling. We've been on this market for a couple of decades with a great installed base, hundreds of systems, thousands of sensors. I would expect this threat to continually change and that's why our solutions are software-based. That's why our Merlin system brings different phenomenology in. So we're able to more than adequately not only defend this nation, but other nations out there. Scott Mikus: Okay. And then I have one for Jeff. I mean, Jeff, what really surprised me was your Fed civilian agency sales were up 17% year-over-year. So I was just wondering if you could maybe parse that out between organic versus inorganic? And then perhaps what was DHS up versus non-DHS? Jeffrey MacLauchlan: Yes. So about 10 points of that percentage basis of content is DHS. So the growth there, Scott, is in DHS and it's in the ramping on NASA NCAP, which is ramping up nicely and moving with our plan. It's really all organic. I don't think there's no inorganic in there. As I think about Azure and Applied Insight, none of those are going to be offensive. Operator: Our next question comes from the line of Gavin Parsons with UBS. Gavin Parsons: John, I know you always remind us, bookings are super lumpy, but obviously, a pretty strong booking quarter here. So I guess a 2-part question. The submitted pipeline is down, but obviously [indiscernible] those strong bookings. So as part of the question, does the simple math imply a very strong win rate on that conversion? And then second question, should we expect bookings to maybe take a breather over the next few quarters given the submitted pipeline is down a bit? John Mengucci: Yes, and potentially. Look, we -- I'm actually quite happy that the transparent information that we share is exactly what should lead to questions like this. Look, we really pride ourselves in giving you all the information we have as we run this company. We do our best to talk about bids that are going to be awarded at some time. We look at what our pipeline of submittals are and we talk about what we end up winning. So yes, there's going to be different movement of numbers out there. Very proud of our first quarter win rate. Of course, I look at where we are at the end of the year, but winning $5 billion in the first quarter, which is half of the total we won last year, it really does position us well. Jeffrey MacLauchlan: I think you also have to look, Gavin, at the whole data set because we obviously had a really good awards quarter you would expect that to probably result in a dip in the awaiting decisions number, but you also have to look at the expected to submit piece, which is up. So this -- the adequacy of the pipeline is really a little bit like a balloon. I mean any one time one piece of it may dip down and another piece dips up. I mean that's inherent in the lumpiness, right? John Mengucci: And I think your second question was around with everything going on, how could it potentially impact the second quarter. Look, I think it's unrealistic to believe that the pace of awards given we're in a shutdown mode is going to continue to the level that we have. What that number ends up being is whatever that number ends up being, I'm sure we'll talk about what the book-to-bill was at the end of the second quarter. I'm more excited about what the book-to-bill is at the end of the year and even more excited by having a trailing 12-month book-to-bill of 1.3x. So we put a lot of awards in our $34 billion backlog, funded backlog is up 26%. I think it really bodes well regardless of what gets thrown at us. Operator: Our next question comes from the line of Seth Seifman with JPMorgan. Seth Seifman: The government shutdown. It appears some awards, especially funded were accelerated ahead of the shutdown. So should that mitigate some of the near-term impact? And is there some sort of length of the shutdown that presents a risk to guidance? Jeffrey MacLauchlan: Yes. Certainly, it leaves us better positioned. I think it's important in the sense that it leaves us better positioned in terms of programs being funded, obviously, but I think it also is sort of an expression of confidence and support by customers to position us to have minimal disruption from this. So certainly, that's true. One of the reasons that we affirmed our guidance despite the fact that you can kind of see some growing momentum in the business is our approach to the guidance, which we've talked about with you before, and this left goal post, right goal post approach, really encompasses sort of a range of outcomes. And we really, at this point, don't see reasonable outcome that isn't encompassed in the guidance range we've given you. Not only is there minimal disruption, the nature of much of the work is that we would expect to make it up within the year. And we really don't see it as being a disruptive factor. I don't know if John adds here. John Mengucci: Yes. Seth, I'd also just add to Jeff's comments. Given our significant intentional exposure to national security work and as Jeff said, the level of technology work and a large level of funding backlog. And the fact that a lot of our work is essential and that -- which is not there, says that we're able to make that work up. You may not see that null any Q2 impact in quarter 2, but you'll definitely see that null any short-term impact over the full year because we have the full year to make that -- those times up. So I think we're in a really good position. Clearly, if it continues to linger for months and months, I think Jeff already covered that. It's well covered within our guidance that we have out there today. Seth Seifman: Great. And then how does the hiring environment look over the last few months? And do shutdowns tend to impact the pool of applicants, whether there's more people coming from, say, like a federal agency that are applying or people are kind of scared off from the industry? John Mengucci: Yes, [ Rocco ]. Look, we're actually seeing applicant value -- or volume, sorry, at an all-time high. Believe it or not, we had 0.5 million applicants in fiscal year 2025, and we have quite a large number of folks applying for jobs to date. It does help that we're more a technology company if we were purely a pure play government services company, when you see shutdowns that go on for 15, 20, 25, 30 days, that gives folks pause if they want to go do national security work on the expertise side. But we've got -- we're still running -- 40% of our hires are coming from referrals. We've got about -- we have well over 300-person intern program that will be kicking off here shortly. So we haven't seen any slowdown in number of applicants, and we certainly haven't stopped hiring given the level of wins we had in the first quarter. Operator: And our next question comes from the line of Tobey Sommer with Truist Securities. Henry Roberts: It's Henry on for Tobey here. Maybe just to start, I thought I go back to Counter-UAS for a second, but I'm just curious if you could roughly quantify the full opportunity set for that space over the next 12 months, let's say? And then how much of that could be related to Golden Dome on the non-kinetic C-UAS side? John Mengucci: Yes, Henry, thanks. Look, I think that the government, given the different funding buckets is still sorting through that. I'm not going to give you a direct answer on amount of Counter-UAS sales we expect in the next 12 months. But I will share that our portfolio of EW technologies, it includes Counter-UAS, and it includes a number of systems. Because if you remember, the hardware form factor is different for us, but the software baseline is the same, okay? So as we build systems, whether they're manpack, whether they're handheld, whether they're mobile, whether they're fixed, the beauty, not by accident of our solution is that software-based allows us to continually modify these with a common software baseline. Our portfolio of EW technology generates about $2 billion of revenue, each and everywhere, and we expect with newer requirements on Counter-UAS, it will experience continued growth. Some of that growth you all see on a quarterly basis when we talk about where our technology portfolio is growing in relationship to our expertise one. But administration priorities are very much focused on defense of the homeland, board security, world events, use of drones in modern warfare. European and allies are all up and we're going to have additional funding through reconciliation. Some of that growth is planned in our current FY '26 plan, and we gave you a low and a high end to our guidance range. We are very well positioned for other upcoming Counter-UAS opportunities, which do include Golden Dome. Henry Roberts: I appreciate the color there. And maybe just to follow up. The contract awarded in this past quarter. How much if any of those were due to reconciliation bill funding at this point? And a broader question, looking ahead, is [ reconciliation ] bill funding kind of one of the key difference makers that you're seeing in terms of funding priorities as the shutdown moves along, that differentiates you all from competitors? John Mengucci: Yes, I'll try to take the last comment first, and I'm sure Jeff will have some comments here as well. The Golden Dome funding and the reconciliation funding, we haven't seen that begin to be spent. So that's sort of gives us a backstop to what we're going through and we're experiencing now perhaps. Jeffrey MacLauchlan: Yes, that's right. It's -- we're seeing it in a planning sense. We're starting to see opportunities, meetings about developing alternatives, things like that. So we're starting to be able to see a little bit of where it's going to land, we believe. And of course, the heavy DHS content, along with the portions of the DoD reconciliation funding that are focused on the areas that are in our sweet spot give us some confidence about that. But none of the performance in the first quarter or the funded backlog that we talked about, we'd identified directly to reconciliation funding. Operator: Our next question comes from the line of Jonathan Siegmann with Stifel. Jonathan Siegmann: The margins were really impressive, especially in the context of your earlier outlook of lower margins to start the year. The incremental sales year-over-year were all technology, which implies the incremental margin year-over-year was over 20%. Can you comment a bit about the mix or any onetime benefits this quarter? It suggests the margins and technology maybe are trending higher than at least we were modeling. Jeffrey MacLauchlan: Yes. Thank you, Jon. Yes, I mean, I'm not going to quibble with your math. The technology margins were strong in the quarter. I would remind you that the segment is not monolithic. There are pieces of the technology portfolio that have margins north of what you mentioned, and there obviously are some that are obviously less. So when we talk about mix, it's both mix of technology and expertise but it's also a mix within the technology sector. So I would also note that it did not change our view of the year. So I would encourage you to think about that as sort of de-risking what you see -- what you've seen historically is our customary first half, second half margin step-up. We now see that increase in the second half as being a little smaller than it has been in some recent years. But you've done the math the right way. Jonathan Siegmann: That's great. And maybe just a follow-up on what John said about loving the fact the government is buying differently. Is it more the impact of these changes the more customers are embracing some of these more progressive ways to buy software, an agile software? Or is it the same customers just buying more? Jeffrey MacLauchlan: It's a little bit of both. John will want to add to this. But if -- certainly, there's been a tremendous increase in OTAs, both in their use by people that have been using them, but also customers that haven't used them before. I think also I would go back and underscore the answer to one of the first or second questions where John talked about the fact that we really are positioned deliberately by design to be able to sell commercially, to be able to sell in a traditional far [ cast ] disclosed environment. I mean we -- literally, there is no way that customers buy that we don't sell. So I think that can't be overemphasized. John Mengucci: Yes, Jon, I'll also add. Look, what customers want is a Far Part 12, Far Part 15. They want to be able to use those when they believe that one of those supports their needs over the other. The days of large development programs where you write your requirements in 2025 and you get your first case of the system in 2035 are not going to support how fast the threats are moving. So as Jeff mentioned, about a decade ago, we positioned this company to be very agile in both, right? So -- and it's why when we invest ahead of customer need, what the government is asking everybody to do is, hey, how about invest ahead of need more on your dollar than on ours, okay? Explain to us how that fits into part of our solve and then allow us to buy that as I answered earlier, from a commercial price sheet that says if you want a mobile Counter-UAS system or a handheld EW gadget then give me the part number and let me start buying that. Our software wrapper around these things is that when you buy that, you're going to find different uses for it. So there should be a quick upgrade path either from a licensing yearly fee that gets that customer additional upgrades and updates to it. Again, at the end of the day, I've been saying this for a decade. This is not the old way, where if you want a new capability, buy the new device. So you're continuously throwing devices away. So they're looking for agility, and what they're saying is they want to be able to buy in the way commercial companies buy and not be locked to long-term development contracts. And as Jeff said, we can support either and both in any other ways. Operator: Our next question comes from the line of Guatam Khanna with TD Cohen. Gautam Khanna: Great results, guys. Wanted to ask 2 questions to follow up on some earlier ones. First, has there been any impact to the business from the shutdown with respect to either revenue, cash or unusually soft awards in the first of the quarter? And then I have a follow-up. Jeffrey MacLauchlan: Yes, I can start with some of that. John will want to add to this, I'm certain. But there's been a slight amount of cash collections disruption that's primarily related to staff that's available for invoice approval and things like that. So we're feeling a little bit of administrative sluggishness, I'll call it, related to that. It's not tremendous. It's -- collections may be 10% or 15% off, it's small but noticeable. And similarly, I would say in terms of revenue, we have pockets of places where we have attenuated levels of activity. It's really de minimis. I'm going to say it's kind of single-digit millions revenue, it's activities that we expect to recover during the year. So it doesn't really affect our view of the year. But yes, it's detectable, but small and manageable. Gautam Khanna: Okay. And just wanted to ask, given the environment maybe tougher for some of the "peers" in the space relative to CACI, have you seen any intensifying price competition. Maybe talk about the bids that you didn't prevail on, is that typically a price shootout? Or anything you've changed -- you've seen in terms of competitor behavior, if any? John Mengucci: Yes. Gautum, it's John. I can answer for everybody else out there. I can tell you that if we've ever lost on price, it's not because we're in a price shootout because we gave up that part of the ecosystem about 7 to 8 years back. But I would imagine people are going to do whatever they need to do to continue to win business. I mean, we've seen a little uptick in the number of protests, which are out there. That, to me, being in this marketplace for a few decades, is usually that early sign is if you win, you win. If you don't, you protest. So I think we'll continue to watch the level of protests which are out there. But for us, I haven't seen pricing be an issue. We believe that we are fairly priced and where we invest ahead of customer need where we've gone out on risk to spend the company's money to help defend this nation in a better, better manner. We would expect to see higher margins. And thus far, that plan and that mode of running this business has served us very, very well. Operator: Next question comes from the line of Conor Walters with Jefferies. Conor Walters: Congrats on a great start to the year. Maybe just to start, it seems like the unchanged top line growth of 7% to 9% embeds stronger organic and perhaps around $40 million in lower acquired revenue. So curious, first, if I'm reading that correctly, but also if you could provide an update on the acquisition integration process. Jeffrey MacLauchlan: Yes. The acquisitions of Azure and AI are largely complete. And in fact, we're finding what we've always found, which is when it's done well, it's increasingly difficult to tell them apart. There is some Azure timing. John may want to comment some more on this related to some of the activities between the Azure legacy programs and Spectral. But they're very definitely meeting expectations and we remain convinced of their strategic and financial value where they're terrific fits, both of them. John Mengucci: I don't have anything else to add. Conor Walters: That's helpful. And then maybe just one follow-up. You guys discussed the upside you're seeing from reconciliation funding for Golden Dome. You mentioned the EW potential there. Curious if any other areas you would call out as considerable opportunities in your portfolio tied to that? And then how you're thinking about the bid process and time line now that you're starting to see that money actually being spent? John Mengucci: Yes. Talk a little bit about Golden Dome. Out in the public domain, you're going to hear a lot about sensors and effectors in command and control. But it's not just a ballistic threat, it's also threat from unmanned systems as well. So we're making it very clear that the Golden Dome concept is going to be completely reliant on early indications and warnings, meaning, as I mentioned earlier, knowing far in advance, when a threat is imminent and then giving folks who have to defend against those minutes and hours of time. We've actually coined that as left-of-launch. It's sort of our contribution to the entire Golden Dome effort. There has not been money spent on this yet. General Guetlein is taking our [ key ] responses. We've submitted our credentials on a few related proposals, but we're really looking at taking all of our sensitive activities work and all of our worldwide set of embedded sensors, which are in the thousands to give a common operating picture. And from there, let's go work on that non-kinetic low collateral defeat of those threats. Because clearly, taking a hypersonic missile on and using that to knock down the drone or other missiles over the Continental U.S. has a high collateral issue. So we're looking at non-kinetic low ones. So we would expect funding to begin to ramp up. I think we'll know better as we get to the end of the second quarter, early third, and we're very excited to be looking at that $150 billion potential spend purely focused on defending this country. Operator: Our next question comes from the line of Louie DiPalma with William Blair. Louie Dipalma: Following the positive TLS Manpack developments, is CACI also well positioned for the U.S. Army's modular mission payload plan for small drones with your Spectral Sieve and KickFlip? And related to this, how does the modular mission payload differ from how the Army is currently using Spectral Sieve on Puma or C100 drones? John Mengucci: Yes. Louie, thanks. So look, our entire -- I shouldn't say our entire, a large portion of our EW portfolio really is modular mission payloads, right? And for the rest of the audience. That's really taking common software capabilities and putting that on different form factors. It can be looking for wireless signals. It could be looking for a land-based signal, it could be looking at missile signals. There's a plethora of RF out there around the globe. The program that Louie mentioned is we already deliver a number of modular mission payloads to [indiscernible], folks who build drones and they're looking for an overall package. They have a drone that's size X that can carry weight Y. What kind of features do we have, what type of devices can we put into those unmanned systems. So we have delivered those. We have delivered to the Puma and a number of other ones, either directly to United States Army and other DoD agencies will be gone directly to a drone builder. So I believe that market will only continue to grow. It's the reason why we got into this market a number of years back. It's the reason why we positioned this company to be able to deliver either under a Far Part 12 or Far Part 15 and allows not only the U.S. government but OEMs of drones and the like to easily be able to buy our systems and have them ready and also allow us to modify those as the threat changes. So that's what we've been up to. Louie Dipalma: Makes sense. How has the Navy Spectral program been progressing? John Mengucci: Navy Spectral program is going very well. Jeff talked about Azure. Azure has the precursor program. We worked very closely with the Navy to make certain that we could time some of the Azure deliveries in a manner that then support the Spectral delivery. So on the Azure front, there were some deliveries that have been pushed out, so that can be more closely integrated with the Spectral ones. The next phase for spectral is a January, February time frame where that program will get through its [ milestone sea ] and that will freeze the design. We'll be able to begin deliveries as we've always mentioned during calendar year 2026. Operator: Our next question comes from the line of Jan Engelbrecht with Baird. Jan-Frans Engelbrecht: Congrats on the strong set of results. I wanted to talk a little bit about just the international opportunity. I think it's not something that you maybe highlight a lot. But just given where NATO budgets are going, now about the 3.5% of GDP and then there's the additional 1.5% bonus on top of that. Just sort of -- there's clearly capability gaps in the EU and in Europe and NATO as a whole. And is there anything you can highlight where maybe areas you guys are targeting in the next couple of years? John Mengucci: Yes, Jan, thanks. Look, I've said many times that the world is a dangerous, dangerous place, and I think that the Ukraine was a real wake-up call. It definitely raised the urgency level around defense and national security globally. And I would say mostly in the electronic warfare area, a war in the end market not by accident, but by a very, very, very solid planning. So as you mentioned, there's many allies they're going to be expanding their defense budgets. We deliver technology to a number of [ 5 NATO ] countries today. And I've been on this slow reveal of what we're doing in the international front solely because we want to be very cautious and very, very careful because you can spend a lot of money on the international front very, very quickly. Since we last talked, we've expanded our sales to 15 NATO countries, and we continue to assess demand signal in 7 other countries. Eastern Europe, allies are increasingly interested in our SIGINT, in our EW, in our Counter-UAS tech. I will tell you that our initial focus was on technologies with existing U.S. government and DoD sales following the FMS path. The number of countries that we have added have now gone to direct commercial sales. And I'm only tempering that -- I should say, I'm tempering that only by the fact that it's true, a lot of European nations are going to be spending far more money, but those same European nations are going to look to spend that money within their borders. So our next step is to understand what relationships do we need. So we either license or we coproduce some of our tech here and then add the applicable software baseline to those products. So still a long way to go there, but it's a market that over the last 90 days since we've last spoken, it has truly opened up to us. Jan-Frans Engelbrecht: And just a quick follow-up. If you could just comment on the slide deck talks about the M&A pipeline expanding. Just any areas that you think that would sort of be a niche capability that you could fill? Just any comments on M&A just in the environment. Jeffrey MacLauchlan: Jan-Frans, as you know, we've talked many times before, and there's no departure from this. Our process and approach is very much GAAP-driven. The opportunities that we see in the pipeline are generally a little bit more technology than they are expertise. A little bit more focused on sensors as well as, not surprisingly, software applications that go around those sensors and things that kind of fit nicely into our sweet spot. So we are seeing a little bit of life in the pipeline, and we look forward to developing a few of these ideas, very early stage at this point, but we'll -- it's an active area of interest for us. George Price: Operator, we have time for one more question. Operator: Our final question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: John, you spoke about -- or you alluded to kind of everyone at AUSA having counter UAS and it was like if you did 15 meetings, 12 had it and 10 led with it, which is pretty unusual. Is the funding coming down the pipeline that significant and can it move the needle for companies much larger than yours? And I know that you didn't want to quantify the forward on that, but can you give us the baseline of how much of the current revenue base is counter drone? John Mengucci: Yes. I'm going to stick with about $2 billion of our entire portfolio is in the EW place, which does include counter drone. And we deliver to both DoD and the intelligence community. And as I shared, a large number of NATO countries. Back to the first part, yes, I think it's a burgeoning market. I think you have to look at 2 different streams of funding, Noah, right? One is the $150 billion on Golden Dome, some portion of that. And I would tell you, it's multiples of billions that will be spent on a layered defense that's going to have to defend against unmanned systems. And frankly, uncrewed systems are a very different beast. Traditional radar is not going to find that. It's going to look like a bird, okay? So it takes new technology. And then on top of that, we're not in a war time in somebody else's zone where the U.S. is assisting. We'll be defending this nation, right? We're also going to have events like the World Cup. We're going to have the Olympics. We're going to have so many more things. And that threat vector, Noah, is up materially. And you can look at common new sources that the threat vector for other countries, potentially drug cartels and others using drones. So I think there's a market growth that we're all watching. It will be billions of dollars worth of Golden Dome funding. And then if you look at the DHS additional funding, that's going to work on the border security side. And today, there's 1 kilometer systems that find group 1 drones. Tomorrow's threats are going to be we need 75 or 100 kilometers to give us minutes of time to go defeat against that. That's going to be Class 1 through Class 5 drones. So yes, I think that the rest of the industry is waking up to this market. My only earlier comment around this hype is we went through 1.5 years period of AI hype and I feel as though we're going to go through another 1.5 years of Counter-UAS hype. So at the end of the day, the government is going to go with systems that have been deployed, where combatant commanders swear by the fact that they want one of what we have. And it's just really allowing funding to catch up to that. And then, of course, you do well know, Noah, government shutdown is going to sort of slow that down as well. So I think it's an emerging market. We've been in it for a couple of decades. I think we understand it very, very well. We have the right partnerships. And we're always looking for additional capabilities that we can add to our system. I'll end with, and we build our latest system on our own nickel, right? So we're not dependent on U.S. government IRAD dollars to advance what we have because I do think that the threat is that real and the government is asking us to look at this as harder. So very large... Noah Poponak: I Appreciate the detail there. If I could just ask one more question. Just hoping to better understand a little bit shutdown impact and shape of the year. Can you shed a little more light on how the government goes through deeming what is essential. The comments you made there at the beginning of the call are interesting. I thought it would have been more missed work in your 2Q that's just made up before the end of the year, but it sounds like that's not the case. And I think historically, you've had a 2Q that's pretty often flat sequentially versus 1Q, and then a back half that's up mid- to high single versus the first half. Is that still the shape of your '26? Jeffrey MacLauchlan: Yes, broadly -- this is Jeff. No, probably, it is with the caveat that I mentioned earlier about that step-up will be between first half and second half. We expect to be less pronounced this year than it has been in prior years given the strong first quarter, which largely was comprised of items that did not change our view of the year. So that's kind of a qualitative way to say quantitatively, the first half, second half step-up will not be as pronounced as it has been in the past. John Mengucci: Noah, I'll also throw in there. If you look at the last shutdown, right, it was '18, '19. If I remember right, some of that was December to January, right? So you had a lower level of folks because you were around with Christmas time. What's different from our company between the '18-'19 shutdown and where we are now is, and we've got far more long-term tech programs that are being developed. We have far more programs that we're investing ahead of customer need and putting enhancements into that software baseline. We're selling them on a purchase order. So that has a very different buying schedule to it. It doesn't take folks to sit around and do a down and select, they can buy these things off of a GSA-approved price list. So there are a lot of differences at least to this sort of de minimis impact. And then you also closed up with -- we can make a lot of these hours up. If we're at a help desk and nobody needs help now, they're not going to be more help later. So clearly, that doesn't get made up. That's your traditional government services work. But the vast amount of this are work that will have to be done. And every agency -- back to your initial comment, every agency is going through their own process. I wish I had that rubric that told us what was mission essential and not. But frankly, I'm sitting on the government side, that sort of changes too, right, whether we defense of the homeland different than other things that are out there going. But all in all, a really good book of business right now as Jeff and I look at the impacts how we can get those covered and we believe we're right at quarter 1 point to having an outstanding year. Operator: And at this time, I will turn the call back over to John Mengucci for closing remarks. John Mengucci: Well, thanks, Tina, and thank you for your help on today's call. I'd like to thank everyone who dialed in or listened to the webcast for their participation. We know that many of you will have follow-up questions. So Jeff MacLauchlan, George Price and Jim Sullivan are available after today's call. Please stay healthy and my best to you and your families. This concludes our call. Thank you, and have a great day.
Niina Ala-Luopa: Hello, and welcome to Vaisala's Third Quarter Results Call. I'm Niina Ala-Luopa from Vaisala's Investor Relations. And today with me in this call are President and CEO, Kai Öistämö; and CFO, Heli Lindfors. And like always, first, Kai will present the results, and then we have time for questions. Kai Öistämö: Hello, and welcome, everybody, from my side as well. Vaisala had a good third quarter, strong sales and profitability as the headline says. So, let's dive a little bit deeper where did it come from and what are the details behind. So, first notion, the net sales growth was strong, 13% in reported currency, which can be characterized really as strong sales in a quarter. The orders received simultaneously declined by 21% and leading into a decline in the order book. Whilst when going back to the financial performance, we maintained a very solid profitability, 18.2% EBITDA margin. And if I exclude extraordinary items due to the restructuring and so on, actually, the EBITDA margin was 20%, which I think is all-time high for us in terms of an EBITDA margin, if I recall right. Really happy on Industrial Measurements on the demand picture and now clearly also broader than earlier. And on demand and on the other hand, Weather and Environment side, more challenging market environment, and I'll talk about both in detail in the coming slides. And really happy on the subscription sales growth continued to be very strong, 57% year-on-year and also the underlying organic growth on a very healthy level. And as I said in the release already, it was great to see also subscription sales now contributing positively also to the profitability of the company. The market environment continued to be challenging. If you think about the entire third quarter within -- inside of the third quarter, we kind of we start -- it started with the tariff changes and kind of fixing the tariffs between Europe and U.S. And then at the same time, during the year, continued in the third quarter, the depreciation of euro vis-a-vis USD and Chinese yuan. So, the environment has many moving parts, and the depreciation of euro, dollar and renminbi really are things that don't often get talked about as much as the tariffs. But actually, if you think about it, like the magnitude of the depreciation of those currencies vis-a-vis euro, the impact actually is equal, if not greater, than what the tariff impacts actually are. So, it's good to remember that as well. And as I will conclude at the end of my presentation, the business outlook for the year 2025 remain unchanged. But before going into the numbers and performance of the company in more detail, good to look at a couple of words on strategy execution inside of the company and this time in terms of a couple, we picked a couple of kind of interesting launches that are reflecting also the strategy and strategy execution of the company. The first one, Vaisala Circular, it's a service product and the emphasis really is on the word product, where the industry measurement probes are recalibrated and provide a reuse service where the customers maintain a dedicated pro pools at our service centers. Essentially, what it means is that we have productized the calibration service in such a way that now we are selling always accurate on uptime and continuous operations in our customers' operations instead of talking about calibration or other technical terms. This is obviously kind of crucial in terms of selling services that how do you productize it, crucial for the customers to understand what's the value and crucial for our sales to actually then be able to communicate what the value is and what the customer should be paying for. So, kind of a great example of the things that we are doing to drive our service sales, both in Industrial Measurements where Vaisala Circular is an example of, but we are doing similar things also in the Weather and Environment side. Then on Xweather, the hail forecasts. Hail actually is one of the more difficult weather phenomena to actually forecast. And it's been really one of these places where -- one of the things that really is -- has been really a challenge for meteorologist for a long, long time. Super happy to report that now we have an Xweather hail forecast. And hail is really important in terms of the damage it causes for various kinds of a property or infrastructure. For us in Finland, the hail sometimes gets to be kind of pea size and even that can kind of cause some damage. But in more southern countries where more extreme weather and extreme thunderstones typically are when hails get to be baseball sized, they really can kind of create quite a bit of damage. And it really is like billions of dollars losses in various kind of places. The example we are showing here where we can apply the kind of capability to forecast and create alerts for hail is solar parks. And if you think about solar parks, there's a whole host of glass facing upwards. And in case of a hail that's really prone for damages. And if you think about solar parks, one of the features is also that in many cases, they actually track sun, i.e., they are turnable. So, in case of hail forecast, you can actually turn them sideways so you can avoid the damages. And there's a kind of a big market and unsolved problem that we are solving for here with hail forecast as an example. And then WindCube, the next generation. Here, this is really, again, a good example of how we push the boundaries of the technology with our own R&D. With this evolution on LiDAR technology, we can actually increase the distance out of which we can read the wind and the wind fields, increased data availability and much, much more robust performance in clean air and complex terrain environment. So significant step-up in terms of our performance, which I believe both demonstrates our capabilities and is important for that business and puts us squarely in the lead also from technology and solution and performance perspective in that business. Then moving on to the financials. So, starting with the group level, strong growth, as I said, with -- in both business areas. Orders received decreased as talked about, and I'll still kind of talk about that a little bit later when I go into the business areas because there's differences in performance side. Order book consequently kind of down from same time last year. And then net sales-wise, a very strong quarter, 13% up year-on-year. And if you take the constant currency side perspective, it would have been 16% up from year-on-year, same time, so third quarter last year. Gross margin, a bit down, and I'll give you -- it's easier to explain when I go through the different business areas. Nothing dramatic about that there. And then on the profitability side, as I said, if you exclude the restructuring side, actually the EBITDA margin being all-time high, at least in my recollection. And cash conversion, no news there remained on a strong level. Now going into Industrial Measurements, yet another strong quarter and really happy to note that now the positive results are coming from all market segments and all geographies. And super happy to see that now Asia performing really well compared to the same time last year, equally so -- almost equally so, Europe and at the same time the U.S. growth continuing. Obviously, in the U.S. and in China, for example, where the local currencies have devalued vis-a-vis euro, that has a negative impact. If you -- like if I take, for example, U.S. in a constant currency, year-on-year growth was 9% in Industrial Measurements in Americas region. And I promised to talk about the gross margin in the business area side. And if I take Industrial Measurement side first. So, first of all, what I forgot to say is the orders received actually increased on the Industrial Measurement side, corresponding to the net sales growth, actually a little bit more increased 9% year-on-year here when the net sales grew 6% in reported currencies. But back to the gross margin. So gross margin decreased a little bit. And this really is due to exchange rate impact, but clearly, kind of big part of the impact was the proportional impact on the U.S. tariffs. And here, maybe worthwhile kind of just pausing and explaining the math that we've said that we have been fully mitigating the tariff impacts in our business. And that means that we've raised the prices correspondingly to whatever the tariff costs have been. And if you think about how that math works, it means actually that the -- even if it's fully mitigated in absolute terms, since the divider and the above the line and below the line kind of when you do the division are added the same amount, the relative number actually goes somewhat down. So that's really like if you have time, just play with the math and you'll see what I mean. So that's a big part of the explanation. So, I am not worried. It's within the normal boundaries in terms of what the gross margin changes have been and it's worthwhile saying also that while we are in the Industrial Measurement side, it's obviously easier to kind of mitigate by price changes, extraordinary events like the import duties and such changes in import duty regimes compared to fluctuations in currencies. Since we price and any global company would do the same, price in local currency, you cannot go every time currency exchange rates go back and forth, go change the local pricing. Obviously, long-term, there are kind of pricing means to compensate this. But short-term, you cannot kind of react to all of this, and it would not be constructively taken either from a customer perspective. Then Weather Environment. In net sales, actually a great quarter and subscription sales-wise, equally so. At the same time, the orders received in decreased in Weather Environment, driven by a couple of things. There's a strong decline in renewable energy market, as we have been saying since the first quarter of this year. Nothing has really changed on that. And there was kind of a significant change in the market in the beginning of the year, and it continues to be on a low level, and we do not expect that to change in any time soon. And I'll come back to that in the outlook. And then likewise now in aviation and meteorology markets, there was a very strong comparison period and kind of big orders taken in the comparison period last year. But also this part of the market, when you take aviation and meteorology, there is a fluctuation between kind of natural fluctuation in those markets as well as this year, where there have been a couple of headwinds that we talked about before, one being the China investments due to a large extent, I would argue, to the fact of the cycle in terms of the 5-year plan this year being the last year of the 5-year plan and very often being the least investment in at least in this sector. So that we have seen that in declining order intake and then simultaneously, the administration changes and so on impact on delaying the order intake in this year in the U.S., which obviously is another contributor to this. And then there are kind of gives and takes on the rest of the market, which is within the kind of, I would argue, in the normal boundaries. And good to remember in the comparison period in the aviation and meteorology side on the back of really kind of a very strong now 2 years in terms of an order intake, really driven by the European stimulus fund on the radar networks in Southern Europe, most notably in our case was the big order that we got from Spain, but there were multiple other ones that we benefited from as well during the past year, 1.5 years that are still in our order book, and are being executed. Now on the gross margin side, a decrease of 3 percentage points. Sales mix, a stronger portion of the project revenues being recognized. So that's in plain English, what the sales mix means. And then same things as what I talked about in Industrial Measurement side on exchange rate and the U.S. tariff impacts, albeit somewhat less pronounced in case of Weather and Environment as the sales mix it's not as heavily weighted in euros and dollars or the U.S. business is a little bit less than what Industrial Measurement is. And then EBITDA percentage being on a very healthy level of 14.6%. I mentioned the cash flow continued on a good level. Here you see on the bridge on puts and takes on the cash flow and cash conversion being at excellent level of 1 and free cash flow around EUR 40 million during the period. Now if I look at the year-to-date, both net sales and profitability clearly improved during the first 9 months compared to the same time last year. And orders received did decrease by 13% year-on-year and while net sales grew by 9% year-on-year. And subscription sales, if I take the first 9 months of the year, almost incredible 58% up, obviously boosted by the acquisitions of WeatherDesk and Speedwell Climate, but also a great performance on the underlying organic growth. And then gross margin, slightly negative, again, same explanations that I went through. And then on EBITDA percentage and EBIT percentage up from comparable time or same time last year. And then worthwhile saying on the operating expenses, the restructuring costs, as I said, also in regards of this past quarter have been not insignificant as we have been adjusting our renewable energy business to the new market reality. And that's now behind us, that restructuring. And then acquired businesses and so on other explanations when you look at the year-on-year comparison on operating expenses. Financial position continued on a very good level, low leverage on the balance sheet, and we continue to have asset-light business model, no changes seen or foreseen in that. And on this page, I think it's good to note that the automated logistics center is now in a phase where we are loading it. So, it's actually fully in schedule, and we are putting material into that and starting to use it as scheduled in the fourth quarter of this year. And then also notable thing during the quarter was the acquisition of Quanterra Systems. Think about it this way that it's kind of an interesting team and technologies on monitoring CO2 fluxes, which means question whether individual geographic area, field or piece of land is a carbon zinc or carbon emitter, which a very interesting piece of technology, potential long-term kind of quite a bit of potential on that, and that was announced in September. Market and business outlook. We continue to see growth in industrial, instruments, life sciences and power, we continue to see roads as a stable marketplace. And then renewable energy, meteorology and aviation decline, and this is outlook for the rest of the year. And obviously, the renewable energy being kind of a clear change in the marketplace since the beginning of the year, whereas the meteorology and aviation now suffering a slightly different market conditions, as I explained before, in terms of the government subsidies and government incentives kind of on a lower level than when we compare to last year. And then on the business outlook, no changes to this. We continue to see the net sales to be between EUR 590 million and EUR 605 million and operating result being between EUR 90 million and EUR 100 million. With that, I want to conclude my prepared remarks, and I'll open up for any questions you may have. Operator: [Operator Instructions] The next question comes from Nikko Ruokangas from SEB. Nikko Ruokangas: This is Nikko Ruokangas from SEB. I have 3 questions, and I'll go one by one. Starting with Weather and Environment and orders, which you already discussed, and you told the reasons why they have now declined for a couple of quarters. But should we soon start to see the trend in orders happening there? Or has the demand continued sequentially weakening? And then do you think that the U.S. government shutdown could affect you now in Q4? Kai Öistämö: Yes. So obviously, kind of when we talk about we compare to year-on-year kind of things will obviously, when the comparables change, then that will change. Your question was on a sequential basis especially aviation, meteorology, things kind of come as they come. So even if there would be like numbers improvement or decline from one quarter to another, it would be hard to make a conclusion out of it since it's a lumpy business as a starting point. As I tried to explain on meteorology and aviation, it is more of a -- it's a bit of a cyclical business where now we have enjoyed, I would argue, almost like exceptionally high cycle in it for good almost 2 years. Now it's more on a normal basis, what it looks like. So, I would not be overly worried about it where I'm standing today. Then, on the U.S. government shutdown, it's a great question. And so, 2 comments on that. We've seen the budget proposal, and I would be actually happy, and this is the government's budget proposal, not minority budget proposal. I would be happy if and when that is approved. So, I have no issues with what is proposed. The shutdown itself, obviously, during the shutdown and getting a new order for next year since there's no budget approved nor and then there are a whole host of people furloughed. It's postponing things. If I look at bit on the history, typically, what has happened is that during this kind of U.S. government shutdowns, the orders will just come a little bit later in. But if I take kind of 12 months average or what kind of a little bit longer time series, it will normalize itself post the shutdown. So, it's like a little bit plowing snow in front of a snowplow kind of a thing, at least has been in the past. And we'll see how long it will last, it can stop tomorrow, or it can be continuing for some time. Nikko Ruokangas: Yes, I understand. Then on the guidance, as it indicates for Q4, clearly kind of year-on-year basis, weaker sales and EBITA development than now in Q3. So, is this basically explained by smaller project deliveries expected for Q4? Kai Öistämö: A big part of it is also very high comparable. If I actually go -- and I'm usually not doing this, I'll try to go back in my slides just to illustrate what I'm saying on this slide. And it's not this slide, here. So, if you look at this slide, it's kind of like highlights the unusual nature of the last year in terms of how the order intake kind of behaved and especially net sales behaved that we had a very weak first quarter, very strong second quarter, weak third quarter and a very strong fourth quarter. And if you went back into '23 or earlier years, typically, the second half, both quarters have been stronger. Typically, even the third quarter has been stronger than like second quarter clearly on an average year. So, there's a bit of when you compare to year-on-year kind of numbers, the anomality of last year makes it a bit harder this time around. Heli Lindfors: And I think the second topic is actually the FX that Kai was referring to earlier on. So, in the beginning of the year, the FX was still more similar level to last year, whereas now in the second half of the year, we see more of an impact of the volatility of the FX. So that will definitely be a factor in Q4 as well if the kind of rates remain as they are currently. Kai Öistämö: Correct. And it's again, a good illustration of that. If you go back and look at our second quarter results, we said that there was not really a material impact on FX yet. Nikko Ruokangas: Okay. So, this year, more normal seasonality expected than last. Kai Öistämö: Correct. Correct. Correct. Nikko Ruokangas: Then last one from me, at least at this point on cost side. So, you mentioned the EUR 3 million restructuring expenses. So, if we leave those out, so to me, it seems that your operating expenses were down in weather despite the acquisition or fixed expenses, but then clearly up in Industrial side. So, if you exclude those restructuring expenses, were those including something extraordinary? Or is it kind of describing the trends you are now having? Kai Öistämö: Yes, the extraordinary costs, as I said, was they were related to the restructuring that what I talked about in relation to the energy business and renewable energy business. So, I think your conclusion was exactly right. And like if you look at our numbers, and we have now a good trend also on the Industrial Measurement side, we have been a little bit longer kind of time series again, over the past 2 years where we had more modest growth, we were more conservative in spending and spending increases in Industrial Measurements. And now we see kind of clearly more growth opportunities and a bit more spending, not going wild, but a bit more spending on Industrial Measurement side. Operator: The next question comes from Pauli Lohi from Inderes. Pauli Lohi: It's Pauli from Inderes. I would start with this demand-related question. Have you seen any signs that the increased tariffs could start to dent the good market activity you have seen in the U.S. market or elsewhere compared to what we have seen already this year? Kai Öistämö: So elsewhere, I don’t see it go – it could have – now I understand your question. So okay, no, answer is no. We can't point anything in the U.S. or anywhere else, that would be at all related to tariffs. It's been more positive than what would have speculated pre-tariffs. Pauli Lohi: Well, that's definitely positive. And your scheduled deliveries for the rest of the year in the Industrial Measurements are a bit lower compared to Q3 last year. So, do you think that the current favorable market activity could still offset this? Kai Öistämö: No, Pauli, remember what Heli just said in terms of the exchange rate changes, which is, if you compare to last year, I think we are about 15, 16 points cheaper dollar than it used to be a year ago, and Industrial Measurements and Xweather are highly exposed to dollars. Heli Lindfors: Also, in dollars and renminbi. And especially for the Industrial Measurements, the renminbi is also very important currency. Kai Öistämö: So, it's not [indiscernible] then you can draw your own conclusions. I would not be worried about the demand picture per se. Pauli Lohi: Okay. Then, regarding the cost base, how large savings you expect from the recent restructuring on an annual level? Kai Öistämö: We have not communicated that. I'll put it this way that when we said in earlier quarters, similar calls, we've said that we are going to adjust our operating expenses to the level that matches the market picture on the renewable energy business. We've now done it. Pauli Lohi: All right. Then, regarding the new logistics center, do you expect any short-term cost-base increase or operational extra costs from starting to use the new center? Kai Öistämö: No, no, no. Absolutely not. Pauli Lohi: And do you see that it could provide any material financial benefits next year? Kai Öistämö: Over time, I think it clearly -- I mean, if you think about it now, fully automated material flow, it should yield into kind of a better rotation days, better management of the inventory, multiple benefits in terms of how much capital is tied into an inventory, and different tools also to optimize that inventory. So obviously, we have a business case, and over time, this is an investment where we expect a payback as well. Pauli Lohi: Okay. Finally, on Xweather, do you think that the current roughly double-digit organic growth rate is sustainable going forward? Taking into account the new product launches and maybe potential synergies from the recent acquisitions? Kai Öistämö: Yes. So, short answer, yes. And here also, short-term, we have to take into account the currency exchange rates when we look at the euro reported numbers. But typically, we do the pricing changes at kind of around the year-end in all of the businesses, well, at least Industrial instruments as well. So, we need to then see how those impact kind of going forward as well, depending on how the exchange rates then turn out to be. Operator: The next question comes from Waltteri Rossi from Danske. Waltteri Rossi: A few questions. First, about the Industrial Measurements orders in America. The report said that they grew slightly. I think the wording was a bit softened from the previous. So, have you seen any changes in the activity level in the Americas? Or is this only related to the FX? Kai Öistämö: So, I think I earlier said that it was a 9% on a constant currency level year-on-year. And if you look at the reported currency, it would have been 2%. So here, you see kind of direct impact on the currency exchange rate. I would be very happy with the 9%. I'll offer you that. Waltteri Rossi: Okay. Okay. Perfect. But you don't disclose how much the Americas is of the Industrial Measurements orders. Can you give us... Kai Öistämö: Not on orders and not on a quarterly basis, but it's clearly the biggest market that we have, and it's clearly north of 1/3 of Industrial Measurement sales. Waltteri Rossi: Okay. Okay. Then, about the Xweather business, it said that over the past quarters, it's actually been contributing positively at profitability. So, does that mean that the segment is now making positive operating profit already? And if so, are we talking about a low single-digit margin, or what? Kai Öistämö: We are not reporting that business separately. So, I will decline to answer you. So, we have not quantified. But contributing positively kind of would imply that it actually makes money. Waltteri Rossi: Yes, yes, sure. But I was just making sure that we're talking about EBIT on an operating profit level. But kind of... Kai Öistämö: Remember on the EBIT level, we did the acquisitions last year. And that's obviously kind of the amortizations of those assets raised the hurdle on one hand. But if you look at on an operating profit side, then that's what I'm referring to. Waltteri Rossi: Okay. Okay. So, we should still expect that you are continuing to invest in the growth of that business and shouldn't expect the profitability to kind of start to improve or scale up from now on? Kai Öistämö: Yes. Well, if software business grows 50% year-on-year, one should expect that it scales. Waltteri Rossi: All right. But you are still keeping the view that you are shifting focus from growth to clearly start improving the profitability side only later during this strategy period? Kai Öistämö: No. There's no shift between profitability and growth to be foreseen. It's always -- like when you are scaling a software business, it's always a kind of a trade-off, of how much you invest in the growth. And typically, in this kind of a software business, it really is investments into sales and demand generation rather than increasing the R&D when software businesses are scaling. And then the return on investment should be quite quick. And it's relatively easy to verify as well, kind of from a cost of acquisition side. If you kind of invest in customer acquisition cost, you can actually measure what the return on investment is, and it really should be quite quick. Waltteri Rossi: Okay. Okay. Lastly, as of now, earlier in the year, the expectations were kind of lowered because of the U.S. tariffs and how they will impact, especially the Weather and Environment public side sales. How would you describe the impacts of the tariffs on public sales this year today? Like, has your view changed since at all... Kai Öistämö: I would say no impact so far on the Weather and Environment sales in the U.S. from the tariff side. As you may recall, we did kind of a plan for the tariffs, and we mitigated the tariffs by actually shipping into our own warehouse in the U.S. so kind of that we have a little bit of time to pass the tariff costs into prices. And I think we are executing against that plan very well. Operator: The next question comes from Joonas Ilvonen from Evli. Joonas Ilvonen: It's Joonas from Evli. I have a couple of questions about Industrial Measurements. You already discussed this question of cost, but if I can come back to it. So, I think like R&D costs were down this quarter at a relatively low level. And of course, I think there's always a bit of like a quarterly variation when it comes to that. But then also you say -- and I saw your total OpEx still grew quite a bit, albeit it was still at a rather moderate level. But you mentioned this investment in sales and digital capabilities. So, my question is that how do you see the kind of overall Industrial Measurements investments continues to grow from now on? Like, do you expect it to grow basically at the rate of sales volumes? Kai Öistämö: If I take all kind of that will be a good approximation over time. Obviously, these things change over, like vary over quarters, and the quarters are not equally strong, and so on. So, kind of different quarters are a little bit different. But over time, that's a good proxy. Joonas Ilvonen: Okay. That's clear. And then you mentioned IM APAC growth that was especially strong. So, was this mainly due to China? Or were there any other countries there you would like to highlight, and which specific industry groups, like you mentioned, life science and power in your report? Kai Öistämö: Yes. As I said in the prepared remarks, if I start from the kind of latter side of the question, it came from all segments in the Industrial Measurement side. So, all market segments, grew. And it's both in China and outside of China. China did have a marked change compared to the second quarter, clearly having more market optimism in the third quarter, great to see. But it was not only in China, it clearly was outside of China as well. And if I pick one very interesting market, which continued to be strong is Japan, and where obviously, lots of industrial activity, and we have a great position in Japan in various different segments, but not only those 2 markets. It's broader than that. Joonas Ilvonen: All right. So, there weren't basically any kind of weaknesses in terms of geographic regions or... Kai Öistämö: No, no, not that I can think of. Joonas Ilvonen: Okay. That's clear. And maybe one last question. So, you already discussed this IM gross margin headwind due to exchange rates and tariffs. So, it's going to fade at some point, but did you comment on when exactly is it going to? Does it still continue over Q4 or into next year? I mean, considering how things look right now? Kai Öistämö: Yes. So, 2 things on, if you look at gross margin, and this was a bit on the net sales side as well, what I tried to say earlier, one thing is we -- and then they function differently if you think about FX and then the tariffs. The tariffs, what I said and what we've been saying all along, is that we fully mitigated that by raising prices. And that has kind of by itself a negative relative impact on gross margin. And I'll do you the math, pardon my details here. But if you think about that -- let's imagine that the transfer cost out of which the tariffs are counted would be 100 units. And then you put a 15% tariff on it. Now that cost would be instead of EUR 100 million, that will be EUR 115 million. And you fully move that into the sales price and let's do an easy math and call it like it's EUR 200 million and you put EUR 15 million on top of EUR 200 million. Now you fully mitigated it. And if you do the relative calculation, there is a negative impact on relative number. Joonas Ilvonen: All right. Kai Öistämö: Sorry about that. I think it's good to understand that that's when you -- and then on FX, as I said, you can't manage FX-related changes within a quarter or within a half a year. You cannot like fluctuate your local prices based on exchange rates. But we do try to be smart when we do the annual price increases as we do every year in the beginning of the year. So that's a chance of actually taking the currency exchange rates and our costs and everything else into account. Operator: [Operator Instructions] The next question comes from Matti Riikonen from DNB Carnegie Investment Bank. Matti Riikonen: It's Matti Riikonen. And sorry if I have to ask some questions again because I had to jump to another call for 15 minutes during the presentation. So, some of the questions might have been asked already. So, I start with the math question that Kai you just explained. So is it in rough terms, we are talking about that the price increase that you made, it covers the kind of cost price, but then the margin that comes on top of that doesn't follow. So, you are not getting the compensation for the lost margin compared to the normal situation where you put the kind of markup to the imported price. Kai Öistämö: Yes. And even if you put a markup to it, you can do the math in different scenarios, how much of a markup you need to do in a high gross margin business in order to kind of mitigate the gross margin if you -- and there's obviously a limit how much you can pass on the costs if you think about the tariff a drastic change in the middle of the year, it's what's acceptable from a customer side. So yes, in a way, what you asked for. And then I'll go back to what I just said that beginning of the year, we are going to review our prices anyway, and we are going to look at different kinds of costs and things that where do we put the prices going forward. Matti Riikonen: Yes. But basically, isn't it always so that when the new year begins, you are trying to kind of achieve the same profitability level or higher what it used to here. So, it takes some time for the following price increases to kind of correct the situation into what it was from there. Kai Öistämö: Yes. That being said, when the book-to-bill cycle is 3 weeks in the Industrial Measurement side, that's pretty fast. Matti Riikonen: Right. Then regarding the Weather and Environment, when you talked about received orders and how they were kind of suffering different things, you meant that there's also industrial cyclical fluctuations or I don't remember what the term that you used was. But what does that actually mean in the Weather and Environment business? So, what kind of industries are there on the customer side that are affected if you're not talking about the renewable business, which I would... Kai Öistämö: No, I was not talking about the renewables business. And maybe I'll just explain it a bit more. So, it's not really an industrial activity. Think about it this way that this is -- it's a relatively small market in the end, I mean, in the total market as we are the market leader in terms of an absolute market leader in this. So, you kind of -- it's a relatively small market. And then many of the products are having their natural cycles and sometimes they are quite long cycles. So, if I take the radars that we just sold, I'm not expecting the same kind of a complete renewal of Finnish network until 15 years from now or something like that. And here, relatively small individual things like the COVID-19 fund to renewal, which was used to renew Southern European radar network kind of increased the tide a bit and now the tide is kind of lower as we speak. But that has been a phenomenon, if you go on a longer-term kind of a history in meteorology and aviation that the relatively small 2 big airports get to be built at the same year, kind of increases the size of the market and the years are not exactly the same. So, this market kind of just has a phenomenon where there's a relatively small discrete demand changes change the size of the market somewhat. Matti Riikonen: Yes. Okay. And that clarifies because maybe the wording in the Finnish stock exchange release was about the industry and basically, it means the sector where you operate in the crisis. Kai Öistämö: Correct, correct. That's good. Thank you, Matti, well spotted. Matti Riikonen: If we then think that these sector changes tend to be quite slow and one year is not necessarily enough to make it go away. Are you afraid that this would continue also in 2026? I'm not talking about the order backlog, which you already have or the Indonesian order, which might come sometime next year, but basically new weather orders that you were -- or you are expecting every year. Is there a danger that we would see an even slower 2026 when it comes to new business? And if your order backlog is decreased this year, then, of course, you would have less to kind of deliver in '26 based on old kind of order backlog. Do you think that is a kind of risk that you would like to highlight? Or of course, you have to take a stance on that when you give the guidance for '26. But at least -- I mean, at this point of the year, you probably already know, and you have made some internal plans how it's going to be in the weather business in '26. So, any thoughts on that would be great. Kai Öistämö: Correct. Yes. So let me answer -- well, it's exactly like you said, we're going to give guidance next year when the time comes. But let's think about it this way that there are the product sales, which are selling to existing projects and existing customers and the fluctuation on that business is very small. The fluctuation really comes from the kind of new projects and bigger and smaller and so on. So, there's kind of a level that has been at least relatively stable in the past, and I don't see any changes why that assumption should be different going forward. But then how will individual projects come through and so that obviously will not only impact our sales but actually like if kind of a couple of big orders come -- big projects come in a half a year, that kind of theoretically means also irrespective of who wins that impacts the entire market as well. Matti Riikonen: All right. So we will wait for your guidance for '26 to see that what is your plan that you promise to deliver. Kai Öistämö: Correct. Matti Riikonen: Okay. I'm just saying that it doesn't look so good when this year, of course, the order backlog has been decreasing. And when you have basically negative outlook for all key metrological... Kai Öistämö: For the rest of the year. Remember the outlook. Matti Riikonen: What would need to happen that it would kind of recover to a normalized situation in '26. Do you foresee some positive changes to this current trend, which you have now said that will impact '25, but do you see some positive triggers that would change the situation for '26? Kai Öistämö: Yes. Like I said, so as the market impact -- market size is really individual like bigger orders can swing that different ways. So that's something that is, as you know, historically, it's really, really hard to say when certain things kind of come through. The pipeline remains on a good level on new projects. But kind of a flow through the pipeline continues to be very unpredictable as it has been in the past. So... Matti Riikonen: All right. Fair enough. Final question, you already touched the topic of Industrial Measurement and some investments in digital capabilities. Just out of curiosity, what kind of digital capabilities are you talking about? Kai Öistämö: So online as a sales channel, whether we talk about to our distributors or whether we talk about to the end users, especially on the services side. If you think about -- so today, it's mainly -- we don't have much of a sales through the digital channel. We are doing demand generation, but the actual sales transactions we do very little through digital channels and that capability we are building. And very important, like kind of first it will have an impact on the services delivery side. But longer term, I believe, like in any other business, obviously, kind of -- it will have an impact on our overall sales, I believe, as well. Matti Riikonen: Does that mean that the existing customers would kind of want or need a different approach to maybe order from you? Or does it mean that you are seeking new business through those channels? Kai Öistämö: I think in the end, it will be both. And I don't think any businesses will remain as they have always been, and I'll just use the car analogy here that nobody ever believed that a car can be bought online and look where we are today. Try to buy a Tesla offline, then they will throw you online. Operator: The next question comes from Waltteri Rossi from Danske. Waltteri Rossi: So just to still clarify the Xweather profitability question. I was actually -- I think I was talking about EBITDA and operating profit as a synonym previously. But just let's talk about EBITDA. So, is the Xweather currently contributing positively on EBITDA level? Kai Öistämö: Yes. Subscription sales to be specific. That's what we report today. We don't report separately Xweather. Operator: There are no more questions at this time. So, I hand the conference back to the speakers. Niina Ala-Luopa: Okay. That was our Q3 call. Thank you all for joining. Thank you for the questions. Thank you, Kai. And I would like to mention or remind that we will arrange a virtual investor event for analysts and investors on November 24. And there, Kai and our business area leaders will provide an overview of Vaisala's strategy and business areas. And you will find more information on the event on our investor website, vaisala.com/investors. But now thank you all for joining and have a nice rest of the week.
Operator: " Diego Echave: " Head of Investor Relations Sameer S. Bharadwaj: " Chief Executive Officer Jim Kelly: " Chief Financial Officer Andres Cardona: " Citigroup Inc., Research Division Tasso Vasconcellos: " UBS Investment Bank, Research Division Alejandra Obregon: " Morgan Stanley, Research Division Leonardo Marcondes: " BofA Securities, Research Division Jeff Wickman: " Payden & Rygel Jaskaran Singh: " Golman Sachs Operator: Good morning, and welcome to Orbia's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Diego Echave, Orbia's Vice President of Investor Relations. Please go ahead, sir. Diego Echave: Thank you, operator. Good morning, and welcome to Orbia's Third Quarter 2025 Earnings Call. We appreciate your time and participation. Joining me today are Sameer Bharadwaj, CEO; and Jim Kelly, CFO. Before we continue, a friendly reminder that some of our comments today will contain forward-looking statements based on our current view of our business, and actual future results may differ materially. Today's call should be considered in conjunction with cautionary statements contained in our earnings release and in our most recent Bolsa Mexicana de Valores report. The company disclaims any obligation to update or revise any such forward-looking statements. Now I would like to turn the call over to Sameer. Sameer S. Bharadwaj: Thank you, Diego, and good morning, everyone. Before we begin discussing this quarter's results, I would like to thank our global employees for their continued commitment to improving business performance and staying customer-focused in difficult market conditions. Turning to Slide 3. I will share a high-level overview of our third quarter 2025 performance. Revenues of $2 billion increased 4% year-over-year and EBITDA of $295 million increased 2% compared to the prior year period. Our performance this quarter reflects subdued end markets in some of our business groups with some positive signs in others. As a result, we are reaffirming our 2025 EBITDA guidance adjusted for nonoperating items of between $1.1 billion and $1.2 billion, with results likely falling in the lower half of the range. In this environment, we are intensely focused on strengthening our leading market positions, making important progress on cost reduction and cash generation, realizing incremental profitability from recently completed investments, executing noncore asset sales and taking proactive actions to simplify and strengthen our business and balance sheet for the long-term. I will now turn the call over to Jim to go over our financial performance in further detail. Jim Kelly: Thank you, Sameer, and good morning, everyone. I'll start with a discussion of our consolidated third quarter results on Slide 4. Net revenues of $2 billion increased by 4% year-over-year, reflecting higher sales across all business groups. Revenue growth was mainly driven by strong demand in Precision Agriculture and Connectivity Solutions. Higher volume in Polymer Solutions, favorable pricing across several regions in Building & Infrastructure and strength in Fluor & Energy Materials. I'll provide a more comprehensive description of these factors in the business by-business section. EBITDA was $295 million in the quarter, a 2% increase year-over-year. Higher volume in Connectivity Solutions and a favorable product mix in Precision Agriculture were partially offset by lower resins pricing in Polymer Solutions, restructuring costs in Building & Infrastructure and higher input costs in Fluor & Energy Materials. Operating cash flow of $271 million decreased by $12 million compared to the prior year quarter and free cash flow in the quarter of $144 million improved by $2 million year-over-year. The decrease in operating cash flow was driven by lower cash generation from working capital. The increase in free cash flow was driven by lower capital expenditures, which more than offset lower operating cash flow. Net debt to EBITDA decreased from 3.98x to 3.85x during the quarter. This decrease was primarily driven by an increase in cash and cash equivalents of $132 million and an increase in the last 12 months EBITDA of approximately $7 million, offset by an increase in total debt of $26 million. The increase in debt was entirely driven by the appreciation of the Mexican peso during the quarter and included a paydown of $7 million of debt in the quarter. Net debt to EBITDA at the end of the third quarter using adjusted EBITDA to better reflect underlying earnings decreased from 3.51x to 3.42x. On October 6, 2025, Orbia redeemed and canceled the remaining portion of its 2027 senior notes in accordance with their underlying indenture. This transaction represented the final step of the completion of the refinancing of our near-term debt maturities that was initiated in the second quarter. Turning to Slide 5, I'll review our performance by business group. In Polymer Solutions, third quarter revenue of $647 million increased 2% year-over-year, largely driven by higher resins volume, partially offset by lower derivatives volume and lower resin pricing. Third quarter EBITDA of $78 million declined 13% year-over-year with an EBITDA margin of 12%. The decrease was primarily driven by lower resin pricing and higher ethane costs. In Building & Infrastructure, third quarter revenue was $647 million, an increase of 2% year-over-year, driven by better pricing across most of EMEA, Brazil and the Andean region, partly offset by lower volume and pricing in Mexico and Eastern Europe and the recently completed noncore asset divestments. Third quarter EBITDA was $76 million, a decrease of 3% year-over-year with an EBITDA margin of 12%. The decrease was driven by restructuring costs and an unfavorable product mix in Western Europe, partially offset by better results in the UK and Brazil and continued benefits from cost reduction initiatives. Moving to Precision Agriculture. Third quarter revenue was $257 million, an increase of 11% year-over-year. The increase in revenues for the quarter was primarily driven by strong demand in Brazil and the U.S. as well as higher project activity in Africa and Peru. These improvements were partially offset by declines in Mexico and Central America. Third quarter EBITDA was $30 million, an increase of 28% year-over-year with an EBITDA margin of 12%. The increase was driven by higher revenues and a favorable product mix. In our Connectivity Solutions business, third quarter revenue was $253 million, an increase of 8% year-over-year. The increase in revenues for the quarter was driven by strong volume growth, supported by increased demand in telecommunications and data center markets as well as a favorable product mix, partially offset by lower prices. Third quarter EBITDA increased 36% year-over-year to $42 million with an EBITDA margin of 17%. The increase was primarily driven by higher revenues, higher plant utilization levels and benefits from cost reduction initiatives, partly offset by lower prices. Finally, in our Fluor & Energy Materials business, third quarter revenue was $227 million, an increase of 3% year-over-year, driven by strong demand across most of the product portfolio, partially offset by constrained volume and shipment timing for upstream minerals and intermediates. Third quarter EBITDA was $64 million, a decrease of 3% year-over-year with an EBITDA margin of 28%. The decrease was driven by higher input costs across key raw materials, freight costs and unfavorable currency fluctuations, partly offset by strength in refrigerants and the benefits from cost savings initiatives. Turning to Slide 6. I'd like to provide an update on our progress in improving earnings and strengthening our balance sheet as first outlined in our October 2024 business update and reviewed again last quarter. First, by the end of Q3 2025, our cost reduction program achieved $169 million in annual savings compared to 2023. This represents 68% of our target to reach a savings level of $250 million per year by 2027. Second, the contribution from recently completed or close to complete organic growth investments, which are primarily focused on new product launches and capacity expansions, reached approximately $35 million of EBITDA year-to-date. The goal is to achieve $150 million in incremental EBITDA per year from these investments by 2027. And finally, we have signed agreements that have generated net proceeds of approximately $83 million from noncore asset divestments as of the end of the third quarter of 2025, exceeding our full year target of at least $75 million. We continue to aim for total proceeds of approximately $150 million by the end of 2026. Before I turn the call over to Sameer, I'd like to comment on a recent change in our credit rating. On Tuesday, Moody's announced the downgrade of our debt rating from Baa3 to Ba1, largely as a result of their more pessimistic view of the chemical sector trends and their belief that a market recovery does not appear imminent. We remain focused on our plan to generate cash and reduce leverage supported by the initiatives that we've been executing on since last year. As I previously indicated, all of these initiatives are on track. The business continues to show its resilience with year-to-date adjusted EBITDA margin slightly above 15%. We also have strong liquidity with cash on hand of $991 million and availability of $1.4 billion of committed funds on our revolving credit facility. Finally, we extended all of our material debt maturities to 2030 and beyond, and we have healthy and stable cash generation from operations to service our debt commitments. We will continue to maintain an open dialogue with the credit rating agencies, investors, bankers and the general public, consistent with how we have done this over the last years, providing updates on our progress toward improving our financial ratios and strengthening our balance sheet. With that, I will now turn the call back over to Sameer. Sameer S. Bharadwaj: Thank you, Jim. Turning to Slide 7. I will now provide an update to our outlook for the current year. The underlying assumptions for the company's guidance reflect a continued subdued environment in Polymer Solutions and Building & Infrastructure, partially offset by improving conditions in Precision Agriculture, Connectivity Solutions and Fluor & Energy Materials. Therefore, we reaffirm the full year 2025 adjusted EBITDA guidance range of $1.1 billion to $1.2 billion, likely falling in the lower half of the range. The company also reaffirms its 2025 capital expenditures guidance of approximately $400 million with a continued focus on investments to ensure safety and operational integrity completing growth projects under execution that are close to revenue and being extremely selective on any new growth investments. Now looking ahead in each of our business segments for the coming quarter and remainder of the year. Beginning with Polymer Solutions, persistent weak market dynamics driven by excess supply and lower export prices from China and the U.S. are expected to continue for the remainder of the year alongside rising ethane and ethylene input costs. While the first half was marked by raw material disruptions and operational issues in derivatives, the business has now stabilized operations and is focused on running at high utilization to improve profitability and cash management control. In Building & Infrastructure, we anticipate modest growth driven by new product launches and margin expansion. This growth is expected despite persistently challenging conditions in Western Europe and Mexico. To navigate this environment, the business remains intensely focused on realizing operational cost efficiencies to further improve profitability. In Precision Agriculture, market conditions are expected to remain stable to slightly improving, supported by continued positive momentum in Brazil and the U.S. The company anticipates continued strong performance in parts of Latin America and from projects in Africa. The business will remain focused on driving growth through deeper penetration in extensive crops while maintaining a consistent emphasis on cost management and working capital improvements. In Connectivity Solutions, we expect continued volume growth throughout the year, supported by sustained momentum in network deployment, data center demand and investment in the power sector. Profitability is set to grow, driven by the benefits of cost-saving initiatives and higher facility utilization. And finally, in Fluor & Energy Materials, we expect continued strength in Fluorine markets with resilient demand and pricing expected through the remainder of the year, which will help offset input cost increases. To support margins, the business is centered on prioritizing cost control initiatives complemented by active portfolio management -- product portfolio management to maximize value creation. In summary, our near-term priorities are to deliver on our commitments, delever the balance sheet, simplify operations and focus on our core business. We aim to improve EBITDA and cash flow through cost savings and growth from recently completed project investments, complemented by cash generation from noncore asset sales. These actions will enable us to significantly improve our leverage and strengthen our balance sheet by the end of 2026 without relying on potential market recovery or further benefits from business simplification. We remain committed to meeting customer needs and generating long-term value for our shareholders. Before I turn the call over for Q&A, I would like to note that we have issued a formal statement regarding recent market rumors about the Precision Agriculture business. As indicated in that statement, the company is continually engaged in assessing opportunities to optimize its portfolio and create value for its shareholders. Operator, we are ready to take questions at this time. Operator: [Operator Instructions] And your first question today will come from Andres Cardona with Citi. Andres Cardona: Stay on the capital allocation front, I just wanted to ask a very straight question about the JV you have with OxyChem and if there is any tag right that you may eventually decide to secure to exit your investment in this particular business. And if it exists, if there is any time for you guys to trigger it? Sameer S. Bharadwaj: Thank you, Andres. As you are aware, earlier this month, it was announced that Berkshire Hathaway had agreed to acquire the Occidental Petroleum's Chemicals business, including our joint venture with OxyChem in Ingleside, Texas. Now this joint venture is important and of significant value to both parties, and we are pleased that Berkshire Hathaway has decided to make this investment. Their long-term perspective and their commitment now at the bottom of the cycle validates the belief in the long-term prospects and value of the PVC chlor-alkali sector. And so on our side, we look forward to building a strong collaborative and productive relationship with our new partners, Berkshire Hathaway. And as far as any tag-along rights are concerned, no, there are no tag-along rights as such, and things continue as usual. Operator: And your next question today will come from Tasso Vasconcellos with UBS. Tasso Vasconcellos: I do have a question on the CapEx side. You did reaffirm the $400 million in CapEx for this year. I'm just wondering how do you view this level of CapEx as being sustainable looking forward? Because we have been reducing the disbursements because of the low of the cycle. So I'm just wondering if the cycle turns or if it doesn't, maybe looking one, two or three years ahead, if you should do some kind of catch-up on this CapEx or if eventually, you'll be able to maintain the maintenance CapEx at this low level? That's my question. Sameer S. Bharadwaj: Tasso, thank you for the question. In fact, the way we think about capital expenditures is our first and foremost priority is safety and asset integrity that allows business continuity. And so we will not compromise on that because that can have serious consequences both from a disruption standpoint as well as safety standpoint. And so our steady-state maintenance CapEx, it varies depending on the turnarounds for the different plants in various years, but it's somewhere in the range of $250 million to $270. And anything in addition to that is basically completing projects that we have already started so that they can get to revenue as soon as possible. And we would be extremely selective about any growth capital investment while we are going through the bottom of the cycle, right? And so our expectation would be to not compromise on maintenance CapEx and be super selective on growth CapEx going forward. Operator: And your next question today will come from Alejandra Obregon with Morgan Stanley. Go ahead. Alejandra Obregon: Hi. Good morning and thank you for taking my question. I actually have 2. The first one is on your optimization program. I was wondering if you can elaborate on what has been achieved so far? Where do you think there is more room for 2026? And if there's any region or any division that you believe could be optimized more for the coming year? And how should we think of it? And then the second one is on the Fluorspar division. I was just wondering if you have observed any recent change in the supply chain of fluorspar or maybe HF among your conversations or with your customers and competitors. This in the context of tightening export policies in China and of course, the increased scrutiny over critical minerals. It's clear that fluorspar is gaining some recognition, I have to say, as a strategic resource. So just wondering if you think that Mexico and Orbia could emerge as a relevant partner or a more relevant partner for the U.S. Sameer S. Bharadwaj: Okay. Well, look, I'll let Jim respond to the first question, and I can complement that as necessary, and I'll take the second question. Jim Kelly: Thanks, Alejandra. Appreciate the question. In terms of the optimization efforts, as I mentioned during my comments, the 3 key legs of the program that we announced a year ago are very much on track. So the cost reductions of $169 million achieved cumulatively over the -- since 2023, so over the past couple of years, with $250 million. And I would say at this point, honestly, $250 million plus being the objective by the time we get to 2027. We continue to look for alternatives and are proactive about continuing to drive cost reductions across all areas of the business. And secondly, we talked about the generation of EBITDA through already implemented or as Sameer calls it sort of near revenue growth projects that we've been driving, and that is on track to generate another $150 million of EBITDA by the time we get to 2027. And then the third element being the cash generation from the sale of noncore assets, where we've said we would generate approximately $150 million or potentially even more through 2025 and 2026, and we are ahead of schedule on that. We mentioned already having achieved about $85 million on that so far through this year relative to our target of $75 -- so that is well on track. And I believe that there are additional alternatives that we can be executing as we go through the remainder of the period of the next couple of years to continue to drive the delivering plan that we've stated. And important to note that as you see the results of that is in the third quarter, we did see leverage come down, as I noted in my comments from 3.51 to 3.42, and we would expect that process to continue over the remainder of this year and through next year. So I think we are beginning to see the results of that, and we'll continue to be aggressive in finding ways to continue that process. Sameer S. Bharadwaj: So as far as your second question is concerned, Ali, Fluorspar is on the list of U.S. critical minerals. -- and Orbia maintains its position as the global market leader in fluorspar supply. This competitive edge is difficult to replicate due to the unique assets Orbia controls and its exclusive rights to operate these critical resources in Mexico. So in that context, we expect the fluorine chain to continue to remain tight through the course of the decade with growth in new applications such as lithium-ion batteries and semiconductors. And the Mexico-U.S. corridor will play a very important role in securing that value chain for the U.S. So you're absolutely right. This is very important to us, and we are very well positioned to take advantage of this. Alejandra Obregon: And perhaps can you remind us of your utilization in your fluor plant in San Luis Potosi at the moment? Sameer S. Bharadwaj: So the mine actually is running at -- we are basically producing at maximum output. There have been some constraints with respect to the optimization of the tailing circuit and the water circuit, and we have been optimizing that over the last year with new technologies, and that will allow us to increase the output even more next year. But the bottom line is we sell every fluorine atom we produce. So we are completely maxed out. And our strategy is to place that fluorine atom in the highest value segments and the most profitable segments down the chain. Alejandra Obregon: Okay, Thank you very much. Sameer S. Bharadwaj: Thank you. Operator: And your next question today will come from Leonardo Marcondes with Bank of America. Please go ahead. Leonardo Marcondes: Good morning, Thank you for picking my questions. I have 2 from my end and the 2 are regarding the Netafim, right? So you mentioned the noncore asset sales, right? But could you maybe provide a bit better color on what you're thinking about the sale of core assets, right? How relevant this is for you nowadays? If you guys -- if this is something that you guys are considering? And the second question, this one is more related to Netafim, right? I mean when you bought the assets in 2018, right, and the first time you disclosed the company's EBITDA, I mean, Netafim's EBITDA was in 2019, the EBITDA was around $190 million, right? So if you guys could do a small analysis of what happened with Netafim over the past years that lead to a drop in profitability and drop in EBITDA as well. If you guys see any micro or macro trends there, I mean, this would be very helpful. Sameer S. Bharadwaj: Okay. Leonardo, let me address both of your questions here. In terms of noncore asset sales, what we call noncore are these small sales of smaller businesses or segments that are not strategic to us long term or sale of land buildings and machinery. And these are relatively small amounts. And as Jim said, we executed on about $83 million of noncore asset sales this year. With respect to Netafim, right, we are aware of certain recent media reports and market speculation concerning a potential divestiture of the business. Now we are continually engaged in assessing opportunities to optimize the company's portfolio. And we don't comment on market rumors on speculation. We are obviously committed to providing material information to the market in accordance with our disclosure obligations and regulatory requirements. We continue to assess ways in which potential changes to our portfolio could on our focus, reduce leverage and create significant shareholder value. And this includes considering divesting in whole or in part businesses that we determine are not an optimal fit within our portfolio or that would create more value under a different owner. Any such process would be done deliberately on a time line we determine. Our focus remains building a strategically focused, highly synergistic portfolio going forward with a single-minded dedication to creating value for our shareholders, okay? Now in terms of what happened to Netafim over the last several years in terms of profitability, Netafim's profitability at its peak was around in the mid-180s, around $180 million, $185 million. And back then, the market, particularly in the U.S. for our traditional heavy wall market and also in Europe were very strong. And these heavy wall crops typically are almonds, pistachios, walnuts, the entire greenhouse market in the Netherlands, where all the major greenhouses use Netafim equipment. And that took a significant hit after COVID, okay? So there were blockbuster years. There were huge inventories created, supply chain restrictions prevented exports of these materials. And then there was a significant slowdown in our traditional heavy wall markets. and that led to a decline in profitability. And the breaking out of the war in Europe had energy costs go through the roof and that impacted the greenhouse market, the drip irrigation equipment that we sell into greenhouses in a very significant way. We compensated for that by growing in new areas, in particular, the thin wall market, which is used for a broader fruits, vegetables and seasonal crops. And we have had tremendous growth in volume in the thin wall segment, but that comes at a somewhat lower profitability and wasn't enough to offset the decline in profitability in the heavy wall segment. Now what we have seen in the past 12 to 18 months, and you've seen a consistent improvement in Netafim's performance over the last couple of years, -- and we have also been focused on reducing costs, optimizing the footprint, focusing on cash generation. There's a huge focus on cash flow generation within Netafim. And you can see that in the results. And we are beginning to see some of our core markets like the United States, Mexico come back. And in particular, Brazil is an exceptionally strong market, driven by growth in coffee, cocoa, oranges, citrus and a number of other crops, okay? So I think we are in a very good trajectory to continue the improvement that we see in Netafim and with a strong focus on cash generation. But essentially, that's what happened with that business over the last several years. Leonardo Marcondes: That’s very clear, Thank you very much. Sameer S. Bharadwaj: Yes. And the thing to note is the thin wall market that we have created is completely complementary. So when the heavy wall market recovers, and we are beginning to see signs of that, that will be all additive. And so there is tremendous operating leverage in Netafim's earnings going forward. Leonardo Marcondes: Thank you. Operator: [Operator Instructions] And your next question today will come from Jeff Wickman with Payden & Rygel. Jeff Wickman: Thank you for the call, Could you provide an update on where you think leverage will be at the end of this year and then at the end of 2026, please? Sameer S. Bharadwaj: Jim, do you want to take this question? Jim Kelly: Sure. I'd be happy to do that. Thanks for the question, Jeff. So as I mentioned, we do expect that we'll continue to see a reduction from where we were at the end of Q3. So this is -- normally, we have a seasonal reduction in working capital, in particular, on top of all the initiatives that we've been driving. So my expectation for the end of the year is we talk about the leverage based on our adjusted EBITDA. That's the one that I talked about that went from 3.51 down to 3.42. I would expect that to end in the roughly 3.2 region by the end of the year. And we continue to drive significant reductions as we go through 2026. And I would expect to be in probably the kind of certainly between 2.5 and 3, probably around the middle of that range, 2.7ish, 2.8ish range, by the end of next year, based on what we see right now. Jeff Wickman: " Got it. Thank you. And then could you give us an update on what Netafim EBITDA is currently. [Audio gap] Sameer S. Bharadwaj: Jim... Go ahead. Jim Kelly: EBITDA for Netafim. So when you say what Netafim is currently in what regard in terms of their EBITDA or? Jeff Wickman: EBITDA, please. Jim Kelly: So on a year-to-date basis -- just give me 1 second. 135... So on a year-to-date basis, we are at $103 million. And we would have an expectation to be in the -- close to the $130 million or slightly above $130 million range, I would say, for the full year in that business. Jeff Wickman: Thank you very much. That’s it from me Jim Kelly: Thank you Jeff Operator: And your next question today will come from Jaskaran Singh with Goldman Sachs. Jaskaran Singh: Just a small clarification on the debt maturities that is there in the appendix. It shows a bank loan of $266 million in 2025. Is the expectation that this will be rolled? [Audio gap] Jim Kelly: Yes, I'm sorry. Yes, I did. the question now. So the expectation is, yes, that the bank debt that we have outstanding will be rolled over. We do not expect to have to pay that down. We'll speak with the banks and just roll that over. Although as we pay down our debt in the coming years, that may be one of the alternatives that we consider in terms of debt reduction, some combination potentially of that and the outstanding bonds. But the expectation right now, I would say, would be to roll that debt. Jaskaran Singh: Got it. So second question is just on Moody's. You mentioned like you are in constant touch with the rating agencies. I see that ratings are still on a negative outlook, and Moody's looks at a downgrade trigger is gross leverage of around 3.5x. I think -- so within that, could we expect any divestment that you already that is rumored? And would that lead to basically redemption of bonds? Just if you can share any thoughts on that because gross leverage as of LTM is around 4.8x, which needs to be around 3.5x for Moody's to at least stabilize the ratings at Ba1. Sameer S. Bharadwaj: I think you've already Go ahead, Jim. Go ahead, Jim Kelly: No, I was just going to say that we can't predict necessarily what other rating agencies will do. Moody's has decided to downgrade based on their metrics and their view of what the chemical sector is going to look like in the coming years. Their projections of leverage are through their model and how they view the world. We will continue to drive, as I mentioned during the comments that I made, the initiatives that we've had going that we talked about starting a year ago, but honestly, which we began considerably before the time that we had a public discussion about the sort of the 3 legs of the initiatives. We will continue to drive those things and the things that are within our control to bring our leverage down. So in terms of whether we would be looking to divest of assets to help to drive this or whatever, I think Sameer addressed that. And any potential divestiture of assets, I would say, would be largely driven by shareholder value creation and focus of Orbia's portfolio and our ongoing strategy more so than being focused just to delever. So we'll continue on the things that we control. And as you have seen, we will continue to bring the leverage down as we've already begun to do. And that process will continue over the course of the next coming years. Sameer S. Bharadwaj: Yes. But as Jim said, we have a strong plan to continue to delever as we generate earnings growth and free cash flow over the next 2 or 3 years. And any portfolio move only accelerates that effort. That's it. Operator: And your next question today is a follow-up from Alejandra Obregon of Morgan Stanley. Alejandra Obregon: If I can just piggyback on the prior question about the EBITDA for Netafim. If you can help us understand how much of that is the Netafim business and how much of that is Mexichem's legacy irrigation business? And if you were to explore alternatives around the division, would that include the whole thing? Or would that exclude Mexichem's irrigation legacy business? Sameer S. Bharadwaj: I think there's some confusion around that. I mean, at this point of time, there is no -- I mean, there is only one irrigation business. And so a long time ago, all operations were merged. And as of today, there is only one irrigation business. And Netafim is what it is, Alejandra Obregon: Got it. Understood, thank you very much. Sameer S. Bharadwaj: Yes, there might be some confusion with PVC pipe we may have sold through Wavin into the Irrigation segment, but that is completely independent of the drip irrigation systems that we sell. Operator: Okay, This will conclude our question-and-answer session. I would like to turn the conference back over to Sameer Bharadwaj for any closing remarks. Sameer S. Bharadwaj: Thank you, Nick. Our business continues to show resilience in challenging market conditions. With all our actions, we have created meaningful operating leverage to increase profitability when market conditions normalize. Thank you for participating in today's call. I look forward to our next update in February. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Lindsay Corporation Fiscal Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Randy Wood, President and CEO. Please go ahead. Randy Wood: Thank you, and good morning, everyone. Welcome to our fourth quarter and full year 2025 earnings call. With me today is Brian Ketcham, our Chief Financial Officer. I'm extremely pleased with our fiscal year 2025 results. I'm proud of our team for demonstrating resilience in the face of challenging market fundamentals and a volatile macroeconomic environment. Double-digit revenue and operating income growth in both our businesses, combined with execution of our key strategic initiatives, enabled us to achieve record earnings and earnings per share for the year. Our fourth quarter performance was marked by revenue growth in our Irrigation segment, driven by double-digit increases in our international Irrigation business as South America, the Middle East, North Africa and Australia all delivered strong results. In North America, low commodity prices and weak crop receipts continue to negatively impact demand. We also saw a large reduction in storm damage volume versus prior year, impacting whole goods orders and aftermarket revenues in the quarter. We also dealt with the wet summer that impacted our run time hours. Pivot analytics data indicates irrigated hours across the core Midwest markets of Nebraska, Oklahoma and Texas were down over 20% versus prior year. Our Global Road Safety Products business delivered strong results, underscoring the resilience and demand in this segment. However, this performance was offset by lower sales and a decline in global leases within our Road Zipper business. Turning to our outlook. We expect North American irrigation headwinds to persist. Near-record yields will be offset by low commodity prices and weak crop returns, and the effect of trade disruptions will continue to weigh on customer sentiment. Increased government support may create a safety net, but we don't expect this to drive significant market activity. We anticipate demand for irrigation equipment in North America to remain suppressed until the outlook for commodity prices and overall net farm income meaningfully improves. Internationally, we're encouraged by the early signs of recovery we're seeing across several key growth markets, particularly Brazil, where demand for irrigation equipment remains stable. However, high interest rates and ongoing credit constraints will continue to present market headwinds in the near term. We continue to execute international irrigation projects during the quarter including the $100 million project in the Mid East, North Africa region that we expect to complete in our first quarter of our 2026 fiscal year. During the fourth quarter, we also began delivery of an additional $20 million project in the region which we also expect to complete in the first quarter of fiscal 2026. Looking ahead, we continue to see other compelling opportunities within our project pipeline, particularly in the MENA and other developing regions. These project opportunities remain a long-term growth opportunity for our business as the region continues to adopt mechanized irrigation to address food security and GDP diversification. We are pleased at the momentum we have and been able to generate and expect to realize additional project volume during fiscal 2026. In our Infrastructure business, we expect to see growth in Road Zipper System leasing and road safety product sales this fiscal year due to ongoing implementation of the IIJA and the introduction of new products. The Road Zipper System project sales fund remains active but we do not anticipate a large project will exit the funnel in 2026 to offset the $20 million project delivered in fiscal 2025. We do see the potential for several smaller projects to fill a portion of this gap. The large capital project at our Lindsay, Nebraska facility is going well, and we've activated our new state-of-the-art automated tube mill, providing increased safety, efficiency and throughput. We recently began construction of our next-generation galvanizing facility, which will provide us with industry-leading capabilities and increase capacity. Our initial plans, anticipated completion of this contract by the end of the calendar year. However, with the expanded galvanizing scope, we anticipate this work will be completed by the end of calendar year 2026. Innovation leadership continues to be a strategic priority and a core piece of our growth strategy. During the quarter, we advanced our position as a leader in precision irrigation with the introduction of TowerWatch. This is the first new product introduction on our Smart Pivot platform that allows customers to diagnose machine falls at individual towers. In testing, this reduced troubleshooting time by up to 75%, enabling growers to save time and maximize yields and profitability. This solution is a direct response to voice of the customer feedback we've received and helps our growers make faster decisions, strengthening their field net user experience. We continue to leverage capabilities like the new TowerWatch to differentiate and increase penetration of our technology portfolio. This has allowed us to surpass 150,000 total connected devices while delivering 20% year-over-year growth in annual recurring revenue. Entering fiscal 2026, we remain dedicated to investing in opportunities and technology advancements that will continue to drive growth and extend our leadership position. Before I turn the call over to Brian, I'd like to take a moment and acknowledge his upcoming retirement. Since joining Lindsay in 2016, Brian has played a pivotal role in strengthening our financial foundation, promoting transparency and shaping an organization that's become recognized for excellence. Under his leadership, we've achieved record earnings performance, maintained a consistently strong balance sheet and laid the groundwork for continued growth across our businesses. While this retirement marks a significant transition, we're pleased that he'll continue to serve as a consultant through 2026, helping ensure a smooth transition. On a more personal note, I'm deeply grateful for Brian's partnership and friendship. On behalf of all of us at Lindsay, thank you, Brian. We wish you the very best in your well-earned retirement. I'm also pleased to formally welcome Sam Hinrichsen, who will join us in November and transition to the CFO role with Brian's departure in January. Sam brings strong financial leadership experience, investor engagement and will be instrumental in continuing our focus on disciplined execution and creating value for our shareholders. Now I'll turn the call over to Brian for a review of our financial results. Brian? Brian Ketcham: Thank you, Randy, and good morning, everyone. Total revenues for the fourth quarter of fiscal 2025 were $153.6 million, a decrease of 1% compared to the fourth quarter last year. Net earnings for the quarter were $10.8 million or $0.99 per diluted share compared to net earnings of $12.7 million or $1.17 per diluted share in the fourth quarter last year. Total revenues for the full year increased 11% to $676.4 million and net earnings increased 12% to $74.1 million and earnings per share increased 13% to $6.78. These record results were driven by double-digit revenue growth and operating income growth in both Irrigation and Infrastructure for the year. Turning to our segment results. Irrigation segment revenues for the fourth quarter increased 3% to $129 million compared to the prior year. North America irrigation revenues for the fourth quarter decreased 19% to $50 million. The decrease in revenues resulted primarily from lower unit sales volume while average selling prices were up slightly compared to the prior year. Lower unit sales volume was due primarily to less storm damage replacement demand compared to the prior year, along with soft market conditions. Higher selling prices reflected the pass-through of tariff-related raw material cost increases. In international irrigation markets, revenues for the fourth quarter increased 23% to $79 million. The increase resulted primarily from higher sales volume in South America, increased project sales in the MENA region and higher sales volume in Australia. Markets in South America are benefiting from increased exports of agricultural products to China. In the MENA region, as Randy mentioned, we continued delivery of a $100 million project and began delivering a separate $20 million project during the quarter. Total Irrigation segment operating income for the fourth quarter was $17.7 million, an increase of 4% compared to last year and operating margin was 13.7% of sales compared to 13.6% of sales last year. For the full fiscal year, total Irrigation segment revenues increased 11% to $568 million. North America irrigation revenues of $273.8 million decreased 9%, primarily due to lower unit sales volume compared to the prior year. International irrigation revenues of $294.2 million increased 39%, primarily due to project sales in the MENA region and supported by higher sales volume in Brazil and other parts of South America. The unfavorable impact of foreign currency translation was approximately $9.5 million compared to the prior year. This marks the first time in company history that international irrigation revenues were greater than North America revenues in a fiscal year, highlighting the value of our geographical diversification. Operating income for the Irrigation segment for the full fiscal year was $97 million, an increase of 11% compared to the prior year and operating margin of 17.1% of sales was similar to the prior year. Infrastructure segment revenues for the fourth quarter decreased 16% to $24.5 million. The decrease in revenues resulted primarily from lower Road Zipper System project sales and lease revenues, while sales of road safety products were slightly higher compared to the prior year. The prior year fourth quarter included Road Zipper project sales that did not repeat in the current year. Infrastructure segment operating income for the fourth quarter decreased 37% to $3.5 million and Infrastructure operating margin for the quarter was 14.4% of sales compared to 19.2% of sales in the fourth quarter last year. Lower operating income and operating margin resulted from lower revenues and a less favorable margin mix of revenues compared to the prior year. For the full fiscal year, Infrastructure segment revenues increased 16% to $108.4 million. The increase was primarily due to higher Road Zipper System project sales and higher sales of road safety products while Road Zipper lease revenues were slightly lower compared to the prior year. Infrastructure operating income for the full fiscal year increased 39% to $26.3 million. Operating margin for the year was 24.3% of sales compared to 20.4% of sales in the prior year. Increased operating income and operating margin resulted from higher revenues and a more favorable margin mix of revenues compared to the prior year. Turning to the balance sheet and liquidity. Our total available liquidity at the end of the fourth quarter was just over $300 million, which included $250 million in cash and cash equivalents and $50 million available under our revolving credit facility. Our record earnings performance for the year, along with active working capital management, resulted in free cash flow of 122% of net earnings and included capital expenditures of $42.5 million. Our demonstrated cash flow generation further strengthens our balance sheet and positions us well to continue executing on our capital allocation priorities of investing in the business, balancing organic and inorganic investments and returning capital to our shareholders. During the quarter, we completed share repurchases of $8.8 million, bringing the total share repurchases to $11.5 million for the year. As I conclude my remarks, I would like to say that it has been a tremendous experience to serve as CFO of Lindsay. I'm deeply grateful for the talented colleagues. I've had the honor of working alongside and proud of all that we've accomplished together. I'm confident in Lindsay's continued success and in the team that we have built and I look forward to working with Sam Hinrichsen on the CFO transition over the next couple of months. And now with that, I will turn the call over to the operator to take your questions. Operator: [Operator Instructions] Our first question comes from Kristen Owen with Oppenheimer. Kristen Owen: Just understanding that there's a lot of uncertainty in your ag markets right now. I'm hoping you can outline just some of the catalysts that you're watching that are shaping your outlook for fiscal '26. And then my follow-up question is related. So just assuming that we are in this more cautious ag investment backdrop, what are the margin levers that you have at your disposal that you're thinking about for next year? Randy Wood: This is Randy. I'll take the first part and then have Brian cover the cost levers that we're actively managing. And from a market perspective, it really depends where you are. In Brian's comments, he talked about the geographic diversity of our business. And when you look at North America, obviously, anybody providing a narrative or commentary on North American market conditions, there's not a lot of tailwinds there right now. And we've been here before. We know how to manage through these cycles. And again, Brian will comment on some of that. But I think we're blessed right now to be a global company. And we're going to see half -- more than half of our revenues come from outside of the U.S. this year. So I think we've battened down the hatches. We manage responsibly in North America and the catalyst that we look for some of those customer sent indicators right now are approaching lows that we haven't seen since the pandemic. Farm income, there's not a lot of positive upside in trade or demand side of the equation to drive pricing. We do see some potential government support, which to me, as I've said, is a bit of a safety net that bridges guys to next year, but they're not going to invest that money like they would crop receipts and profits that they get from growing marketing and selling a crop. So in 2026, North American expectations are not for significant growth. We will probably bounce along the bottom of the trough. And again, we know how to do that. Internationally, Brazil is stable and maybe not at all-time highs, but still a very strong business for us. The project business continues to deliver. And as we've stated, 2026, should see us realize more project opportunity. Australia, New Zealand, the Asia Pacific region, we see some signs of a strong recovery there. So I think when you separate the mature versus the project business, we see 2 different narratives, Kristen. And right now, I think we're well positioned to manage through the trough conditions here and capitalize on the growth opportunities in those international markets. And again, ask Brian to comment on some of those cost levers. Brian Ketcham: Yes. Kristen, on the margin side, obviously, North America is softer, that's going to pressure margins, just like it did in the fourth quarter. But I think that the things that we have -- that we can manage, starting with price. And we've increased price with some of the raw material cost increases that we've seen. We always try to get out ahead of that when it comes to price, but maintaining pricing discipline going forward is going to be key to maintaining margins, managing the costs, as Randy has said. And then the other thing that is supportive of margins, we saw that in the last couple of quarters, and we expect to see that continue into 2026 is just the growth in our recurring subscription revenue, and that's high margin revenue, and it's really cycle proof. It's not -- farmers aren't going to decide not to invest when the market is down. It's something that is going to continue to grow. So those are a couple of things related to North America, primarily. And then in Brazil, we've seen as that volume is picking up we've seen some margin improvement happening in that market. Operator: Our next question comes from Nathan Jones with Stifel. Nathan Jones: Congratulations, Brian. And thank you for all the help over the years. I guess maybe just trying to set some expectations here for 2026. There's obviously some demand headwinds and some discrete comparison headwinds that you're going to have heading into 2026. We're clearly bumping along the bottom in North America. Is it your expectation for North America irrigation that will be somewhere close to flat in '26? Or should we expect to see that market be down overall given the lack of real catalysts there? I guess I'll start with that one and then I'll go to international. Brian Ketcham: Yes, Nathan, on the North America side, our expectation is volume will be down, maybe low to mid-single digits in 2026. But offsetting that, partially offsetting that is price. We do expect that the price increases that we put in place will carry over into the first 2 or 3 quarters next year. I think the other thing that I just mentioned is subscription revenue being up. So when you balance lower volume, higher price, higher subscription revenue. I think from a revenue standpoint, we're expecting to be more flattish for '26 overall compared to 2025. Nathan Jones: And then you probably actually with that, have some tailwinds on the margin side just in the North America business, particularly. Prices obviously drops through at 100% kind of margin carrying over from this year and subscription revenue is going to be higher margin. And you're going to have some benefits, I imagine from all of the upgrades that you've been doing within the manufacturing footprint. So could we expect that on a flat revenue number in North America irrigation your profit would be higher? Brian Ketcham: I would say our expectations would remaining -- having the operating margin be relatively similar to last year, we do have some additional depreciation coming on board in the Lindsay factory that in the short term, will put some pressure on margins. But as volume picks up in the future, that's where we'll see the benefit of those investments and our ability to respond quickly to market demand without adding a lot of costs. So in the short term, a little bit of a headwind on margins just because of the additional depreciation. Nathan Jones: Fair enough. I guess I'll just slug on in on international revenue. You obviously had a large project and a smaller large project to deliver in fiscal 2025. I think that the outlook for the project business is pretty solid, but there's always timing dependency on that. I mean is it possible that you could overcome the headwind from the lack of the Middle East project in 2026? Or is the starting point assumption for that in 2026 should be that revenue will be down in international? Randy Wood: Nathan, this is Randy. I'll take that one. And I think you used the keyword there. The potential is there to kind of lap that project and backfill with additional project volume that could be close to that revenue. But you're absolutely right. The timing is unknown and the project funnel for us. There's lots of moving pieces in many different parts of the world. And when one pops through, we'll be very clear in how we communicate when it's going to start, when it's going to stop, the magnitude of the project. And we do expect to have more news on that as we go into fiscal year '26 and continue through the year. But that potential does exist. Operator: Our next question comes from Brian Drab with William Blair. Brian Drab: Congratulations, Brian, and we'll talk more later when we're not on a public call, but congrats. I just want to follow up on Nathan's questions there and just the outlook for ag first and make sure I understood this. Your comments around volume being down low single digit to mid-single digit. Was -- that was a North America specific comment? . Brian Ketcham: Yes, that's right. Brian Drab: For fiscal '26? Brian Ketcham: For North America, correct. Brian Drab: Yes. Okay. Got it. And then I think that also I think Randy made the comment that you expect probably more revenue to come from the international business in irrigation in '26 relative to domestic? Is that -- did I hear that correctly? Brian Ketcham: Yes. That's our expectation today. We do see continuing improvement in the South America markets next year. We've seen some recovery continuing in Australia. But then as Randy referred to the project side of the business, we feel pretty confident that there's the opportunity to replace the projects that we've had in 2025. So our view right now is international revenues overall could be up slightly in 2026. We're not expecting to take a big step backwards. Brian Drab: Okay. Do you have to have an additional project hit in the EMEA region? In addition to the $20 million that you announced for that to happen? Randy Wood: I think, Brian, we would require and it doesn't have to be in the EMEA region or the MENA region. We would require some project volume coming through the funnel and starting to deliver in the year for that to be true. Brian Drab: Okay. And then can you put any more of a fine point on the revenue that you had from the $100 million project and in the quarter? And then how much of that carries over into '26? And then do you ship the whole $20 million on the additional project in the first quarter? Brian Ketcham: Yes. So on the $100 million project, we had been able to pull forward some of that into the second and third quarters of the past year. In the fourth quarter, we delivered, let's say, round numbers, roughly $10 million of that another $10 million remaining for the first quarter. And then of that $20 million project, we delivered about half of that in the fourth quarter. So the remainder will be in the first quarter. So first quarter comparisons on the project side year-over-year should be fairly similar with the 2 remaining projects. Brian Drab: Okay. Got it. So in total, $10 million from each of those in the first quarter is a good estimate. Brian Ketcham: Yes, I'd say in round numbers. Brian Drab: Okay. Got it. And then I'll just ask one more, if that's all right. On the infrastructure side, you said that the mix was weighing on margins in the near term. And I'm just wondering how do you see that mix playing out going forward and the margin dynamics related to that? Brian Ketcham: Yes. With the large project that we had in the second quarter this year, obviously, high margins drove the overall margins for the year above 24%. As Randy mentioned, we don't anticipate another $20 million project coming in 2026, but between some smaller ones and increase in leasing, we expect without the large projects, this business runs right around that 20% operating margin level. So a little bit of a step back, just with -- when you have a $20 million project that doesn't be -- or doesn't get replaced but still very solid operating margin performance is what our expectation is. Operator: Our next question comes from Ryan Connors with Northcoast Research. Ryan Connors: Congratulations, Brian. I want to start on the international side specific to Brazil. Randy, you mentioned credit constraints there. And that's something I wonder if you can expand on because there was -- you had a peer company actually come out and talk about some bad debt and raising bad debt reserve in Brazil, specifically for that. So can you just expand on that comment you made among credit constraints? Is that just on the impact on actual sales? Or is there -- are you seeing any of that actual credit loss issue as well? Randy Wood: Yes. I think our commentary wasn't connected to credit loss at all. I think we run a pretty tight ship when it comes to credit risk in Brazil. So yes, nothing newsworthy from our perspective there. I think the comments really relate to our customers' ability to access low finance rates to support irrigation and investments. And we do have the FINAME program and what we're seeing right now is total government funding for that program was up year-over-year, and that was launched in July. But at this point, we're really seeing like mid-single-digit utilization. So that money isn't getting through the system and into the hands of the growers. If you look at the -- and that program rate is about 12.5%. If you look at just the -- you go to the bank to get a loan for ag equipment, that rate is in that 20%-ish range. So I think that has some customers kind of taken that wait-and-see approach. There's an election next year, if they're anticipating additional support or funding, some customer might wait for that. But we also offset that with 3 crops a year, and what we know we can generate an incremental yield and returns for irrigation. So it creates a bit of a short-term headwind in the market, but there's still a lot of strong fundamentals for investment in irrigation. So we would still describe the market as stable, but we're not going to see some of the pop that you may expect because of the trade disruption, some of that Chinese demand may be shifting to Latin America and credit is, I would say, right now, probably the lead reason for that. Ryan Connors: Got it. Very helpful. And then one housekeeping for you, Brian, before I have a big picture question. But just you mentioned the capital project in Lindsay, extending out now towards the end of calendar '26. Can you give any update on the corresponding impact on the capital investment in dollar terms there associated with that? Or is that just the same dollars? Or are we adding dollars? Brian Ketcham: So we'll be adding dollars, Ryan. And our expectation for 2026 is CapEx of around $50 million. The scope of the project did expand and mainly due to the galvanizing investment where we've decided to increase the scope of that. So we will have elevated CapEx again next year, a little bit higher than what we had in 2026 or 2025. Ryan Connors: Got it. Okay. And then lastly, just -- so Randy, you mentioned a few times this idea that the grower does not spend the government support money the same way as profits. But I know there's a lot of lobbying going on right now for additional federal support. Is there any way that, that could be structured that would be more beneficial to manufacturers like Lindsay, anything the industry is working to include in that, that would be more beneficial? Or should we just think of any kind of federal benefits we see just don't really accrue to the company? Randy Wood: Yes. I think it's an insightful question, and my view would be -- and this is an opinion that it really doesn't matter how those funds are structured. I don't think it's in how they're worded or how they're administered or how you apply for them. That's not what drives the customer view on how that money is used. It's always been, from my perspective, kind of rainy day funds. That's money that we're not going to get next year. It's not part of money I earned growing, marketing and selling and shipping my grain. It's always going to have that perception that this is the rainy day fund money. So I don't see any administrative change in the programs that would change that customer perception. And I mean the number that we're seeing now is an incremental $10 billion. I know there's been a lot of talk about American and Argentinian beef this week, in particular, creating a bit of a stir and I'm confident that there will be some support for the farmers if they need it, as a result of some of the trade puts. It's just a matter of when and then how they invest it. But again, our assumption isn't that, that's going to be a windfall and that we'd see a significant change in market demand. In farm income this year, if you look at the number in around $180 billion, for both net cash farm income and net farm income. $35 billion of that is what we call ad hoc government support from some of the payments and the weather-related issues last year. So farm income being up this year, you'd expect should be supportive of the market from a fundamental perspective. And it's just not the case. And that again goes back to our view that the customers aren't going to invest those government payments the same way that they'd invest crop receipts. We continue to see that. Operator: Our next question comes from Jon Braatz with Kansas City Capital. Jon Braatz: And Brian, congratulations on your retirement. Wish you nothing but the best and enjoy the lake of the Ozarks. Randy, I just want to go back to Brazil a little bit. And maybe your view -- your commentary is it's stable, obviously facing some headwinds. Yesterday, I read where Banco Brazil (sic) [ Banco do Brasil ] in the second quarter took some -- saw an increase in rural loan defaults and so on. How would you view Brazil at this time, sort of the downside risk in Brazil versus maybe a stable environment? Randy Wood: I wouldn't view the downside risk is significant. And then again, I think you kind of combined the headwinds and the tailwinds. And certainly, there's more demand going there from China, in particular. So that bodes well. There's a currency overlay that's a little complex. And the credit thing. Obviously, we've talked a lot about -- creates a bit of a headwind. So stable is the best word, I think, that describes where the market is. I don't think we're going to see that huge upside from the increases in demand. But I also don't think that market continues to decline in any significant way. So we'll watch for signs. That's a market, that's a year-round market, not as seasonal as what we see in the Northern Hemisphere. So we'll know pretty quickly if things do start to turn, then we'll react to that. But right now, I don't project or foresee any significant downturn issues with the Brazil market. There's too much good news there. And again, the investments in irrigation, we know are going to support and prop up a customers' bottom line and allow them to grow more 3 crops a year, those fundamental market conditions for us really gives us a bit of a parachute there. Jon Braatz: Okay. And Brian, obviously, free cash flow was very strong this year. Working capital, very good. How would you view that in 2026? Do you see that similar type of potential? Or are we going to see a little bit less in terms of free cash flow? Brian Ketcham: Yes. I think the potential is maybe a little bit less next year. I think we've done a great job, particularly in inventories, inventory management this last year and maybe not the same kind of potential there. And then as I mentioned, our CapEx is going to be up close to $10 million compared to what it was this year. So probably not -- if you look historically, we've always been around that 100% free cash flow, but the CapEx obviously makes a difference. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Randy Wood for any closing remarks. Randy Wood: Thank you again for joining us today. We appreciate your interest and believe fiscal 2026 will be another strong year for Lindsay, and we look forward to updating everyone at our first quarter earnings call. Thanks for joining us. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone, and welcome to the First Internet Bancorp Earnings Conference Call for the Third Quarter of 2025. [Operator Instructions] And please note that today's event is being recorded. I would now like to turn the conference over to Ben Brodkowitz from Financial Profiles, Inc. Ben, please go ahead. Ben Brodkowitz: Thank you, operator. Hello, everyone, and thank you for joining us to discuss First Internet Bancorp's Third Quarter 2025 Financial Results. The company issued its earnings press release yesterday afternoon, and it is available on the company's website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us from the management team today are Chairman and CEO, David Becker; President and COO, Nicole Lorch; and Executive Vice President and CFO, Ken Lovik. David and Nicole will provide an overview, and Ken will discuss the financial results. Then we'll open up the call for your questions. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bancorp that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. At this time, I'd like to turn the call over to David. David Becker: Thank you, Ben. Good afternoon, and thank you for joining us on the call today. I want to start by highlighting the continued strength of our core business fundamentals and the key strategic execution. Our revenue engine remains robust. We delivered our eighth consecutive quarter of net interest income growth with net interest margin expansion continuing as planned. Additionally, our SBA and BaaS businesses contributed meaningful growth to noninterest income. In the third quarter, we maintained our top line growth momentum as adjusted total revenues reached $43.5 million, an increase of 30% over the second quarter. Revenue growth was driven by a significant increase in the gain on sale of SBA guaranteed loan balances. Net interest income was also up, marking the eighth consecutive quarter of growth. Net interest income increased over 8% compared to the linked quarter and was up 40% compared to the third quarter of 2024, driven by higher earning asset yields and lower deposit costs. Accordingly, net interest margin on a fully tax equivalent basis increased 8 basis points from the second quarter to 2.12%. Further, our prudent operating expense management and strong top line growth drove significant operating leverage for the quarter. During the quarter, we executed certain strategic actions that had a near-term negative impact on earnings but strengthened our financial position and set the stage for our future growth. First, we successfully completed the sale of $837 million of STL loans. This had several key benefits that advance our strategic priorities. The transaction enhances our interest rate risk profile, strengthens our capital ratios and expedites the optimization of our interest-earning asset base. These improvements will significantly enhance net interest margin and accelerate our progress towards achieving our near-term goal of a 1% return on average assets. During the quarter, we also took decisive and aggressive action to address credit issues in the small business lending and franchise finance portfolios. We recognized a $34.8 million provision for credit losses, which included $21 million of net charge-offs, additional specific reserves and a significant increase to the allowance for credit losses related to the small business lending. These actions reflect our intention to expedite the improvement of our portfolio's credit quality. As a result of these actions, total delinquencies were 35 basis points, as of September 30th, down from 62 basis points in the second quarter and 77 basis points in the first quarter. From the standpoint that delinquencies are the best indicator of potential future credit losses, this puts the health of our portfolio right in line with our peers. Importantly, our credit issues are isolated to small business lending and franchise finance portfolios. Credit quality across the remainder of our lending vertical is sterling, reflecting the strength and stability of our broader portfolio. Turning to lending activity for a minute. Our commercial lending teams continued to deliver a strong level of originations throughout the quarter. Excluding the impact of the loan sale, commercial loan balances were up $115 million or 3.2% and total loan balances were up $105 million or 2.4%. Heading into the fourth quarter, our loan pipelines remain strong, as our teams continue to see excellent opportunities, especially in our commercial real estate, single-tenant lease financing and commercial and industrial lines of business. Looking ahead, the fundamentals that drive our business, a differentiated model, experienced and dedicated teams, diversified revenue streams, solid capital position and disciplined risk management position us well to continue delivering sustainable growth and enhanced long-term shareholder value. Now I'll turn it over to Nicole to talk about small business lending and BaaS. Nicole Lorch: Thank you, David. Gain on sale of SBA loans rebounded strongly in the third quarter following our process improvements, generating $10.6 million in gain on sale revenue. We delivered another solid quarter for new loan originations and ended the quarter with $104 million in held-for-sale loans that we look to sell into the secondary market when the federal government reopens and loan sales resume. Anticipating the government shutdown, we proactively secured SBA authorizations for loans in our pipeline prior to September 30th, enabling us to continue to meet our borrowers' desired transaction time lines without disruption. Our pipeline remains robust at $260 million, positioning us well for gain on sale in future periods and for interest income on retained balances. We continue our drive for process improvement throughout the SBA initiative. This quarter, we made strategic investments in technology platforms, including AI technology to our document collection and verification steps to create a streamlined experience for our borrowers, eliminate manual tasks for our employees and to provide our credit teams better insights into new loan opportunities. We also introduced loan level predictive analytics to bolster our portfolio management processes and problem loan identification practices. Additionally, the learnings from our analytics engine enabled us to further refine our credit standards for better credit outcomes in future periods. Our commitment to innovation and excellence extends to the continued success of our fintech partnerships, which is commonly referred to as Banking as a Service or Simply BaaS. Through strong relationships forged with quality programs, sustained growth in deposit balances has provided us robust balance sheet liquidity as well as tremendous balance sheet flexibility. In the third quarter, we strategically moved over $700 million of fintech deposits off balance sheet to optimize our balance sheet size following the loan sale. We have continued to move additional deposits off the balance sheet here in the fourth quarter, but retain the flexibility to bring them back to fund growth opportunities or to meet liquidity needs as market conditions warrant. Total revenue from our fintech initiatives, consisting primarily of interest income and program and transaction fees was up 14% compared to the second quarter and up 130% from the third quarter of 2024. These results highlight the strong performance across our diverse business lines. I will now turn it over to Ken for additional insight into our third quarter performance and our fourth quarter outlook. Kenneth Lovik: Great. Thank you, Nicole. As a result of the strategic actions taken during the quarter, we reported a net loss of $41.6 million or $0.0476 per diluted share. Excluding the pretax loss on the loan sale of $37.8 million, adjusted net loss for the quarter was $12.5 million or $1.43 per diluted share. However, with the strong revenue growth and corresponding positive operating leverage mentioned earlier, adjusted pretax pre-provision income totaled $18.1 million, an increase of over 50% from the second quarter and almost 65% from the third quarter of 2024. Now turning to the primary drivers of net interest income and net interest expense during the quarter. Net interest income for the quarter -- for the third quarter was $30.4 million or $31.5 million on a fully taxable equivalent basis, both up about 8% from the second quarter. Net interest margin improved to 2.04% or 2.12% on a fully taxable equivalent basis, both up 8 basis points. The yield on average interest-earning assets rose to 5.68% from 5.65%, driven primarily by an 11 basis point increase in loan yields, as rates on new originations were 7.5% during the quarter. Looking forward, while the Federal Reserve lowered the Fed funds rate in September, we expect to see continued expansion in the portfolio yield, as new origination yields should remain above the current portfolio yield of 6.18%. Additionally, the sale of lower coupon single-tenant lease financing loans is expected to have a meaningful impact on the portfolio yield in future periods. Turning to our funding costs. The cost of interest-bearing liabilities declined to 3.90% from 3.96%, driven mainly by a 5 basis point decrease in interest-bearing deposit costs and a 7 basis point decrease in the cost of other borrowings, as we saw the benefit of paying down a significant amount of higher cost short-term Federal Home Loan Bank advances near the end of the second quarter. Deposit costs -- deposit costs declined as we continue to benefit from CD repricing and reduced broker deposit balances. Furthermore, we began moving some of our higher-cost fintech deposits off balance sheet in the quarter, which had a positive impact on deposit costs and this activity ramped up near quarter end following the loan sale. As noted on Slide 10 of the presentation, we continue to see favorable trends in CD pricing across the curve. As higher cost CDs mature, we expect them to be replaced by lower-cost fintech deposits or new CDs at more attractive rates or simply paid down with excess liquidity to assist in shrinking the balance sheet further. This shift in downward pricing, complemented by our ability to move deposits off balance sheet positions us extremely well to capitalize on further declines in deposit costs in the fourth quarter and into 2026. And when combined with higher loan origination yields, these dynamics support sustained growth in both net interest income and net interest margin even in the absence of further rate cuts from the Federal Reserve. At quarter end, $1.3 billion or 27% of our deposits were indexed to the Fed funds rate. So should we see additional interest rate cuts, expansion of both net interest income and net interest margin would be further enhanced. Now I'm going to take a few minutes to speak to asset quality, as there were a number of moving parts during the quarter, some of which are summarized on Slide 13 in the presentation. As David mentioned in his comments, we recognized a provision for credit losses of $34.8 million in the third quarter, which consisted primarily of $21 million of net charge-offs as well as additional specific reserves and a significant increase to the CECL reserve related to small business lending. To provide a little bit more detail on the net interest charge-offs in the quarter, $15.2 million were related to the small business lending portfolio as we took an aggressive approach to cleaning up problem loans that evolved over the quarter. Following these charge-offs, delinquencies in the small business lending portfolio declined over 50% compared to the prior quarter. Additionally, $5.3 million of net charge-offs were related to the franchise finance portfolio. These charge-offs had $3.5 million of existing reserves in place that were removed. Nonperforming loans totaled $53.3 million at the end of the third quarter, up $9.7 million from the linked quarter. The increase in nonperforming loans was primarily driven by moving 9 franchise finance loans with book balances of $14.2 million to nonaccrual with related specific reserves of $5.8 million. Delinquencies in our franchise finance portfolio decreased almost 80% from the second quarter and the pace of new delinquencies has slowed meaningfully, signaling improved borrower performance. A portion of the increase in nonperforming loans, about $1.8 million related to small business lending and represented the remaining balance based on estimated collateral values associated with the loans. At quarter end, the ratio of nonperforming loans to total loans was 1.47%, up from 1% in the linked quarter. The increase was driven not only by the increase in nonperforming loans, but also the decline in loan balances following the loan sale. The allowance for credit losses increased to $59.9 million in the third quarter, up $13.4 million or almost 30% from the second quarter. The increase was primarily driven by a significant increase in the ACL, as a result of updated inputs to the CECL model given recent industry trends in SBA loans, which show SBA loan default rates across the industry are approximately 2.3x higher in 2025 than in 2022. As a result, we more than doubled the small business lending ACL. Following this activity, the ACL now represents 1.65% of total loans, up from 1.07% in the second quarter. If you exclude the public finance portfolio, the ACL to total loans increases to 1.89%. As shown in one of the slides -- in one of the graphs on Slide 13, to emphasize the point David made in his comments, following the credit actions taken during the quarter, total delinquencies 30 days or more past due, excluding nonperforming loans, declined to 35 basis points at quarter end and are at their lowest point in a year. I will briefly touch on our capital position prior to moving on to our outlook for the fourth quarter. As announced in our press release and associated 8-K in September, we closed on the sale of $837 million of single-tenant lease financing loans with a net loss of $37.8 million at the end of the quarter. While the loss from the loan sale reduced shareholders' equity and regulatory capital, the reduction in risk-weighted assets was even more pronounced, leading to growth in regulatory capital ratios from the linked quarter. Related to the Tier 1 leverage ratio, we expect this ratio to increase significantly in the fourth quarter of 2025 as the average assets calculation resets lower with a full quarter effect of a smaller balance sheet. Furthermore, we were able to mitigate the impact of the loan sale on the tangible equity to tangible assets ratio by moving a significant portion of fintech deposits off balance sheet during the quarter. Now turning to the remainder of 2025, I would like to provide some commentary on our outlook for the fourth quarter of 2025. Note that these estimates assume a flat rate environment, consistent with prior quarters, we are not going to attempt to predict the timing and magnitude of Fed rate cuts. We remain excited about our strategies to drive net interest income and net interest margin growth, as loan yields continue to increase and deposit costs decline. During the fourth quarter, we expect loan balances to increase at an unannualized rate in the range of 4% to 6%. While this may seem like a high number, we expect origination levels to remain consistent with prior quarters, while the starting point is lower following the sale of the single-tenant lease financing loans. In addition to the continued benefit of higher loan yields and lower funding costs, we also expect a lift in the net interest margin resulting from the loan sale as the loan portfolio yield is further enhanced. For the fourth quarter, we expect the net interest margin on a fully taxable equivalent basis to increase to the range of 2.4% to 2.5%. In dollar terms, we expect fully taxable equivalent net interest income to come in the range of $32.75 million to $33.5 million for the quarter. With respect to noninterest income, we have about $104 million in loans currently held for sale plus additional loans that have closed thus far in the quarter. However, we do expect loan sale volume to be down from the third quarter. As a result, we expect noninterest income to come in the range of $10.5 million to $11.5 million for the quarter. The one caveat to this assumption is how long the United States government shutdown lasts. As a government program, sales of SBA loans into the secondary market have been halted during the shutdown. Assuming the shutdown ends sometime soon, we should be able to complete the loan sales during the quarter. However, if the shutdown continues for an extended amount of time, then the ability to execute the sale of all of these loans would be at risk. On the expense side, we continue to manage costs well and expect them to come in the range of $26 million to $27 million for the quarter. Moving to an update for our expectations for 2026. With regard to fully taxable equivalent net interest income and the provision for credit losses, we feel comfortable with where the analyst estimates currently are at. Moving to our outlook for noninterest income to Nicole's comments regarding heightened credit standards related to SBA lending, we expect origination volumes to decline from 2025 and have modeled noninterest income to be in the range of $41.5 million to $44.5 million. The lower SBA origination volume will have a corresponding impact on our forecast of noninterest expense for the year, which we now estimate to be in the range of $106 million to $109 million. With that, I will turn the call back to the operator so we can answer your questions. Operator: [Operator Instructions] Your first question comes from the line of Tim Switzer from KBW. Timothy Switzer: So I guess, the first one I had is on the credit outlook. And I understand it's tough to maybe put some numbers behind it or like a time line. But is there any way for us to get a sense of -- I'm sure this is probably peak charge-offs, but when do we see peak delinquencies, peak nonperformers and have confidence that those start to move down? And what is like embedded within the reserve in terms of credit losses? Like what's the credit content of the portfolio as you guys see it today? David Becker: I'll handle the delinquency side. As we discussed, those numbers keep coming down. Like at the current time on the franchise lending, we only have 4 delinquent accounts. It's at 35 basis points compared to 2 quarters ago when it was 77 basis points. So the leading indicators in our mind, are going all in the right direction and getting more and more stable. Obviously, there's a lot of economic activity going on in D.C. and around the world that can have impact on companies. So as you see today, it's a tough one. But as we're looking at it and working -- and it's right now impacting just 2 of the portfolios that we have, SBA and franchise, but it's all headed in the right direction currently from where we're at. I'll let Ken speak to how we've broken out. There's specific reserves, there's reserve reserves. There's some stuff that's in nonperforming that we're waiting on resolution of sale of assets, et cetera, could get some recovery back out of it. But he can give you a little more detail on how that lays out. Kenneth Lovik: Yes. Maybe we'll talk about nonperforming assets first, right? So the biggest -- the increase in nonperforming loans this quarter was primarily driven by certain franchise finance loans that we took action on during the quarter. These were either delinquent loans or loans with identified issues that we moved to nonaccrual and we put specific reserves on. I'll go to David's comment about delinquencies here and with regard to franchise finance, the delinquency number is now down significantly, right? I think I believe we had 4 loans that were delinquent at quarter end. And I guess, as a leading indicator there, I think we feel like in terms of the franchise portfolio, we've kind of seen the worst of the worst. Yes, there -- we do have existing nonperforming loans in there where we might have to adjust an existing specific reserve or there may be a loan that pops up. But I think we feel like we've kind of been through what I'd call maybe the last big bucket of problem loans there. And the credit outlook there should be -- should look good going forward. And quite frankly, those are -- if you break down our nonperforming loan bucket, the franchise loans are by far the biggest -- the largest single amount in there. So I think in terms of NPAs and NPA increases going forward, there might be some more additions with regards to SBA and the residual balances of what we don't charge off. But I think the large increases going -- I think we've kind of minimized the significant increases going forward. And I think we remain optimistic that we're getting close to being peak NPA level. And then to kind of address your question on the reserves and stuff. As we mentioned in the commentary, we made some significant adjustments to the ACL related to SBA. We essentially doubled it. We increased that number to about $27.5 million. And I think we kind of went to the high end on some of the assumptions in our CECL model there. And I think, obviously, a CECL model is a life of loan loss expectation, which is what our model is forecasting. So I think that's kind of a number that we feel comfortable with as we sit here today. Timothy Switzer: So does your reserve kind of embed the outlook you just talked about in terms of delinquencies remaining low, not too many new ones and NPAs moving down from here? Kenneth Lovik: Well, it does to a certain extent. I mean the CECL model is -- there are delinquencies do impact the calculation of the reserve. Most of our delinquencies are 60 days or less. You certainly get penalized when delinquencies are higher than that. But yes, the CECL model does take into account the impact of delinquencies within the math of the CECL model. Now nonperformers, those are not in the -- I mean, those are kind of taken out of the release -- those are taken out of the model and those have specific reserves. Those are called individually evaluated loans. So when something does move to nonperformer, we will do an individual analysis and put a specific reserve on that. So that's kind of the -- obviously, the biggest piece of the reserve of the ACL is the CECL reserve and then a secondary piece are the specific reserves, which are individually evaluated at the loan level. I say clear is mud, right? The bottom line play for both, I think SBA, and we're really, really comfortable on the franchise loans is that we got our arms around the problem. We moved an awful lot of stuff pulled things forward that we could justify pulling forward. Within the SBA world, there's a lot of guidelines, as to when we can put loans to nonperforming. We have to buy them back out of the secondary market. We have to jump through some hoops to get it. But we're as clean as clean can be today. And I think going forward, as we've spoken to in the past, we have been tightening down credit standards over time. We've got data through a group called [ Lumos ] of all the statistical stuff going on in the SBA world and vintages for '21, '22 seem to have peaked, which is also the vintages of loan originations, where most of our problem credits reside. We've tightened up credit significantly over the last 2 years and did another tightening up here within the last 60 days. So I think it's as good as we can get it right now. As I say, there are things happening around the world that could severely impact us. But if we see kind of consistent and status quo on tariffs, et cetera, we think that we're kind of the worst is behind us on both sides. Timothy Switzer: That's very helpful. I appreciate all the color there. And if I could get one more on the government shutdown. There's kind of 2 impacts here, right? If the government shutdown, you can't sell your loans, but also at some point, I mean, the SBA isn't approving new SBA numbers either. So is there a time line or like a deadline in terms of when this kind of slows down your ability to originate new loans? And let's just say we're shut down for another week or 2, how quickly historically is the SBA able to kind of catch up on that backlog of new applications for approval? Nicole Lorch: That's an astute question, Tim. We are -- we anticipated the shutdown. So on the loans that were through credit approval in our pipeline, we went ahead and got authorization prior to September 30th. So we went into the shutdown with about $94 million in pipeline loans that we have authorization on. So month-to-date, we have funded $18 million of new originations. We can continue to close and fund loans, where we have that authorization. So we have another $73 million, $75 million in loan closing right now. And as they work through that pipeline, we will be able to close them. So foreseeably, we can meet our borrowers' desired time lines for several weeks if the government shutdown were to persist. David Becker: One of the big questions on their throughput, Tim, is going to be -- there's a lot of firing and shuffling of the decks going on with personnel in D.C. right now because of the closure. SBA is kind of short staff to begin with. We're praying to god that the people didn't get cut loose or the people come back after it reopens. But part of that will be dependent upon how -- what the staffing situation is when the SBA reopens. So -- but we -- as Nicole said, we've got a prime stood up, ready to go, and we hopefully will catch up before the end of the quarter. We did reduce. We were thinking we did a little over $10 million last quarter in our projection here for the fourth quarter that Ken has given you numbers on. We backed that down from a little over $10 million to $8 million in anticipation that we might not be able to get everything through. But the rest of it, as Nicole said, we're primed ready to go as soon as they reopen and hopefully have the staff to process. Timothy Switzer: Yes. It's definitely a fluid situation, but it sounds like you guys were well prepared ahead of time. Operator: Your next question comes from the line of Brett Rabatin from Hovde Group. Brett Rabatin: Wanted just to go back to the franchise finance portfolio for a second. And obviously, that portfolio was originated by a third-party ApplePie. And so as we look at that portfolio, you're saying that delinquencies are down. But can you help us maybe get some confidence on just the remaining balances of $450 million of that portfolio? David Becker: The ultimate on that one is Crowe is in doing an audit of that portfolio currently. And as yesterday afternoon at 5:00, they've gone through over 90% of those loans as an external audit. They had no downgrades on the loans and had 2 upgrades. So we not only internally feel better about it. And you hit the nail on the head, Brett. The issue wasn't the remote origination, but it was the remote collection effort. And back probably almost 6 months ago now, 5, 6 months ago, we jumped in and took control with the assistance of the folks at ApplePie to do the collection efforts. And we now the minute somebody goes past due or has an issue or if they got a problem or a question or concern, we talk to them. We're not relying on the third-party servicer. So we have been through literally every loan file. Crowe has now been through 90%. We'll finish it up this week, hopefully, early next week. But we're very proud of the fact that right now, they've had 0 downgrades and 2 upgrades on what they've looked at. So we're -- our confidence level is high on franchise. Brett Rabatin: And then I don't know if you guys have it available, but criticized went from [ 108 to 128 ] last quarter. I don't know if you have that balance or you have to wait for the filings, but I was hoping you might have that figure. David Becker: Well, you'll have to wait till the filings because we don't have the formal number calculated. Brett Rabatin: Okay. And then just wanted to -- we started earnings season with Jamie talking about cockroaches, and we've seen a few what you would probably call idiosyncratic issues. How would you describe what you guys have experienced? Would you say it's all idiosyncratic? Would you say some of the stuff that you've had to deal with has been somewhat related to either a weakening consumer or anything in particular? Nicole Lorch: We have referred to our small business loans, Brett, in the past as snowflakes because they are all individual unique and each one has a story behind it. But I do think if you step back and you look at franchise finance as well as small business, there are probably some underlying commonalities to the loan. And so where the Lumos portfolio analysis has been really helpful to us is in identifying any trends that we might not have such as specific geographies, and I don't mean states, but I mean down to ZIP codes as well as we know that there are some industries certainly that have been tougher. We have been fairly insulated from any consumer stress that is out there because the portfolio that we have of consumer loans is to a very high credit quality borrower. What we might see in the future, if there were continued stress in the economy, for instance, is there might just be a slowdown in the acquisition of new recreational vehicles or horse trailers if those are not must-have items, but nice-to-have items and people make a decision not to acquire a new one. So what we might see would be a slowdown in the origination of new loans. But we're seeing that the borrower -- the consumer borrower has stayed very strong for us and for our portfolio. With the small business, we are identifying, where we can any commonalities and remediating those for future credit standards. David Becker: I think the issue -- I agree with Nicole 100% the consumer, I think, is weathering the storm fairly well currently until unemployment starts to rear its ugly head. But I think the small business side is starting to feel some of the effects. We've got a lot of economists around the state of Indiana, all the major universities, et cetera, that are starting to say, hey, it's going to get tougher before it gets better. We're just now starting to feel the impacts of tariffs on raw good and stuff. We're still a manufacturing state here in Indiana, and it's really starting to ripple through small manufacturers, independent players here in the state of Indiana that aren't able to absorb the cost. I have a son that's running a bicycle shop in Bloomington, Indiana, they proposed new tariffs on China go through a bicycle chain that 6 months ago cost $25 will now cost $100. And that's the thing. We don't know how much of this is going to be for real or not. But small independent retailers, small businesses are going to see some impact here over the next 2 to 3 months if things continue on the same path. So yet to be determined. And -- but I do agree with Jamie, if there's one cockroaches more as we well know in the SBA world. So we're on it as best we can be. And one of the things that Nicole pointed out that this Lumos technology and the AI product gets is it warns us of hotspots. So we can take a proactive position. And if we have a quick service restaurant in Southern Florida in certain ZIP codes in areas, they're saying this is a hotspot, take a look. We can talk to those owners before they hit a wall and run into problems. So the AI tech that we've implemented over the last 3 to 4 months has really given us huge insight to both the franchise portfolios as well as the SBA portfolio. Brett Rabatin: And if I could just sneak in one last one. David, you said you'd buy back stock when you got down to these kind of levels and we're down here again. Are you guys going to buy back stock at these levels? And how do you think about that versus maybe growing the capital further? David Becker: It's a mixed bag. It's a tough decision to make. But if we stay in the teens for any period of time here, we do have authorization ability over the next 2 years to buy back $25 million. Obviously, where our capital is today, we can't go spend $25 million tomorrow. But if it stays down here in the teens, we come out of blackout and all that good stuff for part of next week, we will definitely get into the market and buy some shares if it stays in the teens. And I think we have some directors, myself, in particular, that will also get into the market next week. So... Operator: Your next question comes from the line of Nathan Race from Piper Sandler. Nathan Race: I'm a little confused. I was going back to my notes from last quarter and I wrote down that you guys ceased originating franchise finance loans back in January, and you didn't have any deferments within franchise finance coming out of last quarter. So I guess, I'm just trying to understand what transpired with these handful of loans that moved to nonperforming and that you also charged off in the quarter. Was it just the collection efforts that you undertook that you just described earlier, David? Or would just appreciate any other color in terms of what transpired within the franchise portfolio over the last 90 days? Kenneth Lovik: Well, these would be loans that we were either monitoring, where we were aware that the borrower was struggling or perhaps the borrower went delinquent. And maybe last quarter -- because keep in mind, delinquencies came down $11 million. So if you just think about the math, most of that $14 million that we charged off or excuse me, moved to nonperforming this quarter were delinquent last quarter, right? They maybe were 30 days or 40 days or something like that. And obviously, when they're in delinquencies, as David talked about, the level of communication we have and speaking to the borrowers, trying to work through a situation or work through resolution. And those were the loans, the delinquencies, where it was most prudent to move them to nonperforming and put a specific reserve on them. And -- but to kind of go back the other way on it, we are seeing some success in some of our resolution strategies with that. So for example, there was about $1 million of 2 loans totaling about $1 million that were nonperforming last quarter that so obviously have been moved to nonaccrual, had a reserve against them. But our commercial -- or our credit administration team worked out a resolution, where we were made whole $0.90 on the dollar on those deals, which were -- which was obviously much better than what we had reserved. So there are a lot of moving parts, but I guess the simplest piece is that these were just delinquencies that we moved to nonperforming and put reserves on. Nathan Race: And Nicole, I know you mentioned that on the SBA side, these are snowflake situations in terms of where you're seeing charge-offs. But also just curious, are there any commonalities in terms of vintage or when these loans are originated, perhaps when rates were lower and now a lot of these small business borrowers are being rate shocked. Is there any line of thought into that scenario? Nicole Lorch: Yes, that's a great question. Thanks for asking, Nate. We do vintage analysis, and so we are modeling future credit outlook based on the vintages. And I think David talked about some hotspots in the portfolio that we have identified. I would say, more than an increase in rates that the borrowers -- it's yes, an increase in their loan rate has impacted their monthly payment amount. But I think we've modeled on a $1 million loan, a 25 basis point reduction is about $300 a month to them. So it's not just solely the movement of interest rates and the impact on the borrower, but inflation more generally and it driving up the price of their raw materials or inventory that they need to buy, the cost of labor has gone up for them. And in some pockets of the country, consumers are starting to slow down on buying. So what we do see is an impact of inflation more so than impact of interest rate directly. And again, that's data that we're getting from our predictive analytics engine. So it's been really helpful to us in identifying what those industries are that might be more inflation sensitive, and it allows us to better refine our credit standards. Nathan Race: And then, Ken, I think you mentioned you're comfortable with where kind of the projections are for NII for next year. I think it's around $150 million or so. Just curious, if we do get 4 or 5 rate cuts as reflecting the forward curve over the next 12 to 18 months, where do you see kind of the margin trending by the end of next year? Kenneth Lovik: Well, in -- okay. So as I said, we kind of model a flat rate scenario, not to try not to be in the business of guessing, where rates are. So if we think about a full rate NIM for next year, we're probably talking somewhere kind of in the range of 2.70% to 2.80%. That's a full year, and that kind of ramps up over the course of the year. So it's not maybe quite as pronounced a stair step up as we would have had previously but it does increase quarterly over the course of the year. Now on a static balance sheet given -- with the sale of single-tenant lease financing loans, that moved us a lot closer to being neutral, but we are still slightly liability sensitive. So for every 25 basis point rate cut, we see an annualized increase of, call it, $1.4 million of net interest income. Operator: Your next question comes from the line of George Sutton from Craig-Hallum. George Sutton: Can you just walk us through the moving off of the excess deposits, the mechanics of that? I believe you have a relationship with IntraFi and you get a fee on actually moving those deposits? And then structurally, how do you think about future deposits coming in when you have the ability to pull some of these deposits back in a scenario, where loan growth is good? Kenneth Lovik: Yes. The mechanics for pushing them off through the IntraFi network are pretty easy. When we set up several of our fintech relationships the depositor forms allow the deposits to be pushed into the IntraFi network either for reciprocal deposits or deposit insurance or to move off the balance sheet. And yes, we do make fee income, which is -- they pay us kind of a spread, call it, Fed funds minus. And we collect the difference between what the rate we're paying on the deposit and what we're getting paid through pushing it into the deposit network. So it kind of depends. I think where it's really been beneficial for us is the -- a lot of our, what I'll call, higher cost fintech deposits are kind of already approved to be into the IntraFi network. So it does a couple of things, right? It allows us to move kind of the higher cost, call it, Fed funds minus 20 basis points deposits off balance sheet. But we also see a lot of volatility and increasing volume in those. So it helps us to manage the size of the balance sheet. So if those deposits go up $200 million in a quarter and we don't need the $200 million, we can push that off the balance sheet. And then to your point earlier, we can bring those back onto the balance sheet very easily to help in the event that perhaps CD volumes are down or other deposit areas are down, we can bring those back onto the balance sheet very easily to fund loan growth or fund CD outflows. It just gives us a lot more flexibility to manage the balance sheet going forward. David Becker: The other side of that equation, George, as you pointed out, we have plenty of excess cash at the current time. We're still growing and anticipate growing the loan portfolio by 10% next year. We sold STL, but Maris is back in the marketplace, pushing close to $100 million in originations in just this quarter. It gives us a little better pricing there. It also enables us -- if the Fed does do another pop here at the end, we'll probably do a 100% drop on rates kind of across the board on our side to match it. Historically, if we dropped 25%, we would drop rates 10 to 15 points. Because of the excess cash, we have a lot better flexibility. We're also in a position now, I think, on CDs, particularly in the commercial markets, only our long-term CDs in the 4, 5-year category, we appear in the top 25 in the country. Nobody is buying those right now. So it's not impacting us, but we haven't been on the charts in the CD realm for the last 2 months. Renewal on CDs, we have over [ $400 million ] rolling this quarter at a [ 434, 435 ] cost. If they were to renew, it's going to be in a [ 370 ] range or if they go away because we're down lower than they can get elsewhere, we're okay with that. It buys us a lot of flexibility we've not had in years. So you're right, having that excess cash is a nice play. Plus it's not costing us anything, As Ken said, we can get it off balance sheet. pick up a few points. It doesn't mess up our NIMs, doesn't mess up our ratio. So it's a nice position right now compared to where the world was post Silicon Valley 2.5 years ago. George Sutton: So further on the flexibility perspective, that was a pretty meaningful strategic move to sell the single-tenant loans. And I'm just curious, if we think forward, say, 18 months from now, how different do you see the business being? Are there contemplations of moving in different directions? Or it obviously gives you flexibility. I'm curious what you're going to do with that flexibility. David Becker: We have a couple of fintech opportunities we're looking at that could grow significantly on the lending side. We have some leasing opportunities that are yielding us 7.5%, 8% versus the 5% we had on the single tenant. And the new single tenant that Maris is bringing back on board, we're on a 5-year term versus what was traditionally a 10-year term at north of 6%, 6.5%. So -- and there's also forward flow opportunity there with Blackstone. So it gives us a lot of flexibility. We, on the fintech side, kind of shied away from some of the bigger lending opportunities because of lack of cash. We're now back in that market and talking to some folks. So I think you hit the nail head on. We're going to probably have a little different portfolio mix 18 months from now than we have today. But we got a couple of opportunities we're looking at that could be very beneficial to us. Operator: Your next question comes from the line of John Rodis from Janney. John Rodis: Ken, just a follow-up question on -- for 2026, the NII guidance, the [ $149 million to $150 million ], is that on an FTE basis? Kenneth Lovik: No. well, that's GAAP. So add about $4.4 million to get to FTE. Operator: There are no further questions at this time. I will now turn the call over to Mr. David Becker. Please continue. David Becker: Thanks, John. Thanks, everybody, for joining us today. We obviously covered a lot of ground here. We have really, as we've discussed many times already, consistently delivered strong net interest income improvements over the last 12 to 18 months. Macro environment remains uncertain out here as to what's going on in the world, but our customer activity is stabilizing. Lending teams continue to do very well. Pipelines are solid. We are also excited about growth potential from the fintech partnerships, as I just discussed a minute ago, which will further diversify and strengthen our revenue base. So with improvements in the loan mix, anticipated reduction in deposit costs, if the Fed is to do something else, we're confident in our ability to deliver stronger earnings in the coming quarters. As fellow shareholders, we remain committed to enhancing the profitability and long-term value, and we thank you for your continued support, and have a great afternoon. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Alexis Bonte: Good morning, and welcome to the Stillfront Q3 presentation. I am Alexis Bonte, the CEO of Stillfront, and I will be joined later by Tim Holland, our Interim CFO. I would like to start with a slight focus on Europe. As you can see, we had solid progress in Europe. We said a few quarters ago that we were in an investment phase in Europe in the first half of the year and that we would start reaping some of those rewards towards the later part of the year. As you can see, Europe returned to growth for the first time since Q1 of 2024, so in Q3, where the growth was just under 1%. What is important to say here, this is before the launch of the main new games that will happen in Q4. Those big new games, as a reminder, will be Big Farm: Homestead, that will launch towards the end of the year and will be within the Big franchise, and we'll build on the success that we had with Sunshine Island. Another big game that we announced previously that will launch in Q4 is Warhammer 40,000, which is a big important new launch on the Supremacy franchise with a major IP. And we also soft launched with a narrative franchise, the Unfolded: Webtoon Stories game with the Webtoon IP, and that soft launch is having some encouraging results. The marketing efforts also that we'll have in what we call Q5, which is right after Christmas. It's a good time to basically start scaling game. We'll see most of that revenue come into next year. Obviously, and that will impact the margins in Europe in Q4. But I just want to show that we say that we were going to basically really work on building up Europe in the first part of the year. And so I'm very happy to see that, and to be able to share that we are now reaping some of the results with the existing franchises, which are kind of showing the results in terms of live operations and how that is really performing. And also obviously excited about the new launches in our core business area of Europe. If we go into the KPIs that we have in Europe, so that resulted in a net revenue of SEK 643 million. That's up 0.6% year-on-year. UAC was at SEK 207 million, relatively stable. We were able to apply quite a lot of UA, especially in Supremacy at the beginning of the quarter. Then towards the end of the quarter, it was a bit harder to put more UA. But overall, I think we're with a healthy level in UA for Europe. And as you know, every quarter, it varies a lot whether we're able to place UA or not place UA. So that's something that we're always very, very attentive to. Adjusted EBITDAC was solid at SEK 154 million, which is a margin of 24%. Our key franchises in Europe grew by 0.4%, good performance. I was very happy, in particular, with Albion Online, who started doing a lot of investments in product marketing. I told you that I wanted the company to be less dependent on performance marketing and Albion Online's is a great game to be doing more product marketing and they had a really strong effort in product marketing, which actually has borne fruit and has been successful, and that gives me a lot of confidence for that franchise going forward. The smaller franchises actually grew faster in Europe. That was mostly due to -- from our Playa studio, a smaller franchise called Shakes & Fidget, which performed well year-on-year, and also had a small new launch called Mobile Dungeon, which helped that franchise scale a little bit. So that's Europe, very happy with the results in Europe. Continuing on to North America, as you know, and as we said from the beginning, North America has been our turnaround case. It's been really our problem side. It's the only business area that has negative growth. It is the business area that's actually dragging us down overall in terms of organic growth. Without North America, we would have very healthy growth across the group since both Europe and MENA and APAC are growing business areas. But that being said, we're continuing our turnaround efforts in North America, and we're -- and we are deliberately focusing on profitability. That's really what we want to do. We want to find the right level. We've made some very serious cost cutting in North America. I think we have a much healthier base now in that area. We also took some very hard decisions moving games to other business areas. And I would say that a lot of that work is done now. We ended up with basically SEK 246 million of revenues. That's 32.9% down year-on-year. So that's what is dragging down the organic growth. UAC was SEK 110 million. As I said before, we are extremely disciplined about UAC and what games it goes to, and we've really increased the discipline in North America around that. And that obviously has an impact on the net revenue profile of the business area. But then it also resulted in a large increase in our adjusted EBITDAC, which was SEK 36 million, which is a 15% margin. I think most of you will recall that North America was barely profitable a few quarters ago. And that obviously is a big change that now North America is a net positive contributor to our EBITDAC margin. And I think this is just a much more healthy base to work from. Both key franchises and other franchises were down in North America. Now the challenge for North America is going to be to work from that base. I do expect the decline to continue into Q4 as we're continuing with our discipline, but I do also expect North America to continue to be a net positive contributor in terms of EBITDAC as we work on improving things there. MENA and APAC, continued solid growth. Actually, growth has slightly increased quarter-on-quarter. Very happy with MENA and APAC. We have -- if you look at our key franchises, they grew by more than 18%. That's -- and going into even more detail, both Jawaker and the Board Ludo franchise from Moonfrog had very healthy double-digit growth. Very, very solid situation in MENA and APAC. Small level of UAC. There's very little dependency on UAC, EMEA and APAC. I think actually, we do have an opportunity there to boost a little bit the growth in the future and more likely in 2026, particularly for the Board franchise if we're able to place a bit more UAC there, but that's something that we're going to do carefully and slowly, and just basically the -- and with discipline as we've been very disciplined all the time. And adjusted EBITDAC as a result has continued to increase significantly with SEK 276 million, which is a 57% margin. So that's basically the main things on this side. I will now pass on to our interim CFO, Tim, for -- to talk a little bit about finance. Tim Holland: Thank you, Alexis, and good morning, everyone. On a group level, revenues declined by 7.8% organically, coupled with a 6% foreign exchange headwind. Our net revenue declined from SEK 1,595 million, down to SEK 1,373 million. And that was driven by a few different things, but primarily, it was driven by BA North America and specifically Word and HGM franchises. And as Alexis noted, we are much more focused on the profitability of those titles. So we did decrease user acquisition on a year-over-year basis. However, when you do decrease UA, that's obviously going to increase profitability, but it is going to decrease net revenue. But that was partly offset by strong performance in BA Europe. As Alexis noted, we're almost at 1 percentage point of organic growth for BA Europe, and that was driven by strong performance for Big, for Albion Online and for Supremacy as well. And we also had strong performance from BA MENA APAC, where we got to almost 3 percentage points of organic growth, and that was driven again by Jawaker and Board franchises. Looking at UAC. UAC came down year-over-year from SEK 462 million down to SEK 336 million, and that was driven primarily by year-over-year declines in UA spend for HGM and for Word. Looking at adjusted EBITDAC, that's up year-over-year from SEK 385 million up to SEK 436 million. I should note that's a 13% point increase on an absolute basis year-over-year, and our net revenue obviously declined by 14%, but we are showing strong margin resilience even with that net revenue decline. Adjusted EBITDA came in at 32% in terms of margin. Again, that's up 8 percentage points compared to Q3 of 2024. Again, that's primarily driven by decreased UAC as a percentage of net revenue. But one thing to point out as well is that our gross margin has improved on a year-over-year basis from 80 to 83 percentage points, and that's due to the continued success of our Web shop rollout, where we've improved our direct-to-consumer share of revenue year-over-year from 33% up to 44 percentage points in Q3 of 2025. Looking at our LTM free cash flow, that's down slightly year-over-year. Last time we spoke, we reported SEK 1,089 million in terms of LTM free cash flow. That's down to SEK 974 million, but that change is primarily related to working capital adjustments, which is a natural part of our business. So you are going to see that fluctuation from positive to negative in terms of our working capital adjustments. Next slide, please. Digging a bit further into our cash flow generation. Cash flow before changes in net working capital came in at SEK 357 million, of which is SEK 77 million in paid financial expenses. That is down year-over-year from SEK 101 million, down to SEK 77 million. The decrease that you're seeing there is due to two things. That's primarily due to a reduced interest rate environment, and then also a reduction in our interest-bearing debt. Of that cash flow from operations before changes in net working capital, there is taxes paid of SEK 90 million. That's up year-over-year from SEK 42 million, up to SEK 90 million. The reason for the increase is primarily due to Jawaker, where we're paying taxes for Jawaker in the UAE now under that new legislation where you have to pay 9% of your corporate tax -- taxable income there. I should note that we are under CFC taxation in Sweden, so we will be getting a credit back for that amount. So the SEK 42 million to SEK 50 million amount is more of a normalized basis for our taxes paid. Net working capital came in at SEK 47 million, negative SEK 47 million, and that is due to negative SEK 98 million in terms of liabilities. That negative movement for liabilities is due to a reduction in our UAC, but that was partly offset by a positive impact of SEK 51 million for our receivables, and that's primarily due to reduced net revenue. Looking at cash flow from investment activities, that came in at SEK 119 million, and that was primarily driven by SEK 116 million in terms of product development. I should note that, that's about 8.5% of our net revenue spent on product development. Last year, it was 9.4%. So we are spending less in terms of product development. However, we are taking a much more targeted approach in terms of product development by specifically spending more in Europe, spending more in MENA and APAC. We were spending less in terms of BA North America. Looking at our cash flow from financing activities that came in at SEK 326 million. That was primarily driven by SEK 335 million that was used to pay down our RCF. That's up year-over-year, and that shows our continued focus on deleveraging this business. Turning now to our free cash flow. You can see our free cash flow for the LTM basis was SEK 974 million. That is up year-over-year from SEK 835 million. And the difference between the two values primarily comes from reduced financing charges, reduced product development, and it's partly offset by taxes paid. And this table on the right primarily shows what we've done with that free cash flow. So we had, obviously, the cash portion of our earn-outs at SEK 618 million. And we also reduced our borrowings by SEK 268 million. Again, that's up year-over-year. And then we had our share buybacks for SEK 142 million over an LTM basis. And I will note, and as you probably saw from the press release this morning, we have announced a new program that will begin tomorrow. Next slide, please. Looking at our financial position, our financial position, total net debt decreased from SEK 5.9 billion last year in Q3 of 2024, all the way down to SEK 5.1 billion. That's a reduction of almost SEK 800 million, again, showing our focus on deleveraging this business. The middle table shows our maturity profile. The maturity profile remains strong. As you know, we don't have any major maturities until 2027. That large bar there of SEK 2.9 billion represents SEK 1 billion for a bond that's due in 2027, the RCF drawn of SEK 1.2 billion and SEK 0.7 billion in terms of our SEK term loan. Then we have a bond due in 2028, and a bond due in 2029. Looking at the right table, that's our net debt to EBITDA. We came in at 2.06x for our leverage ratio. That's obviously above where we want to be for our 2x leverage ratio target. However, we are down sequentially from Q2 2025. We are down from 2.18, down to 2.06. And then on a year-over-year basis, we're down from 2.08 to 2.06. I should note, excluding earn-outs, we are at 1.87x. And then we'll flip to the next slide here. Then this is the last slide before I'll pass it back to Alexis. But as we've noted in our report this morning, we are announcing the conclusion of our cost optimization program, which has been driven by fixed cost savings and direct cost savings. And this has been announced 1 quarter early. We view this program as being a fantastic success. As I noted, we saved a significant amount of costs, specifically with fixed cost in North America, and we've been very successful with our direct cost savings with the rollout of the Web shop, improving our gross margin. Going forward, we're, of course, going to continue to focus on cost savings and direct cost improvements. However, we want to take a balanced approach to invest in our key franchises and invest in the future of Stillfront. And with that, I'll hand it back to Alexis. Thank you. Alexis Bonte: Thank you, Tim. So basically, to conclude, we are starting to deliver on what we set ourselves to deliver a year ago. We have concluded the cost optimization program a quarter in advance at the maximum level that we had set. We are advancing very decisively with the turnaround in North America and making sure that it's got a healthier base and healthier profitability. We are returning Europe to a more healthy level of organic growth while still having solid margins, and a very interesting pipeline of new games coming in. And we have MENA and APAC that is continuing to go from strength to strength. And we're also leveraging some of the talent there to move some of the games that we had in North America into that region. So we are still very much at the beginning of what we would like to deliver, but we are definitely seeing the first signs that our strategy is working, which gives me a lot of confidence, but also makes me extremely thankful to all the teams at Stillfront. In terms of our key focus going forward, we're going to continue to focus relentlessly our investments on the key franchises. That is something that we will do more and more and more. We obviously -- we're a games company. So we will continue focusing on successfully launching new games. But as you can see from our CapEx with a lot more disciplined approach, but at the same time, I want to make sure that we have the right level of ambition. We will continue to -- with our discipline of delivering on strong margins and cash flow. And obviously, we are continuing to execute on the strategic review. You've seen that we've done some game closures this past quarter. We've also announced that we'll likely do some extra game closures, and we're also looking at, still, very carefully at some potential divestments. So with that, I think we are ready to take your questions, and thank you very much for your attention. Operator: [Operator Instructions] The next question comes from Erik Larsson from SEB. Erik Larsson: I have two questions. First off, I appreciate the outlook comments here on Q4. And as I understand it, your wording on Europe as we will potentially see weaker organic growth rates in Q4 versus what we saw here in Q3. But are you still confident on the ability to grow sequentially here, just to sort of get a feeling on the magnitude? Alexis Bonte: Yes. Maybe I can take that question first, and then Tim, you can build up. So yes, as we've indicated, we do believe that Europe might potentially be a little weaker in Q4, but still, it will be a completely different level to what you saw in Q1 and Q2. The reason why it's very difficult for us to really know where Europe will be is a lot of it depends on the year that we're able to allocate for Supremacy. And also most of the impact of the new games will be in the later part of the year and also towards next year, and it's very difficult to basically balance what will happen there. But it's definitely on another level going forward, and we're very confident that we've kind of found a new rhythm for Europe now. Tim, I don't know if you want to... Tim Holland: Yes. I mean, just as Alexis said, there's going to be variability from quarter-to-quarter, but we do believe in the long-term improvement in Europe. And then as Alexis mentioned as well, that's going to be heavily influenced by the new games. Erik Larsson: Okay. Then second and final question. Looking at your debt structure, it's start to look at some refinancing next year. So I just wanted to hear some thoughts how you think about the capital allocation. I guess you have reducing the absolute debt, giving better earn-outs, et cetera. So any thoughts there would be interesting to hear? Tim Holland: Yes. I mean we're going to get back to that. I think that our debt structure is strong. We have our maturity profile. Everything is primarily due in 2027 onwards. And that's a good timing as well because our earn-outs will be finalized in 2027 as well. So what we'll do with the extra cash could be amortizing much more on our RCF. We can also potentially do dividends. We could do acquisitions, but we'll get back to that at the appropriate time. Operator: [Operator Instructions] The next question comes from Rasmus Engberg from Kepler Cheuvreux. Rasmus Engberg: Warhammer Supremacy, when is that the game supposed to be out? Alexis Bonte: Rasmus, good to hear from you. So basically, we are having an initial launch, I think, around the end of this month, which will be a soft launch. And then we expect to basically scale the launch during the year to have, basically, a larger launch towards the end of the year. So Q4, but later part of Q4. Rasmus Engberg: Okay. And would you dare to say anything about Europe for next year? Do you think it's going to be largely stable then? Or you've taken some measures with launches and improvement of titles? Is Europe stable from these levels going forward? Or how do you think about it? Alexis Bonte: Yes. I mean the way we're thinking about it is we did a lot of work that was necessary to be done in Europe. We're really focusing our investments, focusing on the key franchises, making sure that we have a proper pipeline going forward. We're seeing the results, I think, basically more or less when we expected them, which is good. And that gives me very solid confidence for next year. Rasmus Engberg: And these new measures, you talked about closing some further games in North America, or potentially lowering them. That sounds like though there are more fixed cost savings sort of outside of the program? Or how should we think about that? Or is that going to be reinvested in something or? Alexis Bonte: Yes. I think there's a time to be doing cost savings and there's a time to go on the offensive. I think we've done what we had to do in terms of cost savings. And any further savings that we might receive from other game closures and all that, it is very much our intention to reinvest and to go on the offensive and to strengthen our pipeline. I think we have a strong base to do that. I think the cleanup that we had to do has mostly been done. And now it's about really being more aggressive going forward. Rasmus Engberg: Would it be possible to talk about sort of the better part of North America? Is that a stable part? How much is it? Is it possible to give any indication on that? Alexis Bonte: I mean we don't do breakdowns of business areas, obviously. I mean, I'll let Tim to build up. But obviously, we have some key franchise in North America. Those -- some of those key franchises, I think, have really good potential, but they need to increase their performance. I think we we've really raised the bar in terms of what we consider as good performance. I think there is a few franchise in North America that could do well. Some can do well within North America. Others, clearly, we didn't have the team or the right resources to make them work in North America. For example, like Word. And that's why we moved out Word games to Moonfrog in India, where the team there, a lot of people are former Zynga people that worked actually on Word games. So it was a perfect match. So we'll be kind of very direct with that. But yes, there are some good elements in North America, but they're going to have to demonstrate over the next 3 to 6 months that they can deliver basically. Tim Holland: Yes, nothing further to add other than we have some very strong franchises in North America. Like BitLife, there's probably nothing like it globally in terms of that title. And so we have high hopes for that title. But of course, we do need to see some stronger performance in that region. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Alexis Bonte: Well, on behalf of Tim and myself, thank you very much for joining this call on the Q3 Stillfront results. As I just said, we're executing on what we said we were going to do. And we are happy to start seeing the first results of our strategy. And obviously, we aim to continue to deliver over this over the next quarters. Thank you very much for your time. Tim Holland: Thank you.
Operator: Good morning, ladies and gentlemen, and welcome to the Live Oak Bancshares Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference call over to Greg Seward, General Counsel and Chief Risk Officer. Please go ahead. Gregory Seward: Thank you. Good morning, everyone. Welcome to Live Oak's Third Quarter 2025 Earnings Conference Call. We are webcasting live over the Internet, and this call is being recorded. To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.liveoakbank.com and go to the Events and Presentations tab for supporting materials. Our earnings release is also available on our website. Before we get started, I would like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's call. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings and in the presentation materials. I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer. James Mahan: Good morning, all, and BJ is going to kick us off. William C. (BJ) Losch III: Good morning, everybody. Let's get started with a big shout out to all of Live Oakers and our customers on Slide 4. We're proud to be recognized as the #1 SBA 7(a) lender for 2025 and by an impressive margin. Not only did we provide over $2.8 billion of loans to small businesses, but we also increased our production by 44% over last year, and our market share increased from 6.4% to 7.7%, and yet we still have plenty of room to grow in the program. Turning to Slide 5. We know what we are good at, and we're keeping the main thing, the main thing by ensuring our existing vertical lending and deposit gathering activities are our #1 priority. This performance is top of the class from a growth perspective. Loan production up 22%, loan outstandings growth up 17%, customer deposit growth up 20% and PPNR up 24%. These results reflect the hard work all our teams have done to create outcomes that are more consistent and sustainable over time. That's our goal. To ensure our profitable growth trajectory continues over the medium term, we are extending our customer product offerings by adding checking and small dollar SBA loan capabilities. Both of these efforts launched in early 2024. And in a little over 18 months, our teams have made significant gains in winning customer checking relationships and serving more small business borrowers. On the checking front, we ended the quarter with $363 million of checking balances or 4% of our total deposit base, up from only 2% this time last year. This increase is even more impressive when you consider that our total deposit base grew 17% year-over-year. We have about 1/3 of our new loan customers opening a checking account with us each quarter, and we expect that percentage to increase as we add more capabilities such as merchant services. At the beginning of 2024, only roughly 6% of our customers had both a loan and deposit relationship with us. Today, that percentage is 20%. All this is leading to deeper relationships with customers, better insight into customer cash flows and meaningful reductions in the cost of deposits, both now and over time. On the small dollar 7(a) front, what we call Live Oak Express, production is ramping up meaningfully and will continue to do so. These loans are also very desirable on the secondary market and are leading to a nice gain on sale increase. We are continuing our efforts to make it simpler, easier, faster and more efficient for our people to serve our customers. And in Live Oak Express, we will be piloting an AI-enabled loan origination solution to do just that, which will significantly improve our speed to close for the borrower and the efficiency of our process from the lender all the way through to servicing and loan operations. The tangible result of our efforts is showcased on Slide 6. As you can see, the true earnings power of the company is strong in PPNR, revenue and pretax income on both a quarter-over-quarter and year-over-year basis. We continue to be very focused on building more consistent and sustainable profitability. Healthy revenue growth continues and with appropriate supportive expense growth, operating leverage is strong. With credit impacts moderating in line with our expectations, a significant improvement is evident in our pretax income results. In short, our momentum continues with more to come. So with that, Walt, how about running through some of the financial highlights. Walter Phifer: Thanks, BJ. Good morning, everyone. Diving into the quarter on Page 8. Our Q3 earnings per share of $0.55 increased 8% linked quarter and almost doubled compared to Q3 of 2024. This outstanding growth was aided by the 7% linked quarter and 24% versus prior year increase in core operating leverage that BJ just highlighted as well as a lower quarterly provision expense. The 7% quarter-over-quarter improvement in core operating leverage was driven by a 6% quarter-over-quarter increase in net interest income, aided by $551 million or 5% linked quarter in loan balance growth and 5 basis points of margin expansion to 3.33%. On the growth front, our small business and commercial banking lenders as well as our loan support teams continue to generate high-caliber loans while replenishing their pipelines. Our deposits business continues to fund the bank in an extremely competitive market. As BJ mentioned, we continue to be encouraged by the momentum in our 2 focused initiatives of growing noninterest-bearing business checking balances and originating small dollar SBA 7(a) loans via our Live Oak Express product. Quarterly provision expense was $22 million and was lower for the fourth consecutive quarter. Our reserve and resulting quarterly provision expense continue to be driven by strong loan growth and our navigation of the small business credit cycle that we have discussed over the past few quarters. Lastly, on the capital front, we successfully raised $100 million with our inaugural preferred offering, generating quality Tier 1 growth capital to support our growth aspirations. Next quarter, we will have another earnings and capital accretive event with Apiture agree to sale, which will result in a $24 million onetime gain while also removing approximately $6 million of annual pass-through losses from our income statement. Page 9 provides a financial snapshot of our Q3 earnings results on the top left with quarter-over-quarter demonstrated improvement across all major profitability and growth metrics highlighted on the bottom left. I'd like to briefly highlight 2 other items on this page. The first being the bottom right corner of this slide, where we capture notable noncore items each quarter as they arise. Specifically, in Q3 of 2025, these items collectively had an estimated negative impact of approximately $1.5 million on our reported earnings. The second item is the tax expense line. Similar to last year, we had seasonal increase in the third quarter effective tax rate that was driven by compensation-related accounting treatment in the tax calculation. Slide 10 highlights our loan originations by vertical and business units. A few things to note here. As shown on the right-hand side of the page, our Q3 2025 loan originations totaled approximately $1.65 billion, an 8% increase linked quarter, driven primarily by our Commercial Banking segment. Production momentum in 2025 remains strong across our spectrum of verticals with approximately 2/3 of our verticals originating more production year-to-date in 2025 than they did in year-to-date 2024. Lastly, the bottom right of the page highlights the linked quarter-over-quarter and year-over-year loan portfolio growth trends by lending segment, with both segments providing double-digit year-over-year growth rates. Slide 11 illustrates quarter-over-quarter loan and deposit balance growth, highlighting the strong consistent growth trends on both fronts. Our total loan portfolio grew approximately 5% linked quarter with year-over-year loan balances increasing approximately 17%, outstanding durable growth that you don't often see across the current industry landscape. The approximately 3% linked quarter increase in customer deposits was consistent with Q2 2024's customer deposit growth rate, while our year-over-year customer deposit growth rate was an outstanding 20%. As you can see in the second half of 2024's growth rates on the bottom of the page, we typically experience a slower seasonal growth rate in the second half of the year on the customer deposit front and expect the second half of 2025 to be no different. Year-to-date growth in customer deposits has primarily been driven by our consumer and business savings products as we remain competitively priced in the market to support our aforementioned loan growth and via our business checking growth, which we highlight on our growth trends on Page 12. We saw a nice ramp in business checking in Q3 of 2025, with checking balances increasing 26% linked quarter to $363 million. Our total low-cost deposits, including noninterest-bearing checking balances as well as low-cost collateral construction and loan reserve accounts, now totals approximately 4% of our total deposit basis, a 2% -- or 2x increase year-over-year. As BJ highlighted, adding noninterest-bearing deposits to our primarily competitively market priced customer deposits and wholesale deposit portfolio is substantially accretive to our earnings profile. These deposits not only enhance our margin efficiency, but also strengthen the overall resilience of our funding mix with deeper customer relationships. As such, they remain a key strategic priority for us as we head into 2026 and beyond. Net interest income and margin trends are highlighted on Slide 13. In Q2 of 2025 -- sorry, Q3 of 2025, we saw our quarterly net interest income increased $6 million or 6% linked quarter and $23 million or 19% compared to Q3 of 2024. Our net interest margin also expanded another 5 basis points to 3.33%, our third consecutive quarter of margin expansion, aided both by growth as well as continued deposit repricing as highlighted on the bottom of the table in the middle of the page. As the Fed cut in September, and we expect more cuts to come in the very near future, perhaps as early as next week, here is a general reminder of how this impacts our net interest income and margin trajectory. The first is we have an asset-sensitive balance sheet with approximately 2/3 of our loans being variable and tied to either SOFR or prime. The second is our funding base is predominantly in liquid savings accounts, short-term customer CDs and broker deposits. Since the Fed began easing last December, our blended savings cumulative downward beta is approximately 44%. This is largely a result of us not pricing to the top of the market while the Fed was tightening. And as such, we have blended the top of the market reprice down towards us through 2025. Ultimately, we monitor both deposit market and funding levels closely, ensuring that we continue to support our loan growth appropriately while also adjusting pricing to support margin aspirations and profitability. Our current outlook is that the Fed cuts 25 basis points in October and December of 2025, followed by 3 additional 25 basis point cuts in March, June and September of 2026. Yet Fed forecasts vary and as such, we so do net interest income and margin outlooks. We evaluate a gauntlet of forward-looking scenarios to assess the potential tone of net interest income and margin outcomes. And generally speaking, larger or more frequent Fed cuts provide more margin compression in the near term, while flat interest rates less cuts and less frequent cuts provide more margin opportunity. Ultimately, assuming that the deposit market is rational and reprices appropriately, our margin typically recovers relatively quickly due to the short-term nature of our funding base. Ultimately, what really matters, however, is not simply the margin but the net interest income generated. And our net interest income performance is more resilient due to our strong growth. To drive this point home, over the last 6 years, 24 out of 26 quarters experienced stable or growth in net interest income despite our net interest margin peaking at 4% and valuing at 2.56% over the same time frame. Moving to guaranteed loan sale trends on Slide 14. The secondary market continues to provide consistent earnings while acting as a good source of recycled liquidity. We added some depth to this page this quarter to provide insight to our gain on sale composition and to highlight the accretive contribution we are already realizing from our small loan SBA origination efforts. Our quarterly gain on sale remains primarily driven by our typical larger SBA loan sales, which have provided a consistent $13 million to $15 million a quarter of gain on sale at an average premium in the 106 to 107 range. We've now had 2 consecutive quarters of USDA loan sales, which is encouraging, yet ultimately, the timing and execution of these sales is driven by the completion of the underlying projects, rate environment and investor demand. Similar to my comments on growing checking balances, our focus on ramping our Live Oak Express origination is providing immediate results with our small loan SBA sales providing for $12 million in year-to-date gain on sale, approximately 4x or $9 million more compared to year-to-date 2024, while also providing for approximately 20% of our year-to-date total gain on sale compared to only 8% in year-to-date 2024. To help ramp this product going forward, we remain focused on both filling the top of the funnel through partnerships and lender referrals while also leveraging AI to make the origination and servicing more efficient for our people and our customers. Expense trends are detailed on Slide 15. Q3 reported noninterest expense of $87 million decreased approximately $2 million or approximately 2% linked quarter. We remain focused on supporting our growth via good costs while also working to improve efficiency. This renewed focus on growing revenues faster than expenses and improving operating leverage really began back in the third quarter of 2023. You can see the results of that focus on the right-hand side of this page with loan production, core operating leverage and revenue growth, all significantly outweighing our expense growth as compared to the third quarter of -- comparing the third quarter of 2025 to the third quarter of 2023. We are keenly focused on improving both our customer and employee experiences, embracing the automation and AI wave across our entire business and enhancing our current technology stack, all with the resulting goal of creating internal and external raving fans, improving efficiency and providing for a solid mature foundation that will support our growth. Turning to credit. Slide 16 provides insight into the portfolio with a view of key credit ratio trends in the table at the top with visualization of over 30-day past dues, nonaccruals and provision trends on the bottom. Our over 30-day past dues remained low for the fourth consecutive quarter with $16 million or 14 basis points of our held-for-investment loan portfolio past due as of September 30. The amount of nonaccrual loans increased to $85 million or 73 basis points of our unguaranteed held for investment loan portfolio in Q3. Nonaccrual balances remain very manageable as our servicing team continues to support SBA customers impacted by the small business credit cycle. Provision expense of $22 million improved in Q3 and was influenced by strong $551 million quarter-over-quarter loan growth, what we often refer to as good provision and portfolio performance. While quarter-over-quarter provision will fluctuate based on growth and portfolio activity, we remain comfortable with our reserves. Last page for me on capital -- our capital strength was bolstered in Q3 of 2025 with our preferred issuance as shown on Page 17. The $100 million issuance added approximately 90 basis points of total risk-based capital and approximately 70 basis points of Tier 1 leverage, excellent Tier 1 growth capital. Our equity method investment in Apiture will provide for an additional capital accretive event in Q4 with Apiture's recent sale closing in October. In addition, the removal of approximately $6 million of pass-through losses going forward will largely help fund the annual preferred dividends on the preferred issuance. Thank you again for joining this morning. And with that, I'll turn it back over to BJ for his closing comments before we head to Q&A. William C. (BJ) Losch III: Great. Thanks, Walt. Momentum is building. We're focused on the biggest and best opportunities, and we're modernizing our activities to take full advantage of the AI-driven possibilities that are right in front of us. So with a big thank you to all Live Oakers and our customers, let's take some questions. Operator: [Operator Instructions] Your first question is from Dave Rochester from Cantor. David Rochester: Can you just -- just to start with credit. Can you give a little more color around the increase in the NPAs this quarter and talk about the new default trends as well? And then just on charge-offs, I would imagine you're expecting those to decline, but if there's any reason why those remain elevated, I would love to hear. Michael Cairns: Yes. This is Mike Cairns, Chief Credit Officer. Happy to take that. So I look at this quarter as just a continuation of where we were last quarter. Fortunately, not all credit metrics always move in a perfectly linear way. So we saw some nonaccrual balances tick up a little bit, but still a very manageable balance there and not -- this all kind of came from our SBA portfolio. Nothing caught us by surprise. These are loans that we've been tracking and are related to similar the stress that the small business owners have faced over the last few quarters, which we've talked about quite a bit. So I think about nonaccruals as far as balances, not all nonaccruals are created equally. So when you look at default count, it's also up as well, but not in a dramatic way. The other things I look at are past dues. So with an SBA portfolio as large as ours, having 14 basis points worth of past dues is something I'm incredibly proud of and how our team has managed that. To me, that's an indication that our servicing team is on the portfolio and taking care of it. Reserve levels came down. So not all nonaccruals turned into charge-offs to your question. And so while that has ticked down, we still have really healthy coverage on the portfolio. I feel good about where we are in reserves. And so there's a lot of economic uncertainty out there that has been discussed by other banks. And what we control is -- or what we focus on is what we can control, sound underwriting, which we continue to have. I talked about that last quarter, and we continue to focus on not stretching on credit quality, which we have not done and heavily servicing the portfolio. So for example, we are now going through our annual risk rate process for the entire SBA portfolio, and we will have a servicing team member and a credit officer assessing the risk rate for every meaningful balance within that portfolio. And that's above and beyond our day-to-day servicing that we do, which is interacting with our customers, collecting financial information, spreading that, talking through that with our customers and doing site visits. So a lot of hands and eyes on the portfolio. And I think as I sit here today, I think what we're finding is that while there has historically been a little bit of a cycle in the SBA industry, our small business owners have remained relatively resilient in the face of that. David Rochester: Appreciate that. And then how are you thinking about the potential for an extended government shutdown and what that can do for -- on both the loan side in terms of loan growth and then credit. And when do things start to potentially get rough? What are you guys worried about on this front? Walter Phifer: Hey, Dave, this is Walter Phifer, CFO. I'll start on the loan growth side and secondary market side and then Michael can jump in on credit. Unfortunately, government shutdowns is something we've had practice with over the years. So we have a pretty extensive playbook that we pull out when these things happen. And the first and pretty much kind of the initial action that we take any time there's a potential for a shutdown is we look at our pipeline, especially our SBA loans and start to pull PLPs to reserve that SBA funding. Coming into this shutdown, we've -- our team really pushed in September. We had about $900 million of PLPs pulled so that we can continue to operate business as usual and get that capital out to the small businesses. So from a growth standpoint, that feels really good. Now obviously, the longer the shutdown, you kind of get in through the end of the quarter. The PLPs there, a bunch of run out and then Michael and his team will assess bridge loans as appropriate. The other big impact for us is on the secondary markets. Now we typically don't sell any of our loans in the first 30 to 45 days of any given quarter. So right now, we haven't seen an impact at all of the current shutdown. Once the shutdown ends, we -- the secondary market opens up pretty quickly and we get our loan sales out, we settle. I'd say right now, the shutdown extended past Thanksgiving. That may impact us here in the near term in the Q4 in terms of secondary market sale execution. But once the market opens, we get back out there and we'd catch up later in the quarter or going into Q1 of next year. David Rochester: Appreciate all the color there. Maybe just one last one, if I could. Just switching gears to the AI enhancements you've been talking about in terms of processing times and whatnot. Can you just quantify what those benefits could be? And then it sounds like you guys just overall look very favorably at what AI can do to the expense base and how you can potentially keep that more stable. If you could just talk about that a little bit, that would be great. Michael Cairns: Sure. The history of Live Oak and the gentleman sitting next to me is one of innovation and looking at what's coming down the pike in terms of technology, technology enhancements and the art of the possible. And AI, we think, could be bigger than any of the meaningful step changes in technological advancement from the Internet to cloud computing. They were big. We think AI is even bigger. And so what we're doing is we're spending a significant amount of time educating our people on all the tools available. So developers are all using cursor and understanding how to code in AI. But the rest of our organization is learning to use prompts and build agents for specific processes. And we have people in our insurance group that are literally building their own agents to automate a lot of the follow-up that we have to do with insurance companies to ensure that our borrowers have the appropriate insurance. And that's being done at an individual level, not just an institutional level. And then Renato Derraik and his technology team are way out in front of what a lot of others are doing, and we're building significant Agentic AI solutions, both in-house and with partners to drive across the company. And I think a unique opportunity that we have at Live Oak is that we are growing so fast. I think there's a lot of both excitement and trepidation about what AI might do and how that impacts the employee base and what that means for them. And I think because we have so much growth opportunity over the next several years that what that will mean is AI will help the productivity of our people over time and maybe we have to grow our employee base and our expense base a lot less to generate the same level of revenue as opposed to maybe some others, particularly in our industry that aren't seeing nearly as much top line growth and have to use AI to reduce cost. And so I think our operating leverage because of our use of AI could exponentially grow our profitability while also making our -- make it easier for our people to do business, have more capacity to serve customers and make the customer experience far better. So the world of opportunity is endless out there, and we're already working on capturing a lot of it. I know I've talked a long time, but very excited about this. I did mention we're doing a lot of piloting, particularly around our loan origination platform, starting with our small dollar loans and looking at a platform that is completely AI-driven and incredibly, incredibly easy to use all the way from the lender back to servicing and operations. And so a little bit more to come on that, but that's just one example where we're already ahead and putting major things in practice that are going to help us over the long term. David Rochester: Sounds like that will be a pretty solid competitive advantage for you guys. Operator: Your next question is from Tim Switzer from KBW. Timothy Switzer: First question I have is on the trajectory for the margin. We're reentering the rate cut cycle. And I think you guys are long-term beneficiaries from rate cuts as long as assuming we get a steeper yield curve. But assuming we get 1 or 2 more in the back half of this year and maybe another one next year, how does that impact the near-term NIM? And then maybe what's the time line for when we start to see it rebound and inflect back higher? Walter Phifer: Hey, Tim, this is Walt. I'll jump in on that one. I think you got to leverage a lot of the comments I made kind of earlier. I think if you look at kind of the models you see out there, I think they were perfect coming into this before there's an October cut. Now there's an October cut, so you have to kind of flush that through. But from a margin specifically, being an asset bank, you see some margin variation with -- and you take that plus our growth, it limits what you do in terms of quickly repricing deposits. We tend to take the approach of we see where the market goes and then we slot ourselves appropriately to make sure that we can continue to fund that growth, but obviously help with profitability from kind of long -- as you think about when it recovers, I mean, I think if you look at the past few years and any time we've had the Fed ease, it's pretty quickly, right? And I think you can see even on the page on 13, kind of in the middle of that page, you saw the same thing where NIM compressed and then it recovered pretty much next quarter, start to grow again and got back there within a year. And that's really a testament to, one, our deposit team as well as our treasury team, but as well as our kind of our short-term funding nature. So most of our CDs and our brokered deposits are within a year in terms of near kind of terms. So it recovers pretty quickly. But again, as I mentioned, I kind of reorient you to net interest income and growth, right? BJ always has this saying that you can't spend margin, that kind of always stuck with me. And at 3.30% margin -- 3.33% margin is pretty healthy. And if you can grow your net interest income quarter-over-quarter despite that margin kind of variation, that's a fantastic story in my mind. So we kind of think about that margin but also think about on the net interest income side. Timothy Switzer: Got you. That was very helpful. And I also want to ask about kind of the competition you're seeing broadly in the SBA space with, I guess, the government shutdowns impacting things. You obviously have the credit cycle that seems to be hitting some of your competitors harder than you and all the rule changes that were implemented, I guess, almost 2 quarters ago. So have you seen easing competition at all? And has that created some opportunities for you? William C. (BJ) Losch III: Yes. Tim, this is BJ. The way I would describe it is this is what we do. This is how we grew up, and we know the SBA market, we think, better than anybody. And we've seen tons of things. We've seen SOP changes. We've seen government shutdowns. We've seen nonbank lenders come into the market. We've seen nonbank lenders go out of the market. We've seen big banks try to do SBA. We've seen them pull out of SBA. All the while, all we're doing is growing the number of verticals and the number of customers that we serve through the SBA. So we don't believe that we have a peer in SBA lending. We will see different pockets of competition in different verticals and some competitors are better than others in those verticals. But by and large, we actually just control what we can control in terms of making ourselves better all the time every day. And so I think, obviously, it's showing up in our results and in our numbers, and we'll continue to do that. Timothy Switzer: Got it. And then the last question I have is, it seems like previously most of your commentary around the credit performance was that it was pretty broad-based and more related to certain vintages rather than industries. But now that we're a little bit longer time for the kind of the impact of tariffs and everything else going on, have you seen any industries that are maybe struggling or under a little bit more pressure than others? William C. (BJ) Losch III: Yes. I think, Tim, on the tariff side, really very little, I'd say. It's a little bit more, yes, the rise in rates and the vintages from '21 and '22 showed some significant stress. I think where we see more stress than not -- and by the way, it's not broad-based across all of our verticals. It's a handful is where they don't have as much pricing power, yet their cost of goods sold are going up. And so the struggle of trying to just maintain profitability, and that's where we've seen a little bit of stress. But as Michael kind of talked about, there isn't anything that is surprising us at this point. We kind of know where that tension is. And everything is kind of performing relative to our expectations. Operator: Your next question is from David Feaster from Raymond James. David Feaster: I wanted to talk about the kind of the credit and tech side in one sense. You talked about maintaining strong underwriting and that you guys are going to be going through the risk weighting, updating some of those. I'm just curious, given the broader uncertainty and pressures that we're seeing, again, you talked about the tariffs and all these different things. Have you adjusted underwriting standards or your criteria at all? And then using technology and AI, is there -- we talked about the growth side and improving profitability, but is there opportunities to use tech or AI or whatever it may be to help underwriting or earlier credit identification and just kind of help mitigate the credit risk? William C. (BJ) Losch III: Yes. Hey, David, I'll start. Michael, I'm sure will jump in. On underwriting standards, to be pretty consistent with our customers so they understand kind of -- and our lenders so that they understand what we're interested in and what we're not. With that said, though, there will be times when we'll modify the credit box, let's say, for instance, we'll say we really want to require direct management experience or direct operating experience in a certain vertical if we're going to end credit in that vertical. That's an example of how we might "tighten" underwriting is to make sure that we have borrowers that are going to be able to operate their businesses successfully. So we're constantly tweaking that across our 40 verticals, and we've always done that. And I think that, that will continue. In terms of AI, absolutely. So for instance, one of the things that we're looking at in pilot from a new loan origination and servicing platform is the ability to actually ingest documents and have them read by AI and started to do spreads and create a credit memo. So imagine we've got all this documentation from an HVAC company. And AI is ingesting all this information specifically on this HVAC customer in a certain market. But at the same time, it's going out and using Copilot or ChatGPT to actually build a business analysis around what that market looks like, what the demand in the market looks like, what the overall industry doing and how it's performing, how that looks relative to the financials that we're ingesting, how that looks like relative to our existing HVAC or service contractor portfolio that we have in credit. That's what we're piloting. Those are the types of things that we're looking at in terms of using AI. So it doesn't replace the human aspect of reviewing all that. But in terms of streamlining the ability to analyze, do data entry, ingest information, do competitive analysis and understand trends, it's going to be incredibly impactful for our ability to get loans closed, approved, not approved, and it's just going to make us a lot better and give customer a lot better experience. David Feaster: Okay. That's helpful. And then I was hoping you could maybe elaborate a bit on the government shutdown and kind of how all this works. I appreciate your commentary on this already. But it sounds like assuming that this gets figured out pretty quickly that you think that you're still going to be able to kind of sustain this pace of organic growth quarter-over-quarter. I mean, does that imply that the SBA works through the backlog of loans pretty quickly once we get back up and running? Or do you backfill maybe some of that gap with more conventional lending in the short term? Or just do we -- is it kind of just a timing issue and maybe this quarter might be a little bit weaker and we see some slippage into 2026? Just kind of curious how you think about all -- there's a lot of uncertainty. So just any help on how you think this kind of plays out is helpful. Walter Phifer: Hey, David, it's Walt. I'll start. I think you -- from the SBA's perspective, once the government opens, they're pretty quick to catch up. I don't really see if it wraps up here in the next, call it, week or 2, I really don't see an impact really government shutdown driven on our SBA growth or production for the quarter, largely because of pulling the PLPs towards the end of September, like I mentioned... David Feaster: You might want to explain what pulling the PLP. Walter Phifer: Yes, pulling the PLP. So the SBA has a certain amount that they'll allocate each year in terms of funding. Pulling the PLP reserves, it's -- every SBA loan has an SBA PLP number. It's a reservation for that funding from the SBA program. So you can't originate an SBA loan without that SBA number, that authorization. So -- but you have to be a preferred lender, yes, that's PLP, preferred lender program to find acronym, which I'm known to use quite a bit of acronyms. But yes, from -- David, from kind of growth standpoint, really don't expect much of a change here in the last quarter if they wrap it up here in the next, call it, week or 2. I don't think we'll need to tap into the conventional side. That's always something we do for a much more extended shutdown if we run out of those kind of SBA reservations, and that's where Michael and his team come in, and we'll look at small short-term bridge loans. But overall, this is, like I said, unfortunately, something that we've kind of gotten used to on how to deal. And the other -- last thing I'd say is we have government relations manager that sits up in D.C. Her name is Dawn Thompson, she's fantastic. She lets us know kind of what's going on, as it's going on. So we kind of feel like we are always kind of in the know on how things are progressing, and she's keeping us up to date daily at this point. David Feaster: Okay. That's helpful. And then maybe just kind of staying on some of the exciting parts about the business. You guys -- I wanted to get an update on kind of where we are with the embedded finance build-out, how that's going and the growth potential there? And then just maybe on -- you guys are kind of ahead of the curve on most things. How do you think about -- like just given the market expansion of stable coin, how do you expect to play there? Are there opportunities like just kind of curious what you guys are looking at? Is that a potential opportunity for some deposit growth for you all? Just want to touch on those 2 topics. William C. (BJ) Losch III: Sure. David, it's BJ. So embedded continues to be built out, and we think it's one of our moonshots. So something that really could be meaningful over the next 3 to 5 years. We did do a pivot on how we were building it out earlier in the year. We were doing a lot of in-house building. But again, with AI and what's going on in the marketplace, and we found a partner that was quite a bit ahead of where we were, and we thought that we could leverage that partnership to accelerate our embedded banking growth. So we kind of moved to a different platform, which slowed down our pipeline building in terms of relationships. But we've got one live. We've got several in the hopper. And we think over time, we'll talk about that a little bit more. I'd rather actually put points on the board from an embedded banking perspective and then tell you about it as opposed to tell you it's coming. So that's kind of where we are on embedded. It's still very much on our road map. On stable coins, it's very interesting. We have a new Board member, Patrick McHenry, who you would have seen in press release that when he was in Washington and Congress, he was incredibly involved in the GENIUS Act and what's going on with stablecoins. And so we kind of have an inside view, so to speak, of what's going on, how that could impact things and what -- how people are looking to use it. So we are actively studying how we would participate in stablecoins, and we want to stay ahead of that curve as much as we can as it continues to evolve. Operator: [Operator Instructions] And your next question is from Steve Alexopoulos from TD Cowen. Bill Young: This is Bill Young actually on for Steve. Just to circle on the credit mini cycle topic one more time. In recent quarters, you've spoken of being more aggressive on getting ahead of problem loans and writing them off with more aggressive charge-offs in your book. And we did see a bigger step down in net charge-offs this quarter despite the increase in NPAs. So can you speak to your visibility on kind of the future loss trajectory and your confidence level in terms of how far ahead you've gotten on these issues so far this cycle? Michael Cairns: Yes. I think that -- it's Michael here. I'll take that. So I think in past quarters, we had discussed the fact that we had changed our philosophy on being more proactive in charging off loans. Our special assets team is -- in spirit with the SBA program does everything that we can to help our business -- our borrowers navigate whatever challenges are in front of them. So we will hold on with our customers longer than most and do everything we can to help. In the past, we had held some of those in nonaccrual and not charged them off. We changed our philosophy. We're charging them off when we feel like it's past the point of getting back to repayment quickly. While even though those loans are not charged off, they're not out of mind. We track those loans. We still work with our customers. But -- so I would say that we are right on top of where we should be as far as charge-offs. We'll continue to be proactive in dealing with that and not let them linger on our balance sheet. But I think we're doing a good job there. Bill Young: Okay. Great. And then it was nice to see the return on tangible common equity return back to double digits this quarter. So can you just maybe lay out what you see as kind of a sustainable path for returns can move to in the next year or 2? Michael Cairns: Yes. I think, Billy, what we talk about a lot here is getting to a 15% and 15%, which is consistent and sustainable 15% returns on equity with 15% or more EPS growth a year. And to do that, you've got to make sure that your business model can sustain that kind of performance, which means doing things around the checking portfolio to provide more of a balance for your funding costs. It is always having growth initiatives like Live Oak Express that are going to incrementally move your fee income line up further. It looks like expense discipline and a moderation of credit. All of those things, the senior leadership team talks about constantly is how do we get back not only to those levels, but consistently build a business model that stays at those levels. And so I'm highly confident that we're going to be able to get there in the near term, near medium term, let's say, over the next 18 to 24 months. Bill Young: Great. And my last question, with your pending Apiture sale and some activity among your peers such as MVB with their Victor sale, as you think about Live Oak Ventures and some potential percolation of activity in Silicon Valley, are you beginning to see a bigger opportunity in the near term to harvest some of your investments? Michael Cairns: I'll talk a little bit about ventures, our ventures portfolio specifically, but Chip knows more than any of us about broadly what's going on in ventures. So I'll let him talk about that. But Apiture was one of the 2 largest portfolio companies that we had in our ventures portfolio. And obviously, we just exited with a nice gain there. The other largest that we have is Greenlight Technologies, which is a fantastic company. The other ones are smaller and still in growth mode. And so I think Apiture was probably kind of the largest in terms of harvesting. And the portfolio will probably stay the way it is for quite some time. In terms of -- in terms of exits, I think that we'll continue to incrementally add venture portfolio companies as we continue to look at new technology that we want to use inside the company. That's always been what we use Live Oak Ventures for. And so you'll probably see more of that from us. But Apiture was probably the largest exit that you'll see in a while. Chip, what are you seeing more broadly? James Mahan: Well, I think most of this relates to Canopy. We look at probably 4 companies a day in Canopy. So that gives Live Oak a sneak peek before anybody else if there's anything interesting there that we may want to invest in. I would say that the euphoria of the pricing in that business after COVID has reinstated itself with artificial intelligence. Venture firms are throwing enormous amount of money at these companies where they're fundamentally pre-revenue. And we're trying to take a bit of a circumspect view there because as you know, at Canopy, we raised $1.5 billion from 70 banks and our bank LPs are right there by our side as we look at interesting opportunities on a daily basis. Operator: There are no further questions at this time. I will now hand the call back over to Chairman and CEO, Chip Mahan, for final comments. James Mahan: As always, thanks for attending, and we'll see you in 90 days. Operator: Thank you, ladies and gentlemen. The conference has now ended. Thank you all for joining. You may all disconnect your lines.
Conversation: Operator: Welcome to the Pandox Q3 presentation for 2025. [Operator Instructions] Now I will hand the conference over to Head of IR and Communications, Anders Berg. Please go ahead. Anders Berg: Thank you very much, and we would like to welcome all of you to this presentation of Pandox Interim Report for the third quarter 2025. I'm here together with Liia Nou, our CEO; and Anneli Lindblom, our CFO. And today, we also have the pleasure of having both Aoife Roche, Vice President at STR; and Rasmus Kjellman, CEO at Benchmarking Alliance with us. Aoife and Rasmus will provide a hotel market update on Europe and Nordics, respectively. And STR and Benchmarking Alliance are both leading independent research firms dedicated to the hotel market and the views they express are completely separate from Pandox. And we offer these presentations as a service to Pandox stakeholders. Please note that Aoife and Rasmus's presentations will be held after we have completed our formal earnings presentation, including the Q&A. So we start with Liia and Anneli's business update and financial highlights for the third quarter 2025, followed by the Q&A session. So with that, I hand over to Liia. Liia Nou: Thank you, Anders, and good morning, and welcome, everyone. The hotel market improved in the third quarter, supported by a good event calendar and active leisure travel. Together with the profitable contribution from completed acquisitions, this resulted in increased earnings in both our business segments. In the Lease's business segment, demand improved, but varied across markets. The Nordics developed the best with good rent growth in Sweden, Norway and Denmark, while Finland remained weaker. Overall, development in Germany and the U.K. was stable. Both revenue and profit increased in the Own Operations business segment. Demand improved while comparisons with the corresponding quarter last year eased with a gradual diminishing effect of the UEFA European Championships in Germany in 2024 as the quarter progressed. Total revenues increased by 5%, net operating income increased by 8% and cash earnings increased by 6%. Cash earnings per share increased by 1%, but adjusted for the financial net of SEK 37 million related to the ongoing acquisitions of Dalata Hotel Group, the increase was 7%. In the quarter, several important steps have been taken towards completion of the acquisition of Dalata, which is expected to take place at the beginning of November this year. Financially, we start on a strong base going into the completion of the acquisition. Adjusted for the ongoing acquisition, the loan-to-value was 46.4% compared to 46.7% at the end of the second quarter. This will enable us to also continue to make profitable investments in our existing portfolio. We expect the acquisition to contribute to revenue and NOI already in the fourth quarter with full effect on the revenue and cash earnings for the full year 2026. However, there will be a negative effect from transaction costs accounted for in the fourth quarter. On this page, we summarize some basic facts on Pandox. We are active in Europe, the world's largest hotel and tourism market with strong structural growth drivers. We only invest in hotel properties and create value through active and engaged ownership. We have long-term revenue-based leases with a worth of 14 years and good guaranteed minimum rent levels with skilled operators. Our portfolio has an average valuation yield of 6.24% and a yield spread of 240 basis points. We invest in climate change projects in our portfolio with good returns based on our SBTi validated targets. And we have a strong cash flow and strong financial position, which enable us to drive continuous profitable growth through acquisitions of new properties as well as value-accretive investments in our existing portfolio. We have a strong and well-diversified hotel property portfolio consisting of 162 hotels with approximately 36,000 rooms in 11 countries and 90 cities with a property market value of approximately SEK 76 billion and as I said, a blended average yield of 6.24%. We are divided into 2 mutually supportive and reinforcing business segments, leases and own operations. Leases where we own and lease out our hotel properties stands for 80% of the property market value. And in our own operations, we transform and run hotels in the properties we own and own operations makes up for 20% of our property market value. Our portfolio is upper mid-market hotels with mostly domestic regional demand, which is the backbone of the hotel market, regardless of which phase the hotel market cycle is in. We have one of the strongest networks of brands and partners in the hotel property industry, which ensures efficient operations and revenue management, which maximize cash flow and property values and continuous flow of business opportunities. And also importantly, a relatively large part of the investment in leases is shared with the tenant, which lowers our risk. I will later in this presentation, share some data on what the portfolio will look like after the acquisition of Dalata as well. Our business is to own, improve and lease hotel properties to strong hotel operators under long-term revenue-based leases. We do this through 3 principal value activities, property management, property development and portfolio optimization. Our ultimate goal is value creation, which we achieved through distinctive activities in our business segments, leases and own operations. Leases build upon long-term revenue-based leases with skilled operators, which share risk and upside and have joint incentives to improve the hotel product. And in own operations, an important tool for acquiring, repositioning and transforming hotels where we also have the optionality, which is -- where also the optionality is important for us. We can sign new leases, we can divest the property or keep it in the segment as long as it's the best option from a value perspective. Here, we have compounded annual growth rates for the markets we are currently active in. This is based on market data from STR over the period 2016 to 2025 year-to-date. Against them, we also plotted the portfolio market value as of 30th of September. Obviously, our portfolio has changed quite a lot over this period, but it shows our current exposure to different markets against the historical growth patterns. As you can see, Norway has had the highest growth with 5.3% and Finland, the lowest by 1.1%. Growth in our largest markets, U.K., Germany and Sweden has ranged between 3.3% and 1.2%. And these growth numbers are not adjusted for the pandemic, they are as is. The numbers on the map are the rolling 12-month RevPAR in local currency, just to give you a feeling for the current absolute differences between markets. Here, we would like to illustrate a few different yield spreads as an indication of our value creation over time. Starting from the bottom, we have the average cost of debt, followed by the blended yield on our portfolio, both at the end of the period and in this case, it's 30th of September. The next 2 boxes are the average yield on investment. The first one is unadjusted for the 2020 drop during the pandemic, while the second one excludes it. The underlying assumptions are outlined on the right-hand side of the page, and the period is 10 years 2015 to 2025, for which we have aggregated investments, net of divestments and the incremental increase in net operating income. We have then divided the aggregate incremental increase in NOI by investments to derive at an average yearly yield or return over the period, and it ranges from 7.5% to 11.5% depending if you adjust for the pandemic year. The yield spread range from already healthy 240 basis points to 780 basis points. Capital allocation is at the heart of what we do. Our focus is the expected and actual return, which is a product of many things rather than the property's location in a certain country or city. We evaluate each hotel property on an ongoing basis to ensure that each hotel property has an attractive yield potential, and we also analyze the effects on the property portfolio as a whole. We have an active acquisition strategy based on deep industry know-how, a long-term perspective and the ability to act freely throughout the hotel value chain. Over time, we are net buyers. At the same time, divestments is an important tool to free up capital for acquisitions and investments with a higher return potential. In the third quarter, we made 2 smaller divestments and our expectation is that we will be more active on the divestments in 2026, particularly in the Nordics. Here, we have a breakdown of the performance for a selection of countries, regions and cities versus 2024. You've seen this before. We show average daily rate, ADR on the vertical axis and occupancy on the horizontal axis. Thus [indiscernible] is a point corresponding to 2024 on both ADR and occupancy. In the boxes, we indicate how much higher or lower RevPAR is compared with the corresponding period 2024. Year-to-date, RevPAR growth has been mixed across our markets. Occupancy has been stable or growing in most markets, while average price have been more varied. In terms of RevPAR, the greatest relative improvement in the first 9 months took place in the Nordic markets with Norway as a leader and Sweden gradually picking up the pace. Oslo and Copenhagen were strong city markets. However, several important markets for Pandox saw only modest growth or declined such as Germany, Brussels and U.K. regional. Aoife Roche from STR and Rasmus Kjellman from Benchmark Alliance will talk more about the underlying trends in the hotel market later in this call. As we now move closer to finalizing the acquisition of Dalata, we can share more details on the financial effects of it. In short, the end game is 31 investment properties with long-term based leases with an estimated market value of SEK 16.7 billion, which will be added to the business segment leases with a net initial yield estimated to be 6.95%. Rent is estimated to be SEK 1.2 billion per year with a profitability in line with our existing lease agreements in the U.K. and Ireland. Until the divestment to Scandic can be completed, the hotel operations is reported as profit from discontinued operations with no effect on own operations. No significant effect on earnings for Pandox is expected to be reported under profit from discontinued operations. The balance sheet items, excluding the properties and related items are reported as assets and liabilities held for sale. There are several ways to think about this transaction from a value perspective. Here, we illustrate the different value components in the transaction, starting from the left from the purchase value, adding existing net debt in the target, adding estimated transaction cost and thereby driving at an enterprise value, then taking into account the divestment of Scandic for the operating platform and leased assets, adding value for assets under construction and then driving at an implied yield for [indiscernible] properties, which we intend to keep of 8.4%. This compared to the estimated market value for the same 31 investment properties with long-term revenue-based leases with an initial yield of 6.95% or a market value of SEK 16.7 billion when all steps have been completed in the transaction. The value is based on an estimated rental income of SEK 1.2 billion with a similar NOI as in our other leases in the U.K. and Ireland and an estimated average weighted yield of 6.95%. Compared, as I said, with an implied yield on the acquired properties of some 8.4%, we estimate tentatively a value uplift of some SEK 3 billion. Here's the tentative time line of the main remaining steps in the transactions. The key upcoming event is the court hearing in Ireland on the 29th of October, where the scheme hopefully will be sanctioned. This will allow us to take the final steps toward closing of the transactions, which we expect to take place early November 2025. And here, we mapped out the 31 investment properties from Dalata, which we will add to the business segment leases in the fourth quarter. We apologize in advance if some of the cities have been marked out wrongly. 21 of the properties are located in Ireland and 10 in the U.K. Dublin and London are the biggest cities markets with 11 and 5 hotel properties, respectively. And all hotels are well established with leading commercial positions in the markets. And this is what our portfolio in the U.K. and Ireland will look like, including Dalata. In total, it will include 63 hotels, of which 12 in Dublin and 11 in London. In number of rooms, the U.K. will account for 20% and Ireland, 12%. We thus increase our exposure to Ireland, in particular, but also to the U.K. market. In terms of destinations, our exposure will increase somewhat towards international destinations and decrease somewhat towards -- from regional destinations. And with that, I'd like to hand over to Anneli Lindblom, our CFO. Anneli Lindblom: Thank you, Liia. So good morning, everyone. In the third quarter, revenue and group net operating income increased by 5% and 8%, respectively, driven by acquisitions and improving demand in several Nordic markets. Own operation also improved, supported by acquisition and gradually easier comps due to the European Championship in football in Germany in June, July last year. Cash earnings and profit before change in value increased by 6% and 4%, respectively. Adjusted for financial cost of SEK 37 million related to the acquisition of Dalata, cash earnings increased by 12%. With the same adjustment, cash earnings per share increased by 7%. Currency was negative also in the third quarter. To reduce the currency exposure in foreign investments, Pandox's aim is to finance the investment in local currency. Equity is normally not hedged as Pandox' strategy is to have a long investment perspective. Currency exposures are largely in form of currency translation effects. In the third quarter, currency had a negative impact on both earnings and property values. As you know, we have the main part of our hotel properties outside Sweden and denominated in foreign currencies. On this slide, we show the change in the main valuation parameters for the total property portfolio year-to-date. And please remember that investment properties are recognized at fair value. According to IFRS, unrealized changes in value for operating properties are only reported for information purpose and is included in our EPRA NRV. For the first 9 months, the total unrealized changes in value were a positive SEK 284 million, driven by lower yields. As I said earlier, changes in currency had a negative impact on the balance sheet items for the period with a decline in property values of approximately minus SEK 3.1 billion in the period. On the 30th September, we finally closed the acquisition of Elite Hotel Frost in Kiruna with a transaction value of SEK 347 million. We also divested 2 hotel properties for a total value of SEK 67 million. End of period, the average valuation yield for investment properties was unchanged at 6.09%. And for operating properties, it decreased by 4 basis points to 6.84%. The blended yield decreased 1 basis point to 6.24%. And here, we have the average yield, the average interest on debt and EPRA NRV per share quarterly. In the period, growth of the EPRA NAV was a negative 2% measured on an annual basis adjusted for paid dividend and proceeds from the new shares. Our LTV at the end of the quarter amounted to 52%. The increase is mainly explained by the acquisition of shares in Dalata done during Q3, which are not part of the LTV definition on the asset side. Adjusted for the ongoing acquisition of Dalata, loan-to-value was 46.4%, which puts us firmly on the lower end of our range -- our policy range and provides a strong foundation for the completion of the transaction. The ICR on a rolling 12-month basis was 2.7x on a sequential basis and only marginally affected by the ongoing acquisition. Cash and credit facilities amounted to SEK 2.5 billion. And on top of that, we have unencumbered assets with a value of some SEK 900 billion as an untapped reserve. During the quarter, the constructive trend in our financing market continued. In the third quarter, we refinanced loans of SEK 2.9 billion, which makes it close to SEK 7 billion so far this year. End of quarter, sustainability-linked loans, including green loans accounted for more than half of total outstanding loans. Looking ahead, we have SEK 4.8 billion on debt maturing within 1 year. And our bank relations are strong and expanding across our markets. We have ongoing discussions on future financing and refinancing. There is a strong appetite among not only the Nordic banks to finance our hotel properties. So it's a really good bank market at the moment. 53% of the net debt is hedged, which is the lowest level since the first quarter 2023. And with that, I hand back to you, Liia. Liia Nou: Thank you, Anneli. We have said it before, the hotel market remains resilient, supported by strong underlying structural growth drivers. For the fourth quarter, we expect a stable hotel market. We expect a normal seasonality with slower demand from mid-December to mid-January. We expect positive contribution from already completed acquisition and repositionings and subject to completion of the acquisition of Dalata in early November to recognize both revenue and cost in part of the fourth quarter. However, there will be a sizable negative earnings impact due to the accounting of one-off costs relating to the acquisition. For example, the majority of transaction costs, which will be part of the enterprise value will be accounted for in the P&L in Q4. For 2026, we expect the acquisition to contribute substantially to both NOI and cash earnings. And we look forward to the court hearing for sanction of the scheme on the 29th of October and to start working together with Dalata and Scandic to complete the transaction in the best possible way. We'll now move over to the Q&A. And operator, we are ready for questions, and please don't forget to hand back the call to us afterwards after our external speakers' presentation. Operator: [Operator Instructions] The next question comes from Andres Toome from Green Street. Andres Toome: Just a few questions from me, please. Firstly, just wondering on leisure demand and especially in Sweden, quite a bit of improvement. Do you see sort of the monetary and fiscal stimulus that is coming in Sweden, helping consumer confidence and internal demand? Would you say that's the reason? Or is it more to do with just sort of not so tough comps last year? Liia Nou: I think it's a bit of both. There is still some hesitation in the sort of the overall market, but you see some easing. And we have, as I said, a very strong summer. So I think it's a bit of both actually. International inbound traffic coming in and especially from U.S., it's still continuing. And whereas, again, as I said before, Europe is not traveling so much outside to the U.S. So the net is actually quite positive as well. Andres Toome: Perfect. And then my second point was just around demand in the business segment. There's, of course, quite a lot of sort of measures being brought forward in Europe, especially in the Nordics and Germany in terms of fiscal and defense spending. Would you say that is starting to become visible at all for the hotel sector activity? Or how you perceive that? Liia Nou: I think there's still some way to go. There has been, as I said, especially in Germany, but it's still a little bit awaiting. There will be a gradual effect. But we do expect a stable and sort of stronger second half onwards. Andres Toome: Perfect. And then my last point is just on external growth. Of course, the Dalata acquisition was quite sizable. But how do you sort of see other opportunities out there, both in terms of scale and value creation perspective, which would be sort of akin to what you were able to do with Dalata. Liia Nou: Yes. Well, we are, as you are aware, excited about the Dalata acquisition. We do expect sort of an underlying stable growth, even though it's a sort of modest growth in most of the markets, but still a growth. Then on top of that, the acquisitions and on top of that, our value-creative investments. We do look at capital allocation quite a lot also to enable us to do more value-accretive acquisitions. So we like to keep the wheels spinning quicker and quicker basically. And it's also quite an attractive time for doing both acquisitions. So I think there's a favorable time to both dispose of assets, but also to look at further acquisitions. Andres Toome: And do you think there's a lot of opportunities out there for similar scale as Dalata was? Or would you expect sort of more smaller deals? Liia Nou: Well, for the time being, we have our hands full. I think there is -- in the short term, medium term is probably a little bit more on the smaller side for at least from our perspective, because, again, these larger acquisitions take quite a lot of time to actually consume sort of -- and we have a busy year in front of us also to integrate and to work together with Dalata and Scandic in the best possible way. Andres Toome: And then maybe finally, on the other end of that sort of net external growth picture, you've done some disposals as well. What sort of part of the portfolio do you think you could recycle? And how much do you think you can bring down LTV with that after this Dalata acquisition? Liia Nou: Well, we believe, as I said, it's a favorable time for doing transactions. And I think there's an appetite for assisting high-quality portfolio, especially in the Nordics, which have a potential after recovery after pandemic. So there is -- it allows for giving us liquidity to do more investments and normal acquisitions. I don't want to give a specific number, but we do believe there is a sizable or sort of sizable appetite depending on what type of investment. But we do have -- we do expect some divestments. We will, with our strong cash flow, come back to our target of around 50% quite quickly, but we will also look at capital allocation in a further way. Operator: The next question comes from Staffan Bulow from Nordea. Staffan Bulow: I have a couple of questions. First, on U.K. and Ireland, that would become a rather substantial share of your portfolio if the Dalata acquisition is closed. Could you elaborate what you see on those 2 markets in terms of RevPAR for 2026? And also if there are any structural long-term growth drivers you see on the Dalata geographies which's you perhaps don't see in Germany and Nordics. Liia Nou: Well, I think the 31 investment properties, which we intend to keep are in dynamic markets. I mean, over time, especially Dublin and London are high RevPAR markets with sort of stable, strong underlying demand. So we haven't given any guidance, and I think we'll come back to STR when it comes to the outlook for U.K. and Ireland, but a stable growth. This year, it's been stable, but both from the ADR and occupancy perspective. Staffan Bulow: Okay. That's clear. And a question on the Dalata portfolio. I appreciate that you provided additional information. Could you say something about the financing structure in terms of LTV and cost of debt? Liia Nou: So for the existing Dalata financing? Staffan Bulow: Yes, exactly. Liia Nou: What we have already included in our 2.4 and 2.7 announcement is that we have a sort of a margin of, I think it's 2.25% originally going up to 2.50%. So underlying [indiscernible] a top of 225 as on the margin. And then, of course, there's typically some arrangement fees that are linked to this. But basically very much in line with what we previously had on sort of acquisition debt. And when it comes to LTV, we are -- as we also announced earlier, coming out from 46%, 47%, there will be accounting-wise an increase in LTV, which will peak around 9% or so in the sort of mid-50s. But with the sort of -- with the structure we have, it translates into an LTV, which is close to 52% or so. Anneli Lindblom: Yes. And the number of -- the effect in the LTV will be reported in the coming quarters. The effect From the Dalata acquisition. Staffan Bulow: Perfect. And then one final question from me. There was an article in local media [indiscernible] mentioned that Pandox are looking to sell hotels in the Nordics. Could you perhaps comment the rationale for this? Is it about balance sheet strengthening after the Dalata deal? Or is it rather that you see favorable prices in the Nordics or sort of why would you like to divest in -- specifically in the Nordics? Liia Nou: Yes. As I mentioned just before, I think this is a favorable time for doing transactions. There's a quite good pricing picture and sort of interesting yields. Of course, it allows for getting some liquidity to do more value-creative acquisitions and investments. and also to get quicker back to the 50% LTV, which we are comfortable with. But it's more an opportunistic. It's not a need to do, but it's more a wish to do and to just sort of see whether there is an appetite for a high-quality portfolio in the Nordics with a great potential after the recovery in our market. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments. Anders Berg: It appears we have no written questions. So with that, we thank you for the questions we got on the phone. And then we move over to the external hotel market presentations, and I hand over the word to Aoife for that. Please go ahead. Aoife Roche: Good morning. So looking back on European performance this year requires some perspective. Performance has been lackluster, but that does depend which market class you are looking at and of course, the comps. Uncertainty has bred some indecision and it has slowed things down in the first half of the year, but the summer months give us great confidence that the year will end positively. But first, a helicopter view on global performance. Supply growth is quite stable, showing 1% growth in August. Europe recorded a similar trend with the majority of pipeline in early phase planning and in the in construction stages. Despite trading conditions, the appetite for travel remains positive, albeit somewhat subdued. The economy is vulnerable and volatile and the consumer is quite cautious, and this is duly reflected in the soft demand growth that we have recorded year-to-date August. However, on a more positive note, if we strip out the United States and Mainland China from the global demand numbers, we observed a 2% growth in demand year-to-date. With demand growth somewhat subdued, we observe occupancy growing at a similar pace, and we can see Europe growing here by 1%. Demand stimulation often brings rate elasticity, but buoyant markets and more specifically market classes are propping up this 2% ADR growth we are seeing year-to-date in Europe. If we look at it from a RevPAR perspective, global RevPAR is up 3% or 4.2% when we exclude the U.S. due to those declines in occupancy. So let's move to Europe. Much like the trend globally, the year-on-year change is similar with demand growth in Europe slowing down to single digits with August matching the global demand growth rate of 1%. Occupancy growth is led by countries that perhaps have more availability in terms of their recovery post pandemic and in many cases, more affordability, case in point, Central and Eastern Europe. But if we decouple occupancy from ADR and we look at RevPAR, we observed that occupancy gains don't always drive rate gains. Despite low occupancy gains, the perennial appeal of Southern Europe shows little price resistance for the high-end traveler. Luxury and upper upscale hotels contribute their lion's share of this growth. And of course, the sheer presence of the American traveler is accelerating that ADR. Elsewhere, consumer caution creates a more challenging climate for some, most evident in U.K.'s performance, which is at the end of August, down by 0.2%. And of course, after a rich calendar of events in 2024, Germany and France are seeing some declines in rates. Whereas on the left-hand side of this chart, you see Spain, Portugal, Greece, Ireland and Italy and some emerging countries in Central and Eastern Europe continue to grow their rates, albeit in some cases, quite modestly, where ADRs are possibly touching a ceiling like markets in Greece and Italy. The summer was always going to be a very tough one for Europe when drawing comparisons to a bumper summer of '24. Non-repeat music and sporting events were going to be sorely missed. However, with September's results surprisingly strong, hitting 3.3% growth in RevPAR, year-to-date, Europe is showing a 1.9% growth. This Q3 growth is propped up by events, sporting and music, and of course, international demand. Much of this international demand, however, is being pushed towards Southern Europe with a relatively high proportion of high-end hotels, it is no surprise that these countries such as France, Italy and Greece are capturing much of this international business. But the summer has most definitely pulled Europe up and out of any danger zone. In fact, 73% of all European submarkets grew RevPAR in September. Compare this to March, where only 44% were in positive territory and June 53%. The 2025 trend is tracking closely to 2008 post GFC until August when it broke away and hit that 73% versus 42% in September 2008. This may be the end of our cautionary tail as we go into Q4. Now without those events, we may not have seen such a strong Q3. The Oasis tour was a welcome relief for many U.K. cities and drove strong RevPAR through occupancy and rate. [Compression] also made a comeback with Cardiff and Birmingham almost to capacity. After a tough first half, the U.K. has seen some positive results in Q3 across all classes. Year-to-date September, U.K. gained a positive position versus last year. And now year-to-date, we are posting 0.5% growth on 2024. Germany, on the other hand, endures continued negative growth, down 3% on last year at September year-to-date. With little international demand to speak of and a very cautious domestic consumer, events are forming a crucial part of their recovery, as demonstrated on this slide by the impact of the biennial and NUGA Conference in Cologne and Sibos in Frankfurt. Much like events, groups have a very important part to play for hotels. 20% of all occupied rooms midweek in Europe are by a group traveler. Although less impactful than the transient traveler, the opportunity to drive ADR through group business is an important component to supporting the top and bottom line. Now international demand fully recovered in Europe in 2023, and it played a huge role in Europe's 2024 performance, particularly that of the luxury segment. With consumer caution a recurring theme, we observe one constant. That is that where demand is soft, so too is rate, except in the case of luxury hotels. Out of 500 hotels globally boasting an ADR of over $1,000, the majority of these are in Europe, Italy, France, Spain and Greece making up the vast majority and thereby explaining the ADR performances I showed earlier. Transatlantic routes from the U.S. are holding steady. And although ADR growth may be muted this year for many markets, this is not the case for the U.S. dollar traveler, as you can see in this slide, 6% more expensive in Ireland versus a 1% ADR growth, as an example. Now despite Europe being a more expensive choice for the American traveler, departures to Europe have remained very strong and year-to-date have grown by 5% on last year. From all of the above, we can conclude that trading is stable. Occupancy growth is supported by a supply growth that is diluted somewhat due to delays, cancellations and closures. And at the pan-European level, active pipeline rooms have grown by 2% year-over-year to July, but with growth concentrated in the early phase planning and the in construction phases, final planning phase rooms fell by 28% relative to 2024. This is further compounded by closures for every room that closes, only 3 more open. And although that does sound very positive, pre-COVID, that ratio was 5:1. Looking to the future, supply growth expectations in 2025 and '26 are below historical averages. But the short to medium term looks positive as occupancy stabilizes, supply growth is muted, this allows rates to grow as we go into Q4 and onwards to Q1 2026. Another positive sign comes from our business on the books data, which is showing positive business on the books versus same time last year for all major markets. 2025 was a year that had the economy as a headwind, and it also had comps that were brutal. Germany and U.K. markets were dealt a poor hand as a result. And here, you can see all of our forecast markets as of August 2025, the forecast for full year 2025. On the next slide, a more positive picture for 2026. Although it will have its challenges, we expect more European markets to yield a positive RevPAR performance. New supply or some event offsets may make it more challenging for some. And of course, Amsterdam is yet to take on a new VAT rate, which will undoubtedly impact ADR. So in the short term, we expect muted growth, but as we move to the medium term, normalcy resumes with occupancy and ADR resuming their fair share of contribution to RevPAR growth. To sum up, I'm sure you'll have your own takeaway today, but I will highlight some. Market dynamics differ greatly across the continent and are dependent on a myriad of factors ranging from source markets to demand and supply drivers. Uncertainty has bread in decision throughout the first half of '25, but we do foresee a positive end to the year with supply and demand factors underpinning the outcome as a market class. Thank you so much for your attention, and I am now going to pass over to Rasmus at Benchmarking Alliance. Rasmus Kjellman: Thank you very much, and good morning, everyone. I am Rasmus Kjellman, CEO of Benchmarking Alliance, and I will give you some of the latest numbers for the Nordic hotel industry. This will be a lot of information in about 10 minutes in a very high pace. So if you have any questions afterwards, just reach out to Pandox or to me, and I'll be happy to help. So Benchmarking Alliance is the largest supplier of benchmarking for hotel market data in the Nordics and the Baltics. We strive for the best possible coverage in those markets, and we are based in Stockholm, Sweden. As you see, we started in 2010, and we offer benchmarking for hotels, conference venues, spas and campings. So starting up with the Nordics. Looking at the country-wide averages in the Nordics and the Baltics, we see a positive trend through the entire field. Blue boxes show the year-to-date 2025 RevPAR development compared to last year and the orange boxes show last quarter Q2. And generally, we see an increase in RevPAR in all countries. In Finland, the increase is a bit slower, where we have seen a lot of new supply in some of the local Finnish markets as well as a slower recovery from the Asian markets and the proximity to Russia holding back the recovery. Baltics are continuing to recover after years of lost Russian demand and other negative effects from the war in Ukraine, where travelers are finding their way back to the Baltics, in particular to Riga. Moving to the capitals. Oslo have a strong development with Nor-Shipping, a large maritime industry conference as well as several smaller events driving demand. In Copenhagen, there's an Endo-ERN conference, the [indiscernible], the Copenhagen Rock Festival and Robby Williams events on the same weekend, all driving high demand and record levels in ADRs. Stockholm have difficulties in replacing the extreme demand of last year generated by Taylor Swift and Bruce Springsteen and the [Echo Congress]. Helsinki, May and June good Congress months and the Helsinki Metal Music Festival in August affected positively. Reykjavik bouncing back again after long periods of volcano eruptions last year. Interesting to see that the rest of Icelandic is increasing more than Reykjavik as countryside hotel suffers more from than the Reykjavik hotels. If you go in a bit more of details here, we can see the available rooms, sold rooms, occupancy, ADR and RevPAR in each city. In Stockholm, the lack of Congress and concerts this year mainly had an effect on rates. In Copenhagen, we see an increase mostly through demand and Oslo a really nice development in both rates and demand. In Oslo, [indiscernible] closed and undergoing total renovation by new owners and Helsinki struggles to get prices up even if demand is there. And Reykjavik has supply, but is showing increase in both demand and price. Also Tallinn and Riga show a good development all over. Riga; however, mainly in rates, but also coming from low levels. Just flip the slides here -- so if we're looking for the capital development in 2025, ancillary revenue has increased RevPAR in Stockholm. And in Copenhagen, we see more stable, whereas in Oslo, Helsinki and Reykjavik, it has decreased holding back the RevPAR development. And it's very interesting to look at the total revenue as well as other revenue in the hotels such as food and beverages, meeting events and don't necessarily follow the room department development. So this is why we believe looking at total revenue is very interesting. Diving into the segments. In the Stockholm market, there is some new supply in the luxury segment, holding back the occupancy levels while rates continue to increase. Mid-scale segment supply is due to capacity reopened after renovation and rebranding. And even though demand is there, the lack of events in concert this year can mostly be seen as loss of average rates in all segments, except in luxury. Moving to Oslo, shows a very steady and positive trend in all segments. The mid-scale and budget hotels previously mentioned can be seen in the loss of supply. Moving to Copenhagen. Luxury segment is starting to slow down in demand, but rates are still increasing. The upgoing trend can be seen in all segments, while it's only upscale and mid-scale hotels that can enjoy higher demand as well. Moving to Helsinki. Last of the Nordic capitals. Hotel Maria and Collections adding more supply to the luxury segment. However, the capacity has been utilized well, maybe at a cost of slightly lower rates. Otherwise, only smaller changes in the lower segments. So if we look in even more details to the Swedish market, we cover 36 markets, including all regional cities. And in this graph, each bubble represents the market and the size of the bubble represents the RevPAR. So if we look at the development for these bubbles in the next slide, we see that [indiscernible] is developing its RevPAR very strong. There's a lot of corporate projects in that area as well as active destination marketing from [indiscernible]. In Uppsala, we see Sweden live music conference in January. And left in the bottom with a very weak development or negative development affected by the Northvolt bankruptcy. Moving to the Norway and in the same way, looking at the different markets, Tromso is the Norwegian market with the highest RevPAR. And here is the [indiscernible] and the Midnight Sun has helped those markets a lot. And Oslo is the highest occupancy. So looking at the development for those markets, [indiscernible], very strong with the Ski World Championship in the end of February and beginning of March. Kristiansand had a very strong summer with an increase in the month of July with 25%. And Bodo had a culture capital opening weekend last year in February or [indiscernible] last year in March that was not replaced in any way this year. Moving to Denmark. Copenhagen is maybe not surprisingly, the strongest market in Denmark. And looking at the development for the Danish markets, [indiscernible] has a strong development, very large amount of out of order rooms last year due to renovations that are now back in sale. But in general, a strong development in all the countries -- in all the markets. Moving to Finland. We see Rovaniemi and the Arctic Tourism Santa Clause bringing people from all over the world to Rovaniemi with also seeing increased direct flights to the area. Helsinki is far behind, but of course, it's also a much larger market. Otherwise, most of the Finnish markets range on an ADR of EUR 100 to EUR 110 and an occupancy between 55% and 70%. So looking at the development of those local market, Rovaniemi, together with the largest cities, Helsinki, Espoo and Tampere is the ones increasing in Finland, Pori affected by slower corporate demand as well as Vantaa and Helsinki Airport area is struggling with large supply increase with 2 new hotels opening -- during last year. So as final part, looking into the future bookings. So if we look at the future bookings, 365 days from the 1st of October versus last year, we see a strong increase with future bookings in Stockholm. It's more than 20% up compared to last year. This is the [Eco Congress] coming back in February. We have the EHA Hematology Congress in June, and there is 2 concerts by [indiscernible] in July, bringing up demand. If we look at the Oslo market, the market is up more than 9% with a trade show travel match for the travel industry taking place in January, driving up demand in that period. Looking at Copenhagen, this market is also a very strong development, more than 19% up. We see a very general increase in the future bookings for the rest of this year and beginning and the start of next year. And -- last but not least, Helsinki, 13% up in the future bookings, very positive. In the beginning of 2026, it's maybe a bit pretty slow compared to last year with Congress missing out, but in general, a strong development. So that's a lot of market data in a few minutes. If you have any questions, please reach out to Pandox or to me, and I'm handing the word back to Pandox. Thank you. Anneli Lindblom: Thank you, and thank you for this great comprehensive hotel market update. And thank you all for participating in this call. We really appreciate your time and interest in Pandox. Our year-end report for 2025 will be published on the 5th of February 2026. And now we wish you a nice autumn, and don't forget to stay at our hotels when you're on the road. Thank you so much.
Operator: Hello, and thank you for standing by. Welcome to Valley National Bancorp Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Andrew Jianette. Please go ahead, sir. Andrew Jianette: Good morning, and welcome to Valley's Third Quarter 2025 Earnings Conference Call. I am joined today by CEO, Ira Robbins; and CFO, Travis Lan. Our quarterly earnings release and supporting documents are available at valley.com. Reconciliations of any non-GAAP measures mentioned on the call can be found in today's earnings release. Please also note Slide 2 of our earnings presentation and remember that comments made today may include forward-looking statements about Valley National Bancorp and the banking industry. For more information on these forward-looking statements and associated risk factors, please refer to our SEC filings, including Forms 8-K, 10-Q and 10-K. With that, I'll turn the call over to Ira Robbins. Ira Robbins: Thank you, Andrew. Valley delivered strong results in the third quarter, reporting net income of approximately $163 million or $0.28 per diluted share. This is up from $133 million or $0.22 last quarter and represents our highest level of quarterly profitability since the end of 2022. This performance reflects a significant operating momentum that has been building in our organization. This quarter's results were highlighted by robust core customer deposit growth, continued momentum in net interest income and fee income, disciplined expense control and a meaningful reduction in credit costs. Our balance sheet remains extremely strong, and we have achieved many of our stated profitability goals ahead of schedule, including annualized return on average assets being above 1%. Valley is well positioned in the current environment. In 2024, we enhanced our balance sheet and are now leveraging this strength to improve our profitability and franchise value. Today, I'm thrilled to formally introduce our new commercial and consumer banking leaders who we believe will help accelerate the next phase of our evolution and success. Gino Martocci joined Valley in March as President of Commercial Banking, bringing extensive experience from M&T Bank, where he led national commercial and CRE banking efforts. Gino played a key role in M&T's growth and has already contributed his market knowledge, network and strategic insight to support our commercial franchises further development. In September, Patrick Smith joined as President of the Consumer Banking, following leadership roles at Santander, Capital One and other large financial institutions. Patrick will oversee retail, consumer and small business sectors, drawing on a notable record of growth and execution. Gino and Patrick are already making an incredible impact by enhancing our customer acquisition efforts, talent base and strategic operating model. Their expertise helps position Valley to further leverage our strong foundation and accelerate our strategic initiatives. Before passing the call to Travis, let me highlight a few of the key areas of sustained momentum. First, ongoing growth in core deposits and funding transformation. Over the past 12 months, we've added nearly 110,000 new deposit accounts, which have contributed to nearly 10% core deposit growth. Targeted investments in products, technology and talent, especially in commercial and specialty lines have driven this progress. Consequently, indirect deposits as a percent of total deposits dropped from 18% to 11%, the lowest level since the third quarter of 2022. This has been achieved alongside a 56 basis point reduction in our average cost of deposits since the third quarter of 2024. We continue to actively manage deposit pricing in the back book and expect to benefit from lower deposit costs in the fourth quarter and into 2026. Secondly, noninterest income. Excluding volatile net gains on loans sold, noninterest income has grown at an annual rate of 15% since 2017, 3x faster than publicly traded peers in our size range. We spoke last quarter about our focused efforts with respect to treasury management and tax credit advisory opportunities. These initiatives collectively contribute roughly $3 million of incremental revenue during the third quarter. The success of our treasury management demonstrates our effective combination of technology and talent. The implementation of an upgraded platform following our core conversion 2 years ago, coupled with expanding our expert sales team has resulted in nearly $16 million of incremental deposit service charge revenue on an annualized basis since the third quarter of 2024. Thirdly, the resilience of our credit performance. Consistent with our guidance, we saw a significant reduction in net charge-offs and provisions during the third quarter. We expect to sustain these levels again in the fourth quarter. At the start of 2024, Valley was notably CRE-heavy in a challenging environment. However, differentiated underwriting and credit management have limited aggregate CRE losses to just 57 basis points of average CRE loans over the last 7 quarters. Although 2024 CRE charge-off rates were beyond our internal standards, loss rates have remained far below larger banks, more pessimistic stress test forecast. From a C&I perspective, we continue to focus our growth efforts on traditional small business and middle market opportunities in our well-known geographies and established specialty verticals. As I mentioned last quarter, we have specifically targeted the health care C&I and capital call line areas, given their compelling risk-adjusted return profiles. We've been active in both verticals for some time, and we have never taken a loss on a Valley originated health care C&I or capital call loan. I am extremely proud of our organization's achievements over the past few years, and I'm highly optimistic about our future prospects. The bank continues to demonstrate exceptional momentum with respect to customer growth, talent acquisition and profitability. We have set ambitious goals for ourselves and are confident that continued execution of our strategic initiatives will deliver substantial value to our associates, shareholders and clients. With that, I will turn the call over to Travis to discuss this quarter's financial highlights. After Travis concludes his remarks, Gino, Patrick, Travis, Mark Saeger and I will be available for your questions. Travis Lan: Thank you, Ira. Slide 9 illustrates our continued core customer deposit growth momentum. We gathered about $1 billion of core deposits during the quarter, which enabled us to pay off approximately $700 million of maturing brokered deposits. Brokered deposits now comprise 11% of our total deposit base, representing the lowest level since the third quarter of 2022. Roughly 80% of the quarter's core deposit growth came from commercial clients, reflecting our proactive business development efforts and the continued success of our treasury management sales efforts. The relative stability of average deposit costs during the quarter masked a 7 basis point reduction in spot deposit costs from June 30 to September 30, which positions us well heading into the fourth quarter. Turning to Slide 12. Gross loans decreased modestly on a spot basis due to targeted runoff in transactional CRE and the C&I commodity subsegment, which was acquired from Bank Leumi USA in 2022. Commodities payoffs accelerated during the third quarter, leaving a modest $100 million of C&I loans left in this business line at September 30. CRE loans made to more holistic banking clients increased during the quarter, supported by the conversion of construction projects to permanent financing. Other C&I activity slowed from the second quarter's exceptional pace of growth. Average loans increased 0.5% during the quarter. The pipeline is rebuilt, and we anticipate solid origination activity as the fourth quarter progresses. New origination yields were stable during the quarter at around 6.8%. Average loan yields improved 7 basis points on a linked quarter basis due to the fixed rate asset repricing dynamic that we have previously discussed. As a result, our cumulative loan beta stands at 21% for the current cycle. Slide 15 illustrates the second consecutive quarter of 3% net interest income growth. NIM improved for the sixth consecutive quarter aided by asset repricing and sequential growth in average noninterest deposits. While excess cash held during the quarter weighed on our margin by an estimated 3 basis points, we are on track to achieve our above 3.1% NIM target for the fourth quarter of 2025. We expect that net interest income will grow another 3% sequentially in the fourth quarter. The current interest rate backdrop, combined with anticipated fixed rate asset repricing remains supportive of further NIM expansion in 2026. Noninterest income continued its strong momentum this quarter. Deposit service charges saw continued growth as we expanded the penetration of our commercial client base with our robust treasury management platform. Wealth management was also strong, lifted partially by our tax credit advisory business. We anticipate that fourth quarter fee income will be generally stable within the range of the last 2 quarters. Turning to Slide 18. Adjusted noninterest expenses declined modestly, driven by lower compensation, occupancy and FDIC assessments. These improvements were partially offset by higher third-party spend. Professional fees are expected to remain at this modestly elevated level, but total expenses should remain flat or only marginally higher in the fourth quarter as compared to the third quarter. Our efficiency ratio continues to improve, and we anticipate further progress as we generate additional positive operating leverage in the fourth quarter of 2025 and into 2026. Slide 19 illustrates our asset quality and reserve trends. Nonaccrual loans increased during the quarter, primarily due to the migration of a $35 million construction loan. It was in the 30- to 59-day past due bucket at June 30. We anticipate resolution of this credit with no incremental impact, but from a timing perspective, it necessitated migration to nonaccrual. On a combined basis, total past dues and nonaccrual loans as a percentage of total loans declined 9 basis points from June 30 to September 30. Net charge-offs and loan loss provisions saw meaningful declines during the quarter, consistent with our prior guidance. We foresee general stability in 4Q, implying improved 2025 guidance relative to the range of our prior expectations. Slide 20 emphasizes our cumulative commercial real estate charge-off experience since early 2024, affirming the effectiveness of Valley's distinctive underwriting and credit management practices. Despite the relative challenges of 2024, cumulative losses remained far below the adverse forecast of DFAST eligible banks. Turning to Slide 21. Tangible book value increased as a result of retained earnings and a favorable OCI impact associated with our available-for-sale portfolio. Regulatory capital ratios continue to increase, and we utilized around $12 million of capital to repurchase 1.3 million common shares during the quarter. We remain extremely well capitalized relative to our risk profile and have ample flexibility to support our strategic objectives and sustain the strong momentum that we are experiencing. With that, I will turn the call back to the operator to begin Q&A. Thank you. Operator: [Operator Instructions] Our first question comes from the line of David Smith with Truist Securities. David Smith: Could you speak to the competitive backdrop, just given the decline in C&I loans? I understand some of that was commodities driven and the increase in deposit costs for the quarter on average. I think I understood there was a decline on the spot deposit rate, but just help us unpack what's happening on a competitive basis driving some of those trends and what you -- how you're expecting them to revert in the fourth quarter and the coming year? Travis Lan: Yes. Thanks, David. This is Travis. Maybe I'll start on the deposit cost side, and Ira and Gino can chat a little bit about the competitive environment from a loan perspective. So to your point, spot balance or spot deposit cost declined from $630 million to $930 million by 6 basis points. I'll tell you, quarter-to-date, we're down another 7 basis points from a spot perspective. So when you factor all that together, I think the beta relative to the 25 basis point cut in late September is consistent with what we've modeled. I would just say quarter-to-date, since 9/30, we paid off another $500 million plus of additional brokered at a rate of $450 million. The environment for new deposit relationships remains competitive. We originated $1.4 billion of new deposits this quarter at 2.9%. That compares to $1.8 billion in the second quarter at 2.8%. So the competitive environment for new relationships is still there. I would just say we have continued opportunity on repricing the back book, which we were effective with during the quarter. So I think as we enter the fourth quarter, I mean, deposit costs will come down. And I think there's more opportunity as we head into 2026. Gino Martocci: Thanks, Travis. This is Gino Martocci. As it relates to the competitive landscape, we continue to see very strong demand both in C&I and CRE. There is ample liquidity in the marketplace. Banks are -- and nonbanks are fighting pretty hard for loans. And we have seen some decline in spreads. But our pipeline remains very strong, and we continue to add loans and then add clients. David Smith: Okay. And then just on capital, stock is barely 1x tangible right now, and you've got 11% CET1 and TCE almost 9%. Just with loan growth expectations, about 1% for the next quarter, how are you thinking about the buyback opportunity against conserving capital for longer-term organic growth ambitions? Travis Lan: Yes. I think, look, over the last couple of quarters, we've talked about a near-term CET1 target of around 11%. And the reality is, given our risk profile, we'd be very comfortable in a range below that, call it, 10.50% to 11%. Historically, we've thought about the buyback in the context of repurchasing shares that we issue for incentive purposes. But to your point, I mean, based on the progress that we've made, the outlook that we have and the incredible confidence that we have in investing in ourselves, I do think that the buyback will be an increasing source of capital deployment going forward. Operator: Our next question comes from the line of Feddie Strickland with Hovde Group. Feddie Strickland: Just wanted to ask on the geography of CRE and C&I. I think you've got a majority of C&I outside the Northeast at this point. As you look at your pipeline today, do you expect to continue to have more business coming from outside the Northeast than inside the legacy Northeast footprint? Gino Martocci: So our originations for the quarter and actually for the last year really reflected 1/3, 1/3, 1/3; 1/3 in the Southeast, 1/3 in the Northeast in 1/3 in our specialty businesses. So as it relates to CRE, Florida franchise remains very strong, and we expect to see slightly more originations down there, but it's pretty evenly split amongst the geographies. Ira Robbins: Maybe I'll just add to that, Feddie. I think as you know, we've spent a lot of time investing into the Florida footprint. We went into Florida, I think, back in 2014 with the acquisition of First United Bank. We then acquired a couple of other banks in that footprint. I think in the aggregate, it's about $4 billion to $5 billion of commercial assets that we acquired. Today, we sit with commercial assets that are well north of $15 billion, right? From a loan perspective, it's one of our largest geographies. That's $10 billion of organic growth in just a 10-year window, I think represents really the foundation and footprint that we have in that Florida area, an unbelievable set of lenders and unbelievable set of bankers there and obviously very strong markets. And we continue to really make sure that we're focusing on letting that be a more sizable piece of what our franchise is. So as we think about the growth projections that we've outlined, obviously, as Gino said, we're seeing strong contributions coming from the specialty and coming from the Northeast as well. But we feel really strong and confident in the growth numbers are largely a function of what we're seeing in the Florida footprint as well. Feddie Strickland: Ira, I appreciate that. And just one more for me. I just want to ask on the fee side. How should we think about the capital markets business and the insurance businesses in particular over the next quarter or so? It seems like capital markets has held up pretty well. Insurance maybe have some seasonality. Just within the guide, obviously, how should we think about those businesses? Travis Lan: Yes, I would anticipate general stability for the fourth quarter, general stability in both areas. I think heading into 2026, there is definitely momentum on the capital market side. So just as a reminder, for us, capital markets is 3 businesses. It's our syndications business, our FX desk and our swaps desk. The swap activity tends to be more tied to commercial real estate originations, which have picked up over the last couple of quarters and helped support revenue there. FX has been a long-term growth trend for us as we continue to expand our commercial client base and the folks that utilize that offering. So I think there's good tailwinds definitely on the capital market side. Operator: Our next question comes from the line of Anthony Elian with JPMorgan. Anthony Elian: Could you provide more color on the increase in nonaccrual loans? I know you called out the construction loan that migrated to nonaccrual but no further impacts, but I would love to hear more on the commercial real estate loans that migrated. Mark Saeger: Certainly, yes. Again, this is Mark Saeger, Anthony. The increase primarily driven by the one $35 million loan, while it's in construction bucket, I'd note that it's really a land loan. So really strong value there. The borrowers in the midst of a refinance to take us out. We don't anticipate any issues with that at all on the go forward. The other primary migration into nonaccrual is based off of updated appraisals. What I would note is that 50% of our nonaccrual portfolio is current on payment. So there's just some appraisal valuation and consistent with our [Audio Gap] to go there, but that is a much higher percentage of paying nonaccruals than we've seen in the portfolio in quite some time. Our overall view of the real estate market is we're starting to see definitely positive activity even within the office market in the real estate portfolio. I'd point to the improvement in our criticized assets for the quarter after a stable second quarter, and that improvement really came from approximately 2/3 of payoffs in refinance at par and about 1/3 upgrade. So we're definitely seeing positive movement in the real estate market. Anthony Elian: And then my follow-up, on your commercial real estate concentration fairly well below the 350% level now at 337%. Looking ahead, how low do you think you can take that level? And at some point, would you expect to actually grow CRE balances? Travis Lan: Thanks. This is Travis. So look, I think we are targeting growth in CRE. I think we're looking at low single-digit growth for 2026 and beyond. But as a result of capital growth, that ratio would continue to decline. I mean for us, the next kind of guidepost is 300%. I think you're probably there at the end of '26, early '27 and then continuing to grind lower over time. And again, that's just our own focus on ensuring that we're diversifying the balance sheet. And candidly, when you look at our peer group and the set of peers that are above us from a size perspective, I mean, we do remain somewhat of an outlier. So it's something that we've been focused on. We've made a ton of progress on. But at this point, we expect that CRE balances will stabilize and begin to grow and then allow that capital to build to drive the next leg down in the ratio. Operator: Our next question comes from the line of Manan Gosalia with Morgan Stanley. Manan Gosalia: A question for Gino. Where do you see the biggest white space for Valley? What areas are you most focused on? And which subsegments or geographies do you think you need to invest most in? I recognize that you're focused on health care, C&I and capital call, but maybe if you can talk about opportunities outside of that. And maybe same question for Patrick, although that might be an unfair question. I know you've only been there for a month now. Gino Martocci: Yes. So thanks for the question. As Ira mentioned, the Florida franchise is an incredible differentiator from my perspective. It's had sustained momentum and growth for many years now, and that growth continues. It's now a $15 billion franchise. It's largely organic. And there's considerable opportunities ahead for that. In addition to that, I think Valley has an opportunity to go upmarket in C&I. And in fact, we're adding some upmarket C&I lenders. It's more in that $150 million to $500 million revenue space than Valley traditionally played in. They're actually onboarding 5 senior bankers who're building out their teams currently. In addition, I really see a tremendous opportunity for Valley in business banking. But currently, we didn't sell it into that book as much in the deposits as we should -- as we could have. And we have a real opportunity to do that. And I think we can gain significant deposits from that book. And as part of that effort, we're going to build out a professional -- we're going to expand our professional services book to focus on law firms, accounting firms, medical and dental practices. And the deposit profile of those companies is extremely good. So we think that going upmarket C&I is a real differentiator for us as well because there's a real void left by the larger institutions and regional banks that are consolidating away. Valley's attention to the relationship, their responsiveness is frankly superior to the super regional banks and is rewarded by our customers. So as I mentioned, we're bringing on seasoned bankers. They're going to build out teams. We're doing it in every geography. We're adding business bankers as well. And we went through the efficiency exercise in order to create that capacity. So there's a number of opportunities, I think, for Valley to grow in 2026 and beyond. Patrick Smith: This is Patrick. First of all, let me say that I am incredibly enthusiastic about what I've seen so far in my first few weeks at Valley. And to your question, I'd offer up a few points. One is small business. When I -- I've been conducting an evaluation of our small business segment, and I'm excited about the opportunity we have to really grow in this segment. We've been underpenetrated in small business. And we have a real opportunity to grow organically in that segment across our footprint. So we've been adding experienced small business bankers and enhancing our product set to go after that opportunity. So I think it's a wonderful opportunity for us. We've already added 8 bakers in principally in Florida and New Jersey to take advantage of the opportunity. The other one I'd say quickly is that we have an opportunity to organically grow deposits from a retail perspective in our branches. Our branches have been positioned historically in support of our commercial business. as we pivot more toward a focus on -- or add a focus on retail, there's a real opportunity for us to grow our small business -- sorry, our retail franchise through our branches. And so we have a really good branch network across our footprint. That's an incredible opportunity. And then finally, I'd echo what Gino said, which is we are acquiring really strong talent across the retail bank, and I expect us to continue to do that. And that's going to be a core driver as it is in commercial of our retail franchise growth. Manan Gosalia: That's great. I really appreciate the thorough response here. Maybe a follow-up for Ira and Travis. So you're beating your expense guide. You're clearly investing and there's clearly some more white space to invest in. How should we think about the expenses as we go into 2026? How much of these investments are already in the run rate versus how much do you think you'll need to accelerate that spend? And I guess I'm asking from the point of view of as NIM expands further from here, should we expect that you can drop most of those benefits to the bottom line? Or are there areas where you'd want to invest as we go into next year? Travis Lan: Yes, thanks. From an expense perspective, I mean, we undertook over the last couple of months an efficiency exercise where we tried to unlock savings in some of the back office and corporate service areas that could be reinvested in the front office that Gino and Patrick have talked about. So this is all baked into the near-term expense guide that we provided for the fourth quarter. And I'd just tell you as we begin to kind of pencil out 2026, I mean, I don't think there's any reason to move ourselves off of a low single-digit expense growth rate for that year as well. So our goal is to invest in revenue-generating talent that's going to enhance franchise value and ensure that we're dropping the majority of that revenue growth to the bottom line. Ira Robbins: Maybe I'll just talk about sort of in my mind where we sit from sort of positive operating leverage. And I'll maybe take a step backwards and go where we were before the regional banking challenges that we had in 2023. But if you go back to June of '23 in that period of time, we had 3,957 associates across our entire footprint. Today, we're 3,624, so a contraction of 333 associates, about 8.5% over that period of time. Just once again, taking a step back, in 2022 at the end, we had a return on tangible common of 17.20%, right? So obviously, a lot of focus on continuing to grow the organization and delivering returns for our shareholders that we think are appropriate, and we definitely believe that we'll get back to. Obviously, we had to sort of recalibrate how we thought about investing into the organization in 2023 based on some of the external challenges that happened with SVB and Signature, et cetera. And then obviously, a refocus on commercial real estate based on what happened with NYCB and a few others at that point in time. So we feel really strongly that we've made the cuts necessary to really open up the ability for us to reinvest back into revenue in this organization. And as Gino alluded to, as Patrick alluded to, you're going to see continued hiring within the organization and really a growth trajectory that's going to get us back to return on tangible common numbers that we think we've delivered before and more in line with where the higher-performing peers are. So we don't believe we're going to need to really add on a lot of incremental expenses that we've created space for that. And we are really, really confident in the positive operating leverage that we're going to be able to generate here. Operator: Our next question comes from the line of Chris McGratty with KBW. Christopher McGratty: Travis, going back to your comment about the CRE book troughing and growing low single digit, how do you think about the impact at low rates -- lower rates will influence that, I guess, that statement? Travis Lan: Yes. Look, I think we assume, obviously, in our loan growth guide, some amount of payoffs consistent with our loan growth -- or excuse me, with our rate forecast. So it's in there and look to the degree that rates are significantly lower than we anticipate payoffs would accelerate. There's no doubt and then we'd end up kind of on the lower end of our guidance range for loan growth. But what I would say is when you look at -- we took 2024 off effectively from a CRE origination perspective, which is a period of time in which I think the highest yield in CRE loans were put on. So I don't really think that we have maybe the headwind that others do in terms of potential impact of lower rates on payoff activity. I mean we still have a fixed rate loan portfolio that's yielding in the mid-4s to 5%. And so you got to pull rates down pretty significantly before you'd see a significant acceleration of payoff activity. So I'm not saying it's not a factor, but I just think we're a little bit more insulated than maybe other lenders would have been. Gino Martocci: I would add that lower rates will also drive some transaction volume. I mean our pipeline is $3.3 billion today in total C&I and CRE. That's up from $2.1 billion in 2024. And it's much more -- so it's more like 50-50 CRE, C&I where it was more like 60-40 up until this quarter. So we're seeing good momentum in C&I and CRE and the payoffs are here, but -- and the liquidity is in the marketplace, but we're effectively building our pipeline. Christopher McGratty: That's helpful. And I guess my follow-up, Ira, is more of a strategic question. It seems very clear that buying back your stock at book value is the right move. Is there a scenario where you deviate and consider inorganic at these levels? Ira Robbins: Look, I think -- let me just start with, there really is no change in how we think about M&A across the organization. For us, I would say, being shareholder-friendly and focusing on shareholder is the primary focus of how we think about anything when it comes to capital allocation across the organization. Obviously, as you know, we've done a handful of M&A acquisitions over a period of time. And there's always been a focus on what that tangible book value dilution would look like and what the return to the shareholder is going to be. As we think about sort of capital deployment as we continue to move forward, I think as Travis has alluded to, we're sitting at a pretty significant discount to where our peers are. We feel really confident in the trajectory of where the earnings profile is. And when you're sitting at 1% on tangible book, it seems like a pretty good use of capital to me. Travis Lan: I would just add, Chris, just from an M&A perspective, I mean we -- as you can hear in Gino's voice and Patrick's voice, like we have an incredible organic opportunity set ahead of us. And so our primary focus is supporting the growth that we'll generate organically. I would say more M&A in the system is good for us, right? It creates additional disruption that we can capitalize on. And through the investments that we're making in the talent, we're working to position ourselves to capitalize on that. Operator: Our next question comes from the line of Dave Rochester with Cantor. David Rochester: You mentioned NIM expansion in 2026. That makes a lot of sense. And without trying to nail you down to a range right now, how are you thinking about what a more normalized NIM level could look like just given the forward curve and then everything you guys are doing on the remix of CRE and the other work on the funding side? Travis Lan: Yes. Look, I think, I mean, for legacy Valley, which would have been CRE-heavy and overreliance on wholesale funding, that normalized NIM probably would have been 2.90% to 3.10%. I think if you look back over time, that's where you would see them fall most of the time. Look, I think structurally, the balance sheet has already improved materially with the increase in C&I and the enhancement of the core funding base. And I would say now a more normalized margin for Valley is probably be closer to 3.20% to 3.40%. I think, as I said in my prepared remarks, I have high confidence we'll be at 3.10% or above in the fourth quarter. And I think you can pencil out another 20 basis points of expansion from the fourth quarter of '25 to the fourth quarter of '26, which gets you kind of within that more normalized range. And I think there's additional upside as we further enhance the funding base because none of what I just described includes any growth in the composition of noninterest deposits. And I think we have a real opportunity there. So look, I think we got a lot of tailwinds heading into 2026, and we look forward to executing on them. David Rochester: Great. And on the effort to go upmarket, where are you in the innings of that hiring in that effort? Are you hiring underwriters as well along with the senior bankers? And then when are you expecting to be really hitting the ground running on that effort? When will you start to see the boost in growth from that? Gino Martocci: We've had a lot of traction in hiring both senior people and underwriters thus far. We wanted to get them in here so that we can hit the ground running in January really and really all through 2026. I think you're going to see some real momentum in more upmarket C&I and in business banking, frankly, for next year. And we are -- which inning, I think we're probably only in the second or third inning at this point, but momentum has been strong. And people have a willingness to come to Valley. It's got a good perception in the marketplace and we're just excited about the opportunity. David Rochester: It seems like that boost to growth could be pretty substantial, right? I mean how are you guys quantifying that? Ira Robbins: Maybe just before we get into that, I think, look, there's obviously headwinds in different quarters. You look at this quarter, the unused line or usage changed. There was the commodity headwind that we had. So we've had strong contribution as you think about sort of what the C&I growth has looked like for an extended period of time. We do believe, obviously, as you think about sort of the new hires that are coming into the organization on the commercial side that there'll be a lot of strength there. And maybe I'll just reiterate real quickly what Patrick said also. I mean SMB has been a solid performing vertical for us. But we're really leveraging that up as you think about the people that are coming in. And these are known people to Patrick, known to the market that we've been in. So it's really across the board as to how we think about what loan growth is going to look like. Obviously, as we talked earlier, there's potential headwinds when it comes to interest rates and CRE runoff and everything like that. But as Gino said, we're sitting with a $3.3 billion pipeline today. That's like $1.2 billion more than where we were about a year ago. I mean that's unbelievable. So we think the tailwinds there for loan growth in addition to the fact that Gino is still hiring and Patrick is still hiring. Travis Lan: Yes. We're penciling out mid-single-digit loan growth expectation for 2026. So call it at a range of 4% to 6%. I think the more hirings that you get done, you'd get to the upper end of that for sure. And I think if you zoom out and think about where Valley has been, we've been a high single-digit, low double-digit loan grower in our history. Now a lot of that's been driven by high single-digit CRE growth. And to the point we've made before, we expect CRE growth will pick up, but we're not going to return to that level. And so think about low single-digit CRE growth, low double-digit C&I growth, contributions from consumer. I think that's how you begin to get to that 4% to 6%. The other thing I would add on the hires is these are not transactional lenders and we're talking about holistic bankers that are bringing deposits as well. We haven't talked yet on the call about the significant deposit growth that we saw this quarter, but core customer deposits were up $1 billion. It's a significant annualized pace. It's due to a variety of factors. It's very broad-based. But part of it was this is the first year we've incentivized our bankers more on deposit growth than loan growth. And so I think that's paid off significantly. Operator: Our next question comes from the line of David Smith with Truist Securities. David Smith: Just thinking a little bit longer term now, you did 11.6% adjusted ROTCE in the third quarter, guiding to operating leverage with cost of credit improving this coming quarter, and it sounds like pretty decent operating leverage next year as well. The cost of credit can stay controlled like you think. Can you just give us the latest on how you're thinking about profitability improvement over the next year or 2 in the context of your 15% goal? Travis Lan: Yes. So there's no change to our 15% ROTCE target. I think we're pretty confident we can effectively achieve it by late '27, early '28. If you think about where we're starting today in rough numbers, we have a 350 basis point gap to close in that period of time. 75% of that's going to come from net income expansion based on all things we're talking about mid-single-digit loan growth, margin expanding into the high 330s, continuation of high single-digit fee income growth and low single-digit operating expense growth and to your point, normalized credit costs. Under those assumptions, you get pretty close to the 15%. The delta is going to be with that backdrop, you're going to build excess capital dramatically. I think that leads into the buyback conversation we've already had today. So I think those are the factors that we think about. But again, we think that we have high confidence in the target on that time line. And I do think there's also some flexibility in the levers that we'll get there because ultimately, the environment isn't going to play out the way that we model it to, but we have flexibility to ensure that we achieve that. Operator: Our next question comes from the line of Matthew Breese with Stephens. Matthew Breese: Travis, I want to go back to a comment you had made. I just want to clarify. I thought you had said maybe kind of normalized loan growth in the 4% to 6% range. Is that accurate, did I hear that right? Is that a good bogey for 2026? Travis Lan: Yes. Matthew Breese: And then alongside that, maybe just help us out with the deposit growth alongside that and the outlook. And is there a potential we might see a further lowering of the loan-to-deposit ratio in '26? Travis Lan: Yes, I think that's part of our plan, Matt. So we would anticipate that deposit growth will exceed loan growth. The loan-to-deposit ratio today is 96.4%. I mean, over time, we'd love to get that to 90%. There's no time line on that expectation. But I think each year, we'd make progress. It doesn't mean it's a straight line down. I mean you may have quarters where it bumps around a little bit, but we've made a lot of progress and have a lot of momentum. The other thing that we think about from a funding perspective is loans to nonbrokered deposits today is 108% and that should be closer to 100% for sure. So we would need to obviously grow core deposits in excess of loans to continue to make progress there. But again, based on some of the efforts that we've undertaken, I would just add, Matt, I talked about the incentive plans with our bankers, incentivizing deposit growth. The treasury management capabilities that we have has been another key driver there. So that's been significant as well. Matthew Breese: Got it. All right. And then my last one, admittedly feels a bit out of tune given all the positive and optimism on the organic front. But it feels like the M&A deal window is open, and I heard your comments loud and clear, Ira, on focusing on organic. But I did want to get your sense on or thoughts on all strategic alternatives, including maybe a potential sale because the big bank M&A window appears open as well. I haven't seen that in a while, and just would love your thinking there. What would type -- will drive that type of outcome? Ira Robbins: I'll just go back to the one commented shareholder first, right? And I think that's how we need to think about anything that happens in this organization. Operator: Our next question comes from the line of Jared Shaw with Barclays. Jonathan Rau: This is Jon Rau on for Jared. I guess maybe looking at the CRE side of things, it sounds like there's a pretty good capacity for these borrowers to refinance away from Valley and I guess, the banking system. Is there any subset of CRE borrower that's having a little more difficulty in finding that alternative capital source? And then particularly, if there's any insight on how that would look for like rent-regulated multifamily? I know they're small there for you, but just any color would be helpful. Mark Saeger: So Jon, Mark Saeger again. As I mentioned, we're actually seeing really positive trends in the office space with stabilization there and really some rational transactions. So I think you hit the nail on the head. The only other segment that continues to be a little stagnant is that rent stabilized in New York. But as you mentioned, it's a very small part of our overall portfolio. We have just around $600 million that has more than 50% rent stabilized, very small portion of our overall portfolio, not a growth portfolio for us. We weren't competitive in that market because we offered a lower loan amount traditionally and required stronger in-place debt service coverage or our lower level and why that portfolio continues to perform for us. But it's still an area that we're watching on a go forward. Jonathan Rau: Okay. Perfect. That's helpful. And then just looking at expenses, it sounds like professional fees are still expected to remain elevated in the fourth quarter. Does that continue into 2026? And I guess what's driven the increase in the last 2 quarters? Travis Lan: Yes. I would expect it remains at the current level for the fourth quarter and into 2026, at least for the first half of the year. As part of the efficiency exercise, we've utilized consultants to help us enhance our operating model and organizational design. So those are temporary dollars that we have to spend. But again, we've offset it with the savings that we've generated in the compensation line and elsewhere. Jonathan Rau: Okay. Great. And then just last one for me, that land loan that the borrowers refying away from you. There's -- just wanted to confirm there's no loss expected on that -- through that process. Mark Saeger: No, we have more than adequate value there. No loss anticipated. Operator: Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Jon Arfstrom: Mark, maybe for you. What do you think the time line is for nonaccrual balances to start declining? I know you feel comfortable, but just curious on your thoughts on that topic. Mark Saeger: So I would point, right, it's hard to talk about a time line on resolution of some of these items other than the one that I just mentioned, which we do think has a short-term resolution. But I point kind of to the strength that we're seeing in the CRE market, the reduction in criticized. I think that will also translate in some resolution on especially that 50% of our nonaccruals that are continuing to pay current. So I don't anticipate a material inflow on a go-forward basis, but it may take some time to see some of those CRE-loans finance out. Jon Arfstrom: Yes. Okay. That's helpful. I appreciate that. Just kind of bigger picture, it looks like it's a good quarter. I'm just curious if you guys feel like this is a new floor for EPS for the company. And I'm especially curious, I guess, if you feel like this is a more normalized provision as we look forward? Travis Lan: Yes. I think that's absolutely true. So I mean, just the progress that we've made, I mean, part of the overhang coming out of the liquidity crisis is on the funding side. I think we've done a lot of work over the last years to rectify that, which has enhanced our net interest income, obviously. We still have a significant fixed rate asset repricing tailwind behind us. As we head into 2026, we have $1.7 billion of loans that are coming off from a fixed perspective at a rate of around 4.75%. That creates significant opportunity and supports the margin expansion that we've talked about. From a credit perspective, I mean, I think we all anticipate here that you need to see normalized charge-off rates in '26. So call that around 15 basis points, give or take, and a generally stable reserve. So when you factor that all together, I think you are seeing -- this provision level is effectively sustainable from my perspective within a given range. Operator: Our next question comes from the line of Janet Lee with TD Cowen. Sun Young Lee: On deposits, when I look at specialized deposit growth over the past quarter, that's about $700 million. It looks like a lot of that is going into replacing indirect deposits. You mentioned deposit growth should be picking up at a -- should be growing at a faster pace than loan and with the incentivized structure change, I guess that's going to help. If I look at the pace of deposit growth from the specialized deposits, I guess, more specifically on other commercial and small business, could -- is this the area where you expect a lot of your deposit growth to come from? Could it continue to grow at the $2 billion pace per year that you reported over the past year? Travis Lan: Thanks, Janet. This is Travis. I think, look, that it is an area of focus for sure. This quarter, we had $100 million of specialty deposit growth within the bucket you're describing came from health care clients. I mean there's still momentum there. We had $200 million between HOA, cannabis and our national deposits group. So those are kind of specialty niches that we bank. That was $300 million of growth this quarter. We look broad-based across the franchise, whether it's in the branch network, which is a combination of consumer and commercial deposits as well as the other commercial bucket that you're talking about. I mean there was significant growth in all of our markets. New Jersey was up $200 million commercial. New York up $150 million commercial. These are deposits. Florida up $150 million commercial. So there's significant tailwind and momentum across the franchise. So I think specialty deposits should grow at an above average rate, but it's not the only source of growth that we have. Sun Young Lee: Got it. And you made your point clear about that 4% to 6% loan growth over the intermediate term in 2026. So in terms of over the near term that had -- that 3Q headwinds from commodities, C&I payoffs, can I consider that as temporary? And there's -- or is there any parts of Bank Leumi or within Valley that you might want to run off? Travis Lan: No. I think that's temporary. It was a dynamic unique to this quarter. I think if you zoom out over the last 6 months, that gives you a better sense for some of the pace of growth. I think total loans are up 2.5% annualized in that time line, but that includes some additional headwinds from CRE runoff. So look, I think from a given quarter, loan growth may move around a little bit based on the timing of closings. But I think you'd see more significant momentum if you zoom out a little bit. Operator: Our next question comes from the line of Steve Moss with Raymond James. Stephen Moss: Maybe just circling back to the loan pipeline here. With the $3.3 billion pipeline, just curious what's the coupon on those new originations? Travis Lan: This is Travis. So this quarter, new origination yields were 6.8%, which was consistent with last quarter. I'd say the pipeline yield is similar, although slightly lower because benchmark rates are lower. We saw some spread tightening earlier this year. I'd way that's fairly consistent, maybe a little bit more now, but that's kind of where we sit. Stephen Moss: Okay. And then on the expansion moving upstream into larger loans, just kind of curious how do we think about pricing for those types of loans will be relatively tighter? And are you thinking about them being syndicated? Just kind of curious. Any color you can give there. Gino Martocci: Valley has always been done loans of this size. They just haven't had the focus on it. And we're just going to -- we're going to more intently focus on it and bring in talent that's done this before. The pricing tends to be a little thinner and we're building out our syndication. We continue to build out our syndications platform. We will want to originate these loans and sell some of them. The pricing, as you know, it tends to be 1.75 to 2.25, more or less. And we wouldn't play much below that amount. So -- and then the relationships tend to be fulsome, deposits, fees, opportunities for capital markets, et cetera. So we see it as a driver of profitability going forward. Stephen Moss: Okay. Great. I appreciate that color there. And then just on the criticized and classified, I think I heard that they went down. Just kind of curious if you could quantify the level of decline and also wondering if substandards declined this quarter. Mark Saeger: So yes, we had a $100 million reduction in criticized in total for the period. Again, I mentioned that was through not just upgrades, but payoffs in financing out, which is positive. And I'll have to get back on the -- specifically on that substandard component. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. And that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Bill Cimino, Senior Vice President of Investor Relations. Please go ahead. William Cimino: Thank you, Daniel, and good morning, everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury; and Executive Vice President and CFO, Rob Gorman, with me today. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on this webcast are available to download on our investor website, investors.atlanticunionbank.com. During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix to our slide presentation and our earnings release for the third quarter of 2025. In our remarks on today's call, we will also make forward-looking statements, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statements except as required by law. Please refer to our earnings release and the slide presentation issued today and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ from those expressed or implied in the forward-looking statement. All comments made during today's call are subject to that safe harbor statement. And at the end of the call, we'll take questions from the research analyst community. Now I'll turn the call over to John. John Asbury: Thank you, Bill. Good morning, everyone, and thank you for joining us today. Atlantic Union Bankshares delivered a solid third quarter, while maintaining our focus on execution and integration of the Sandy Spring acquisition. Our quarterly operating results illustrate the earnings potential of the company we envisioned. While merger-related costs continued to create a noisy quarter, we believe we are on a path to deliver on the expectations related to the acquisition of Sandy Spring for adjusted operating return on assets, return on tangible common equity and efficiency ratio. The Sandy Spring integration is progressing smoothly. Over the weekend of October 11, we successfully completed our core systems conversion and closed 5 overlapping branches as planned. We are experienced acquirers, and I want to recognize our outstanding and dedicated team for their commitment and diligence in executing this complex process. We have now unified Sandy Spring Bank under the Atlantic Union Bank brand and operate as one integrated team. While some merger-related impacts will persist in our fourth quarter results, we expect to enter 2026 having achieved our cost savings targets from the acquisition and with our enhanced earnings power visible on a reported basis. Our commitment to creating shareholder value remains unwavering. We believe Atlantic Union is well positioned to deliver sustainable growth, top-tier financial performance and long-term value for our shareholders. The strategic advantages gained from the Sandy Spring acquisition, combined with continued organic growth opportunities, reinforce our status as the premier regional bank headquartered in the lower Mid-Atlantic. We have a robust presence in attractive markets, providing us with further growth opportunities. I will now summarize the key highlights from our third quarter performance and share insights into current market conditions before turning the call over to Rob for a detailed financial review. Here are the highlights from our third quarter. Quarterly loan growth was approximately 0.5% annualized in the typically seasonally slower third quarter. Notably, lending production increased modestly versus the second quarter. However, in the latter part of the quarter, an uptick in loan paydowns had a decline in revolving credit utilization from 44% to 41% offset some of the increased production. Average loan growth quarter-over-quarter was a good story at 4.3% annualized. Our pipelines indicate we should have loan growth consistent with the seasonally strong fourth quarter. While forecasting loan growth remains challenging and the still uncertain economic environment, we currently expect year-end loan balances to range between $27.7 billion and $28 billion, inclusive of the negative impact of the fair value loan marks. We paid down approximately $116 million in broker deposits during the quarter and continued to reduce higher cost nonrelationship deposits from the Sandy Spring portfolio. By moving quickly to lower our deposit rates, we anticipate further improvement in our cost of deposits in the fourth quarter. We were pleased to see approximately 4% annualized growth in noninterest-bearing deposits in the third quarter. Our reported FTE net interest margin remained steady at 3.83%, reflecting a modest decrease in accretion income quarter-over-quarter. As a reminder, some quarterly fluctuation in accretion income is to be expected. Importantly, if you exclude the impact of accretion income, our net interest margin improved compared to last quarter. I'd also like to point out the strength we saw in fee income, especially with interest rate swaps and in wealth management. Opportunities in both lines were augmented by the Sandy Spring acquisition. And during the quarter, approximately $1 million of swap income is attributed to the former Sandy Spring Bank. Sandy Spring did not offer interest rate swaps for the acquisition, and we believe that will provide upside to the combined entity going forward. Overall, credit quality improved despite an increase in charge-offs largely driven by 2 commercial and industrial loans that have been partially reserved for in prior quarters. One was the larger credit first disclosed in the fourth quarter of 2024 involving a borrowing base misrepresentation. Ongoing uncertainty in its resolution led us to charge off the remaining balance of approximately $15 million in addition to the previously incurred specific reserve of $14 million. Leading asset quality indicators are encouraging. Third quarter nonperforming assets as a percentage of loans held for investment remained low at 0.49%. Past dues remained low and criticized asset levels improved by more than $250 million or 16%, which brings criticized loans as a percentage of total loans down to 4.9% at the end of the third quarter from 5.9% at the end of the second quarter. As typical, we'll present more details in our third quarter 10-Q filing. We do remain confident in our asset quality and reaffirm our forecast for the full year 2025 net charge-off ratio to be between 15 and 20 basis points, in line with prior guidance. In the Greater Washington, D.C. region, recent headlines have focused on government employment reductions and the government shutdown. However, we believe both our economic data and on-the-ground observations indicate resilience in the market. Atlantic Union maintains a well-diversified portfolio with approximately 23% of total loans of the Washington metro area and the remaining 77% across our broader footprint. The exposures that prompt the most inquiries are government contractors and office buildings in the Washington metro area. Updated disclosures on these segments can be found on Pages 21 through 23 of our supplemental presentation, and these portfolios are performing well. Our government contractor finance portfolio is predominantly focused on national security and defense. We believe these businesses are well positioned, supported by a record high defense budget and ongoing defense modernization efforts. Government shutdowns are not new to us. With more than 15 years in this specialty, we have seen many. Most contractors we finance provide essential services and have historically continued to operate during shutdowns, typically drawing on lines of credit to maintain payroll and repaying those lines when government funding resumes. We are certainly monitoring the shutdown and its duration. More broadly, August unemployment rates for Maryland and Virginia stood at 3.6%, well below the national average of 4.3% and among the lowest for states with larger populations. Official government September data is not yet available due to the shutdown. While we anticipate some increases in unemployment rates across our markets, we expect this to remain manageable and below the national average, consistent with the current Moody's state level forecast. With the Sandy Spring systems conversion now behind us, strong pipelines and expanded footprint in attractive markets, specialty lines and increased investment in North Carolina, we believe we are well positioned for continued organic growth. In summary, it was a good quarter as we continued our focus on disciplined execution and the integration of Sandy Spring. This quarter also marks my ninth year with the company. Over this time, we have intentionally and carefully built the distinctive and uniquely valuable franchise that we envisioned in our strategic plan and have consistently communicated for years. We have done what we said we do in establishing the banking platform we set out to create. With this foundation in place, we believe we are well positioned to capitalize on the expanded markets gained through the Sandy Spring acquisition, continue our growth in Virginia and pursue new organic growth opportunities in North Carolina and across our specialty lines. We are set up well to demonstrate the organic earnings power of the franchise we have worked so hard to build on a reported basis, absent merger-related noise in 2026, and that's what we intend to do. Looking ahead, our focus remains on delivering sustainable top quarter performance relative to our peers and creating long-term value for our shareholders. With that, I'll turn the call over to Rob for a detailed review of our quarterly results before opening the call for questions. Rob? Robert Gorman: Well, thank you, John, and good morning, everyone. I'll now take a few minutes to provide you with some details of Atlantic Union's financial results for the third quarter. A commentary today will primarily address Atlantic Union's third quarter financial results presented on a non-GAAP adjusted operating basis, which excludes $34.8 million in pretax merger-related costs from the Sandy Spring acquisition and a $4.8 million pretax loss recorded in the third quarter for the final CRE loan settlement related to the approximately $2 billion of Sandy Spring acquired CRE loans that we sold in the second quarter. As a result, the final net pretax gain from the CRE sale transaction was $10.9 million. That said, in the third quarter, reported net income available to common shareholders was $89.2 million, and earnings per common share were $0.63. Adjusted operating earnings available to common shareholders for $119.7 million or $0.84 per common share for the third quarter, resulting in an adjusted operating return on tangible common equity of 20.1% and adjusted operating return on assets of 1.3% and an adjusted operating efficiency ratio of 48.8% in the third quarter. Turning to credit loss reserves. At the end of the third quarter, the total allowance for credit losses was $320 million, which is a decrease of approximately $22.4 million from the second quarter, primarily driven by the net charge-off of two individually assessed commercial and industrial loans that were partially reserved for in the prior quarter, as John noted. As a result, the total allowance for credit losses as a percentage of total loans held for investment decreased to 117 basis points at the end of the third quarter, down from 125 basis points at the end of the prior quarter. Net charge-offs increased to $38.6 million or 56 basis points annualized in the third quarter from $666,000, only 1 basis point annualized in the second quarter, primarily due to the net charge-off of the two commercial industrial loans that we've discussed. This brought the annualized year-to-date net charge-off ratio through the third quarter to 23 basis points although we are maintaining our full year net charge-off ratio guidance to be in the 15 to 20 basis point range. Now turning to the pretax pre-provision components of the income statement for the third quarter, tax equivalent net interest income was $323.6 million. That's a decrease of $2.1 million from the second quarter, primarily driven by lower interest income on loans held for sale due to the impacts of the CLO approximately $2 billion of performing CRE loans at the end of the second quarter and lower net accretion income, partially offset by lower borrowing costs and higher investment income as we used proceeds from the CRE loan sale to pay down short-term borrowings and broker deposits and to purchase additional investment securities in the third quarter. As John noted, the third quarter's tax equivalent net interest margin remained at 3.83% as lower earning asset yields were fully offset by declines in the cost of funds. Earning asset yields for the third quarter declined by 5 basis points to 6% compared to the second quarter due primarily to lower accretion income and the impacts from the CRE loan sale, which resulted in a decrease in average loans held for sale balances and an increase in lower-yielding cash and investment average balances. The cost of funds declined by 5 basis points in the third quarter to 2.17%, primarily due to the impact of the 4 basis point drop in the cost of interest-bearing liabilities to 2.93% from 2.97% in the second quarter driven by lower average short-term borrowings and broker deposit balances as well as lower customer time deposit rates. Noninterest income decreased $29.7 million to $51.8 million for the third quarter, primarily driven by the $15.7 million preliminary pretax gain on the CRE loan sale in the prior quarter compared to a $4.8 million pretax loss in the third quarter of 2025, related to the final CRE loan sale settlement accounting, as well as by the $14.3 million pretax gain on the sale of our equity interest in Cary Street Partners which was recorded in the second quarter. Adjusted operating noninterest income, which excludes the pretax loss and gain on the CRE loan sale in both quarters, the pretax gain on the sale of our equity interest in Care Street Partners in the second quarter and pretax gains on sales of securities in both quarters increased $5.1 million from the second quarter to $56.6 million, primarily due to a $4.2 million increase in loan-related interest rate swap fees due to higher transaction volumes and a $1.2 million increase in other operating income primarily due to an increase in equity method investment income. These increases were partially offset by a $2.2 million decrease in bank-owned life insurance income due to debt benefits of $2.4 million that was received in the second quarter. Reported noninterest expense decreased $41.3 million to $238.4 million for the third quarter, primarily driven by a $44.1 million decline in merger-related costs associated with the Sandy Spring acquisition. Adjusted operating noninterest expense, which excludes merger-related cost in the second and third quarters and the amortization of intangible assets in both quarters increased $3.1 million to $185.5 million for the third quarter, primarily due to a $1.3 million increase in marketing and advertising expense, a $966,000 increase in professional services expenses related to strategic projects, $874,000 increase in other expenses, primarily due to an increase in other real estate owned and credit-related expenses and an $800,000 increase in occupancy expense. These increases were partially offset by a $1.6 million decrease in salaries and benefits expense, primarily driven by reductions in full-time equivalent employees and lower group insurance expenses which was partially offset by an increase in variable incentive compensation expenses. At September 30, loans held for investments, net of deferred fees and costs were $27.4 billion, that was an increase of $32.8 million from the prior quarter, while average loans held for investment increased $291.8 million or 4.3% annualized from the prior quarter. At September 30, total deposits stood at $30.7 billion, a decrease of $306.9 million or 3.9% annualized from the prior quarter, primarily due to declines of $256.3 million in interest-bearing customer deposits and $116.1 million in broker deposits. This was partially offset by an increase of $65.5 million in demand deposits. At the end of the third quarter, Atlantic Union Bankshares and Atlantic Union Bank's regulatory capital ratios were comfortably above well-capitalized levels. In addition, on an adjusted basis, we remain well capitalized, as of the end of the third quarter, if you include the negative impact of AOCI and held-to-maturity securities unrealized losses in the calculation of the regulatory capital ratios. During the third quarter, the company paid a common stock dividend of $0.34 per share, which was an increase of 6.3% from the previous year's third quarter dividend amount. As noted on Slide 16, we've updated our full year 2025 financial outlook for AUB and have also provided our financial outlook for the fourth quarter. Please note that the final outlook for 2025 and the fourth quarter include preliminary estimates of purchase accounting adjustments with respect to the Sandy Spring acquisition that are subject to change. We now expect loan balances to end the year between $27.7 billion to $28 billion while year-end deposit balances are projected to be between $30.8 billion and $31 billion, driven by mid-single-digit annualized growth in loans and low single-digit annualized growth in deposits in the fourth quarter. Fully tax equivalent with net interest income for the full year is projected to come in between $1.160 billion and $1.165 billion that we are targeting the fourth quarter fully tax equivalent net interest income run rate to fall between $325 million and $330 million. As a result, we are projecting that the full year fully tax equivalent net interest margin will fall in a range between 3.75% and 3.8% for the full year and between 3.85% and 3.9% in the fourth quarter driven by our baseline assumption that the Federal Reserve Bank will cut the Fed funds rate by 25 basis points in October and December, and that term rates remain stable. In addition, the projected fully tax equivalent net interest margin ranges include the impact of our estimate of the net accretion income from the Sandy Spring acquisition, which are volatile and subject to change. On a full year basis, adjusted operating noninterest income is expected to be between $185 million and $190 million, and we're targeting the fourth quarter adjusted operating noninterest income run rate to fall between $50 million and $55 million. Adjusted operating noninterest expenses for the full year are estimated to fall in a range of $675 million to $680 million, while the fourth quarter adjusted operating noninterest expense run rate is expected to be between $183 million and $188 million. Based on these projections, we expect to produce financial returns that will place us within the top quartile of our peer group on an operating basis and meet our objective of delivering top-tier financial performance for our shareholders. In summary, Atlantic Union delivered solid operating financial results in the third quarter. We continue to be on track and confident that we will achieve the anticipated financial benefits of the combination with Sandy Spring. As a result, we believe we are well positioned to continue to generate sustainable, profitable growth and to build long-term value for our shareholders in 2025 and beyond. I'll now turn the call over to Bill to see if there are any questions from our research analyst community. William Cimino: Thanks, Rob. And Daniel, we're ready for our first caller, please. Operator: [Operator Instructions] Our first question comes from Russell Gunther with Stephens. Russell Elliott Gunther: First question for me is on the loan growth front. I appreciate your guys' thoughts in terms of what transpired this quarter in the mid-single-digit outlook for next. Wondering, is that mid-single-digit sustainable outcome for 2026 based on where pipelines and investor sentiment stands today? And as you look out, is a high single-digit a possibility on this larger pro forma balance sheet? And I guess an adjacent question, John, I think you mentioned whether it's an increased appetite or expectation for growth within specialty lines. So I'd be curious if you could expand upon that as well. John Asbury: Sure. To answer your questions, we do expect at this point, mid-single-digit loan growth on the total company for next year. Based on past experience, we certainly believe that we're capable of doing high single-digit loan growth. And what I will refer to as a more normalized environment, assuming we see such a thing again, which I think we will eventually, but there's still a lot of uncertainty out there, obviously. And we do see strength in our specialty lines. And as part of our strategic planning process. And as a reminder, we're going to do an Investor Day in early December, and we'll take you into more detail. We continue to look at additional opportunities to further grow and expand our specialty lines such as equipment finance and others. Dave, do you have anything to add to that? David Ring: Yes. I mean we're still seeing production for new client acquisition and growing at a slightly higher rate, 35% of our production this quarter came from new clients. Coming into the bank, that's a great trend and positive momentum. The pipelines at Sandy Spring now that they've been converted here since April 1 have grown dramatically, three or fourfold. And our pipeline within the legacy bank is higher than it normally is as well. So if pull-through is what we expected to be, we think we'll have a good solid fourth quarter. John Asbury: Yes. And so as you saw, loans averaged up 4.3% Q-over-Q, which is good. But what really happened is in the back half of the quarter, we saw paydowns, which are always an issue to some extent. But the line utilization drop was kind of what really hit us towards the end of the quarter, and that should come back over time. Russell Elliott Gunther: I appreciate that. And then just last question for me, switching gears a bit on to the expense outlook. I appreciate the thoughts on where 4Q could shake out. And I believe you guys mentioned cost saves for Sandy Spring will fully be in the run rate in early 2026. So I just wanted to circle back to what was a, I believe, the efficiency guide for the pro forma franchise, about 45%, excluding amortization expense. Is that still on the cards for 2026? And as it relates to the expense side of the house, how are you guys thinking about keeping a lid on the absolute expense base as you organically build out North Carolina over the next few years? Robert Gorman: Yes. Russell, I'll take that one. Yes, we still -- we're, of course, in the middle of our 2026 planning process, but we fully expect to see mid-single -- mid-40s on the efficiency ratio, inclusive of the investments in the North Carolina franchise. Coming out of the -- you see our guide in the fourth quarter is $183 million to $188 million. If you annualize that at some inflation to that and additional costs associated with North Carolina. We should be flat year-over-year to pro forma first quarter. If you include the first quarter run rate for Sandy Spring in 2025, it should be flattish, which would basically be able to provide us with the mid-40s efficiency ratio. So feel good about that. Of course, if we don't see the revenue come in, but the other part of that is revenue growing at high single-digit level going into next year. If we don't see that, we're obviously focused on positive operating leverage. So we would take some actions on the expense side, maybe have to delay some things. But at this point in time, we don't anticipate that happening. Operator: Our next question comes from Stephen Scouten with Piper Sandler. Stephen Scouten: Rob, I wanted to just follow back on that expense messaging you just gave there. So if we're looking at $190 million and then you said add North Carolina, add inflation and then it should be flat from there? Or is there a baseline like of a 1Q '26 kind of all in? I'm assuming all cost saves out kind of run rate you can give us as a starting point? Robert Gorman: Yes. So what I would say is it's probably about the $190 million give or take level would be a good run rate for going forward on excluding any of the related or amortization of intangibles. That's how we're kind of looking at it. So you've got, call it, a $185-ish million run rate at another $5-or-so million annualized that for those items that we talked about inflation, et cetera, so it would be pretty good run rate. Stephen Scouten: Got it. And that 1Q '26 run rate shouldn't calculate all the Sandy Spring cost savings at that point in time, correct -- more or less? Robert Gorman: Yes. We don't see it all in the fourth quarter because there's -- we just finished the conversion, there's cleanup going on. There's some related systems disengagement that's happening. We still got some duplicate costs there. So those will all come up by the end of the fourth quarter. Stephen Scouten: Got it. Got it. Okay. And on the -- John, you noted there were a higher level of paydowns and I think you guys noted in the press release to lower line utilization there at quarter end. Do you have any data in terms of kind of what paydown levels were this quarter maybe versus any prior quarters? And kind of what would lead you to believe that maybe that paydown activity would slow a bit? Or is the better growth not so much about paydown levels slowing but production levels continue to ramp higher? John Asbury: Yes. I think it's probably more about production levels continuing to ramp higher. And let's see, I'll call on Dave Ring here, who leads all our commercial businesses. But -- we've seen for a while higher levels of paydowns. But as I think about Q3 versus Q2, I don't think it was out of line. David Ring: No. No. Production in both quarters was very close. It's a little higher this quarter than last quarter. Paydowns were relatively the same over the quarter. There are just more players right now in our markets, and we're going to see some of the paydown activity that we're seeing today probably throughout the rest of the year and into next year, but we're relying on higher production cost. John Asbury: Yes. And so often on paydowns, you'll see commercial real estate that is sold or refinanced into the institutional non-recourse term markets like some of the Fannie or Freddie programs, for example, for multifamily. And the pullback that we've seen in term yields tends to create more of that. But we feel good about the overall setup. Stephen Scouten: Got it. And then last thing for me, just around the margin, obviously, the low end of that range kind of remained at the 3.75%, but obviously, the range was tightened kind of removing some theoretical upside there. What kind of changed quarter-over-quarter that kind of takes that higher level off the table? Is it just where we ended up here in the third quarter? Or is it more rate cuts being baked in? Or kind of -- any color there to what's leading to that? Robert Gorman: Yes. It's more about where we came out in the third quarter, kind of dialed back some of the impacts of the accretion income in the fourth quarter. That would have been driving -- it could be higher on the higher end. So we dialed that back a bit. But we feel like on the core basis, we should see some expansion. That's why we're guiding to 3.85% to 3.90% in the fourth quarter. So it's a bit higher than when we came in at 3.83% in the third quarter. But that 3.75% to 3.80% is for the full year, Stephen. So that's kind of where we are. So it's going to -- we see it going up, but not quite as much as we had anticipated. We had a 3.75% to 4% coming in this year. But accretion hasn't been coming in as high as we were expecting. John Asbury: Yes. It is somewhat difficult to predict that with great precision because it's influenced, as you know, by payoffs and that sort of thing. And so you'll see a little bit of volatility. And obviously, as we get a few more quarters under our belt, we'll have a better sense for the sort of what to normally expect. But there's always an element of fluctuation in that, be it up or down. Stephen Scouten: Yes, no doubt. All this modeling is a little bit art, a little bit science. So definitely... John Asbury: Correct, Stephen. Operator: Our next question comes from Catherine Mealor with KBW. Catherine Mealor: My question is just back to the margin, maybe just getting into the pieces of it. And on the deposit side, as we think about another couple of rate cuts, I think of you as asset-sensitive, but Sandy Spring lessens that a little bit, right? And so then as we think about on the NIM expansion over the next few quarters even with rate cuts. Can you help us think about, first, on the deposit side, how much room you think you can lower deposit costs to keep the margin kind of in that level? And then secondly, if you could give us just some color on new loan yield rates and kind of where you see -- where you think loan yields go outside of some of the purchase accounting noise? Robert Gorman: Yes. So Catherine, we think we have a lot of room on the deposit cost side as the Fed gives us cover and continues to lower rates, we're expecting. Obviously, we saw a 25 basis point cut in September. We're expecting one in late October and then in December. Just to give you a perspective on that, we had about $13 billion of deposits that reprice pretty quickly, following that cut like an 85 basis -- of that population, about 85% betas. The good news that we're seeing is on the deposit side, we can lower rates pretty quickly. We're talking probably in mid-50s betas on interest-bearing deposits in mid-40s through the cycle on total deposits. If you look at the short-term rate changes we just made, those pretty much offset the variable rate note loan book that we have, which is about $13 billion, $14 billion. So those kind of are offsetting each other in terms of reducing or having the impact of lower yields on the loan side versus lower deposit costs. So the real impact as we go forward here in terms of looking for a core margin expansion is what's happening with term loans and the back book fixed rate and new loans coming on, what rates are those coming on. We think as a result of our average portfolio yields of, call it, [ 5.10 to 5.15 ] on our fixed loan portfolio today, repricing in the, call it, [ 6.10 to 6.20 ] range in the last quarter. We should be able to see a pickup in terms of the core margin, primarily due to lower deposit costs, lower variable rate loan yields offset by higher fixed rate loan yields. Catherine Mealor: Okay. That's awesome. And then my second question is just on credit. I know you were -- you didn't like having these two C&I losses this quarter. Just kind of curious if you could give just a broader perception of any of the credit trends you're seeing within the portfolio. I think there's especially within D.C. and just kind of the health of the Sandy Spring portfolio now that you've got a couple of quarters under your belt with that portfolio. Just any kind of credit -- additional credit commentary would be helpful. Just to try to figure out whether those two are isolated events or if there's anything else we should be aware of happening within the portfolio? John Asbury: Yes. Those are certainly the two that you saw that had specific reserves. One of them was partially reserved and it was just an unusual situation that -- both actually were identified and partial reserves were taken in Q4 of last year. One in the end was fully reserved, actually slightly more than the ultimate resolution. The other just due to ongoing uncertainty, we elected to charge the rest of it off as we work to maximize recovery. So that's totally unrelated. Broadly speaking, the overall credit trends look good. You can see that in our numbers. You can see, obviously, 0.49% nonperforming assets as a percentage of the total loan book is a pretty good number. Past dues down criticized down. And we feel pretty good. Obviously, we're well aware of all the headlines that go on in the greater Washington region, but we're hard-pressed to point to any real problems as a result of that. The client base is actually quite resilient. So we feel pretty good about it. Doug, anything you would add? Douglas Woolley: Now all the leading indicators of those kinds of big problems all look very good and moving in the right direction. Like John said, criticized noticeably lower since the second quarter. Past dues continue to be low. So we all feel very good about where we are. Obviously, we're paying attention to what's going on in and around D.C. with the shutdown. But we just don't see any weakness anywhere, and we'll be prepared for anything supporting customers and whatnot. I was Chief Credit Officer, Doug Woolley. Catherine Mealor: Great. Is it fair to say the D.C. noise is maybe more of a growth issue than a credit issue for that? John Asbury: Yes, I would say so. I do think that it impacts confidence to some extent. But as Dave Ring pointed out, the pipelines are growing. And you've heard me make this point before, don't think of us as a D.C. Bank. About 23% of the total portfolio would be in the broad Greater Washington metro area. But Sandy itself was -- is and always has been the Bank of Maryland. And we are seeing opportunities there. So overall, we think that we're in the right spot. As you know, we do not finance larger office buildings, which definitely could be problematic. And from a government contract finance standpoint, I would expect to see more opportunity there over time since it's mostly focused on national security and defense. And even interestingly, we were talking to the head of government contract finance yesterday, even with the government shutdown because the defense department is still operating, we're seeing contracts awarded like right now. So we do feel pretty good about the opportunity there over time. But yes, it's -- I think it does put a damper on growth, particularly as it relates to commercial real estate investment, but it's very submarket specific as well, even in that Greater Metro D.C. area. Operator: Our next question comes from Janet Lee with TD Cowen. John Asbury: Janet, we're glad. Thank you for picking up coverage on us. Sun Young Lee: Of course. I believe you guys touched on it a little bit. Apologies if I missed it. So are you attributing all of the loan decline that you saw on the C&I side to lower utilization? And basically, are you also referring to the loan growth coming back in that mid-single digits as the utilization picks back up seasonally in the fourth quarter to the mid-single digits range? Or is that more so in a typical environment, you'd be a mid-single digit to high single-digit grower? John Asbury: Yes. I wouldn't say all of it was a result of the reduced line utilization, but that was a material number contributing to that. And I think it's -- Dave Ring, you'll have to weigh in here. From my standpoint, we've got the pipeline right now to support the targets that we laid out, which are roughly mid-single-digit loan growth based on what we're seeing in Q4. So that's not really predicated on a reversal and line utilization, although that would be helpful. Is that accurate? David Ring: Yes. We're -- we have the pipeline to -- it's just pull through. We just have to pull it through. And sometimes it takes longer than others and things creep into other quarters. But we have the pipeline that will -- that implies... John Asbury: Dave makes a good point. We actually had some financings that were slated and expected to have closed in Q3 that did not. And we're seeing that come through now. We're actually off to a pretty good start in Q4. Sun Young Lee: Got it. That's a helpful color. So on a core basis, I guess you're not guiding to 2026, but -- should I think of the core NIM trajectory based on your comment as being able to stay stable as rates come down with an upper bias if the yield curve steepens? Or would it be a sort of board pressure given your asset sensitivity profile? How should I think about that? Robert Gorman: Yes. The way we're thinking about it is we think there's opportunity for core expansion, give or take, in the low single digits per quarter. That's predicated on that the fixed rate loan portfolio back book and new fixed loans coming on are repricing higher, call it, 100 or so basis points higher. So that really depends on where term rates go. So if we do have a steeper curve, that would be very helpful to that projection that goes -- if it increases more, that will be more beneficial. So we are calling for in our baseline for the Fed to cut 2x here in the remainder of this year, 2x next year, but we do expect to see some expansion in the margin, again, not material. If term rates were to drop materially from really looking at, call it, the 5-year term rate, we could see some contraction in that projection that I'm talking about -- either a flat margin or it could be down depending on the term rate structure. John Asbury: And we are certainly less asset sensitive than we used to be. Sandy acts as a bit of a natural hedge. And as you can see on Slide 11 of the supplemental presentation, where we break out the drivers of net interest margin change, to Rob's earlier point, the core net interest margin actually went up Q-over-Q. It was really just fluctuation in accretion that caused the reported net interest margin to be stable. Sun Young Lee: If I could just ask one more question. For those of us including myself, who is newer to the name. So you made it clear that the government contractor finance group is doing fine. I mean, it's more security like national security and defense focus or more protected there. If the government shut down is prolonged, hopefully not. But if it does get extended, like what would you be -- in what way could it -- or could it impact you the most in terms of -- like what would you be most worried about? Is it the consumers in your -- the consumer customers in your market? Or is it just lower commercial activity? Could you just elaborate on what would you be most worried about or maybe not? John Asbury: Yes. Sure. The government contractors should be fine. We have lived through many shutdowns before. The longer shutdown was 35 days in the first Trump administration. We've never had an issue as it relates to government shutdowns. They have to wait to be paid, but most of them are doing essential services. And so they will continue to work, as I indicated. Normally, what we would expect to see them do is they'll draw on their lines as they await payment. It creates a timing difference. To the extent that they -- we have any that are working on nonessential services, what they do, it's a variable cost structure. They would furlough workers. You're already seeing that in some cases up there. So I think broadly, it certainly could sort of, I guess, I would say, further slow things down, we should be fine. The one thing we -- the only thing we can say with certainty is the U.S. government will reopen. That will happen. The question is how long it's going to take? Interestingly, I was just looking at some data. As of the end of the day yesterday, we had 50, 5-0 consumers contact us, wanting to talk about some sort of potential relief because they've been impacted. And the most common thing that you would see might be a payment deferral or a fee deferral. And that's on the consumer side, and we're very happy to work with customers if there's any sort of event weather like this in that region. So we do not have any reason at this point in time to be particularly concerned about it. Operator: Our next question comes from Brian Wilczynski with Morgan Stanley. Brian Wilczynski: Maybe just sticking with the loan growth. I think during your prepared remarks, you talked a little bit about higher competition that you saw in the third quarter across some of your markets. I was wondering if you could give some more detail on that, where it's coming from and just what you're seeing broadly? John Asbury: Yes. We're certainly accustomed to competition. I'm a 38-year commercial banker by background, and I don't ever remember a time when it's not been competitive, at least for the better credits, which is the types of things that we do. We sometimes see other banks kind of turn it on and turned it off, which we've never done. We've always been a consistent provider of capital, and that's part of how we differentiate ourselves in the marketplace. We are definitely in a turn it on environment right now, where some who had pulled back or fully open for business. We see that show up in terms of an element of pricing pressure, not that we've ever been the low-cost provider. But it's -- the banks are eager for business. Dave, anything to add? David Ring: In the first couple of quarters, we were impacted a bit by private credit. John Asbury: Yes, particularly in the government contract space. David Ring: Right. As a competitor in some of the specialty businesses, but that slowed down a little bit, frankly. And it's really the traditional banks coming in back in, turning it on again, like John said. And one of the things we're very proud of is we're consistently in the market. We don't turn it on and turn it off. And -- but we're seeing some of those banks come back in and turn it on. Brian Wilczynski: That's really helpful. And then maybe just on Sandy Spring. You mentioned that the integration is now complete. I was wondering if you could talk a little bit more about some of the revenue-related synergies. I think you mentioned briefly that swap income was higher. But as you look out to Sandy Spring, what are the opportunities that you see on the revenue side that you can lean into a little bit more over the next few quarters? John Asbury: Yes. Sort of moving -- starting at the top of the house, the single best opportunity is simply the fact that they're no longer constrained by commercial real estate concentrations or liquidity issues, which means they are, in fact, fully open for business. So that's good from a lending standpoint. They do pick up additional capabilities. Interest rate hedging is a great example. Other examples that we'll see as it begins to mature, will be foreign exchange, where we have a good offering broadly. They had a good treasury management offering, but we brought additional capabilities to the table as well. Dave, do you want to pick up from their specialty lines? We've already seen equipment finance business up there. David Ring: I mean the biggest probably help over the next, call it, 15 months is just them getting back into the market. We've retained almost all of their bankers. And most of them have stayed on their own as well without us having to work hard to retain them. And they are back to business back and calling. So new client acquisition is going to be a real important thing in that market for us. The things we bring to the table around talking at a higher level to clients, bringing in products like John said, plus loan syndications, asset-based lending and some other things into that market. That's a really good asset-based lending market, for instance, which we will penetrate deeper because of our acquisition of Sandy Spring. So there are a lot of things just -- but I would think of it just holistically as two good banks coming together, combining products and services, they had some that we didn't have. John Asbury: Correct. David Ring: They had some really interesting offerings, some niche treasury management capabilities that we now have. John Asbury: Right. And they've brought some really good leadership to the table as well. And so we really think we're just stronger in that market because of the combination. Operator: Our next question comes from David Bishop with Hovde Group. David Bishop: Staying on that topic in terms of the Sandy Spring opportunity. John and Rob and Dave, as you expand maybe their pure commercial C&I lending capabilities, do you see the opportunity to sort of harvest more deposits behind new loan relationships and maybe what legacy Sandy Spring is bringing to the table? David Ring: Overall, they did a pretty good job gathering deposits. And we've done a pretty good job since April 1 of retaining those and trying to deepen and enhance relationships to get more. But -- they actually brought some products to the table that we're going to leverage in that market around escrow, the title businesses, litigation services, things like that, that will bring pretty chunky, nice big deposits into the bank. But in general, if you acquire a C&I client and you're giving them a line of credit, it comes with the deposits. It comes with the treasury management fees. And so we're really focused on new client acquisition in that market. And we do think we give them the capacity and the ability to do more faster new client acquisition. Like I said earlier, 35% of our production this quarter was from new client acquisition, and we expect that to kind of ramp up with Sandy over time. John Asbury: It's a good team with great leadership, and we complement each other. David Bishop: Got it. And then a follow-up, maybe, John, I think you mentioned the freeable some pretty material movement, I think it was $250 million decline in criticized. Maybe curious any sort of color you can give on where you saw that improvement types of credits, segments, et cetera? John Asbury: Pretty much across the board. Part of what we did in part just a function of the environment, we continue to dig pretty deeply in terms of scrutinizing the portfolio, not that we don't do that in the normal course. We've especially done that with the Sandy Spring portfolio being new to us. And the reality is we call them as we see them. The overall health of our client base is pretty good. And so we've seen it pretty much across the board. Doug Woolley, the Chief Credit Officer is here, is that a fair assessment? Douglas Woolley: Dave, the improvement in credit is at the client level. There are no industries or markets that are of any concern. It's just individual clients that may suffer difficulties. And of course, we work with them all the way through, and that's where the improvement comes from, the improvement of their operations. And we do believe we are conservative risk raters. Operator: Our final question comes from Steve Moss with Raymond James. Stephen Moss: Maybe going back to loan growth here. John, I hear you on the mid-single digits with potential to be doing higher single digits over time here. And obviously, the pipeline has increased. Just curious here with the North Carolina expansion, what kind of contribution could you see next year from that from loan growth, if any, that could be additive? John Asbury: Dave? David Ring: So we're adding bankers in North Carolina. We've actually seen North Carolina turn to positive growth after... John Asbury: Initial America... David Ring: Yes. And there's very positive momentum there. What we like about North Carolina is it is a real active market, and you could drive down any highway and see multiple manufacturing distribution facilities. And -- we have now -- we think we placed a lot of talent in that market to go after that business. We have pretty low market share. So there's a lot of upside in that state. John Asbury: Yes. It's arguably from an economic development standpoint, it's arguably the best of the growth markets where we have a physical presence, which we're expanding. So Steve, that is potential upside. We're being very conservative in terms of how we think about it. We're speaking to loan growth expectations for the entirety of the franchise. But Dave, you and I have a conversation yesterday, you've been here 8 years. And we think about how diversified the bank is now versus what we first saw and all the -- I think you referred to it as the levers that we have to pull now. So this is a very diversified franchise. And so we see opportunities really in all markets, but North Carolina will have the fastest rising tide. David Ring: And we do have roughly 20 bankers now in that market going at it, which is an increase over time. So we're very excited about the opportunity there. We're in Wilmington. We're also in the Triad and Triangle markets, and we have a presence in Charlotte and in South Carolina as well. So we're pretty excited about that. Stephen Moss: Okay. Appreciate that color there. And then one last one for me. Most of my questions have been asked and answered. But I'm not sure if I missed it. Curious, Rob, as to the purchase accounting assumptions for the fourth quarter and for 2026. Robert Gorman: Yes. So in terms of the accretion income, I think you could -- if you take a look at the third quarter, it's kind of what we're anticipating for the fourth quarter, call it about $40 million, $41 million which was down from the third quarter, as we mentioned. It's probably going to continue to decline as we go through next year. But call it about between $35 million and $40 million run rate -- quarterly run rate going throughout next year and continue to come down as we go into '27. John Asbury: And of course, that's being replaced, that cash income has been reinvested. Robert Gorman: Yes, exactly. Turning into core. John Asbury: Since it's mostly interest rate marks. Stephen Moss: Okay. And actually, maybe just one last one for me here. John, with regard to capital return here, profitability, you're talking about -- you're definitely building capital. Just curious, you talked about a buyback as well, how to think about maybe the timing of a buyback starting next year? John Asbury: Yes. We're definitely going to be accreting capital at a good rate. And even more so as we get through Q4 once all of the Sandy Spring related expenses are out. And you can see we have pretty handsome operating metrics right now, which should get better still. So Rob, do you want to talk about how we would think about the -- well, actually, let me say this, clearly, as always, first priority for capital is simply to reinvest in the business and fund lending growth. But what we're guiding for implies that we're going to be accumulating capital faster than we need it. Therefore, capital will continue to rise. Robert Gorman: Yes. Taking into consideration our growth on the balance sheet, the investment and strategic initiatives and things, assuming we've got the capital for that. We're comfortable managing with a CET1 between 10% and 10.5%. So anything beyond, call it, 10.5% would be available for buybacks, excess capital, if you will. Our projection call for that is probably be in that position probably in the second half of next year. So likely we would export for an authorization to repurchase shares sometime in that time frame. William Cimino: Thank you, Steve. And thanks, everyone, for joining us today. We look forward to talking with you at our Investor Day in December. Have a good day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Vista's Third Quarter 2025 Earnings Webcast Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alejandro Chernacov, Vista's Strategic Planning and Investor Relations Officer. Please go ahead. Alejandro Cherñacov: Thanks. Good morning, everyone. We are happy to welcome you to Vista's Third Quarter of 2025 Results Conference Call. I'm here with Miguel Galuccio, Vista's Chairman and CEO; Pablo Vera Pinto, Vista's CFO; Juan Garoby, Vista's CTO; and Matias Weissel, Vista's COO. Before we begin, I would like to draw your attention to our cautionary statements on Slide 2. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by these remarks. Our financial figures are stated in U.S. dollars and in accordance with International Financial Reporting Standards, IFRS. However, during this conference call, we may discuss certain non-IFRS financial measures such as adjusted EBITDA and adjusted net income. Reconciliation of these measures to the closest IFRS measures can be found in the earnings release that we issued yesterday. So please check our website for further information. Our company is sociedad anónima bursátil de capital variable organized under the laws of Mexico, registered with the Bolsa Mexicana de Valores and the New York Stock Exchange. Our tickers are VISTA in the Bolsa Mexicana de Valores and VIST in the New York Stock Exchange. I will now turn the call over to Miguel. Miguel Galuccio: Thanks, Ale. Good morning, and welcome to this earnings call. During the third quarter of 2025, we recorded a strong performance across key operational and financial metrics, especially on a sequential basis, driven by strong productivity in new well tie-ins in Bajada del Palo Oeste and La Amarga Chica. Total production was 127,000 BOEs per day, an increase of 74% year-over-year and 7% quarter-on-quarter. Oil production was 110,000 barrels per day, an interannual increase of 73% and 7% sequentially. Total revenues during the quarter were $706 million, 53% above the same quarter of last year and 16% above the previous quarter. Lifting cost was $4.4 per BOE, 6% below year-over-year. Capital expenditure was $351 million, driven by new well activity during the quarter. Adjusted EBITDA was $472 million, an interannual increase of 52% and a sequential increase of 70%. Adjusted net income during the quarter was $155 million. Net income was $315 million, reflecting a nonrecurring gain of $288 million from the Petronas Argentina acquisition. Earnings per share was $3 and adjusted earnings per share was $1.5. Free cash flow in this quarter was almost neutral at minus $29 million, driven by higher adjusted EBITDA and a decrease in working capital. Finally, our net leverage ratio at quarter end was 1.5x on a pro forma basis. During Q3, we connected 24 wells, 11 in Bajada del Palo Oeste, 4 in Aguada Federal, and 9 corresponding to our 50% working interest in La Amarga Chica. We recorded solid productivity in the latest well tie-ins, which boosted Q3 production by 7% compared to the previous quarter. Based on robust well performance, improvement in our oil realization prices and financial flexibility award by the $500 million term loan closed in July. We have decided to accelerate new well activity in Q4. We are now planning between 12 and 16 tie-ins in the next quarter, leading to between 70 and 74 connections for the year. We are seeing Q4 production about 130,000 BOEs per day, which leaves us on track to over deliver on production guidance for the year and the second semester. Total production in Q3 was 126,800 BOEs per day, an interannual increase of 74%. Oil production was 109,700 barrels per day, 73% above year-over-year. On a sequential basis, both oil and total production increased 7%, reflecting solid execution of our drilling campaign and robust well productivity during Q3, especially in Bajada del Palo Oeste and La Amarga Chica. Bajada del Palo Oeste also drawn production in our operated block, which increased 50% compared to a year ago and 6% compared to the previous quarter. Gas production increased 87% on an interannual basis and 9% on a sequential basis. In Q3 2025, total revenues were $706 million, 53% above Q3 2024, driven by a strong increase in oil production, which more than offset lower oil prices. On a sequential basis, total revenues increased 16%, driven by 7% increase in total production and 4% higher oil prices. Oil exports increased 84% year-over-year to 6.3 million barrels for the quarter. Realized oil prices were $64.6 per barrel on average, down 5% on interannual basis and up 4% on a sequential basis, in both cases driven by international prices. We captured higher Brent prices and lower discounts, which were around $1 per barrel during the quarter. During Q3, 100% of oil volumes were sold at export parity prices. In Q3, lifting cost was $4.4 per BOE, 6% lower compared to both the previous quarter and the same quarter of last year. This reflects our continuous focus on efficiency. Selling expenses per BOE were down 24% on an interannual basis, driven by the elimination of oil trucking services as of the start of the last quarter. Adjusted EBITDA during the quarter was $472 million, 52% higher on interannual basis, mainly driven by production growth, explained by the 15% in our operated production and the consolidation of 50% of La Amarga Chica. Compared to the previous quarter, adjusted EBITDA increased 17%, mainly driven by oil production growth. Adjusted EBITDA margin was 67%, up 2 percentage points compared to the same quarter of last year as production growth and the elimination of oil trucking offset lower oil prices. Netback was $40.5 per BOE, up 8% on a sequential basis. During Q3 2025, cash flow from operating activities was $304 million, reflecting income tax payments of $179 million, partially offset by a decrease in working capital of $43 million. Cash flow used in investing activities was $333 million, reflecting accrued CapEx of $351 million partially offset by a decrease in CapEx-related working capital of $17 million. Free cash flow during the quarter was minus $29 million, reflecting higher adjusted EBITDA that drove cash from operations and a decrease of $59 million in working capital. Cash flow from financing activities was $195 million, driven by proceeds from borrowings of $500 million, partially offset by the repayment of borrowings' capital of $193 million and the repurchase of shares of $50 million. Finally, cash at period end was $320 million, our net leverage ratio on a pro forma basis reflecting the Petronas Argentina transaction stood at 1.5x adjusted EBITDA. To conclude this call and before we move to Q&A, I will make some closing remarks. During Q3, we recorded a robust well productivity in new well tie-ins, reflecting our high-quality asset base and peer-leading operating performance. This led to a material increase in adjusted EBITDA, both in a sequential and interannual basis, driven by production growth and continued focus on cost control. Q3 production was well within guidance range for the second semester. Production growth in the fourth quarter on the back of solid productivity and more investment in our profitable ready-to-drill inventory leaves us on track to potentially over-deliver on our guidance. I remind you that we will be hosting our third Investor Day on November 12. During this virtual event, we will present an updated strategic plan, focusing on profitable growth, cost efficiency and cash generation. Before we move to Q&A, I would like to thank everyone at Vista for delivering a remarkable quarter. Operator, we can now move to Q&A. Operator: [Operator Instructions] Our first question comes from the line of Rodolfo Angele from JPMorgan. Rodolfo De Angele: Thanks for the time to discuss the numbers presented yesterday. I'm sure we would like -- looking forward to the investor event where you're going to revise the strategic numbers. But for the time being, I think my question to you is on price realization. The numbers were pretty good. And compared to our expectations here, one of the positive surprises came from a realization of prices pretty solid versus Brent. So can you expand a little bit on what drove this? And what should we expect for the coming quarters? That's it for me. Miguel Galuccio: Rodolfo, thank you very much for your question. It's a good one. There are basically 2 factors driving this good realization prices. With our spot export via the Atlantic, we have some flexibility regarding when we trigger the Brent price. This can potentially usually help us to capture some Brent price slightly above what you can see as a quarterly average. In Q3, the Brent averaged around [indiscernible], but the trigger Brent that we use to price the cargo was on average $1 higher. Also, the average discount of Brent was around $1 per barrel during Q3. So this is explained by 3 main factors. The first one is the high oil demand that we saw from West Coast U.S. due to seasonal factor. The other one was the very good demand that we have for Medanito. And the last factor was the lower availability of other type of crude oil that usually compete with us like [indiscernible] crude. So that mainly explains why we have some good realization pricing during the Q3. Operator: Our next question comes from the line of Leonardo Marcondes from Bank of America. Leonardo Marcondes: So my question is regarding the drilling completion and tie-in of the wells since September's figures beat the market expectations, right? So I would like to know if you could provide some color on the rationale of this significant increase in well tie-ins now, right? And also some color on what can we expect from this team for the remainder of the year? I mean, should you keep the rhythm on October, November, December? Miguel Galuccio: Leonardo, thank you very much for the question. And I will explain and give you a bit of context on the rationale on the increase of well tie-ins. So I mean, as a recap, in April, we took on a bridge loan to finance the Petronas Argentina acquisition, as you know. In May, we successfully tapped to the international market and issued a bond of $500 million to take out the bridge loan. And also in July, a $500 million term loan to refinance all our short-term maturities, and that basically give us or regain full financial flexibility. We also consolidate the new assets. We saw very good productivity and production growth, even, I would say, better than our original expectation. And on the top of this, now there is less bearish consensus regarding the oil price. So in summary, due to all these factors, we decide -- we saw that we are aware in a position that we were more comfortable to basically accelerate CapEx. Regarding Q4, the short answer to your question is yes. You will see pretty much, I would say, 11 to 14 wells. And regarding '26, you have to bear with me, I mean we have in a few weeks at our Investor Day in November 12, and I will probably wait to give you a full view of what we're going to do in 2026 and onwards. Operator: Our next question comes from the line of Bruno Amorim from Goldman Sachs. Bruno Amorim: I have a follow-up question on the production outlook. It seems that you ended third quarter on a strong tone. So what does it mean for the fourth quarter, given you just mentioned you're going to continue to drill and tie-in a significant number of wells into the fourth quarter. Can you elaborate on where do your current expectations stand versus your guidance for the remainder of the year? Miguel Galuccio: Bruno. Yes, you can expect that the production for Q4 to be about the 130,000 barrels oil per day that we guide. As always, you will see the typical up and downs that we see month-over-month. As you know, the natural rhythm of how we tie-in the wells sometimes it's not quarterly, but it's changing month-by-month. But on average, Q4 will be similar to September. So this implies that we will likely be above guidance for the year. The guidance was between 112,000 and 114,000 barrels oil per day. And also [indiscernible] we will be about the guidance for the second semester, which was between 125,000 and 128,000 barrels oil per day. So yes, you can you can probably look at Q4 about 130,000. Operator: Our next question comes from the line of Alejandro Demichelis from Jefferies. Alejandro Anibal Demichelis: Congratulations on the quarter. Miguel, one quick question. Could you please indicate how you're seeing the evolution of drilling and completion costs over the next few quarters? We have seen a bit of volatility on the FX. We have seen kind of inflation kind of going up a little bit. So just some kind of direction on how you see those costs go on, please? Operator: [Operator Instructions] Alejandro Anibal Demichelis: Congratulations on the quarter. Miguel, one quick question. Could you please indicate how you're seeing the evolution of cost of drilling and completion costs over the next few quarters given the volatility on the FX, inflation and so on. Miguel Galuccio: Yes, Ale here again. I mean we listened the first one, but thanks for the question. So we announced, I was saying in Q2 that our cost of the well was around $12.8 million. This is drilling and completion cost for well with a lateral length of approximately 2,800 meters and 47 stages. Today, we are slightly below this number and we are seeing very good results from the initiatives that also we announced last quarter that we will implement it. We are currently working on further initiatives on the same 2 verticals that were contracts and technology, so -- which basically, we believe and we feel very strongly that will lead to further savings. So the idea is to comment and to give a lot of color and more color because we have very good news coming on that front on the Investor Day. So I hope you take that answer now, and we will give you more detail when we see you in the [ field ] on November 12. Operator: Our next question comes from the line of Thiago Casqueiro from Morgan Stanley. Thiago Casqueiro: Congratulations on the results. My question here is regarding La Amarga Chica. It's been about 6 months since you acquired the stake in the assets. So looking back on this initial learning period, what would you say are the key challenges and opportunities you have identified in the assets so far? Miguel Galuccio: Thiago, thanks for the question. Look, I mean, we have a very open and contractive relationship with YPF, I will say, at all levels. At my level, CEO and at the level of Matias in the field and everybody. You imagine they have been for many years, co-worker of us. So very good relationship, very good collaboration. We are collaborating in many fronts. First, I would say, sharing technical learnings. We regard ourselves as lead operator. We have learned a lot. YPF has a very extense experience in unconventional. So the sharing of practices has been very rich. Second, in opportunities on services and also in infrastructure, very collaborative and very open discussion also in those both fronts. The performance of the production and the cost efficiency this quarter was very good, I have to say, very good. So we are now focusing and discussing the 2026 [indiscernible] and the budget for that. But overall, it's going very well. Operator: Our next question comes from the line of [ Matteo Tosti ] from Citi. Unknown Analyst: Congratulations on results as well. I was wondering while you may comment on M&A. I mean I remember last quarter, you touched on this, and we -- you said maybe there was still appetite for M&A. And has this appetite continued? Is something that has maybe weighed down a bit? What can you comment on this? Miguel Galuccio: Matteos, well, the short answer is the appetite is intact. So we have a proven track record, as I said before, creating value through M&A. So we are not only good operators, we have been very good M&A wise all the way up to here. And the best example of that probably the Petronas acquisition earlier this year. So that is part of our strategic approach as Vista. So given also that we are increasing our scale and our cash profile going forward, we will continue assessing opportunities. The only thing I will say that you have to take in consideration that we have a very high value in terms of value accretion and also in terms of strategic fit. But yes, the short answer is the appetite to M&A is intact for us, and we will continue looking to opportunities as they come. Unknown Analyst: If I may add a quick follow-up. Are there any open processes today, maybe the opportunities to engage with other companies? Are there any open process, any assets available that you're looking into? Or has the temperature cooled on that front, too? Miguel Galuccio: No, I don't think -- I mean, as we said in a formal process, I don't see any formal process that we are participating. We are having, yes, several discussions as always we have. As you know, the interest in Argentina have renewed a lot during the last few -- during the last year. And also, we see new players coming into the country, I would say, exploring opportunities. So yes, we are maintaining discussion with all of them. But I will not say that we are participating in any formal process at the moment. Operator: Our next question comes from the line of Tasso Vasconcellos from UBS. Tasso Vasconcellos: Great. Miguel, maybe a follow-up question on the discussion on CapEx and production levels. If Vista were to only maintain current level of production is stable without much growth, what would be the level of CapEx required? And in this same sense here, what would be the maintenance CapEx to maintain production stable closer to 150,000 barrels a day. That's my question. Miguel Galuccio: Thank you, Tasso for the question. Yes, these are numbers that usually when we simulate our plans, we look into. I will say using 100,000 barrel per day of production as a reference, we will need around $700 million of CapEx to keep the production flat going forward. And that will imply probably between 50 and 55 wells. If we in [indiscernible] of 130,000 with 150,000 barrel per day, then I think that we should add one rounding the CapEx around $800 million and then the number of wells would be between 55 and 60 wells. So that will be around numbers. Of course, that could change also depend of the context now. Operator: Our next question comes from the line of Michael Furrow from Pickering Energy Partners. Michael Furrow: So there's been a lot of attention on the upcoming midterm election. And for good reason, the outcome could have meaningful implications to the country. Now that said, the Vaca Muerta is an extremely valuable natural resource, and it seems to us that regardless of the outcome, this resource will continue to be developed. So I was hoping that you could maybe take some time to discuss your thoughts on the matter and if you see any outcomes from this weekend's election that would have a material impact on Vista's operations. Miguel Galuccio: Thank you, Michael, for the question. It's a recurring question and a good question. In short, the elections do not change our plan. We've been growing Vista from the scratch to where we are today, participating in 4 different administrations. And even before that, most of us came back to the country in 2012. And as we said, we were part of making Argentina a structural net exporter today and being part of the solution of the country. So the fact that we are holding an Investor Day 2 weeks after the elections is a full reflection of what we feel about the business. Our business model is solid, is dollarized, and we are increasing as we grow the amount of sales to the export market. So also, we said that we have secured the funding to continue growing, and we will discuss that in November 12. And we don't have any large financial debt maturity in the coming years. We also have secured the services, the rigs, the completions, the frac set with flexible contracts going forward. So no, Michael, I don't think, I mean, the elections will affect multiples and other things or the perception of Argentina, but will not affect Vaca Muerta. It doesn't affect our ability to continue growing and to execute our plan. Michael Furrow: That's great. I appreciate such a comprehensive answer. Operator: Our next question comes from the line of George Gasztowtt from Latin Securities. George Gasztowtt: Brent has remained pretty volatile again this quarter. And I was wondering what your EBITDA sensitivity to oil prices was now in 4Q. Miguel Galuccio: Thanks, for the question. Yes, there is a sensitivity. Using 130,000 barrel oil per day production as a reference, you should think that for every dollar per barrel of changing in realized oil prices, the adjusted EBITDA in the fourth quarter will change approximately between USD 8 million and USD 9 million. That's more or less will be the impact. Operator: Our next question comes from the line of Juan Jose Munoz from BTG. Juan Muñoz: Regarding La Amarga Chica, could you provide more color about the production of the 3Q? I understand that you finished on a strong note and also regarding the outlook that you have for La Amarga Chica in the last quarter of the year. Miguel Galuccio: Thank you, Juan Jose, for the question. So in La Amarga Chica, let me do a bit of a recap of La Amarga Chica. In La Amarga Chica, we connect around 18 wells. And we have 50% of that work [indiscernible], so YPF connect 18. This well correspond to 4 parts, Pad 120, Pad 67, and these Pads, if I'm not mistaken, in the south triangle of the block and also the Pad 105 and the PAD 83 that are in the center of the block. All the 4 pads are producing above budget. The well performance of La Amarga Chica was good and the production was for Q2, 38.7 and they took it from 38.7 to 43.5 in Q3. So very good performance for Q3. And we are expecting -- I cannot give you a number, but we are expecting a very strong performance also in Q4. So I hope that gives you a feeling of how we are looking at La Amarga Chica. Operator: Our next question comes from the line of Francisco Cascarón from DON Capital. Francisco Javier Cascarón: My question is what caused the decline in operated production during the first 2 months of the quarter? And if you are looking to accelerate that production going forward like we saw in September? Miguel Galuccio: Thank you, Francisco. So yes, we saw a very good productivity in the wells that we connect during the quarter, specifically Bajada del Palo Oeste where we connect 11 wells that correspond to 3 different pads. Bajada del Palo 35 was connected in July, has 5 wells of around 3,400 meters in lateral length and 57 completion stages on average. Then we connect Bajada del Palo Oeste 36 that has 4 wells, lateral of 3,300 meters. On average, I think, around 50 stages. And then we -- that was -- the last one was connected in August. And then we connect Bajada del Palo Oeste 37 that has only 2 wells, 2,800 meters length and 48 stages on average that was connected in September. So what you're seeing is the solid productivity of this 11 wells is the result of the boost production that you saw from Bajada del Palo Oeste that went from 56,400 barrels of oil per day in Q2 to 60,200 barrels oil per day in Q3. So that are the pads that somehow result in the boosted production. You will see that also continuing in Q4. Operator: Our next question comes from the line of Matías Cattaruzzi from Adcap Securities. Matías Cattaruzzi: Miguel and Alejandro, my question goes on the regard of CapEx guidance. Given the current activity levels and the pulse of -- the pace of well tie-ins, do you see a possibility of this year CapEx ending above the $1.2 billion guidance closer to $1.3 billion or over that number as recent trends in activity suggest? Miguel Galuccio: Matias, yes, thanks for the question. Yes, I mean, we guide 59 wells, and we will be end up drilling between 70 and 74 wells. So you should add 11 to 15 wells to our original guidance. Of course, that will involve more CapEx or some additional CapEx. So you should think that [indiscernible] $1.2 billion. So you should think that we will end up between $1.2 billion and $1.3 billion for total CapEx for the year and Q4, a little over $300 million. So that is how you should look to the actual CapEx numbers. Operator: Thank you. At this time, I would now like to turn the conference back over to Miguel Galuccio for closing remarks. Miguel Galuccio: Well, thank you very much, everybody, for the participation. Of course, we are super happy with the quarter, a fantastic quarter for us. And I'm looking forward to see you all on November 12 in Argentina. Thank you very much, and have a good day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Hello, and welcome to the First BanCorp Third Quarter 2025 Financial Results. My name is Carla, and I will be coordinating your call today. [Operator Instructions] I would now like to hand you over to the Investor Relations Officer, Ramon Rodriguez to begin. Please go ahead, when you're ready. Ramon Rodriguez: Thank you, Carla. Good morning, everyone, and thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the third quarter of 2025. Joining you today from First BanCorp are Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website at fbpinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman. Aurelio Alemán-Bermúdez: Thank you, Ramon, and good morning to everyone, and thanks for joining our call again today. I will begin by briefly discussing our financial performance for the third quarter and then move on to discuss our outlook for the franchise. We're definitely very pleased with the progress on the quarter we delivered another exceptional quarter of financial results that underscore our ability to produce consistent returns to our shareholders and consistent progress in our franchise metrics. We earned $100 million in net income during the quarter, including the benefit of certain nonrecurring special items that Orlando will explain later. However, adjusted for these items, normalized earnings per share grew 13%, when compared to the prior year. Most of the improvement came from record net interest income and well-managed expense base and disciplined loan production. Turning to the balance sheet. Our strong capital position enabled us to continue supporting our clients on the loan production side. We grew total loan by $181 million, of course 5.6% linked quarter annualized surpassing $13 billion in total loans for the first time since 2010. Since the beginning of the second quarter, we do -- we've been experiencing slowdown in consumer credit demand. Especially, I want to comment on the auto industry, which has been below our original expectation for the year. After the sector-specific tariffs were announced in April, industry-wide sales began trading down, which has negatively impacted overall loan origination in this space during the year and loan mix production. For some additional context, total retail sales in our industry are down 7% year-to-date as of September. But when looking at the third quarter sales, they are below 17% compared to the third quarter of the prior year. Thankfully, we've been able to mitigate this slowdown by executing our growth plan within the commercial and construction lending segment, coupled with a steady loan production progress in the residential mortgage business, it's about business diversification and regional diversification contributing to that. In terms of deposit, it was a good quarter. We grew $140 million on core franchise deposits, trends in the market flows remain favorable. Although we're seeing higher competition in just seeking flows, we believe that could be temporary, particularly from affluent customers and government relations. That said, we continue to focus on what is our core deposit franchise, while deploying a measured approach to retaining valuable cost core customer's relationships. In terms of asset quality, credit continues to behave in line with expectations, consumer charge-offs stabilizing, healthy commercial credit trends and a 7% reduction in nonperforming assets. Finally, our earning performance translated into growth across all capital ratios, while expanding our loan book organically and being able to repurchase another $50 million in shares of common stock. Consistent with the strategy of returning 100% of annual earnings to shareholders, as we announced yesterday, our Board authorized an additional $200 million share buyback program that we expect to execute through 2026. Please let's move to Slide 5 for some additional highlights on the macro. In terms of the macro, the operating background remains, as to stay stable with uncertain elements that are surrounding us as we continue to monitor and assess the potential impact that evolving trade dynamics are bringing to the market, any potential impact of federal government shutdown, tariff-related inflationary pressures are having pressure on businesses and consumers across our regions as everybody is realizing. That said, we are encouraged by the resiliency of the labor markets in Puerto Rico, the continued improving trend of the tourism activity and the recently announced investments of manufacturing companies expanding production capacity in Puerto Rico or establishing new facilities. We believe that the ongoing expansion of the manufacturing sector, coupled with the consistent flow of federal disaster funds earmarked for infrastructure will continue to support local economy for the years to come. Our franchise is in a great position to benefit from the tailwinds and we expect to strategically deploy our excess capital to continue growing organically our regions. Year-to-date, total originations other than credit card activities are up by 7% when compared to prior year. We're supported by sales discipline, client outreach, well-managed regional and business line diversification, which is really the strength of our franchise. Based on current commercial lending pipelines, development rate environment and the ongoing normalization of industry-wide auto sales. Our loan growth guide for the year will probably be closer to the 3%, 4% range, depending on commercial credit line uses and any level of unexpected payments that we don't have knowledge today. We will provide an updated guide on our -- for 2026, once we report our fourth quarter in January, and also full year forecast for next year. With that, I would like to thank you for your interest in First Bank, I'm definitely very proud of our team's accomplishments to 2023 -- 2025 and look forward to a strong end of the year. And now I will turn the call to Orlando to go over financial results in more detail before we open the call for questions. Orlando? Orlando Berges-González: Good morning, everyone. As Aurelio mentioned, we had a strong quarter with net income reaching $100 million or $0.63 a share. That compares to $80 million or $0.50 a share in the second quarter. Return on average assets for the quarter was 2.1%, much higher than last quarter. This quarter did include a few things, and I'm going to touch upon. We had a $16.6 million reversal of valuation allowance on deferred tax assets that are related to net operating losses at the holding company. This quarter, a new legislation was enacted in Puerto Rico allowing limited liability companies to be treated as disregarded entities, based on this change, we now expect that NOLs at the holding company will be mostly utilized against revenues from one of its subsidiaries, resulting in the reversal. Also, during the quarter, we collected $2.3 million in payroll taxes related to the employee retention credit. That's been outstanding for a while, but we collected it this quarter and it resulted in a reduction of payroll costs, obviously. We also recorded a $2.8 million valuation allowance for commercial other real estate property in the Virgin Island as a result of an ongoing litigation, which involved potential loss of title of the property. If we were to exclude the DTA valuation allowance and employee retention credit components from results. Non-GAAP adjusted earnings per share were $0.51 and return on average assets was 1.7%. The quarter also had a reduction of $3 million in provision as compared to last quarter. Provision was $17.6 million. This was mostly due to a $2.2 million benefit in the allowance for residential mortgage. We've seen updated -- improved updated loss experience in this portfolio and also the projected macroeconomic for unemployment has an improvement in the trends. In terms of our net interest income, we reached $217.9 million for the quarter, which is $2 million higher than last quarter. That includes a $1.3 million improvement due to an extra day in the quarter. Compared to the third quarter, net interest income the third quarter of 2024, I'm sorry, net interest income, it's 8% higher. Net interest margin for the quarter was 4.57%, 1 basis points higher than last quarter. And over the last 4 quarters, margin has grown 32 basis points. As stated in prior calls, the reinvestment of the cash flows from the investment portfolio resulted in a 16 basis points expansion in the investment portfolio yields. However, the margin ended up growing less than the 5 to 7 basis point guidance we had provided. Aurelio mentioned, we saw a slowdown in consumer lending originations for the quarter, which was below our expectations and ended up reducing the average balance in the portfolio by $12 million. Remember, these are high-yielding portfolios, and they are more accretive to net interest income. Also, we saw increased competitive pricing pressures led to a 15 basis point increase in the cost of government deposits and a 2 basis points increase in the cost of time deposits. The average cost of all other retail and commercial deposits remained flat at 72 basis points as compared to prior quarter. In addition, when we look at the mix of deposits, we see a shift with time deposits growing $166 million at the end of the quarter, while lower cost interest-bearing nonmaturity deposits decreased $45 million. Regarding other loan portfolios, we saw improvements in the quarter with net interest income on commercial loans increasing $3.8 million related to $126 million increase in average balances, 3 basis points increase in yields. And we had an extra day in the quarter, which also improved the net interest income. The average balance on the residential portfolio grew $19 million for the quarter. For the fourth quarter, we will continue to benefit from yield improvements from reinvestment of the cash flows from the investment portfolio, but this will be partially offset by the 2 projected Federal Reserve rate cuts that would result in reduction in yields on the floating commercial loan portfolio as well as the cash balance at the Fed. Remember, we have a floating commercial portfolio, which about half of it is floating with either prime or SOFR, mostly as it's a priced today. In that we have an asset-sensitive position repricing on the asset side will happen faster than on the liability side. We expect that margin for the fourth quarter to be sort of flat with increases in net interest income coming from loan portfolio growth. In terms of other income for the quarter was relatively flat, slight reduction on card processing income due to lower transaction volumes. Expenses for the quarter were $124.9 million, which is $1.6 million higher than last quarter, which is mostly due to the net loss on the OREO operation related to the $2.8 million valuation adjustment I just mentioned. Also, payroll expenses decreased $300,000 due to the $2.3 million employee retention credit that basically compensated for a $1.8 million increase we had from annual marine increases and from an additional payroll day in the quarter. If we were to exclude OREOs and excluding the employee retention credit, expenses were $126.2 million, which compares to $124 million in the second quarter, which is slightly above our guidance, but pretty much in line with the $125 million to $126 million we had provided. The efficiency ratio for the quarter was 50% pretty much unchanged also, when compared to prior -- to the second quarter. The projected expense trend for technology projects and business promotion efforts we plan to do in the fourth quarter. And so we reiterate our guidance expense base of $125 million to $126 million for the next couple of quarters. And still believe our efficiency ratio will be in that range of 50% to 52% considering expenses and income components. In terms of credit quality, it remained fairly stable in the quarter. In the quarter, NPAs decreased $8.6 million basically $3.8 million decrease in nonaccrual loans, mostly residential mortgages and CRE loans and a $5 million reduction in OREO balances. That includes the $2.8 million adjustment on the VI property I mentioned. Inflows to nonaccrual were $32.2 million, which is $2.2 million lower than last quarter. Mostly commercial and residential mortgage inflows of $6.7 million, which are offset by -- I'm sorry, a reduction of $6.7 million in residential and commercial with an offset of $4.5 million increase in consumer inflows. Loans in early delinquency, which we define it as 30 to 89 days past due increased $8.9 million, mostly 1 case in the Florida region, a $6 million commercial case that the payment was not received until later in October. In terms of consumer loans, early delinquency remained relatively flat from the second quarter, increasing only $300,000. Moving on to the allowance. The allowance is down $1.6 million to $247 million. The decrease was mainly in the residential mortgage portfolio as loss severities have continued to improve. On the other hand, the allowance for commercial loans increased based on the portfolio growth and some deterioration that is projected on the CRE price index as part of the macroeconomic over projections. The ratio of the allowance for credit losses to loans decreased 4 basis points to 1.89%, and this was mostly a decrease of 9 basis points in the allowance for credit losses on the residential mortgage portfolio. Net charge-offs for the quarter were $19.9 million, 62 basis points of average loans, which is up about $800,000 from prior quarter or 2 basis points. Last quarter, we had an $800,000 commercial loan recovery. And this quarter, we did not have any of this size to offset some of the charge-offs. As Aurelio mentioned, consumer charge-off levels continue to be normalizing and commercial charge-offs continue to be very low. On the capital front, again, our strong capital base continues to support the actions of share repurchases and dividends. During the quarter, we declared $29 million in dividends and repurchased the $50 million in common stock we had mentioned. Regulatory capital ratios continue to be low, but these capital actions were offset by the earnings generated in the quarter. In addition to all of this, we registered a 6% increase in the tangible book value per share to $11.79 and the tangible common equity ratio expanded to 9.7%. Also due to the $49 million improvement in the fair value of available-for-sale securities. The remaining AOCL still represents $2.42 intangible book value per share and over 177 basis points in the tangible common equity ratio. As we announced yesterday, our Board approved an additional $200 million in share repurchase, our intention is to continue the approach of opportunistically executing on our capital actions based on market circumstances with the base assumption of repurchasing approximately $50 million per quarter through the end of 2026. But again, as we have done so far, we will continue to deploy our excess capital in a thoughtful manner, looking for long-term best interest of our franchise and our shareholders. With that, operator, I would like to open the call for questions. Operator: [Operator Instructions] And our first question comes from Brett Rabatin with Hovde Group. Brett Rabatin: I wanted to start off. I just want to make sure on the tax situation, that's onetime, right? That doesn't continue from here in terms of any benefit? Orlando Berges-González: Well, there will be a benefit in the sense that we won't have reversals of deferred tax asset at these levels. But there is a benefit on the normal operating losses or expenses we have at the holding company. Those are annual expenses that are -- now we're not yielding any tax benefit. And they will be offset also against revenues from this stock. So it's not -- that is a huge amount, but you saw that the effective tax rate came down a bit, and that's reflecting some of that benefit. So not at the level of this reversal of DTA, but there is a little benefit on the effective tax rate going forward. Brett Rabatin: Okay. That's helpful. And then wanted just to talk about -- I've seen the stats, and I know that the auto lending has finally come in as expected for some time, a bit -- any thoughts on the health of the consumer in Puerto Rico and your credit trends seem fairly stable from a consumer perspective. But just wanted to hear any thoughts on how you guys are seeing on the grounds consumer activity? Aurelio Alemán-Bermúdez: Well, I think it's clearly auto sales, we can call it normalizing. We were expecting for the year, a 5% adjustment coming down. It's actually 7% year-to-date. But obviously, it disrupted by there were increased sales in the second quarter because of the tariff and they were coming. Now you see a reduction, some sales were accelerated. So I think we need to see what happened this quarter to normalize those auto sales and see what is a real stable volume. They have fluctuated between 100 to 120 units, 20,000 units per year for some years. So we expect somewhere on that range probably the second half of the year will determine how we project 2026. Yes, credit demand has been lower. It's been -- on the other hand, unsecured credit demand has been a little bit lower. We remember 3 years ago, 2 years ago, we have been doing adjusted policies. We've seen the good performance of the portfolios across the board and some of the higher losses that we experienced in credit cards and unsecured are being leveling. So we expect stability on the consumer, but we don't expect portfolio growth as we achieved for some years. So the portfolio growth will come from resi, which is performing excellent and from the commercial portfolio that we continue to gain some share across the different sectors. So that -- I would say, stability on the consumer. Obviously, working hard to diminish any contraction of the portfolio as we continue to move on with products and services in that segment. Brett Rabatin: Okay. And then 1 last one, if I can. Just around the margin guidance were flattish in the fourth quarter. Does that assume -- in the face of the rate cuts, does that assume you are able to lower funding costs, deposits, even though the beta in Puerto Rico on the way up was obviously a lot slower than maintenance? Are you expecting the beta on deposits to be better on the way down? Aurelio Alemán-Bermúdez: I think 1 element that definitely will come down, we have some index deposits for the government that are -- they move with the rates, and some of that will come down. We don't see the other core retail products coming down yet. Orlando Berges-González: Other than time deposits that we do see some reduction. Aurelio Alemán-Bermúdez: Other than time that they happen -- they move with the market. So there will be some reduction on the cost of deposits. Expected to happen during the quarter. Obviously, how much that can offset the mix of the portfolio. Obviously, the margin is very strong. So having less consumer loans at high yield impact the margin directly as well as which segments of the deposits are growing, which this quarter we have growth on the CD book at market, not necessarily above market. So as an example, so it depends on the whole mix of the balance sheet, which is big, yes. Operator: And the next question comes from Timur Braziler with Wells Fargo. Timur Braziler: Back on the deposits, can you just elaborate a little bit more on the competitive pressures that you're seeing on the government side? I guess, how much economics are you having to give up how much of that is going to potentially lower some of the benefits of being able to reprice those with some of these rate cuts. And then just lastly, you said that you are optimistic that some of these competitive pressures might abate here. Maybe just give us some color as to what gives you that confidence? Aurelio Alemán-Bermúdez: Well, I think the cycle matters. Some of these are contracted deposits that are indexed. So they are already contracted and they're not necessarily up for bid. So they would buy -- if the rates move, they will move. With them either monthly or quarterly. So some of them are, in our case, probably 40% of the government book is on that bucket. I think the others in the CD, whatever matures obviously, move down with rates. I think competitive pressures are really coming from the smaller players, not from the large players. And the way we manage that is we go after operational accounts plus what additional services the government entities need, but we compete in pricing, where we have other type of relationship, not just to get a CD or it really has to add something else to the mix of the products that we sell and the franchise services. Municipalities and other government have a lot of payment services, deposits. So obviously, to complement that, we compare on CDs when they come to the market. Timur Braziler: Okay. And I guess maybe tying that into kind of 4Q, 1Q is the expectation that deposit costs drop with the subsequent rate cuts? Or do some of these, I guess, how much of an offset could some of these competitive pressures be to the planned drop in deposit costs? Aurelio Alemán-Bermúdez: We do expect some reduction in deposit costs coming down from -- as a result of the reduction in rates. The main point is that typically, we have seen the betas on some of these deposit products move at a -- there is a lag as compared to some of the floating asset products. So there is a timing issue in terms of when we see that on the asset side versus the deposit side. But we do expect reductions. It's just the pace at which all of them will come down. Timur Braziler: Okay. And then just on credit, credit results at First Bank in 3Q are really strong. There was a couple, let's say, in-migration inbounds on the NPL side for your competitor banks on the island, including some degradation maybe on Puerto Rico itself. I guess to what extent does credit at the other banks influence your own level of reserving in the way that you're thinking about your own portfolio, if at all? Aurelio Alemán-Bermúdez: Well, we've been telling for some time that we have a firm risk appetite and we have policies that we follow, and we have ticket -- deal size tickets that we have. And so it's really our methodology. It's really the performance of our portfolio. Obviously, if there are things that could impact an industry, we take that into consideration. But from what we have seen so far, we don't see any systemic or industry-wide impactful. Orlando Berges-González: Yes. Other than we tend to look at each of our cases individually. And again, as Aurelio mentioned, unless we see something in the industry, it would be more of what we are seeing on our own customer base and what are the results and the lines of business they have. Timur Braziler: Okay. Great. And then just last for me. I think more recently, First Bank has been open to doing maybe M&A on the Mainland. Can you just remind us what you would be considering in terms of size, location, assets, deposits and kind of just your updated view on capital deployment here? Aurelio Alemán-Bermúdez: Well, capital deployment priorities are obviously #1 organic growth. As said in the Florida market could be an alternative fit for us is a franchise that enhance our current franchise. It's very easy to originate loans in Florida, if you have the right teams and they move from 1 bank to the other and as long as we have a good discipline of credit, it will perform well. And I think we have a history of that. I think it will be -- definitely have to be complementary to our deposit franchise. That would be the profile. We have the capital, so size will depend, yes. Operator: And our next question comes from Kelly Motta with KBW. Kelly Motta: Wanted to circle back to the competitive landscape in Puerto Rico. I appreciate the color on the government deposits. Wondering if there's been any competitor competition from outside the Puerto Rico banks any -- if you've seen any new entrants into the market and just opine on the competitive landscape? Aurelio Alemán-Bermúdez: None of the deposits. It's really -- while we see, it's more aggressive now with the smaller players, as I mentioned. Obviously, in the credit card business, there's always been a lot of entrance and they dominate U.S. banks dominate the card issuance, including the larger bank, so the larger bank so nothing new on that front. Orlando Berges-González: And it's also the credit unions that play in the market, but not coming from the outside. It's entities that have operations in Puerto Rico. Kelly Motta: Okay. Got it. That's helpful. There's some... Orlando Berges-González: I'm sorry. The only caveat. Kelly, I'm sorry, the only caveat is there is 1 player, big player, which is called the U.S. treasury and so the -- you face that with some of the high-end customers that they could move monies into treasuries. Aurelio Alemán-Bermúdez: Yes. Kelly Motta: Got it. That's helpful. There's been a lot of news onshoring early glimmers of that picking up and helping Puerto Rico. Have you seen any notable impacts? And how should we be thinking about that like more from a high level in terms of the potential? Aurelio Alemán-Bermúdez: Yes. I think in the short term, they have announced a few deals, and we will try to put some more detail on that in our investor deck, give you more granular things that have been already approved or negotiated. We're trying to get more data on that. In addition, but we don't see that it's really in the short term. Probably we continue to sustain and improve the construction sector and whatever is related to materials and the labor-related benefit of that. But not necessarily, we see anything that must flow through the economy other than that impact in the short term. As we -- as we see this expansion become operational, then we'll probably see more employment, better compensation and expansion of the workforce, yes. But we don't expect that until probably second half of 2026 or further. But the good thing is a long-term benefit to sustain the economy of the island rather than having a long-term risk by not having this commitment. Yes. Kelly Motta: Got it. That's really helpful. And then I guess circling back to the margin. I know you guys have had -- we saw a nice uplift from on the securities book. Can you remind us about the cash flows on that, 1. And then 2, what the new loan yield originations look like, just so we can kind of get a sense of the potential offset to some of the floating rate dynamics that you already articulated? Orlando Berges-González: So we have about $600 million of cash flows coming in this fourth quarter. The yields on that are around 1.5% on average. So that would be some of the cash flows that we immediately repriced. We also have about $1 billion more in the first half of 2026. That also, on average, are yielding that 1.5% that it's also come due. Obviously, with rates coming down, the reinvestment component, it's a bit lower than what we were -- we're seeing rates somewhere between 50 to 100 basis points lower already in some of the reinvestment options within our policy guidance. And some of it obviously could go into lending, but Aurelio made reference to it would be more on the commercial and residential side. Kelly Motta: Okay. And if your loan book right now is 7 -- 77%, what the new loan origination yields look like, I guess, in Q3? Orlando Berges-González: You're talking about the overall or you're talking about just the -- that's the average yield -- those are average yields, including consumer. If you take a look at the commercial side, mortgages, we're talking about sort of 6%, 6.25% kind of rates, right? It's market as so whatever you see in the market. The commercial portfolio yields are right now overall commercial portfolios, including everything, it's about [ 6.70% ] on average. So that's a combination of what goes into construction or CRE and C&I, obviously. So that -- we are not seeing big changes on spreads. It's a function of the base. The base meaning the base rate, which we either SOFR or Prime, which are the main ones. That would be the 1 the adjustments we'll see, but not necessarily on the spreads, it's a lot more. Consumer yields are going to be similar to what we have now, but it's only an issue of what's the level. We -- consumer on average are about 10.5% that what we have in the blended in the whole portfolio of consumer portfolio. And that stays sort of around those levels, but it's a function of volume more than anything on the consumer. Operator: [Operator Instructions] The next question comes from [ Erin Signaviwith ] Truist Securities. Unknown Analyst: I'm sorry, if you mentioned this, but what's your outlook for loan growth into the fourth quarter? I think you said that NII is expected to be higher despite the kind of flattish NIM just thinking about what you're thinking there on loan growth? Aurelio Alemán-Bermúdez: Yes. We -- I did mention that we -- the guidance that we have for the full year is between 3% and 4%. And I think the original guidance was 5%, mid-single digit. This is actually considering what happened in the auto lending side over the third quarter and actually part of the second quarter. it's the primary driver. Some offset has been provided by mortgage and we do have a fairly strong pipeline in the commercial. Obviously, there's always timing issues on those. But the pipelines continue to help. Unknown Analyst: Okay. And you announced a new share repurchase program, and there's still some remaining authorization from the prior plan. Can you talk about the cadence you're expecting in terms of share repurchases over the next several quarters? Aurelio Alemán-Bermúdez: Well, we've -- we always been opportunistic in the market, and we still have $38 million from this year authorization. We can move back and forth and increase or decrease as we believe is prudent. Again, open market is our approach. No ASRs are on schedule or as part of the strategy. So we'll continue monitoring. Orlando Berges-González: Yes. As I mentioned, were our base assumption continues to be around $50 million a quarter. Obviously, with the flexibility or the optionality of saying a little bit more or a little bit less depending on what are the circumstances on the market. Unknown Analyst: Perfect. All right. And then lastly, just a follow-up on the Mainland M&A question. I mean, it seems like a lot of other Mainland banks are also looking to expand in that geography. Would you say that the environment currently would be somewhat challenging to get a deal done around that area? Aurelio Alemán-Bermúdez: Again, opportunities come and go. So we'll see -- we continue to monitor and see what could happen. I think there's some -- if you see some of the bank reports, obviously, there's a credit side could be more reflected in the U.S., so that could bring opportunities too. Unknown Analyst: Got it. Aurelio Alemán-Bermúdez: These are always a timing opportunity. Thank you. Operator: The next question comes from Steve Moss with Raymond James. Stephen Moss: Orlando, just following up -- and maybe just following up, Orlando, on the margin here in terms of the timing of the cash flows from the securities portfolio. Is that just -- is that throughout the quarter? Or is that kind of late in the quarter to impact the margin? Orlando Berges-González: Well, you saw it's -- it's not really equally spread, but you can assume it's on average, November and December tend to be the highest in terms of the cash flow coming in. You saw that last quarter, we had that 16 basis points pickup. So we had about $500 million for the third quarter that those were the cash flows more or less than we're having the big repricing impact. So we -- and all of it did not benefit the third quarter. Some of it we'll see in the fourth quarter. So it averages out a bit. So we should see a pickup, obviously, with the only difference is what I mentioned that we are seeing rates the options that we have in rates being between 50 to 100 basis points lower based on our policy guidelines of what we put in the portfolio. As you know, we don't put much of credit risk in the portfolio. It's more of an interest rate more than anything. Stephen Moss: Right. Okay. Just I appreciate that color. And then on the loan loss reserve here, you guys have made a number of, I guess, qualitative adjustments, if you will, over probably the last 12 or maybe 18 months -- just kind of curious here kind of as you think about credit performed quite well on the island for an extended period, your consumer credit charge-offs are lower year-over-year, just kind of curious as to where you think that reserve ratio could shake out over the next 6 to 12 months? Orlando Berges-González: It's -- we don't talk about specific guidance like that is specific, but what I can tell you is that -- on the mortgage side, we have seen the trends with the lower charge-offs that our methodology uses historical loss information that is updated all the time. And obviously, as you get more history with better numbers in terms of losses that improves the ratio. So the residential reserves should come down. There is always an uncertainty on the forecast -- the macroeconomic forecast projections. We've seen the stability on the unemployment sector, the unemployment ratios in Puerto Rico reflect on the way the trends are expected on some of the portfolios, especially in when you look at the downside scenarios, we do include in our reserve calculations. So for mortgage, I do expect with the credit expectations we have that it would come down -- continue to come down a bit. The consumer, we're still seeing -- obviously, we had, as you mentioned, the '23 and '24, we saw increases related to those vintages of the older vintages at '22, '23 vintage, we've seen more stability now on the charge-offs, and that includes that affects calculations. So that for now will be sort of stable, I would say, in the meantime. And commercial has been pretty good. So I don't see major changes in commercial. Operator: [Operator Instructions] We have a follow-up from Kelly with KBW. Kelly Motta: Thank you for letting me jump back on. I just wanted to close the loop on the tax rate just given it looks like the FTE adjustment is up a bit and there was some noise in the quarter. Do you have a good like approximation of what the go-forward tax rate looks like here? Is it any materially different after adjusting for some of these onetime time things you had in the quarter? Any help would be appreciated. Orlando Berges-González: The number that we put on the press of effective tax rate of about 22.2%, which is estimated for the full 2025 already reflects some of this expected improvement. So I would say that's a good number to use as a guidance, remember that with a few things here and there. As we reinvest on the investment portfolio, a large chunk of that would have tax benefits. And since we have reinvested our better yields that reflects on the rates, then you have other components of the operations on some of the growth on the commercial lending side that's on a taxable side. So the 22.2%, I think, reflects fairly good number that we should be between that I'm sorry, 22% to 22.5% range. It's what I'm expecting now. Kelly Motta: I apologize. I think it's said in the release. Thank you. Operator: [Operator Instructions] And as we have no further questions in the queue, I will hand back over to Ramon Rodriguez for any final comments. Ramon Rodriguez: Thanks to everyone for participating in today's call. We will be attending Hovde's Financial Services Conference in Naples on November 4. We look forward to seeing a number of you at this event, and we greatly appreciate your continued support. Have a great day. Thank you. Operator: Thank you, everyone, for joining today's call. This conclude the call, please. You may now disconnect. Have a great day.
Niina Ala-Luopa: Hello, and welcome to Vaisala's Third Quarter Results Call. I'm Niina Ala-Luopa from Vaisala's Investor Relations. And today with me in this call are President and CEO, Kai Öistämö; and CFO, Heli Lindfors. And like always, first, Kai will present the results, and then we have time for questions. Kai Öistämö: Hello, and welcome, everybody, from my side as well. Vaisala had a good third quarter, strong sales and profitability as the headline says. So, let's dive a little bit deeper where did it come from and what are the details behind. So, first notion, the net sales growth was strong, 13% in reported currency, which can be characterized really as strong sales in a quarter. The orders received simultaneously declined by 21% and leading into a decline in the order book. Whilst when going back to the financial performance, we maintained a very solid profitability, 18.2% EBITDA margin. And if I exclude extraordinary items due to the restructuring and so on, actually, the EBITDA margin was 20%, which I think is all-time high for us in terms of an EBITDA margin, if I recall right. Really happy on Industrial Measurements on the demand picture and now clearly also broader than earlier. And on demand and on the other hand, Weather and Environment side, more challenging market environment, and I'll talk about both in detail in the coming slides. And really happy on the subscription sales growth continued to be very strong, 57% year-on-year and also the underlying organic growth on a very healthy level. And as I said in the release already, it was great to see also subscription sales now contributing positively also to the profitability of the company. The market environment continued to be challenging. If you think about the entire third quarter within -- inside of the third quarter, we kind of we start -- it started with the tariff changes and kind of fixing the tariffs between Europe and U.S. And then at the same time, during the year, continued in the third quarter, the depreciation of euro vis-a-vis USD and Chinese yuan. So, the environment has many moving parts, and the depreciation of euro, dollar and renminbi really are things that don't often get talked about as much as the tariffs. But actually, if you think about it, like the magnitude of the depreciation of those currencies vis-a-vis euro, the impact actually is equal, if not greater, than what the tariff impacts actually are. So, it's good to remember that as well. And as I will conclude at the end of my presentation, the business outlook for the year 2025 remain unchanged. But before going into the numbers and performance of the company in more detail, good to look at a couple of words on strategy execution inside of the company and this time in terms of a couple, we picked a couple of kind of interesting launches that are reflecting also the strategy and strategy execution of the company. The first one, Vaisala Circular, it's a service product and the emphasis really is on the word product, where the industry measurement probes are recalibrated and provide a reuse service where the customers maintain a dedicated pro pools at our service centers. Essentially, what it means is that we have productized the calibration service in such a way that now we are selling always accurate on uptime and continuous operations in our customers' operations instead of talking about calibration or other technical terms. This is obviously kind of crucial in terms of selling services that how do you productize it, crucial for the customers to understand what's the value and crucial for our sales to actually then be able to communicate what the value is and what the customer should be paying for. So, kind of a great example of the things that we are doing to drive our service sales, both in Industrial Measurements where Vaisala Circular is an example of, but we are doing similar things also in the Weather and Environment side. Then on Xweather, the hail forecasts. Hail actually is one of the more difficult weather phenomena to actually forecast. And it's been really one of these places where -- one of the things that really is -- has been really a challenge for meteorologist for a long, long time. Super happy to report that now we have an Xweather hail forecast. And hail is really important in terms of the damage it causes for various kinds of a property or infrastructure. For us in Finland, the hail sometimes gets to be kind of pea size and even that can kind of cause some damage. But in more southern countries where more extreme weather and extreme thunderstones typically are when hails get to be baseball sized, they really can kind of create quite a bit of damage. And it really is like billions of dollars losses in various kind of places. The example we are showing here where we can apply the kind of capability to forecast and create alerts for hail is solar parks. And if you think about solar parks, there's a whole host of glass facing upwards. And in case of a hail that's really prone for damages. And if you think about solar parks, one of the features is also that in many cases, they actually track sun, i.e., they are turnable. So, in case of hail forecast, you can actually turn them sideways so you can avoid the damages. And there's a kind of a big market and unsolved problem that we are solving for here with hail forecast as an example. And then WindCube, the next generation. Here, this is really, again, a good example of how we push the boundaries of the technology with our own R&D. With this evolution on LiDAR technology, we can actually increase the distance out of which we can read the wind and the wind fields, increased data availability and much, much more robust performance in clean air and complex terrain environment. So significant step-up in terms of our performance, which I believe both demonstrates our capabilities and is important for that business and puts us squarely in the lead also from technology and solution and performance perspective in that business. Then moving on to the financials. So, starting with the group level, strong growth, as I said, with -- in both business areas. Orders received decreased as talked about, and I'll still kind of talk about that a little bit later when I go into the business areas because there's differences in performance side. Order book consequently kind of down from same time last year. And then net sales-wise, a very strong quarter, 13% up year-on-year. And if you take the constant currency side perspective, it would have been 16% up from year-on-year, same time, so third quarter last year. Gross margin, a bit down, and I'll give you -- it's easier to explain when I go through the different business areas. Nothing dramatic about that there. And then on the profitability side, as I said, if you exclude the restructuring side, actually the EBITDA margin being all-time high, at least in my recollection. And cash conversion, no news there remained on a strong level. Now going into Industrial Measurements, yet another strong quarter and really happy to note that now the positive results are coming from all market segments and all geographies. And super happy to see that now Asia performing really well compared to the same time last year, equally so -- almost equally so, Europe and at the same time the U.S. growth continuing. Obviously, in the U.S. and in China, for example, where the local currencies have devalued vis-a-vis euro, that has a negative impact. If you -- like if I take, for example, U.S. in a constant currency, year-on-year growth was 9% in Industrial Measurements in Americas region. And I promised to talk about the gross margin in the business area side. And if I take Industrial Measurement side first. So, first of all, what I forgot to say is the orders received actually increased on the Industrial Measurement side, corresponding to the net sales growth, actually a little bit more increased 9% year-on-year here when the net sales grew 6% in reported currencies. But back to the gross margin. So gross margin decreased a little bit. And this really is due to exchange rate impact, but clearly, kind of big part of the impact was the proportional impact on the U.S. tariffs. And here, maybe worthwhile kind of just pausing and explaining the math that we've said that we have been fully mitigating the tariff impacts in our business. And that means that we've raised the prices correspondingly to whatever the tariff costs have been. And if you think about how that math works, it means actually that the -- even if it's fully mitigated in absolute terms, since the divider and the above the line and below the line kind of when you do the division are added the same amount, the relative number actually goes somewhat down. So that's really like if you have time, just play with the math and you'll see what I mean. So that's a big part of the explanation. So, I am not worried. It's within the normal boundaries in terms of what the gross margin changes have been and it's worthwhile saying also that while we are in the Industrial Measurement side, it's obviously easier to kind of mitigate by price changes, extraordinary events like the import duties and such changes in import duty regimes compared to fluctuations in currencies. Since we price and any global company would do the same, price in local currency, you cannot go every time currency exchange rates go back and forth, go change the local pricing. Obviously, long-term, there are kind of pricing means to compensate this. But short-term, you cannot kind of react to all of this, and it would not be constructively taken either from a customer perspective. Then Weather Environment. In net sales, actually a great quarter and subscription sales-wise, equally so. At the same time, the orders received in decreased in Weather Environment, driven by a couple of things. There's a strong decline in renewable energy market, as we have been saying since the first quarter of this year. Nothing has really changed on that. And there was kind of a significant change in the market in the beginning of the year, and it continues to be on a low level, and we do not expect that to change in any time soon. And I'll come back to that in the outlook. And then likewise now in aviation and meteorology markets, there was a very strong comparison period and kind of big orders taken in the comparison period last year. But also this part of the market, when you take aviation and meteorology, there is a fluctuation between kind of natural fluctuation in those markets as well as this year, where there have been a couple of headwinds that we talked about before, one being the China investments due to a large extent, I would argue, to the fact of the cycle in terms of the 5-year plan this year being the last year of the 5-year plan and very often being the least investment in at least in this sector. So that we have seen that in declining order intake and then simultaneously, the administration changes and so on impact on delaying the order intake in this year in the U.S., which obviously is another contributor to this. And then there are kind of gives and takes on the rest of the market, which is within the kind of, I would argue, in the normal boundaries. And good to remember in the comparison period in the aviation and meteorology side on the back of really kind of a very strong now 2 years in terms of an order intake, really driven by the European stimulus fund on the radar networks in Southern Europe, most notably in our case was the big order that we got from Spain, but there were multiple other ones that we benefited from as well during the past year, 1.5 years that are still in our order book, and are being executed. Now on the gross margin side, a decrease of 3 percentage points. Sales mix, a stronger portion of the project revenues being recognized. So that's in plain English, what the sales mix means. And then same things as what I talked about in Industrial Measurement side on exchange rate and the U.S. tariff impacts, albeit somewhat less pronounced in case of Weather and Environment as the sales mix it's not as heavily weighted in euros and dollars or the U.S. business is a little bit less than what Industrial Measurement is. And then EBITDA percentage being on a very healthy level of 14.6%. I mentioned the cash flow continued on a good level. Here you see on the bridge on puts and takes on the cash flow and cash conversion being at excellent level of 1 and free cash flow around EUR 40 million during the period. Now if I look at the year-to-date, both net sales and profitability clearly improved during the first 9 months compared to the same time last year. And orders received did decrease by 13% year-on-year and while net sales grew by 9% year-on-year. And subscription sales, if I take the first 9 months of the year, almost incredible 58% up, obviously boosted by the acquisitions of WeatherDesk and Speedwell Climate, but also a great performance on the underlying organic growth. And then gross margin, slightly negative, again, same explanations that I went through. And then on EBITDA percentage and EBIT percentage up from comparable time or same time last year. And then worthwhile saying on the operating expenses, the restructuring costs, as I said, also in regards of this past quarter have been not insignificant as we have been adjusting our renewable energy business to the new market reality. And that's now behind us, that restructuring. And then acquired businesses and so on other explanations when you look at the year-on-year comparison on operating expenses. Financial position continued on a very good level, low leverage on the balance sheet, and we continue to have asset-light business model, no changes seen or foreseen in that. And on this page, I think it's good to note that the automated logistics center is now in a phase where we are loading it. So, it's actually fully in schedule, and we are putting material into that and starting to use it as scheduled in the fourth quarter of this year. And then also notable thing during the quarter was the acquisition of Quanterra Systems. Think about it this way that it's kind of an interesting team and technologies on monitoring CO2 fluxes, which means question whether individual geographic area, field or piece of land is a carbon zinc or carbon emitter, which a very interesting piece of technology, potential long-term kind of quite a bit of potential on that, and that was announced in September. Market and business outlook. We continue to see growth in industrial, instruments, life sciences and power, we continue to see roads as a stable marketplace. And then renewable energy, meteorology and aviation decline, and this is outlook for the rest of the year. And obviously, the renewable energy being kind of a clear change in the marketplace since the beginning of the year, whereas the meteorology and aviation now suffering a slightly different market conditions, as I explained before, in terms of the government subsidies and government incentives kind of on a lower level than when we compare to last year. And then on the business outlook, no changes to this. We continue to see the net sales to be between EUR 590 million and EUR 605 million and operating result being between EUR 90 million and EUR 100 million. With that, I want to conclude my prepared remarks, and I'll open up for any questions you may have. Operator: [Operator Instructions] The next question comes from Nikko Ruokangas from SEB. Nikko Ruokangas: This is Nikko Ruokangas from SEB. I have 3 questions, and I'll go one by one. Starting with Weather and Environment and orders, which you already discussed, and you told the reasons why they have now declined for a couple of quarters. But should we soon start to see the trend in orders happening there? Or has the demand continued sequentially weakening? And then do you think that the U.S. government shutdown could affect you now in Q4? Kai Öistämö: Yes. So obviously, kind of when we talk about we compare to year-on-year kind of things will obviously, when the comparables change, then that will change. Your question was on a sequential basis especially aviation, meteorology, things kind of come as they come. So even if there would be like numbers improvement or decline from one quarter to another, it would be hard to make a conclusion out of it since it's a lumpy business as a starting point. As I tried to explain on meteorology and aviation, it is more of a -- it's a bit of a cyclical business where now we have enjoyed, I would argue, almost like exceptionally high cycle in it for good almost 2 years. Now it's more on a normal basis, what it looks like. So, I would not be overly worried about it where I'm standing today. Then, on the U.S. government shutdown, it's a great question. And so, 2 comments on that. We've seen the budget proposal, and I would be actually happy, and this is the government's budget proposal, not minority budget proposal. I would be happy if and when that is approved. So, I have no issues with what is proposed. The shutdown itself, obviously, during the shutdown and getting a new order for next year since there's no budget approved nor and then there are a whole host of people furloughed. It's postponing things. If I look at bit on the history, typically, what has happened is that during this kind of U.S. government shutdowns, the orders will just come a little bit later in. But if I take kind of 12 months average or what kind of a little bit longer time series, it will normalize itself post the shutdown. So, it's like a little bit plowing snow in front of a snowplow kind of a thing, at least has been in the past. And we'll see how long it will last, it can stop tomorrow, or it can be continuing for some time. Nikko Ruokangas: Yes, I understand. Then on the guidance, as it indicates for Q4, clearly kind of year-on-year basis, weaker sales and EBITA development than now in Q3. So, is this basically explained by smaller project deliveries expected for Q4? Kai Öistämö: A big part of it is also very high comparable. If I actually go -- and I'm usually not doing this, I'll try to go back in my slides just to illustrate what I'm saying on this slide. And it's not this slide, here. So, if you look at this slide, it's kind of like highlights the unusual nature of the last year in terms of how the order intake kind of behaved and especially net sales behaved that we had a very weak first quarter, very strong second quarter, weak third quarter and a very strong fourth quarter. And if you went back into '23 or earlier years, typically, the second half, both quarters have been stronger. Typically, even the third quarter has been stronger than like second quarter clearly on an average year. So, there's a bit of when you compare to year-on-year kind of numbers, the anomality of last year makes it a bit harder this time around. Heli Lindfors: And I think the second topic is actually the FX that Kai was referring to earlier on. So, in the beginning of the year, the FX was still more similar level to last year, whereas now in the second half of the year, we see more of an impact of the volatility of the FX. So that will definitely be a factor in Q4 as well if the kind of rates remain as they are currently. Kai Öistämö: Correct. And it's again, a good illustration of that. If you go back and look at our second quarter results, we said that there was not really a material impact on FX yet. Nikko Ruokangas: Okay. So, this year, more normal seasonality expected than last. Kai Öistämö: Correct. Correct. Correct. Nikko Ruokangas: Then last one from me, at least at this point on cost side. So, you mentioned the EUR 3 million restructuring expenses. So, if we leave those out, so to me, it seems that your operating expenses were down in weather despite the acquisition or fixed expenses, but then clearly up in Industrial side. So, if you exclude those restructuring expenses, were those including something extraordinary? Or is it kind of describing the trends you are now having? Kai Öistämö: Yes, the extraordinary costs, as I said, was they were related to the restructuring that what I talked about in relation to the energy business and renewable energy business. So, I think your conclusion was exactly right. And like if you look at our numbers, and we have now a good trend also on the Industrial Measurement side, we have been a little bit longer kind of time series again, over the past 2 years where we had more modest growth, we were more conservative in spending and spending increases in Industrial Measurements. And now we see kind of clearly more growth opportunities and a bit more spending, not going wild, but a bit more spending on Industrial Measurement side. Operator: The next question comes from Pauli Lohi from Inderes. Pauli Lohi: It's Pauli from Inderes. I would start with this demand-related question. Have you seen any signs that the increased tariffs could start to dent the good market activity you have seen in the U.S. market or elsewhere compared to what we have seen already this year? Kai Öistämö: So elsewhere, I don’t see it go – it could have – now I understand your question. So okay, no, answer is no. We can't point anything in the U.S. or anywhere else, that would be at all related to tariffs. It's been more positive than what would have speculated pre-tariffs. Pauli Lohi: Well, that's definitely positive. And your scheduled deliveries for the rest of the year in the Industrial Measurements are a bit lower compared to Q3 last year. So, do you think that the current favorable market activity could still offset this? Kai Öistämö: No, Pauli, remember what Heli just said in terms of the exchange rate changes, which is, if you compare to last year, I think we are about 15, 16 points cheaper dollar than it used to be a year ago, and Industrial Measurements and Xweather are highly exposed to dollars. Heli Lindfors: Also, in dollars and renminbi. And especially for the Industrial Measurements, the renminbi is also very important currency. Kai Öistämö: So, it's not [indiscernible] then you can draw your own conclusions. I would not be worried about the demand picture per se. Pauli Lohi: Okay. Then, regarding the cost base, how large savings you expect from the recent restructuring on an annual level? Kai Öistämö: We have not communicated that. I'll put it this way that when we said in earlier quarters, similar calls, we've said that we are going to adjust our operating expenses to the level that matches the market picture on the renewable energy business. We've now done it. Pauli Lohi: All right. Then, regarding the new logistics center, do you expect any short-term cost-base increase or operational extra costs from starting to use the new center? Kai Öistämö: No, no, no. Absolutely not. Pauli Lohi: And do you see that it could provide any material financial benefits next year? Kai Öistämö: Over time, I think it clearly -- I mean, if you think about it now, fully automated material flow, it should yield into kind of a better rotation days, better management of the inventory, multiple benefits in terms of how much capital is tied into an inventory, and different tools also to optimize that inventory. So obviously, we have a business case, and over time, this is an investment where we expect a payback as well. Pauli Lohi: Okay. Finally, on Xweather, do you think that the current roughly double-digit organic growth rate is sustainable going forward? Taking into account the new product launches and maybe potential synergies from the recent acquisitions? Kai Öistämö: Yes. So, short answer, yes. And here also, short-term, we have to take into account the currency exchange rates when we look at the euro reported numbers. But typically, we do the pricing changes at kind of around the year-end in all of the businesses, well, at least Industrial instruments as well. So, we need to then see how those impact kind of going forward as well, depending on how the exchange rates then turn out to be. Operator: The next question comes from Waltteri Rossi from Danske. Waltteri Rossi: A few questions. First, about the Industrial Measurements orders in America. The report said that they grew slightly. I think the wording was a bit softened from the previous. So, have you seen any changes in the activity level in the Americas? Or is this only related to the FX? Kai Öistämö: So, I think I earlier said that it was a 9% on a constant currency level year-on-year. And if you look at the reported currency, it would have been 2%. So here, you see kind of direct impact on the currency exchange rate. I would be very happy with the 9%. I'll offer you that. Waltteri Rossi: Okay. Okay. Perfect. But you don't disclose how much the Americas is of the Industrial Measurements orders. Can you give us... Kai Öistämö: Not on orders and not on a quarterly basis, but it's clearly the biggest market that we have, and it's clearly north of 1/3 of Industrial Measurement sales. Waltteri Rossi: Okay. Okay. Then, about the Xweather business, it said that over the past quarters, it's actually been contributing positively at profitability. So, does that mean that the segment is now making positive operating profit already? And if so, are we talking about a low single-digit margin, or what? Kai Öistämö: We are not reporting that business separately. So, I will decline to answer you. So, we have not quantified. But contributing positively kind of would imply that it actually makes money. Waltteri Rossi: Yes, yes, sure. But I was just making sure that we're talking about EBIT on an operating profit level. But kind of... Kai Öistämö: Remember on the EBIT level, we did the acquisitions last year. And that's obviously kind of the amortizations of those assets raised the hurdle on one hand. But if you look at on an operating profit side, then that's what I'm referring to. Waltteri Rossi: Okay. Okay. So, we should still expect that you are continuing to invest in the growth of that business and shouldn't expect the profitability to kind of start to improve or scale up from now on? Kai Öistämö: Yes. Well, if software business grows 50% year-on-year, one should expect that it scales. Waltteri Rossi: All right. But you are still keeping the view that you are shifting focus from growth to clearly start improving the profitability side only later during this strategy period? Kai Öistämö: No. There's no shift between profitability and growth to be foreseen. It's always -- like when you are scaling a software business, it's always a kind of a trade-off, of how much you invest in the growth. And typically, in this kind of a software business, it really is investments into sales and demand generation rather than increasing the R&D when software businesses are scaling. And then the return on investment should be quite quick. And it's relatively easy to verify as well, kind of from a cost of acquisition side. If you kind of invest in customer acquisition cost, you can actually measure what the return on investment is, and it really should be quite quick. Waltteri Rossi: Okay. Okay. Lastly, as of now, earlier in the year, the expectations were kind of lowered because of the U.S. tariffs and how they will impact, especially the Weather and Environment public side sales. How would you describe the impacts of the tariffs on public sales this year today? Like, has your view changed since at all... Kai Öistämö: I would say no impact so far on the Weather and Environment sales in the U.S. from the tariff side. As you may recall, we did kind of a plan for the tariffs, and we mitigated the tariffs by actually shipping into our own warehouse in the U.S. so kind of that we have a little bit of time to pass the tariff costs into prices. And I think we are executing against that plan very well. Operator: The next question comes from Joonas Ilvonen from Evli. Joonas Ilvonen: It's Joonas from Evli. I have a couple of questions about Industrial Measurements. You already discussed this question of cost, but if I can come back to it. So, I think like R&D costs were down this quarter at a relatively low level. And of course, I think there's always a bit of like a quarterly variation when it comes to that. But then also you say -- and I saw your total OpEx still grew quite a bit, albeit it was still at a rather moderate level. But you mentioned this investment in sales and digital capabilities. So, my question is that how do you see the kind of overall Industrial Measurements investments continues to grow from now on? Like, do you expect it to grow basically at the rate of sales volumes? Kai Öistämö: If I take all kind of that will be a good approximation over time. Obviously, these things change over, like vary over quarters, and the quarters are not equally strong, and so on. So, kind of different quarters are a little bit different. But over time, that's a good proxy. Joonas Ilvonen: Okay. That's clear. And then you mentioned IM APAC growth that was especially strong. So, was this mainly due to China? Or were there any other countries there you would like to highlight, and which specific industry groups, like you mentioned, life science and power in your report? Kai Öistämö: Yes. As I said in the prepared remarks, if I start from the kind of latter side of the question, it came from all segments in the Industrial Measurement side. So, all market segments, grew. And it's both in China and outside of China. China did have a marked change compared to the second quarter, clearly having more market optimism in the third quarter, great to see. But it was not only in China, it clearly was outside of China as well. And if I pick one very interesting market, which continued to be strong is Japan, and where obviously, lots of industrial activity, and we have a great position in Japan in various different segments, but not only those 2 markets. It's broader than that. Joonas Ilvonen: All right. So, there weren't basically any kind of weaknesses in terms of geographic regions or... Kai Öistämö: No, no, not that I can think of. Joonas Ilvonen: Okay. That's clear. And maybe one last question. So, you already discussed this IM gross margin headwind due to exchange rates and tariffs. So, it's going to fade at some point, but did you comment on when exactly is it going to? Does it still continue over Q4 or into next year? I mean, considering how things look right now? Kai Öistämö: Yes. So, 2 things on, if you look at gross margin, and this was a bit on the net sales side as well, what I tried to say earlier, one thing is we -- and then they function differently if you think about FX and then the tariffs. The tariffs, what I said and what we've been saying all along, is that we fully mitigated that by raising prices. And that has kind of by itself a negative relative impact on gross margin. And I'll do you the math, pardon my details here. But if you think about that -- let's imagine that the transfer cost out of which the tariffs are counted would be 100 units. And then you put a 15% tariff on it. Now that cost would be instead of EUR 100 million, that will be EUR 115 million. And you fully move that into the sales price and let's do an easy math and call it like it's EUR 200 million and you put EUR 15 million on top of EUR 200 million. Now you fully mitigated it. And if you do the relative calculation, there is a negative impact on relative number. Joonas Ilvonen: All right. Kai Öistämö: Sorry about that. I think it's good to understand that that's when you -- and then on FX, as I said, you can't manage FX-related changes within a quarter or within a half a year. You cannot like fluctuate your local prices based on exchange rates. But we do try to be smart when we do the annual price increases as we do every year in the beginning of the year. So that's a chance of actually taking the currency exchange rates and our costs and everything else into account. Operator: [Operator Instructions] The next question comes from Matti Riikonen from DNB Carnegie Investment Bank. Matti Riikonen: It's Matti Riikonen. And sorry if I have to ask some questions again because I had to jump to another call for 15 minutes during the presentation. So, some of the questions might have been asked already. So, I start with the math question that Kai you just explained. So is it in rough terms, we are talking about that the price increase that you made, it covers the kind of cost price, but then the margin that comes on top of that doesn't follow. So, you are not getting the compensation for the lost margin compared to the normal situation where you put the kind of markup to the imported price. Kai Öistämö: Yes. And even if you put a markup to it, you can do the math in different scenarios, how much of a markup you need to do in a high gross margin business in order to kind of mitigate the gross margin if you -- and there's obviously a limit how much you can pass on the costs if you think about the tariff a drastic change in the middle of the year, it's what's acceptable from a customer side. So yes, in a way, what you asked for. And then I'll go back to what I just said that beginning of the year, we are going to review our prices anyway, and we are going to look at different kinds of costs and things that where do we put the prices going forward. Matti Riikonen: Yes. But basically, isn't it always so that when the new year begins, you are trying to kind of achieve the same profitability level or higher what it used to here. So, it takes some time for the following price increases to kind of correct the situation into what it was from there. Kai Öistämö: Yes. That being said, when the book-to-bill cycle is 3 weeks in the Industrial Measurement side, that's pretty fast. Matti Riikonen: Right. Then regarding the Weather and Environment, when you talked about received orders and how they were kind of suffering different things, you meant that there's also industrial cyclical fluctuations or I don't remember what the term that you used was. But what does that actually mean in the Weather and Environment business? So, what kind of industries are there on the customer side that are affected if you're not talking about the renewable business, which I would... Kai Öistämö: No, I was not talking about the renewables business. And maybe I'll just explain it a bit more. So, it's not really an industrial activity. Think about it this way that this is -- it's a relatively small market in the end, I mean, in the total market as we are the market leader in terms of an absolute market leader in this. So, you kind of -- it's a relatively small market. And then many of the products are having their natural cycles and sometimes they are quite long cycles. So, if I take the radars that we just sold, I'm not expecting the same kind of a complete renewal of Finnish network until 15 years from now or something like that. And here, relatively small individual things like the COVID-19 fund to renewal, which was used to renew Southern European radar network kind of increased the tide a bit and now the tide is kind of lower as we speak. But that has been a phenomenon, if you go on a longer-term kind of a history in meteorology and aviation that the relatively small 2 big airports get to be built at the same year, kind of increases the size of the market and the years are not exactly the same. So, this market kind of just has a phenomenon where there's a relatively small discrete demand changes change the size of the market somewhat. Matti Riikonen: Yes. Okay. And that clarifies because maybe the wording in the Finnish stock exchange release was about the industry and basically, it means the sector where you operate in the crisis. Kai Öistämö: Correct, correct. That's good. Thank you, Matti, well spotted. Matti Riikonen: If we then think that these sector changes tend to be quite slow and one year is not necessarily enough to make it go away. Are you afraid that this would continue also in 2026? I'm not talking about the order backlog, which you already have or the Indonesian order, which might come sometime next year, but basically new weather orders that you were -- or you are expecting every year. Is there a danger that we would see an even slower 2026 when it comes to new business? And if your order backlog is decreased this year, then, of course, you would have less to kind of deliver in '26 based on old kind of order backlog. Do you think that is a kind of risk that you would like to highlight? Or of course, you have to take a stance on that when you give the guidance for '26. But at least -- I mean, at this point of the year, you probably already know, and you have made some internal plans how it's going to be in the weather business in '26. So, any thoughts on that would be great. Kai Öistämö: Correct. Yes. So let me answer -- well, it's exactly like you said, we're going to give guidance next year when the time comes. But let's think about it this way that there are the product sales, which are selling to existing projects and existing customers and the fluctuation on that business is very small. The fluctuation really comes from the kind of new projects and bigger and smaller and so on. So, there's kind of a level that has been at least relatively stable in the past, and I don't see any changes why that assumption should be different going forward. But then how will individual projects come through and so that obviously will not only impact our sales but actually like if kind of a couple of big orders come -- big projects come in a half a year, that kind of theoretically means also irrespective of who wins that impacts the entire market as well. Matti Riikonen: All right. So we will wait for your guidance for '26 to see that what is your plan that you promise to deliver. Kai Öistämö: Correct. Matti Riikonen: Okay. I'm just saying that it doesn't look so good when this year, of course, the order backlog has been decreasing. And when you have basically negative outlook for all key metrological... Kai Öistämö: For the rest of the year. Remember the outlook. Matti Riikonen: What would need to happen that it would kind of recover to a normalized situation in '26. Do you foresee some positive changes to this current trend, which you have now said that will impact '25, but do you see some positive triggers that would change the situation for '26? Kai Öistämö: Yes. Like I said, so as the market impact -- market size is really individual like bigger orders can swing that different ways. So that's something that is, as you know, historically, it's really, really hard to say when certain things kind of come through. The pipeline remains on a good level on new projects. But kind of a flow through the pipeline continues to be very unpredictable as it has been in the past. So... Matti Riikonen: All right. Fair enough. Final question, you already touched the topic of Industrial Measurement and some investments in digital capabilities. Just out of curiosity, what kind of digital capabilities are you talking about? Kai Öistämö: So online as a sales channel, whether we talk about to our distributors or whether we talk about to the end users, especially on the services side. If you think about -- so today, it's mainly -- we don't have much of a sales through the digital channel. We are doing demand generation, but the actual sales transactions we do very little through digital channels and that capability we are building. And very important, like kind of first it will have an impact on the services delivery side. But longer term, I believe, like in any other business, obviously, kind of -- it will have an impact on our overall sales, I believe, as well. Matti Riikonen: Does that mean that the existing customers would kind of want or need a different approach to maybe order from you? Or does it mean that you are seeking new business through those channels? Kai Öistämö: I think in the end, it will be both. And I don't think any businesses will remain as they have always been, and I'll just use the car analogy here that nobody ever believed that a car can be bought online and look where we are today. Try to buy a Tesla offline, then they will throw you online. Operator: The next question comes from Waltteri Rossi from Danske. Waltteri Rossi: So just to still clarify the Xweather profitability question. I was actually -- I think I was talking about EBITDA and operating profit as a synonym previously. But just let's talk about EBITDA. So, is the Xweather currently contributing positively on EBITDA level? Kai Öistämö: Yes. Subscription sales to be specific. That's what we report today. We don't report separately Xweather. Operator: There are no more questions at this time. So, I hand the conference back to the speakers. Niina Ala-Luopa: Okay. That was our Q3 call. Thank you all for joining. Thank you for the questions. Thank you, Kai. And I would like to mention or remind that we will arrange a virtual investor event for analysts and investors on November 24. And there, Kai and our business area leaders will provide an overview of Vaisala's strategy and business areas. And you will find more information on the event on our investor website, vaisala.com/investors. But now thank you all for joining and have a nice rest of the week.