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Operator: Good day, everyone, and welcome to today's Fibra Danhos' Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this call is being recorded, and I'll be standing by should you need assistance. Now I'll turn the call over to your host, Rodrigo Martínez. Please go ahead. Rodrigo Chavez: Thank you very much, Alvis. Hello, everyone. I am Rodrigo Martinez, and I run Investor Relations for the company. At this time, I'd like to welcome everyone to Fibra Danhos' 2025 Third Quarter Conference Call. We issued our quarterly report yesterday. If you did not receive a copy, please do not hesitate and contact us. Please be aware that they are also available on our website and in Mexico Stock Exchange website. Before we begin the call today, I would like to remind you that forward-looking statements made during today's call do not account for future economic circumstances, industry conditions and company performance or financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in according to IFRS standards and are stated in nominal Mexican pesos, unless otherwise noted. Joining us today from Fibra Danhos in Mexico City is Mr. Jorge Serrano, CFO of Fibra Danhos; and Mr. Elias Mizrahi. Now I will turn the call to Jorge Serrano for opening remarks and financial and operating indicators. Jorge, please go ahead. Jorge Esponda: Good morning, everyone. Thanks for joining us today. Let me share some initial remarks on Fibra Danhos' third quarter results. It has been only 2 years since we announced our interest in industrial assets and Danhos is already a reference player in the CTT logistics corridors that services Mexico City. We have been recognized for our execution capabilities and high-quality construction standards. We have not only delivered our commitments on time and within budget, but we are also working in new opportunities that will translate into profitable growth. During the quarter, we signed build-to-suit lease agreements for more than 300,000 square meters on 3 additional industrial parks with best-in-class tenants that will generate cash flow by the end of next year. This is very relevant. Not only because it will translate into profitable adjusted risk returns, but also because it reinforces our strategy of diversification in industrial real estate and complements our traditional growth strategy on mixed uses and high-quality real estate developments. Our CapEx pipeline is additionally confirmed by Parque Oaxaca and Ritz-Carlton Cancún Punta Nizuc project, which are under construction and up and running. Sound financial results were supported by strong fundamentals. Total revenues of MXN 1.9 billion were 14% higher against last year, explained by increased occupation levels, positive lease spreads, higher overage, parking adjusted revenues and contribution of industrial assets. Total expenses increased 10%, keeping control on operating and maintenance expenses and dealing with labor-intensive services that have posted major increases. NOI reached MXN 1.5 billion, an increase of almost 15% year-on-year with a 78.6% margin that is 75 basis points higher than last year's. AFFO reached MXN 1.1 billion that accounted for MXN 0.69 per CBFI. Distribution was determined at the same level of MXN 0.45 per CBFI which amounts to MXN 722 million and represents a payout relative to AFFO of 66%. Retained cash flow, as you know, was used to finance our CapEx program, which was complemented with MXN 300 million of short-term debt. Balance sheet, however, remains strong with only 13% [indiscernible]. Our portfolio overall occupancy continued growing and reached 91%, with retail occupancy reaching 94%, office at 76% and industrial of 100%. Thanks. We may now turn to the Q&A session. Operator: [Operator Instructions] Our first question today comes from Alejandra Obregon of Morgan Stanley. Alejandra Obregon: The first one is on your CapEx and dividend payout. If you can perhaps provide some color on how to think of these 2 metrics in 2026 and 2027 as you move forward with Nizuc and Oaxaca. So that's the first question. And then the second one is in terms of your portfolio mix and perhaps if I'm allowed to think of it in a more long-term sort of way, maybe 3 or 5 years from here, how much do you expect industrial to represent of the mix in your portfolio and whether you see some recycling opportunities elsewhere. So how do you see your mix 3 or 5 years from here? That's the question. I'll stop here. Elías Mizrahi: Alejandra, this is Elias Mizrahi. Regarding distributions, so as you know, we've been investing very heavily on industrial assets. We're starting construction of Parque Oaxaca in the coming months. And obviously, we're also investing in the Nizuc project. So as long as we continue investing at this rhythm, we expect at least for 2026 for the dividend to remain the same. I think towards the end of next year, we'll probably have better color for 2027. But I think that this gives us the ability to reinvest our cash flows and give better returns for our long-term investors. Regarding the mix on our portfolio, I would say that we don't have a specific target on where we see or where we want to have the industrial assets as a percentage of our total portfolio. I think we're opportunistic. We will be looking at new development opportunities. And we're also investing in retail assets as well. So we don't expect only to grow in the industrial segment, but in all segments. So I think that more than targeting a mix, we'll be targeting solid projects with great risk-adjusted returns. Alejandra Obregon: Got it. And if I may follow up in terms of land and backlog, if you can talk about what you're seeing in the Mexico City and metropolitan area. Do you think there's more interest for you to continue growing here? And what -- and how does your land access look like from here? Elías Mizrahi: Yes. So first, I mean, we highlighted in our report and Jorge just mentioned the lease activity we had for the quarter. So we leased 300,000 square meters this quarter alone. We're very proud of that achievement. We already have 250,000 square meters operating and generating rent. And by year-end -- next year, we'll have more than 0.5 million square meters generating rent for the Fibra in basically 2 or 3 years since we basically announced the industrial component in our portfolio. So we continue to see strong demand. I think the market, as Jorge mentioned, welcomed Danhos, welcomed its development capacity and ability. And we're assembling land for future projects, which if we find the right land and the right opportunities, we will be able to develop them and continue growing. But we see the Mexico City market as strong and resilient for now. Operator: Our next question comes from Igor Machado of Goldman Sachs. Igor Machado: I have 2 questions here. And the first one is on the retail sales. So we saw some deceleration from department stores company. So any color that you could share with us like if you expect a retail deceleration for the next quarters, this would be helpful. And the second question is regarding the land for the industrial real estate assets. I'm just trying to better understand here who is selling the land and the terms of the selling. So that's it. Jorge Esponda: Igor, this is Jorge. Well, as you know, I mean, our retail portfolio has very positive occupation levels. I think we have a very strong tenant base. But it's true that we've seen some deceleration in the economy in consumption. However, we continue to have demand for our shopping centers. This is given the location we have. And that allows us to be quite defensive in a deceleration environment on the economy. So, so far, we're posting still very strong results in our retail portfolio. Operator: Our next question comes from [indiscernible] of JPMorgan. Unknown Analyst: Congrats on the results. My question is regarding any update on the office segment. Could you maybe walk us through how easy or hard it has been to renew the office properties? How sticky were these tenants with some minor decrease in the Toreo property? Elías Mizrahi: [indiscernible], I'm sorry, but there was some interference in the question. Can you repeat it, please? Unknown Analyst: Yes. My question was regarding the office segment. Maybe could you walk us through how easy or hard has it been to renew the office properties? And how sticky were these tenants? Elías Mizrahi: Yes. So at the beginning of the year, we had 2 major leases that -- actually this was pointed out, I think, in the fourth quarter of last year's or first quarter of this year's call. And both contracts were renewed. One was in Toreo, the other one was in Esmeralda. So in both cases, we were able to renew both big leases. And the smaller leases are also being renewed basically every quarter. So we're -- as we've mentioned, we're in the midst of keeping our tenants. Unknown Executive: [indiscernible] Elías Mizrahi: Yes. And leasing activity has picked up. In Urbitec, we leased this quarter 2,500 square meters. And also in [indiscernible] 3,500 square meters. So during the quarter, we leased approximately 7,000 square meters. Unknown Executive: [indiscernible] Operator: [Operator Instructions] Rodrigo, we have no questions at this time. I'll turn the program back over to you for any additional or closing comments. Rodrigo Chavez: Thank you very much, Alvis. Thank you, everyone, for joining us today. Please do not hesitate to contact us, Elias, Jorge or myself for any further questions. We are always available. We'll see you on our next conference call. Thank you very much. Operator: That concludes our meeting today. You may now disconnect.
Operator: Good day, and welcome to the Xtract One Technologies Fiscal 2025 Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations adviser. Please go ahead. Chris Witty: Thank you, and good morning, everyone. Welcome to Xtract One's Fiscal 2025 Fourth Quarter and Annual Conference Call. Joining me today is the company's CEO and Director, Peter Evans; and CFO, Karen Hersh. Today's earnings call will include a discussion about the state of the business, financial results and some of Xtract One's recent milestones, followed by a Q&A session. This call is being recorded and will be available on the company's website for replay purposes. Please see the presentation online that accompanies today's presentation. Before I begin, I would like to note that all dollars are Canadian unless otherwise specified and provide a brief disclaimer statement as shown on Slide 2. Today's call contains supplementary financial measures. These measures do not have any standardized meanings prescribed under IFRS and therefore, may not be comparable to similar measures presented by other reporting entities. These supplemental financial measures are defined within the company's filed management's discussion and analysis. Today's call may also include forward-looking statements that are subject to risks and uncertainties, which may cause actual results, performance or developments to differ materially from those contained in the statements and are not guarantees of future performance of the company. No assurance can be given that any of the events anticipated by the forward-looking statements will prove to have been correct. Also, some risks and uncertainties may be out of the control of the company. Today's call should be reviewed along with the company's annual consolidated financial statements, management's discussion and analysis and earnings press release issued October 23, 2025, available on the company's website and its SEDAR+ profile. And now it is my pleasure to introduce Peter Evans, Chief Executive Officer of Xtract One. Please go ahead, Peter. Peter Evans: Well, thank you, Chris, and welcome to all of our investors and analysts joining us today. We're going to start off by turning to Slide 4 and talk a little bit about the state of the business. I'm very pleased to say that we ended fiscal 2024 with a very strong Q4 that has positioned us well for the immediate and long-term future, particularly as our new Xtract One Gateway benefited from strong and accelerating demand across a wide variety of markets, most particularly education where we are rapidly cementing ourselves in a leadership position by offering the most efficient, most adaptable frictionless technology suitable for screening solutions in environments where the average individual has a much higher volume of personal items on them as they pass into a venue, items such as backpacks or laptops, tablets, metal water bottles and other items. We see this application not only for schools in the education market but also for places like convention centers, office buildings and hospitals, where we've seen a significant uptick in interest for our solutions. Following a record $16.1 million of total bookings during the fourth quarter, we began fiscal 2026 with a solid backlog, including pending installations of nearly $50 million. These are signed contracts soon to be installed. This is clearly the largest in our company's history and something we're very proud and pleased about. While revenue was negatively impacted by certain onetime events, which we'll talk about in a moment, these were customer-initiated delays and also times when we saw a customer doing a phased approach for some of our larger installations. We continue to work through these items with our customers and cannot be happier about where the company stands as we begin on the next stage of our journey as a company. I personally am looking forward to the coming year being one of higher revenue growth, significant conversion of the backlog into revenue and continuing improvement of our bottom line results as well as continued progress on our path to cash flow breakeven, a key objective for the company and myself and the other executives. Let's turn to Slide 5 for a moment. I'd like to provide some further commentary on the rollout of the Xtract One Gateway. The market continues to be very large and growing for this recently launched product. As evidenced by the number of announcements that we've made over the past few months, particularly in the education marketplace, including organizations and school districts like Manor Independent School District out of Texas, The Delmar School District in Delaware, Volusia County Schools in Florida and Mecklenburg in Virginia. It was a very, very active summer for us with several of these awards taking place just before the end of our fiscal year or just after the fiscal year and some additional contract wins that have continued to go and be booked soon after the end of the fiscal year. Many of these are not yet reflected in our backlog. That said, during the year and predominantly in the fourth quarter, the company signed contracts for Xtract One Gateway with multiple customers worth over $13.1 million serving a variety of markets, including education, some health care and some commercial enterprises. Since then, we've continued to win additional contracts and have now successfully begun commercial deployment of the Xtract One Gateway just subsequent to the fiscal year-end. And the initial feedback from those first customers has been extremely positive with many of them looking to expand. We see this as the tip of the iceberg for us in terms of overall demand as deployments, referenceability, client demonstrations and all further drive interest that we believe will continue to show growth and acceleration in 2026 and beyond. We have surpassed the original business plan that we built and that we envisioned for the first year of deployments for the Xtract One Gateway. And accordingly, we now have plans in place to double the manufacturing capacity very quickly for the Xtract One Gateway in fiscal 2026 in order to serve this inbound demand that we're seeing from organizations like schools and others. This is a nice sign of having a vision to deliver something different and actually delivering on that and the market responding incredibly positively. That positive market response has been in comparison to other solutions where essentially you need to introduce other technologies like x-ray machines and create an environment like a TSA screening activity in airport in order to have a comparison versus the Xtract One Gateway. It's for these reasons that the customers are so excited. As a reminder and a point often asked by investors, we would love to announce many, many more of these customer wins but due to competitive reasons or their preference of a particular entity or perhaps their nondisclosure agreements, we may not always be able to announce some of those new wins. This is why we promote and highlight that our backlog is a much better barometer and a good forward-looking indicator of the health of our business and the future success of our business. It's the best measure of our performance than the number of press releases that we put out. We continue to visit potential customers and host demonstrations on a weekly basis, multiple different demonstrations across the country every single week, and this is resulting in an expanding way of interested school boards and new previously untapped industries who are intrigued by our unique and groundbreaking capabilities. Our AI-enabled technology is truly the best-in-class at determining real threats in a world where the average individual is carrying a large number of large metallic items like laptops, phones, chromebooks, chargers, metal bottles and all sorts of other paraphernalia. I'd invite anyone on this call to think about your own experience when you have to divest of all those items versus the Xtract One Gateway where you just simply walk through with your rolling luggage, your backpack or whatever, and we can uniquely highlight that is a gun and that is a knife on the person and on the location. We continue to meet not only the school boards, but health care entities have now shown interest, warehousing and distribution companies who are looking to protect on both inbound and outbound. Commercial property organizations due to some of the unfortunate incidents such as what happened in New York a few months ago, has caused these marketplaces to open up to us. Other organizations like that similarly are looking to showcase our applications, which will then result in us securing new contracts. All of this does take time, particularly as the size of the orders grow. A typical school board is much larger or a school district is much larger than, say, a theater. And so the analysis that goes in takes some time for these organizations, but we're very pleased because that is increasing the size of our average order, and it's -- we're very pleased with the pace of introduction and even more excited by what the future holds for this solution. With rapid growth on the horizon, we're planning for the future and expect fiscal 2026 to be a year of significant change here at Xtract One on many aspects. Complementing this new and accretive growth that we're recognizing with the Xtract One Gateway, we continue to win new contracts for our SmartGateway at a strong, steady pace. The SmartGateway has proven itself to certain specific vertical markets and is performing extremely well. In the past few months, we've announced awards from organizations such as Temple University in Philadelphia, a global performing arts organization, San Mateo Medical Center in California and follow-on contracts, for example, with a multinational entertainment organization amongst others. These wins underscore the continued and strong demand for the SmartGateway product and its unique fit to serve those markets particularly well, particularly with this latter customer that I mentioned, where this entity, a known worldwide organization known for its theme parks and related properties chose to order additional SmartGateway units to accommodate expansion in its locations. With a planned spring 2026 deployment for a 3-year contract worth about USD 2.6 million in value, we'll increase the Xtract One's global footprint, particularly with SmartGateway and further support the entertainment organization's mission to deliver a safer guest experience at all of its venues. Both the SmartGateway and the One Gateway deliver specific capabilities that are key requirements for unique market segments and their needs. So this is not a one size fits all, it's a perfect fit for each segment. So each of those products is well positioned to serve their respective marketplaces, and we're very pleased with the response from those markets. This provides balance across our portfolio and more future business predictability as we have different kind of cycles of purchasing across different segments and of course, delivers a differentiated value that each customer acquires out of their screening solutions. Overall, as a business, we continue to grow the pipeline of opportunities. We have more than about USD 100 million currently in our qualified sales pipeline, customers that we're actively engaged in at various stages of selling cycle. And this is across both product lines. And this number continues to rise due to increasing threats, unfortunately, across the world and in geographies outside the United States as well as inside the United States. This improves our positioning and growing brand recognition of who we are and what our technology can actually accomplish. Given the current outlook for these and other opportunities, we're very optimistic about the quarters to come, and we believe the company is on a precipice of a step level change in terms of the volume and scale of our operations; therefore, why we continue to do things like I mentioned earlier, about doubling the capacity to manufacture the One Gateway. This obviously leads us to be very positive about the trend towards cash flow neutrality and we look forward to sharing those updates as we get further into fiscal 2026. I'd like to address some prior comments about revenue delays. We have experienced a handful of customer-initiated delays in their deployments of systems, which will cause onetime delays in our revenue recognition. Let me provide a few examples of these. We've signed a contract and there's a desire for an expanded contract with a major U.S. federal organization that due to federal government optimization activities that have taken place through 2025 has caused a lot of reorganizations of their organizational structure and how different people are responsible for different activities like IT infrastructure, budgets, financing and these sorts of things. While the contract is still valid and while that organization has a federal mandate that they will screen for weapons at all of their locations, they've had to pause as they've gone through these reorganization activities. So the requirement is still there and the order is still there and has not gone away, but we're working with that customer as new individuals come into play to start scheduling those deployments. Similarly, a very significant sports venue that we signed a contract with earlier has undertaken a new rebuild of their venue, and they have paused deployment of the systems until such time as they get closer to building occupancy. The good news here is that they have invited us to work closely with them and with the venues architects, for the best placement of the systems, where the conduits would go underground, how do they bring wiring in, how they bring power in and optimize the deployment of the systems into the venue design to ensure the maximum guest experience and deployment of our systems. So I'm pleased that we're working with them closely. I'd just like the building to be finished that much faster, so we can actually convert that order to revenue. On the other hand, we do have scenarios where we're very pleased where things are accelerating. We signed a contract with one of the top 5 major car manufacturers who wish to protect various venues. And they had delayed their deployments for sort of reasons. However, when we were starting to get a little bit frustrated with their delays, they called us up and said, we are ready to take shipment. And so we shipped those months -- those systems this past month after about a 12-month pause where they worked through some entrance redesign activities. So along the same lines, these orders have not gone away. Sometimes a customer needs to pause as they work through some internal activities. The summary here that like all our investors to take from this is the bookings backlog is solid, and we are still actively engaged with all of those customers as well as new customers. At this point, I'd like to turn it over to Karen, who can then provide a little more detailed discussion on our financial results, and then we'll move to Q&A. Karen, over to you. Karen Hersh: Thanks, Peter. I'm happy to review the financial highlights for what amounted to a very busy quarter, setting us up nicely for a strong fiscal 2026. Turning to Slide 7. Total revenue was approximately $3.3 million for the fourth quarter versus $5.6 million in the prior year period, reflecting certain customer-initiated delays, which Peter highlighted previously. We've been working with these customers and many of these installations have started to ramp up in Q4 and into fiscal 2026. We have also been instituting a phased deployment schedule for some of our larger, more complex installations. In particular, this is an approach that we use with school districts, delivering first for the high schools, then moving on to the middle schools and finally, elementary schools. While this approach may initially slow down our revenue in the short term, we believe that working with our customers to develop systematic deployment schedules and instituting rigorous training programs are positioning the company for long-term revenue generation and high customer satisfaction. Similar to previous quarters, revenue for the fourth quarter was spread across numerous customers and industries with the largest contributors being entertainment, education and health care. We've recently made many announcements about various new customer contracts and growing demand for Xtract One Gateway, which are expected to positively impact revenue in fiscal 2026. The mix of business will continue to fluctuate and diversify in the coming quarters given the order acceleration and interest in our products across an expanding array of industries, which I'll elaborate on in just a few minutes. We also remain committed to expanding our channel partner program, which is a valuable contributor to the company's growth. Channel partners accounted for approximately 52% of deployments for the entire fiscal year and this is expected to increase in fiscal 2026. Our gross profit margin was a record 71% for the fourth quarter versus 65% in the prior year period. Margins were also higher versus the third quarter of fiscal 2025 with the improvement both sequentially and year-over-year due to efficiencies achieved in our SmartGateway manufacturing and supply chain processes, as well as the use of advanced software tools like our view dashboard that allow for continuous and proactive monitoring of customer environments. We anticipate margins to be slightly negatively impacted in the near term by costs related to the initial production and installation of the Xtract One Gateway. However, we expect that this will improve over time with broader commercial deployment in fiscal 2026. Turning now to Slide 8. New bookings for the quarter were a record for the company at $16.1 million compared to the prior year quarter bookings of $5.6 million, of which approximately 74% were upfront contracts, meaning that the majority of these new contracts will translate to revenue relatively quickly. Bookings for the quarter were almost evenly split between direct sales and channel partners, as markets like education and health care are well suited for the channel. Total bookings for the year were $38.5 million, up from $29.8 million in the previous year. Anyone who's been following our story will know that our initial target markets were entertainment and sporting venues with a view of further expanding into other markets like schools and health care. Interestingly, in fiscal 2025, approximately 33% of our annual bookings were in the education sector, up from 14% in the previous year, primarily due to the recent launch of Xtract One Gateway. We are excited to see that several schools are now coming on board as evidenced by many of our recent customer announcements. Further, health care currently represents 17% of our bookings, and we expect this will grow in the coming year given the strong product market fit with our SmartGateway for these facilities. With the diversification of our gateway products, we expect our customer base will continue to expand into a multitude of industries in fiscal 2026. Moving on to Slide 9. Our contractual backlog and signed agreements pending installation rose to record levels as Peter previously mentioned. At the end of the quarter, our backlog collectively totaled $49.5 million as compared to $26.8 million last year, almost doubling the backlog year-over-year, which we consider to be an excellent indicator of future revenue. The backlog of $49.5 million at year-end was comprised of $15.5 million of contractual backlog with an additional impressive $34 million worth of signed agreements pending installation, the majority of which are expected to be installed within the next 12 months. Given our current total backlog of almost $50 million and a substantial pipeline of opportunities reflecting strong bid activity and expanding interest in both of our gateway products, we anticipate bookings to continue to increase, putting us on sound footing for fiscal 2026 and beyond. Now let's turn to Slide 10, which shows fourth quarter and full year operating costs year-over-year for each of our key expense categories. Sales and marketing expenses were $1.8 million in the quarter versus approximately $1.5 million in the prior year period, reflecting increased business development initiatives across a wider spectrum of industries while costs associated with R&D were $1.9 million in the quarter versus $2.3 million in the prior year period due to streamlined R&D activities. General and administrative expenses were approximately $2.2 million for the quarter in both years. Overall, operating costs were lower year-over-year even as we significantly grew our backlog and invested in the rollout of Xtract One Gateway. We have consistently managed our operating expenses while growing the company, demonstrating the scalability of our business model as we move forward on our path towards cash flow breakeven. Finally, on Slide 11, I'll discuss cash flow. During the quarter, the company had operating cash usage of $1 million compared with $1.7 million in the prior year period. And excluding changes in working capital, we spent approximately $2.7 million compared to last year's $1.3 million. For the year as a whole, we had operating cash usage of $6.5 million versus $8.1 million in fiscal 2024, primarily due to focused management of our working capital. During the quarter, we also completed a successful public offering of a bought deal, including the full exercise of the underwriter's overallotment option and raised just over $8 million to finance working capital requirements and for general corporate purposes. Our fourth quarter has been a busy but productive quarter. With the completion of our financing, the successful launch of Xtract One Gateway and the growth of our bookings and backlog, we are well positioned for growth in fiscal 2026. With that, Peter and I welcome any questions that investors may have at this time. Operator: [Operator Instructions] Our first question comes from Amr Ezzat from Ventum Capital. Amr Ezzat: Congrats on the very strong bookings number. I appreciate your comments on revenue recognition, and I think it's -- we all get excited with signed contracts that often forget that customers have challenges as well in taking delivery. I'm just wondering how do you feel this friction from the customer side is evolving relative to your comments last quarter and I mean, Q1, which ends next week. Are you guys seeing a bit of easing into Q2? Peter Evans: Yes. From my perspective, Amr, it's Peter here. We are seeing that easing. We do see that some of the contracts take longer to work their way through from trial to contract signing because they tend to be larger deals that we're dealing with because there's more, let's say, as an example, Fortune 500 companies that we're working with. And then those organizations might have multiple locations that they wish to deploy, multiple manufacturing plants, multiple high schools and middle schools. And they're not as interested in flash cutting, for example, 12 high schools and 20 middle schools all in one week. It's not the best approach. So we're seeing kind of these phased deployments. And we're actually starting to see things loosen up and accelerate now in terms of those deployments and in terms of that acceleration. So I'm feeling much better. We did have these onetime events, but we're starting to see that subside. Amr Ezzat: Fantastic. But if I'm sort of thinking about fiscal '26, is it fair to assume a stronger second half relative to the first half? Is that a fair assessment? Peter Evans: From my perspective, yes, primarily because we will be -- as we've seen so far, we're seeing some good momentum for the business and for One Gateway. We're also seeing steady, solid momentum for the SmartGateway, and those contracts will start converting over revenue as we work our way through fiscal 2026. Amr Ezzat: Okay. On the bookings, like, again, exceptional this quarter, and you did announce a flurry of wins post quarter end. I'm just confirming your bookings number probably doesn't capture a lot of these post-quarter wins that you guys announced. So we should be expecting another strong Q1 bookings print. Then maybe on the $16 million of bookings, if you could walk us through the split between verticals. I believe, Karen, you gave it for the full year. Peter Evans: Yes. So in general, we're continuing to see the momentum. And to your question about the flurry of announcements. Yes, where we can, as we said earlier, Amr, we are always interested in keeping our investor base aware of the activities in the company as much as we're allowed to do so by the customers. And where we can announce schools, hospitals, other locations, we will. But the announcements that have been made post Q4, in general, it's a safe bet to say that those are new deals that are occurring post the close of Q4. Some might have been from a Q4 time frame, but just due to timing of getting press releases approved, they might have rolled over into Q1. Amr Ezzat: Then, Karen, I'm not sure if you guys have the split handy for the quarter itself between the verticals? Karen Hersh: For Q4? Amr Ezzat: Yes, the bookings for Q4, the $16 million. Karen Hersh: For sure. So the general split by industry for Q4 was 60% for education in Q4 and entertainment was about 24%. So those were the 2 big ones and health care came in around 12% with the rest being some miscellaneous through other industries. So the overwhelming winner for Q4 was definitely education followed by entertainment. And those, I think you could evidence towards 2 of the larger press releases that we did, one for Volusia and the other for an entertainment organization. Those ones both fell within Q4, and so those represented a good portion of the bookings for that period. As Peter said, the deals tend to get larger that we've noticed, certainly with the Xtract One Gateway, and that's evidenced in Q4 where we're seeing a number of larger deals come through. Amr Ezzat: Fantastic. I was very pleasantly surprised with the gross margins coming in at 71%. Can you unpack what drove that? You spoke to, I believe, manufacturing efficiency. And I just wonder, is that a peak you feel? Then obviously, into Q1, what I understood from the comments is that we should expect some step back on One Gateway before margins scale again. I just want to confirm if I understood that correctly. Karen Hersh: I think you've understood it exactly correctly, which is we have said all along that we continue to bring efficiencies in terms of our [ BOM ], In terms of our support that we manage for our customers, and we've done numerous things to help improve those efficiencies over time. And so it's really nice for us to see that this has sort of translated into 71% margins, which are frankly quite impressive for our industry. You did pick up correctly on the comments about Q1. This is what happened to us with SmartGateway. You bring a new product to market. There's things to work out in terms of support. There's little adjustments that we want to make. We want our customers to be completely happy. And this tends to cause some degradation in the gross margin, at least temporarily until we work out those kinks. And so that's what we're anticipating for Q1 is a little bit of an adjustment as we get used to the Xtract One Gateway and bring it to market. And we're also continually already making changes to our [ BOM ] and making further efficiencies. It's going to take a few quarters to run through that cycle and get it really running the way that we -- similarly to our SmartGateway. Amr Ezzat: Fantastic. Then maybe one last one on OpEx. I think you spoke to what's driving that. But are we -- should we view this as a new run rate going into fiscal '26? Or maybe you could quantify how much of it has to do with the launch of One Gateway? Karen Hersh: Well, a lot of the One Gateway charges that were sort of one-off type of expenses, we did capitalize because we felt that there was a long-term future value of those. We'll start to amortize those costs in Q1 as we've brought the product to market. But similar to what we've said in the past, we believe that our operating structure is fairly stable. We have to continue to add to it to some degree to continue to address, for example, business development across more markets than we were initially targeting. And R&D is still going to continue to be a focus for us as we continue to innovate. We're not going to sit on our laurels. So R&D is going to continue to be a focus for us. But these changes are relatively small when you compare them to what we're expecting from a top line growth. So I think that scalability, which is really what you're talking about is, I think, going to continue on. And I think the changes that we have and the growth that we have in the operating base will be quite modest. Operator: Our next question comes from Scott Buck with H.C. Wainwright. Scott Buck: Peter, I was hoping, given the momentum you're seeing in education, if you could give us a bit of a reminder on how big the education opportunity here is in North America? And then maybe touch on some of the other higher growth segments of the business like health care as well. Peter Evans: Yes, absolutely, Scott. So simple math, Scott, there's 130,000 K-12 schools in the United States. That is a public K-12 that doesn't include private. And if you assume 1 to 2 systems per school, depending on the size of the school, depending on the number of entrances, maybe they've got entrance for bus drop-offs, another entrance for main entrants. And we see a variety. Some schools want as many as 3 systems. So you can argue that depending on the systems, the feature functionality and things like that for very simple round numbers, $100,000 to $200,000 a school for argument's sake. And those are just round numbers for simple math. So multiply that by 130,000 K-12 schools, you're in the range of $13 billion to, what, $25 billion or so for that marketplace. So I believe that between ourselves and our competitors, we've barely scratched the surface in terms of the numbers of schools and the numbers of opportunities. I think there are some things that take time to work through the schools, particularly budgets. Most of the schools have to fund these kinds of acquisitions of the systems through grant applications and grant funds, which is -- can be a bit of an arduous process. The money is there, though. Recently, Texas awarded several hundred million dollars for school safety and security, which has opened up, for example, the Texas marketplace. So the market is there. The market is large. The market is significant. It doesn't all happen overnight, though, depending on grant monies and these sorts of things. What we're pleased with, though, is for those schools like Volusia County that did extensive testing over a month-long period, and they were previously using one competitive solution and tested a second competitive solution versus us. It was very obvious what the best solution was for those schools. They could choose an x-ray machine and a screening solution and still have issues with alerts and weapons getting through or they can walk through the One Gateway with kids streaming in at 66 per minute. So we're very pleased with our position that innovation has delivered. We're very pleased to be serving that school industry, that $13 billion to $25 billion market. And all of our customers that we've deployed with so far are very happy and have become strong references for us. Does that answer your question, Scott? Scott Buck: Yes. No, that's perfect, Peter. I appreciate that. You mentioned one example there where you went in and displaced a competitor. Typically in the education space, is that more often than not you're displacing somebody else? Or are there a lot of greenfield opportunities in there as well? Peter Evans: I think we barely scratched penetration in the marketplace between ourselves and all the competitive opportunities. There are some schools you'll see -- I think there's higher penetration, quite frankly, Scott, of walk-through metal detectors that might have been deployed in some intercity locations 5 years ago. I think a place like downtown New York or Detroit or Chicago. But in terms of advanced screening solutions, in the case of this one place where we displaced a competitor, they're using that competitive solution for screening of football matches on Friday evening. And they had occasionally used it for screening students entering into the school. And I was very pleased to get a call from the Chief Security Officer one day where he said, well, I finally scrapped my last of product X and thrown in the dumpster after we've deployed now in 6 high schools with you. Scott Buck: Great. That's helpful, Peter. And then one last one. I want to ask about some of the commentary you had on channel partners and that becoming, I guess, a larger piece of revenue. Are you adding new channel partners at this point? Or are your partners just getting better at helping sell the product? Peter Evans: It's a little bit of both, Scott. We are adding new channel partners, but we're very selective of how we do this. Weapon screening solutions need to be deployed correctly. It is a people, process and technology question, not just dropping technology on the ground. People need to be trained correctly. You have to get the [ con ops ] and the flow right. Otherwise, it gets a little lumpy. And so we look to very good channel partners who can essentially replicate what we do with the high quality and the high touch and the high customer focus. So I'm less interested in having 500 partners versus having 5 really excellent partners. Now we have more than 5, okay? But as an example or an anecdote. And so we're continuously recruiting new partners, but being very selective about who they are. And then what we're finding is our existing partners, as they get their fourth, fifth, sixth deployment with their customers, they as a company are starting to replicate our level of knowledge and our level of engagement, and we're seeing the aperture of their pipeline expand also. So we've got growth with new partners. We've got growth with the existing partners become more fluent in the solution. Scott Buck: Okay. And just given the partnership network that you guys have built, we shouldn't expect any kind of deployment delays on your side, given any kind of capacity constraints at this point. Is that right? Peter Evans: Right now, we don't have any capacity constraints. But as I mentioned in my comments, because of the high demand for the One Gateway that's outstripped what we had our original business plan, we are already in the process of looking to double the capacity that we built into the manufacturing lines so that we can deal with that. So there may be some slight delays until we get that ramped up, but not something that we think is going to be meaningful or significant. Scott Buck: Good problems to have, right? Peter Evans: Yes. Operator: Our next question comes from [ John Hyde ] with Strategic Investing Channel. Unknown Analyst: Congrats on the bookings as the other analysts have said. My first question is around contract split between upfront and subscription. I know, Karen, you mentioned, I think it was 75% or so was upfront in these bookings. Can you give us maybe, let's say, like a split between what type of customers are choosing the different types of subscription versus upfront? Karen Hersh: Sure. It was -- 73% was upfront for Q4. And interestingly, for the full year, the upfront came in at 58% versus 42% for subscription. And so we look to that to see what's going on here. And I think you heard from Amr's question that we had a strong education quarter. And I think that was the main reason for the upfront. So what we're finding sometimes with schools or fairly often with schools is that they have grant money that comes in and they tend to work on an annual budget. And that lends itself well to the upfront contracts. So we often see upfront when we're dealing with schools. Similarly, when we deal with entertainment or stadiums, arenas, any sporting facilities, they tend to be very highly focused on their P&L, and they like to have security as a service. And so that lends itself extremely well to our subscription model, and that's what we often see when we're dealing with sports and entertainment. Health care, we find can go either way. They're often upfront, but at the same time, we do find some of our health care facilities do like to use a subscription model. I would say it's perhaps a little bit more leaning towards the upfront. But you're definitely seeing a preponderance of a market going towards one type of contract versus the other. But that being said, we always have exceptions. And from our standpoint, we're agnostic as to which one our customers choose. We just want to meet the customer with what suits them best for their needs, and that's why we offer that flexibility of both models, whereas some of our competitors in the market are much less flexible in terms of what they offer and they're often pushing customers into a subscription model when they are, in fact, better suited towards an upfront model. So I think that's the key takeaway from us, which is we're very happy to meet our customer from whichever model suits their purposes. Our margins are comparable on both scenarios. And therefore, we just do what's best for our customers. Unknown Analyst: Awesome. So -- and on kind of that topic, having a lot to offer for the customers. I know, Peter, you mentioned, and I think this kind of goes under the radar sometimes. I think you guys are really the only player in the space as far as advanced weapons detection that offers kind of 2 different tailored products, whereas I think your competitors mostly kind of just take their product and try to maybe add on a metal detector like you were saying. Is this something that is really kind of driving some of the advantage with having those 2 products? And if you can talk about maybe which particular customers really do appreciate that advantage? Peter Evans: Yes. So John, it's a great question. I guess the easiest way to describe it is there are -- for each market segment, there are certain critical key factors that they're looking for. And by having more flexibility in the portfolio, that allows us to be more aligned to what those customers' needs are. And I'll give you some examples in a moment versus kind of a one-size fits all. If all you've got is a square peg and you've got to push into a round hole, a hexagonal hole, a triangular hole of unique needs, you kind of have to hammer it in there, and it's not going to fit very, very well. In our case, think of it like we have got a solution with SmartGateway and what it does uniquely and the flexibility for various environments to address the needs of the square pegs and the hexagonal pegs and with the One Gateway, the round pegs. There are certain things that certain markets want. The #1 thing for schools is they want the kids just to flow in. They don't want them to have to divest their backpacks, their laptops, put them on an x-ray machine, walk on through all that sort of nonsense. We want the schools to be very welcoming and the One Gateway allows people to do that. In the case of hospitals, the bulk of the hospitals, the majority of them are very worried about edge weapons. And there's unfortunate incidents like what happened in Nova Scotia in January this year, where 3 nurses were stabbed and one needed life-saving surgery, and that was from a 2-inch blade. And so being able to detect those small edge weapons without alerting on 70% to 80% of the smartphones like other solutions would do, is a competitive advantage for the SmartGateway. And then that applies when you start to think about international markets where the preponderance of the issues are edge weapons, they are not firearms. And so for health care organizations or international markets, the ability to detect the smaller knives without the untenable numbers of alerts is critical. For other organizations like stadiums and arenas, there's all sorts of other capabilities in the SmartGateway, ease of portability. Let just tip it, roll it, drop it on the ground, turn it on and it works. And it's up and running, self-calibrating, self-managing. I don't have to worry about moving metal doors or rebar under the ground or all these other silly things that make it operationally complex for people. The arenas and stadiums have enough to worry about to get 17,000 excited Billy Joel fans in to go see Billy. And so making our systems very simple to use, particularly in an environment where you're using outsourced security guards who change over frequently. Now these are things that we've built into the platform in a manner that makes it very easy for arenas and stadiums and the SmartGateway perfect fits that, very easy for hospitals. I was at one hospital location where they were doing a demonstration and the vestibule between the 2 sets of sliding doors was about 6 foot by 7 foot, fairly small, and we fit into it perfectly where others couldn't. So the ability to fit and align to those different market needs for the different segments is what's giving us competitive advantage. Unknown Analyst: Awesome. One last question. I know you talked about the advantage with -- internationally with knives. I know that's a big thing, especially with the SmartGateway. With schools, though, I know a lot of the schools, obviously, in the U.S. have been picking up on these technologies and we kind of only expect it to continue. But internationally, are you guys seeing the same trend with schools wanting to add security systems like these? Or is it kind of particularly just certain markets like the U.S.? Peter Evans: I think the primary issue in the U.S. is with weapons and firearms. There isn't a week that goes by where we don't hear a story about some child bringing a gun to school. You don't have the same issues in outside of the U.S. because there's not same easy access to firearms. However, there are anecdotally certain locations like I believe in the south of France, they have now mandated that schools will start screening for weapons. So we are starting to see this coming a little bit at the forefront, usually driven by some sort of an event. I was in the U.K. a month ago, and there are certain school districts that are now starting to make it mandatory to start screening for weapons also, primarily driven by some sort of unfortunate event. What we see is in countries outside of the U.S., when there is an event, there's a much faster reaction and mandate to start driving weapon screening solutions. Operator: Our next question comes from, Jeffrey Bennett, a private investor. Jeffrey Bennett: I just wanted to get some visibility into Europe with Martyn's Law coming into effect. I know you just signed Carlisle Support Services and you've done some demos for the Premier Soccer League over there. What kind of revenues are you expecting out of that? I'll put on mute there. And for Karen, I wanted to know what kind of warrant conversions are currently taking place with your warrants? Peter Evans: So thank you for the question. The U.K. is a very strong and emerging market for us. We're very pleased with the engagements with assorted football clubs, theater organizations and other iconic venues. Obviously, we can't speak to them specifically because we're under a nondisclosure with those organizations, until such time as we've either signed a formal contract with them or until such time as we have got their agreement to actually put out a formal press release. So I can't name any specific names. I wish I could, but we can't right now. But the U.K. particularly is becoming a very nice market for us, and we're very pleased with the business acceleration that's occurring there right now. All I can really say is stay tuned, more announcements to come. Jeffrey Bennett: Karen, for the warrant conversions, what kind of conversions are you seeing? Karen Hersh: We have seen some conversions happening in September. We had [ $2.8 ] -- almost [ $2.9 million ] of warrants that were exercised. And this was primarily -- this was exclusively actually related to the financing that we just completed in June. So we've had some additional cash come into the organization from those conversions. And that extended into a little bit more going on in October. In total, [ $4 million ] warrants, give or take, have been exercised since year-end that has provided additional cash for the company. And I would note that there are a number of warrants that are still in the money and could potentially convert throughout the rest of the year. Operator: At this point, there are no further questions in the queue. I would like to turn the conference back over to Peter Evans, CEO, for any closing remarks. Peter Evans: Well, first off, thank you, everyone, for taking the time out of your very busy day to join us today for this presentation. We are very pleased with how we wrapped up the year strongly. There's a few bumps in the road last year, but those were quickly corrected, and we feel that we've got our momentum back, and we've got that strength back in everything that we're doing. 2026 is looking very, very good. I'm feeling very pleased about it right now. I couldn't be happier. I'm very thankful for our investors who continue to support the company. I'm unbelievably thankful to all the employees that we have in our company. We have got a fantastic group of individuals who are all very passionate about what we do. And most importantly, I'm very thankful to our customers who continue to support us, continue to renew with us and continue to go tell all of their friends about us and why they want to work with Xtract One. So with that in mind, I'd invite everyone to stay tuned. We are looking forward to our Q1 announcement coming up very soon, and we will continue the momentum and keeping everyone aware of what we're doing here at Xtract One. Thank you, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Third Quarter 2025 Comfort Systems USA Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to turn the call over to Julie Shaeff, Chief Accounting Officer. Please go ahead. Julie Shaeff: Thanks, Michelle. Good morning. Welcome to Comfort Systems USA's Third Quarter 2025 Earnings Call. Our comments today as well as our press releases contain forward-looking statements within the meaning of the applicable securities laws and regulations. What we will say today is based upon the current plans and expectations of Comfort Systems USA. Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments. You can read a detailed listing and commentary concerning our specific risk factors in our most recent Form 10-K and Form 10-Q as well as in our press release covering these earnings. A slide presentation is provided as a companion to our remarks and is posted on the Investor Relations section of the company's website found at comfortsystemsusa.com. Joining me on the call today are Brian Lane, President and Chief Executive Officer; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer. Brian will open our remarks. Brian Lane: All right. Thanks, Julie. Good morning, and thank you for joining us on the call today. Our amazing teams across the country continue to deliver excellent results for our customers, and they have delivered financial results that far exceed even our recent outcomes. We earned $8.25 per share this quarter, which is double what we earned in the same quarter last year. Our mechanical business had a sharp increase in profitability, and our electrical segment was higher as well. We also had favorable developments in some late-stage projects that contributed to our great results. Construction is driving most of our results, but service revenue and profit also grew by double-digit percentages. Our bookings were strong, and our backlog at the end of the quarter grew to a new high of $9.4 billion. As a result of exceptional demand for our services, we achieved a second consecutive same-store backlog increase of more than $1 billion despite significant third quarter burn. We continue to book work with good margins and good working conditions for our valuable people. We entered the fourth quarter of 2025 with $3.7 billion more in backlog than last year at this time. I'm happy to announce the acquisition of 2 companies on October 1. FZ Electrical, a contractor with strong industrial capabilities located in Grand Rapids, Michigan; and Meisner Electric, a contractor based in Boca Raton, Florida, with strong capabilities in health care and other attractive markets. We are thrilled to have these 2 companies join the Comfort Systems USA family of companies, and we welcome them. Today, we increased our quarterly dividend by 20% to $0.60 per share, and we have actively purchased shares during 2025. With solid bookings and great demand, we expect continuing growth and strong results in 2025 and 2026. Trent will discuss our operations and outlook in a few minutes, and I will make closing comments after our Q&A. But first, I will turn the call over to Bill to review our financial performance. Bill? William George: Thanks, Brian. Our third quarter results were remarkable in every way with 33% same-store revenue growth, sharply higher margins, EPS up by over 100% from the prior year and a surge of over $500 million in quarterly free cash flow. We achieved more than $400 million in quarterly EBITDA for the first time ever, and that's a 74% increase over the same quarter 1 year ago. So we'll start with revenue. Revenue for the third quarter of 2025 was $2.5 billion, an increase of $639 million or 35% compared to last year. Electric segment revenue grew by 71% and mechanical revenue increased by 26%. Through 9 months, same-store revenue increased 23% and currently, our best estimate is that fourth quarter same-store revenue will grow in the high-teen range as compared to the same quarter last year. For full year 2026, we expect same-store revenue growth to continue most likely by a percentage in the low to mid-teens and weighed more heavily to the first half of the year. Gross profit was $608 million for the third quarter of 2025, $226 million higher than 1 year ago. Our gross profit percentage grew to a remarkable 24.8% this quarter compared to 21.1% for the third quarter of 2024. Quarterly gross profit percentage in our mechanical segment increased significantly to 24.3% this year compared to 20.3% last year. Margins in our electrical segment also grew to 26.2% as compared to 23.9% in the third quarter of 2024. Great ongoing execution augmented by favorable developments in certain late-stage projects drove us to higher margins in both segments. Our largest single discrete project development was recognizing $16 million of previously deferred revenue on a project as a customer emerged from bankruptcy. We currently expect that 2026 profit margins are likely to continue in the strong ranges that we have achieved and averaged over recent quarters. SG&A expense for the quarter was $230 million or 9.4% of revenue compared to $180 million or 9.9% of revenue in the third quarter of 2024. SG&A increased mainly from ongoing investments in people to support our higher activity levels. Our operating income increased by just over 86% from last year from $203 million in the third quarter of 2024 to $379 million for the third quarter of 2025. Our operating income percentage surged to 5.5% this quarter from 11.2% in the prior year. Our year-to-date tax rate was 20.9%. Our effective tax rate in the first quarter was lower due to interest we received on a delayed refund relating to our 2022 federal tax return. We expect our tax rate to continue to be around 23% for the rest of 2025 and into 2026. After considering all these factors, net income for the third quarter of 2025 was $292 million or $8.25 per share as compared to net income for the third quarter of 2024 of $146 million or $4.09 per share. Thanks to great execution by our people, EBITDA increased by 74% to $414 million this quarter from a strong $238 million in the third quarter of 2024. Our trailing 12-month EBITDA is now $1.25 billion. Free cash flow for the third quarter of 2025 was $519 million, and year-to-date, our free cash flow is $632 million. We purchased additional shares this quarter. And year-to-date, we have spent around $125 million, buying approximately 345,000 shares at an average price of $363.13 per share. At the end of September, our net cash position was $725 million. As Brian mentioned, we acquired 2 fantastic companies on October 1, Feyen Zylstra and Meisner Electric. We funded approximately $170 million in purchase consideration in the first -- fourth quarter, and these acquisitions are expected to provide over $200 million in incremental annual revenue and $15 million to $20 million of annual EBITDA. In August, we finalized an amendment to our senior credit facility that increased our borrowing capacity from $850 million to $1.1 billion on very favorable terms. The new maturity date is October 2030. Our balance sheet and cash flow have put us in a great position to continue to invest, grow and reward our shareholders. That's all I got. Trent? Trent McKenna: Thanks, Bill. I'm going to discuss our operations and outlook. Our backlog at the end of the third quarter was a record $9.4 billion, a large sequential and large year-over-year increase. Since last year at this time, our backlog has increased by $3.7 billion or 65% and $3.5 billion of the increase was same-store. On a sequential basis, backlog increased by $1.3 billion or 15%, all of which was same-store. Third quarter bookings were especially strong in the technology sector, both in our traditional construction business as well as the modular part of our business. We are entering the final quarter of 2025 with same-store backlog 62% higher than at this time last year, and our project pipelines remain at historically high levels. Industrial customers accounted for 65% of total revenue in the first 9 months of 2025, and they are major drivers of pipeline and backlog. Technology, which is included in Industrial, was 42% of our revenue, a substantial increase from 32% in the prior year. While our manufacturing revenues declined on a percentage basis, we continue to see good demand for manufacturing, but in many cases, data center opportunities are more compelling. Institutional markets, which include education, health care and government remain strong and represent 22% of our revenue. The commercial sector provided about 13% of revenue. Most of our service revenue is for commercial customers. Construction accounted for 86% of our revenue with projects for new buildings representing 61% and existing building construction 25%. We include modular in new building construction and year-to-date, modular was 17% of our revenue. We remain on track to have 3 million square feet of space in our modular businesses by early 2026, and we will prudently consider additional investments next year based on the strong demand we are seeing in modular. Service revenue was up 11%, but with faster growth in construction, it is now 14% of total revenue. Service profitability was strong this quarter, and service continues to be a growing and reliable source of profit and cash flow. I cannot say enough about the amazing team of craft professionals that we have working hard for our customers every single day. Thanks to the teams that are working across the country, we are optimistic about our future. I want to close by joining Brian and Bill in thanking our over 21,000 employees for their hard work and dedication. I will now turn it back over to Michelle for questions. Thank you. Operator: [Operator Instructions] Our first question comes from Adam Thalhimer with Thompson, Davis. Adam Thalhimer: Congrats on another wave of record results. I wanted to ask high level on the technology side. Does the bidding activity match the bookings and the revenue growth that you saw in Q3? Brian Lane: Yes, Adam, the opportunities, the pipeline is still robust, matching quarter 3. There's still more opportunities that then probably can be handled out there in the market at the moment. So we've seen no let up at all in the opportunities. Adam Thalhimer: And then I'm curious on capital allocation. Your free cash flow -- your net cash, I think, broke out to an all-time record in Q3. Just curious how you're thinking about that and if just accumulating cash from here wouldn't be the worst thing in the world? William George: Well, that's never the worst thing in the world. There are worse alternatives to accumulating cash. But we haven't changed our capital allocation thinking since 2007. We will -- to the extent we can find opportunities that we have conviction around, we will deploy most of our cash doing acquisitions. We will continually buy back our shares using a portion of our free cash flow, and we get aggressive on that when we feel like the stock has dipped to -- relative to our prospects. So for example, when it dipped earlier this year, we spent $100 million in a couple of weeks buying shares. And then we -- one point you might be making is there's so much cash now. Is it realistic for us to deploy it into acquisitions? And I think the answer is we've faced that problem on a couple of stair steps in our cash over the last few years. So far, our reputation as an acquirer and our commitment to great outcomes for the people we buy have allowed us to find good opportunities to deploy our cash. One thing people might not think about is we are growing, but the companies we're buying are growing as well. There's a certain amount of scaling going on. So I meet with companies regularly that are having -- that have results that are twice as big as they were 2 or 3 years ago. And so in a sense, the reality is the opportunity set that's facing a company with a great, deep, well-established workforce of pipe fitters or electricians is amazing. These companies are worth more today than they were 5 years ago just because of actually what's going on because of the investments they've been making in the meanwhile. And we're optimistic. We're going to just try to keep doing what we've been doing. And if we wake up with the problem of we just can't keep up with the cash, then we'll find ways to reward our shareholders in other ways. Operator: Our next question comes from Sangita Jain with KeyBanc Capital Markets. Sangita Jain: So a couple that I have. One is on the cash flow in third quarter, your free cash flow was especially strong. So I'm just trying to think how we should think about it for the whole year and if there were any material advance payments included in 3Q that we should be aware of? William George: So for one thing, there wasn't an extraordinary event like there has been a few times over the last few years where we get way ahead due to some specific event or we have a turnaround where that event is sort of recalibrated. I will say that you can always expect our cash flow to be roughly equal to our net income. We are a cash business. We pay our taxes in cash. So when you see a quarter where we have cash flow above our net income, at some point, we're going to give that back. When it's below our net income, then we have cash we'll collect in the future. Through 6 months, we were behind our net income. There were some specific reasons for that, that we've discussed. In the third quarter, we had a big catch-up. We're getting fantastic payment terms. As we can negotiate good pricing and good conditions for our workers, we can also negotiate good payment terms. So we just had a great cash flow quarter, but nothing fundamental has changed. We're going to cash flow our net income. Sangita Jain: Got it. And then if I can ask one on backlog growth. Obviously, your backlog suggests that you're booking out further than a year. Can you speak a little bit to that? And if it's primarily on the modular side or also on the traditional construction side? If it's just data center or also life sciences pharma work that you feel like you're booking out earlier and earlier? Trent McKenna: So when -- our bookings for the quarter, right, we were broadly across all of our businesses. And there were some -- the bookings that we had in modular, those are going to -- those are pushed out farther. So those aren't going to be exactly relevant to what I'm about to say. But for the rest of our bookings, all of those bookings are going to start sometime within the next year. They might be longer-term projects because of the size of the projects, but they are all projects that are slated to begin in 2026. So when we talk about bookings out further out, that's more of the modular side of the business. Operator: Our next question comes from Julio Romero with Sidoti & Company. Julio Romero: Just following up on the last question about the order acceleration. Historically, you guys are very prudent at kind of not taking on additional backlog and not getting out over your skis. I know, Trent, you mentioned a piece of the backlog growth was modular orders that were further out. But just help us think about the step-up in orders here for the last several quarters. Part of it is booking yourselves further out, but some of it is also, I guess, securing enough pricing in your bid margins to compensate for that additional risk of additional orders? Brian Lane: Yes. So Julio, we still have the same philosophy we've always had. We'll take on work we know we can do that we can handle with the skilled workforce that we have. So we look at each opportunity, particularly on the lodger side, make sure the timing is right, work for us that we can achieve a good product for our customers. So if you look at the timing of what we're winning, when it's coming in and can we handle it, we feel very comfortable with the workload that we have today. Trent McKenna: And I want to add too, Julio, the collaboration between our companies is really permitting a lot of this additional booking that you're seeing. It's the companies working together to share workforces so that they can tackle projects that would otherwise have been kind of outside of their ability scope previously. Brian Lane: And Julio, one thing that we do have going for us is that we have folks that will travel and you see some of this work, maybe get all the West Texas, Abilene, Amarillo that we can handle because we have people that will travel to these sites. Julio Romero: That's very helpful. And then I know a big emphasis is being selective with regards to the specific partners you work with. And I think you guys mentioned earlier, your partners are getting bigger. They're taking on additional work. But just throwing that question back at you guys, has the pool of partners that you work with increased? Or is this just more a function of you doing more with your existing partners? William George: So what Trent was referring to was our companies working together. We do work sometimes with -- we worked with some companies. We worked with a company we bought, called Ivey, before we bought them. We have selected situations like that. But I think overwhelmingly, we're really talking about companies that are Comfort Systems USA companies that are 50 or 100 or 10 or 50 miles from each other. Brian Lane: And it's really a great point for people to come and join us. They have opportunity to work with a lot of other companies in the same industry. under the same overall structure that we have. Julio Romero: Yes. And I'm sorry to rephrase my question, I meant when I said has the pool of partners increased, I meant has the pool of kind of the customers that you typically have worked with increased? Or are you doing more with existing customers? William George: I would say there aren't many people in the United States we haven't done work for in the past. If they've done work in the past, we've probably done it. So that's kind of a hard question to answer, but it's mostly -- there is a definite preference for people who we have a history of succeeding together with. We have rough projects, we don't want to do work with those people anymore. We want to do work with the people that we have great projects with over and over. Brian, did you -- I mean... Operator: Our next question comes from Brent Thielman with D.A. Davidson & Company. Brent Thielman: Congrats again, another great quarter. I guess, Brian, Trent or Bill, one of the questions that seems to come up often is just your ability to sustain the growth you're seeing outside of modular, just given sort of the industry labor constraints out there. You've grown same-store, call it, 20% or more for what looks to be a fourth year in a row here. And I know there's a lot of factors to the growth over the last few years. But maybe you could talk about just sort of how critical have your sort of internal recruiting, hiring efforts been in recent years in support of that growth versus job values getting bigger? And then also, I guess, is there any sort of slowdown or change you've seen in terms of your ability to bring in people to support the growth, I guess, outside of acquisitions? Brian Lane: Yes. So I'll go first, Brent. First and foremost, this is a good place to work, right? We treat people fair in what respect. We pay them well, and there's a good benefit package. So we're constantly recruiting. But as you can tell by our numbers, we're up over 21,000 access to another probably 35,000, 34,000 contract labors that we have. So all in all, we're constantly recruiting, but we do get people to come here and work. We also have a lot of work, which makes us a good place to work as well. So how much can we grow? We continue to train. We're improving productivity constantly. We're trying to pick the right jobs that we're good at planning them using BIM, prefab and modular help us. But the enhancement that we are achieving with the skilled workforce is the best I've ever seen in my career today. Brent Thielman: Okay. All right. And then the 3 million square footage of space in modular that, I guess, becomes available early 2026, I think you said Trent. Is that capacity or space already effectively sold out? Or do you expect it to be soon? Trent McKenna: Yes. The answer is yes. Brent Thielman: Okay. Just one last technicality, if I could. The $15.5 million write-up that you called out, I think, in the filing, is that all reflected in the mechanical segment? Or I'm just trying to level set what kind of normalized margin looks like. William George: So that happens to be in the electrical segment. But one of the things we were basically saying is we always get these questions, did you have anything special in the quarter? Did you have jobs that closed out especially well? We have a lot of jobs now. So we almost always do. But at this point, we did have some special closeouts this quarter that were particularly helpful. That was the biggest one. So in MD&A, you're required to give an example. We gave the biggest single example, but they happened in both electrical and mechanical. We're late in some jobs. The jobs are going well. The systems are being turned on and they work well. We're able to relieve contingency. So we did -- this would have been a great quarter without those. This would have been a record quarter even without some of those pickups. Some of those pickups pushed our results a little further, and we wanted to just let people know that. Brent Thielman: Okay. Sorry. And Bill, theoretically, you have these every quarter. It just varies. So even if we compare year-on-year, you might have had them last year? William George: But the last 3 or 4 quarters, we were frequently asked, did you have any special closeout? And we said nothing out of the usual. This time, we're saying we kind of had some a little more than we would -- we might normally count on having. So I would say we do have -- we had some really good stuff happened this quarter. Operator: Our next question comes from Josh Chan with UBS. Joshua Chan: Congrats on a really great quarter. I wanted to ask about the backlog question, but especially within the last 6 months because obviously, you've had a strong demand environment, you have labor constraint, you have labor sharing for a while now. But really over the last 2 quarters, you had these 2 consecutive $1 billion step-up in the backlog. And I was just wondering if anything is different in this last 6 months versus the longer period, I guess. William George: It's an interesting way you asked that question. Every quarter is different from every other quarter, right? We had some big bookings. Sometimes they're in pharma, sometimes they're -- it's never exactly the same because this is lumpy stuff, as we've said. We had a lot of really, really good opportunities get to the point where they were documented and could go into backlog this quarter. Year-to-date, it's the companies you guys know of and think about. There were some interesting ones this quarter. It's work we know are really companies that are doing work they've done over and over. So we feel great about it. But there's just such a good market. There's such a good opportunity. Our customers, they want us to commit early, so they commit early. It's just a fantastic market, and we have just unbelievably good companies. Joshua Chan: Yes. That makes a lot of sense. I appreciate the color there. And then on modular capacity, if you were to expand kind of incrementally from here, would there be a preference to serving existing customer or I guess, demand for that? Or would there be a preference to kind of grow with other types of customers within modular? William George: I would say we always have a preference towards meeting the needs of the people who have been great partners for us over years. And in the case of one of the ones you would be referring to more than a decade. So we'll always have a preference towards great customers as opposed to new customers. Having said that, we are -- we talk to new customers. We have opportunities. As you know, we added a customer. But if you were asking me the question, would our guys rather do work with people who they have a great relationship with or find out how good somebody else is, they'll take the sure thing. Operator: Our next question comes from Tim Mulrooney with William Blair. Timothy Mulrooney: I hate to go back to this backlog question and beat it to death, but I'm newer to the company here. So I just want to make sure I understand how this works. How much of your backlog, excluding that modular piece, would you expect to start at some point over the next 12 months? I'm just trying to understand how much of this backlog is actually being pushed out versus just elongated due to the larger projects? William George: So I'm really glad you asked. The majority of the backlog numerically is jobs that have already started. It's the work left to finish on jobs that have already started. When Trent says everything is going to start within a year, he means all the new bookings. We don't have new bookings. Really many of the new bookings have already started at some level in the sense that we're doing preliminary work, underground work. We have engineering we're billing for. But it is -- this is really a -- because the definition of backlog in sort of what's called a remaining performance obligation under GAAP is so strict. You really don't put something into the reported backlog number until you have a price, a scope and a legally binding obligation that can be audited. We are -- almost any project that we put into our backlog, it was awarded to us a quarter, 2 quarters, 3 quarters ago. We received a phone call saying, this is your work, long before it shows up in backlog. So I hope that helps because it's not like -- we're not like a manufacturing company that's selling stuff we're going to start producing far in the future. You can't really price the building until it's been designed. You can't really design a building until you're about to start it. So... Timothy Mulrooney: Yes. No, that's really helpful, Bill. I guess, a more firm picture for a more firm backlog. That's helpful. So my other question just really quick is actually something I don't hear discussed a lot on these calls, but I'm curious to learn more is that service revenue piece. I mean it's up 11%. You said it's like 14% to 15% of your revenue. It's not insignificant. I don't hear it talked about a lot. What's driving that strength in the revenue growth there, and it sounds like -- and in the profitability? And is there some sort of conversion like when your new construction is stronger that brings along some service? Or are those pretty much not correlated? Just any color on that piece of the business. Trent McKenna: So the service business continues to be strong. There's a lot of investment in sales force collaboration, making sure that we're going after the right parts of that market. Across the board, we're just seeing broad strength in that business, and it's execution driven. We have a lot of people -- the service business, it's really -- it's a day-to-day kind of bunt single doubles business. It's not like the construction business where you add a lot to your backlog at once. It's small maintenance contracts, pull-through work that comes from that. To your point, it's converting new work to service contracts over time. So it is the kind of business that just by its nature, doesn't grow quite as episodically as the construction business. But what you've got is you've got some real strength in that from the teams out in the field that are making it happen. Operator: Our next question comes from Brian Brophy with Stifel. Brian Brophy: Congrats on a nice quarter. Just wanted to follow up on some of this headcount discussion. I think the over 21,000 employees implies a little bit over 15% headcount growth since the end of 2024. It obviously seems to be an important enabler of some of the organic growth we've seen here this quarter. Just could you help us understand how sustainable that pace of hiring could be, assuming demand remains healthy here? William George: That number does include some acquisitions. So -- but I would say the majority of that was 15 points were added by our companies. And we don't -- we would never tell you, oh, we can regularly add 12% to our workforce of craft workers. We had a really good 9 months. We're confident we can -- we have -- on any given day, we have apprenticeship programs going on that we really are trying to get as many people as we can legally put into them involved in. There are like state-mandated ratios where you can only have a certain number of apprentices per journey persons. So we're trying to grow as fast as we can. I think high single digits is what we've accomplished over a long period of time. We're pretty proud of that, by the way, because that means you're creating or you're helping people create themselves as electricians and pipe fitters and that's good for them. That's good for us. That's good for the U.S. Brian Brophy: Okay. Yes, that's helpful. And then wondering if you could give an update on some of the automation investments you've made on the modular side. And just to what extent you're seeing some productivity benefits? Any color you can provide there would be interesting. William George: You want to -- Okay. Well, so more and more robots, right? So as we get more and more buildings implemented, we see the bills go by for robots we're buying. We've added turn tables. It's what Trent was saying, it's singles and doubles, but yes, no, there's a lot of automation going in. There's improvements in welding proficiency that's driven by better software, really AI-enabled software. There's just a million little things. I mean... Brian Lane: I'll also tell you, Brian, in terms of the history of construction, the amount of innovation and technology that's being developed and applied today leaps and bounds over what it's ever been. And it's going to be a huge help into helping us build stuff as we go forward safer, more productively and the quality is getting better every day. So... Trent McKenna: Yes. And one of the benefits Comfort Systems has is we have 48 different test beds where we can try new things and then move them throughout the enterprise if they work. And so it's a really excellent way to be able to test and innovate and then be able to do it in a controlled way and then move it out if it's effective in one operating unit, then it will be effective across. And it's a way for us to be able to innovate inside of a construction environment without significant risk. So it's a real benefit to our structure. Brian Brophy: Yes, that's really helpful. Last one for me. Pharma was mentioned very briefly. Just would you give us an update on kind of what you're seeing on the project pipeline side, particularly some of the onshoring opportunities that may be coming. Obviously, we've had a little bit more tariff discussion on pharma products. I'm just curious if you've seen any movement in that market. William George: Our biggest single booking, I think, in the last couple of quarters was in pharma, but the majority of our bookings today are in technology. It's not because there aren't pharma opportunities. It's because technology is competing for our resources and they're making a compelling case for our resources. I will also say, if you talk to -- we have a very, very strong pharma group of people that have done work in pharma for decades in the Mid-Atlantic. I've spent time with some of them recently. They say that there is a lot of planning going on projects with code names for construction along the Eastern Seaboard. But in our case, that would be the Mid-Atlantic area and especially the research triangle, the area around the research triangle. So there's a lot of work coming. Pharma has very, very long lead times. They they think and plan for years. So unless something like -- there are exceptions to that. GLP-1 boom, they're just building it as fast as they can. The COVID vaccines and all sorts of things that were needed for the COVID vaccines, very, very fast. But normal regular day-to-day pharma stuff, it develops over a long period of time. And that pipeline, the people, the smartest people in our company who know about it, say it's very, very good. Now the time may come when it's available to us, and that's not what we choose to do, right? But I think that the opportunity is out there. Operator: Our next question is a follow-up from Sangita Jain with KeyBanc Capital Markets. Sangita Jain: I just had a follow-up on -- as you see large data centers starting to get commissioned, I'm wondering if there's a change in the type of electrical or mechanical scope that you may be seeing because we're hearing that developers are now looking at DC power instead of AC power. And I wonder if that impacts you or if it just kind of stays outside the wall. William George: So we don't -- for us, electrons going through a wire, you just can't even imagine how generic that is to an electrician. He couldn't care if those electrons are -- he doesn't care if it's going to make pills or it's going to make data. So you'd be -- you just need electricians. That's a great thing about our positioning. Whatever you -- if you need to do something, you need us. And I haven't heard anybody saying that it's materially changing. The one thing you do hear is scale, like the amount of copper, the amount of switchgear, the density of cooling, just the sheer scale, people -- even very, very seasoned people are amazed by that in our organization. But as far as like those kind of tweaks, I'm not hearing anything. Trent? Trent McKenna: No. Operator: There are no further questions at this time. I'd like to turn the call back over to Brian Lane for closing remarks. Brian Lane: Okay. I just want to reiterate my gratitude for the amazing dedication and excellence of the teams we have across our nation, serving our customers every day. Demand is strong, and our people are rising to the challenge of addressing the unprecedented need for their unique skills. As Trent mentioned, we feel that conditions are good for us to continue to perform. And as Bill indicated, we have the resources and the commitment to lean into delivering for our employees, our customers and for you, our shareholders. As we embark upon the holidays that are coming up, we won't have another call. I wish everyone the best for the rest of the year and enjoy your time with your families as the holidays come upon us. Thank you for your confidence. Have a great weekend. Operator: Thank you for your participation. This does conclude the program. You may now disconnect. Good day.
Operator: Good morning. Welcome to Megacable's Third Quarter 2025 Earnings Conference Call. With us this morning, we have Mr. Enrique Yamuni, CEO; Mr. Raymundo Fernandez, Deputy CEO; and Mr. Luis Zetter, CFO. Let me remind you that the information discussed at today's earnings call may include forward-looking statements on the company's future financial performance and prospects, which are subject to risks and uncertainties. Megacable undertakes no obligation to update or revise any forward-looking statements. I will now turn the call over to Mr. Enrique Yamuni. Sir, you may begin. Enrique Robles: Thank you, Saul. Good morning, everyone, and thank you for joining us today. During the quarter, we remain firmly aligned with our strategy and continued with the execution of our expansion and network evolution projects as planned. This disciplined approach has enabled us to sustain subscriber growth above market level, positioning Megacable as the second largest operator in the country by number of broadband subscribers. The achievement reflects our commitment to becoming a leader player in Mexico telecommunications sector. A key driver of this progress has been the expansion of our infrastructure. During this period, we successfully reached our goal of doubling our infrastructure by number of homes passed compared to those at the expansion announcement, making a significant milestone 3 years into the execution of this initiative. Today, our network is capable of serving 82% of our subscriber base to fiber, a tangible result of our strategic investments. We have already captured over 50% of the subscribers originally target in those territories, and we continue working diligently to increase penetration and reach the next set of objectives. In parallel, we have made substantial progress in our network evolution project, migrating subscribers to a state-of-the-art fiber network. This effort is part of our clear vision to become a full fiber operator in the medium term, enhancing our competitive edge. We are proud to offer a robust service portfolio with competitive pricing bandwidth, tailored to evolving needs of our customers and outstanding customer service. This is evidenced by our performance in key indicators such as Net Promoter Score, which continues to improve quarter-over-quarter. Operationally, we remain focused on driving value to quality service and fair prices. In this sense, ARPU increased both sequentially and for the first time in the last 12 months on a yearly basis, thus reflecting the strength of our value proposition and the positive impact of recent commercial adjustments. From a financial standpoint, subscriber growth has consistently translated into revenue growth. Our mass market segment has maintained high single-digit growth with an acceleration observed during this period. Likewise, with consolidated EBITDA has increased its growth pace, resulting in margin expansion on a year-over-year basis, a trend we expect to sustain in the coming quarters. Our capital investment levels are showing a clear deceleration trend. Excluding extraordinary investment projects, our organic CapEx has declined to mid-teens aligning with global best-in-class telecom operators aligning the foundation for a more efficient investment structure going forward. As a result of this lower CapEx intensity and continued EBITDA growth, we are approaching our cash generation target. This year, we expect to be cash flow positive before dividend payments and very close to achieving net cash flow even after dividends. It is also worth noting that throughout this investment cycle, our debt levels have not increased significantly. We maintain a solid balance sheet with one of the lowest leverage ratios in the market. This highlights the efficiency with which we have executed our initiatives and position us well to capitalize on future strategic investment opportunities. Our financial strength has been recognized again by the rating agencies as HR Ratings confirmed -- reaffirmed our AAA rating this quarter, following Fitch's rate confirmation in the second quarter. These rating actions reflect the quality of our balance sheet, the consistency of our performance and the strength of our long-term outlook. As we approach the final quarter of the year, we remain committed to execute our fiber deployment strategy, consolidated growth in new territories and drive operational efficiency. Above all, our focus is on maximizing free cash flows and solidifying our position as Mexico's most reliable telecommunications platform to preserve the strength of the Megacable brand, with millions of households and businesses across Mexico have come to rely on connectivity and entertainment. All this said, now I pass the call over to Raymundo for operational remarks. Please Raymundo, go ahead. Raymundo Pendones: Thanks, Enrique, and good morning, everyone. As Enrique just note, this was another quarter of steady progress. Our results reflect the continued momentum of the core business, reaffirming the strength of our strategy and our ability to adapt to shifting market dynamics and evolving customer expectations. Our subscriber base continues to grow both in new territories and expansion areas where penetration levels keep increasing. And more importantly, this growth in our base has consistently translating to revenue increases particularly during this period where mass market segment revenues accelerated. Let me walk you through the key operational metrics of the quarter. We ended the quarter with nearly 5.9 million unique subscribers, an increase of 9% year-over-year, equivalent to 506,000 net additions. In this quarter alone, net additions reached 122,000 slightly below last quarter's, but well within internal expectations in line with the consistency of our performance. In the Internet segment, subscribers totaled almost 5.7 million, up 10% versus third quarter '24, representing 528,000 net additions, of which 129,000 were added this quarter. This performance reflects strong demand for high-speed connectivity, even following the price adjustment implemented at the start of the quarter, highlighting the continued relevance of our value proposal particularly in price-sensitive markets. Regarding our Video segment, we closed the quarter with nearly 4 million unique content subscribers, including 3.9 million of linear TV and 124,000 users with streaming service coupled only with our Broadband solution. Within the linear TV segment, XView continued to expand, reaching almost 3.7 million users at 9.9% year-over-year increase with 333,000 net additions. In Telephony, we surpassed the 5 million subscriber mark, up 11% versus the prior year, equivalent to 490,000 net additions with 98,000 net additions during the quarter. While this service remains primarily complementary within our bundles, its expansion contributes significantly to customer retention. Turning to our mobile virtual network operator business, our revenue, total lines reached 640,000 with 21,000 net adds this quarter and 128,000 over the last 12 months. Growth remains focused on postpaid offerings continuing the upward trends since early 2023. We closed the quarter with 14.6 million RGUs, up 8% year-over-year driven by a steady subscriber growth in the mass market, whilst revenue generating units per unique subscribers stood at 2.49, ARPU improved to MXN 422.3, up from MXN 418.9 in the same period last year and MXN 421 last quarter. This figure reflects pricing optimization despite a bundled mix more inclined towards double play. Our expansion and modernization of network continues to be core drivers of our growth. Our infrastructure now extends to 107,000 kilometers, allow it to serve over 18.7 million homes, up 10% from last year. As of quarter end, over 82% of our subscriber base was already connected via fiber compared to 73% in the same period last year, a clear indicator of the progress made towards becoming a full fiber operator. Churn levels stood at 2.3% for Internet, 2.7% for Video and 2.7% for Telephony, reflecting the price adjustment carried out at the beginning of the quarter and despite the upward fluctuation within reasonable levels. It is important to mention that based on seasonal patterns, we anticipate churn to improve toward next quarters. In a nutshell, our mass market segment remains a primary engine of growth and profitability driven by expanding coverage and improved operational leverage in both legacy and developing markets. By contrast, the corporate segment remains soft, consistent with trends in earlier this year, mostly attributed to an economic slowdown in the corporate segment. Undoubtedly, competitive conditions in this market have intensified. With greater fiber availability, there has been an increase in the supply of available services, which has negatively impacted market prices for these services. On the positive side, the integration of the corporate segment has progressed steadily under the business Tech-Co model. As part of this merger, we have focused on evolving the business model shifting from generating most of our revenue from equipment sales to managed service models, which generate a larger recurring revenue base. This has had a temporary effect on the results of these 9 months of 2025. However, we expect greater stability and recurrence in revenue as these consolidation matures. Before I close, I want to emphasize that these quarterly results were achieved through disciplined execution and quality service despite an increasingly competitive and price-sensitive market as our network reliability coverage expansion and bundles continues to differentiate our value also. Looking ahead, we remain focused on preserving momentum to the fourth quarter, with churn expected to soften in the next quarters, territory penetration to move forward an infrastructure deployment to meet customer needs, we are confident in our ability to deliver resilient results as of year-end. Thank you for your attention. I will now turn the call over to Luis for the financial review. Luis Zetter Zermeno: Thank you, Raymundo. Good morning, everyone. Let me walk you through our financial performance for the third quarter 2025. During the quarter, as Enrique and Raymundo mentioned, we continue to execute our long-term strategy with discipline and consistency, enabling us to deliver solid top line growth and strong profitability. Taking a closer look at our financial performance for the quarter. Total revenues reached MXN 8.9 billion, a 9% increase against the MXN 8.2 billion recorded in the third quarter 2024. This performance was mainly supported by the mass market segment that grew 11% year-over-year, the highest growth in the last 6 periods driven by ongoing subscriber growth and a gradual ARPU improvement. In the same period, corporate segment revenues contracted 5% compared to the third quarter of 2024, mainly explained by the economic deceleration in this segment, coupled with a higher competition. As a result, mass market operations contributed with 85% of total revenues in the quarter and the remainder on the corporate segment. On the cost side, cost of services for the quarter totaled MXN 2.4 billion, up 6% year-over-year, mainly due to a deeper revenue mix composition in the corporate segment, favoring higher margin income streams. Well SG&A reached MXN 2.5 billion, increasing 9% primarily from higher labor costs. Both lines remain under control advancing at the same level or below revenue. Turning to profitability. EBITDA reached MXN 3.9 billion, up 10% year-over-year, accelerating its growth trend in the annual comparison along with total revenues. EBITDA margin was 44.2%, slightly below sequentially as a result of seasonal effects, but above the 43.6% recorded in the third quarter of 2024. Again, an expansion of 50-plus basis points, regardless of the contraction in corporate revenue. Notably, margin expansion at newer territories continue driven by an incremental subscriber base and improve infrastructure utilization. At the same time, margins in mature regions remain solid and aligned to historical trends. Net income for the quarter was MXN 628 million, accumulating MXN 2.1 billion year-to-date, a 13% increase versus MXN 1.9 billion recorded in the same 9 months of last year. In this context, we remain confident that profitability will strengthen as depreciation stabilizes and newly integrated regions mature. Turning to the balance sheet. Net debt declined sequentially, but remained largely in line with the same period of last year closing at MXN 22.3 billion at quarter end, supported by a solid cash generation and the absence of any additional debt. The net debt-to-EBITDA ratio stood at 1.45x down from 1.56x in last quarter and below the 1.54x of the prior year. In this sense, we continue to maintain one of the strongest leverage profiles of the industry. Additionally, our interest coverage ratio remained solid at 5.59x and the weighted average cost of debt stood at 8.77%, continuing its downward trend. This indicator reinforce the strength of our capital structure and provide flexibility to support our long-term goals. Turning to investments. CapEx for the quarter totaled approximately MXN 2.4 billion, above the MXN 1.9 billion reported last quarter, mainly due to typical second half seasonality. However, we remain comfortably within our full year investment guidance. In relation to revenue, CapEx represented 26.6% in the quarter and 25.1% year-to-date. And we continue to expect the full year ratio to lie as we have been mentioning between 26% and 28% of revenues, consistent with our soft lending investment trend. Looking ahead, we focus on balancing growth with cautious capital allocation, and our priorities continue to include the generation -- increase the generation of positive cash flow in 2026, preserving our investment-grade credit profile and advanced maturation of recent investment across both new and legacy markets. Lastly, I would like to highlight 2 items that reflect our continued commitment to transparency and value creation. First, as noted by Enrique HR Ratings reaffirmed our AAA credit breaking, following the reaffirmation rate by Fitch Ratings in the second quarter. Both rating actions validate the strength of our balance sheet and consistency of our financial strategy. Second, we continue to advance at our sustainability and disclosure activities with the release of our 2024 integrated annual report under GRI and SASB standards. Verified by 35 professionals in accordance with these standards as we continuously strive to further strengthen our ESG reporting in anticipation of evolving market standards and practices. In line with this, the impact allocation report of our 2024 local notes is also now available. In summary, our third quarter results reflect the strength of our business model, discipling financial execution and a healthy position for long-term growth. Thank you. We are now ready to take your questions. Operator: [Operator Instructions] Our first question comes from the line of Marcelo Santos from JPMorgan. Marcelo Santos: I have two questions. The first is regarding CapEx. So you made it very clear what's the outlook for this year. How do you see CapEx going in 2026 and 2027. And the second outlook is a bit about the competitive environment and growth. I mean, you had very good adds, but churn was a bit higher and SG&A was a bit higher sequentially. So is growth coming at a more expensive cost than what was foreseen? Is this because of a bit of the environment? So just wanted to tie these things. Raymundo Pendones: Luis, you want to go ahead? Luis Zetter Zermeno: Yes, on CapEx, for sure, Marcelo, thanks for your question. And as we mentioned, our CapEx is in the downhill trend and even when we are going to end this year around 26% as we expected, our forecast for the future '26 and '27 will be, '26 will be around 24% to 26% of revenues and declining on '27 to grow between 21% and 23%. Enrique Robles: Yes. The CapEx trend continues to decline, even though we have [ up ] worth in this quarter because of the build of the network and the [ comps ] that we activate, we expect that we announced that in the second quarter when we said the second quarter wasn't difficult. But the good news is like Luis is saying that we continue to have a lower CapEx over revenue this year around 26% to 28%, that's what we expect. And the message here from the management is that we will have that decline for next year between 24% to 26%. Raymundo Pendones: And Marcelo regarding the competitive environment. The highest growth that we have in subscribers, the highest growth rate comes from expansion territories as there is a greater opportunity for penetration and company's expansion on that part, of course. In legacy territories, the good news is that penetration remains stable at around 40% and growing. That means despite of competition, the offer that we have and the strategy of a good product, good network at the best affordable price is proving to provide a 10% growth in revenue, EBITDA and subscribers all around and we continue -- we will continue to forecast that for the early 2026 if you might say. Now the churn, remember that we have an increase in rates at the beginning of the quarter. That increase in rates put pressure on the churn. Our level of gross adds is the same. It's a little bit higher than what we had in the second quarter. So that means we're improving and having more capacity of bringing gross adds. We're not against any increase in rates that we that we have at the beginning. And in some of our high penetrated market, we have that increase in short. We expect that's shown to stabilize and decline slightly in the quarters to come. That's our view of what we have. Of course, it is a competitive environment. We've been having that competitive environment for a long time. We have Izzi, we have Total, we have Telmex in our markets. But as we said before, we believe that we'll have the best offer and to continue to provide growth in the markets where we are. Operator: The next question comes from Milenna Okamura from Goldman Sachs. Milenna Okamura: The first one is you mentioned in your early remarks, some commercial adjustments that drove your ARPU increase. So can you give us a little bit more detail about these initiatives, aside from the price you have implemented? And how do you expect margins to evolve going forward as you continue to increase your fiber penetration in new areas? Raymundo Pendones: Yes. Thank you for the question, Milenna. Regarding the ARPU, we continue to provide a slight increase in the ARPU that we have there. And that's a combination of several factors. One is the increase in rates that we have on that part. The other one is the increase in apps and services per unique subscribers that we also are successful in that part. And that's coupled with the increase of subscribers bring a lower ARPU because of the promotions that we have. So all that combination doesn't allow us to increase more the ARPU, but we believe that we can continue to have a slight trend increasing going forward. Now in terms of the markets, we still have room to grow, we are at around 81% Broadband penetration in our markets, and we really believe that we can raise to around 90% -- to below 90% in the years to come. So all the companies will continue to grow in that part. The thing is that who has the better offer price and margins to take part of that growth in the market. So far, we have growth in expansion. That means we're capturing market from competition. And of course, some of them also will be new market subscribers. And we're capturing subscribers, also 1/3 of our subscribers come from organic systems. That means we're growing above market growth because of that offer that we have because we convert and we have all our subscribers, 83% of our base, the majority of those organic subscribers already has access to fiber, brand-new CPEs, better quality of the video that we have there and better offer. So that's what we see that we will continue to grow in the markets to come. You can expect 2026 and 2027 to continue to provide for Megacable growth between 100,000 to 150,000 subscribers per quarter. Operator: The next question comes from Phani Kumar from HSBC. Phani Kumar Kanumuri: So the first one is regarding the comment that you made earlier, saying that if you exclude the special projects, your CapEx margin is in mid-teens. So I wanted to understand like what are you excluding from this? Is it just the expansion project and the migration products that you have? The second question is how was this CapEx, the maintenance CapEx, let's say, 3 years ago, has it come down from like 20% to mid-teens? Or is it -- how is the trend evolving? And what is driving that trend? Raymundo Pendones: I'm sorry, this was [indiscernible], it was productized in my opinion. Luis Zetter Zermeno: Phani -- a little bit. Can you rephrase the first question, please? Phani Kumar Kanumuri: The first question is, you said that you are excluding some special projects. So what are the special projects that you have? Is it just a recognition or does it also include the customer premise equipment? Luis Zetter Zermeno: So what we consider special projects are both the expansion and the GPON evolution CapEx projects per se. There are other small investments that come along with that -- those strategies. But basically, those are the 2 special projects that we mentioned. Raymundo Pendones: The expansion project like Luis was saying, we announced that at the end of 2021, we start getting subscriber at the mid of 2022. We're very happy that we already doubled the infrastructure of the company, getting more than 9 million home pass in addition, put us in a very similar position to that of the competition as a strength company and growing subscribers on that. We are very well in terms of how we're increasing those subscribers, and that's reflect on the growth of revenue. And that means that in the future, we will slow down kilometers and homes to be activated in the expansion territories and that's for sure. The other project that we have, which is the GPON Evolution we call it, that's evolving from HFC to GPON to fiber, all our existing territories. We're very successful also. As I said, totally, we already have 83% of the company is already on fiber. So for the years to come, the evolution from HFC to fiber, it will be smaller. So what Luis is saying, our 2 main projects -- special projects are decreasing in CapEx intensity expenditures, okay? This company will never stop investing in CapEx, that's for sure because we're a technology company. But the levels that we expect after we finish those special projects and that's around 2028 will be levels between the 15% to 28% CapEx over revenue. Enrique Robles: But in the meantime, it will be declining from the current 25%, 26% to the lower very low 20s, and we will get to below 20s when we finish -- when we finish those 2 special products. Luis Zetter Zermeno: And to your second question, the maintenance CapEx has reduced, yes, because it's easier or cheaper to maintain network on the GPON side of the house compared to the HFC previous network. Phani Kumar Kanumuri: Is there any quantity measure? Is there any quantification of what's the decrease that happened, let's say, over the last 3 years? Luis Zetter Zermeno: Well, it was a little bit above 20%, and now it's on the high teens or mid-teens. So that's basically on the maintenance CapEx. Operator: Next question comes from Andres Coello from Scotiabank. Andres Coello: Two quick questions, please. The first one is on the competitive environment. I think Televisa just confirmed that they will invest $600 million this year. I think that's 20% more than what you are planning to invest, around $500 million. So I'm wondering if you are noticing any change in behavior from Televisa, if you think that Televisa can become a little bit more defensive in the territories that you just entered. That's my first question. And whether this can, in any way, affect your CapEx guidance to have Televisa investing more than you. And my second question is on the recent natural events in Veracruz and other states. I'm just wondering if there was -- if you're expecting any nonrecurring impact in the fourth quarter, perhaps in terms of revenues and also in terms of infrastructure. Raymundo Pendones: Yes, Andres, thank you for the questions. Regarding the competitive environment, Televisa is investing more than us because we already invest what we have to invest. We have been investing in fiber before they did hit on that part. We have a good offer, a good product and good price and we don't see why we are going to slow down our CapEx and our growth in subscriber. Regarding Veracruz, we were affected and hit in some of our markets. One of those markets being Costa Rica. We already have all the system back and working and on and working with our subscribers. And what we can say is that we're working in a normal condition. Operator: The next question comes from the line of Emilio Fuentes from [ GBM ]. Emilio Fuentes: I was wondering if you could give us some outlook on how your dividend will evolve going forward, especially given how you've been able to pay around 20% of your EBITDA. Now that you -- the company will go into a less intensive investment phase and the more cash generating phase, should we expect this to go up? Enrique Robles: Well, we haven't made any decisions yet. Obviously, it will depend on the future, how we see the industry and opportunities going forward, but if we do not have anything better to put our money in. Obviously, we could always raise our dividends. We don't see why not, but it's too early to call that. Operator: The next questions come from Ernesto Gonzalez from Morgan Stanley. Ernesto Gonzalez: Look, I know it's early to discuss 2026. But given the high levels of penetration in the Broadband market in Mexico, is it reasonable to assume that you can maintain the current level of growth for next year? And the second question is, can you also discuss the main drivers of why your subscribers churn? Is it because they get better prices elsewhere because they're looking for a better network or any general commentary in churn is appreciated. Raymundo Pendones: Thank you, Ernesto. Yes, as we mentioned, we don't see why we should slow our growth. We forecast the same growth that we have between 100 to 150 per quarter. That's what we're looking for 2026. And that's based in the offer and also because the market at 81% penetration still have room to grow on that part. Regarding the churn, what we see is that a slight amount of our churn goes to competition. But as I said, this slide, what we see is that every churn that we have is economically, that's the main reason that they can afford to pay. And as I said at the beginning of the third quarter, we had an increase in rates that put pressure on the churn. That's the reason of the increase in churn. Operator: The next question comes from Lucca Brendim from Bank of America. Lucca Brendim: I have only one here from my side. Can you give us an outlook on the corporate segment. It has slowed down this year, but how can you -- we think about it going forward, especially for 2026, 2027, how much do you think that this segment can grow. Raymundo Pendones: Yes, it's a good question. Look, as I said, the corporate segment has a slowdown, it's a soft result that -- what we have. And that's due to -- 2 main factors. One is the market. The market has decreased the price of fiber and the price of connectivity. And the other one is that we changed the way that we sell our infrastructure product before we used to sell a lot of that infrastructure on a cash basis. And now we changed that into more products that has serviced over a long period of time, bringing a more recurring into the future, more profitable instead of just selling hardware in that part that we don't like that part. So we make a shift in the strategy of the corporate segment that affect us slightly in the short term, but that sure will bring better results in the future. Something that I want to say is that the corporate -- even for the corporate segment has a 5% decline year-over-year. We did not see a decline in the EBITDA of that segment. That means we have a much more better margin with our strategy, recoveries of the decrease in the revenue that we have. So that's part of our strategy. We are very happy of that part. We integrate our 3 companies into MCM business, Tech-Co and that shift is sure it's going to pay off in 2026. Operator: The next question comes from Alex Azar from GBM. Alejandro Azar Wabi: I just wanted to pick your brains on what's next. Several questions from my colleagues being on capital allocation, fully penetrated market. So what's on your mind when you see Mexico fully penetrated in terms of cable perhaps '27, '28. How should we think about Megacable in the next 5, 10 years? Are you guys going to grow more aggressively in -- as an MVNO or perhaps the corporate networks. Just wanted to understand how you're viewing the company very long term. Enrique Robles: Thank you, Alex. Obviously, in the telecom industry, there is very many opportunities in the future, like as you mentioned, mobile with MVNO. In the corporate market, we have a great, great opportunity. In the digitalization of the country, obviously, also in education and telemedicine and all that and with the AI accelerating, growing -- the growth of the AI and all the applications that will come with that. Obviously, there is a big -- very big opportunities in the future for the telecom industry to sell -- to upsell services and applications for the Mexican homes and for the business community. Also in the education and medicine industries and services are really big -- it's going to open very big opportunities. We still have a lot to do in digitalization, and this government is putting a big emphasis in that. We have to digitalize the country banking and everything. I think that the market is there. Obviously, it will decelerate in some segments like the connectivity of homes, but we will get to saturation point at times -- some certain time, but there are a lot more things to do. And also, we -- I mean we don't know what new things are coming with AI and the new technologies. For sure, we will find something to do. Raymundo Pendones: That's the remark. At the end, this is a MXN 64 million question, what are you going to do? We're really, really, really focused, Alex, in what we announced at the end of 2021 in that part, those main 2 projects as we like to say, the GPON evolution that brings us that strength in the network and in the product for the future to come and expanding and being effective in both. That's where we're focused on the management right now on that part. But for sure, we're not going to stay on that part. CapEx will decrease. Free cash flow will increase. Revenues will continue to come. EBITDA will continue to come. And the same question that you have, it will be good to know in a year or 2, what we are going to do. But for sure, we're going to continue to be part as Enrique said, on a market that will continue to move from connectivity to IT solutions and value-added services, both in the corporate segment and the residential and maybe other technologies, too. Luis Zetter Zermeno: And we will have the balance sheet to support any endeavor that we will be searching. Raymundo Pendones: We won't be steady, that's for sure. Alejandro Azar Wabi: If I may add, if I may have a follow-up, and thank you for the color. But the market has been really hot in terms of AI, data centers. If I'm not mistaken, you have some data centers. So how are you thinking on these assets? Are you seeing them as core assets? Or would you be thinking of divesting like Axtel bid that under different circumstances. But how are you seeing your data centers? Are you -- are those core assets or you can divest them? Or how you think on those? Enrique Robles: Well, the data center is an asset that would be able to test the waters there. I think that's going to be really big players in that specialized in data centers. Ours is a very good asset that we have. But I don't think we will be growing in those kind of data centers. We will be more focused in edge data set. We already have built over 300 of those all across the country. Raymundo Pendones: And also, like Enrique telling you and your straight question, it is not core. What we have on those both in our main data centers, centralized data center and the edge, we have Megacable infrastructure. Those facilities are built mainly as an anchor for Megacable and an office space and kilowatts for other people to be here. We don't have the mind in investment in fixed data center assets. We want to have a solid core network, both in the long haul and the last mile, the best fiber company in terms of products and services and put applications on top of that. The other ones, the main anchor for the data center is Megacable. It has a great asset for somebody else in the future because it's located in the western part of Mexico. There is no other asset like that in this area. The hyperscalers and the content and the streamers will have to come after going to Greater Mexico, will have to come to different parts of Mexico, one of those being Guadalajara, and that's where we have it. And that's the mind that we have for that part. Our infrastructure is for Megacable use. We don't know whether to maximize that in the future. We will explore that when we finish having our mind in bringing the growth of subscribers increase in margin, the decrease in EBIT -- in CapEx and all the KPIs that we're telling you we're focused on that point. Operator: We have one question through the chat is coming from [ Patrick Brook ] from DS Advisers. There have been reports that AT&T is looking to sell its mobile business in Mexico. Is that something Megacable will be interested and consider buying? Enrique Robles: Not currently, we are pretty much focused in our main projects, which is finishing our expansion plan. And we don't want to go into -- I mean, we're going into a cash positive cycle, and we don't want to reverse that, not currently. We are focused in our main projects. Thank you very much. Operator: Okay. That was the last question. With no questions in the queue. This session is concluded. I pass the call over to Mr. Enrique Yamuni for final remarks. Enrique Robles: Okay. Thank you very much, Saul. As always, it is a pleasure to discuss our results with you. Please contact our Investor Relations department if you have any questions or concerns regarding the company. Have a very wonderful day and a great weekend. Luis Zetter Zermeno: Thank you, everybody.
Operator: Good morning, and welcome to the Minerals Technologies 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 Lydia Kopylova, Head of Investor Relations. Please go ahead. Lydia Kopylova: Thank you, Gary. Good morning, everyone, and welcome to our third quarter 2025 earnings conference call. Today's call will be led by Chairman and Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Erik Aldag. Following Doug and Erik's prepared remarks, we'll open it up to questions. As a reminder, some of the statements made during this call may constitute forward-looking statements within the meaning of the federal securities laws. Please note the cautionary language about forward-looking statements contained in our earnings release and on this slide. Our SEC filings disclose certain risks and uncertainties, which may cause our actual results to differ materially from these forward-looking statements. Please also note that some of our comments today refer to non-GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release and in an appendix of this presentation, which are posted on our website. Now I'll turn it over to Doug. Doug? Douglas Dietrich: Thanks, Lydia. Good morning, everyone, and thanks for joining today. I'll start today's call with a review of our third quarter, followed by an update on what we're seeing across our key end markets. I figure it would be helpful to provide some perspective on how our markets have changed over the past year and how they continue to move within the global economic context. I then want to highlight some of the recent investments we've made to support the long-term growth we are seeing across several of our product lines. Erik will then take you through the detailed financials and share our outlook for the fourth quarter, and then we'll open it up to questions. Let me start with our Q3 numbers. We had strong execution across our business. delivering solid financial results despite facing mixed market conditions, which I'll get into a bit later. Our sales increased 1%, both sequentially and over last year to $532 million. Operating income came in at $78 million and earnings per share were $1.55, a company record for the third quarter. Cash flow was strong and was up 24% year-over-year. We continue to strengthen our balance sheet, providing us with a financial foundation from which we can evaluate different investments and opportunities to drive growth. We also returned $20 million to our shareholders in the quarter and last week announced a 9% increase to our regular quarterly dividend, making this the third consecutive year that MTI has had a dividend increase. We recognize our sales growth has been sluggish this year due largely to the softer market conditions we've been experiencing in residential and commercial construction, heavy truck and agricultural equipment markets and in Europe in general. These softer market conditions have largely offset the growth we are seeing in many of our other product lines where we are executing on opportunities in markets that are structurally expanding and where we have built a distinct competitive advantage. I'll highlight some of these specific investments and opportunities in a moment and outline how they will set us up for meaningful expansion across several product lines, both in the near and long term. But first, let me provide an update on our current market conditions. As a general overview, after the first quarter, most of our end markets have been and remain relatively stable. A few continue to be weaker than last year, and we expect them to remain so through the fourth quarter. Let's start with our Household & Personal Care product line. Pet litter market conditions in North America and Europe have remained stable and at similar levels compared to last year. We continue to see discounting activities from branded producers in North America, and in response, we've worked with our customers to make promotional adjustments to the products we supply them. These activities have had a positive impact on our sales volumes and profits. The pet litter market in Asia, and more specifically, China, continued to show strong growth. Our volumes are momentum there, and we are making investments to support this long-term growth. In our other consumer these markets, demand for our natural oil purification and animal health products has been strong, with our sales this year up 18% and 12%, respectively, and we see this trend continuing. In Specialty Additives, we're facing mixed market conditions in paper and packaging. Asia continues to be a market with good opportunities for us to expand our base business and introduce new technologies. However, this year, North America demand has been weaker. Elsewhere in this product line, demand in the residential construction market has been relatively flat all year. We did see some signs of further softening late in the third quarter, which may make it a slower end of the year. For our high-temperature technologies product line, conditions have remained relatively stable for steel production in the U.S. with utilization rates remaining in the mid to upper 70% range. It is not the highest level we've seen over the past 2 years, but healthy enough for stable volumes. Europe continues to be more of a challenge with steel utilization rates dropping below 60% this year. The U.S. foundry market has also remained relatively steady for most of the year, buoyed by stable auto production. Two areas that have been soft for this business all year are the agricultural equipment market and heavy truck markets. When these markets begin to rebound, they will provide good eye for foundry demand. The China foundry market has remained relatively strong this year despite the impact of tariffs and ongoing trade disputes. In fact, we've seen strong volume across our metalcasting business there with year-to-date volumes up over 10% from last year. In environmental and infrastructure, commercial construction remains slow compared to historical levels, and these similar conditions exist for the environmental lining and remediation markets. We expect to see some improvement in project activity as interest rates ease and projects are financed. We are already specified on several large commercial and environmental projects and expect an inflection in this product line sales when these projects commence. Elsewhere, we've seen strong pull for our infrastructure drilling products this year, increased geothermal drilling and fiber optic cable installation has been driving the increased demand. As you can see, we continue to experience mixed conditions across our end markets. But despite the impact these conditions are having on our top line this year, our team has navigated these conditions to maintain margins, profits and cash flow. At the same time, we've not deviated from our focus on investments in technologies and markets where we see the biggest growth opportunities, which I'll go into more detail on the next slide. We've spoken about our strategy to build positions in higher growth markets. Markets with economic or macro trends where we can deploy new technologies or expand our existing technologies to drive higher levels of growth and balance the more cyclical portions of our company. We've been executing on these opportunities, expanding our pet care business, investing in technology serving a variety of consumer-driven end markets, and deploying new technology in some of our more traditional businesses like refractories and paper and packaging to expand our value proposition globally. As you've likely seen, we announced a few recent investments made in support of these strategies, and I want to highlight a few of them to remind you of the opportunity we continue to see. Let's start with a few opportunities in our Consumer and Specialty segment. In our pet care business, we remain confident in the long-term growth trends of this market and in the private label portion in particular. We expect the North America pet litter market to continue to grow by 3% to 4% and in the Asia market to grow by 6% to 8% per year over the long term. Over the past 5 years, our pet litter business has grown organically at a 9% compound rate. Adjusted for the 2 acquisitions we've made over this period. To support this continued growth, we recently made investments at our plants in Dyersburg, Tennessee; Branford, Ontario, and Chaoyang City in China. We've broadened these plant manufacturing capabilities to increase throughput, lower cost and offer greater packaging flexibility to meet customer demand. Dyersburg and Branford are both strategically located and well connected to large portions of the North America market. These recent investments to expand capacity upgrade capability at these sites enabled us to secure some significant contracts beginning in 2026. In China, we've outgrown our existing facility and are bringing online a completely new one to meet the demand that we are seeing from this rapidly growing pet litter market. The upgrades across these 3 plants are expected to be completed by the end of 2025 and will fortify our position as the largest high-quality private label cat litter supplier to customers around the world. In our natural oil purification product line, we announced an investment at our plant in Turkey to support the significant growth we are seeing in this market. Since 2018, our Bleaching Earth business has grown at a compound rate of 20%, and this is our third expansion since we opened the facility to support this level of revenue growth. Our facility in Turkey at both mines the raw materials and manufactures absorbents and Bleaching Earth products sold under the brand name Rafinol , which are used for the purification of edible oils and renewable fuels. Including biodiesel, renewable diesel, sustainable aviation fuel. The market opportunity here is significant. The global natural oil purification market size was $1.1 billion in 2024. The renewable fuels portion accounts for over 12% of this market and is the fastest-growing segment. Demand for sustainable aviation fuel, in particular, is growing rapidly and is being bolstered by supportive regulatory changes in the U.S. and Europe. Our Rafinol product line is differentiated in the market with its high-performing absorptive properties that succeed in the most challenging applications like sustainable aviation fuel. Also worth mentioning, we've made other investments to meet the increased demand for our natural animal health products, and also for our higher tech Fabric Care solutions for dry laundry detergent. In our Paper and Packaging business, we continue to secure new contracts in Asia and in the next 6 months, we expect to commission 4 new satellites in the region. There continues to be a significant unpenetrated addressable market in Asia for our technologies. We've been driving the deployment of engineered calcium carbonate and the introduction of renewable technologies to the paper and white packaging industry as producers expand and look to upgrade their product quality. Since 2022, our volumes there have grown by 20%, including the doubling of our sales to the white packaging industry. We've always been the leader in the region and are well positioned to continue to grow by delivering the best calcium carbonate solutions including innovative technologies like NewYield. On the Engineered Solutions side, our MINSCAN installations and our Refractories business continue to go strong. We just signed our 18th MINSCAN contract and we'll be installing 6 new units this coming year. There's a large addressable market with over 130 electric arc furnaces in the U.S. and Europe capable of using MINSCAN, providing us with a significant runway to grow over the next several years. In summary, we expect these investments to generate $100 million in incremental revenue over the next 12 to 18 months as they ramp up. And these are just a few examples of the investments that we've recently made to support the growth opportunities for which we have strategically positioned ourselves. I want to be clear that these are just a subset of the initiatives that we are pursuing. Other areas like PFAS remediation, natural skin care additives, geothermal drilling products and further penetration of our greensand bond technologies into Asia are all progressing nicely as well. Together, they provide several significant pathways for us to drive sales higher going forward. And when our weaker markets begin to rebound, we see that providing additional upside to our top line growth. With that, let's have Erik take you through more detail on our third quarter financials and our fourth quarter outlook. Erik? Erik Aldag: Thanks, Doug, and good morning, everyone. I'll start by providing an overview of our third quarter results followed by a review of the performance of our segments, and I'll wrap up with our outlook for the fourth quarter. Following my remarks, I'll turn the call over for questions. Now let's review our third quarter results. Overall, our team delivered another solid performance while continuing to navigate mixed market conditions. Third quarter sales were $532 million, up 1% sequentially and 1% higher than the prior year. You can see in the sequential sales bridge on the top right, that sales increased in 3 of our 4 product lines. In Consumer & Specialties, our Household & Personal Care product line was up 2% sequentially and driven by increases in cat litter and other consumer specialties. In Specialty Additives, sales were 2% lower sequentially as we moved into the seasonally lower period for residential construction applications. In Engineered Solutions, sales in high-temperature technologies increased slightly from the second quarter as higher sales to steel customers were partly offset by lower sales to foundry customers in North America. And we saw a 5% sequential increase in our environmental and infrastructure product line, driven by increased demand for offshore services as well as infrastructure drilling products. To summarize, conditions played out mostly as we anticipated, and I'll take you through more of the details when I cover the segments in a moment. Operating income for the quarter was $78 million, down 1% sequentially and versus the prior year, and operating margin was 14.7% of sales. In the operating income bridge on the bottom right of the slide, you can see that unfavorable volume and mix primarily in the Consumer & Specialty segment impacted income directly by $1 million. And lower volume also contributed to temporarily higher operating costs at a few of our facilities in the quarter. Higher pricing of $1 million offset inflationary input costs, including higher tariff costs in the third quarter. EBITDA was $100 million, up 1% from prior quarter and prior year and EBITDA margin was 18.8%. I'd like to point out that versus the third quarter last year, we've done well to offset $10 million of higher costs, including tariff costs raw material increases, energy and temporary increases like higher logistics costs associated with our U.S. cat litter plant upgrade. We offset these cost increases with a combination of productivity improvements, supply chain actions, price increases and our cost savings program. And I would also highlight as we move through the temporary cost increases, we should see margin improvement from these actions going forward. Earnings per share, excluding special items, was $1.55 , the same level as the second quarter and up 3% from last year, representing a record third quarter for the company. We recorded special items of $7.5 million in the quarter related to litigation expenses. Now let's turn to a review of our segments, beginning with Consumer & Specialties. Third quarter sales in the Consumer & Specialty segment were $277 million, flat sequentially and down 1% from last year. In Household & Personal Care, sales improved by 2% from prior quarter to $130 million, driven by improving volumes in our cat litter business and continued progress on growth initiatives in consumer specialty applications. Most notably in edible oil and renewable fuel purification, where sales grew 18% with last year. In Specialty Additives, sales were $148 million, 2% lower sequentially. The Global Paper and Packaging volumes were flat compared with the second quarter as volume increases in Asia offset lower volumes in North America. Meanwhile, demand for residential construction products was incrementally softer in the quarter, which pulled volumes lower for the product line. Despite the volume pressure in Specialty Additives, the segment continued to build on the operating performance gains we saw in the second quarter, delivering a modest improvement to operating margin sequentially. Operating income in the quarter was $37 million, representing a 13.5% of sales. Looking ahead to the fourth quarter, in Household & Personal Care, we expect continued sequential growth in cat litter, edible oil and renewable fuel purification. And in Specialty Additives, we're expecting lower sales sequentially, primarily driven by typical seasonality for residential construction products. We do expect softer-than-normal residential construction volumes in the fourth quarter as some customers are indicating they have efficient inventory levels heading into the winter months. and they are planning to adjust production schedules accordingly. Overall, for the segment, we expect sales to be flat or slightly lower sequentially. Now let's turn to the Engineered Solutions segment. Third quarter sales in the Engineered Solutions segment increased by 2% sequentially and grew 4% from prior year to $255 million. In the high temperature technologies product line, sales of $179 million were similar to prior quarter and up 2% year-over-year. Sales to steel customers in North America continued strong more than offsetting continued weakness in the Europe and Middle East steel market. Sales to foundry customers were mixed with North America volumes impacted by continued softness in the heavy truck and agricultural equipment markets, in addition to the typical third quarter customer maintenance outages. On the positive side, we saw continued strong demand across a with foundry volumes up 5% sequentially and up 17% versus prior year. In Environmental & Infrastructure, sales led by 5% sequentially and were up 9% from prior year driven by a for offshore services and strong pull for infrastructure drilling products. The segment did a nice job of mitigating tariff impacts and turned in another strong operating performance. Operating income was $45 million, and operating margin improved by 20 basis points sequentially to 17.6% of sales, a record level for the segment. Looking ahead to the fourth quarter, we expect environmental and infrastructure sales to be 10% to 15% lower sequentially and due to typical seasonality for large project activity. And in high-temperature technologies, we expect sales to be slightly lower sequentially as several of our foundry customers in North America have communicated longer than towards the end of the year. This is due to the continued softness seen in the agricultural equipment in markets and in anticipation of some acute automotive production disruptions. While these plans could change, our current outlook assumes a reduced number of foundry working days in December, along with the temporary margin impact of the associated lower productivity at our plant sites. Overall, we expect segment sales to be lower by around 5% sequentially. Now let me turn to a summary of our balance sheet and cash flow highlights. We delivered another solid cash flow performance in the third quarter. with free cash flow of $44 million. Capital expenditures totaled $27 million in the third quarter, and we remain on pace for approximately $100 million of capital investments for the full year. Some of the key investments that Doug outlined earlier will be commissioned during the fourth quarter with revenue ramping up in the beginning of 2026. And we expect that sort of cadence to continue into next year with additional start-ups expected throughout the first half. In total, we returned $20 million to shareholders in the third quarter through share repurchases and dividends in keeping with our stated balanced approach to capital deployment. Our balance sheet remains strong, and our net leverage ratio remains at 1.7x EBITDA. Below our target of 2x EBITDA. Now I'll summarize our outlook for the fourth quarter. Overall, we expect fourth quarter sales to be approximately 2% to 4% lower sequentially and primarily driven by seasonal patterns in a few of our end markets. Operating income for the quarter is expected to be between $65 million and $70 million, with earnings per share between $1.20 and $1.30. Our sales range of $510 million to $525 million considers a number of factors. On the positive side, we expect continued traction with our growth initiatives in Household & Personal Care. The cat litter business is gaining sales momentum and the fourth quarter is typically a strong one for cat litter. In addition, we expect continued growth in edible oil and renewable fuel purification. As I noted earlier, some of our customers serving the residential construction and foundry markets in the U.S. are signaling the potential for slower order patterns and extended outages around the holiday. Which would impact volumes of some relatively high incremental margin products in both our Specialty Additives and high-temperature technologies product lines. We are also watching for potential volatility in order patterns due to uncertainty around tariff policy. As we've communicated, we don't have a significant direct exposure to tariffs. However, we're mindful of potential near-term impacts on our customers. Our guidance takes all of these to accounts and where we land in the range depends on how they play out. In summary, we have positive momentum across a number of product lines as we head into the fourth quarter, and we are focused on delivering the growth initiatives that will carry this momentum into next year. With that, I'll turn the call over for questions. Operator: [Operator Instructions] Our first question today comes from Daniel Moore with CJS Securities. Dan Moore: Pet Care. It looks like you saw an uptick in catlier volumes in Q3. How should we think about -- you described the market dynamics, how do we think about those and the potential to get your pet care business back to that kind of term mid-single-digit plus growth rate cadence, not necessarily 2026 guide, but over the next 12 to 24 months. Erik Aldag: Yes. I appreciate that. Look, Dan, as I mentioned, let me start. I'll hand it over to DJ for some details. There's been a challenging pet term market for us. But this is one year we -- I tried to make some comments to highlight, if you take a longer-term view on the market and our performance in it, we've grown organically. I mean, we pieced the business together through some acquisitions. But even adjusting for some of those over the past 2 years, the business has grown by 9% compound. This year, a little bit flatter, we've seen some dynamics in the market that haven't been seen before in terms of something. We've made those adjustments. We have to work with our customers to make those adjustments. We've done that. We've seen those the volume improve as a result. And I think that carries through the fourth quarter and into next year. The biggest thing is, I think this is a good business for us, vertically integrated. We're global, obviously the largest with the technology, and we're confident in that long-term growth rate of it, that I mentioned, 3% to 4% North America, 6% to 8% in Asia. And we're making investments to be able to support the growth that we see and what's going to be coming forward and short term next year. I'll let D.J. talk about that. But these are good investments to make this business is going to revert to that growth rate. I never said it's going to be a straight line, but we will have that business growing next year. And I'll pass it over to DJ to let's give you some details on what we're securing with some of these upgrades. D. J. Monagle: Yes. Thanks, Dan. We kind of close out some of the market dynamics and then just give you a sense of the return back to that upper single-digit growth rate. On the North American market, what we did see early on, and we had mentioned in previous calls, these battles among the brands and is the only way I would describe the significant discounting that went on the brands, that caused some pretty big market share shifts within the brands, but it also had an effect on private label. Most pronounced at some specialty pet stores and grocery stores. We want to adjust with our private label partners and come up with a promotional schemes that still keep their private label relevant. That includes price discounts, changes in packaging, changes on shelf allocation. And so we feel that, that part of the market has stabilized pretty well. Doug had mentioned some pretty significant investments that reposition us for some future growth and coming pretty quickly, Doug had mentioned some contracts. So what you'll be seeing is of some $30 million plus of growth that will be going into next year as those contracts come online, that's towards the end of the first quarter. So we feel really good about that. There's some further growth that's capable or enabled by these investments in North America, especially with the product flexibility and packaging flexibility. The other thing Doug mentioned that we're very excited about is the reinvestment or the establishment of a new facility in Asia. We outgrew our old facility. We've got a lot of pull from a wide range in the market on how to take advantage of that growing region. And the difference for Asia with us is that it's a much broader and more profound mix of branded customers, global brands that want to grow in Asia, and we're well positioned to manufacture and co-pack for them, but also supporting the regional private labels as well as an emerging e-commerce business there. So this investment does that for us. So that would be additional growth. So I think the market has stabilized. We've made some adjustments with our branded partners, and we're very well positioned to get that back on track as projected in 2026. Dan Moore: Really helpful. And just pulling on that string. With all of those investments you're making, how do we think about just the overall increase in capacity as we exit '25. Douglas Dietrich: Well, some of them in North America, so the overall increase in capacity. So we're looking at that 6% to 8%. I'll start with China. We've made this investment. It's a new facility. We've put in capacity to probably sustain it for the next 3, 4 years. It's a big enough facility that we can add additional packaging capacity to meet that growth over a longer period of time. So that one, we're starting with modular kind of growth to meet the incremental investments over the next 10 years. In North America, the investments we've made in Canada and here in the U.S. and these 2 we talked about were a lot of quality upgrades handling upgrades. Again, these are 2 acquired facilities. So these were planned a long time ago. We needed to find the right time to be able to shift production around keeping our customers supplied while we made these changes. That's a lot of the cost increase you've seen and some of the margin -- a bit of the margin deterioration you saw this year. But that's -- we're through that. And we've made upgrades to material handling, quality packaging, packaging flexibility, throughput, all of which have reduced cost as well and should accrue to profitability going forward. So it's a number of different things, but we've got plenty of capacity in these facilities to grow at those rates for I'd say the next 5 to 10 years. But again, we can also have space in them to add modular packaging capacity if we need to keep up with the market. So I think we're in good position, Dan. These investments, they're not significant huge investments for us, but they did put us in a position to be able to secure higher quality contracts. And as DJ mentioned, we see about $30 million of that coming in starting in the second quarter next year. Dan Moore: Very helpful. Switching gears, Environmental and infrastructure, little pockets of strength there at least this quarter. I know maybe a more difficult seasonally slower period that we're going into, but just talk about momentum as we kind of think about -- or to think about turning the page towards '26. Douglas Dietrich: We saw some momentum. Actually, this quarter was in our offshore water treatment business, which has been doing really well. I guess I'll start with just construction and environmental remediation, relatively flat. We've seen some projects come I mentioned were specific projects. We thought that business would probably turn this year. It still hasn't Commercial construction, large building is still relatively flat. I think when -- it's interest rate sensitive. I do think when interest rates start to move down, we will see more of that on the shelf activity come into play, and that will be positive for us. But this quarter a lot of water filtration stemming from our capability around PFAS remediation, our ability to take complex things out of water. And that was some new projects we secured offshore, and that really came through in the quarter, and we think that's sustainable through the fourth and into next year. Dan Moore: Very helpful. Just in terms of the Q4 guide, revenue down 3-ish percent sequentially at midpoint, op income down more like low teens. So a little bit of a higher decremental margin. I appreciate the color on boundaries, which is high margin. Are there other corporate incentive comp, any other expenses, which you might call out in Q4 that could pinch margins more than might be typical given the volume decline? Erik Aldag: Yes. Thanks, Dan. This is Erik. No, nothing unusual from a corporate expense standpoint in the fourth quarter. The main drivers are really the ones that I called out in the prepared remarks in terms of the mix. I mean, the markets that are down seasonally for us, Q3 to Q4 and then the foundry and some of the residential construction products that we have, those are higher incremental margin products for us. And so we do have a mix impact that goes against us in terms of the decremental margins that we're seeing Q3 to Q4. The only other thing I would highlight is we had some strong margins in the third quarter in the Engineered Solutions segment. That was continued strong performance from the team's offsetting tariffs, continued strong productivity, variable conversion cost control. We did have a couple of the equipment sales in the high-temperature technologies product line that helped margins in the third quarter, and we don't have any of those equipment sales forecasted for the fourth quarter. But as Doug mentioned, we've got about 6 to come next year in terms of those MINSCAN installations. Operator: The next question is from Mike Harrison with Seaport Research Partners. Michael Harrison: I was hoping we could talk a little bit about the margin performance in Consumer & Specialties. I think it was relatively close to where you were expecting, but you are kind of tracking like 150 to 200 basis points lower than you were last year. I was hoping that we could maybe break down or help kind of bridge some of those key factors that have driven that weaker margin performance. Maybe just talk about how you see the discounting or promotional activity in pet care. Maybe mix, maybe the volume declines in Specialty Additives and on that resi high-margin stuff as well as the temporary cost from pet care expansions like -- can you help us understand what's going on there? And then maybe just directionally help us understand what that -- as we start to think about consumer and specialty margin into next year, how some of those items should trend? Erik Aldag: Yes. Thanks, Mike. This is Erik. So I think you hit on a lot of the key themes there. And actually, for the third quarter, the margins were right where we expected them to be for the segment. The largest driver there is some of these temporary cost impacts we have. I mean we have a significant upgrade going on at one of our U.S. cat litter plants. And we've had to move around production across our footprint in North America, and there's been an increase in logistics costs as a result. So that's the primary driver of the margin pressure, I'd say, from Q2 to Q3 -- in Q2 as well as in Q3. That facility is going to be ramping up here in the fourth quarter. And so we're moving through that more temporary impact. You mentioned discounting. We're not seeing a negative margin impact because we've been helping our retail partners with discounting. And the reason for that is we've had some incremental pricing discounts on our products but it's helped with our volumes. And so as we get more volumes running through these plants, there is significant fixed cost leverage benefit that we get. And so we haven't seen margin donation from any of the discounting that we've been participating with our retail partner. As far as where this is going, the segment is set up well for 15%. We were very close to 15% last year, and we're going to get there again as we move through some of these more temporary issues. But that's our target. This segment should be delivering 15% operating margin. Douglas Dietrich: Michael, the only thing I'll add, and I'll put that same as echo what Erik just said. We'll get back to and probably exceed last year's margins in the segment. And that's going to come from a couple of things. A, the ending of the temporary logistics expense, number one, and some of the other ancillary expenses that came across as we made these investments in these facilities. Two, we have seen some lower volumes due to this discounting, which we've adjusted. And as Erik just mentioned, those volumes are coming back. That is helping profitability. And three, the additional volume that we're going to be putting through these plants next year, starting in the second quarter, is going to be very accretive to those margins. And so I think, as Erik said, we're set up to get back to last year's margins next year and probably see them with some of this additional volume. Michael Harrison: All right. That's very helpful. And then maybe just on the investments that you're making in Turkey with the Bleaching Earth for renewable fuel. . Can you help us understand what the dollar amount of that investment looks like? How much is your capacity expanding? And I guess, should we think about the investments as mostly mine expansion or is there something that you're doing on the, I guess, refining or processing side that's helping to improve your capabilities as well. Douglas Dietrich: Sure. I want to be careful about giving some information out there and how much capacity we're putting into the market. So I won't give you a ton give you a percentage. -- again, we built the facility 8 years ago. We built it with enough room to expand it. At the time, we want -- we were looking more at the edible oil market, which grows at about 3%, 4% kind of GDP business and we had a great product for that application. Since that time, we saw the development of the market for renewable fuels. And we started supplying that market probably 4 years ago, 5 years ago, and then more recently, the development of sustainable aviation fuel through regulation changes in Europe, in particular, now U.S. has really started to pull that product much harder. And so this expansion, $9 million, $10 million type expansion. We've expanded the plant by about 30% and in terms of capacity to be able to meet the growing demand. Like I said, we've been growing at about 20% per year for the past 8 years. But a large portion of what's happening is what started as a 100% edible oil kind of application and product sales has now moved probably 34% of our business is now in sustainable aviation fuel and renewable fuels. And that's growing very quickly. And so this expansion was -- it's going to supply both, but it will probably be consumed very quickly with some of the renewable fuels. We have sufficient reserves in the region for decades. And we will look probably to expand the facility again over the next 5, 6 years, depending on how the market goes. But this one is an incremental step within the current footprint. The next one might be a whole new footprint if we continue to grow at this pace. Michael Harrison: All right. Very helpful. And then last question I have is just on the cash flow and maybe some of the working capital dynamics. You mentioned the higher logistics costs, but I assume you're carrying some additional inventory in the pet care business as you work through these expansions. And then is there anywhere else that maybe inventory is a little bit elevated right now? I'm thinking, in particular, maybe MGO as you're trying to navigate or mitigate some of the tariff impacts. Just trying to think about how working title trends in Q4 and how we should think about it as we're starting to look at next year? Erik Aldag: Yes. Thanks, Mike. So in terms of working capital, AR, AP, both in good shape. We watch those metrics closely and no major changes there. We are holding on to a little more inventory, and you touched on it to a few of the spots there. a little higher inventory in pet care, but some strategic positions, I would say, in the high temperature business. MGO being one of them, every couple of years, there's a river closure in the middle of the U.S. that we have to work around and we build up some inventories to manage around those. We're going to be working through a lot of those inventory positions in the fourth quarter. And so we should be ending the year sort of at a more typical level in terms of the inventories. We'll still have some of those strategic positions in place, but more of a typical level from an inventory perspective. From a cash flow standpoint, we're expecting a strong fourth quarter as usual for the company, strong cash from ops, the free cash flow number is going to depend a little bit on the pace of some of these growth capital investments that we've talked about. We've got a number of them ramping up in the fourth quarter. And so the capital number that ends up happening in the fourth quarter could depend a little bit on the timing of how those come through. But overall, expecting a strong cash flow quarter in the fourth. Operator: The next question is from Pete Osterland with Truth Securities. Peter Osterland: I wanted to start just by following up on the recent investments across pet care and Bleaching Earth, so you've talked about an aggregate targeting $50 million of growth investments supporting $100 million of additional revenue -- just in aggregate, how much of those targets are represented by what you've already in a currently in progress. And to the extent that there's more to come, we're across your portfolio are you still targeting for additional organic growth investments? Erik Aldag: So if I understand -- Pete, this is Erik. If I understand the question correctly, the $50 million of CapEx and the $100 million of revenue that we've talked about, those are the investments that Doug laid out today in terms of the highlight on growth capital projects that we have. But importantly, that is just a subset of the growth opportunities that we have much of the opportunity we have is supported by existing capacity, and so it isn't requiring necessarily growth capital to support it. Those are just investments that we wanted to highlight supporting the growth opportunity. Douglas Dietrich: Yes. I guess I'll add, Pete, this is just -- when I look at -- when you look at those markets, and so the North America pet litter market, the Asia pet litter market, the bleaching earth market of $1.1 billion and the renewable fuels growing as the fastest segment. And then also with paper and packaging and our MI scans. -- just these investments are $100 million over the next 12 to 18 months, right? But that trend continues. That's not just the opportunity in those markets alone, right? I think just the MI scans, if you do the math on the MI scans, each MINSCAN is probably worth to us $1 million -- $1 million to $2 million depending on the size of the vessel that is going on, et cetera. So you're looking at just the 18 that we've installed are probably worth about $20-plus million of reoccurring revenue every year. And there's a whole runway of those to go. Not that we'll get 130 million of them, 100% of them, we might. But that market, that's a $0.25 billion market for us just in that product line, right? Look at the bleaching earth market with renewable fuels. We're targeting $75 million of growing this business to $75 million over the next 2 years. Pet care, we're a $400 million business. We think that business grows with some of the investments we're making to $500 million, and that's been our target for 2027. And I think we're on target for that. Given this year, it might be another 6 months, 9 months, but we're still seeing that, that business is another $100 million to grow. And these investments that we've made will support that. So all the way down the list, you're looking at hundreds of millions of dollars of opportunity that we positioned ourselves for -- these investments are the first step in tapping into them, but we've been making these investments over the past 5 years. This is our third bleaching earth expansion. We've upgraded these other facilities in pet care. Now we're upgrading these 2 or 3 key ones. And so these are investments that we've made before, we've delivered on. We're making them again, and they're setting us up for that continued growth. So I think you're going to see that. So I took your question a little bit further, but these are big opportunities, but we've positioned ourselves in these markets for these opportunities, and now we're taking advantage of. Peter Osterland: No, that's very helpful. And just kind of following up on the pet care investment specifically that you're expecting to finish by the end of '25. I guess what's the time frame to realize that run rate of incremental revenue that you discussed? I mean, is it kind of a gradual ramp throughout the course of '26, so you kind of expect that to continue driving growth into '27? Or how should we think about that? Douglas Dietrich: For pet care, in particular, as DJ mentioned, these investments will set us up for longer-term growth. But in particular, we've secured about $25 million, $30 million of contracts on an annual basis that should start to ramp up through the first, but be full run rate by the second. So I think if you snap the chalk line at the end of March and ran 12 months, we think that's $20 million, $25 million of revenue right there. So next year, probably expecting $20 million, $18 million of that $25 million to hit in pet care alone, and that's going to continue. And we've got capacity -- further capacity in China for that market that continues to grow. So we think we're getting this thing back on track. These investments position ourselves with high-quality operations, low-cost operations and strategically located to deliver on the business. And so I think you'll start to see that growth rate revert in the second quarter. Peter Osterland: Very helpful. And then just lastly, I wanted to ask for any update on Talc. It looks like litigation expenses have trended higher each quarter during this year. Just was wondering if you have any update to share on the time frame or expected cost to resolve? And would you expect that until it's resolved, with the $7.5 million of litigation expenses you saw in the third quarter, would that be the run rate of what to expect going forward? Douglas Dietrich: This quarter was a little bit higher in terms of activity. I think our average has been more $3 million to $4 million per quarter. We think it probably reverts back to that. I will say that we're continuing very diligently to work on establishing a 524G trust. There's not a lot significant in terms of updates to report this quarter. We're waiting to hear back from the Southern District of Texas District Court on a number of motions to figure out which lane we'll be in, whether it will be in the District Court or back in the bankruptcy court. And as I mentioned, we're continuing to work to establish that 524. We are wide open to getting this done and getting it done quickly. But the court systems, they take their time and they schedule themselves, and we have limited ability to kind of impact that portion of it. But -- so not a lot of progress, but rest assured, we are working to get this behind us as fairly and as finally and as quickly as possible. With regard to costs, the reserve that we have on our balance sheet, we see that as sufficient for the ongoing both establishment of the trust and the cost it's going to take to get there. So no change to what we see in terms of the reserve. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Doug Dietrich for any closing remarks. Douglas Dietrich: Thanks, everyone, for joining this quarter. We appreciate the questions. We appreciate the attention and interest in Minerals Technologies, and we'll chat with you again at the end of January. Thank you very much. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to FIBRA Macquarie's Third Quarter 2025 Earnings Call and Webcast. My name is Rob, and I'll be your operator for this call. [Operator Instructions] I would now like to turn the conference call over to Nikki Sacks. Please go ahead. Nikki Sacks: Thank you, and good morning, everyone. Thank you for joining FIBRA Macquarie's third quarter 2025 earnings conference call and webcast. Today's call will be led by Simon Hanna, our Chief Executive Officer; and Andrew McDonald-Hughes, our CFO. Before I turn the call over to Simon, I'd like to remind everyone that this presentation is proprietary, and all rights are reserved. The presentation has been prepared solely for informational purposes and is not a solicitation or an offer to buy or sell any securities. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. These forward-looking statements are made as of the date of this presentation. We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation, whether as a result of new information, future events or otherwise, except as required by law. Additionally, on this conference call, we may refer to certain non-IFRS measures as well as to U.S. dollars, which are U.S. dollar equivalent amounts, unless otherwise specified. As usual, we've prepared supplementary materials that we may reference during the call. If you've not already done so, I would encourage you to visit our website at fibramacquarie.com and download these materials. A link to the materials can be found under the Investors, Events and Presentations tab. And with that, it is my pleasure to hand the call over to FIBRA Macquarie's Chief Executive Officer, Simon Hanna. Simon? Simon Hanna: Thank you, Nikki, and good morning, everyone. I'm excited to share that we delivered another solid quarter of financial and operating performance with record-breaking results across key metrics. At the same time, we executed on both strategic and opportunistic initiatives that create value for our certificate holders and continue to position us for sustainable growth. The third quarter showcased the strength of our business model, starting at the top line. For the quarter, we achieved record consolidated revenues, up 8.4% in underlying U.S. dollar terms over the prior year. This momentum translated through to our quarterly U.S. dollar AFFO, which increased an impressive 6.6% annually. [ AFFO ], our quarterly distribution reflects a significant 17% increase from last year, all whilst maintaining a comfortable and prudent payout ratio. Turning to our industrial portfolio. We continue to see strong performance amidst a subdued market backdrop with average rental rates increasing 6.8% year-over-year. Notably, we achieved another quarter of double-digit renewal spreads, 17% on negotiated leases with high quarterly retention of almost 90%. Our full year 2025 performance continues to shape up rather well, perhaps best demonstrated by the 6.1% increase in U.S. dollar same-store NOI year-to-date. So in summary, we are very satisfied with the sustained momentum enjoyed from our industrial portfolio through to today, and we expect that momentum to carry through to the fourth quarter, providing for a strong finish to the year. Moving to our capital allocation and asset recycling initiatives. We had an active quarter closing on a number of transactions. I'm excited with the continued growth of our Mexico City footprint with the acquisition of a prime 250,000 square foot logistics facility. We acquired the property through a sale and leaseback for $35 million, leased to a leading global consumer company under a 3-year U.S. dollar-denominated contract. It not only provides 2025 NOI and AFFO contribution, but also positions us to capture embedded real rental rate growth. This acquisition exemplifies our thoughtful approach to capital allocation. In this case, we secured a scarce well-located infill asset that enhances our portfolio quality, while providing visible earnings and NAV accretion. We're optimistic about repeating this type of success in other deal opportunities under our review, alongside pursuing additional strategic land investments in our pipeline. We also continue to selectively pursue asset recycling initiatives. And during the third quarter, we sold a vacant industrial property in Chihuahua City for $14 million, representing a 30% premium to book value. This transaction demonstrates our commitment to active portfolio management, allowing us to accretively recycle capital into attractive opportunities like the Mexico City acquisition, I just mentioned. Turning to our retail portfolio. We also delivered strong results and achieved a post-pandemic record occupancy of 93.6%. Rising occupancy and rental rates contributed to annual NOI growth of 4.1%, essentially reaching record levels of operating cash flow. We maintain a cautiously optimistic outlook on the operating performance of our retail portfolio and expect the medium-term growth trends to continue. Looking at the broader market environment. While we acknowledge the ongoing uncertainty around trade policy, we also remain confident in Mexico's strategic position within North American supply chains. The long-term fundamentals that have driven Mexico's manufacturing growth over the past decades remain firmly intact, including high-quality labor, proximity to major U.S. markets and continued trade advantages. Notwithstanding the evolving geopolitical landscape, our high-quality portfolio, internalized platform and strategic market positioning, enables us to continue to deliver strong results and capitalize on growth opportunities. It is also worth mentioning our unique vertically integrated platform gives us, amongst other benefits privileged access to market intelligence and allows us to respond swiftly to changing conditions. This positioning, combined with our ability to capture embedded rental growth allows us to continue delivering value to certificate holders, while building a long-term portfolio resilience. Before turning the call over to Andrew, I want to highlight our ongoing commitment to sustainability. We are proud of achieving 3 green stars in our 2025 credit assessment, including a score of 94 points for the development benchmark, exceeding our peers on a regional and global basis. We're also taking this opportunity to publish our annual ESG report that is now available on our website, which provides a comprehensive overview of our sustainability initiatives and performance. Andrew, over to you. Andrew McDonald-Hughes: Thank you, Simon. I'm pleased to report another quarter of strong financial performance that reflects both the quality of our portfolio and the effectiveness of our capital allocation strategy. For the third quarter, we delivered AFFO of USD 29.7 million, representing a solid 6.6% increase year-over-year and demonstrated our continued ability to grow earnings on a per certificate basis. Our balance sheet remains exceptionally well positioned. During the quarter, we successfully completed the refinancing and expansion of our sustainability-linked credit facility. This USD 375 million facility comprises a $150 million 4-year term loan and a $225 million 3-year revolving credit facility. The transaction delivered multiple strategic benefits. Firstly, it enhanced our liquidity position to approximately USD 625 million, providing substantial financial flexibility to fund growth initiatives. Second, it reduced our weighted average cost of debt to approximately 5.5%, while extending our debt maturities. And third, the sustainability-linked features align our financing strategy with our ESG objectives through green building certification targets with the sustainability-linked portion of our drawn debt now representing 68%. As of September 30, we maintain a prudent debt profile being 92% fixed rate with our CNBV regulatory debt to total asset ratio standing at 33.2% and a robust debt service coverage ratio of 4.6x. Embedded firepower stands at approximately USD 500 million, whilst managing to a 35% LTV ratio, including the potential recycling of our retail portfolio. Turning to our guidance. We are reaffirming our FY '25 AFFO per certificate guidance to a range of MXN 2.8 to MXN 2.85 and our FY '25 AFFO guidance in underlying U.S. dollar terms to a range of $115 million to $119 million, representing annual growth of up to 5%. We are also reaffirming our cash distribution guidance for FY '25 of MXN 2.45 per certificate. This represents a 16.7% increase in peso terms and translates to an expected FY '25 AFFO payout ratio of approximately 87% based on our guidance midpoint, representing a well-covered distribution. This guidance assumes stable market conditions and no material deterioration of the geopolitical landscape or Mexico's key trading relationships, including the potential implementation of tariffs. Looking ahead, our strong balance sheet, ample liquidity and disciplined approach to capital allocation position us well to navigate market uncertainties, while selectively pursuing growth opportunities that create long-term value for our certificate holders. In closing, I want to recognize the exceptional work of our entire team. Their dedication and expertise continue to drive our operational excellence and strategic execution. With that, I'll ask the operator to open the phone lines for your questions. Operator: [Operator Instructions] And the first question comes from the line of Andre Mazini with Citigroup. André Mazini: Yes. So my question is around the potential economic deceleration Mexico is supposed to be having now in the second half of 2025. A lot of talk on that among investors and media. So I wanted to understand if you're feeling that this economic deceleration in your conversation with tenants, maybe splitting between the 3 tenant types, industrial light manufacturing, industrial logistics and the retail tenants as well. Simon Hanna: Yes. Thanks, Andre. Thanks for the question. Yes, I guess it's a bit of a dynamic backdrop out there. As you can appreciate, really where we're much more correlated with the U.S. GDP, U.S. economy more so than Mexico, and that's obviously going to be where most of the activity will basically drive outcomes for us. When we break it down between those 3 categories, look, I'd say, in general, for industrial light manufacturing, fair to say that our volumes production is slightly off compared to last year. When you look at auto parts production, it's off around sort of 7% compared to last year. So I'd say nothing that's fundamentally causing a problem there from a demand perspective, maybe a slightly lower utilization. But in general, sort of, I'd say, steady demand backdrop and something which we expect to prevail regardless of that Mexican -- Mexican economy dynamic, more so just to do with how trends continue out of the U.S. So that will very much then link into the logistics part of industrial, at least for the business-to-business, where we have most of our exposure. It will be correlated more or less with the trend on light manufacturing. So again, I'd say for both manufacturing and the B2B logistics going pretty steady, and I think the outlook is steady as well. Obviously, the name of the game there is really USMCA as a real catalyst to change that demand environment probably heading towards the second half of next year. Retail, yes, definitely more sort of linked to Mexican economy fundamentals. But I'd say the consumer remains in pretty good health. We're seeing good employment, wage numbers, et cetera. general foot traffic and activity in the shopping centers is we've been happy with that. You would have seen some of the encouraging metrics come through the quarter, record occupancy, rising rental rates, same-store were up about 5% year-over-year at the NOI level. So I'd say generally good conditions there. Cinema is continuing to struggle a little bit more, I'd say, compared to the rest of the tenant mix to be fair. Gym is doing rather well. Supermarkets is doing rather well, restaurants rather well. So that's probably cinema probably the main weakness that we're still looking for a bit of a pickup. But again, we have a cautiously optimistic outlook as well when it comes to retail, expecting fairly steady demand environment. So overall, that leads us up to a pretty good outlook for heading into 2026. Operator: The next question is from the line of [ Helena Ruiz ] with [indiscernible]. Unknown Analyst: I have a couple. The first one is on the stress. I was wondering if you could give us like any color if you expect them to remain like at these levels for the last quarter of the year and next year? And also, if you could give us a breakdown like this growth is coming from all regions like especially one market? And then my second question is on occupancy, like looking at each market, like most markets remain like really strong. The only one that saw a drop in occupancy are Monterrey and Juarez. So if you could also give us a bit of color on why the occupancy fell in those markets? Simon Hanna: Thanks, Helena, for those questions. Yes. Look, when it comes to lease spreads, firstly, taking that one on. Look, pretty good quarter again, around 17%. We have a sort of a last 12-month run rate of around 20%. So that's been tracking, I'd say, at a pleasing level for us. When we look ahead, virtually 0 rollover on 4Q, so it doesn't really move the needle. So we should be somewhere close to that run rate level on a full year basis. Outlook for next year, it's still early. We have about 16% rollover, 17% rollover next year. So we have some opportunity there to continue capturing, I would say, positive momentum when it comes to spreads, a little bit early to say how much. Obviously, the -- a little bit there depend on market conditions. But I think we -- we'd like to think that we can capture positive momentum in the same way we're seeing through the balance of this year. When it comes to some of those, I'd say, market-by-market dynamics, and I'd say there's -- it's quite an active market out there even despite the subdued new leasing conditions. I would say, in general, we are seeing that the same dynamic we have today is what we've seen for the last couple of quarters, where steady occupancy and operating trends with USMCA being the real catalyst to, we think unlock new demand. But taking that down to, I guess, market levels to answer your question, Monterrey is probably the most active market. It's also one of the biggest in the country, around 185 million square feet. So we still see a lot of activity there, a lot under construction. So supply is still coming through. And that's always been the Monterrey way to be fair, but there's probably around 8 million under construction. Amongst all that, though, on a quarterly basis, we're seeing sort of close to 4 million new leasing to basically offset some move-outs of about 4 million. So no doubt, there's a little bit of vacancy there north of 5%. And you can probably say it's more of a tenant market than a landlord market these days. But -- when it comes to the type of product that we're delivering in the market, this is in Monterrey, but in other markets as well, I'd say that we're at the upper end of that tier. And that pro forma vacancy is not so much of an issue for us. We're looking at in terms of the best quality buildings in the market, that's who our competition is because that's what we're building in terms of location, quality of building size, utilities, et cetera. So that real competition is much more narrow. So whether you're even talking someone like Tijuana, where, again, you're seeing a lot of vacancy or supply come on, it doesn't really change the equation for us. We're in the best part of town with some of those flagship developments up against really just a handful of building competitors. And so that noise around sort of 13%, 14% vacancy in Tijuana or 8% in Monterrey, it's not as relevant when you actually just boil it down to what the hard competition is against our Class A development product and we feel very well positioned to have some activity on that as we get through the year in USMCA in particular. Juarez, I'd say, is probably remains pretty soft. That one has got a lot more sort of undifferentiated vacancy. It's a bit more of a slower market than Monterrey at the moment, much more USMCA linked as well. So I think we expect more activity in that second half of next year or maybe the summer. Reynosa, again, sort of a key northern market, I'd say, very, very quiet as well and had a good positive absorption quarter for the quarter. But on a year-to-date basis, it's pretty flat in terms of absorption. And again, you'd expect that to be more correlated with USMCA pickup. Operator: The next question is from the line of Jorel Guilloty with Goldman Sachs. Wilfredo Jorel Guilloty: So my first question is around the recent M&A that you announced or mentioned in the report in Mexico City. So you bought an asset $35 million, sale leaseback. And back of the envelope, this is like $1,500 per square meter. So I wanted to get a sense of what cap rate you saw for this asset? And also, if the idea here is on further capital allocation, if it's in Mexico City that you want to focus on. And then -- and I'm sorry if you spoke about this earlier, but I wanted to ask about Monterrey and Juarez where you saw occupancy declines of 300 and 120 basis points each on a sequential basis. So I wanted to get a sense of what drove that, if it's 1 tenant or multiple, just to understand if this is a one-off or a trend. So any color would be very helpful. Simon Hanna: Okay. Thanks, Jorel. Great questions there. Yes, the Mexico City acquisition, that was a fantastic one to do is irreplaceable location around 15 minutes from downtown in the Vallejo submarket. And so that's a great last mile district to be in for sure. We're able to access that facility, really thinking about the stabilized cap rate at around a 10% level U.S. dollar sort of the rental as well. So that's the way we're looking at it sort of seeing that stabilize into a 10% cap. Now it's got an initial 3-year lease period there with the user. So -- sort of coming in at sort of an 8% area, but that's definitely below where we think the market rates are. So just thinking about that on a real embedded rental rate growth profile when you actually look at 3 years down the track, where you think that should land around 10%. And so if you're able to access Mexico City last mile stabilized 10%, dollarized 250,000 square foot, we take that all day long, and we're very excited about that. And yes, potentially, there could be 1 or 2 other opportunistic deals like that, that could come along. We're currently looking at 1 deal in particular and we'd like to think that maybe there's an opportunity to do that opportunistically. Again, let's see, so I think that was a great transaction to pull off from a capital allocation point of view. And I'm happy to say, repeat that success. Moving to the second question, on Monterrey, Juarez. So yes, I think from our own perspective, we -- in line with the market trends, we did see some vacancy there. But when you actually look at what drove that year-over-year, pretty simple story, Jorel, in the sense that we just delivered some Class A product that has not been leased up. So it's been added into our inventory. Both fantastic buildings, and we think very marketable. And again, something that will probably be more linked to USMCA ultimately, given the type of buildings and locations they're at. So we feel very good about the buildings that have been added to inventory, even though they're unleased in the short term. We do think they've got great income potential over the medium term. And we actually take the step back there, Jorel, actually not just what we've delivered in Monterrey and Juarez, but the other Class A product we have that basically has income potential and you add that up in terms of sort of getting close to 1 million square feet around the country. The exciting thing there is that we actually do have some real embedded growth that I don't think has been properly priced into our valuation or share price. And any type of a meaningful lease up there on that sort of Class A development product that we have, we're fully invested. It's basically built product ready to be leased up, mainly subject to USMCA, if you want to say that. That's got the potential ability to add something like, I'd say, comfortably north of $10 million at the NOI level. And you can obviously just drop that down to AFFO as well given that we're essentially fully funded and built that. So that's a pretty exciting sort of short-term opportunity we think, to help drive NOI and earnings is to basically take advantage of improving market conditions into next year, particularly with USMCA to trigger that lease-up. Wilfredo Jorel Guilloty: And a quick follow-up, if I may. So the sale leaseback opportunity, you mentioned there's a few in Mexico City, but are there opportunities such as those in other markets that you're in? And would it be focused on logistics? Simon Hanna: Yes. I think the answer is there are. Obviously, we're sort of looking at selective opportunities here. We particularly like Mexico City Logistics. That's a favored market for us where we'd like to increase our footprint. There are other opportunities in those other large consumption markets as well, sort of more of a logistics spend, you could say. But as I say, when you look actually see what's in our immediate pipeline and possible opportunities, we're thinking more Mexico City as being executable in the short term. Operator: The next question is from the line of Alejandra Obregon with Morgan Stanley. Alejandra Obregon: Mine is on capital allocation as well. So I was just wondering if you can provide some color on how you're thinking of your uses of cash for 2026. I mean if we split it between dividends, acquisitions, development, how would that look like in 2026? And what are the elements that will get you to any sort of decision on the mix on that front? And then the second one is on the M&A market. So I was just wondering if you're seeing any change in sentiment or acceleration in M&A activity that perhaps could trigger some recycling opportunities for you other than the sale and leaseback that you just mentioned? Simon Hanna: Sure. Yes. Thanks, Alejandra. So yes, look, I think in terms of capital allocation, fairly consistent outlook with how we currently have been deploying our capital. I think the main focus in the medium to long-term is going to be on that industrial development program. We have a land bank there of around 5 million square feet of buildable GLA in core markets. So that's something that we can flex up in terms of development activity. As you know, we've been doing 0 construction starts for the last few quarters. But as we get better visibility on demand fundamentals, that will remain the primary avenue of how we allocate our capital into those development properties, mainly on a spec basis, you could say. We remain also interested in pursuing certain opportunities in the short term. They boil down, as I say, one is 2 opportunistic acquisitions where we can access those sort of development like returns, if you want to call it that, something like the 10% cap Mexico City. If we can do that on a more sort of a bite-sized basis to complement what we're doing on the development program, that's great. I would say the other investment portal would be through strategic land bank investments to basically complement and add to the $5 million that we have so that we will basically continue that runway for building out getting back to that sort of 1 million to 2 million square feet of velocity on a medium- to long-term basis is where you want to be. And adding to that land bank will be an important part of that equation. When it comes to buyback, I guess that's obviously another opportunity. I'm not sure, Andrew, if you wanted to give color on that. Andrew McDonald-Hughes: Yes, happy to. I think as we've said previously, we continue to favor allocating capital to development and value-add opportunities where we see obviously; a, you have a much lesser impact on the balance sheet over the long-term. You're not impacting liquidity overall and you're setting yourself up for valuation upside and the growth of those underlying assets. And so we'll continue to do that. I think historically, we've guided to in the order of $100 million to $150 million of development per year. We've obviously been softer this year given the broader macro backdrop, but we continue to work towards some permitting and predevelopment works with respect to the recent acquisitions that we made in both Guadalajara and Tijuana. And I think there's a good opportunity for those particular projects to progress over the next 12 months. And I think more to the point, we see a broader opportunity for future growth with the embedded potential recycling opportunity of our retail portfolio, along with the broader liquidity that we have access to through the balance sheet, which really sets us up for in the order of $500 million worth of potential firepower over the medium term. So ultimately, from a growth perspective, over the near term, there's a deep sense of embedded value with the development projects that we have delivered to date that are well positioned for lease-up once we see the tailwinds return to the markets, which we're positive on with respect to how that looks over the short to medium term. And just with what we have already completed and delivered; that's in excess of $10 million in potential NOI contribution over the coming years. And we think that, that will come to fruition and have a good line of sight to lease up on those properties as we go through the USMCA renewal and have more, I think, surety on the tariff and macro backdrop going forward through 2026 and into 2027. So overall, I think broadly speaking, from a capital allocation standpoint and the growth opportunities that the business is well positioned. Alejandra Obregon: Excellent. That was very clear. Operator: The next question is from the line of Alan Macias with Bank of America. Alan Macias: My question was answered, but just going back to M&A, anything on the table regarding the retail sector? Simon Hanna: Yes. Thanks, Alan. Good to hear you. So I think retail, we're definitely very satisfied with the general trend of what we're seeing in operating financial metrics at the risk of repeating myself, but happy to say at 93.6%, record occupancy on a post-pandemic basis, NOI essentially at record levels, up around sort of $7 million, $8 million quarterly run rate. It's been a fantastic contributor to the overall returns. As we think about operational performance, probably a little bit more upside to go, I think, even as good as it's been, that we are seeing some interesting opportunities to add to that overall, NOI performance, and that will obviously lead into valuation also becoming higher. And as you think about that sort of valuation number, it's not insignificant by any means, sort of -- we're talking sort of $300 million plus. And so the interesting dynamic that we're seeing just as NOI continues to improve is obviously a more conducive interest rate backdrop with the interest rates locally falling from, let's say, 10% to sub-8% and you're sort of getting into positive leverage territory and sort of more compelling M&A backdrop. So we like the sound of that in terms of how that's all converging and [indiscernible] for an ability to start thinking about that sort of medium-term opportunity that Andrew mentioned around recycling. And really, that's what we've got to be thinking about in terms of -- apart from that short-term catalyst to grow earnings, which is really simple, which is just to lease up the Class A stuff that we've built and is ready for lease-up. The medium-term opportunity is certainly quite exciting and quite compelling when we think about that embedded firepower of around $500 million, that really allows us to flex up when it comes to building out the land bank and thinking about additional investments. We feel quite excited and well positioned with the ability to do that. Operator: Thank you. At this time, there are no further questions. I'd like to turn the floor back to management for closing remarks. Simon Hanna: Yes. Thank you for that, Rob, and thank you for everyone for participating in today's call. Along with Andrew, I would like to thank all of our stakeholders for your ongoing support, and we very much look forward to speaking with you over the coming days and weeks as well as updating you again at the end of the quarter. So have a great one. Thank you. Operator: The conference has now concluded. Thank you for joining our presentation today. You may now disconnect.
Operator: Thank you for standing by, and welcome to First Western Financial's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Tony Rossi. Please go ahead. Tony Rossi: Thank you, Latif. Good morning, everyone, and thank you for joining us today for First Western Financial's Third Quarter 2025 Earnings Call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; Julie Courkamp, Chief Operating Officer; and David Weber, Chief Financial Officer. We will use a slide presentation as part of our discussion this morning. If you've not done so already, please visit the Events and Presentations page of First Western's Investor Relations website to download a copy of the presentation. 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 Western Financial 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. I would also direct you to read the disclaimers in our earnings release and investor presentation. 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. And with that, I'd like to turn the call over to Scott. Scott? Scott Wylie: Thanks, Tony, and good morning, everybody. Starting on Slide 3. We executed well in the third quarter and saw positive trends in many areas of loan deposit growth, growth in our net interest income, well-managed expenses and generally stable asset quality. This resulted in an increase in our level of profitability and positive operating leverage. Market remains very competitive in terms of pricing on loans and deposits. We continue to successfully generate new loans and deposits by offering superior level of service, expertise and responsiveness rather than winning business by offering the highest rates on deposits or the lowest rates on loans as other banks are doing. We continue to maintain a conservative approach to new loan production with our disciplined underwriting and pricing criteria. However, as a result of the additions we made to our banking team over the past few years as well as generally healthy economic conditions in our markets, we had a solid level of loan production, which was well diversified across our markets and industries and loan types. As a result of our financial performance and the balance sheet management strategies, we had a further increase in both book value and tangible book value per share, and we used our strong capital position to repurchase some of our shares during the third quarter, which was accretive to our tangible book value per share. Moving to Slide 4. We generated net income of $3.2 million or $0.32 per diluted share in the third quarter, which is higher than the prior quarter and a 45% increase from our EPS in the third quarter of last year. With our prudent balance sheet management, our tangible book value per share increased by 1.2% this quarter. I'll turn over the call to Julie for some additional discussion on our balance sheet and trust and investment management trends. Julie? Julie Courkamp: Thanks, Scott. Turning to Slide 5. We'll look at the trends in our loan portfolio. Our loans held for investment increased $50 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production. But with the higher level of productivity we are seeing from the additions to our banking team that we have made over the last several quarters, we are seeing a solid level of new loan production. While we are also seeing an increase in CRE loan demand that meet our underwriting and pricing criteria, new loan production was $146 million in the third quarter. The new loan production was well diversified with the largest increases coming in our residential and commercial real estate portfolios. And we are also getting deposit relationships with most of these new clients. We continue to be disciplined and are maintaining our pricing criteria, which resulted in the average rate on new loan production being 6.38% in the quarter. Moving to Slide 6. We can take a closer look at our deposit trends. Our total deposits increased $320 million from the end of the prior quarter. This was due to both new accounts and a buildup among existing client balances. We had an increase in noninterest-bearing deposits due to inflows we saw from title companies, driven by mortgage industry volume. Additionally, we had an increase in interest-bearing deposits as a result of the successful execution of our deposit gathering strategies. Now turning to trust and investment management on Slide 7. We had a $64 million decrease in our assets under management in the third quarter, primarily attributed to net withdrawals on low fee product categories, partially offset by improved market conditions on investment agency accounts. This resulted in increased $43 million or 2.7% during the quarter. Trust and investment management fees increased $100,000 from the prior quarter, primarily driven by the increase in investment agency AUM. Now I'll turn the call over to David for further discussion of our financials. David? David Weber: Thank you, Julie. Turning to Slide 8, we'll look at our gross revenue. Our gross revenue increased 8.7% from the prior quarter due to increases in both net interest income and noninterest income. Year-over-year, our gross revenue increased 15.5%. Now turning to Slide 9. We'll look at the trends in net interest income and margin. Our net interest income increased for the fourth consecutive quarter and increased 8.9% from the prior quarter, primarily due to an increase in our average interest-earning assets with the strong deposit growth we had contributing to our higher level of cash on the balance sheet. Our net interest income increased 25% relative to the third quarter of 2024. Our NIM decreased 13 basis points from the prior quarter to 2.54%. This was due to unfavorable mix shifts in both interest-earning assets and deposits as our deposit growth during the quarter was in higher cost money market accounts. The strong deposit growth during the quarter contributed to higher cash held on the balance sheet. As this liquidity is deployed into the loan portfolio during the fourth quarter, we expect to see NIM expansion. Now turning to Slide 10. Our noninterest income increased by more than $500,000 or 8.5%, which is 34% annualized from the prior quarter. This was primarily due to increases in all major fee categories, including trust and investment management fees, insurance fees and gain on sale of mortgage loans. The increase in gain on sale of mortgage loans was driven by a higher level of mortgage production and the increase in trust and investment management fees was driven by an increase in investment agency AUM as a result of improving market conditions. Now turning to Slide 11 and our expenses. Our noninterest expense increased by less than $1 million from the prior quarter. Most areas of noninterest expense were relatively consistent with the prior quarter as we continue to tightly manage expenses while also making investments in the business that we believe will positively impact our long-term performance. Turning to Slide 12. We'll look at our asset quality. As Scott indicated earlier, we saw generally stable trends in the loan portfolio in the third quarter with slight increases in NPLs and NPAs. This was primarily due to one loan that was downgraded during the quarter. And we had a minimal level of net charge-offs again this quarter. We had a slight increase in our allowance coverage from 75 basis points in the prior quarter to 81 basis points in the third quarter. Now I'll turn it back to Scott. Scott? Scott Wylie: Thanks, David. Turning to Slide 13, I'll wrap up with some comments about our outlook. Overall, we continue to see relatively healthy economic conditions in our markets, and we're seeing good opportunities to add both new clients and banking talent due to the ongoing disruption from M&A activity here in the Colorado market. Our loan deposit pipelines remain strong and should continue to result in solid balance sheet growth in the fourth quarter. In addition to balance sheet growth, we also expect to see positive trends in net interest margin, fee income and more operating leverage resulting from our disciplined expense control. Based on trends we're seeing in the portfolio and the feedback we're getting from our clients, we're not seeing anything to indicate that we'll experience any meaningful deterioration in asset quality. The positive trends we're seeing in a number of key areas are expected to continue, which we believe should result in steady improvement in our financial performance and further value being created for our shareholders going forward. So with that, we're happy to take your questions. Latif, if you could please open up the call. Operator: [Operator Instructions] Our first question comes from the line of Brett Rabatin of Hovde Group. Please go ahead, Brett. Brett Rabatin: I wanted to start with the deposits and the strong MMDA growth. And if I heard you correct, it sounds like that's a mix of internal efforts as well as maybe the mortgage department. Just any -- can you maybe go into a little more color there? And then are those levels sticky, the growth in the level? Scott Wylie: Well, I think we've talked about our efforts to grow deposits and the fact that, that would happen a little bit in a lumpy fashion wouldn't be a big surprise given our history here. We do see large deposits coming in and out. And in this case, I think the things that we saw that happened in Q3 are deposits that are going to stay here and give us a higher deposit base to grow from into Q4. Brett Rabatin: Okay. That's helpful. And then the NPA that you added during the quarter, any color on that credit? And then just was there part of the provision related to a specific reserve for that NPA? Scott Wylie: Yes. I think we have a number of credits that have performance issues over time, and this is one that is a C&I loan. We have been paying attention to it. We downgraded it in Q3, and we do have a specific provision for it. We expect it to be worked out and work through over time, the provision is more than adequate. Brett Rabatin: Okay. And then just maybe lastly, if I could ask on the margin. Julie, you indicated the margin would be up from here. Any magnitude that you could share in terms of what you think 4Q might look like, presuming we get a rate cut or 2? David Weber: Yes. I think we do have opportunity to see NIM expansion. If you look at the amount of liquidity that's sitting on the balance sheet, if we redeploy that into the loan portfolio at something like plus 200, I think that should drive NIM expansion there. We also certainly have the ability to continue to improve earning asset yields and lower our deposit costs. So I think we've got we've got a pretty nice path for NIM expansion in the fourth quarter. Brett Rabatin: Okay. David, any magnitude that you're thinking about in terms of basis points? David Weber: Yes. I'm thinking we can achieve something like 5 basis points of NIM expansion. Brett Rabatin: Okay. Okay. Great. Appreciate all the color. Operator: Our next question comes from the line of Matthew Clark of Piper Sandler. Matthew Clark: I wanted to start on the spot rate on deposits at the end of the quarter. David Weber: Yes. Matthew, it was 3.04%. Matthew Clark: Okay. And then any updated thoughts on the beta you're looking to achieve with additional Fed rate cuts through the cycle and whether or not that starts to decline over time? David Weber: Yes. It has been declining, and it will certainly continue. We achieved somewhere around a 63% beta on money market accounts in the third quarter. And I think that's reasonable for the fourth quarter expectation as well. Matthew Clark: Okay. And then the expense run rate going forward, I think some of the increase this quarter was related to incentive comp. But what are your thoughts on the run rate here in the fourth quarter? David Weber: Yes. The incentive comp can vary certainly with the financial performance. But I think something similar to third quarter as far as expenses is probably a reasonable estimate for fourth quarter. Matthew Clark: Okay. Great. And then last one for me, just on the wealth management business. AUM down a little bit. It looked like it was in the lower fee products, though may have been deliberate, not sure. But any update on the kind of renewed growth and profitability improvement strategy there? Scott Wylie: Yes. We've definitely been working on getting that going again, and we've replaced the team on the trust and in the planning side. We've got a new leader that joined us beginning in the second quarter for our planning team and definitely seeing some nice progress from them. As David noted, we saw AUM go down, which is not really something we manage for. We're really more concerned about the fee income, and we saw fee income grow in the agency accounts in Q3, which is what we want to see. So definitely nice progress from that new team with, I think, a lot more to come. And Matt, just a little bit more color on deposit pricing. With the increase in deposits, you're always going to see relatively expensive at first, and then it's going to moderate over time typically with these new relationships and additional deposits you bring in. Our average deposit costs last quarter peaked at 3.22% in August, and then we're down about 3.15% in September. And as David said, ended the quarter at 3.04%. So you're seeing a nice trend just within the quarter there. So hopefully, we can see that continue into Q4. Operator: Our next question comes from the line of Will Jones of KBW. William Jones: I wanted to circle back to the deposit growth. Obviously, a fairly banner quarter there for deposits, and it sounds like you expect maybe to see a little bit more balance sheet growth in the fourth quarter here. But should we, in any way, view this large influx of deposits as a way to prefund your expected growth for 2026, and maybe '26 then becomes more about just remixing the balance sheet? And then just, I guess, pairing within that, you obviously have a fair amount of liquidity from the deposit growth. How should we think about you guys being a little more opportunistic with securities purchases at this point? Scott Wylie: Well, I think that was a 3-part question. So let me see if I can get them all here. William Jones: Yes. I'm sorry about that through... Scott Wylie: Well, we appreciate the question. So I think you're right on with the idea that we were opportunistic in bringing deposits on. We have done a number of things over the last 12 months to get the team here focused on deposit growth. We know we can grow loans, and we wanted to see the loan-to-deposit ratio come more in line. And so the way you described that is reasonable. Although I would say it's not like a one-off thing that prefunds 2026 or something like that. I mean, I think this is an ongoing effort that goes throughout the product group throughout the -- our PTIM world, planning, trust and investment management world goes definitely through each one of our 19 locations. We require relationships with each loan, and that includes deposits. And so very much a focus of the company. I think that we're seeing a lot of market disruption out there. So on one hand, you've got this competitive environment for deposits, but you've also got people that don't want to be with really large out-of-state banks. And that disruption is continuing, I would say, increasing, and that creates opportunity for talent for people that we can bring centrally to support our teams. We can bring new people into our teams and then we're bringing in new clients. And so I think that's going to continue. I don't really see any reason to think that's going to abate. And at the same time, we've got this tiny low market share in most of our markets. We're kind of 1% or 2% in our bigger markets and less in the newer markets. So in strong and growing economy. So I think all those things set up for some nice continued asset growth into the fourth quarter and next year. William Jones: Okay. Helpful response. And just as I kind of like pair some of those comments, just into how the margin looks for 2026. As I kind of look back how you've transformed the margin this year, about 20 to 25 basis points of year-over-year expansion. Do you think that magnitude is repeatable again in 2026? Is the opportunity there from both a deposit pricing standpoint and loan growth standpoint to see that kind of magnitude again in 2026? Scott Wylie: Well, what I've been seeing is that we really got heavily impacted by that rapid run-up in short-term rates and the inverted yield curve and that we thought that, that would turn around and we'd see nice deposit betas as rates declined, which we have. And the fact that we've seen 22 basis point improvement from Q3 of last year to Q3 of this year, I think it's a nice start in that. We've moved out of the 2.30s into the 2.50s. And I continue to think that in normal environments, my banks, including this one, have produced 3.15%, 3.20%, 3.25% NIM for the way we do business. And that's where I think we're going. I don't think we're going to get there next quarter. I don't know if we can get there next year, but that, I think, is going to continue and the fact we've seen that amount of improvement here over the last 12 months in spite of the growth that we've seen on the balance sheet, I think, is really promising and bodes well for continued operating leverage into 2026. William Jones: Yes. Okay. Very helpful there. And then lastly for me, you touched a little bit on in some of your comments, just the organic opportunity that's arisen from some of the M&A disruption. But there has been a lot of deal announcements. There's been a lot of price discovery. So just curious how you think about your own scarcity value within that? And then maybe how you view yourself as a downstream buyer potentially of banks. Scott Wylie: Well, we believe that our path to -- we believe our job is to drive shareholder value. And we believe our path to creating shareholder value is creating operating leverage in our business here by growing revenues a lot faster than expenses. And that turns into improved efficiency ratio, improved bottom line. And we're not happy where the profitability is. We're not happy where the efficiency ratio is. But we've made a bunch of investments here over the last couple of years and changes that are now paying off, and we're seeing the green shoots of that, and that's going to drive continued organic growth and operating leverage for us. And now talked a couple of times about why we think that continues into '26 and beyond. So specifically, in terms of scarcity value, clearly, First Western is a unique franchise that both is becoming more unique in Colorado, but I would say also more unique as a successful wealth management business on a national basis. I mean I think the bank, in a lot of ways, most similar to us in terms of their balance sheet and AUM was FineMark in Florida, and the fact that they sold for 6.5x revenue and 92x trailing earnings to a really good buyer, I think, is an interesting data point for us. And I know others use other metrics on that, but I mean, I think that's what the data is. So yes, I think there is good scarcity value here. I think our clients, frankly, see that and they find us to be a desirable place to do business. I think other bankers around the country are seeing that, too. In terms of acquisitions, we would love to be buyers. We've done that over the years a lot, 13 times, and we just have to get our stock price back to something reasonable. And definitely, there's a lot of activity out there that we could benefit from if we can get our stock price back in line or when we get our stock price back in line. William Jones: Okay. I appreciate that. Appreciate that response. That's all for me. Operator: Our next question comes from the line of Bill Dezellem of Tieton Capital Management. Please go ahead, Bill. William Dezellem: First of all, Scott, it sounded like you may have had some additional comments that you were going to share to the last question. I'll let you do that if there's something more you want to add. Scott Wylie: No, I'll add a few comments at the end. Thank you, Bill. William Dezellem: All right. So continuing down the deconsolidation route, would you talk about what transactions have been most disruptive and possibly favorably impactful for First Western? Scott Wylie: Yes. I don't entirely understand it, Bill. So I can't really give you a really solid prediction of what's going to happen with all this. But I would tell you that when Guaranty Bank and CoBiz sold, I thought that was going to create a lot of opportunity because our type of clients definitely were at those 2 banks. And I thought with them being acquired by out-of-state banks, that was going to create a lot of opportunity for us. As it turned out, it didn't. And I think a lot of the reason for that is the bankers stayed in place for a while. And then when they did move, they were really bid up by other players. And so it got to be really expensive to bring those folks over. Now with the second-tier acquisitions that we're seeing, for example, with Citywide, which was a really great local family-owned and family-run bank, they sold to Heartland, I don't know, 5, 7 years ago, something like that. And then I think Heartland really had a strategy of trying to run these local banks as the way they had run historically. UMB buys Heartland, UMB is going to drive a UMB culture into what used to be Citywide. And so we've seen some good people and good opportunities come out of that. And so I think interestingly, it's sort of the second-tier acquisitions that really create more opportunities in some way. And then the FirstBank one in this market is just really interesting. Like FirstBank is a great retail bank and just really loved by Coloradans. So there's this emotional tie that I don't entirely understand. But definitely local people here, local business leaders, local entrepreneurs have strong relationships with that company. And it's just going to be a challenge for a big national player to keep that passion. And we'll see. I mean we've had lots of calls. We have clients that bank here and bank there. And you can be pretty sure that those folks are calling us to saying what additional capacity you guys have for us to stay with you guys. So I don't know how all that plays out, Bill. I do feel like we're seeing more benefits of the disruption in today's market than what we saw 5 or 7 years ago. And again, I'm not sure all the reasons why, but it's been really good for us so far. William Dezellem: So let me take that one step further. Do you sense that you have the opportunity to become the new bank that Coloradans love that others look at you and go, we don't even know why, but they sit on this pedestal. Scott Wylie: Well, I do know our clients love us. We're never going to be a retail bank the way FirstBank was. Like FirstBank, one of their strengths was they did one thing. And over the years, I've talked to people like John Ikard and other CEOs over there, and they're like, well, what do you think about the trust and investment management business? And I would tell them and they would say, well, that's fine, but we're never going to do that at FirstBank. So I mean they're just very focused on being a retail bank. And I think they did that better than anybody. And we're not ever going to do that. We're not going to open branches on every corner like they did and stuff like that. So I think we'll continue to be in First Western. I know that our folks are very committed to their markets and their communities. We talk here about taking care of our 4 key stakeholders, which are shareholders, associates, clients and communities. And so we try and do those things that are right for our people and create that emotional connection that you're talking about. And certainly, with our niche, that's something we would hope to expand and build on. William Dezellem: That's helpful. And then relative to Arizona specifically, are you seeing anything from a transaction standpoint that you see as benefiting your opportunity for bringing on new people there? Scott Wylie: Well, I don't think we've announced it yet. We have Julie, who is telling me. So I was thinking I was going to make some news here, Julie, but you're ahead of me. But we actually recruited one of the top folks out of First Republic to build our franchise in Arizona for us, and he had a garden leave period and all that stuff, but he's now joined us. And we are really optimistic about what we think the team there can do in the years to come. I think that, that Arizona market for us, if we had the same tiny market share that we had in Arizona that we have in Colorado, we would be -- what's the number, Julie, $4 billion, $6 billion, bigger or something like that. And so that's what we've charged the team there to come up with. I think we've got a leader in place that can do it. William Dezellem: Great. Congratulations on that. One additional question, please. The excess cash that you have on the balance sheet, how long are you thinking that it will take to redeploy that cash? Scott Wylie: Yes. Actually, that was one of the 3-part question that I missed on, David. And do you want to talk about what we've done already with investments and then what our thoughts are. David Weber: Yes. I mean, Bill, if you kind of look back at the history of our balance sheet, we certainly have our liquidity and capital really more earmarked towards the loan portfolio. And I think that continues. Now that being said, when there are opportunities from a bond perspective that we like, we will take advantage of them. So we did add about $50 million in the third quarter to the bond portfolio, and those were primarily floaters that got us a nice spread over interest-bearing cash, which still really remains highly liquid assets, government guaranteed bonds, agency GSEs, things like that. So I think the focus is still to deploy that liquidity into the loan portfolio. But as we see opportunities in the bond portfolio, we'll certainly assess those as they come up. William Dezellem: So 2 follow-on questions to that. Number one is that the $49 million available for sale that's now on the balance sheet that you're referring to. And then that redeploying of that, I mean, is this something that is a 2-, 3-quarter phenomenon given what you see with economic activity? Is it something you think by the end of the Q4 -- is it more like full year next year? I guess I'm looking for a bit more solid view of how you see loan demand relating to that excess cash -- excess liquidity, I should say. David Weber: Yes. Good question, Bill. We expect our loan demand trends to continue. We had a really strong second quarter in loan growth. We had a good quarter again in the third quarter as far as loan growth. And we -- given our loan pipelines and what we're seeing in our markets, we do expect those trends to continue. So I don't think it's a year down the road type of thing with those trends continuing as far as redeploying that liquidity. Scott Wylie: I would just add, Bill, that we have seen a modest growth rate in the balance sheet, right? Like I think that our expectation is that we can grow single digits, mid-single digits, maybe low double digits. We're not interested particularly in growing faster than that. And I think that you're going to see this growth continue at a moderate pace here into 2026 from everything we know. Not expecting to go out and lend all this money out next week. That is not in our game plan. Operator: I would now like to turn the conference back to Scott Wylie for closing remarks. Sir? Scott Wylie: Great. Thank you. We said for several quarters that we had success playing defense and that we were going to shift back on to offense in 2025. We had some pretty stiff headwinds there for a while with short rapid run-up 525 basis points in short-term rates. We had that inverted yield curve for an extended period. We have 3 of the 4 largest bank failures in U.S. history, including First Republic, which very much was seen as a successful player in our niche. But we said, we got through the defense, let's shift over to offense and really leverage the investments that we've made over the past couple of years in 5 key areas. We've replaced our technology infrastructure. We've moved to a completely cloud-based environment. We've installed middleware. We've rolled out a new digital platform. We're adding all kinds of new services and tools onto that tech platform that really, I think, help us be a leader from a tech standpoint. We've reorganized number two, our product teams, our loan deposit, investment management planning, trust, mortgage teams have all been strengthened and reorganized. We've expanded our PC local office teams. We've given them a new proprietary toolbox for growth and rolled that out here in the last quarter. We've reset and standardized our internal control processes for more efficiency and value add so that we're competing on value and not on price. And number five, we've rebuilt our credit and risk and support and marketing teams to support the First Western that we envision for the future. And that's all paid for and in our current expense structure. And so we were hoping to see some green shoots of progress in that this year, and that showed up in Q3. Our net interest income was up 35% Q-over-Q, quarter-over-quarter annualized. Our fees were up 31.6% quarter-over-quarter annualized in each of our key areas, David pointed that out, which I thought was a really great pointing in PTIM, in insurance, in banking, in mortgages, we saw nice growth. Our pre-provision net revenues were up almost 35% quarter-over-quarter annualized, and our efficiency ratio is trending down with operating leverage up. So thinking about 2026, we do our business planning in the fourth quarter. And so that's a big project that we're doing now with each department head in each office. And so we'll see how all that plays out. But if you just look at Q3 year-over-year trend lines, then our net interest income is up 25% year-over-year, and that was done with modest growth in the balance sheet plus NIM improvement, which drives nice operating leverage, which we saw. Our fees were up 21% from September of last year to September of this year. And our operating expenses were only up 4%, and that was mainly due to incentive comp that is driven off of revenue growth. So if we had higher expenses in Q4 because we're paying incentive growth because we're seeing good -- incentive comp because we're seeing good growth, and that's a good problem to have. So looking past this quarter, our intention is to get back to be a high financial performance like we were earlier in this decade. And we have a clear path to 1% ROAA and plenty of room beyond that. We were honored to be named one of just 16 KBW Bank Honor Roll members in 2025 for our performance over last year. We were just, I think, made as of Q3 now, Piper Sandler's list of the top 200 U.S.-listed banks in size. And then we just saw our schedule for the Hovde Conference down in Florida in a couple of weeks. And the organizers there asked us to add some time slots because of high demand. So I think there's good momentum here. We're really optimistic about how we can finish the year and continue to deliver shareholder value into 2026. Thanks, everybody, for your support, and thanks for dialing in today. We really appreciate it. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Cenk Gur: Dear friends, this is Kaan speaking. Thank you for joining our third quarter earnings call. I'm speaking to you from Copenhagen. While I am on the road, I wanted to take a moment to connect with all of you and share my perspective on the current operating environment and how we are positioning ourselves for the period ahead. After my remarks, I will leave the floor to Turker, Ebru and Gulce and our IR team, who will go through the detailed financial results and handle the Q&A. Although I'm not able to stay for the entire call, I'm looking forward to catching up again soon. Before we dive into the numbers, I want to take a moment to talk about the broader macro environment, particularly what we are seeing in Turkiye. As you all know, the strong monetary tightening in April postponed the anticipated margin expansion. Following today's 100 bps rate cuts, we expect the policy easing to continue in measured steps. On the growth side, following a solid pace in Q2, economic activity shows sign of moderation in Q3. We envisage another period of mild economic growth this year around 3.5%. Current account balance remains supportive for exchange rate stability. Looking forward, achieving lasting this inflation will be key to sustaining healthy growth across the real and financial sectors. Monetary measures have successfully restored financial stability and the Central Bank restarted reserve accumulation in May. Gross reserve have surpassed its mid-March level by reaching $189 billion, while net reserves have steadily improved to around $57 billion. Domestic residents still favor Turkish lira assets and deposit dollarization remains weak. A fixed deposit share in the banking system has been stable around 40% levels on the back of the macro prudential measures, keeping Turkish lira deposit rates higher than the policy rate. Foreign capital flows have been on the rise since May. Without a doubt, global conditions generate a conducive environment for the continuance of the existing exchange rate regime and support financial market stability. Let's move on to our bank. Let me start with our overall performance. During the quarter, we delivered healthy loan growth accompanied by across-the-board market share gains, particularly in our core customer segments. This growth was quality driven, fully aligned with our disciplined and selective lending strategy as well as the regulatory requirements. On the funding side, our dedication continued on expanding and deepening customer relationship. This translated into market share gains in low-cost deposits and a strong performance in demand deposits, further enhancing the stability and efficiency of our funding base. This balanced development on both sides of the balance sheet supported a solid increase in net interest income, while our fee income also maintained its strong momentum. At the same time, we remain fully focused on asset quality and risk management. Our prudent underwriting standards, proactive monitoring and well-diversified portfolio continue to support the resilience of our asset base. As a result, we maintained strong solvency comfortably above regulatory threshold. This solid foundation positioned us well to capture growth opportunities ahead while continuing to safeguard the strength and stability of our franchise. We are executing today with discipline while transforming for tomorrow through a clear long-term vision. We have a strong proven business model, which we continue to enhance and adapt as customer needs evolve. Our business models brings together digital excellence, strong customer engagement and strategic investment in technology and our people, all shaping the future of sustainable growth and lasting value for all stakeholders. Let's move to our 3-year strategic plan, where we regularly share transparent updates on our progress each quarter. Execution remains strong with the majority of our 3-year strategic objectives already delivered or well within reach. Our only shortfall remains in Turkish lira time deposit market share, which is a reflection of our funding optimization efforts and the impact of a regulation-driven low level of Turkish lira LDR. Our dedication for customer growth remains fully in place through both customer acquisition and deepening relationship. Backed by a well-structured balance sheet, this forms a scalable, resilient earnings platform with strong momentum and long-term growth potential. Let me leave you with 3 takeaways. First one is we continue to grow selectively and with discipline. Secondly, we manage risk proactively. And lastly, we remain focused on sustainable core revenues that will drive real return on equity in the upcoming periods. I'm very proud of our teams. Their hard work and dedication truly drive our success. A sincere thank you to all people for their commitments. And dear friends, the partners, thank you for your continued trust and support. I look forward to seeing you all again soon, bye for now, Turker and Ebru. Over to you. Kamile Ebru GÜVENIR: Thank you so much, Kaan Bey. We will start now with the first slide on the NII and the revenues. Our net income in the 9 months was up by 17% year-on-year to TRY 38.908 billion, resulting in an ROE of 20.4% and ROA of 1.8%. During the same period, we had solid revenue growth, up 48% year-on-year to TRY 155.970 billion, led by robust fee generation and renewed NII momentum during third quarter. To put in numbers, our quarterly swap adjusted NII improved notably by 48% [ quarter-on-quarter ], supported by disciplined balance sheet management, while strategic investments, deepening client relationships and strong cross-sell execution continue to fuel fee growth. Together, these drivers further strengthened our recurring revenue base and the solid NII recovery this quarter underscores how we're leveraging our strong solvency position to deliver profitable growth and our balance sheet flexibility. Strong growth alongside robust solvency highlights our agility and risk reward discipline. As we move ahead, our sustainable growth mindset, solid balance sheet and analytical capabilities will drive margins further. Moving on to the balance sheet. We achieved a 28% year-to-date growth in TL loans, well on track to meet our full year loan growth guidance of over 30% shared at the start of the year. On a quarterly basis, our TL loan growth of 13% led to across-the-board market share gains, while risk discipline remained intact. Please also note that our robust growth achieved is in full alignment with the loan growth regulations. During third quarter, we captured 90 basis points of market share in business banking loans among private banks, illustrating our targeted focus on segments with growth potential. Building on our leadership in consumer lending, we expanded our presence further, capturing 30 basis points additional share among private banks. This demonstrates our readiness to capture new opportunities while managing risk. On the FX book side, we grew by 4.1% quarter-on-quarter and 5.1% year-to-date, capturing 30 basis points market share gain among private banks during the quarter. The increase was mainly driven by government-backed infrastructure projects, multinationals and blue-chip corporates, reflecting a prudent, quality-focused growth strategy, fully aligned with regulations. Please also note that we have a solid pipeline, indicating upside potential to our mid-single-digit foreign currency loan growth guidance for the full year. Moving on to the securities. Our security portfolio composition demonstrates our balanced approach with a focus on yield maximization, 69% of our securities are TL, while we have selectively increased our positioning in the foreign currency side through proactive Eurobond investments. This is underlined by a robust 21% year-to-date growth in our foreign currency securities in dollar terms. We are well positioned with long duration, comparatively higher yielding TL fixed rate securities, which will support book value growth going forward. To put in numbers, 65% of our TL fixed rate securities are classified under fair value through other comprehensive income. Our TLREF index bond portfolio offers decent spread. While our CPI linkers offer positive real rate and its share in total has actually declined since 2022 by 33 percentage points. Our active yield-focused management of the securities portfolio has supported timely adjustments to market dynamics and will underpin margin resilience in the periods ahead. Moving on to the funding side. We effectively utilized our flexible balance sheet and strong deposit franchise while optimizing our funding costs. At the same time, we successfully strengthened our TL deposit base, capturing notable market share gains in both demand deposits and widespread consumer-only segments. Our TL demand deposit market share among private banks increased quarter-on-quarter by 190 basis points, reaching a robust 18.6% as of third quarter. Accordingly, TL demand deposit share in total TL deposits advanced by 300 basis points year-to-date to 16%. Share of total demand deposits in total deposits also excelled by around 500 basis points to 33% during the same period. Meanwhile, our strong customer engagement helped us achieve a 40 basis point market share gain in the sub TRY 1 million TL time deposits, reaching 16.5% in third quarter. On top of our strong and widespread deposit base, our low TL LDR, which, as you can see, was partially utilized for growth opportunities during the quarter, is still offering substantial room for funding cost optimization in the coming period. Moving on to P&L. NIM recovery resumed in third quarter as expected, following the temporary margin pressure in second quarter due to the pause and the reversal of the rate cut cycle. Our swap adjusted net interest margin expanded by 73 basis points quarter-on-quarter, supported by both improved funding dynamics and well-positioned loan portfolio. Please note that our CPI normalized quarterly NIM improvement was also strong at 50 basis points after adjusting for the impact of CPI linker valuation change based on the revised October to October CPI estimation of 32.5%. It is worth to note that our weekly NIM trend towards the end of the quarter indicates ongoing progress in margin improvement for the fourth quarter. Our unwavering focus on profitable growth and effective funding strategies will remain key drivers supporting NIM evolution. On the other hand, the disinflationary phase and the magnitude of the upcoming rate cuts will continue to influence the extent of the quarterly NIM improvement. As a reference, the underlying year-end policy rate assumption of our revised guidance in July was at 36%, whereas the current expectations actually point to a tighter environment. Moving on to the fee slide. Our net fees advanced by 67% year-on-year, reflecting innovation, strong customer engagement and diversified offerings. Our diversified fee base remains a key strength with solid contributions from every business line. To name some of them, first, net payment systems fees advanced by 76% year-on-year, reflecting effective customer engagement and targeted campaigns. Second, net bancassurance fees surged by 77% year-on-year, backed by our advanced digital solutions actually, which are covering around 80% of our sales. Third, net money market transfer fees rose by 58% year-on-year, reflecting higher transaction volumes and digital channel migration of transactions. Our strong market positioning in key business lines ensures a diversified and resilient fee base throughout the rate cut cycle, offsetting the cyclical impact of interest rate-driven payment system fees. While the banking sector fees benefited from the rate environment, our market share gain among private banks reflects the bank's inherent strength in fee generation and ongoing focus on sustainable growth. I am very pleased to share that the fee growth once again outpaced OpEx, lifting our fee to OpEx ratio to 104% as of 9 months. Accordingly, our fee to OpEx ratio showed an 18 percentage point increase year-to-date, underlining our continued execution on customer-driven revenue growth and disciplined cost control. On that note, let's move on to the OpEx. The year-on-year increase in operating expenses was limited to 35% in 9 months, underscoring our strong cost control and operational efficiency. This realization is still evolving below our revised guidance of around 40% for the full year. Moving on to asset quality. Retail-led NPL inflows continue to be persistent trend across the sector. During this period, our disciplined risk management framework has enabled us to optimize the loan portfolio while preserving sound asset quality. This was supported by excellence in advanced analytical capabilities across the retail segments, automated and AI-based credit decision models, diligent tracking and individual assessment of our corporate and commercial loan portfolio as well as our prudent provisioning. Our NPL ratio remained at 3.5%, fully in line with our full year guidance. Meanwhile, the share of Stage 2 plus Stage 3 loans representing potentially problematic exposures remains low at 9% of our gross loan portfolio. Please also note that the restructured loans represent only 3.2% of the total loan portfolio. In 9 months, our total provisions reached almost TRY 68 billion, reflecting our continuous provision reserve buildup. Meanwhile, our coverage ratio for Stage 2 and Stage 3 loans stands strong at 34.3%, mirroring disciplined risk management practices. Excluding currency impact, our net cost of credit increased to 230 basis points on a cumulative basis, mainly driven by ongoing retail-led inflows and also further strengthening of our already strong coverage ratios. Hence, our full year cost of credit may slightly exceed the upper end of our guidance range of 150 to 200 basis points by the year-end. Our total capital, Tier 1 and core equity Tier 1 ratios without forbearances remain robust at 17.2%, 13.6% and 12.4%, proof of resilience alongside solid growth. As for the sensitivity, as we share every single quarter, 10% depreciation in TL results around 29 bps decrease in our capital ratios, while the impact diminishes for higher amounts of change. And 100 basis points increase in TL interest rate results in 9 basis point decline in our solvency ratios, again, demonstrating a limited sensitivity and the strength of our capital buffers and also declining as the interest rates go higher. So solid capital strength anchors resilience and long-term profitable growth. This slide highlights the snapshot of our 9 months financial performance. As a final note, across the board, strong loan growth, improving NII performance, along with robust fee income generation led to strengthened core revenue momentum. That said, the ongoing disinflation process and the magnitude of the rate cuts will determine the extent of the NIM improvement. Going forward, customer-centric growth will remain our main engine of sustainable profitability, supported by robust fees, disciplined operations and prudent risk management. Before moving on to the Q&A, I'd like to share a few highlights regarding our nonfinancial performance. As highlighted in our ESG video, we sustained a strong momentum, advancing our 2025 sustainable action plan with measurable results. We are on track with our long-term sustainability goals and notably have reached 74% of our sustainable finance targets as of third quarter. We are proud to pioneer a tailored banking program via Akbank's women platform, offering integrated financial and social benefits to women customers. We strengthened our internal engagement through the climate ambassador program in the third quarter, empowering Akbankers to foster a green future. With our consistent performance in climate strategy, governance and social impact, we maintained our leadership position, sustaining a AA score in MSCI, which was just updated this month. All these efforts reflect our continued commitment to building a low-carbon and inclusive economy in line with our long-term objectives. This concludes our presentation. Kamile Ebru GÜVENIR: And we are now moving on to the Q&A session. Please raise your hand or type your question in the Q&A box. And for those of us joining by telephone please send your questions by email to investor.relations@akbank.com. And as I see, there are a few hands up already. And the first question comes from Mehmet Sevim. Mehmet Sevim: I just had one question on the trajectory of margins. And maybe starting with the 3Q performance, which looks really strong and with the 73 basis point expansion this quarter, I just wanted to understand if this was completely in line with your expectation going into the third quarter? Were there any aspects that surprised you, such as loan or deposit pricing, behavior of households or corporates or anything in this quarter? And then secondly, just going into the fourth quarter, you already indicated the NIM trajectory from here depends on the policy rate understandably. But with what we know today, where do you see the exit NIM? And how should we think about it into the early quarters of 2025 -- 2026, apologies? Türker Tunali: This is Turker. Thank you very much for joining the call. Let me start with the third quarter and then move on to the fourth quarter of '26 to share some thoughts on '26. Actually, as you have rightly mentioned, so there was a strong recovery in our quarter NIM in the third quarter, mainly coming from the deposit cost easing. That was actually in line with our expectations. But having said that, actually, when we dive into deep, as you may recall, by the end of June, we had this like easing on the upper bands of policy of Central Bank funding decrease. So there was an indirect rate cut. And on top of it, we had another rate cut in July. We were successfully able -- like we were able to reflect these rate cuts into our deposit pricing as a result of which our core spread from second quarter into third quarter has improved by roughly 3 percentage points. But after the latest rate cut in September, as you may have followed from like market data, like second half of September, I am referring to. This deposit rate -- deposit cost easing has stopped somehow, maybe due to the ratio requirement of the Central Bank. But at the end of the day, that latest rate cut was not reflected into like deposit pricing. Now we are at the beginning of the fourth quarter. Let's wait and see actually how the -- like the coming weeks will evolve. Also not to forget like a partly a week ago, we had this monthly reporting period, and maybe that was one of the reasons of this pricing behavior in the market. So we will be observing how the upcoming days will evolve also after this -- after today's rate cut. So it will definitely impact our net interest margin in the fourth quarter. But having said that, I can say like the net interest margin starting into the fourth quarter is surely above the third quarter figure, but the magnitude of the improvement will be important since after today's announcement of Central Bank, probably last rate cuts will be also a bit more moderate. Therefore, actually, it puts some pressure on our full year NIM guidance in the range of 3% to 3.5%. So it's very likely that we may like stay behind this. But definitely, this rate cut cycle will further help us to improve our net interest margin also in the upcoming year as well. Maybe in the past, we were talking with some net interest margin peaks in '26. But probably like as of today, what we are like forecasting, this rate cut cycle will be more like gradual in '26. Therefore, we may see a gradual net interest margin improvement throughout the year rather than seeing a peak in the first quarter or in the second quarter. So that's what we are currently observing. But at the same time, so to offset some of this net interest margin maybe gap, our growth has exceeded our expectation. And it's very likely that we will be beating our full year loan growth guidance by the end of the year. So just recall, so mid-single digits for FX and 30% for TL loan growth, we will be probably ending year above this level, which is also currently increasing our Turkish lira LDR. So we are like in a way, operate in a more optimized manner. And also, we are funding roughly 20%, 25% of our TL balance sheet via wholesale funding, where we are fully benefiting from the rate cut cycle, albeit it is a bit maybe more moderate, but that's how it is at the moment. Kamile Ebru GÜVENIR: The next question comes from David Taranto. David Taranto: I have 3 questions, please. The first one is about this year. The 25% ROE target appears quite ambitious considering the 20% ROE achieved in the first 9 months of this year. Could you please elaborate on how you see the full year ROE outlook evolving following the third quarter results? Second question is a follow-up on NIM. In the last quarterly presentation, you mentioned expectations for NIM to reach 5.5% in the fourth quarter of this year and towards 6% in the first half of next year. And given the changes in the macro outlook, do you still see this trajectory as achievable? To my understanding, you now see the peak NIM at a lower level, but you do not expect an immediate normalization. You see it hovering around those levels for some time. Third one is about the fee. The fee income continues to show strong momentum. The year-on-year growth accelerated this quarter despite regulatory changes on the debit cards. When do you anticipate this growth to begin decelerating? And what factors would likely to drive that shift? And perhaps I could squeeze one more. The percentage of Stage 2 loans remain below the sector average, but there has been a large increase in restructured loans in this quarter. Are these driven by unsecured retail loans or business loans? And could you please elaborate a bit on your strategy here? Türker Tunali: David, let me start with the ROE. So definitely, so this gap on the -- potential gap on the net interest margin guidance side may put some limitation to like achieve this 25% ROE guidance. So probably we are going to end the year in between the existing level and 25% guidance. Definitely, the NIM improvements going forward will impact the level of ROE improvements in the fourth quarter. With regard to our like previous talks and the previous earnings call, so definitely, this delay in the rate cut cycle, just recall, when we made this guidance revision, we were anticipating policy rate to come down to 36% by the end of the year. But nowadays, we are more like 38% level. So at this 2% deviation. So will definitely also impact our exit NIM. But surely, exit NIM will be like much higher than the third quarter NIM, but maybe not at this 5%, 5.5% levels. And the improvement trend, as I answered Mehmet's question, probably the NIM improvements will be like more like in a step form like with gradual improvement. But definitely, like next year's NIM will be significantly higher than this year's NIM. That was your second question. And third question, fee income. Yes, our third quarter fee income performance wise was quite strong. That was also driven by our growth trend in the third quarter. It has also positively impacted our fee income growth. And currently, our year-on-year fee income growth is above our guidance, and we are expecting to end the year again at similar levels between the existing level and the full year guidance. And this latest regulatory change on the debit card side will impact fourth quarter, but its magnitude is more moderate. So it's not that significant. Probably into next year and maybe also into fourth quarter and into next year, the Central Bank's decision with regard to interchange commission caps will be important as we -- as you know, it hasn't been touched so far, which was also one of the reasons why this year's fee income growth was also way above the initial guidance of 40%. But assuming with the upcoming rate cut cycle and with some also central banks starting to reflect these rate cuts into interchange commissions, we may expect some moderation, but the aim of Akbank will be again to continue with this enhanced fee income generation capacity also as a result of our customer acquisition efforts. So definitely, we will be aiming to preserve this superior fee to OpEx ratio. We may see some moderation there, but our ambition will be always to stay at this 100% levels. Finally, with regard to stage -- not Stage 2, but yes, Stage 2 was almost the same at the same level, but the ratio of restructured loans increased from 2.6% to 3.2%, so only 0.6% increase. And just recall, by the end of the second quarter at Akbank, we had the lowest restructured loans, not only in nominal terms, but also as a percentage of total loan book. And this slight increase was mainly driven by the restructuring scheme of BRSA. As you may recall, that restructuring scheme was also -- was made available for credit card customers with not -- without overdue status, but having rolling over some of their debt. So we had to respond to them when the customer was coming with some restructuring demand. That's the main reason. But just to recall, 3.2% like probably will be, again, like a quite low figure when we see the sector figures in the coming weeks. And as Ebru has mentioned, we continue to further improve our provisioning charge. Therefore, our cost of risk is currently slightly higher than the full year guidance, and we may end the year slightly higher than the guidance, but it's like bottom line impact is not that material compared to the NIM impact. But I think so, it's a more prudent approach. I hope I was able to answer your questions? David Taranto: Yes, all good. Thank you. Kamile Ebru GÜVENIR: The next question comes from Konstantin Rozantsev. Konstantin, we cannot hear you. Okay. I guess I'm just looking into the written questions. They're mainly regarding NIM and cost of risk, and we've answered both of them. I don't know if there are any further questions. Another -- Konstantin is now again coming in. I guess this is a different Konstantin. Konstantin, please go ahead and ask a question. Konstantin Rozantsev: Could you please confirm, if you can hear me? Kamile Ebru GÜVENIR: Yes, we can hear you now. Konstantin Rozantsev: I had 2 questions, which I wanted to ask. The first one is on the retail FX deposits. So I see in the sector data that in the recent weeks, there has been some increase in the stock of retail FX deposits even on parity adjusted basis. So could you please confirm why is it happening? Well, is it completely explained by the fact that there are these KKMs, which are maturing and which have been moved into FX deposits? Or is there also some elements that regular lira deposits are being moved into FX deposits as well? So that's the first question. Second question, could you please comment if you have done any stress test on the loan quality in different macroeconomic scenarios. And if yes, then what do the results of the stress tests suggest? Do you have some specific examples in mind and some particular scenarios in mind saying that these scenarios lead to the high pressure or like large pressure on the loan quality. So could you please quantify these scenarios if you did this stress test? Türker Tunali: Konstantin, this is Turker. With regard to your first question, this FX deposit increase, as you mentioned, is mainly due to the parity change. Currently, gold deposits make up a significant part of FX deposits in the system. So therefore, actually, the gold price change has -- is impacting the level of FX deposits. But other than that, when I really look at our own portfolio, the strong TL deposit base is there and the shift from TL into FX is not material. Surely, with the phasing out of the KKM scheme, the remaining small part of KKM modelers are switching to FX. But it was in a way, FX indexed deposits. But other than that, there is no behavior change in the customers. With regard to the stress, surely, we are always monitoring our portfolio like in different ways. We are applying different stress scenarios into our capital. But in all these stress tests, we preserve our strong capital. But other than that, there isn't really currently any specific sector or area where we feel concerned. And when you look at our loan portfolio breakdown, there [ isn't ] a sector concentration. And it is really like in every sector, there are like customers with a better asset -- with a stronger financial performance and maybe a weaker financial performance. And according to that, we are continuously changing our lending criteria in terms of collateral version, in terms of duration. So that's how it's. Konstantin Rozantsev: Okay. And sorry, just a third quick question. Do you have any number in mind for cost of risk for next year, 2026 in the base scenario? Türker Tunali: Actually, currently, we are in our budgeting process, and we will be sharing our guidance by the end of -- probably by the end of January. But maybe as a reference point, probably it will evolve at similar levels like in '25. Kamile Ebru GÜVENIR: Okay. At this moment, I do not see any further hands up for questions. So I guess we're coming towards the end. There are no written questions that are different to the questions that have been actually asked. So this concludes our earnings webcast. Thank you all for joining us today. Please do not hesitate to contact our team if you have any further questions, we're always glad to help. And we also look forward to staying in touch in the upcoming conferences. We'll be in Dubai for the Jefferies Conference. We will be in London for the Goldman Sachs Conference, and we'll be actually in Prague for the WOOD's Conference. So if you're attending, we look forward to seeing you there, and bye for now.
Operator: Good day, and welcome to the Community Health Systems 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 Anton Hie, Vice President of Investor Relations. Please go ahead. Anton Hie: Thank you, Betsy. Good morning, everyone, and welcome to Community Health Systems' Third Quarter 2025 Conference Call. Joining me today on the call are Kevin Hammons, President and Interim Chief Executive Officer; and Jason Johnson, Senior Vice President, Chief Accounting Officer and Interim Chief Financial Officer. Before we begin, I'll remind everyone this conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks as described in headings such as Risk Factors in our annual report on Form 10-K, and other reports filed with or furnished to the SEC. Actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. We've also posted a supplemental slide presentation on our website. All calculations we will discuss today exclude gains or losses from early extinguishment of debt, and impairment gains or losses on the sale of businesses. With that said, I'll turn the call over to Kevin Hammons, President and Interim Chief Executive Officer. Kevin? Kevin Hammons: Thank you, Anton. Good morning, everyone, and thank you for joining our third quarter 2025 conference call. Before we jump into discussing the quarter, I want to take a moment to thank the team here at CHS for the support they've shown me and others through the recent transition of senior leadership. It is gratifying to see our team's confidence in the work we are doing here at CHS and their commitment to our future success. Over the past 90 days or so, since stepping into my new role as interim CEO, I've had the opportunity to visit several of our markets and speak with many of our hospital leadership teams, including operational, financial, clinical and service line leaders. It is always inspiring to see the folks who are providing high-quality care for our patients, and helps put into perspective how important our hospitals are to the people and communities they serve. At CHS, we will remain focused on supporting our caregivers, physician partners and support teams to help ensure an exceptional health care experience for our patients. Next month, approximately 150 CEOs and CFOs from across the CHS network will gather for a leadership conference where we will discuss our vision for the future of the company and our ongoing commitment to investments in quality, improving both physician and patient experience, improving employee satisfaction, and achieving sustainable positive free cash flow. As I've shared with many on our team already, I'm very optimistic about the future of CHS and our opportunities to continuously improve the health care experience. To continue to improve our operational and financial performance and to create value for our investors through disciplined and proactive management of our business. Now turning to the third quarter operating results. Our operating performance was in line with our updated expectations. And our reported results were further enhanced by the recognition of a $28 million gain from the settlement with some prior litigation, which reimbursed us for previously incurred expenses. Same-store net revenue for the third quarter improved 6% year-over-year. We were encouraged to see some improvement in payer mix on both a sequential and year-over-year basis as well, as realizing the incremental state directed payments from New Mexico and Tennessee when compared to the prior year. As we have done all year, we continue to grow our inpatient volume. However, similar to last quarter, the overall business mix remains more heavily skewed towards medical versus surgical cases. And inpatient admissions were flat ahead of outpatient elective procedures. However, solid expense management across most categories helped drive slight margin expansion year-over-year, even when excluding the benefit from the legal cell. We continue to make targeted investments in advance our competitive position in many key markets during the quarter, including capacity and service line expansions, such as the acquisition of a vascular surgery practice and the relocation of a large OB/GYN practice onto our campus, both in Birmingham, Alabama. The addition of a new urology service line in Las Cruces, New Mexico, the addition of a new neurosurgery and spine program in Laredo, Texas and new robotic surgery programs in two of our New Mexico markets. We are successfully recruiting physicians and advanced practice providers to our markets. At September 30, 2025, we had approximately 160 more employee physicians and APPs in our clinics than in the prior year. With the recent recruits and plan commencements in the fourth quarter and early next year, we should be favorably positioned as we enter 2026. In addition, we continue to improve our capital structure, further reducing our leverage to 6.7x, down from 7.4x at year-end '24. Also as a reminder, during the quarter, we refinanced $1.74 (sic) [$1.743 billion ] of our Senior Secured Notes due 2027, through the offering of $1.79 billion of 2034 notes, thereby pushing out our nearest significant maturity to 2029. At this point, I want to introduce Jason Johnson, our Interim Chief Financial Officer. And I'll turn the call over to Jason to review the financial results in greater detail and discuss our updated guidance. Jason? Jason Johnson: Thank you, Kevin, and good morning, everyone. For the third quarter, CHS delivered results generally consistent with expectations. The overall volume growth was in line with our updated guidance and with continued solid execution on controllable aspects of our business, the company achieved expansion in adjusted EBITDA margins, and remains on track for the full year. Adjusted EBITDA for the third quarter was $376 million, compared with $347 million in the prior year period, with a margin of 12.2%, increasing 100 basis points year-over-year. Results included $28 million from the receipt of a settlement of a legal matter recognized as nonpatient revenue. When excluding this amount, adjusted EBITDA was $348 million (sic) [ $376 million ] and margin was approximately 11.4%, up 20 basis points from the prior year period. Please note that the nonpatient revenue related to legal settlement is excluded from the same-store metrics provided in our earnings release and supplemental materials. Same-store net revenue for the third quarter increased 6.0% year-over-year, again, driven primarily by rate growth as net revenue per adjusted admission was up 5.6% year-over-year. Same-store inpatient admissions increased 1.3% year-over-year, and adjusted admissions were up 0.3%. Same-store surgeries declined 2.2% and ED visits were down 1.3%. We were encouraged by the sequential volume performance coming out of the second quarter, which was better than our typical seasonal experience in the third quarter. However, as Kevin previously noted, we again experienced a divergence in inpatient surgeries, which were flat year-over-year. And outpatient surgeries, which were down, reflecting continued pressure on consumer demand for elective procedure in our markets. Despite this environment, the company continued to perform well on cost controls, including labor costs. The year-over-year increase in average hourly rate was in line with our expectations and contract labor expense was down slightly on a year-over-year basis. We also performed well again on supplies expense, which were down year-over-year, and as a percentage of net revenue fell 20 basis points to 15.0% when excluding the $28 million legal settlement. While we acknowledge ongoing inflationary pressures and potential incremental upward pressure from tariffs on imported products and raw materials in future periods, we believe that opportunities remain as we stabilize and mature workflows under our ERP. Medical specialist fees were $165 million in the third quarter up approximately 4% year-over-year on a same-store basis, and representing 5.4% of net revenue when excluding the legal settlement, which is generally consistent with recent quarters. We expect continued upward pressure on medical specialist fees in the fourth quarter and into next year, especially in radiology, while increased use of emerging or developing technology, including AI tools should eventually help on this front. Cash flows from operations were $70 million for the third quarter, and $277 million for the year-to-date. Cash flows from operations for the year-to-date as reported includes $126 million in outflows for taxes on gains on sales of hospitals, which are paid out of divestiture proceeds that are reported as investing cash flows. When excluding these cash taxes on divestiture gains, our adjusted cash flows from operations were $403 million for the year-to-date, and adjusted free cash flows were slightly negative for the year-to-date. Based on our historical performance, in which the fourth quarter operating cash flows are typically the strongest of the year, we remain confident in our ability to achieve positive free cash flow for the full year of 2025 after adjusting for cash taxes paid on divestiture gain. In August, we refinanced substantially all of our 2027 maturities, using proceeds from an offering of $1.79 billion and 9.75% Senior Secured Notes due 2034, to redeem via a tender offer $1.743 billion, or 99%, of our outstanding 2027 Senior Secured Notes. As Kevin previously noted, leverage at quarter end was 6.7x, down from 7.4x at year-end 2024, and our next significant maturity is in 2029, providing ample runway to continue executing our strategic initiatives. As expected, in October, we received $91 million in contingent cash consideration related to last year's divestiture Tennova Cleveland. We also continue to expect the divestiture of our outreach lab asset to close later this quarter with proceeds of approximately $195 million, which will provide additional liquidity to fund growth investments or further reduce our leverage. Now moving on to our updated 2025 financial guidance. Based on our operating results through the first 9 months, along with the benefit from the legal settlement that was not contemplated in the previous guidance, we are tightening our adjusted EBITDA range for the full year 2025 to $1.50 billion to $1.55 billion. Consistent with our prior approach, this guidance does not contemplate any further divestitures beyond those announced, nor does it assume contribution from any new or pending supplemental payment programs. This concludes our prepared remarks. So at this time, we will turn the call back over to the operator for Q&A. Operator: [Operator Instructions] The first question today comes from Brian Tanquilut with Jefferies. Brian Tanquilut: Congrats on the quarter. Maybe, Kevin, as I think about volume performance, obviously, nice to see the positive trend in inpatient. But on the outpatient side, you still saw some weakness in surgeries and ER. Just any thoughts you can share with us in terms of what you're seeing in terms of the recovery of volumes there? Or how are you guys thinking internally in terms of what that trajectory looks like? And maybe also the components of what outpatient is, and what you're seeing in those buckets? Kevin Hammons: Thanks, Brian. Absolutely. So as we called out in the second quarter, and as I believe we still saw in the third quarter, some of the economic headwinds, more the macroeconomics, the climate and consumer confidence seems to be the big headwind. And I think that continued on into the third quarter, particularly in some of our markets are experiencing some heavier or more softness economically than other markets. . And so we still believe that has been the primary driver of some of the softness now. As consumer confidence seems to be stabilizing, it's bounced off its lows in the second quarter a little bit and seems to be improving. We are seeing some recovery, and I think that we experienced that where we saw some improvement in payer mix into the third quarter, and we're certainly experiencing that in some of our markets. So that gives us a little more confidence as the payer mix improves and people are feeling better. They're starting to come back in for more procedures. Our -- although we were still down on an outpatient elective surgery volume year-over-year, it was improved over second quarter. So we did see some improvement there. I'd also point out maybe that the immigration climate probably is affecting some of our markets still if you think about markets in Arizona, across Texas, primarily, there's still probably a little bit of an overhang there where patient behavior, people are staying away from hospitals, at least on an elective basis more than we've seen in the past. Now we're also experiencing, or noticing that, in our ER business. And many of those are uncompensated. So where you're seeing some lower volume and maybe why that hasn't completely been noticed in our EBITDA generation is because some of that volume that we're seeing lots of volume, particularly in the ERs and uncompensated care. And so that has not had an EBITDA -- negative EBITDA impact on it. Brian Tanquilut: That's very helpful, Kevin. And then maybe just a follow-up question for me. How should we be thinking about your divestiture kind of plans or outlook for 2026? Kevin Hammons: Yes, we're still pursuing. Some divestitures were in some early conversations that -- it's too early at this point. We don't know how far those will go. But certainly, we're continuing to get some inbound interest. We are in some more advanced discussions on a couple of deals, which we think could be announced even later this year. But no agreements have been signed at this point. So nothing to report today that we are advancing some discussions... Operator: The next question comes from A.J. Rice with UBS. Albert Rice: First of all, I guess, you're moving towards this year. It sounds like you think you'll be free cash flow positive on a full year 2025 basis, assuming the fourth quarter comes in with a couple of hundred million positive for you. Is that -- as you begin to move to a position where that's ongoing going to be the case. Does that change your thinking on capital deployment, amount of CapEx you're going to spend, other initiatives, maybe tuck-in deals with outpatient or other things? Any thoughts on that? Kevin Hammons: Thanks, A.J. Absolutely, I think that it frees us up a little bit and does allow us to think, and be a little more strategic in terms of how we think about either deploying capital. It gives us some optionality of whether we use incremental free cash flows to further delever the company to -- which in effect would have a virtuous cycle benefit because it reduced future cash flows. We could use it where there are opportunities for some tuck-in deals to spend capital more strategically in areas of things that we think could generate further EBITDA. So it does free stuff and should then again, create a little more of a virtuous cycle for us. Albert Rice: Okay. And then, I mean it's early, I know, but when you look at '26 and you're starting your budgeting process, et cetera. Are there headwinds or tailwinds that you would call out that we should keep in mind as we try to model '26? Kevin Hammons: Yes. I think I could point out a few things. Certainly taking into consideration the divestitures that we've completed this year, Lake Norman and ShorePoint early in the year, Cedar Park divestiture kind of midyear. We did recognize some prior year SVP for Tennessee that's about $15 million to $20 million that we'll have this year towards the settlement gain that we recognized this quarter. As I think about 2026, directionally, some of the things -- Medicare rate increase will be strong for 2026. We potentially there's a couple of other SVP programs out there in Georgia, Florida, Indiana, the rural health fund, which we don't know, can't quantify at this point, but that should be incrementally positive for us. And then we're making -- continue to make some growth investments. And as you just mentioned with positive free cash flow this year continue on into next year may allow us to further invest in incremental growth capital. Jason Johnson: I might add, Kevin, this is Jason, that you might want to include that $28 million legal settlement this quarter. Exclude that from the jump off from the 2025. Operator: The next question comes from Ben Hendrix with RBC Capital Markets. Benjamin Hendrix: Just a quick question for Kevin and Jason in turn. Just a little bit more color on your early observations in your roles. Kevin, you mentioned you've visited some facilities, any surprises or anything out of expectation in your review of the platform? And then any initiatives you guys are looking at? You talked a little bit already about capital deployment. But anything in operations or balance sheet management that could kind of deviate from your prior practice? Kevin Hammons: Thanks, Ben. I appreciate the question. I think the short answer is to say, I'm really excited about the direction of the company, and I'm confident that we have the right strategies and people in place to execute on our opportunities. We've had a -- I believe, a very smooth transition of leadership. And I believe we're already picking up momentum in a number of key areas. As I mentioned in my prepared remarks, we have taken the time to visit several local health systems. We've met with health system leaders and I think substantially all of our major markets already. They're very enthusiastic about the progress we're making. And I just -- and becoming increasingly confident that our investments, our strategic priorities, and the resources that we're appropriately laser-focused on those most important aspects of our business. I think we'll see some of that come to fruition here in the near term with a few areas. I'm highly focused on quality of care. So our quality, ratings, our patient and physician experience, employee satisfaction, and I won't take my CFO hat on, and I'll continue to be laser-focused on free cash flow and making sure we've made such great progress over the last, probably, 9 quarters in a row on free cash flow trending positively, now that we're getting to kind of cross over from being negative to positive free cash flow. I think that's going to give us a lot more opportunity. So as I think though about those kind of 5 priority areas for myself and the progress that we're already making on quality and getting focused on the others. I think that will help really accelerate what we can do in the future. Jason Johnson: Brian, this is Jason. Kevin alluded to as CFO hat so. I'm in the position of following the guy who's still here. And Kevin put into place to focus on adjusted free cash flow in that virtuous cycle, and that's -- we're continuing to make sure that we're laser focused on that. So no change there. I do think about that, we got the ERP fully implemented earlier this year. So continuing to optimize that as a big focus. Evaluation of the most efficient use of proceeds from any divestitures, whether that's investment in capital or deleveraging through debt repurchases. So from my standpoint, it's just -- I've been here with Kevin for a number of years. So I understand what his vision is financially and aligned with it and we're continuing on. Benjamin Hendrix: Great. Appreciate that. Just a quick follow-up to a prior comment. With the sequential surgical trend you saw from 2Q into 3Q, anything changing in the way we should think about typical 4Q elective seasonality? Kevin Hammons: I do feel that with the improvement in payer mix in Q3, it gives me a little more confidence that Q4 could look more like the normal seasonal recovery. There was some concern that if commercial patients did not come back in Q3, and you get late in the year and people have not met their co-pay and deductible yes, they may put it off until early 2026. It's looking less likely that, that will occur. But with the continued kind of headlines around health care and some uncertainty, we did not want to get ahead of ourselves in terms of guidance, or suggesting that it could be better. But I think we're in a pretty good position coming into Q4. There's also potentially an opportunity that people are concerned who have exchange insurance, about losing it. There may be some more of that comes back in Q4. It's a relatively small component of our net revenues, is less than 5% of our net revenues. So I don't think it's a real material needle mover for us, but it potentially could be a slight positive. Operator: The next question comes from Andrew Mok with Barclays. Andrew Mok: I think I want to just follow up on some of those encouraging volume trends. Were those trends you saw exiting 3Q, or at the start of 4Q? And from a category standpoint, what are you seeing? And is the payer mix improvement generally driven more by the employer-based coverage, or the ACA? Kevin Hammons: So we saw the payer mix improvements really beginning early Q3 in July. So the -- we saw that improvement throughout Q3. So I think our expectation would be that, that will likely continue into Q4. Now from a comp perspective, Q4 of 2024 was strong and particularly kind of the post-election period, we saw consumer confidence kind of spike in Q4 of last year. So we will have that to climb over. But all in all, directionally and sequentially, I would say that we should continue -- or we expect that we could continue to see some improvement Q3 to Q4. In terms of where we're seeing improvement in terms of the breakdown? It was primarily in commercially insured business, although we did see improvement in exchange as well. But again, the exchange business is a relatively small component of our overall net revenues. Andrew Mok: Great. And on the government side of things, Indiana is one of your largest states, which I think has the large -- one of the largest declines in state Medicaid enrollment to date. Are you seeing the impact of tighter Medicaid eligibility in states like Indiana impact your Medicaid volume results? Kevin Hammons: We've not. We've not experienced any significant impact, specifically to Indiana from that. Operator: The next question comes from Jason Cassorla with Guggenheim. Jason Cassorla: Can you guys hear me? Kevin Hammons: Yes Jason. Jason Cassorla: Okay. Got it. I just wanted to touch quickly. I think you noted kind of thinking about 2026 and the favorable Medicare IPPS coming in. Obviously, the -- we're waiting on the final outpatient rule. But like as you think about -- if the outpatient were to come in as proposed, like how do you think about the net of those two pieces as it relates to 2026? Were they largely offset each other? Or are there nuances from a Medicare rate perspective if the OPPS comes in as proposed? Kevin Hammons: I would say with the proposed outpatient, but we know an inpatient proposed outpatient, I still think it's a little net positive to 2026 over 2024. Sorry, 2025. Jason Cassorla: Okay. Great. And maybe just more of a high-level question. On the ambulatory front, I know you have new access points opening up, including a few ASCs. But as you step back, can you just discuss your ambulatory strategy or remind us, help frame maybe what inning you're in, in terms of building out those access points and how that's helped your market share position? And anything else along those front would be very helpful. Kevin Hammons: Sure. So we are -- continue to look at access points. We've been investing in those for some time. I think each market -- in our markets, each market is a little bit different. We've taken a little different strategy in those markets where we've had capacity constraints on the inpatient side. We have invested in more inpatient dollars, such as this past year, we opened up new towers in Knoxville, Tennessee, where we added, I believe, 58 beds, and we added a new patient tower in Foley, Alabama. Both of those markets, we had capacity constraints. Currently, we do not have any of those kind of larger construction projects on the inpatient side in flight. And so as we kind of move through '25 into 2026, more of our dollars will be focused on the access points, whether that's urgent care, freestanding EDs, ASCs, and so forth. And so I think those are lower dollar. We can do more of them kind of for the same amount of capital. Now we have been opening 3 to 4 freestanding EDs per year. We have, I believe, 3 ASCs scheduled for opening this quarter here in 2025 -- in the fourth quarter of 2025. We'll probably target kind of 6 to 8 ASCs for next year in 2026 along with some additional freestanding EDs and possibly some urgent care centers. And then we're always also acquiring clinics and hiring new doctors into our existing clinics as well. Operator: The next question comes from Stephen Baxter with Wells Fargo. Unknown Analyst: This is Mitchell on for Steve. Can you please highlight what drove the 5.6% growth in same-store revenue per admission, and kind of what you see as a sustainable rate there? Jason Johnson: Steven, this is Jason. About 1/3 of that 5.6% improvement in same-store net revenue per AA is a result of the Tennessee and New Mexico state-directed payments programs that were approved in the second quarter. And then the rest of the improvement is payer mix related. And there is some offset. We did have a little bit lower acuity. Kevin Hammons: I might -- just to add in terms of kind of what's sustainable. We think a mid-single-digit net revenue growth and net revenue per growth is a sustainable number. And between your Medicare rate increases our commercial rate increases, we expect acuity to recover going forward. Right now, there is some dilutive impact on the net revenue per AA with the softer outpatient surgeries, particularly orthopedic and cardiac surgeries, which have been areas of softness. But as those come back, we should see a lift in the net revenue per AA, just that they're higher acuity services. Operator: The next question comes from Josh Raskin with Nephron. Josh, your line is open. You may now ask your questions. We appear to have lost connection with Josh... Joshua Raskin: I'm sorry, do you guys hear me? Kevin Hammons: We can. Joshua Raskin: Sorry. Can you speak to trends from payers around denials and underpayments, maybe just an update there and more importantly, around maybe the mitigation of those pressures? And I'm curious if you're using any external vendors? Or is it all internal services on the RCM side and maybe any changes that have been there through the year? Kevin Hammons: Sure. So we called out really third quarter last year and in 2024, a big spike in denials. And since that time, it's stabilized. It is not really gotten any worse. But we continue to invest in our physician adviser program. We're investing in some AI tools in terms of how we do denials with our internal revenue recycle team. We are using a combination of third-party vendors as well as internally developed products on that for purposes of our revenue cycle team. Our revenue cycle is managed internally with our own team that they do use a combination of products. So as we get better at it, I would say we've been able to kind of hold things stable, which would indicate that the payers are probably also denying more claims, but we've been more efficient or better at overturning some of those denials in order to kind of keep things status quo. Joshua Raskin: Perfect. Perfect. That's helpful. And maybe just a quick one. Flu season. It seems like off to a little bit of a slow start. I assume that's contemplated in guidance, and I'd be curious if you guys are seeing any updates into October as we kind of move into flu season? Kevin Hammons: Yes. It is contemplated in guidance, and we haven't seen any big pickup yet in our facilities and the heavy flu. So at this point, I'm not sure we'll -- what we'll see yet for the remainder of the quarter, but we have kind of taken that into consideration. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Hammons for any closing remarks. Kevin Hammons: Thank you, everyone, for joining us on the call today. I want to close by reiterating my thanks for our team members at CHS for their commitments and confidence through the leadership transition as we approach the future together. If you have any additional questions, you can always reach us at (615) 465-7000. Have a good day, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, everyone, and welcome to Grupo Televisa's Third Quarter 2025 Conference Call. Before we begin, I would like to draw your attention to the press release, which explains the use of forward-looking statements and applies to everything discussed in today's call and in the earnings release. Please note, this event is being recorded. I would now like to turn the call over to Mr. Alfonso de Angoitia, Co-Chief Executive Officer of Grupo Televisa. Please go ahead. Alfonso de Angoitia Noriega: Thank you, Elsa. Good morning, everyone, and thank you for joining us. With me today are Francisco Valim, CEO of Cable and Sky and Carlos Phillips, CFO of Grupo Televisa. Before discussing our third quarter operating and financial performance, let me share with you what we believe are the key milestones achieved this year, both at Grupo Televisa and TelevisaUnivision. At Grupo Televisa, let me touch on 4 major achievements. First, our strategy to focus on attracting and retaining value customers in cable has allowed us to grow our Internet subscriber base in the first 9 months of the year compared to the end of 2024. Second, we keep executing on implementation of OpEx efficiencies and the integration between Izzi and Sky to extract further synergies. This has already contributed to expanding our consolidated operating segment income margin by 100 basis points in the first 9 months of the year to 38.2% driven by year-on-year OpEx reduction of around 7%. Third, we continue to keep a disciplined CapEx deployment approach to focus on free cash flow generation. So far this year, we have invested MXN 7.5 billion in CapEx, which is equivalent to 16.8% of sales. In the fourth quarter, CapEx deployment should remain at similar levels to those of the third quarter. Still, our CapEx budget of $600 million for 2025 implies a reasonable CapEx to sales ratio of less than 20% for the full year. We have been able to achieve this mainly because we have had successful negotiations with suppliers, resulting in more favorable terms. And fourth, during the first 9 months of the year, we have generated around MXN 4.2 billion in free cash flow, allowing us to prepay a bank loan due in 2026 with a principal amount of around MXN 2.7 billion. This debt repayment comes on top of the $220 million principal amount of our senior notes already paid on March 18. Additionally, at the end of the third quarter, Grupo Televisa's leverage ratio of 2.1x EBITDA compared to 2.5x at the end of last year, mainly driven by our free cash flow generation. And at TelevisaUnivision, I will mention 3 key milestones. First, engagement and growth for ViX remains solid with strong momentum across both our free and premium tiers. Moreover, the Gold Cup semifinals and final and the compelling entertainment in sports slate that included the third season of La casa de los famosos, Mexico and our broadcast of Liga MX and the NFL helped drive a high single-digit increase in MAUs and robust demand for advertisers and ViX. Second, the efficiency plan to reduce operating expenses at TelevisaUnivision by over $400 million in 2025 is delivering outstanding results. In the first 9 months of the year, our total operating expenses have declined by around 12% year-on-year for total savings of around $300 million. This shows a disciplined execution of our cost savings initiatives, including lower content, technology and marketing costs and the normalization of our DTC related investments. And third, looking at TelevisaUnivision's leverage and debt profile, the company ended the quarter at 5.5x EBITDA an improvement from 5.9x in the fourth quarter of 2024, driven by growth. Moreover, so far this year, TelevisaUnivision successfully refinanced $2.3 billion of debt. As discussed in our second quarter earnings conference call, the company successfully issued $1.5 billion of new 2032 senior secured notes and refinanced over $760 million of term loan A now due in 2030. In addition, more recently, TelevisaUnivision extended its $500 million revolving credit facility and its $400 million accounts receivable facility. These transactions strengthened TelevisaUnivision's balance sheet, enhanced its liquidity and extended its maturity profile with its nearest maturity now almost 3 years away. Deleveraging remains a core strategic priority for TelevisaUnivision and management remains committed to further strengthening the capital structure of the company over the coming quarters. Having said that, let me turn the call over to Valim as he will discuss the operating and financial performance of our consolidated assets. Francisco Valim Filho: Thank you, Alfonso. Good morning, everyone. As Alfonso mentioned, we had an excellent quarter in this third quarter. First, let me walk you through the operating and financial performance of our cable operations. We ended September with a network of almost 20 million homes after passing around 20,000 new homes during the quarter. Our monthly churn rate has remained below our historical average of 2% for 2 consecutive quarters as we continue to execute our strategy to focus on value customers while working on customers' retention and satisfaction. Our broadband gross adds continues to improve on a sequential basis, allowing us to deliver 22,000 net adds during the third quarter compared to net adds of around 6,000 in the second quarter and disconnections of about 6,000 in the first quarter. In video, we also experienced a strong gross adds than in the first 2 quarters of the year and managed to reduce churn. Therefore, we lost about 43,000 video subscribers during the third quarter compared to 53,000 cancellations in the second quarter and 73,000 disconnections in the first quarter of the year. Moreover, we expect the improving trends to continue going forward, influenced by our recently announced multiyear partnership with Formula 1 to provide live coverage of all Grand Prix via Sky Sports channels available through Izzi and Sky. Beginning in the fourth quarter of this year until 2028 season, Formula 1 is the one of the fastest-growing and most passionate sports events in Mexico and around the world, and we definitely see this as a competitive advantage relative to our peers. Moving to mobile. Our net adds of 94,000 subscribers during the quarter continued to gain momentum, beating the 83,000 net adds of the second quarter and doubling those of the first quarter. Our innovative MVNO service developed by ZTE, offering enhanced user experience is already making our bundles more competitive and allowing us to increase our share of wallet from our existing customers. During the quarter, net revenues from our residential operations of MXN 10.6 billion, which accounted for around 91% of total cable revenue decreased by only 0.7% year-on-year. This marked the best quarter of the last 2 years at our residential operations from the revenue growth performance standpoint and compares well to a decline of 3% in the first half of the year. On a sequential basis, net revenue from our residential operations grew by 0.4%, potentially signaling an ongoing gradual recovery. During the quarter, revenue from our enterprise operations of MXN 1.1 billion, which accounted for around 9% of our cable revenue increased by 7.7% year-on-year. This also marks the best quarter of the last 3 years of our enterprise operations from a revenue growth performance standpoint and compares favorably to growth of 3% in the second quarter and a decline of 4.5% in the first quarter of this year. Moving on to Sky's operating and financial performance. During the third quarter, we lost 329,000 revenue-generating units, mostly coming from prepaid subscribers that have not been recharging their services. In addition, beginning in the second quarter, we started to charge an installation fee of MXN 1,250 to all satellite pay TV subscribers to increase the return on investment for this service. This translated into a slowdown of video gross additions for Sky that has been steady over the last 2 quarters. Sky's second quarter revenue of MXN 3.1 billion declined by 18.2% year-on-year mainly driven by a lower subscriber base. To sum up, segment revenue of MXN 14.7 billion fell by 4.4% year-on-year, while operating segment income of MXN 5.7 billion declined by only 0.7%, making it the best quarter of the year as we appear to be very close to reaching operating segment income stabilization. Our operating segment income margin of 38.5% extended by 140 basis points year-on-year, mainly driven by the efficiency measures that we have been implementing and synergies from the ongoing integration between Izzi and Sky. Regarding CapEx deployment, our total investment of MXN 3.6 billion account for 24.3% of sales during the third quarter. This shows a material sequential increase in CapEx deployment, but it is in line with our updated CapEx budget for 2025 of $600 million. Finally, operating cash flow for Cable and Sky, which is equivalent to EBITDA minus CapEx was MXN 2.1 billion in the third quarter, representing 14.2% of sales. Alfonso de Angoitia Noriega: Thank you, Valim, best quarter of the year indeed. Now let me take you through TelevisaUnivision's third quarter results. The company's third quarter revenue of $1.3 billion declined by 3% year-on-year, while adjusted EBITDA of $460 million increased by 9%. Excluding political advertising, revenue fell by 1% year-on-year, marking a sequential improvement compared to both the first and second quarters of this year. On the other hand, also excluding political advertising, adjusted EBITDA increased by 13% year-on-year, underscoring the scalability of a profitable DTC business and the sustained impact of cost reductions initiatives launched at the end of last year. Moving on to the details of our revenue performance. During the quarter, consolidated advertising revenue decreased by 6% year-on-year or 3% excluding political advertising expenditure. In the U.S., advertising revenue was 11% lower as growth in ViX continued to partially offset linear declines. Within ViX, the Gold Cup, semifinals and finals helped drive a high single-digit increase in MAUs and robust demand from advertisers. In Mexico, advertising revenue increased by 3% year-on-year, primarily driven by private and public sector ad sales that powered ARPU growth for ViX. Results this quarter benefited from a compelling entertainment and sports slate that including the performance of the third season of La casa de los famosos Mexico, dramas such as Monteverde and Amanecer and our broadcast of Liga MX and the NFL. During the quarter, consolidated subscription and licensing revenue increased by 3% year-on-year, driven by ViX's premium tier and higher content licensing revenue. In the U.S., subscription and licensing revenue grew by 11%, supported by ViX and results included a mid-single-digit increase in linear subscription revenue and higher content licensing revenue due to timing of content delivery. In Mexico, subscription and licensing revenue fell by 17%. Excluding the impact of the renewal cycle, subscription and licensing revenue in Mexico grew by 5% driven by ViX. To wrap up, Bernardo and I remain confident that our focus on value customers, efficiencies and ongoing integration between Izzi and Sky at Grupo Televisa and further integration and operational optimization at the TelevisaUnivision now that our DTC business has gained scale and achieved profitability will allow us to create greater value for our shareholders throughout this year. Now we are ready to take your questions. Operator, could you please provide instructions for the Q&A. Operator: [Operator Instructions] Our first question comes from Marcelo dos Santos with JPMorgan. Marcelo Santos: The first question is if you could comment a bit the CapEx outlook for 2026. How do you see this trending? And the second question is regarding the insurance claim you received. Was that related to Hurricane Otis? And is there something left to be received? Alfonso de Angoitia Noriega: Thank you, Marcelo. I'll ask Valim to answer both questions. Francisco Valim Filho: We gave -- Marcelo, we gave a guidance of around $600 million, and we should be within that range. Regarding the insurance claim, I think that's the last portion of the claim on the Otis Acapulco situation. So we shouldn't be seeing anything more from that event. Marcelo Santos: Valim, just one question. The CapEx for 2026, so for next year you're... Francisco Valim Filho: 2026, no 2026 is so far away, Marcelo. No, no, no. Alfonso de Angoitia Noriega: Let's finish 2025, then we can talk about '26. Operator: Our next question comes from Matthew Harrigan with Benchmark. Matthew Harrigan: You've actually reached a point in the U.S. when you look at the entire TV industry, there's more consumption on streaming than on linear. And I know your linear is much more durable than your English language peers. But you've got tremendous local programming positions, particularly in news and some of the largest U.S. EMAs. Are you really taking a lot of our -- hopefully, eventually almost all the news content on local stations and the distinctive content on the local stations and moving that to ViX over time because it feels like it would be a shame to lose the local identity. You have those stations because eventually, linear is going to fall off even for Hispanic audiences. And then secondly, clearly, a very dynamic situation in the U.S. and Mexico right now. Are you doing anything more on the BC side in relation to advertising for investments? And also, I can't help but ask, what's your general perspective on the U.S. and the imaginations with the administration on the tariff side and the prospects for near-shoring and everything going on. I know this is kind of ridiculously open-ended question. But just any thoughts on the stability of the economic relationship with the U.S. Alfonso de Angoitia Noriega: Yes. Thank you, Matthew, for your questions. I think, as to your first one, local news is very important for us. We are very strong in the local places where we produce news and local programming. We are exploring the possibility of including that in our streaming platform. We haven't yet included all of that content, but we're exploring that. The good thing is that, as I was saying, the local content is very strong. So very popular. As to your second question, we have made media for equity deals with great companies with great startups. We have assembled a great portfolio, I would say, and more companies are coming to us as they realize the importance of our platforms. And this is because of the strength of our platforms, we can position and grow their products and especially their brands when they're launching. Companies like Kavak, like Rappi, have become our ambassadors. At the beginning, we had doubts about the strength of linear television and most specifically in Mexico. But now they have become ambassadors of ours. We will continue to do these deals as we generate value with unsold inventory. And these companies become regular clients. So it's basically a funnel for these start-ups to grow, to position their brands, to position their products. And we take equity, which is great at very good valuations, and then they become regular clients and this is basically unsold inventory. So we're very happy with the portfolio we have been able to put together, and we'll continue to do this. As to your last question, I think that the Mexican government President, Sheinbaum has done an extraordinary job in dealing with the negotiations, the trade negotiations. I think that Mexico and the U.S. are key partners. If you look at the border region, it's one of the largest economies in the world by itself. The border, the legal border crossings that happened every day are in the millions. So I mean it's an integrated region. It's an integrated economy. So I believe that eventually, we'll be able to get to the right deal for Mexico and for the U.S. Operator: Our next question comes from Alex Azar with GBM. Alejandro Azar Wabi: Few ones on competition, Valim, on cable. If you can share a little bit of color on short-term and medium-term dynamics, especially when seeing how competitors are adding 1 million, 1.5 million net adds per year. It seems that in 2, 3 years, the market is going to be fully penetrated. So that would be my first question. And the second one is on Sky. With the levels of net disconnections you have year after year, how should we think about the EBITDA contribution in the next couple of years from Sky? Alfonso de Angoitia Noriega: Thank you, Alex. Valim? Francisco Valim Filho: Thank you, Alfonso. Well, I agree 100% with you. With this amount of net adds on a yearly basis, the market is very close to being fully penetrated. That's why our strategy is not going after volume because we know that we will be fighting for prices at the lower end of the pyramid. So our aim is to focus on the higher-end clients. That's why we have -- we are the only company in Mexico increasing ARPU consistently across the board. So I think that's the focus. So we think there's obviously a diminishing returns of this fight for the volumes of subscribers. And that's why our strategy moved away from that, and we have been successful in doing that. Regarding Sky, Alex, the way I see Sky is very straightforward. This is a business that will eventually disappear. Why? The penetration of the fiber networks and the amount of OTTs and the availability of a linear TV through cable and fiber operators is something that will obviously position Sky to only subscribers that are outside of those covered areas. So it will by definition then keep on declining. So how we perceive it, we perceive it as a cash flow from existing subscribers minus the programming cost, minus the technological cost of the satellite and all that is involved in that and then it generates a positive cash flow. That's the business and it has been generating positive cash flow and for the foreseeable future, we'll see positive contribution from Sky as a cash flow perspective. Obviously, it has this negative optics on our revenue, but just the way we see it is we've kind of segregate that from everything else and see that as an inflow of cash flow and everything else is more a stable growing businesses. Alfonso de Angoitia Noriega: Yes. And to add to your first question, to add on what Valim was saying, in Mexico, we have a 4-player market, but it's a pretty rational market, except for Telmex, which has kept its entry price unchanged for, I guess, more than 10 years, while also increasing Internet speeds and offering Netflix now for 3 -- for 6 months. They don't seem to be really interested in the profitability of Telmex as they extract value from the lease of fiber owned by other subsidiaries of theirs. And the other Megacable raised prices by around MXN 30 per month from the beginning of the year. So there, you can see that the industry is raising prices, except for Telmex. Totalplay also announced price hikes from April particularly from broadband customers that are heavy data users. So even though it's a 4-player market, it's a rational market and if you look at the prices and ARPU, we feel comfortable, and we feel confident that this will remain like that. Alejandro Azar Wabi: If I can just add a follow-up on Sky remarks. When you say Sky probably will disappear. I'm just thinking that there must be some part of the population that where fiber is not around, and they -- if Sky becomes the only thing that they can use, especially for video. Do you guys have an approximate of that? I don't know. Alfonso de Angoitia Noriega: No, you're absolutely right. I mean there are rural areas where a satellite provider makes sense. I don't know. Francisco Valim Filho: No, I don't think they will disappear per se. It's obviously a diminishing volume like we have been seeing and we'll keep on seeing. But just to give an example, in Central America, we have close to 100,000 subscribers basically flat because in those areas, there are less competitors offering a fiber network or a cable network. And it is very stable. And like Mexico, where we are all deploying network and expanding our infrastructure. So yes, I don't think it will disappear, not just there will be a day that will be just shut down. I think it will still have -- and I think there are just several hundred thousand people living in areas where there's no other option for entertainment and Sky will keep on being a solution. But that's why we don't see this as a -- I understand some people see this as a problem. We actually see this as an upside given the fact that we're generating positive cash flow. Alfonso de Angoitia Noriega: Yes. I think Valim is absolutely right. We see Sky as a cash flow. And the more we extend, we prolong the life of the subscribers, it's going to be an amazing driver for our cash flow. Operator: Our next question comes from Ernesto Gonzalez with Morgan Stanley. Ernesto Gonzalez: Look, I know it's early but going back to the discussion on broadband penetration in Mexico. Do you have any -- or can you share any expectations for cable growth rates next -- sorry, next year? Do you believe that you can accelerate growth for the unit. And the second question is on the sustainability of margins for Cable Sky but also TelevisaUnivision. They were strong in the third quarter. So I wanted to get a sense of how much more room they have to grow going forward. Francisco Valim Filho: Well, I think that -- back to your point Ernesto, I think that it's key to understand that obviously, as penetrations go higher, the level of net adds will diminish for every player in the market. And you have already saw that. As you see quarter after quarter after quarter, we already see a diminishing number of net adds being added to the different players. So that's a diminishing return in other countries like Brazil, for example, where the penetration is significantly higher even than Mexico. You see there's this dynamic as well and companies find ways by selling more products to the same existing customers to keep revenues growing but obviously, you're not going to be seeing high double-digit numbers because of the dynamic of the market. So like Alfonso just said, this is a very rational market. Nobody is flashing, prep is down. The promotions are very reasonable. And everybody is actually making money in this market like our cash flow generation that we have just presented. This is significantly -- is very significant. So I think that's a dynamic in mature market that you'll see. And what happens is you add more products, better products, more speeds and that's how you keep on increasing ARPU. And that's why we think the strategy of going after the high-end customers, they have more disposable income available as opposed to the other end of the pyramid. And I think regarding margins of cable... Alfonso de Angoitia Noriega: No. I think he asked about TU... Francisco Valim Filho: No, no, no. The answer is not over. Alfonso de Angoitia Noriega: Okay. Go ahead. Francisco Valim Filho: So the idea here is we think that we keep on improving margins. This is an ongoing, never stopping exercise that will go internally. And we find that through many different ways, mostly through technology. Obviously, we still are collecting a few synergies from Sky mostly through technology and improvement in how we provide services and processes. So there is an ongoing effort to increase margins. I'm talking about cable. Alfonso de Angoitia Noriega: Yes. Yes. And about -- I mean, TU amazing margins. I think that was a result of the cost cutting and all that we did in terms of costs and expenses in the fourth quarter of last year, which are being reflected in this year. We believe that we have the highest margins in the industry. And that has to do with that cost cutting, $415 million. And also, it has to do with owning the largest library of content in Spanish in the world, more than 300,000 hours of content. It also has to do with the very efficient way in which we produce content, especially in our studios in Mexico. And that allows us to have these amazing margins. So I think those margins in the mid-30s are sustainable. Operator: This concludes our question and answer session. I Would like to turn the conference back over to Mr. Alfonso de Noriega for any closing remarks. Alfonso de Angoitia Noriega: Well, thank you very much for participating in our call. And if you have any questions, please give us a call. Have a great weekend. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to the HCA Healthcare Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir. Frank Morgan: Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen; and CFO, Mike Marks. Sam and Mike will provide some prepared remarks, and then we'll take questions. Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward-looking statements, they're based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we will reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Healthcare, Inc. is included in today's release. This morning's call is being recorded, and a replay of the call is available later today. With that, I'll now turn the call over to Sam. Samuel Hazen: All right. Good morning and thank you for joining the call. As reflected in our earnings release for the third quarter, the company produced strong results when compared to last year with 42% growth in diluted earnings per share as adjusted. Revenue increased by 9.6%, which was driven by broad-based volume growth, improved payer mix, more utilization of complex services and additional revenue from Medicaid supplemental programs. We also translated this revenue growth into better margins with disciplined operations. As a result, you will see in this morning's release that we raised our guidance for the year to reflect this performance and our outlook for the fourth quarter. Our teams continue to execute our agenda at a high level across many operational measures, including quality and key stakeholder satisfaction. Outcomes were better year-over-year. I want to thank our 300,000 HCA colleagues who once again demonstrated excellence in what they do. As a team, we remain disciplined in our efforts to improve care for our patients by increasing access, investing in advanced digital tools and training our people. These investments allow us to enhance capacity, improve service offerings and gain efficiency. Making it easier for our -- for us to provide better services to our patients, physicians and the communities we serve. Typically, on our third-quarter earnings call, we provide some preliminary perspectives on the upcoming year. Before I get to these, I want to comment on the enhanced premium tax credits. We continue to advocate strongly for the extension of this program for the 24 million Americans who depend on it for health insurance coverage. Today, we believe there is greater recognition by legislators of the negative impact this issue will have on families, small businesses and individuals than earlier in the year. At this point, however, we still do not know how this policy will play out. Because of the fluid nature of the federal policy environment, we will limit our early thoughts for 2026 to our views on demand and the cost environment. We continue to see solid demand across our markets for health care services and believe volumes will be within our long-term 2% to 3% growth range. As it pertains to operating costs, we expect mostly stable trends consistent with the past couple of years. As usual, there are some pressures in certain areas, but we believe our resiliency plan should provide some relief. It is important to note that we are still early in next year's planning process, and these preliminary views may change before our fourth quarter's earnings call when we will provide you with our guidance for 2026. So let me close with this. As we work to complete another successful year for HCA Healthcare, we believe the company is well-positioned to sustain high levels of performance in the years to come. Organizationally, we have strengthened enterprise capabilities to execute at a higher level through our previously restructured management team and improved management systems. Competitively, our networks have enhanced service offerings for patients with more outpatient facilities, greater inpatient capacity and improved operations. And financially, because of the increased cash flow and stronger balance sheet, we have the resources to invest more in our strategic agenda. With that, I will turn the call over to Mike for more information on the quarter and our updated guidance. Mike Marks: Thank you, Sam, and good morning. The company produced solid results during the third quarter. The demand for health care services was strong in the third quarter with same facility equivalent admissions increasing 2.4% over the prior year. Our surgical volume growth also improved with the same-facility inpatient surgical volume of 1.4% and outpatient surgical volume up 1.1% in the third quarter over the prior year. Same facility ER visits increased 1.3% in the quarter over the prior year. Commercial and Medicare ER visits combined increased 4.1% in the third quarter of 2025 to prior year, whereas Medicaid and self-pay ER visits were both down to prior year. We have also seen a slow start to the respiratory season in 2025, which is impacting the year-over-year growth rate in our admissions and ER visits by an estimated 50 and 70 basis points, respectively. Our net revenue per equivalent admission growth in the quarter reflected strong payer mix, improved dispute resolution results, consistent case mix index and increased Medicaid state supplemental payment revenues. Regarding payer mix during the quarter, same-facility total commercial equivalent admissions increased 3.7% over prior year, with exchanges growing 8% and commercial, excluding exchanges, growing 2.4%. Medicare increased 3.4%, Medicaid increased 1.4% and self-pay declined 6%. Regarding Medicaid supplemental payment programs, as we've said in the past, these programs are complex, variable in timing and do not fully cover our cost to treat Medicaid patients. Considering these programs in isolation, the revenue growth from these programs drove about half of the overall increase in net revenue per equivalent admission in the third quarter compared to the prior year. And we saw an approximate $240 million increase in net benefit to adjusted EBITDA from these programs in the third quarter of 2025 over the prior year. This increase was largely driven by Tennessee program payments and the approvals of grandfathered applications in Kansas and Texas. We were pleased with our operating leverage and expense management in the quarter. The improvement in adjusted EBITDA margin was driven primarily by good performance in labor and supplies. As expected, we did see contract labor expenses flat in the prior year. Same-facility contract labor was basically flat in third quarter of 2025 to the prior year and represented 4.2% of total labor costs in the third quarter of 2025. The increase in other operating expenses as a percentage of revenue in the quarter was driven primarily by increased expenses related to Medicaid state supplemental payments and to a lesser extent, professional fees compared to the prior year. Our work progressed to both enhance and accelerate our resiliency program as we prepare for the future. Through these efforts, we continue to identify a robust set of opportunities across revenue and cost to improve efficiencies. The growth in our adjusted EBITDA in the third quarter reflects our strong operating performance and the increase in supplemental payments. We would also note the estimated $50 million impact from the hurricanes in the third quarter of 2024. Moving to capital allocation. We continue to execute our strategy of allocating capital for long-term value creation. Cash flow from operations was $4.4 billion in the quarter with $1.3 billion in capital expenditures, $2.5 billion in share repurchases and $166 million in dividends. Year-to-date, we've been able to defer approximately $1.3 billion in federal income tax payments to the fourth quarter due to the IRS providing relief to Tennessee taxpayers in the aftermath of severe weather in early April. Our debt to adjusted EBITDA leverage remained in the lower half of our stated guidance range, and we believe our balance sheet is strong and well-positioned for the future. So with that, let me speak to our 2025 guidance. As noted in our release this morning, we are updating the full year guidance as follows: we expect revenues to range between $75 billion and $76.5 billion. We expect net income attributable to HCA Healthcare to range between $6.50 billion and $6.72 billion. We expect adjusted EBITDA to range between $15.25 billion and $15.65 billion. We expect diluted earnings per share to range between $27 and $28. We expect capital spending to be approximately $5 billion. We now anticipate our supplemental payment full year net benefit to be $250 million to $350 million favorable comparing full-year 2025 versus 2024. This guidance update does not include any potential impact in 2025 from any additional approvals of grandfathered applications under the Act. And at the midpoint, this guidance assumes a $120 million decline in net benefit from Medicaid state supplemental payments in fourth quarter of 2025 versus the prior year due to onetime payments in the year. Consistent with our comments on the second quarter call, we believe our hurricane-impacted markets will produce approximately $100 million in adjusted EBITDA growth in full-year 2025 over 2024. Year-to-date, adjusted EBITDA in our hurricane markets is modestly below prior year, and we are anticipating all of this growth will occur in the fourth quarter. We are increasing our earnings guidance at the midpoint of adjusted EBITDA by $450 million. This represents an expected $250 million increase in net benefit from the state supplemental payment programs and $200 million increase from operational performance. With that, I will turn the call over to Frank for questions. Frank Morgan: Thank you, Mike. [Operator Instructions] [ Priela ], you may now give instructions to those who would like to ask a question. Operator: [Operator Instructions] Your first question comes from Ann Hynes with Mizuho Securities. Ann Hynes: Great. And thanks for all the detail on the DPP programs. Can you remind us -- I know there's other states that have preprints in for approval for grandfather programs. Can you remind us what states are still pending? And any quantification of what could be incremental would be great. Mike Marks: So as you think about kind of the states, there are several that have applied under the grandfathering programs, we've mentioned Florida before and certainly, that one is under review. There are a few others as well. I might mention Georgia and Virginia as well being in that list. We do not expect that CMS will be approving these additional grandfathering programs during the shutdown. I would say that we have reports that indicate though that the reviews between CMS and these states are active and those reviews continue during the shutdown. I might also mention that we were encouraged, coming up to the shutdown, that several states had approvals coming into the shutdown. So I think we're in a pretty good environment. We are, at this point, not going to size those potential applications until they get approved. But I did note in my comments, and I'll note again that the updated guidance that we gave you just now on this call does not include any potential impact from the applications that are still pending review with CMS. Operator: And your next question comes from the line of A.J. Rice with Credit Suisse. Albert J. Rice: Just to maybe ask on the public exchanges. So there's been some chatter and some of the managed care companies are talking about anticipating a potential step-up in volumes in the fourth quarter, elective procedures, because people are worried that they're going to lose coverage or their co-pays and deductibles will go up dramatically. I wonder if you're seeing an early scheduling for surgeries, for example, elective surgeries or anything else that would indicate that we might see that in the fourth quarter. And then if we do get disruption where people go off during the traditional open enrollment period, but then reset -- are able to reset because after open enrollment, special enrollment period is set up, would you be able -- if people show up in your emergency room, are you basically set up so you could get them re-signed up if that's a possibility under the special enrollment? Provisions if we get an extension, but it comes late. Mike Marks: So if you think about EPTCs and what happens with these exchanges, I would mention a couple of things. I mean, right now, we're really not sizing the potential impact given the fact that it's so fluid. There's going to be an enrollment period, as you know, that opens up here in a couple of weeks. When we get to the fourth quarter call, A.J., we'll have a lot more information. First about what is the deal potentially that comes out of this work in the government? Do they get extended? If they do get extended, what is the form of that extension? And then third, to your point, is timing. Do they -- do we end up with a special enrollment period at the end -- and so it's really difficult to size the potential impact of that until we get a little bit closer to the fourth quarter call, and that's when we'll intend to do that. We do have our financial counseling teams through our Parallon revenue cycle that helps our patients, both with things like Medicaid and with exchanges. It's the idea of them being able to do that on-site is not something that we can do, but we certainly can connect them to the appropriate resources to help them navigate that. And I think we've mentioned this in previous calls. We have structured our efforts here as we've gone through the balance of this year into next year to really beef up our resources with Parallon and broadly as a company to help patients navigate coverage, both on Medicaid and on the exchanges. And we feel really good about our preparation in that area, and we're going to try to help our patients navigate this season is very best that we can. Operator: And your next question comes from the line of Pito Chickering with Deutsche Bank. Pito Chickering: The quarter was a pretty strong beat even if we exclude the supplemental payments in the 3Q, but guidance didn't go up a whole lot past the beat you guys did this quarter, at least at the midpoint of the range. Can you give us any color on how we should think about the range of guidance implied on the fourth quarter, if we just steer towards one or the other? And also, if you can help provide a bridge from 3Q into 4Q as we think about the moving parts between hurricanes and supplemental payments. Mike Marks: When I think about fourth quarter growth rate, there's really 2 main considerations that I would think about and then the third being just operations. But the first would be the hurricane impact for sure. And then the second would be the decline in state supplemental payments that I noted in my comments when you compare fourth quarter of '25 to prior year. When we take those 2 factors into consideration, we believe the implied growth rate is still solid for fourth quarter in the kind of high single digits range, maybe 7% roughly. And then the other note I would give you, when you take those same considerations into account, our sequential growth from third quarter to fourth quarter is in line with our past trends. And so we feel that our guidance for fourth quarter is solid. I might also just note that our range in our guidance is intended to really cover a range of outcomes and including at the higher end of the range, even stronger performance as well. So that's how we're viewing the fourth quarter. Operator: And your next question comes from the line of Ben Hendrix with RBC Capital Markets. Benjamin Hendrix: Just a quick follow-up on the SDP guidance. How much in there did you recognize in the fourth -- or in the third quarter and is included in guidance for Tennessee specifically? And did you include -- recognize anything in the quarter and in guidance related to Texas? I know that got approved later in the quarter. I just want to see if you're including anything in there. Mike Marks: Thanks, Ben. So Tennessee was the largest driver of our net benefit in third quarter. We did receive cash in the third quarter of 2025, and we began accruing this program. So that's the update on Tennessee. Texas, as you know, we did receive approval of the grandfathered application. As this approval was really an enhancement to an existing program, this was really accrued just in our normal manner for third quarter of 2025. I might note being, though, that this grandfathered application really only had 1 month of impact for third quarter. The third one that we mentioned on call is Kansas, where we also received approval of the grandfathered application, we received caps for this program in third quarter of 2025 as well. This is a calendar year program, so 9 months of impact recorded in third quarter of '25. And Ben, let me just mention, like always with these programs, we always talk about that they're complex and variable. There were another number of pluses and minuses that you see across our portfolio of programs. So these 3 states with those pluses and minuses of all the other programs really led to the aggregate of the $240 million net benefit. It's always important to keep that in mind. Operator: And your next question comes from the line of Brian Tanquilut with Jefferies. Brian Tanquilut: Congrats on the quarter. Mike, I appreciate you highlighting how you guys have done really well with expense management, labor and supplies. So just curious, as I think of supplies cost, you guys have done a great job over the last few years keeping that fairly steady. At what point do those contracts reset? And then maybe the follow-up question for me on cost too is, as we think about your efforts to mitigate Medicaid cuts from '28 forward, when do we start seeing those efforts come through the P&L? I mean I'm guessing a lot of that -- those initiatives will start way before '28. Mike Marks: On supplies, Brian, we have a robust ongoing effort with supplies that we've communicated multiple times in the past. I mean, certainly, to HealthTrust, a lot of effort in flight on our contract renewal cycles. We tend to run 2-year cycles, some contracts as many as 3. And so those renewals flow as follows. And we spend a lot of effort in those contract negotiations, and that's certainly one component of our supply expense annual trends. The second component would be mix of technology. And so as you're aware, every year, there's new technology coming in. And then there's management of technologies that goes through its maturation cycle that's a big part of our overall management routines. The third part of our resiliency plan is our efforts to manage utilization. And so we have a very active resiliency plan. Supplies is one of those areas that we are continuing to both enhance and accelerate our resiliency plans focused on appropriate management of supplies and the utilization of supplies throughout the platform. As I think about bridging into the future, the other component that we're keeping a close watch on our tariffs, where our HealthTrust team continues to work through a very diligent effort to manage the tariff risk. Both in terms of sourcing, the way that we negotiate with contracts, our vendor partners on contracts and then also in terms of moving products and moving choices of products across countries of origins. So a lot of work in flight with supplies that I think you've seen not only help us manage supplies over the last several years, but we believe will continue to give us a very strong platform moving forward and our ability to manage supplies. You asked about resiliency. And really, we've had a long-standing resiliency effort in the company. As we've noted on the last couple of calls and noted again today, our work to both enhance and accelerate our resiliency plans continue as we prepare for the future. These are widespread across both our corporate platforms and our field platforms. really proud of the entire team at HCA, helping us to find additional opportunities to drive efficiencies. We're doing this through benchmarking. We're doing this through a robust focus on digital tools. Sam talks often about digital transformation, and it certainly applies to our resiliency and efficiency efforts. It's a big part of what we're doing. And then third, we're focused on our shared service platforms and the strength that they give us and the ability to expand their influence across the company is helpful as we continue to move forward. So a lot of good work going on with resiliency. And as we get into our fourth quarter call, we will intend to provide additional comments about our resiliency effort when we give 2026 full year guidance as well. Samuel Hazen: And Mike, let me add to resiliency. I mean we think about resiliency holistically. There -- it's clearly a financial resiliency culture within HCA that Mike's alluded to, and it's not event-driven. It's really a part of our culture. It's embedded within the disciplined thinking, the disciplined resource allocation and the disciplined execution. But holistically, we also think about other aspects of resiliency across the organization. First is what we call organizational resiliency, and I alluded to this in the fact that we had restructured. We're now embarking upon a more aggressive effort to develop our people, enhance the capabilities of our C-suites across our facilities and so forth, prepare for succession planning, all these things that go into having a very durable organization. And we have great people in HCA. We want to make them greater through our development programs. And we've asked our human resources department to invest even more in ramping up capabilities there. The second aspect of resiliency that's beyond financial, it's something I'll call network resiliency. Our organization within sort of the marketplace is also advancing resiliency with respect to adding more outpatient facilities, improving throughput within our facilities, investing in very targeted ways to improve our overall competitive positioning and then just operating at an even more excellent level when it comes to quality, engagement, efficiency, patient satisfaction, all these important fundamentals that help us endure through whatever cycles we have. And so our resiliency agenda is broad. It's across these 3 dimensions, and it puts us in a very strong position, we believe, to navigate tailwinds, push through headwinds, compete on the ground and produce solid outcomes. And we've got a pattern of doing that, and we're enhancing that now with technology. We're enhancing it with new capabilities within our shared service platform, as Mike alluded to, and we're further enhancing it with development of our people. Operator: And your next question comes from the line of Whit Mayo with Leerink Partners. Benjamin Mayo: I was wondering how you guys are thinking about capital deployment for next year. Obviously, you have the capacity to increase buybacks or the dividend or whatnot. But I know you evaluate every year. So I just wanted to take your temperature on preliminary thoughts. And then I think what I mean is like where do you think you will be spending differently versus prior years? Samuel Hazen: So, this is Sam. We're not ready to give you our financial plan for 2026 yet. I think it's a reasonable assumption to assume that our plan is going to be somewhat consistent with the methodologies we've used in the past. And so we need to get through the planning process that we're in now, see how some of the federal policies land. And from there, we will refine and define our capital allocation plan for 2026. But just as much as the culture of HCA is around resiliency and cost discipline and so forth, we have the same culture around capital allocation and finding the most productive ways to allocate it to benefit our networks and benefit our patients, but also benefit our shareholders. And that thinking will permeate our plan in 2026, just as it's done this year and in past years. Operator: And your next question comes from the line of Justin Lake with Wolfe Research. Justin Lake: A couple of things here. First, I think you mentioned payment dispute resolution is one of the drivers of revenue growth, pricing growth in the quarter. How much of a benefit there? And then another question on DPP. It sounds like your DPP number for 2025 benefit will be somewhere in the -- if I'm right, the $2.3 billion, $2.4 billion range billion this year. Is that the right number? And before any of these additional state approvals come through, what's the right run rate that we should think about going into 2026 when we normalize for stuff that might have been out of period? Mike Marks: So let me walk through NRA real quick, and then we'll talk a little bit about supplementals. When I think about our net revenue per equivalent admission growth, in the third quarter to prior year, first thing, and I mentioned this in them comments, Justin, but the first thing is about half of the growth was related to state supplemental payment increases in revenue. And so that's a piece. I also mentioned and it's the next biggest driver is payer mix. I mean, as we noted, with very strong payer mix in the quarter, and that's the next biggest driver for sure in our overall growth in net revenue per unit. Case mix index was pretty consistent. It was just up a tick, about 30 basis points to prior year. And then we're -- as we've noted in past calls, we continue to work on our dispute resolution activities, and they did provide some support in the quarter. And so those combined really drove the net revenue per unit growth I think on -- as I think about for the year and the state supplemental payments at this point, just keep in mind that we noted that we expect -- and part of what drove the earnings guidance is the net benefit from state supplemental payment programs, we're going to be about $250 million better for the quarter. And so you would just apply that now if you just think about kind of the walk up on state supplemental payment programs and you apply that to our full-year guidance, I think that gives you a sense that now we're expecting it to be $250 million to $350 million, favorable full-year '25 to full-year '24. And that gives you a sense of our kind of our early thinking as we kind of finish guidance right here, this is where we think the year will come in at this point. I did note, and there's a lot of volatility here, that guidance update does not include any additional impact from any other state supplemental payment programs that may get approved by CMS in 2025 once the government reopens. So just keep that in mind as well. Operator: Your next question comes from the line of Andrew Mok with Barclays. Andrew Mok: Last quarter, you called out a few underperforming regions outside the hurricane markets. Can you give us an update on those markets and how addressable those issues are near term? Samuel Hazen: So we did mention that we had 2 of our 16 geographic divisions that had some challenges in the second quarter. One of those, I'm happy to say, has recovered. But within our portfolio, we're fortunate that we have a very diversified geographical base and a very diversified service base. And we've seen, again, very strong portfolio performance across the company in the third quarter. So one of the divisions recovered. The second one is still working its way through some of the challenges, and we're confident that we'll be where we need to be as we push into 2026. I think an important point here is the third quarter over the second quarter is always a challenging period. You got summer dynamics with vacations, physician movement during the summer months and so forth. And in this particular third quarter, we performed sequentially really well. And our core operations were managed very effectively from a cost standpoint. We saw a good mix of volume from the second quarter to the third quarter. So that's an encouraging seasonality aspect to this particular year versus some of the other years that we've seen. And I'm really proud of our teams and how they push through that. And again, with a large portfolio, you always have movements inside of it. But for the most part, none of them are material in and of themselves individually because we have other divisions that are outperforming our expectations and tend to provide cover for those that may have a struggle in the short term or what have you. Operator: And your next question comes from the line of Matthew Gillmor with KeyBanc. Matthew Gillmor: I thought I might ask about the growth in surgeries. There was a little bit of an improvement this quarter versus last quarter. Sam just mentioned some of the seasonal dynamics. Can you give us a sense for some of the service lines that are maybe doing a little bit better? Just anything to highlight there? Samuel Hazen: Well, when we look at our outpatient surgery, we had strong general surgery activity. Our urological service line was very strong on the outpatient side. On the inpatient side, our neurosciences surgical capabilities, our orthopedic surgical capabilities, cardiac, all of these were up and had very good performance on a year-over-year basis. So again, diversification is a powerful element for us. diversification amongst these service lines, different mills use for delivering care to our patients, all of it sort of works as a system to create again the enterprise performance that we're able to produce. But those are some of the categories that moved favorably. We had a couple that weren't as positive. Again, that's par for the course from one quarter to the other and not really indicative of anything structural. Our gynecology business on an outpatient in the third quarter was slightly down. So that's one item that was down, but it was covered by some of these other areas. And then within the inpatient side, our neurosurgery business was down modestly, and that impacted the inpatient business, but it was overcome by some of these other areas. Mike Marks: Matthew, I might also mention on outpatient surgery, that payer mix continues to be solid. Actually, Medicaid and self-pay volumes continue to be below prior year, which obviously implies that our commercial and Medicare business continues to be really strong. So we're seeing that in really good growth in overall net revenue in outpatient surgery and the translation to earnings. Samuel Hazen: One of the things we talked about at our investor conference back in November of '23 was what I term the staying power of HCA Healthcare. And that staying power is really connected to 3 points. One, the relevance of our systems within the communities that they serve. The second thing is the scale across the company when it comes to just the sheer size of HCA Healthcare. The third aspect to that is the diversification. And so you're hearing about how the diversification provides what I call staying power for our organization, allowing us to push forward with our agenda, produce solid returns on our capital and create better outcomes for our stakeholders. Operator: And your next question comes from the line of Scott Fidel with Goldman Sachs. Scott Fidel: I was hoping if you could maybe drill a bit more into the Medicare volumes in the quarter and break those down for us between Medicare Advantage and then fee-for-service, year-over-year and sequentially? And then just observations on case mix or acuity that you're seeing in the volume trends within those 2 categories of Medicare. Mike Marks: So Medicare Advantage was up 4.8% in the quarter over prior year. And then I think look what was traditional over there. [indiscernible] 90 bps, yes. Traditional was up 90 bps. Case Mix Index, the traditional Medicare case mix index was actually up a bit and Medicare Advantage was pretty flat to prior year. So those would be the 2 components of Medicare in the quarter. I think one of the things that we noted, and I'll go kind of more of a macro statement here is the improvement in our volume trends in third quarter to prior year versus second quarter to prior year. We saw that in Medicare. Medicare combined was up 3.4% on adjusted admissions. Medicaid was up 1.4% after being down for several quarters. And then as we noted, we saw good movement in our overall commercial business as well with self-pay being down 6%. So overall, really good operational growth, good demand growth across our payer categories, really with the one exception of being self-pay. Operator: And your next question comes from the line of Ryan Langston with TD Cowen. Ryan Langston: We've heard a lot of news on the pickup of hospital usage in AI, particularly in revenue cycle. Can you give us a sense on how your initiatives there are progressing and how much runway you see with the advances of technology in the future? Mike Marks: So you're right. I mean there's been a lot of commentary around this idea of utilization intensity and maybe coding intensity and the like. And I think it's important to note, we can't speak to all of the dynamics that the payers see across their various geographies and line of insurance. We've already noted from a pure volume perspective, what we're seeing volume-wise. I do think that both Medicare Advantage, the exchanges, you are seeing pretty good volumes this year, at least from HCA, and that's really the extent that we can speak to. As it relates to coding intensity, we think about that as case mix index. And from a case mix index perspective, it's pretty consistent with prior year and with trends. I think it was up 30 basis points in third quarter of '25 versus third quarter of '24 and actually down a little bit sequentially from second quarter. As we look at the individual lines of insurance, whether it's Medicare Advantage, Medicaid, exchanges and commercial, we're really not seeing any material changes in case mix index compared to the prior year at the detailed line level as well. It's always important to note, our coding practices remain consistent and accurate as verified by multiple layers of audits. Specifically related to AI, we do -- as Sam mentioned, we're deep into our efforts around digital transformation across our company, including in our revenue cycle. Our focus in terms of AI automation and our revenue cycle right now is really specifically focused on working to respond to the growing denial and underpayment activities from the payers. We have noted before, we are also both piloting and rolling out ambient AI documentation tools designed to help our physicians be more complete, more accurate and more timely in completing their clinical documentation. So that's a quick update of what we're seeing in the utilization space. Operator: And your next question comes from the line of Raj Kumar with Stephens Inc. Raj Kumar: Just kind of maybe focusing on the expense side and pro fees. Just maybe kind of any color on how that trended year-over-year? And as a sense, if we kind of bridge towards '26 and think about Valesco and how that's historically been a drag of $40 million to $50 million in the past for EBITDA on a quarterly basis, kind of how do you expect that to trend in 4Q and 2026? And what kind of opportunity is still there to maybe potentially achieve breakeven in '26? Mike Marks: So our same-facility professional fees increased 11% over the prior year in third quarter '25 versus third quarter '24. I'll note it's about a 1% sequential increase to second quarter of 2025. So professional fees continue to run hotter than just average inflationary levels across the rest of -- if you think about our cost structure, I might note that this is a bit more related to anesthesia and radiology this year. And so that's a bit of an update on pro fees. Professional fees on an as-reported basis still represent about 24% of total other operating expenses. Remember, Valesco was an acquisition. It's in part of our employee base. And so we don't really call that out separately other than just to say generally, and Sam might note additional commentary here, but we're pleased with our work around integrating Valesco and really making Valesco a strategic asset for the company as we're thinking about not only the ability to manage the cost structure of emergency physician management and hospital medicine. It also really helps us with our strategic work around things like case management, to improve our length of stay and the ability to manage our emergency rooms and drive really good emergency room efficiency. So the work around Valesco continues to mature and really proud of our operating and our physician management teams for the really good work around Valesco. Sam... Samuel Hazen: Yes. The only thing I would add there, Mike, is I would say, generally, we do expect continued financial improvement as we carry forward into 2026. We haven't finalized their budgets yet either. And so we don't have a number specific to that, but we are seeing progression -- favorable progression in the financial performance of Valesco. And beyond even operational improvements, as Mike was alluding to, we expect clinical improvement, patient engagement improvement and other clinical efficacy, if you will, from the opportunity that we have with Valesco being part of our organization now. So we're excited about what the prospects are. Operator: And your next question comes from the line of Ben Rossi with JPMorgan. Benjamin Rossi: Regarding maybe the capacity for incremental volumes, I appreciate your commentary regarding the stable operational backdrop and some of your existing efforts and patient throughput. I guess as we think about 4Q and the typical seasonal uptick in utilization, how would you characterize the incremental cost to manage additional throughput or free up additional capacity? And then are you seeing any variance across your markets and being able to ramp up this capacity in a cost-effective manner? Samuel Hazen: Well, the short answer is we don't see any significant capacity constraints at this particular point in time. If you recall from a couple of years ago, we had capacity constraints that were driven mostly by staffing and not having the workforce that we needed to take care of the patients who desired service in our facilities. We don't have that issue today. We've improved the net headcount of the company, and we believe we have good programmatic efforts in place today to put us in a position to carry forward the workforce necessary to meet the demand that we expect in the fourth quarter. And really on into next year, we're excited about some of the other operational initiatives that are being put forward with our emergency rooms. We have very specific surge planning that we're preparing for and learning from past years to improve our preparation and anticipation of demand surges in whatever periods we have. So we feel much better about our capacity on the labor side. We're also encouraged about the fact that we have more capital coming online in 2026 than we had this year. And that will add physical capacity and align with the workforce capacity that we're creating and put the company in an even better position to accommodate the demand that we anticipate. Mike Marks: I might add as well that the work that we've been putting forth to manage length of stay has also been very helpful. Third quarter showed really good performance around length of stay management. Those efforts continue not only into the fourth quarter, but into 2026. That also gives us the ability to make additional room for volume growth as we head into the future. So I really want to call out to our operating teams and our case management teams for really good work this year to help us prepare for volume growth in the future. Operator: Your next question comes from the line of Jason Cassorla with Guggenheim. Jason Cassorla: Just wanted to ask about the hurricane-impacted facilities. I know you left that the same in guidance. There's a big step-up in the fourth quarter. But how should we think about the ability to recover the remaining $150 million or so headwind versus the $250 million total headwind back in 2024? Would you expect to recover the majority of that remaining headwind next year? Or how do we think about growth off that? Mike Marks: Yes. So let me walk back to just quickly the way the hurricane markets has kind of transversed this year. As you may recall, as we started the year, we actually thought that our 2025 full-year EBITDA would be about flat with 2024. And '24 had this $250 million hit from the hurricanes. And really, that $250 million hit was a hit to our pre-storm run rate of earnings. So think about to '23. As we're now updating guidance, we're -- we believe that we'll recapture, call it, $100 million of that in 2025. The real impact here now is just the continued and lingering effects of that storm and mostly in our North Carolina markets. While volumes have recovered in North Carolina, the payer mix has deteriorated, and we're having to use a significant amount of premium labor to staff those facilities. And so that's the driver there. It's too early to give 2026 guidance. But just to give you a sense of kind of how it's moved through the first 3 quarters of the year, first quarter of 2025 was about flat to prior year. Second quarter was a bit negative, modestly negative in third quarter '25 to '24 combined for our hurricane markets on EBITDA was again about flat. So that's why we said in fourth quarter, we do expect that all plus of that $100 million improvement in year-over-year EBITDA will happen in the fourth quarter. We will give more guidance on our fourth quarter call when we give full-year 2026 guidance about the hurricane markets. But hopefully, that helps as it relates to the movement through the year. Operator: And your next question comes from the line of Stephen Baxter with Wells Fargo. Stephen Baxter: I appreciate the early commentary on 2026. I'm wondering if there's something that you can speak to that gives you confidence in achieving the long-term volume range at this point. I guess the question would really just be without exchange growth, you'd be below the range this year. So I'm sure you thought about that even with an extension, exchange volumes could potentially be flat to down next year. But wondering how you're thinking about what the other moving parts are, whether that could be more level -- more normal levels of Medicaid or self-pay growth in there, too. Samuel Hazen: I realize the past is not prologue here, but we've had 18 consecutive quarters of volume growth. So that gives us a pretty confident foundation that we can continue to navigate through different dynamics within our markets. As I mentioned, we have more capital coming online next year. We have more outpatient facilities. So our ambulatory outreach is growing. We're building new relationships with physicians. All of that's woven into our thinking around 2026 volume. We continue to believe that population is growing in many of our markets, as it has, and there's going to be this consistent level of demand. The exchange piece of it is a small component of the overall, again, diversification that we have as a company. And so when you add all that up, we feel pretty confident that the range will accommodate some of the movement within our overall demand equation. Operator: Your next question comes from the line of Craig Hettenbach with Morgan Stanley. Craig Hettenbach: On the $600 million to $800 million resiliency program you laid out a few years ago, can you just give us a sense on kind of how you're tracking to that? And then how you think about any additional levers to extend that further over time, whether that's technology or increased AI adoption? Mike Marks: Yes. So at our Investor Day back in 2023, we highlighted our resiliency plan, including that target of $600 million to $800 million. We've been working hard on that. And -- but the other thing that we highlighted, so yes, some of those dollars helped us in '24 and in '25 -- but as we've gone through really the last 12 to 18 months, we've been focused at both enhancing and accelerating our development of our resiliency program and our execution of our resiliency program. And that development piece is key. We think about this as a program. In other words, as we have work streams that we identify, we work those through, we pilot them, we execute on them and then we roll them out to scale. And then literally, every day, we're hunting for new ideas. And our teams are really attuned to this idea of the pipeline of resiliency and identifying new ideas. And as new ideas come into our resiliency work stream efforts, those ideas, again, are piloted. They are verified within our markets, and then we try to roll them out at scale. And so think about the resiliency program with all of our benchmarking work with all of our digital technology and development. We have a robust series of use cases that are in flight for AI, machine learning and automation. And then lastly, as I mentioned earlier, this notion of continuing to expand the impact of our shared service platforms, all of those combined really give us encouragement that we are preparing for the future and that this resiliency program is not a static, onetime event. It is a program that allows us to develop financial resiliency well into the future as well. Samuel Hazen: I think, Mike, some of that's reflected. I mean if you just look back in 2023, when we gave the update on the resiliency program and you look at the core operating margin of the company at that particular point in time versus what it is now, it's improved. And so we're experiencing some of that in the margin advancement that you're seeing in the results of the company. And we are continuing to, as Mike said, with technology, with best practices, with benchmarking, with finding other ways to deliver more efficient services. We see this as a growing agenda, not one that's static. Frank Morgan: Priela, let's take one more question. We're running up close to the end of the hour. Operator: Yes. Your last question comes from Joshua Raskin with Nephron Research. Joshua Raskin: I appreciate that. So I wanted to ask about cash flow conversion. We've seen the ratio of EBITDA that converts to free cash flow sort of move from the 30% range into the 40s. And I think this year, you're on track to almost 50%. So maybe talk about the factors that are driving that? Is that a shift to outpatient? Is there an impact from the strong pricing, including the sub payments? And I guess, most importantly, do you think that's sustainable over the next couple of years? Mike Marks: There's 3 or 4 things I would note that are driving our strong cash flow from operations as we think about it. One certainly is just we've had really solid adjusted EBITDA growth. And that strong operational performance that we continue to highlight as we think about the strength of our revenue cycle operations with Parallon, we turn that revenue into cash. And so that's a piece of that. And you're seeing that in kind of our working capital management plans. We have a pretty robust working capital management strategic plan that includes not only net days in ARR, but includes things like inventory levels, prepaid levels. And that work around working capital continues to assist us as we think about growing our cash flow. The other point, and I made this on the call, but it's important to note is that year-to-date, we have been able to defer $1.3 billion of estimated federal income tax payments to the fourth quarter. And so keep that in mind as well. But when I think about the long term, this idea of clearing out your revenue with cash and the strength of Parallon and our revenue cycle operations and the strength of the working capital management plans of the company, I think, puts us in good stead for continued strong management and performance around cash flow into the future. Operator: And that is all the time we have for questions. I would like to turn it back to Mr. Frank Morgan for some closing remarks. Frank Morgan: Priela, thank you for your help today, and certainly, good luck for the rest of the earnings season. If anybody has any questions, we're around today. Give us a call. Thank you. Operator: Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.
Anders Edholm: Good morning, and welcome to this presentation of SCA's 2025 Third Quarter Results. With me here today, I have President and CEO, Ulf Larsson; and CFO, Andreas Ewertz, to go through the results and take your questions. Over to you, Ulf. Ulf Larsson: Thank you, Anders. And also from my side, a good morning. Happy to present results for the third quarter '25. So -- and when I summarize the quarter, we can state that SCA continued to deliver a solid result in a rather challenging environment. Our high degree of self-sufficiency in strategic areas continued to be an important factor to mitigate higher costs, not the least related to wood raw materials. Our EBITDA reached SEK 1.64 billion and by that, an EBITDA margin of 33% for the third quarter. In Q3 '25, we had substantially lower prices in the Pulp segment in comparison with the same period last year. Our planned maintenance stops in pulp and containerboard were also considerably more extensive compared to the same quarter last year. Delivery volumes in the Containerboard segment increased this year compared with the same quarter last year, driven by the continued ramp-up of our Obbola containerboard mill. The uncertain market situation, mainly dominated by changing tariffs continues to affect market conditions. The forest industry in general is momentarily challenged by a weaker -- with a market with soft underlying demand in many product areas. Turning over to some financial KPIs for the third quarter '25. As already mentioned, our EBITDA reached SEK 1.64 billion in the quarter, which corresponds to a 33% EBITDA margin and a 22% EBIT margin. Our industrial return on capital employed came out just over 6%, counted for the last 12 months. And the leverage was at 1.7x with our -- while our net debt to equity reached 11.2%. I will now make some comments for each segment, starting with Forest. Higher harvesting levels from our own forest have not the least contributed to stable supply of wood raw materials to our industries during this period. We have seen a continuous long-term trend of increasing prices for both pulpwood and sawlogs as can be seen in the graph on the bottom left. Regarding pulpwood, we have now passed the peak, I guess, and the prices have started to come down during this quarter. Demand for sawlogs continues to be high, especially for spruce logs. When one compares Q3 '25 with Q3 '24, sales were up 14%, while EBITDA was up 17%, mainly due to higher prices for wood raw materials. Turning over to Wood. In general, we still have a slow underlying market for solid wood products. As said before, we have noted signs of improvement in the repair and remodeling segment this year in comparison with the last year, but the uncertainty in general economic development continues to affect the market recovery negatively. Stock levels remain on the high side among producers for pine, but are on normal levels for spruce. Stock levels at customers continue to be on the low side. The volumes in both production and deliveries were good for SCA during the quarter, resulting in a close to unchanged stock level of sawn goods. The price for solid wood products decreased by 5% in the third quarter of '25 in comparison with the second quarter of '25. This development is in line with what I said when I presented the report for the second quarter. As expected, the cost for sawlogs has increased from the second to the third quarter, and we also expect them to continue to increase going into the fourth quarter. Sales were in line with the same quarter last year. EBITDA margin decreased from 19% to 15% due to higher raw material costs and a negative currency effect. Today's stock level of solid wood products in Sweden and Finland is described at the top left on this slide and is shown in relation to the average for the last 5 years. As mentioned earlier, we note that the inventory level is on the high side, especially for pine, while the SCA level is rather normal. As can be seen in the diagram to the bottom left, the Swedish and Finnish sawmills production has been on a normal level during the first 8 months of '25. In the diagram to the top right, we can note that the price decreased during the third quarter. The decrease in pine has been larger in comparison with the spruce products. Going into the next quarter, I estimate that prices on average again will decrease by up to 5%, somewhat more for pine and somewhat less for spruce. And this is driven by the momentarily high availability of pine products. In the construction sector, we can conclude that start of new buildings continues to be low. As said before, uncertainties are still present, but we see improved consumption in the repair and remodeling sector. The level of duties now put in place on wood products from Canada delivered to U.S., about 45% in comparison to the level for wood products from European Union, delivered to the U.S. about 10% has strengthened the competitiveness for EU producers in comparison with Canadian producers. And I guess it's likely that the price level in U.S. will increase when stock levels are coming down from today's high levels. So over to pulp. When comparing Q3 '25 with Q3 '24, sales were down 21%, mainly due to lower prices, a lower delivery volume and a negative currency effect. EBITDA was down 57%, compared to last year, mainly due to lower prices, a negative currency effect and higher cost for wood raw materials. The cost for the planned maintenance stop was SEK 83 million this quarter compared to SEK 35 million in Q3 '24. Global demand for pulp was at a healthy level during the first quarter of '25. During the second quarter, the market changed with reduced demand and prices came under pressure, much due to uncertainty related to U.S. tariffs. During the third quarter, prices on NBSK pulp were stable at low levels. On the demand side, we saw increased activity in China during the quarter. The weakening of the U.S. dollar in relation to the Swedish krona, which started already in Q1, continued to have a negative impact on the pricing in SEK also in Q3. Tariffs on NBSK pulp from the European Union to the U.S. were removed during the third quarter, and this allows us to maintain a competitive offering in the U.S. Looking at CTMP, prices have been unchanged in Asia at low levels and have decreased slowly in Europe during the third quarter. Inventories of softwood and CTMP have been increasing in July and August, as you can see in the diagram and are now on the high level. Hardwood inventories on the contrary were stable during the third quarter. Moving over to Containerboard. Sales were up 10% in Q3 in comparison with the same period last year, driven by higher delivery volumes and higher prices, somewhat mitigated by a negative currency effect. EBITDA was down by 39%, very much driven by long planned maintenance stop with a cost of SEK 204 million versus SEK 87 million in Q3 2024. Higher costs for wood raw materials and a negative currency effect also had an impact. We have seen a softer box demand during the last quarter, but still with a positive development on a year-to-date basis. The retail business remains on a positive driver. On the other side, we continue to see a weak European manufacturing industry, which, for the moment, drives the demand in a negative direction. After a stable first half of the year of European demand of containerboard has started to decrease in Q3, due to the current turbulent macro environment, it's difficult to have a view on the long-term demand. In Q3, we have seen additional supply coming on stream with the vast majority coming in testliner. We do not expect further capacity increases in Q4, except from the ramp-up effect of newly started machines. Kraftliner inventories remain above average level in Q3, as you can see in the graph. During Q3, the availability of OCC has been good, driven by the lower demand in the quarter, which in its turn has led to decreasing prices of OCC. Moving into Q4, we see the availability of OCC to be stable and expect prices to be more or less unchanged. Prices for brown kraftliner in Central Europe has during Q3 decreased with EUR 20 per tonne, driven mainly by slow demand and reduced prices of OCC. White kraftliner has remained stable. Finally, I will say some words about renewable energy. In this area, we have had a weaker quarter compared to the same period last year, mainly due to lower prices in wind power and solid biofuels. Continued improvements in ramping up Gothenburg biorefinery are partly compensating for this. The market for solid biofuels in Northern Sweden continues to be weak due to warm weather and low electricity prices. This factor increases our export share and by that, reduced margin. For liquid biofuels, we have seen higher margins compared to previous quarters. The main reasons are tighter supply due to maintenance stops in biorefineries, European countries implementing RED III and better control mechanism within the EU regarding imported feedstock. We expect market volatility in renewable fuels to remain high as Europe ramps up the blending mandates both from -- both in HVO and SAF. Electricity prices were low during the quarter, which impacted on our wind business negatively, but it is good, of course, for SCA as a net buyer of electricity. SCA's land lease business is stable at 9.7 terawatt hours, which is equal to 20% of installed capacity of wind power in Sweden. Installed capacity on our land is expected to reach 10.5 terawatt hours by the end of the year. And by that, I hand over to you, Andreas. Andreas Ewertz: Thank you, Ulf, and good morning, everybody. I'll start off with the income statement for the third quarter. Net sales decreased 5% to SEK 5 billion, driven by negative currency effects and lower prices, which was partly offset by higher delivery volumes. EBITDA decreased 18% to SEK 1.6 billion, driven by negative currency effects, lower prices and higher costs for planned maintenance stops. EBIT decreased to SEK 1.1 billion and financial items totaled minus SEK 103 million. With an effective tax rate of just below 20%, bringing net profit to SEK 0.8 billion or SEK 1.19 per share. On the next slide, we have the financial development by segment and starting with the Forest segment to the left. Net sales decreased to SEK 2.4 billion, driven by lower delivery volumes compared to the previous quarter due to several planned maintenance stop at SCA's industries. EBITDA decreased to SEK 912 million due to seasonally lower harvest from SCA's own forest. In wood, prices decreased compared to previous quarter, while the cost for sawlogs continued to increase. Net sales decreased to SEK 1.5 billion, driven by lower delivery volumes and lower prices compared to the previous quarter. EBITDA decreased to SEK 232 million, corresponding to a margin of 15%. In pulp, net sales decreased to SEK 1.65 billion, driven by lower delivery volumes and lower prices. EBITDA decreased to SEK 242 million, corresponding to a margin of 15%. Higher costs for planned maintenance stops and lower prices were offset by lower costs. We had lower energy and raw material costs in the quarter, and Q3 is also a low-cost quarter for indirect costs in all segments, which had a positive impact. In Containerboard, net sales decreased to SEK 1.8 billion and EBITDA decreased to SEK 194 million, corresponding to a margin of 11%. Result was negatively impacted by planned maintenance stops in both Munksund and Obbola of SEK 204 million. The market for renewable energy continued to be weak. EBITDA decreased compared to previous quarter and amounted to SEK 79 million, corresponding to a margin of 21%. The decrease was mainly driven by lower deliveries of solid biofuels. On the next slide, we have the sales bridge between Q3 last year and Q3 this year. Prices decreased 2%, driven by lower pulp prices. Volumes increased 1%, driven by higher volumes in containerboard, which was also offset by lower volumes in pulp. And lastly, currency had a negative impact of 4%, bringing net sales to SEK 5 billion. Moving on to EBITDA bridge and starting to the left. Price/mix had a negative impact of SEK 99 million and higher volumes had a positive impact of SEK 14 million. Higher costs for mainly wood raw materials had a negative impact of SEK 57 million, which was mitigated by our highest degree of self-sufficiency. We had a positive impact from energy of SEK 37 million and a negative impact of currency of SEK 169 million. This was impacted by higher costs for planned maintenance stops. And in total, EBITDA decreased to SEK 1.6 billion, corresponding to a margin of 33%. Looking at the cash flow. Operating cash flow increased to SEK 1.1 billion for the quarter, and SEK 2.5 billion for the first 9 months. And as you know, other operating cash flow relates mostly to working capital currency hedges and should be seen together with changes in working capital. Looking at the balance sheet. The value of the forest asset totaled SEK 108 billion. Working capital decreased compared to previous quarter and totaled SEK 5.6 billion. Capital employed totaled SEK 160 billion and net debt decreased compared to the previous quarter to SEK 11.7 billion. And we have now almost finalized our large ongoing investment projects. Equity totaled SEK 104 billion and net debt to equity was 11%. Thank you. With that, I'll hand back to you, Ulf. Ulf Larsson: So thank you, Andreas. And well, just to summarize, I mean, as I said, we have continued to deliver a solid result in a rather challenging environment. . I guess the market has bottomed in more or less all areas except from solid wood products. On the other side, we will see a cost pressure coming in our solid wood business, wider price for pulpwood has now stabilized and are on its way down, I would say. In pulp and kraftliner, I guess, the market is going sideways now, and we are 100% focused on what we can have an impact on ourselves, which is meaning that we are focusing on the ramp-up of our big projects. And they are going very well -- did go very well during the third quarter. So by that, I think that we open up for some questions. Operator: [Operator Instructions] And we will now take our first question from Ioannis Masvoulas of Morgan Stanley. Ioannis Masvoulas: I've got 3 questions, if I may. I'll take them one at a time. First on pulpwood costs. Given the small decline that you show in your slide deck for Q3 and the typical lag in your business, what should we expect for cost development in your industries in Q4 this year and also Q1 2026? Ulf Larsson: You asked about pulpwood. And as I said, I mean, we see that now that prices for pulpwood is coming down in the market. But as you say, we have a lagging effect. And I could say that we have -- it's around 6 months or less. Andreas? Andreas Ewertz: Yes. So in the fourth quarter, I mean, fairly flat, maybe we're talking about 1% decline in pulpwood prices. So fairly flat, while the cost for sawlogs will continue to increase a bit into Q4. Ulf Larsson: And in the beginning of next year? Andreas Ewertz: Then I think that pulpwood will slowly continue to decrease. But as I said, I would say, it's around 6 months of lag effect in the terms of sawlogs. I think they will start to peak also around maybe Q1, Q1 next year. Ioannis Masvoulas: And then going back to pulp, looking at NBSK inventories on days of supply were pretty much at the top of the historical range, do you see the recent temporary curtailments among your peers to help rebalance the market in the short term? Or do we need to see more aggressive supply response? Ulf Larsson: It's hard to say, I mean, maybe I didn't say that, but I mean we are still at a very high operating rate in NBSK, and we should because we have a very low cash cost, of course. But on the other hand, we see announcements now from many areas where they have started to take curtailments. I guess also in the statistics that you see now, we haven't included the typical longer maintenance stops that we have had now during the autumn. So I guess that the inventory will come down. And as always, it's a question, it's a supply-demand issue. And I guess we will see a better balance, but I mean, underlying, we have to wait for an increase in consumption before we can say that we have a stronger market. Ioannis Masvoulas: Understood. And then just last question for me on the FX hedging. Looking at your disclosure, you seem to have brought down your USD hedge ratios for the next 4 quarters. Is that a conscious decision to avoid locking in an unfavorable FX rate? And could these ratios come down further in the coming quarters if spot FX rates persist? Andreas Ewertz: We use statistical model for our hedge strategy. So we have -- for the next 6 months, we hedge around 50% to 85% of our net exposure and then it goes down. But then it depends on statistically how favorable the currency is. So we use model and for the U.S. dollar currently in the low range of that while for euro, we are on the normal range. Operator: And we'll now take our next question from Linus Larsson of SEB. Linus Larsson: Couple of questions on use of funds. It seems to me that you have a very strong balance sheet. Cash flow is robust through the cycle. You're running at high operating rates, like you say, your competitiveness is strong. How do you look at buybacks in this context, given where your share price is trading and given your investment plans for the time being? Ulf Larsson: If we start with the investment plan, as I said, we are just now 100% focused on ramping up what we have started, and we feel that we are doing that in a good way. As I've also said, I mean, just now, we sit on our hands. We will not start up new big projects. And I guess, as all other companies, we also try to -- yes, not do too many current investments because we have an uncertain market coming going forward, I mean, that's the position we have just now. And the question about buybacks, I mean, that is more question for the Board, honestly. So let's see. We are now focused on ramping up what we have started. And by that, as you said, we expect that we will increase our cash flow capacity substantially. Linus Larsson: Yes. Yes. No, that's great. But I mean, principally, how does the Board look at buybacks? Is there like a principal view on whether or not buybacks is part of the toolbox? Ulf Larsson: Again, that's a question for the Board. But as far as I understand, we have no principles in this matter. I think we have done since the split 2017, I mean, we have invested 20% of the net sales in the company every year. For us, that's a lot of money. For all companies, it's a lot of money. So we are more focused just now to realize the cash flow that we suppose -- that we will have from these ongoing investments, so that's our focus now. Linus Larsson: Yes. No, that's clear. And just to finish off that, what's your CapEx guidance for 2025 and 2026, respectively? Andreas Ewertz: If you look at CapEx for '25, I think that current CapEx will be around SEK 1.5 billion. We might have some spillover to next year, so SEK 1.4 billion, SEK 1.5 billion. And then in terms of strategic CapEx, also depending on timing of some payment, but around SEK 1.3 billion, SEK 1.4 billion. So maybe SEK 2.8 billion in total for current and strategic, but it depends on certain timing of certain payments. For next year, strategic CapEx will go down. We have some payments left in the ramp-ups, but strategic CapEx will come down. And then I would guess that current will be slightly higher than this year since we have some spillover from this year to next year. Linus Larsson: But how much will the strategic CapEx go down? Is it SEK 0.5 billion or SEK 1 billion or around the backlog? Andreas Ewertz: It depends on some timing, but I would guess we have a couple of hundred millions left on our current projects. Operator: And we'll now take our next question from Charlie Muir-Sands of BNP Paribas. Charlie Muir-Sands: I wanted to start on the round wood market. So you mentioned obviously log prices are high and if anything, still slightly moving up due to high demand. But equally, it sounds like the wood products market in general is still quite soft. So I'm just trying to understand, is this a demand that's for other uses? Or are you basically saying this is more of a supply issue for the market? And if so, is this just of a hangover from the spark beetle delivery from prior years? Or is there any other reason why we could expect some better balance coming back on the supply side soon? And then just on the pulpwood cost side, very helpful the detail you've given so far. But just in terms of the timing effects, the changes in pricing of pulpwood hit the forestry and then the industrial segment at the same time? Or is there a phasing effect whereby the P&L benefit on forest is reduced before the cost tailwind on the industrial segments come through or anything like that to be aware of. Andreas Ewertz: Yes. So if you look at the pricing, I mean we base our internal prices of what the Forest division pays for its sourcing and a lot to buy on stumpage. So you buy the right to harvest. And then, I mean, you optimize the harvesting to try to have some larger areas to have efficient harvesting. So it can be vary. I mean, some of these -- what the harvest is couple of months. You bought it for some might be 3 months ago or 6 months ago. And then that average price is what the industry gets to pay. But the pricing is -- when the prices goes down, the industry will get a lower price, but then, of course, our Forest division will earn less money on their own harvest. But one day, what they source externally that they get paid for. And then the second question -- the first question was around the demand for sawlogs. Ulf Larsson: The coming demand. I mean, as we see just now, we have, as you saw on the graph in Sweden and Finland, the production is still on a normal level, even if we know that the price -- log prices are very, very high. And profitability in the business is, in general, rather low. We feel rather confident with the profitability we have in our own Wood division. But I mean we -- up until today, we haven't seen any signs of decreasing log prices actually. Andreas Ewertz: And also -- it's also difference between pine and spruce sawlog. On spruce sawlog, you have much lower supply compared to pine sawlog, sort of pricing and demand difference there. Charlie Muir-Sands: And then just on the wood products side, you mentioned the relative competitive advantage for EU exporters to the U.S. now versus Canadian. Can you just talk about the relative profitability of your U.S. business compared with your European business today? How big an opportunity might this be? Ulf Larsson: Yes. First, if we take the tariffs, I mean, as I said, the tariff just now going from Europe over to U.S. is 10%, and coming from Canada over to U.S., then the tariff is 45%. As it is just now, in U.S., the stock level is on the very high side. So, so far, we haven't seen any impact on the, let's say, the local price in U.S. But I guess when the inventory level is coming down, then, of course, customers, they have to start to buy and then they can buy some volume from Europe and they have to buy some volume from Canada. But then I guess that prices can in a short while, increased quite dramatically. We don't have a big volume for U.S. We do, let's say, 80,000 cubic meter per year. But again, it's a global market. So if we start to see better trade in U.S., I mean, that will, of course, have also an impact on the European market and also the Asian market and so on and so on. So we have to wait and see. But I mean, as it is just now, I guess, it's more a question of time. We will have a slow fourth quarter, as we always have. And I guess it will be rather slow also in the first quarter. But then I guess, in the beginning of the second quarter next year, then we might start to see something. Charlie Muir-Sands: But Canadian volumes can't get displaced into other parts of the world or even coming into Europe to offset that benefit? Ulf Larsson: Yes, not really. I mean, of course, you will see some Canadian volumes in China and you might -- I don't think you will see too much of it in Europe. Again, it's -- you have the distribution cost and many of those sawmills, they are located inland. And so it's also a question of distribution, inland distribution cost within in Canada so I guess if this remains, which you never know, I mean, then you probably will see further closures and capacity reductions. And honestly, I don't know really how the U.S. -- I mean, we know that U.S., they need a lot of solid wood products coming into U.S. So I guess it might be so that we see some further changes going forward now. Also when it comes to tariffs and things like that. So I mean, it's -- but all these -- I think we had a question before. But I mean, tariffs, we are not directly too much impacted by tariffs. We can handle that in a good way. But I guess that this discussion has created uncertainty globally. And that's the reason also why we have a rather slow demand in Asia in more or less all product areas. And so I mean that is the -- I guess the worst thing with tariffs is it is creating some kind of uncertainty in all areas and globally. Operator: We'll now take our next question from Robin Santavirta of DNB. Robin Santavirta: Thank you very much. Firstly, I have a question related to the Containerboard business. Looking at the delivery volumes now this year, they have been quite steady, but it seems still Obbola is not running at full capacity. And now you had the log maintenance shut. So could you give some guidelines on volume outlook for that segment in Q4 and early 2026? Should we expect a bit of a step change or more of a slow gradual ramp-up during the end of the year and next year? Ulf Larsson: When it comes to Obbola, we have said that Obbola will produce 600,000 tonnes this year, and they will do so if nothing expected will happen in the fourth quarter. Then it is a tough market in kraftliner. So we have seen during the third quarter, increasing inventories in kraftliner. And so that's the case. And as you said, we also had a rather long maintenance stop in Q3. So that also had an impact on deliveries. But production-wise, Obbola will reach 600,000 tonnes next -- this year. And then the plan is to reach 700,000 tonnes next year. Robin Santavirta: Okay. Okay. Can I ask about this EU deforestation regulation? How do you view that? Will that have any kind of impact for your businesses in Europe either way, what is your view? Ulf Larsson: I mean, it has also created a lot of uncertainty. But I guess for us, we can manage EUDR, but of course, it would be an administrative burden, which we don't like. But we can handle it. Robin Santavirta: But what about your competitors? Could it be a setup where some pulp had been imported from some countries or some paperboard that has been imported from Asia or Americas, they could end up in a bit of difficulty to do so in the future? Or will this impact trade flow at all in your view? Ulf Larsson: Yes, it's very hard to predict. I mean, we have been working quite hard to find out a system which will not create a lot of administration. And I mean, typically, we are for free trade. I think that's good. And I think that EU in the long run, they will benefit from a free trade. We don't know what -- how this will be implemented in the trade up till today. So again, this is also another thing that really creates uncertainty. But the honest answer is we don't know how that will -- this will play out. The only thing we can do is to focus on our own ability to meet the requirements that might come. Robin Santavirta: Yes, for sure, for sure. Follow-up question related to the pulp market. What is going on in the softwood pulp market? There's a lot of curtailments now during early autumn. Certainly, Finland, some in Sweden as well, I understand some in Canada as well. And historically, when you do that, you tighten up the market quite quickly. Now we're not seeing that. Is this a bit of a substitution into hardwood pulp? Is it some Chinese volumes that -- I mean, historically, they do not produce a lot of softwood pulp. Now I understand there is some production going on in China as well. So why is not the market tightening despite the quite significant production curtailments in the Northern Hemisphere? Ulf Larsson: I guess the first thing is that the underlying demand is weak. So that's the first explanation. The second thing is substitution. I don't think that we will see more of substitution today than we did last year. I mean, it's not as easy as that. And we have always had a delta between hardwood and softwood prices. So I mean, if possible, I guess, it would have already been done. So I haven't heard anything -- no structural changes in that area. What we know is that a lot of capacity in pulp is -- will be built up in China. And that, of course, sooner or later, that will -- might have an impact. As it is just now, we are more considered about the CTMP volumes. And as we have understood, I mean, the board market is very weak. And while companies in Asia while they closed down the converting and stop producing boards, I mean, they still produce CTMP, and that will, of course, give a surplus in the market. Then also, I guess, that the statistics that we also saw on our side was from August, Andreas, and I guess we will see some other figures now coming into September, October and so on. We also have had a lot of big maintenance stops in pulp. But you're right. I mean, we also hear that companies, they are taking curtailments now. So far, no big changes. But I mean -- and the prices maybe -- I guess that the price has already bottomed because at this level, we see that curtailments are taken instead of continuing to produce and of course, creating a negative cash flow. So we have reached the bottom. I guess we will see some result of actions taken now later this year. But again, the fundamental challenge is the underlying demand that must come back. Robin Santavirta: Thank you very much. Operator: And we'll now move on to our next question from Oskar Lindstrom of Danske Bank. Oskar Lindström: Three questions for me, if I may. The first one is just on the lower wood cost. You mentioned this in the Pulp division sequentially, but not in containerboard, sorry, not lower pulp costs, lower wood costs, having a positive impact on pulp, but it didn't seem to have it on Containerboard. What's the reason for that? Should I go on with the other questions? Andreas Ewertz: No, we take 1 at a time. So I mean, we have maybe 1% lower pulpwood prices in both Containerboard and in Pulp. In Pulp, we had a better yield in the quarters, we had lower consumption of both energy and wood and they generally have low cost quarter. But I would say it's more on the consumption side that we have lower cost on pulp in this quarter. Oskar Lindström: And in Containerboard, was it just the maintenance stop that sort of... Andreas Ewertz: The Containerboard, we had large maintenance stop both in Munksund and Obbola, the cost around SEK 20 million. So that quarter was impacted by that stop. Oskar Lindström: Right. Moving on to cash flow. You say that you will increase your cash flow significantly in 2026, and I presume beyond as well, while CapEx looks as if it's going to come down quite a bit. If we only look at the ramp-up of Obbola, can you say anything about what kind of contribution you expect from that 2026 versus 2025? If you reach the 100,000 tonnes, could you put a monetary value on that? Andreas Ewertz: Currently, I would say it's hard to put the money on the excess volume because you said that currently have a weaker market, and that means that the extra volumes you would place on -- you have a worst customer mix and country mix on those extra volumes that will, of course, depend on how the market develops. If you have a stronger market, I mean, those volumes would be placed in customers in Europe and places nearby. And that will have a larger impact. But if you have a weak market, of course, then we'll have to put it further away. So it depends on how the market develops. Ulf Larsson: And also to add, I mean, if you have -- yes, maybe that was exactly what you said. I mean, if you have an additional volume already this year, if you go from a little bit over 400 up to 600, I mean that puts a pressure in a tough market that puts a pressure on the market side, of course. So I mean you also have a -- you have ramp-up production-wise, but you also have a ramp-up in the market. So of course, we have to find markets overseas not at least as it is just now. Oskar Lindström: Of course. And my third question is, I mean, we've seen other companies in your sector announcing cost savings and even structural changes as a consequence of the tough market, which both they and you seem to feel is not about to change anytime soon. I mean, do you see any need for you to take actions if demand does not improve, either cost-saving actions or structural changes? Ulf Larsson: I mean, if we go back to 2017, as I said, we have been invested 20% of the net sales more or less every year. And by that, we have also top-class sites as it is just now. We have also, during this period, closed down our publication paper business. and we are focused on pulp, containerboard and also solid wood products and to some extent, also renewable energy. And step by step, I mean, as soon as we see that we can reduce the manning or if we can do something else to improve our cost position, we will do that. So for me, it's -- I don't like those programs because that means that you haven't done your work -- your ongoing work, so to say. Andreas Ewertz: For the last one and half year we had a program to reduce our personnel at our pulp division with around 80 people and has gradually begun to give an effect. Ulf Larsson: And we reduced the manning by 800 people when we closed down the publication paper business. So I mean, if you have structural changes, then, of course, you have to follow up with personnel reductions, but otherwise, that is something that you have to do. That's the everyday work. Oskar Lindström: My final question is on CapEx, which you talked a little bit about here. You say that you expect next year for current CapEx to be -- I can't remember the exact wording, but slightly higher. And then how much higher is that? And then you said the strategic CapEx will be a couple of hundred million. How many couples of hundreds of millions are we talking about? Is it possible for you to be a little bit more precise? I'm just wondering. Andreas Ewertz: It depends, of course, on what overspill we have to next year, and then it depends. I mean, we have our base CapEx for next year. And then we have some potential projects, and it depends on which of them we go through with which timing, but if we go around 1.5 this year, then you're talking maybe SEK 100 million, SEK 200 million more next year on current CapEx. But again, it depends on what projects we do. And also on the strategic side, it will -- I mean, it will be between 0 and SEK 1 billion but it depends on the timing of our strategic CapEx. For example, we have 1 payment that would either go at the end of this year or the early next year, which is around SEK 150 million, and we have a couple of hundred millions next year. So it depends. But just to give a rough figure. Ulf Larsson: But CapEx will come down. Andreas Ewertz: Yes, CapEx will come down, yes. Oskar Lindström: Thank you very much. Those are my questions. Operator: And we'll now take our next question from Martin Melbye of ABG. Martin Melbye: Given tariffs and new volumes to place, could you give some hints on prices for Pulp and Containerboard at volumes heading into Q4 quarter-over-quarter? Ulf Larsson: I mean, we don't know. That's the honest answer. But as I said, we -- I guess, we are in Pulp at the bottom level just now. I mean, as we -- as I said before, I mean, we have seen substantial curtailments taken now. And so I guess, Pulp prices will -- if they -- the only way from this point, I guess, is upwards. When will that come? Well, remains to see, I guess. I think for Containerboard, we have more capacity has come on stream during the third quarter. No additional capacity will come on stream, but we will see some ramp-ups. I guess we will see some closures in testliner going forward. The balance for kraftliner is much better, of course. I mean, the only additional volume coming in now is our own from the ramp-up in Obbola. On the other side, the inventory level is on the high side coming down a little bit now when we had the new statistics. So it's always -- it's a question of supply-demand balance, of course. But my best guess is sideways, maybe we will start to see upward trend in Pulp and maybe sideways in Containerboard. And as I already said, I guess, we will see somewhat decrease in prices in solid wood products, I guess, another 5% in the fourth quarter and then the first quarter is always -- it's tricky to increase prices in the first quarter. If something is happening now in U.S., that might have a faster impact on the pricing for solid wood products. But otherwise, I think we have to wait for the second quarter next year. Andreas Ewertz: And in terms of volumes, forest, you harvest a bit more from our own forest in the fourth quarter. In solid wood products, I sort of mentioned, you seasonally weaker quarter compared to the summer months so they have lower delivery volumes. In Containerboard, it will be slightly higher since we had a big maintenance stop in the third quarter, which we won't have in the fourth. And in Pulp, I would say it's slightly up or flat. Operator: Thank you. And we'll now take our next question from Cole Hathorn of Jefferies. Please go ahead. Cole Hathorn: I'd just like to ask what do you see would be the positive catalyst for each of your segments and like to take it in turn. But maybe starting on Pulp. What do you think is truly needed exit the demand? Do you think it's going to be capacity closure potentially something out of Canada considering they've got elevated wood costs and you see a sawmill go down and then pulpwood closure that tightens the market. Wood product, is it ultimately just a demand that's needed rather than any form of supply response? And Containerboard, I'm just wondering what are you looking for in the market for kraftliner. Is it -- do we need to rely on the recycled closures and to follow that? Or are you seeing the ability to kind of keep this premium versus recycled considering the less imports from the U.S. and much better supply-demand balance in... Ulf Larsson: If we start with pulp, I guess, it's again, it's about demand. The tissue business is rather slow, of course, it might be impacted by closures also, again, it's a supply-demand issue. And it might be so that just my speculation, but I mean, if we will have a tough -- if tariffs will remain in Canada for solid wood products that will have a negative impact on the raw material supply to the pulp mills that might have an impact over time, of course. Otherwise, it's demand and mainly then in the tissue segment. In wood, as already said, I mean, we are in the slower season just now in Q4 and Q1. I guess that sooner or later, Americans, they have -- they must start to buy solid wood products. And if the tariff level from Canada over to U.S. will remain of 45%, that definitely will mean that we will see increasing prices in solid wood products even if you're not a big supplier to U.S., which we are not, but still, that will have an impact on the global trade rather immediately, I would say. And then we know that it can start to move quite fast. But I guess if you look at the inventory level in U.S., we have to wait for at least a quarter before we can see something. In Containerboard, I mean, we look at the box consumption, and we feel that we have a slow demand from the industry while I mean, in other businesses for food and yes, maybe trade and that part -- that is going quite in a normal pace. So -- but the industry for us, I mean, heavy-duty spare parts and things like that where we typically can find a premium for kraftliner. My -- I don't know, but my guess is also that we will see closures in testliner, I guess that the main part of testliner produces just now, they don't make money. And I guess we have a chicken race on the testliner side as this just now. The balance both for Containerboard, kraftliner and also for NBSK, it's much, much better than for recycled-based production. Cole Hathorn: And then maybe just following up on capital allocation. You were clear that you're ramping up your projects, your past peak CapEx. And beyond that, you've got flexibility for consider capital returns via dividends and buybacks. But you didn't mention anything on M&A, and I'm just wondering how you think about that? And what are your criteria there? Would you consider anything in Central Eastern Europe if a very low-cost asset came available? Are you staying with your production base in Sweden? Just like your thoughts. Ulf Larsson: I mean, typically, we are a company based on organic growth. And typically, we are a company focused on Sweden where we have our own forest. We don't like to stay in countries where we can see a higher risk really. So I guess we are -- but on the other hand, you shall never say no. But typically, we are based on -- and focused on organic growth as it is. Andreas Ewertz: And as Ulf mentioned before, currently, I mean, we're focusing on our ramp-up of our current project before we add some too much complexity. Operator: And we will now move on to our next question from Andrew Jones of UBS. Andrew Jones: Can you hear me okay? Andreas Ewertz: Now, we hear you. Andrew Jones: Sorry, apologies, I missed the start of the call. So if you've mentioned this, my apologies. But on the actual solid wood products, what usually give a bit of the sort of guidance range in terms of pricing? I mean, how do you look at pricing going into the fourth quarter on -- in the Wood division? And then also, I think on the last quarter, you sort of gave us like a percentage changes you expect in the Forest division in both logs and then pulp. What sort of percentage changes are you sort of thinking about in the Forest for those 2 categories? Ulf Larsson: The first one, yes, we did mention that one. And as I said, I mean, we lost 5% in terms of price from -- in the third quarter in comparison with the second quarter. And I guess that we will lose another 5% in the fourth quarter. And that is mainly a seasonal effect as the demand always -- we always have a slower demand in the fourth quarter and in the first quarter. Forest, Andreas, you can... Andreas Ewertz: Yes. So Forest, pulpwood, I mean, they have peaked. We saw a very slight decrease here in the third quarter, maybe 1%, and we expect fairly flat, maybe 1% down in Q4 because of this lag effect. In terms of sawlogs, they will continue to increase a bit in the fourth quarter, maybe 5% compared to Q3, but that's also because you saw that the logs were quite flat within Q2 and Q3. But that's more of a mix effect. We had lower dimension on the logs, which have a lower prices. So we didn't get that so underlying, the prices increased also in Q2 to Q3. But since we had that mix, we didn't see that increase. But now we'll get that in Q4 so maybe 5% up. Andrew Jones: So it sounds like a pretty tough quarter, fourth quarter if you're sort of saying price is 5% down, log import prices 5% up. And you're probably seeing some seasonal volume weakness, I guess, maybe and it's about 5% last year. So anything to mitigate or offset those moving parts? Andreas Ewertz: Yes. So but on the solid wood products, I mean, as Ulf said, the prices will go down 5% and also the log will continue to increase a bit, but of course, continuing to focus on cost and what we can affect. Andrew Jones: Okay. And just 1 question just about the structural change. On kraftliner, I mean, you've kind of talked about the market being more balanced in kraftliner, obviously compared to testliner, but I mean, how -- why can the actual premium kraftliner and testliner fee in the medium term given the sort of substitution potential, I'm curious like to see whether that premium can be maintained in the near-ish term. Ulf Larsson: It's hard to say. I mean, the delta just now is EUR 280 or something like that. So that is a rather wide gap. And I guess if customers -- if they can substitute, they will substitute. And we see the same trend in -- we have the same question always in softwood and hardwood pulp. But the same answer, I mean, if customers, if they can substitute, they will do it because if something is cheaper, of course, they will use that instead. So I guess my perspective is more that I think we will at least remain on rather high delta between testliner and test recycled products and base products and virgin-based products as virgin fiber will be a scare resource going forward. So strategically, I guess, we will widen this gap, which we have also seen in the past years. So I think that will remain, honestly. And also, when you look at the capacity increase. I mean, the absolute main part capacity is coming in the recycled business. But in order to get raw material to the recycled business, you must have some virgin-based production. Operator: And we'll now take our next question from Pallav Mittal of Barclays. Pallav Mittal: Pallav Mittal on behalf of Gaurav Jain. So a few questions. Firstly, you and your peers have all highlighted good availability of pulpwood because of which we are now seeing this decline in pricing. And now given demand is weak and there are a number of production curtailments, how do you think these pulpwood costs could change if you start seeing some sort of improvement in demand? Ulf Larsson: Then, of course, it might be so that you have bottleneck again in raw material supply. So again, to have a stable long-term increase in the market, then the consumption must come up, the demand must come up. So that's the simple answer. And I mean, then it might be so that if -- when sawlog prices, if they come down, but pulpwood prices, when they come down, then it might be so that you see additional capacity coming on stream. And by that, of course, the supply will increase for a while. And if then the demand is not picking up, then, of course, you will have a pressure in the market again. So it is as easy as that. It's always a question about supply-demand. Andreas Ewertz: And your question on -- I mean, of course, if demand for the finished product goes up and the production goes up, that will, of course, increase the demand for wood raw material, which is already has been tight. Pallav Mittal: Sure. And then if I can ask something on CTMP. So you did mention that CTMP prices have declined in Europe, and now we are seeing new capacity in China as well. But does that impact your CTMP ramp-up? Ulf Larsson: I mean, as it is just now, we have a rather profitable business within Europe in CTMP. But as you say, I mean, we have very -- the margin is not too big in Asia. So yes, in that perspective, we are maybe in -- it's always a marginal calculation. So if we have days with high electricity price or if not now, but before when we saw that we had scarce situation when it comes to pulpwood. I mean then we -- of course, the first production site, we took containers in was in Ortviken and CTMP. So as it is just now, we are a little bit more focused on fine-tuning, I mean, also try to validate products for the European market and so on. So it is very small or from time to time, negative market going from Sweden over to Asia in CTMP as it is just now. Operator: Thank you. That was our last question. I will now hand it back to the host for closing remarks. Ulf Larsson: Thank you, and that concludes our presentation of the third quarter results. We'll come back in January for our full year report. Thank you for watching, and thank you for listening.
Operator: Thank you for standing by, and welcome to the First Hawaiian, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Kevin Haseyama, Investor Relations Manager. Please go ahead, sir. Kevin Haseyama: Thank you, Jonathan, and thank you, everyone, for joining us as we review our financial results for the third quarter of 2025. With me today are Bob Harrison, Chairman, President and CEO; Jamie Moses, CFO; and Lee Nakamura, Chief Risk Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the Investor Relations section. During today's call, we will be making forward-looking statements, so please refer to our Slide 1 for our safe harbor statement. We may also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measurements to the most directly comparable GAAP measurements. And now I'll turn the call over to Bob. Robert Harrison: Hello, everyone. Thank you, and thanks for joining us today, and I'll start by giving a quick overview of the local economy. The state unemployment rate continued to drift lower and was at 2.7% in August compared to the national unemployment rate of 4.3%. Through August, total visitor arrivals were up 0.7% compared to last year as strength in the U.S. Mainland arrivals more than offset weaknesses in Japanese and Canadian arrivals. Year-to-date, visitor spending was $4.6 billion, up 4.5% compared to the same period of last year. The housing market remains stable. The median single-family sales price on Oahu was $1.2 million in September, up 3.8% from last year. The median condo sales price on Oahu for September was $509,000, down 1.7% from the prior year. Before we move on, I wanted to discuss the federal government shutdown, and it's too early to measure the full impact on the Hawaii economy, but with a large civilian federal workforce, we expect that many families will begin to face financial hardship. Through the Hawaii Bankers Association, all the local banks have asked affected families to contact their local bank to discuss available relief measures. Turning to Slide 2. We had another strong quarter as net income increased compared to the second quarter. The improvement relative to the prior quarter was driven by higher net interest and noninterest income, partially offset by a higher effective tax rate. As you might recall, our second quarter results included the impact from a change in California tax law, which resulted in a net benefit of $5.1 million last quarter. The effective tax rate in the third quarter returned to a more normalized 23.2%. Turning to Slide 3. The balance sheet remains solid as we continue to be well capitalized with ample liquidity. We held the investment portfolio relatively flat and loans declined by $223 million. Average deposits were higher during the quarter, and we saw a surge at the end of the quarter due to inflows in public operating accounts, and Jamie will cover this in more detail in a little bit. We also repaid the $250 million FHLB advance that matured in September. And during the quarter, we repurchased about 965,000 shares at a total cost of $24 million. We have $26 million of remaining authorization under the approved 2025 stock repurchase plan. Turning to Slide 4. Total loans declined by about $223 million in the quarter. The decline was primarily in C&I. Dealer flooring balances fell by $146 million and paydown on lines of credit by several Hawaii corporate borrowers added about $130 million to the decline in the C&I balances. We're seeing strong originations so far in the fourth quarter and expect to end the year about flat to year-end 2024. Now I'll turn it over to Jamie. James Moses: Thanks, Bob. Turning to Slide 5. Total deposits increased about $500 million in the third quarter. Commercial deposits increased $135 million and were partially offset by a $43 million decline in retail deposits in the quarter. The decline in retail deposits seems to be largely due to seasonality, where we have seen a pattern of declining balances in the third quarter, followed by growth in the fourth quarter. Total public deposits increased by $406 million, and all of that growth was in operating accounts. There was no change in the balance of public time deposits. In the fourth quarter, we expect seasonal increases in both retail and commercial deposits, while seeing outflows in public deposits. The total cost of deposits fell by 1 basis point and the ratio of noninterest-bearing deposits to total deposits was a strong 33%. On Slide 6, net interest income was $169.3 million, $5.7 million higher than the prior quarter. The NIM in the second -- third quarter was 3.19%, up 8 basis points compared to the prior quarter. The increase in the margin was primarily driven by higher asset yields as well as some nonrecurring items such as loan fees. The run rate NIM for the month of September was 3.16%, and we continue to expect positive NIM momentum in the fourth quarter, and our current thinking is that the margin will advance a few basis points from the September NIM. This guidance reflects the impact of our fourth quarter loan and deposit outlook and additional 25 basis point rate cuts in both October and December. Turning to Slide 7. Noninterest income was $57.1 million in the quarter. Noninterest income benefited from higher BOLI income due to favorable market movements and swap income. We continue to expect the normalized run rate of noninterest income will be about $54 million per quarter. There were no unusual expense items in the third quarter. And based on our year-to-date expenses, we now expect that full year expenses will come in below our most recent outlook of $506 million. And now I'll turn it over to Lee. Lea Nakamura: Thank you, Jamie. Moving to Slide 8. The bank continued to maintain its strong credit performance and healthy credit metrics in the third quarter. Credit risk remains low, stable and well within our expectations. We are not observing any broad signs of weakness across either the consumer or commercial books. Classified assets increased $30.1 million due primarily to a single borrower, who is a long-time customer that we know well and are continuing to work closely with. Quarter-to-date net charge-offs were $4.2 million or 12 basis points of total loans and leases. Year-to-date net charge-offs were $11.3 million. Our annualized year-to-date net charge-off rate was 11 basis points or 1 basis point higher than in the second quarter. NPAs and 90-day past due loans were 26 basis points at the end of the third quarter, up 3 basis points from the prior quarter, resulting from a slight increase in nonaccruals. Moving to Slide 9. We show our third quarter allowance for credit losses broken out by disclosure segment. The bank recorded a $4.5 million provision in the third quarter. The asset ACL decreased by $2.6 million to $165.30 million with coverage remaining at 117 basis points of total loans and leases. We believe that we continue to be conservatively reserved and prepared for a wide range of outcomes. And now we would be very happy to take your questions. Operator: [Operator Instructions] Our first question comes from the line of David Feaster from Raymond James. David Feaster: I wanted to talk on just kind of the growth outlook. I mean, obviously, we've had some dealer floor plan with a headwind, some just natural declines in C&I. I was hoping you could first maybe touch on kind of how the pipeline is shaping up, demand that you're seeing and other opportunities that you'd be interested in helping accelerate organic growth, whether it's -- is there any appetite for full purchases or C&Is? Just kind of curious kind of your thoughts on, again, what are you seeing now in the pipeline and demand and organic growth and other opportunities to accelerate that? Robert Harrison: David, this is Bob. I'll maybe start off, hand off to Jamie. So yes, the third quarter was a little unusual in that we saw some pretty significant paydowns in dealer floor plan. Part of that was one of our customers sold several franchises. So that impacted that negatively. But overall, we're still very bullish in that business. We're seeing very strong production in the pipeline. There are some of that's already closed for the fourth quarter. Some of that's C&I, a lot of that is CRE. So we think we're going to have a very strong fourth quarter. And as we look to the future, we have considered pool purchases, but maybe I'll ask Jamie to just comment on that. James Moses: Yes. Thanks, Bob. I think we're looking at just in totality, as Bob said, I think we're looking at being able to get back to flat at the end of '25, roughly to where we were at the end of '24, which speaks to the strength of the pipeline that we see today. But to the broader question of pools and purchases, I think we always look at things. And to the extent that we feel like we have some level of expertise or knowledge in particular areas, we look maybe to carve out things that we have expertise in. So for example, maybe like a residential pool of Hawaii loans, right, might be something where we would think the long and hard about purchasing or if there are opportunities around properties in Hawaii that we might look at as well. So for the most part, we see where that we want to grow loans, but we're really looking for areas where we have some sort of expertise or niche knowledge around in order to be able to do that. David Feaster: Okay. That's helpful. And then maybe just -- I mean, the core deposit growth was tremendous. I was hoping you could maybe touch on a bit. You talked on some continued growth in core deposits. Obviously, there's some seasonality that you alluded to. But could you talk about where you're having success driving core deposit growth? And then just, again, the good and the bad of that is we built liquidity. Like how do you think about deploying some of that liquidity in the coming months? James Moses: Yes. Thanks, Dave. So I guess we're going to expect that our deposit total balance is probably going to be like roughly flat at the end of the year to where we are today. And that mix is going to shift a little bit from -- we expect to see some of our public deposits kind of run out here in the fourth quarter, but sort of replaced by retail and commercial deposits. So where we're having success really is our retail teams and our commercial teams are really out there and really talking to our customers and doing a really good job of maintaining, strengthening relationships in the community. And I think we're really trying to focus on that relationship activity. And so we've had a lot of success with that, and that's due to the efforts of our retail and commercial teams primarily out here on the ground. Robert Harrison: And to add to Jamie's answer, as far as the liquidity that we have, we have been -- we are no longer letting the investment portfolio run down. So we're holding that flat. So we have kind of restarted some purchases after a number of years of letting it run down. So we're keeping that relatively flat with similar duration and very similar categories of securities that we're looking at to purchase. David Feaster: Okay. That's helpful. And then maybe just last 1 for me. I appreciate the margin commentary I mean, look, you're naturally rate sensitive just given the strength of your core deposit base and the floating rate nature of some of your loans. Just kind of curious I mean there's a lot of moving parts in here, right? You got liquidity deployment and all -- there's a lot of moving parts. But I'm just kind of curious, first, how do you think about managing deposit costs as the Fed cuts? And then just given the tailwinds from back book repricing, remixing and some of the liquidity deployment that we're talking about, do you think that we can see the margin continue to expand even with Fed cuts next year? James Moses: I think Dave, that depends kind of on the timing and the magnitude of those cuts. I think that would -- that is ultimately by the end of the year, it could be a challenge to see NIM expansion at the end of the year. But for now, I think, for now... Robert Harrison: End of the year and then 2026. James Moses: That's right. Yes. But for now, what we see is that we have sufficient loan growth and sufficient loan growth just sort of cover this, right? So we're still -- we're looking at -- we're looking at $1 billion of cash flows over the next 12 months. At like -- we'll call that like a 125 basis point spread right now to loans that we're putting back on the books. And we have a 200 to 250 basis point spread on the investment portfolio, right now that we're sort of -- that we're keeping flat. So there are a lot of underlying dynamics. And of course, those spreads will decrease, right, the more the Fed decreases as well. But I think the trajectory for now looks like we can still support increasing expansion of the margin. But of course, there will be a natural spot. I think that's maybe like 1% or so from now. So 4 to 5 rate cuts, something like that. There'll be a natural floor to our ability to drive out further decreases in the deposit book. So good and bad news, right? We got a great deposit base, but it can only go so low, right? There's a floor on that. And so I think there is opportunity to continue to expand the NIM. And again, I think that is going to be largely dependent on our ability to generate loans. Operator: And our next question comes from the line of Charlie Driscoll from KBW. Charles Driscoll: This is Charlie on for Kelly Motta, if you could remind us of your capital priorities, how you're viewing the buyback? And from an a perspective, the environment is obviously heating up. Just remind us of your strategy on that front? Robert Harrison: Yes. Thanks, Charlie. So the capital priorities continue to be the same. We'd love to -- we're doing all the loans that fit our credit box and profile. We want to do all those that we can -- and we have a share buyback authority of $100 million. You see that we've done $74 million so far, and the rest of that is going to depend on, I'll call it, market conditions for sure. And I think the dividend is pretty good yields kind of a place. And also just in terms of the ratio of earnings that we pay out is relatively high. So probably not going to see an increase in the dividend or anything like that as part of that at the moment. Charles Driscoll: That's helpful. And then I guess, like circling back to the deposit rate conversation. The pricing has been rational and anticipating some cuts, like we've been hearing some changes in expectations from bank. Maybe just put some numbers around how you're thinking about betas on the way down? Robert Harrison: Yes. So Charlie, we tend to talk about it as beta on our rate-sensitive portfolio. So we continue to have roughly $4.5 billion rate-sensitive deposit portfolio. We've been very successful in -- with past rate cuts. We're talking maybe 90%, 95% betas on that portfolio relative to a Fed rate cut. We think that we're -- that drives a little bit lower and it gets successively lower for each rate cut that we have, but I think right now, I think about maybe like a 90% beta on the next rate cut, 88% on the next 1 after that, 85%, something like that. So we -- we still think we have a range there where we can drive deposit costs lower of course, when the Fed cuts rates as well. So it's a decreasing ability to do that for sure, but still relatively high at the moment. Charles Driscoll: Great. And then I guess, just like a little bit of detail with the margin expansion and the 50 bps of additional costs, are you assuming any loan purchases in that or... James Moses: No loan purchases in that. That's just what we're looking at in terms of looking at our pipelines and talking with the teams over the past month or so, we just expect to have really strong loan growth here in the fourth quarter. Operator: And our next question comes from the line of Anthony Elian from JPMorgan. Anthony Elian: Jamie, just a follow-up on NIM. Just a follow-up on NIM. Slide 5 to 6, you saw a really nice tailwind from loan repricing and looks like every 1 of your loan yields increased from the prior quarter. I'm just wondering how much of a tailwind is left from loan repricing, maybe in 4Q and beyond, just given the outlook for rate cuts on the forward curve? James Moses: Yes. So I think there's still a tailwind there. I guess I'll start with that. But then as we look out, we have $1 billion of fixed rate cash flows coming off of the portfolio over the next 12 months. And right now, we think that, that's repricing higher at like a 125 basis point spread at the moment. So there's still a pretty significant tailwind there. Now the 125 basis points, that's an average. And more the Fed cuts, the tighter that spread gets for sure. But there is still an ability to reprice those cash flows higher. On the investment portfolio, where we're seeing $500 million to $600 million of runoff over the next 12 months, we're getting like a 225 to 250 basis point spread on those purchases. So there's still a really significant sort of balance sheet role impact that we're seeing. That should be a tailwind not only in the fourth quarter, but into the first and second quarters as well. Now again, all of this is dependent upon being able to replace those cash flows with loan growth. And we think we can do that. but it will be dependent upon that sort of loan growth trajectory. And to the extent that we don't get the loan growth, we would consider other things we would consider maybe increasing the size of the investment portfolio. It's not our preferred option. But there are things that we would do to manage the balance sheet and to try to manage that NIM to continued expansion or at least sort of trying to keep it flat as we get those third and fourth and fifth anticipated rate cuts. Anthony Elian: Okay. And then my follow-up, I think you pointed to $54 million of fee income in 4Q. Just what are the areas or headwinds you expect to decline this quarter? Is it just the 2 items you call out on Slide 7. James Moses: Yes. I think that's right, Tony. Yes. It's not really headwinds. It's just we kind of got some good positive surprises here in the third quarter and wouldn't necessarily expect that to continue into the fourth. Robert Harrison: Yes. And to add to that, we have been kind of messaging more in the 51% to 52% range. And now just given the strength of the overall fee business, we're moving that up to 54% as kind of our expected run rate. Operator: And our next question comes from the line of Matthew Clark from Piper Sandler. Matthew Clark: Just to close out the NIM discussion, do you have the spot rate on deposits at the end of September? James Moses: That was 136 basis points end of September. Matthew Clark: Okay. And then the negative migration you saw in substandard this quarter. Can you just speak to what drove that increase? Lea Nakamura: So it's primarily that single loan to our long-time customers. And we're not really worried about loss or anything like that. We work closely with the customer. We just feel it's prudent to continue to update the ratings as we see the financials. Matthew Clark: Okay. I may have missed it, but the type of customer and the situation there? Robert Harrison: We didn't share that one, Matt. So we'd rather not. It's a small town. Matthew Clark: Understood. And then just on the capital question. I don't think you finished up on the M&A piece. But -- and again, I may have missed it, but just any updated comment on M&A discussions you might be having, whether or not things have changed materially since last quarter. Robert Harrison: No, unchanged. We're still open to talking to people and we certainly consider the right opportunity, but no change from previous guidance and discussion. Operator: [Operator Instructions] Our next question comes from the line of Timur Braziler from Wells Fargo. Timur Braziler: Jamie, your comment on total deposits, I want to make sure I heard that right. Is it flat for 4Q or flat for the year? James Moses: It's flat third quarter to fourth quarter. So we expect public to run out in the fourth quarter a little bit, while we increased retail and commercial. Timur Braziler: And then maybe back to Matt's last question. Just more specifically, Mainland M&A. It sounds like that's been something that's at least on the table more recently? Just is that still the case? And maybe just remind us if that is the case, kind of what you'd be looking at as far as criteria goes? Robert Harrison: No change to what I said. Timur, I think the only thing would be it would only be mainland M&A for us because with our HHI market share here, there's nothing we'd be able to do in Hawaii. So but no change. We're certainly open to talking to people and would consider the right opportunity. Timur Braziler: Okay. That's a good point. And then, Bob, your starting comment on expecting many families will face potentially some real hard ships here from a prolonged government shutdown. I guess that comment and then looking at the last few UHERO report, which is calling for a mild recession over the course of the next year. I mean is that any different really from kind of the operating trends on the island over these last couple of years? Does that change the way that you guys are thinking about the local economy and, I guess, more pointed just how much of that is already factored in, in the reserving that you have, particularly on the consumer side. Robert Harrison: Yes. Maybe I'll start and ask Lee, if she has any additional comments. Really no change. We think that the local economy is resilient. I mean people are not the first time this has happened. It's been a little while since there's been a shutdown that's affected salaries and all that. But we just want to make sure, and that's why we want to do it with all the banks here. I want to make sure we're open and people know they can approach us if there's a need. But we've had just very few inquiries, Lee, maybe if you have any additional comments. Lea Nakamura: Not really. We haven't really seen any effects in the credit metrics yet. And -- but we're always cautious and we always take it into consideration, when we try to figure out what the right valuation is for the ACL. Robert Harrison: And on that, I mean, to speak to consumer credit metrics. Lee did mentioned it earlier, but the 2 that tend to pop up soonest is credit cards and indirect and they're doing quite well. So really no -- nothing observable at this point, Timur. Operator: And our next question comes from the line of Jared Shaw from Barclays. Jared David Shaw: Everybody. Following up on that, when you look at the impact of federal spending apart from military in Hawaii. Do you -- are you concerned at all that it could be impacted by reshifting of federal priorities? Or is it still pretty heavily defense focused. So while we're dealing with the shutdown now, you still feel that's not going to change the long-term contribution of federal government spending into Hawaii? Robert Harrison: Yes, Jared, this is Bob. Totally agree. The long-term trend is defense focused, and it's going to be very strong. I'm heading down to Guam for next week, and the spend there is phenomenal and the projects on deck here are very, very strong. So we're not expecting that our core federal employee workforce is pretty stable. The largest employer being the Pearl Harbor and naval shipyard, which is -- and has been identified as a key resource in the Navy. So really stable to improving, I guess, would be the long-term view. Jared David Shaw: Okay. And then in conversations with your floor plan dealers, what's their expectation for sort of auto sale volume going into the next year? Are they -- are they thinking that there's going to be a slowdown in purchase activity? And is that incrementally, I guess, better for you with floor plans if inventories stay around longer? Robert Harrison: Certainly, we have really great customers with strong credit, so we'd love to see higher balances with those same customers. The discussions haven't been as much around next year. It's really been more topical about tariffs and the impacts of tariffs and different manufacturers are picking up some of the impacts of those additional costs. Others, I think we'll start based on the conversations we're having, we'll start to soon start passing those through to customers. And so there's a fair amount of uncertainty still on the end impact of the tariffs that started at the beginning of this year and what consumers will do with potentially higher price points and how that will affect demand. If it slows down demand, maybe not in the next year, but even into the fourth quarter first and second quarters of 2026. That would definitely help us. Jared David Shaw: Okay. And then just finally for me. Have you seen any change in sort of pricing behavior from some of the change in ownership of other Hawaii competitors over the last year. It sounded like earlier in the year, there wasn't really any big change, but are you seeing any change in how they're approaching pricing in the markets? James Moses: Yes. We haven't seen any change in the market as far as competitive dynamics or pricing. Operator: And our next question comes from the line of Janet Lee from TD Securities. Sun Young Lee: Hello. Going back to M&A, just quickly, I know you guys touched upon it just a few times on this call. But can you remind us what is your stance -- what is your current stance on that M&A -- potential M&A opportunity if you are looking to -- you're considering opportunities? Like what would be -- what would make sense in the Mainland? Robert Harrison: Really nothing to add to our earlier comments, I guess the only thing would be in the Western states. It's not that we're going to go center or East. But it's just -- we're open to talking to people and we're considering the right opportunity and really nothing more to share than that at this time. Sun Young Lee: Okay. Got it. Fair. I think people are entertaining the idea of resi mortgage coming back if the rate comes down to the 5 handle, is was that something that would be helpful to your market or perhaps not because it's more of a supply issue. How should I think about the positive impact from that point on your resi? James Moses: Yes, Janet, it's a good question. I think that the lower the rates go, just the more activity you will see. You are correct that there is some sort of supply constraints around that for sure. But I think it will be helpful for balances. I think that there's -- that there should be some good opportunities there. So yes, I mean, I think, ultimately, for the mortgage business, in particular, if you -- if the rates go a little bit lower, we could see some increased activity in that area, and that should be constructive. Sun Young Lee: Got it. And apologies if this was already covered, but the paydown on $130 million of paydown on corporate lines, is that -- was that just seasonality that is coming back or just one-off? Or is it really a big quarter for paydowns? Robert Harrison: No, it wasn't necessarily seasonally. These were earlier draws for specific things, and now that that's done, they're getting repaid. It's it was odd in that several happened in the same quarter, but there is nothing unusual about the borrowing and repayment. It's just -- just all kind of lend -- the draws weren't in the same quarter, but the paydowns were. So that's why we didn't call it out on the way up, but we're calling it out when it got repaid. Operator: [Operator Instructions] And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Kevin Haseyama for any further remarks. Kevin Haseyama: Thank you. We appreciate your interest in First Hawaiian, and please feel free to contact me if you have any additional questions. Thanks again for joining us, and have a good weekend. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Greetings, and welcome to the OMA Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Emmanuel Camacho, Investor Relations Officer for OMA. Thank you. You may begin. Emmanuel Camacho: Thank you, Melissa. Hello, everyone, and welcome to OMA's Third Quarter 2025 Earnings Conference Call. We're delighted to have you join us today as we discuss the company's performance and financial results for the past quarter. Joining us today are CEO, Ricardo Duenas; and CFO, Ruffo Pérez Pliego. Please be reminded that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on current management expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our control. And now I'll turn the call over to Ricardo Duenas for his opening remarks. Ricardo Duenas: Thank you, Emmanuel. Good morning, everyone, and thank you for joining us today. This morning, Ruffo and I will review our operational performance and financial results. And finally, we will be pleased to answer your questions. In the third quarter of this year, OMA's passenger traffic totaled 7.6 million passengers, an 8% increase year-over-year. Seat capacity increased by 11% during the quarter. On the domestic front, passenger traffic grew by 7%, driven primarily by the Monterrey Airport, which saw increases on routes to the metropolitan area of Mexico City, mainly to Toluca Airport, Bajio, Puerto Vallarta, Mérida and Querétaro. These routes collectively added over 300,000 passengers during the quarter, representing 68% of the total domestic passenger growth. International passenger traffic increased by 11%, mainly driven by Monterrey on the route to San Francisco, San Luis Potosi with higher traffic on the routes to Atlanta and Dallas and Tampico on the route to Dallas. Together, these routes added more than 47,000 passengers during the quarter, accounting for 46% of the total international passenger growth. Moving on to OMA's third quarter financial highlights. Aeronautical revenues increased 11% with aeronautical revenue per passenger rising 3% in the quarter. Commercial revenues grew by 7% compared to the third quarter of '24 and commercial revenue per passenger stood at MXN 60. Commercial revenue growth was mainly driven by parking, restaurants, VIP lounges and retail, mainly as a result of higher penetration and an increase in passenger traffic. Occupancy rate for commercial space stood at 96% at the end of the quarter. On the diversification front, revenues increased 8%, with Industrial Services contributing most of this growth, mainly because of additional square meters leased in our industrial park as compared to the third quarter of '24 and contractual increases to rents. OMA's third quarter adjusted EBITDA increased by 9% to MXN 2.7 billion with a margin of 74.8%. On the capital expenditures front, total investments in the quarter, including MDP investments, major maintenance and strategic investments were MXN 472 million. Finally, in relation to the negotiation process of our next Master Development Program discussion with the AFAC remain underway. We submitted our proposed Master Development Program for the '26-'30 period at the end of June, and the process remains on track. During the quarter, we continued addressing AFAC's technical observations and advancing the validation of investment projects in accordance with the schedule agreed with the authority. We continue to expect the final resolution and publication of results during December. Our expectations regarding the overall investment level remain at committed levels of MDP investment similar in real terms to the level of the previous '21-'25 MDP and maximum tariff increase in the low single digits. I would now like to turn the call over to Ruffo Pérez Pliego, who will discuss our financial highlights for the quarter. Ruffo Pérez del Castillo: Thank you, Ricardo, and good morning, everyone. I will briefly go over our financial results for the quarter, and then we will open the call for your questions. Aeronautical revenues increased 10.6% relative to 3Q '24, mainly due to the increase in passenger traffic as well as higher aeronautical yields. Non-aeronautical revenues increased 7.3%. Commercial revenues increased 7.0%. The line items with the highest growth were parking, restaurants, VIP lounges and retail. Parking grew by 9.4%, mainly as a result of higher passenger traffic. Restaurants and retail increased 9.8% and 8.2%, respectively, both driven by higher passenger traffic as well as the previously opened or replaced outlets. VIP lounges rose 9.9%, mainly due to higher market penetration, primarily in Monterrey as well as the increase in passenger traffic. Diversification activities increased 8.2%. Industrial Services, which relates to the operation of the industrial park contributed most to the growth in the quarter, increasing by 53%, resulting from higher square meters leased as compared to third quarter of '24 as well as contractual rent increases. Total aeronautical and non-aeronautical revenues grew 9.8% to MXN 3.5 billion in the quarter. Construction revenues amounted to MXN 382 million in the third quarter. The cost of airport services and G&A expense increased 14.4% versus 3Q '24, primarily due to the following line items: Payroll grew by 10.7%, mainly as a result of annual wage increases as well as higher headcount as compared to the third quarter of '24. Other costs and expenses increased by 22% due primarily to higher IT-related requirements and transportation services. Contracted services expense rose 16.4%, mainly due to higher cost of security and cleaning services following contract renewals in prior quarters, reflecting the inflationary pressures and tight labor market conditions in Mexico. Minor maintenance increased 19.8%, primarily due to timing effect of the works performed. Concession tax increased by 10.4% to MXN 290 million, in line with revenue growth. Major maintenance provision was MXN 28 million as compared to MXN 75 million in the same quarter of last year. OMA's third quarter adjusted EBITDA grew 9.0% to MXN 2.7 billion and adjusted EBITDA margin reached 74.8%. Our financing expense increased by 9.8% to MXN 299 million, mainly driven by higher interest expense as a result of higher average debt levels. Consolidated net income was MXN 1.5 billion in the quarter, an increase of 9.1% versus the same quarter of last year. Turning to our cash position. Cash generated from operating activities in the third quarter amounted to MXN 1.9 billion and investing and financing activities used cash for MXN 480 million and MXN 365 million, respectively. As a result, our cash position at the end of the quarter stood at MXN 4.4 billion. At the end of September, total debt amounted to MXN 13.6 billion, and we maintained a solid financial position, ending the quarter with a net debt to adjusted EBITDA ratio of 0.9x. This concludes our prepared remarks. Melissa, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Pablo Ricalde with Itaú. Pablo Ricalde Martinez: I have one question regarding your traffic expectations maybe for the fourth quarter and maybe your early thoughts on 2026, taking into account the World Cup. Ricardo Duenas: Yes. Thank you, Pablo. So we're looking for the rest of the year to finish in our traffic overall for the year between 7% and 8% growth. And our expectation at this point in time for next year, it's traffic to be in the low to mid-single digits for next year growth. Operator: [Operator Instructions] Our next question comes from the line of Enrique Cantu with GBM. Unknown Analyst: I have a quick question. Commercial revenue per pass declined this quarter, the first contraction since early 2023. Could you elaborate on the main drivers behind this softness? And how do you plan to reaccelerate this [ known ] area of growth? Ruffo Pérez del Castillo: Enrique, so yes, commercial revenue per passenger mainly reflects -- in the quarter reflects the impact of onetime revenues recorded in the previous year. And in the following quarters, we expect commercial revenues per passengers to gradually increase in line with inflation from current levels. Unknown Analyst: Okay. Perfect. And just another one, if I may. SG&A and utility costs rose this quarter, eroding margins despite strong top line growth. Do you view these cost pressures as temporary? Or should we expect a structurally higher cost base heading into 2026? Ricardo Duenas: Sorry, could you repeat that? Maybe you're too close to the microphone. Unknown Analyst: Yes, sorry. So it's regarding SG&A and utility costs. We saw that this quarter they erode margins. Do you view these cost pressures as temporary? Or should we expect this higher cost base heading into 2026? Ruffo Pérez del Castillo: So yes, as we mentioned, there are some specific line items that are facing some pressures like cleaning and security, where the total level of cost in the following quarters should be similar to the level of cost that we are facing right now. However, we do have started to analyze different alternatives to continue maintaining cost at check, and it's part of the history of the company to be very cost conscious, and we expect pressures not to be permanent. Operator: Our next question comes from the line of Gabriel Himelfarb with Scotiabank. Gabriel Himelfarb Mustri: A quick question on capital allocation. First, for the next MDP, I think you have mentioned that almost all the capital will go to Monterrey. It will be focused on, perhaps, increasing the capacity of the airport or developing more the commercial spaces, the commercial portion of the business? And my second question, are you seeking or have you considered expanding gap -- sorry, OMA's portfolio towards outside Mexico? Ricardo Duenas: Yes. Thank you, Gabriel. Regarding the last part, we're always looking for opportunities to expand internationally. At this point in time, we don't have a concrete transaction that we could share. In terms of the MDP, it's around half of the MDP will be allocated to Monterrey, given that half of the traffic is allocated in Monterrey. We're looking to expand in most of -- in capacity that will generate commercial opportunities as well. There's pavement, there's technology, there's environmental and sustainability projects as well. Operator: Thank you. There are no questions at this time. I'll turn the floor back to Mr. Duenas for any final comments. Ricardo Duenas: We would like to thank you, everyone, for participating in today's call. We appreciate your insightful questions, engagement and continued support. Ruffo, Emmanuel and I remain available should you have any further questions or require additional information. Thank you once again, and have a great day. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to the NatWest Group Q3 Results 2025 Management Presentation. Today's presentation will be hosted by CEO, Paul Thwaite; and CFO, Katie Murray. After the presentation, we will take questions. Paul Thwaite: Good morning, and thanks for joining us today. I'll start with a short introduction before I hand over to Katie to take you through the numbers. We have delivered another strong quarter as we continue to execute on our priorities of disciplined growth, bank wide simplification, together with managing our balance sheet and risk well. Though inflation is above the Bank of England's 2% target, the economy is growing, unemployment is low, wage growth is above the rate of inflation and businesses and households have relatively high levels of savings and liquidity. This is reflected in the levels of customer activity we're seeing across the bank. So let me start with the headlines for the first 9 months. Lending has grown 4.4% since the year-end to GBP 388 billion, in line with our annual growth rate of more than 4% over the past 6 years. Growth has been broad-based across our 3 businesses and we attracted a further 70,000 new customers in the quarter. Mortgage lending was up by more than GBP 5 billion for the first 9 months as we broadened our customer proposition with new offers for first-time buyers and family backed mortgages, and issued mortgages to landlords in collaboration with buy-to-let specialists, [indiscernible]. Unsecured lending grew GBP 2.9 billion or 17.3%, and we made good progress integrating our recently acquired Sainsbury's customers. They're now able to view their credit card, link their Nectar card and view their Nectar points from credit card spending via the NatWest app. In commercial and institutional, we delivered lending growth of GBP 7.9 billion or 5.5% across both our large corporate and institutional and commercial mid-market businesses. in areas such as infrastructure, social housing and sustainable finance. As the #1 lender to infrastructure, we are supporting many large-scale programs up and down the country. And we have delivered GBP 7.6 billion towards our 2030 group climate and transition finance target of GBP 200 billion announced in July. Deposits grew 0.8% to GBP 435 billion as we balance volume with value in a competitive market and as customers manage their savings across cash deposits and investments. And there's more customers across the bank chose to invest with us assets under management and administration have grown 14.5% to GBP 56 billion. This has contributed to growth in noninterest income, along with higher fees from payments, cards and good performance in our currencies and capital markets business. This customer activity has resulted in a strong financial performance. Income grew to GBP 12.1 billion, 12.5% higher than the first 9 months last year. Costs were up 2.5% at GBP 5.9 billion resulting in operating profit of GBP 5.8 billion and attributable profit of GBP 4.1 billion. Our return on tangible equity was 19.5%. Given the strength of our performance, we are revising our full year guidance for income to around GBP 16.3 billion and for returns to greater than 18%. We continue to make good progress on both simplification and capital management. We have reduced the cost/income ratio by 5 percentage points to 47.8%. And and we generated 202 basis points of capital for the 9 months and ended the third quarter with a CET1 ratio of 14.2%. This strong capital generation allows us not just to support customers but to invest in the business and deliver attractive returns to shareholders. As you know, we announced a new share buyback of GBP 750 million at the half year, of which 50% has now been carried out. and we expect to complete the buyback by our full year results. Earnings per share have grown 32.4% year-on-year and TNAV per share is at 14.6% at 362p. So a strong performance for the first 9 months. I'll hand over to Katie to take you through the numbers for the third quarter. Katie Murray: Thank you, Paul. I'll talk about the third quarter using the second quarter as a comparator. Income, excluding all notable items, was up 3.9% at GBP 4.2 billion. Total income was up 8.2%, including GBP 166 million of notable income items. Operating expenses were 2.1% more at [indiscernible] due to lower litigation and conduct charges. And the impairment charge was GBP 153 million or 15 basis points of loans. Taken together, this delivered operating profit before tax of GBP 2.2 billion for the quarter and profit attributable to ordinary shareholders of GBP 1.6 billion. Our return on tangible equity was 22.3%. Turning now to income. Overall income, excluding notable items, grew 3.9% to GBP 4.2 billion. Across our 3 businesses, income increased by 2.5% or GBP 101 million. Net interest income grew 3% or GBP 94 million to GBP 3.3 billion. This was driven by further lending growth and margin expansion as tailwinds from the structural hedge and the benefit from the Sainsbury's portfolios for a full quarter more than offset the impact of the base rate cut in August. Net interest margin was up 9 basis points to 237, mainly due to deposit margin expansion and funding and other treasury activity. Noninterest income across the 3 businesses was up 0.8% compared with a strong second quarter. This was due to increased card fees in retail banking, higher investment management fees in private banking and wealth management. and a good performance in currencies and capital markets with heightened volatility. Given continued positive momentum and a clearer line of sight to the year-end, we have refined our income guidance and now expect full year total income, excluding notable items, to be around GBP 16.3 billion. We continue to assume 1 further base rate cut this year with rates reaching 3.75% by the year-end. This improved guidance alongside strong Q3 returns means we now expect return on tangible equity for the full year to be greater than 18%. Moving now to lending, where we have delivered another strong quarter of growth. Gross loans to customers across our 3 businesses increased by GBP 4.4 billion to GBP 388. 1 billion. with growth well balanced between personal and corporate customers across retail banking and private banking and wealth management, mortgage balance grew by GBP 1.7 billion, and our stock share remained stable at 12.6%. Unsecured balances increased by a further GBP 100 million, mainly in credit cards. In commercial and institutional, gross customer loans, excluding government schemes were up by GBP 3 billion. This includes GBP 1.6 billion across our commercial mid-market customers, in particular, in project finance, social housing and residential, commercial real estate as well as GBP 1.5 billion in corporate and institutions, mainly driven by infrastructure and funds lending. I'll now turn to deposits. These were broadly stable across our 3 businesses at GBP 435 billion. Retail banking deposit balances were down GBP 0.8 billion, with growth of GBP 0.6 billion in current accounts, more than offset by lower fixed-term saving balances following large maturities. Private banking balances that reduced by GBP 0.7 billion with flows into investments as customers diversify and manage their savings as well as tax payments made in July. We saw a small increase in commercial and institutional of GBP 0.4 billion, with higher balances in both commercial, mid-market and business banking. Deposit mix across the 3 businesses were broadly stable. Turning now to costs. We are pleased with our delivery of savings this year, which allows us to invest and accelerate our program of bank-wide simplification. Costs grew 1% to GBP 2 billion, including GBP 34 million of our guided onetime integration costs. This brings integration costs for the first 9 months to GBP 68 million. We remain on track for other operating expenses to be around GBP 8 billion for the full year. plus around GBP 100 million of onetime integration costs. This means you should expect expenses to be higher in the fourth quarter, driven by the annual bank levy and the timing of investment spend. I'd like to turn now to impairments. Our prime loan book is well diversified and continues to perform well. We are reporting a net impairment charge of GBP 153 million for the third quarter. equivalent to 15 basis points of loans on an annualized basis. Our post model adjustments for economic uncertainty of GBP 233 million are broadly unchanged. And following our usual review, our economic assumptions also remain unchanged. Overall, we are comfortable with our provisions and coverage, and we have no significant concerns about the credit portfolio at this time. Given the current performance of the book and the 17 basis points of impairments year-to-date, we continue to expect a lower impairment rate below 20 basis points for the full year. Turning now to capital. We ended the third quarter with a common equity Tier 1 ratio of 14.2%, up 60 basis points on the second. We generated 101 basis points of capital before distributions, taking the 9-month total to 202 basis points. Strong third quarter earnings added 84 basis points and the reduction in risk-weighted assets contributed another 8 basis points. Risk-weighted assets decreased by GBP 1 billion to GBP 189.1 billion. GBP 0.9 billion of business movements which broadly reflects our lending growth and GBP 0.3 billion from CRD 4 model inflation were more than offset by a GBP 2.2 billion reduction as a result of RWA management. This brings our CET1 ratio before distributions to 14.6%. We accrued 50% of attributable profits for the ordinary dividend as usual, equivalent to 42 basis points of capital. We continue to expect RWAs of GBP 190 billion to GBP 195 billion at the year-end, with a greater impact from CRD4 expected in the fourth quarter. Turning now to guidance for 2025. We now expect income excluding notable items, to be around GBP 16.3 billion and return on tangible equity to be greater than 18%. Our cost impairment and RWA guidance remains unchanged. And with that, I'll hand back to Paul. Thank you. Paul Thwaite: Thank you, Katie. So to conclude, we're pleased to report another very strong quarter of income growth, profits, returns and capital generation. This has been driven by customer activity across all 3 of our businesses, leading to strong broad-based lending growth and robust fee income. Our continued focus on cost discipline has delivered meaningful operating leverage. And as we actively manage both our balance sheet and risk, the business remains well positioned to deliver strong shareholder returns. As you've heard, we have upgraded our full year income and returns guidance today. And we'll update you on our guidance for 2026 and share our new targets for 2028 at the full year in February. Many thanks. We'll now open it up for questions. Operator: [Operator Instructions] Our first question comes from Benjamin Caven-Roberts of Goldman Sachs. Benjamin Caven-Roberts: So 2 for me, please. First on deposits and second, on noninterest income. So on deposits, could you talk a bit about deposit momentum in the business? And in particular, you mentioned the retail fixed term outflows over the quarter. Could you talk a bit more about how much of that is reflecting conscious pricing decisions? And then looking ahead, the sort of trajectory for deposits going forward? And then on noninterest income, very strong even when adjusting out the notable items related to derivatives. Could you talk about momentum in that franchise and what business drivers you're particularly focused on looking ahead? Paul Thwaite: Thanks, Ben. Good to hear from you. So let's take them 1 by one. So on deposits, so big picture is up around GBP 3.5 billion, around 1% year-to-date. Different stories within the different businesses. I guess, we talked at the half year around the kind of ISA season and some of the -- get the confluence of debate around the future of ISA and how that led and some of the movements in the swap curves on the back of tariffs and how that led to different pricing. That period is behind us. There's been more normalized pricing since the kind of April, May. If you look at our 3 businesses, I'd say slightly different trends. I'll finish with retail because there's more to unpack there. On the commercial side, deposits are up, encouragingly, that's in kind of the business bank and commercial mid-market. That's good. Private bank cash deposits are down. A combination of things, July, we saw some tax payments -- but also we see more funds shift from cash deposits into securities and investments, which is a net positive trend. In retail, if you look at current account balances, they are up. So kind of operational balances, salary accounts, you can see that the numbers are up there. I think the details are in the disclosures. Instant Access is flat. -- where we've seen some reductions is in fixed term accounts. And that reflects a number of mature -- large maturities that we had during the quarter. We're pleased with our retention rates. They're running about 80%, 85%. But as you alluded to, given our LDR at 88%, LCR at 148% we're finding a right balance between value and volume. So we've been pretty dynamic, and we're focusing on where we see funding and customer value. So that's that's unpacking the deposit story for you. So different stories in different businesses, relatively stable given our overall funding profile, very focused on managing appropriately for value. On the second question, which is non-NII, yes, as you alluded to, we're pleased with the quarter, and we're pleased with the year-to-date. Good momentum in the areas that we've been focusing on. I mean it's quite broad-based actually, when you unpack it, cards, payments, but obviously good contribution within C&I from our markets business driven by the strong FX franchise and by the capital markets business. So we've had a strong quarter 3 there, probably slightly stronger than we expected when we spoke to you at the half year. We feel as if our focus on those areas, whether it's the market part of commercial institutional, whether it's our payments business. But also, as you can see in our wealth business, the fees from assets under management are increasing as well. So it feels like we've got good progress and good momentum on fees and it remains a strategic area of focus for us. Thanks, Ben. Operator: Our next question comes from Sheel Shah of JPMorgan. Sheel Shah: Great. Firstly, on the costs. You've reiterated your cost guidance for the year despite the strong third quarter performance. How should we think about cost growth going forward, given we have CPI going back towards 4%. You're clearly simplifying the bank internally. Do you think a 3% cost growth number is the right level for the bank? Or do you think that maybe understates your ability to manage the cost base? And then secondly, on capital, could you give us a steer on the CRD impact that we expect for the fourth quarter? And maybe thinking about the fourth quarter capital level, how are you thinking about operating in that 13% to 14% range? Is there anything preventing you from moving down towards the 13%? Or are you managing maybe for M&A or anything else maybe in the horizon that you're thinking about? Because this is clearly the strongest capital print we've had for the last maybe 3, 4 years or maybe 2 to 3 years for the bank overall. Paul Thwaite: Thanks, Sheel. Katie, I'll take the cost and then turn it over to you on the capital piece of that okay. Katie Murray: Yes. Paul Thwaite: On cost, Sheel, so as you say, it's a -- it's a strong year-to-date picture if you look at year-on-year comparisons. And obviously, we have the one-off in terms of the integration costs as well of Sainsbury's. I am pleased with the momentum we're getting on the simplification agenda. I think that's -- you can see that starting to bear fruit. It's also I think most pleasingly, it's a bit of a flywheel because it creates investment capacity to drive further transformation in the business. And it's not only cost out it's also improving customer experience and colleague experience as well. So as you alluded to, we're holding with the current year guidance, GBP 8 billion plus the GBP 100 million of integration costs, but we are pleased with the momentum on the agenda -- on the simplification agenda. I'm not going to be drawn on kind of 26 costs or future costs. We'll talk to you in February around '26 guidance and new '28 targets. But what I would say thematically is we still have a very significant focus on cost management, and we're a very high conviction on the simplification agenda. And to help put that in context a little bit for you to deliver the cost print that we are doing this year requires us to take more than 4% out of the kind of the underlying business. so that we can support the investment, the inflation-related changes, be they wages or tech contracts. So we've got good momentum in kind of taking that, driving that efficiency out. been able to invest, but also delivering good cost control. So that's the ethos going forward. And the levers that we're pulling those levers can still be pulled moving forward, whether that's continued acceleration of our digitization, streamlizing and modernizing the tech estate. Just by way of example, we decommission 24 platforms in retail so far this year, which is great. You've seen we've done a lot of work simplifying our operating model, whether it's in our wealth business, moving some of the support areas in Switzerland to the U.K. and India rationalizing our European footprint, legal entity footprint. and just some of the good organizational health measures. So it feels as though those levers that we've been pulling can continue to be pulled -- and then obviously, you lay over that some of the productivity benefits we're seeing from AI and those activities around customer contact, software engineering. So net-net, I'm not giving you a number for '26, but hopefully giving you a sense of how we're thinking about it and where the momentum is coming from, and therefore, our confidence in maintaining a good healthy cost profile going forward. Katie? Katie Murray: Perfect. Sure. So Sheel, I'll just start off talking a little bit with CRD for the interest on capital as well. So look, as you look at it, you're absolutely right. In the quarter, limited CRD4 impact. We are expecting the majority of that in Q4 and a little bit of that may even bleed into 2026. So when you think of our kind of RWAs from here, it's very much about the loan growth, the management actions as well as that more material impact of CRD4 coming in, in the fourth quarter. And then going forward, you're familiar with Basel 3.1 coming in in 2026. That is always important to remember that comes with a bit of a Pillar 2 reduction when it comes through in terms of capital. But when I think of kind of the RWAs is to kind of think of the absolute growth that we're talking about in the book, importantly, the mix of that growth, but also the kind of risk density that you see once we pass the CRD for and the Basel 3.1. And of course, obviously, the continuing strength of our management action program that we have. And then if you turn to kind of capital, clearly, a really strong print today, very pleased with the 101 basis points we did in the third quarter, 202 bps for the first 9 months. I mean a great result by any measure. We've always said that we're happy to operate down to that 13%. We do think about capital generation and when we think of it in terms of dividends and where we're going to land and things like's that, we do debate the sort of next sort of 6, 12 months as well because you've got to think about we really try to manage a consistent program of capital return back to the market, but also it mindful of that RWA generation that's coming, whether it be from regulatory change or the growth the growth within the book. And so as you -- I would kind of as you consider where we might land and what we might think about is think on those various points. Thanks very much, Sheel. Paul Thwaite: Thanks Sheel. Operator: Our next question comes from Aman Rakkar of Barclays. Aman Rakkar: I had 2 questions, please. I guess we're all probably singularly focused on 2026 at this stage. So particularly on income, love to kind of get your take on how we should think about the various drivers from here across I guess margin developments, clearly, loan growth continues to surprise positively, but any color you can provide on kind of the drivers of fee income from here would be really helpful. And I guess the second question was around your longer-term targets that hopefully you're going to present to the market in the new year. And to me, it looks like there is the underpinning of pretty decent operating leverage for a number of years here, not least because of the structural tailwind to '28 that you guys flagged. So I guess one for Paul really in terms of your view on structural operating leverage in your business on a multiyear view from here, how confident you are in that in terms of some of the levers you might want to pull -- and I guess, I'm ultimately interested in the RoTE output. For me, you're doing 18% this year, and there's no reason to think in my mind why you don't accrete quite nicely over and above that level as you realize that operating leverage. So any kind of color you can give on that basis would be really helpful. Paul Thwaite: Katie, do you want to take '26 and I'll talk about. Katie Murray: Perfect. That's great. Thanks, good to hear your voice. Look, we do continue to expect the income growth that we've seen throughout our guidance period, and we do remain confident in that growth trajectory beyond 2025. So as I look at 2026, there's probably a few things I would kind of guide you to. One, growth. I mean, we've talked about this a lot, but we've got a strong multiyear track record of growth across all 3 of our businesses. We outpaced the wider sector on that. if we look at the breadth of our business, we know that we're well placed to capture demand as it comes through, and we'll continue to deploy capital throughout 2026, and we do expect that growth to continue. Obviously, there's a mix of growth across both sides of the balance sheet, and that's very much a function of customer and competitor behavior. The hedge, I think you're all very familiar with the hedge these days. We've talked about it such a lot over this last year, but certainly, strong growth into 2026, over GBP 1 billion higher in absolute terms in 2025. I think that's well understood by all of you. Rate cuts, we do expect one further rate cut in Q1 after our plans still have a rate cut in November. So we get to a kind of terminal rate of 3.5%. And then you'll see the kind of averaging impact of the rates we've had this year coming through into 2026. Paul has already spoken on noninterest income and our confidence in that business, very much the strength of the kind of customer franchise, always dependent on customer volatility and -- sorry, customer activity and volatility, but it served us very well this year. But if I think of all of those trends together, Aman, they will continue beyond next year as well, obviously, with the exception of rate cuts as we believe we'll get to that terminal rate in 2026. But I'd agree with you, we feel quite well placed at the moment. Paul? Paul Thwaite: Thanks, Katie, and thanks, Aman. And yes, A, we've announced today that we'll share targets for '28 in February. So we've been very explicit on that. So we look forward to that session. But as you say, it's obvious we've got good momentum in the business, and that's predicated on strong operating leverage. If you look at today's numbers, we've got a 5% cost/income ratio improvement, and we've guided to over 9% jaws for the year. So a very strong proof point of the operating leverage that we've got in the current business model and business mix, which we have talked about previously. But as I said, I'm just very pleased that it's bearing fruit as the -- both the income growth and the simplification agenda comes through. as I said to Sheel's question, we are high conviction on the simplification agenda. The levers we are pulling are working, and we can see a path to continue to pull those levers, which should further support the operating leverage to link it to Katie's answer as we see the top line growth through the different aspects. It's our seventh year of growth above 4% on the lending side. So that gives us confidence there that we've got customer businesses that will capture demand and have grown above market growth levels over a multiyear track record. So that's what's going to inform our thinking as we go through. But the underlying thesis here is very tight management of costs that creates capacity to invest, growing the customer franchises, strong jaws, generates a lot of capital, over 100 basis points in the quarter, over 200 for the year, and that gives us confidence about the outlook. So hopefully, that gives you a sense how we're thinking about it. And obviously, we'll talk specific numbers in February. Thanks Aman. Operator: Our next question comes from Alvaro Serrano from Morgan Stanley. Alvaro de Tejada: Hopefully, you can hear me okay. I guess the 2 bit follow-ups, but I'm interested. NatWest Markets continues to do very well and hold up very well. And I know there's a history there, and I suspect part of the cautious guidance has been on the limited visibility of the nature -- because of the nature of the business. But given it continues to perform pretty steadily, consensus has it down the contribution in 2026, and there's not a lot of growth medium term in noninterest income. Given the performance the last few years, can you sort of share your reflections on that business? How much is being cyclical versus what you changed in the business? And is that right to assume a normalization down medium term and next year in particular? And second, around loan growth, it continues to do very well. in corporate, I'm thinking now it was lumpy to start with in corporate and institutional, but it does look like it's much more spread out in mid-market now. Again, as we think about the next few quarters, how do you see that momentum? Should we think that this level of growth is sustainable? Paul Thwaite: Thanks, Alvaro. Katie, do you want to take the C&I kind of markets products question, and I'll take the wider lending. Katie Murray: Yes. No, absolutely. So I mean, Alvaro, it's interesting. Obviously, you've been with us for some time, and you've been on that journey in terms of NatWest Markets. And I think the real strategic important thing that kind of has happened really from the beginning of last year is actually the merging of C&I into into that kind of commercial and institutional business so that you have one team really delivering strategically for their customers. And we've really seen the benefit of that coming through. We've had very robust noninterest income. That -- there's been higher fee income coming through in payments and the strong performance from C&I is an important part of that. And it's really around the strategy that we've got of bringing more of the bank to more of our customers. And a result of that, we see -- we saw the strong demand for FX management and then really strong risk management as well against the backdrop of the volatile markets that was there. So really making sure that we were in place for our customers when they needed us in terms of the general kind of market activity. So I would say it is very much the outcome of that strategy of bringing that NatWest activity into the C&I franchise, making sure that we're there to deliver and meet the kind of customer activity as we go forward. And we would expect that to kind of continue from here. Volatility is a big part, of course. It's hard to call where that will land. Customer activity is critical, but we kind of -- we really do see that as a really strong basis going forward. I'd just remind you, as I often do on these calls, is when you're looking at noninterest income, it's always good to look at the 3 businesses. You do get a little bit of noise in the center as you move forward from here that will reduce a little bit as we go forward. But overall income outlook kind of is -- I think we're very pleased with it, and that's what's enabled us to upgrade our guidance for this year. And you've heard me talk around the confidence we have as we go into 2026 as well. Thanks, Alvaro. Paul? Paul Thwaite: Thanks, Katie. And Alvaro, I sense your question on lending was specifically around the commercial institutional business. And -- but just I think it's worth framing our, I guess, our lending growth and our lending opportunity more broadly before that. I say we've got a decent multiyear track record now of growing the 3 businesses. That's 7 years at above 4%. This year, it's currently running up GBP 16 billion. It's up 4.4%. So it's quite broad-based the growth. If you drop down into the commercial franchise, it's a good spot. The quarter 3 print and the growth of around GBP 3 billion is split between, I guess, the large corporates and the mid-market. It's pleasing to see the momentum in the commercial mid-market. You'll have heard me say before, I do think that's kind of a helpful proxy on the kind of wider U.K. environment. When you look at where the growth is coming from in the mid-market, -- you can see it in social housing. You can see it in certain parts of real estate. You can see it in parts of infrastructure. So again, it's quite broad-based. So lending as a total quantum, yes, strong, but the constituent businesses it's coming from is encouraging as well. Infrastructure is a big part of that. And what I'd say is I feel as if our commercial business is very well positioned to some of those bigger structural trends that we're seeing. So whether it is infrastructure, whether it's project finance, whether it's sort of the social housing agenda. So the kind of combination of the structural trends and the policy trends support those areas we are -- we have deep specialisms in and have had for quite a few years. So yes, encouraging, as you say. Thanks Alvaro. Operator: Our next question comes from Chris Cant of Autonomous. Christopher Cant: Can you hear me? Paul Thwaite: Yes, we can. Christopher Cant: Okay. It's still got a little mute icon on the screen, so I was a bit concerned. Paul Thwaite: Crystal clear. Christopher Cant: Just on loan growth, Paul, I mean, I think it's been an area where if I look at consensus, consensus has got 3% or less loan growth in over the next couple of years. It's been something that as a management team, you've typically been reluctant to sort of give an expectation on beyond saying you have a track record of growing quicker than the market. But as you think out to the next planning period, -- how are you thinking about that in absolute terms? I presume you have a view on how much growth you think the market is likely to see and you want to exceed that. But should we be thinking about 4% as a sort of reasonable expectation or in excess of 4% is a reasonable expectation, assuming no kind of macro volatility or blow up? And then on the returns target, please. So again, it's an area where you're a little bit different from your domestic peers. The last 2 return targets you've given, I guess, have been a little bit more of a through-the-cycle expectation where you would expect to hit them sort of regardless of what was happening to rates and the macro environment. Now that things have settled down from a, I guess, customer behavioral perspective, in particular, on the deposit front, are you going to be giving us a different flavor of return expectation when you're looking out to 2028? So will you be guiding on where you think the business will be in '28 with your base case assumption rather than a sort of a floor underpinning a broader range of potentially more downside scenarios around customer behavior and macro activity and so on? Paul Thwaite: Great. Okay. Thank you, Chris. So I'll take the second one quickly first. Obviously, we'll see you in February and talk about it. And obviously, some of the topics you alluded to are what we're thinking about as we go into February and we share '28 numbers. But obviously, we will lay out what assumptions we've made around those targets at that time. But it's a very active debate, as you rightly allude to. On the lending side, I think you characterized the position very well and very consistent with how we see it. We're very confident in the track record that we've had. Our ability to grow above market has been proven year-on-year. It does vary by business and market conditions as to as well. But that's what gives us confidence in terms of the outlook for the lending position. I'm not going to declare new targets or new deltas relative to market growth on the call. I think I've given quite enough color about, I guess, our historic track record and how we're thinking about the business going forward to hopefully give you a sense of confidence and optimism we have around the lending profile. Thanks Chris. Operator: Our next question comes from Jonathan Pierce of Jefferies. Jonathan Richard Pierce: I've got 2 questions. One is on the equity Tier 1 target moving forward. Is that something you'll potentially give us a bit more of an update on in February? Or are we going to have to wait until the back end of the year once Basel 3.1 is pretty much nailed down. I ask, of course, because the MDA is 11.6. I guess it drops 30 bps, something like that on Basel 3.1. And it feels like the scope to probably operate towards the lower end of your current range rather than the middle or the upper end of it. The second question is a bit more detailed, I'm afraid, around deferred tax assets. In the 9 months to date, the DTA deduction from capital has fallen by GBP 250 million, and it was GBP 100 million in the last quarter alone. So it's not an insignificant amount of capital build that's now coming from that DTA. So I just wondered if we should expect that sort of run rate to continue until the stock has run out a few years forward. I guess we should because RBS plc is now generating good profit and so on and so forth. And sorry, just a supplementary on that. The last 3 years, you bought back around GBP 300 million a year of unrecognized DTA back onto the balance sheet. Are we going to see the same again in the fourth quarter of this year, Katie? Paul Thwaite: Okay. Thanks, Jonathan. So Katie, why don't you lead out on the CET1? Katie Murray: And then I will get to... Paul Thwaite: And then we'll get to some of the DTI. Katie Murray: No, that's all right. It's one of my preferred specialist subjects, so I'll make you wait for the answers on that one just for a little bit longer. But on CET1 Look, there's a lot of things going on at the moment, Jonathan, with CET1, as you're very much aware. Obviously, the Bank of England is looking at their review of capital requirements. So we're looking forward to the FEC's update on that assessment. It's due to come out on December 2. So we'll see what comes through with that. Our approach on capital has always been to review it as part of our annual ICAP process and the risk appetite review that we do as well as working with the PRA on their kind of annual stress tests. And you're familiar with the numbers. We can see that our capital position has really improved over the last couple of years as we've derisked the business. We've also added a significant amount of capital into the business as a result of the RWA inflation that we've had. I think importantly, as part of the SREP process that we had this year that just came out in Q3. Our Pillar 2A there was reduced to -- by 17 basis points. which took our statutory minimum requirement to 11.6%. I do expect that number to reduce further once Basel 3.1 is implemented on the 1st of January 2027. And we've got pretty good line of sight in that. So therefore, when you look at it, you can see that we've got strong buffers relative to that lower bound of 13% of our current targets. So I'm not committing today as to the date or what we might do on any change of our 13% to 14% target, but we are actively thinking about the appropriate capital targets and capital buffers that we have required for our business on a more medium to longer term. Look, if you go to the deferred tax aspect of it, I think there's a couple of things to remember within there that the treatment within capital is slightly different than the treatment within accounting. So you sort of -- you can see changes coming through at different times. differences of recognition versus utilization of those assets. But we have just over GBP 800 million of DTA assets remaining. We have written back about GBP 1.2 billion since 2023. So we don't have a significant amount more to recognize. Interestingly, with deferred tax assets, you've got to really look at where they're sitting in terms of the legal entity structure as well and what's kind of -- and the ability to use them is very much structured by that legal entity structure. We do think, however, that our utilization in Q4 would be around in line with Q3. And then for 2026 onwards, we do expect a slightly lower utilization, probably around GBP 100 million to GBP 150 million per year. So continued support to capital generation, but at a slightly different level just given that we've used a lot of the losses up there or given where other historic losses are sitting and your ability to kind of access them. And Jonathan, we happily have a longer chat on DT offline as well with you, if that's something that would be helpful. Operator: Our next question comes from Guy Stebbings of BNP Paribas Exane. Guy Stebbings: So just around NII and the NIM bridge in Q3, and then I had one very short supplementary. So the hedge build was, I think, broadly as expected. The better performance in terms of the NIM bridge, I think came from funding and other and then to a lesser extent, the asset margins, which were up fractionally. So firstly, on the funding and other, I think that included some hedge accounting and reallocations between NII and OI. So perhaps you could just clarify exactly what's going on there. And to be clear, if it's correct to think that we should expect any sort of sequential benefits from there, but nor it reverses, that's the right way to think about it? And then on the asset margins, do you think we should expect to see further growth in there? Or is that really just a function of Sainsbury's coming in fully and then perhaps need to be mindful of some minor mortgage spread churn as we look forward? And then just a very quick point of clarification. On RWAs, I recognize the guidance hasn't changed. You flagged the business growth and CRD IV model changes. But just interested if we're coming into Q4 in a slightly better position than you originally thought and whether that means we might be more towards the lower end of that range for the full year guide. Paul Thwaite: Thanks. Katie, over to you. Katie Murray: Yes, perfect, Lovely. Thanks very much. So first of all, yes, funding and other, up 3 basis points, 2 bps related to treasury, and that's not going to repeat. This bucket is always interesting in the walk. It's got a number of different moving parts within it. And really, it's kind of the reflection of the management of a GBP 700 billion balance sheet that we need to consider kind of in any given quarter. So you do get the odd basis point that comes out. But this quarter, we did implement a hedge accounting solution for some of that FX swap activity that we've talked about over the last number of quarters. It's a one-off 2 bp benefit. in NIM, we don't expect it to repeat nor do we expect it to reverse. But going forward, you should see less volatility in the NIM from that activity quarter-on-quarter, which will be a lower drag to NII, a lower benefit to noninterest income. But really importantly, the same economic benefit overall as we go through. If I look at the asset margin, up 1 basis point is a very kind of small movement. And you're absolutely right, Guy, is benefiting from a whole quarter of Sainsbury's. I'm not expecting particular expansion in that line. It's very much dependent in one quarter on the mix and what you might see kind of happening within there at any time. If I spend a little moment on the kind of mortgage margins that we have within there, you're absolutely right. If you think of where our mortgage margins are versus the NIM overall, that's clearly something that you do see as a bit of a negative -- we've always talked that the book is around 70 basis points. We do see at the moment that we're writing a little below that, just -- and that's very much a symptom of the really intense competition that we're seeing on mortgages. So again, that will be a feature of the NIM as we go through from here. The market does move around in terms of where that is. But certainly, at the moment, there's a little bit of pressure within that space. In terms of RWAs, I would really think of that really as timing as much as anything else. I wouldn't say it's going to be particularly having an impact. In the next quarter, I have talked about more material CRD IV impacts coming through. There'll be a little bit of loan growth, of course. We've obviously continued to work on our risk management -- sorry, our RWA management program as well. But I wouldn't look at that and go actually, that's going to pull them down. It really is just timing. Thanks, Guy. Hopefully, that answered it all. Operator: Our next question comes from Robert Noble at Deutsche Bank. Robert Noble: I wanted to ask one on liquidity, please. So there's been a continued rotation in your liquidity from cash into government bonds that seems to pick up, right? So what's the spread pickup you're getting off that? And hypothetically, could you move all cash into gilts? Or what's the regulatory restriction that caps you out from doing that? And then just on the term deposit outflows in the quarter, should we expect the same next quarter given that 1 year and 2 year ago, rates looked equally as high. Is there a similar maturity issue in Q4? Paul Thwaite: Thanks, Rob. So I take the deposit one quickly and then back to you liquidity piece. On deposits, Rob, we did have some particularly large maturities in the third quarter. And you're right, if you think back 2 years ago when we had the kind of the backup in rates, they related to that. So it's not that we don't have maturities in quarter 4, but they're not of the same size or price or margin price points as what we had in quarter 3. And as I said, our retention rates are actually quite good. We're just being very dynamic in where we see value and retention and where we don't. So that's how to think about that. Katie? Katie Murray: Yes, sure. On liquidity. So we -- a couple of things going on in that liquidity ratio. One, we've recognized the TFSME repayment that we're about to do given the way that's moved through. So don't -- so don't kind of forget that piece, that will be happening in the next kind of few weeks. But you're absolutely right. If I look at the swap we've made into gilts, it really was a question to get some of that pickup. It's about 50 basis points in the 5- to 7-year kind of level. So very pleased to have done that. We wouldn't move the entire piece of our liquidity portfolio into gilts. That would be not quite putting all your money on black. But it's -- we do kind of obviously have some restrictions around where we have to hold and the restriction is really a function of that leverage ratio as well to make sure that, that's the right balance. I would say at the moment, the portfolio is split around 50-50. So there's plenty of opportunity to do a little bit more of maneuvering into gilts if we think that that's attractive as well. But certainly, just as you would expect us to be being quite dynamic in the management of that portfolio. Thanks very much, Rob. Operator: Our next question comes from Benjamin Toms of RBC. Benjamin Toms: First one is just to help my structural hedge model, if that's all right. Your guidance this year for structural hedge maturities of GBP 35 billion. Should we be making the same assumption for next year? I'm just conscious that you added to the hedge in '21 and 2022. So I'm not sure whether that should mean there's a pickup in maturities or whether you're just feathering at the front end, which means maturities should be pretty consistent as we go through the years. And then secondly, on other income, you purchased cushion in 2023 to provide workplace pension solutions. Can you just give us your latest strategic thoughts on that part of the business, what you think you do well and what you think you lack? Katie Murray: Yes, perfect. So in terms of the maturity, I mean, Ben, the way that we look at it, it's GBP 172 billion at the moment. It's obviously a function of current account and NIBs growth. We're pleased to see the growth in that. You'll recall that we do a kind of look back of 12 months as we work out how much we're going to reinvest. We also do some work during the year on the behavioral life in terms of what's happening with our actual current account holders and things like that. But actually, what I would guide you to at the moment is think of it really as GBP 35 billion a year. If we see particularly strong growth on those current accounts, it might change in the future years. But for your model, I would stick to the GBP 35 billion number. It's very even because we've been so mechanistic. So I wouldn't kind of deviate from there. Paul, do you want to? Paul Thwaite: Yes, I'll take workplace pensions. So Ben, cushion is a good business. It's got a strong proposition, very strong technology, and it's proven attractive to our kind of commercial mid-market customers. Obviously, there's kind of legal legal and kind of market dynamics that make it important for a lot of those clients to be able to offer workplace pensions to their employees and colleagues. And it's proven very attractive. And it's -- going forward, I think it's an important part of the proposition that we can provide or facilitate that service. There has also been a series of reg changes in the last couple of years around Master Trust, which certainly lend themselves to Master Trust having significant scale. So net-net, it's a good business. It's an important proposition to be able to offer to our commercial clients, but there have been some regulatory changes as well. So that's how we're thinking about, I guess, that workplace pensions area. Thanks Ben. Operator: Our next question is from Ed Firth of KBW. Edward Hugo Firth: I guess I had 2 related questions. I mean the first one is, if I look at your returns in Q3, they're now -- even if you take out the one-off, over 20%. And if I -- if you can normalize, we can normalize the hedge and capital is quite strong. So you're easily getting into the mid-20s or high 20s. And so I'm just trying to think how do you think about that in terms of what is an appropriate level of return? Because we can talk about the operating leverage and lower capital requirements going forward, et cetera, which would push that up even more. And I'm thinking of that, I guess, in the context of a bank tax potentially in November because it feels like it will be quite a tough discussion between you and the government about levels of return and appropriate levels of return. So I guess that would be my first question. At what level do you think we make enough now and actually we should be focusing on growing from here and fixing the returns? I guess that's the first question. Then the second one is sort of related to that. We're all sort of thinking now about -- I know it's sort of 2 years away, but what happens when the hedge runs out. And if you are at sort of peak returns, what do you do next, I guess, is the question? Because there was various discussions earlier in the year about potentially you buying things, but you obviously stepped away from that. And I'm just thinking, is that what we should think about going forward? Because relative to your own returns, I think it's going to be tough to find anything that makes an equivalent level if that's okay. So rather rambling 2 questions, but I think quite key. Paul Thwaite: Yes. Thanks, Ed. Good to hear from you. I guess there's a number of those points intersect with each other. First thing I'd say is, as you well know, it's taken a long time for a number of banks to return their cost of capital. So in some ways, it's healthy that we're having that discussion. You look at it through another lens, notwithstanding that, U.K. banks are still valued very differently to many other parts of the world for what could arguably be said to be similar businesses, similar business models and mixes and in certain extent, very similar regulatory regimes. I'm going to slightly disappoint you and give you a kind of a politician's answer about what's the right levels of returns. I think the key way we think about it is from a management team perspective and a Board perspective is we need to get the balance right between supporting customers and deploying our capital to do that and helping them grow and hopefully helping the U.K. between investing in the business, it's a very competitive sector, not just the large incumbents, but there's a very broad range of competitors. It's crucial that we invest in the business. And primarily, that relates to technology and people. And we need to make the right returns and return and present what hopefully everybody believes is an attractive investment case. So the debate we have is about the balance between those 3 items. It's a spot RoTE for the quarter. As you say, it has some one-offs in, but yes, fair challenge, it's year-to-date, it's 19.5%. And if you take off the one-offs, it's high 18%. We're working very hard on all the lines, not just the structural hedge. We're trying to grow lending growth. We're driving cost out of the business. We're working the balance sheet an awful lot harder. So we think those returns are the kind of the fruits of our activity. And I think as a Board, you just have to -- we just have to debate, let's get the balance right between making sure we've got a really attractive and sustainable business in the long term, and we're investing it -- we're doing what we need to do in terms of supporting customers and delivering returns. So that's how we think about it. I know I haven't shared a number there for -- because I don't think that's the appropriate way to do it. On M&A or kind of where does that lead, which is a very connected question. The strategy is working. I laid it out 2 years ago. The organic plan is obviously proving successful. We're growing all 3 of our businesses. We're driving a lot of simplification. I think we've got a good runway to go. We've managed to do that without changing our kind of risk profile. That hasn't been a constraint on our growth. We've continued to grow. So that's great. So organic plan looks good. If opportunities come to accelerate that plan, then we'll look at them. You'll have heard probably 5 times my quote about the financial high bar, but that remains true. It has to be -- if we're going to deploy capital on something that we think can accelerate the plan, it has to be compelling from a shareholder perspective. And that's how we look at things. It has to Otherwise, it's -- I think it's a hard case for me to make to investors. So we will look, but we'll be cold eyed. And the counterfactual, as you say, when the organic plan is performing so well, the counterfactual can be arguably more challenging. But I think I have a responsibility to do that in terms of the alternative uses of the capital. So I've expanded a little bit there. Hopefully, that's given you a sense of just how as management, we think about those topics. Operator: We are now approaching 10 a.m. So we'll take our last question from Andrew Coombs from Citi. Andrew Coombs: I guess one follow-up and 2 follow-ups really. Just firstly, on that point about capital return versus inorganic versus organic loan growth. I mean, you yourself have said there's a very high bar for inorganic given the returns you're already producing. And obviously, now you're trading well above tangible book. The buybacks are also slightly less accretive than they would have once been. So when you're thinking about the dividend payout, the 50% policy, any reason why that couldn't be higher going forward? What are the pros and cons of shifting that dividend payout ratio? And then second question, just on the structural hedge. You're still at 2.5-year average duration. Your peers are all now at 3.5 partly due to what they see to be the behavioral life of the deposit base. I'm sure partly due to technical reasons as well. But perhaps you could elaborate on the maturity profile of the hedge and why you don't see the need to increase it here. Paul Thwaite: Great. Thanks, Andrew. I'll take the first. You take the second, Katie? Katie Murray: Okay. Paul Thwaite: Okay. So Andy, obviously, we've increased the ordinary dividend from 40% to 50%. We're in the first year of that. In parallel, we'll also said we'll look at surplus capital at the half year and the full year, as you would expect us to with the Board. We're very keen to have a consistent approach to surplus capital distribution. So we're not actively reviewing the ordinary at the moment. But over time, obviously, it's a responsible thing for the Board to do. Katie, on the average life of the hedge? Katie Murray: Yes, absolutely. So it's interesting -- as we look at the hedge, it's important to remember the hedge has got 2 portions within it. There's the equity hedge and also the product hedge. So you're absolutely right. The product hedge is 2.5%. The total hedge is closer to 3. I think it's important as you look at the assumptions on this is the mechanistic model that we've had has played out very well for us. I mean, for me, I think you'd only increase your duration if you felt the duration of your eligible deposits had increased based on behavioral assumptions. I think given what we are seeing in terms of movement that we have not just on the current accounts, that wouldn't actually necessarily be something that I would say that we've seen in our books. I'm not doing that. And I think it's also really important. We've always been very clear that with the hedge. It isn't there for us to express a view on where rates are sitting. Others sometimes have taken different views on that, and you need to talk to them on that. But that's -- for me, if you were to try to extend at this point, the absolute pickup you'd be getting wouldn't be logical for the difference you would be making in it. And we don't necessarily see that actually within our underlying numbers that we're seeing those changes in behavioral likes that would also support that duration extension of that. But overall, product hedge 2.5 years, total hedge about closer to 3, very comfortable with the performance of it served us well for many, many years. And as we look at that increase in income this next year into 2026, greater than GBP 1 billion and continuing to grow as we go out to 2028 as well. So very happy with how it's performing. Thanks very much. Operator: Thank you for all your questions today. I will now pass back to Paul to close. Paul Thwaite: Yes. Thanks, Oliver, and thank you, everybody, for your questions. We appreciate both your time and the insightful questions on the call. So to wrap things up, we're very pleased with the performance in quarter 3 and the continuing momentum we've got in our 3 businesses. We've upgraded our income and returns guidance, and we continue to see opportunities, as I think we've conveyed today to continue to take market share and grow those businesses. We look forward to catching up with you at a couple of things. We've got the retail banking spotlight on November 25. And also, as I said earlier, we'll update you on our guidance for 2026 and share our new targets for 2028 at the full year in February. So I wish you all a good weekend. Thank you. Katie Murray: Thanks very much. Operator: That concludes today's presentation. Thank you for your participation. You may now disconnect.
Operator: Hello. Welcome to the Signify Third Quarter 2025 Results Conference Call hosted by As Tempelman, CEO; Zeljko Kosanovic, CFO; and Thelke Gerdes, Head of Investor Relations. [Operator Instructions] I would now like to give the floor to Thelke Gerdes. Ms. Gerdes, please go ahead. Thelke Gerdes: Good morning, everyone, and welcome to Signify's Earnings Call for the Third Quarter of 2025. With me today are As Tempelman, Signify's CEO; and Zeljko Kosanovic, Signify's CFO. I would, first of all, like to welcome As to his first earnings call as Signify's new CEO. During this call, As will take you through the first -- the third quarter and business highlights. After that, he will hand over to Zeljko, who will present the company's financial and sustainability performance. Finally, As will return to discuss the outlook for the remainder of the year and share some first reflections and priorities. After that, we will be happy to take your questions. Our press release and presentation were published at 7:00 this morning. Both documents are available for download from our Investor Relations website. The transcript of this conference call will be made available as soon as possible. And with that, I will hand over to As. A.C. Tempelman: Thank you, Thelke, and good morning, everyone, and thank you for joining us today. As Thelke said, this is my first earnings call in this role, and I look forward to this engagement with you this morning. Now I joined the company six weeks ago at a time when the markets are indeed very challenging. So let's begin with some of the key market developments I have observed in my -- over the third quarter. Firstly, we see the ripple effects of tariffs as Chinese overcapacity is redirected from the U.S. to Europe and other regions. And this is creating additional price pressure, especially in the professional trade channels in Europe and Asia, where competition has intensified. Secondly, in our Professional business, we also see continued softness in important European countries, such as France, the Netherlands and the United Kingdom. And increasingly also in the U.S., where demand is slower or has been slower than expected in the third quarter. And this is especially the case for the public sector projects with government funding. And thirdly, in our OEM business, we see further compression of demands and continued price pressure, particularly in Europe as well. And this has been, again, intensified by the increased imports of Chinese components putting pressure on the market for nonconnected. However, I'm glad to say the market also presents opportunities that fit our strategy well. Our growth in connected and specialty lighting and particularly in consumer is very encouraging. The consumer business grew in all major markets and was particularly strong in India. And this strong performance of consumer was boosted by the expansion of our Hue portfolio, and I'll cover that in a bit more detail a little later. Now overall, connected and specialty lightings grew by high single digits across both the professional and consumer businesses. And worth mentioning is also our agricultural lighting business that delivered a strong seasonal performance, helping to offset some of the weaker areas of the portfolio. So overall, if I would have to summarize, this quarter underlines the resilience and growth potential of our connected and specialty lighting and the price pressure on the more commoditized products in the traditional trade channel. Now let me move to an example that illustrates how our connected solutions are creating value for our customers and wider communities. I mean despite the challenges in the European public sector, there are still great projects. And one of them is presented here. We just completed the street lighting project for the municipality of Montbartier in France. And the local municipality set out to modernize its public lighting with the goals of improving safety, enabling remote maintenance in a sustainable, cost-efficient way. And by implementing our SunStay Pro solar luminaires that are fully integrated with our connected lighting managements and the Signify Interact platform. And this all-in-one solar powered solution allows the municipality to optimize luminaire run time, control the systems remotely and significantly reduce energy costs, while addressing environmental impacts. So it's a great example of how solar and connected technologies come together to support energy transition goals, while delivering meaningful benefits for customers and communities. And we hope to see a lot more of that going forward. Let me move to the second example, second highlights. I talked about this earlier, the exciting new portfolio expansion that supported the strong third quarter performance of our consumer business. And I just installed the Philips Hue system myself, and I have to say, I've been super impressed by it. It's a really cool product. And Hue is truly the leading connected lighting system for the home, with a very strong brand and a loyal growing customer base. And the launch in September exceeded our expectations, creating strong demands with excellent execution, including well-managed availability on our e-commerce sites. And among the new innovations was a new feature that transformed existing Hue lights into intelligent motion sensors that respond to movements. So really, this way, we continue to extend the role of Hue beyond illumination in our customers' home to integrating security, entertainment and intelligent lighting. And also worth mentioning, we introduced the new Essential range that introduces you to customers at a more accessible price point. So these are some highlights. And with that, I'll hand it over to Zeljko, who will continue to cover the financial performance of the quarter. Zeljko? Zeljko Kosanovic: Thank you As, and good morning, everyone. So let's start with some of the highlights of the third quarter of 2025 on Slide 8. We increased the installed base of connected light points to EUR 160 million at the end of Q3 2025 from EUR 136 million last year. Nominal sales decreased by 8.4% to EUR 1.407 billion, including a negative currency effect of 4.5%, which was mainly related to the depreciation of the U.S. dollar. Comparable sales declined by 3.9%. Excluding the conventional business, the comparable sales decline was 2.7%. This is reflecting the continued weakness in Europe's Professional business and a softer demands in the U.S. In addition, the OEM business saw further demand compression and continued price pressure. The adjusted EBITA margin decreased by 80 basis points to 9.7%. We sustained a robust gross margin, particularly in the Professional and in the consumer businesses. But we, at the same time, saw headwinds in the OEM business and conventional, which I will address later in the presentation. Net income decreased to EUR 76 million, reflecting a lower income from operation as well as a higher income tax expense as the previous year included one-off tax benefits. Finally, free cash flow was EUR 71 million. I will now move on -- move to our 4 businesses. Starting with the Professional business on Slide 9. Nominal sales decreased by 6.8% to EUR 928 million, reflecting lower volumes and a negative FX impact of 4.6%, mainly related to the depreciation of the U.S. dollar. Comparable sales declined by 2.1%, driven by different dynamics. First of all, we saw a softer-than-anticipated U.S. market. Europe remained weak, especially in the trade channel, and these developments were partly compensated by the continued growth of connected sales in most geographies and also a strong performance in agricultural lighting during the peak season for this segment. The adjusted EBITA decreased to EUR 97 million with an EBITA margin sustained at a robust level of 10.4%, however, contracting by 40 basis points compared to last year mainly due to the lower sales. The business maintained a solid gross margin, which expanded sequentially, but contracted slightly against the high comparison base in the previous year, and we also retained strong cost discipline. Moving on to the Consumer business on Slide 10. The positive momentum we saw in the first half of the year continued and strengthened in the third quarter, supported by sustained demand across all key markets. Nominal sales decreased by 1.1% to EUR 301 million, reflecting a negative currency impact of 4.8%, partly offset by the underlying growth. Comparable sales growth was 3.7%, driven by the continued success of our connected portfolio, particularly Philips Hue, and the recent new product launches as was highlighted by As a few minutes ago. We also saw a further acceleration of online sales, particularly through our own e-commerce website. Our Consumer business in India also continued to deliver strong performance, particularly in luminaires, further contributing to the segment's overall growth and profitability. Adjusted EBITA increased to EUR 27 million, while the margin expanding by 150 basis points to 9.1%, supported by a robust gross margin and operating leverage. Continuing now with the OEM business on Slide 11. As anticipated, performance deteriorated in the third quarter. Nominal sales decreased by 26.1% to EUR 93 million, while comparable sales declined by 23%, driven by lower volumes and the persistent price pressure in nonconnected components. The impact of lower orders from two major customers highlighted in previous quarters continued to materially affect the top line. Price pressure continued to be intense in this market as in the previous quarters. And overall, we are also seeing a further weakening of the market demand, especially in Europe. Adjusted EBITA decreased to EUR 4 million, with the margin contracting to 4.7%, mainly reflecting the gross margin decline due to the volume reduction and price pressure. Looking ahead, we expect market conditions to remain challenging, with limited recovery in demand in the near term. And finally, turning to the Conventional business on Slide 12. Performance in the third quarter was broadly in line with expectations, reflecting the ongoing structural decline in this part of the portfolio. Nominal sales decreased by 25.3% to EUR 76 million impacted by lower volume and a negative currency effect. Comparable sales declined by 21.5%, consistent with the gradual phaseout of conventional technologies across most regions. The adjusted EBITA margin decreased by 230 basis points to 17%. This was mainly driven by a lower gross margin, which was impacted by temporarily higher manufacturing costs as we are rationalizing our manufacturing sites. Let me now dive into the financial highlights on Slide 13, where we are showing the adjusted EBITA bridge for total Signify. The adjusted EBITA margin decreased by 80 basis points to 9.7% due to the following developments. The negative volume effect was 70 basis points, reflecting the decline of our OEM and Conventional businesses. The combined effect of price and mix was a negative 170 basis points, reflecting the further stabilization of price erosion trends across our business. As mentioned, we see higher the effect of price erosion in some parts of the business, such as OEM and Professional Europe, but also a positive pricing in the U.S. Cost of goods sold overall had a usual contribution year-over-year this quarter, with four main elements within that. First, we continue to deliver strong bill of material savings across all businesses, in line and even slightly higher than in previous quarters, which was including an accelerated price negotiation savings. Second, the overall manufacturing productivity was impacted specifically in the OEM business by significant volume decline, and in the Conventional business by temporarily higher manufacturing costs as a result of the site rationalization mentioned earlier. There were also one-off elements that impacted cost of goods sold positively last year, but did not repeat this year. And finally, the cost of goods sold in the third quarter included the effect of incremental tariffs, which were mitigated through pricing action, and are therefore neutral on the total gross margin level. The indirect costs improved by 130 basis points on adjusted EBITA margin level, reflecting the continued cost discipline across our business. Currency had a negative effect of only 10 basis points as we limited the effect of FX movements on our bottom line. Finally, Other had a positive effect of 40 basis points and related mainly to the outcome of a legal case. On Slide 14, I'd like to zoom in our working capital performance during the quarter. Compared to the end of September 2024, working capital increased by EUR 20 million or by 70 basis points, from 7.7% to 8.4% of sales. Within working capital, we saw the following developments: inventories decreased by EUR 70 million; receivables reduced by EUR 52 million; payables were EUR 156 million lower; and finally, other working capital items reduced by EUR 13 million. The increase of the overall working capital ratio is mainly driven by 2 factors: the ramping up of consumer ahead of the peak season and the impact of the top line compression on the OEM inventory churn. Now before I hand it back, I would like to touch on our progress toward our Brighter Lives, Better World 2025 commitments. Starting with greenhouse gas emissions. We are ahead of schedule to meet our 2025 goal of reducing emissions across our entire value chain by 40% compared to 2019. That's twice the pace required by the Paris agreements. Next, on circular revenues, we reached 37% this quarter, well above our 2025 target of 32%. The biggest driver here continues to be serviceable luminaires within our Professional business, where we're seeing strong adoption across all regions. When it comes to Bright Lives revenues, the part of our portfolio that directly supports health, well-being and food availability, we increased to 34% this quarter, up 1 point from last quarter and again, above our 2025 targets. Both our Professional and Consumer businesses are contributing strongly here. And finally, on diversity, the percentage of women in leadership positions remained at 27% this quarter. While that's below where we want to be, we are continuing to take concrete steps to improve representation from more inclusive hiring practices to focused retention and engagement efforts to help us reach our 2025 ambition. So overall, we are making good progress, with strong momentum in most areas and a clear focus on where we still need to accelerate. I will now hand back to As for the outlook. A.C. Tempelman: Thank you, Zeljko. So moving on to the outlook. Based on the softer than previously expected outlook, particularly for the Professional business in the U.S., and further demand compression in the OEM business, we are updating our guidance for the full year 2025 as follows. So we expect comparable sales growth of minus 2.5% to minus 3% for the year, which is equivalent to 1 -- minus 1 to minus 1.5 CSG, excluding Conventional. And as a result of this lower expected top line, we are also adapting our adjusted EBITA margin with a guidance to 9.1% to 9.6%. And finally, we expect our free cash flow to land at around 7% of sales. That's on the outlook. Now I wanted to share a few reflections and talk a bit about the priorities as I see them going forward. Almost eight weeks into the role now -- let me do that. There is a lot to be proud of at Signify. I mean we have very committed, capable professionals, a really impressive world-class innovative engine and a strong culture of cost and capital discipline that continues to serve us very well. At the same time, we are also clear about the difficulties that we face as a company. The lighting market remains very challenging. Growth has been lacking and the performance has been volatile. So coming in, I see the following immediate priorities. First, to outperform in what is a very tough markets. So we must focus on commercial and supply chain execution. We need to manage price pressure, continue to win in the connected and the specialty lighting and close efficiency gaps. We also need to maintain strict control and capital disciplines to enhance our profitability and cash flow. And I will make sure that, that discipline, we will stay with that going forward. Secondly, we can, and we should be clearer about our strategic intents and our strategic objectives. And therefore, we are planning to review our strategy. We will organize the Capital Markets Day towards the middle of next year, where we will provide clarity on our portfolio on how we deliver durable growth and on capital allocation. And thirdly, as key enablers, we will focus our R&D resources and continue to invest in accelerating digitalization and AI adoption. Now 18 months, the company launched a new operating model that we will not change, and we will fully leverage to its full potential. And at the same time, we will start shifting the culture, from products, to a more market-led mindset and approach. And from what I've seen so far that by addressing these priorities, I'm confident that we will set up Signify for future success. And with that, I'll hand it back to the operator to facilitate the question-and-answer session. Operator: [Operator Instructions] Our first question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I hope you can hear me well. I will ask one and then the follow-up. But I just wanted to ask on your kind of early thoughts in terms of the OEM business. So it seems to be mentioning intense pricing pressure, lost some customers. Do you see this as more structural or more cyclical when you look at it? And have -- was that anything to do with -- what prompted you to talk about reviewing the portfolio, I wonder. A.C. Tempelman: How do we see the OEM business going forward? Well, first of all, we saw the impact of the loss of two specific customers that was quite significant. That also is explaining a large part of the drop we saw. That, of course, will go away after a year. But going forward, we expect that current conditions will continue to be challenging, both in terms of demand as well as the price pressure. But it's too early to call what exactly that will look like in the next year. Daniela Costa: And then just following up on the topic of tariffs. I mean in the release, they weren't too many references to it, but I was just wondering if you could give us a little bit of what is happening on the ground, given the U.S. market was highly dependent on Chinese imports on lighting. What's sort of the inventory attitude you've seen at distributors. Has there been any restocking of Chinese product? Could this be impacting what you are seeing in the market right now? And ultimately, as you look medium term, if the tariff stand, do you see them as a positive or a negative for Signify? Is it an opportunity to gain market share and put prices through? Or also you are very dependent on Asia and it's not really -- we shouldn't see it this way? Just a little bit more color there would be very helpful. Zeljko Kosanovic: Daniela, so maybe to give a bit of an update and a summary on what we see. So first of all, I think in general, on pricing, the scale players have generally taken price increases to the extent that was needed. Our price adjustment, on the Signify side, were generally in line with the market, and we also saw that prices increase are sticking. Now overall, we've been able, in the third quarter like we did in the previous quarter, and we expect to be able to continue to do so to successfully mitigate the tariff increase with pricing. So with a slightly positive impact on the top line for our U.S. business and a neutral impact on the bottom line. So overall, the strategy we have set up and of course, all the activities that we have taken on the supply chain side to adapt and to reduce the exposure or to optimize our cost base and outsourcing, I think, are really being executed really exactly in line with our plan. So there we are basically implementing what we had. And of course, we continue to maintain the agility to adapt, moving forward, depending on how the situation will evolve. But overall, slightly positive on top line, neutral on the bottom line and implementation in line with our strategy. Daniela Costa: So you don't see it as a market share grabbing opportunity or something a bit more structural medium term is just a pass-through? Zeljko Kosanovic: Look, the answer on that would be probably -- we should go more in detail, depending on the portfolio. Of course, what we are doing in the different portfolios is to find the balancing act between prioritizing market share gain where we do see opportunity and where we are extracting those opportunities very clearly, while protecting the margins. So I think it's really, at a more granular level, let's say, that this is going to be a different answer. But overall, it's to make sure that we can absolutely take advantage. And we have seen a clear example where we've been able to do so, while protecting the profitability, as I just mentioned. So this has actually been our strategy, and we are seeing that, of course, evolving, depending on the landscape of tariffs that has also been changing quite a bit over the last few months. Operator: The next question comes from Martin Wilkie from Citi. Martin Wilkie: It's Martin from Citi. Just coming back to the overcapacity being redirected from China that you referred to, just understand where we are in that process. And obviously, we hear a lot about China's antipollution drive to reduce overcapacity across other industries. You probably hear more about markets like solar, batteries, things like that. But is there a reduction or an anticipated reduction in Chinese overcapacity? Or is that something that you expect to remain like this for the foreseeable future? A.C. Tempelman: Yes. Thanks, Martin, for the question. So indeed, we look also at all the export statistics and what is happening with the trade flows. And indeed, what we see is that you see some of the decline in terms of trade flows from China to the U.S. seeing kind of an equal amount of quantities lending in the rest of the world and in Europe. So -- and that does cause some additional price pressure. To your question around, hey, do we expect that -- how sustainable is that -- in China, we see that is kind of flattening out, that price erosion. And well, to whether we see a significant consolidation in the Chinese market is still to be seen. So I wouldn't want to conclude anything on that at this point. Martin Wilkie: And just related to that, just keen to hear about your first impression of industry dynamics and the side that we might get a lot more detail at the Capital Markets Day next year. But when you consider what's happening with Chinese competition, but also, as you pointed out, you have some great connected products and so forth at Signify, what are your first impressions of Signify's competitive position and in particular, the moat around the business to address some of these competitor challenges? A.C. Tempelman: Yes. So there you really need to -- Martin, you need to really go deeper. What I see is that on the professional side, we play in many, many segments, and each segment has kind of its own dynamics. And equally, if you look at the business by trade channel, the dynamics around projects is very different than the competitive dynamics around the more traditional and online trade channels. So we need to make very explicit in our strategy and we will do that at Capital Markets Day about where we want to focus our efforts. And what is the portfolio that we want to build going forward. So that clarity will be created there. Operator: The next question comes from Akash Gupta from JPMorgan. Akash Gupta: My first one is on North America. So maybe if we can zoom in on U.S. business a bit. One of your U.S. competitors, they reported kind of flattish revenues in U.S. lighting, professional lighting, while you are talking about softness in the quarter, which was weaker than what you expected. Maybe if you can provide some color on what do you see in various categories in Professional channel? And I think you did talk about some weakness in public side. So maybe if you can talk about where do you see growth where you don't see growth in North America Professional. And is there any loss of market share that we should be aware of? So that's the first one. A.C. Tempelman: Yes. Sure. Good question. And indeed, the U.S. market, I mean year-to-date, we are growing in the U.S. We had expected more of the U.S. market in the third quarter, but that was not as high as expected. So we saw more flattish pattern. Now the two key messages on the U.S. market, I think, and you mentioned them yourself. One is that we see project activity is softening, and that is particularly driven by public sector projects. Will that change in the fourth quarter, that is to be seen. It's not that we lost projects, to your question around market share, but we see more of delays, right? So there's clearly a delay there. And then there's the trade channel where there, we see quite tough competition, particularly on the lower end of the product portfolio. So to your question about how are we performing in that context. So I think it's fair to say that we are on par with markets when it comes to professional projects. We are outperforming when it comes to connected and agricultural lighting, and we are probably a bit below par when it comes to the trade and do-it-yourself channels. Akash Gupta: And my follow-up is on organic growth guidance. So for this year, you are now guiding minus 1 to minus 1.5, excluding Conventional. And year-to-date, we are at minus 1.0. So that would imply that for Q4, you have -- the best expectation is flat organic growth. I think you already said consumer -- not consumer, sorry, OEM is going to be a bit weak in Q4. But maybe if you can tell us about the moving parts for both Professional and Consumer in Q4 that we should be aware of? And also on the growth, how much of this is also driven by price/mix compared to, let's say, simply lower than previously expected volumes? Zeljko Kosanovic: Yes. Akash, maybe to give a bit of color on the -- as you said, the building bricks on the dynamic of the top line in the fourth quarter. So first of all, if you look at consumer there, we see, as we mentioned, a strengthening momentum and we expect this to continue, and we have confidence on the momentum to continue with a strong Q4. Of course, this is the highest and the strongest quarter for that business. The Conventional business also is more predictable. Now to your question, I think the two areas where we see the most challenges and where we've looked, of course, at the different scenarios, Professional business. So this is trade as mentioned, in both U.S. and Europe and also the public sector in general as well as OEM business. So look, in the -- what is reflected in the guidance is the translation of what we see out of those scenarios of what could evolve in the fourth quarter in the continuity of our third quarter trends. So as we said, for the U.S. it's softer than what we had previously anticipated, but it's basically a softening of the momentum that we remain resilient in many parts of that business. Now on the price, maybe looking back, what we've observed across all our businesses is a stability in the pricing trends over the last quarters. However, with more price intensity, clearly, in the nonconnected part for the OEM business and also definitely in the trade part in Europe and also to some extent, in the U.S. So look, in terms of the price dynamics, it's not for price and mix dynamic. Of course, the mix will be impacted by our portfolio mix. But overall, no major change. And I think the softer or the update of the guidance is fundamentally driven by volumes. And as we said, mostly linked to professionally in the U.S. and OEM. Operator: The next question comes from Chase Coughlan from Van Lanschot Kempen. Chase Coughlan: My first one regarding the Conventional business, you, of course, talked about rationalizing the footprint a little bit more, which might have a several quarter and had some profitability.Can you just elaborate a little bit on the exact plan there? How much more can you rationalize, for example, how many facilities are you operating at the moment? And what will that be in a few quarters? Zeljko Kosanovic: Okay. Look, yes, the line was not totally right. But if I understood, and please correct me, the question, it's about the further rationalization of our manufacturing in convention. So look, yes, we've been, I mean, consistently, over the last few years, in driving, I think we used to have over 30 factories, now down to 3. So we've been doing proactively adjusting the manufacturing base, and we have a clear line of sight and a clear road map to do so. Of course, as I indicated earlier, in the process of doing so, then you do have adjustments that you need to really manage in the manufacturing process. So this is where we see temporarily, some headwinds or higher manufacturing costs in the process and the transition of doing so, but I think we have a very clearly established road map to drive that further, to the extent that is required to recalibrate the supply chain of that business, which we have been doing consistently over the last few years and for which we had, again, a clear road map for the coming years. Again, in that business, as a reminder, we are three parts. The general lighting or the conventional general lighting part of conventional, which is, of course, the part that is declining at a faster pace. We have the digital projection piece, which has a line of sight, let's say, another few years with very specific customers being served, and we have the specialty lighting, which has within that, growth opportunities. And that, of course, has a different road map of evolution in the future. And that will, of course, as we go along, see those pieces being bigger in the overscale of the conventional business. A.C. Tempelman: Yes. Maybe just to add to that, I was -- I spent some time with the conventional team, and I was very actually very impressed with that multiyear road map, that is really nicely faced with clear milestones and sign posts to bring that business -- harvest that business to the best extent possible. So I think the team is doing an extremely solid job on that. And to the question, is there more to go after? Yes. So we are now single-digit plants, but we also know how the trajectory will -- what it will look like going forward. Chase Coughlan: Okay. That's very helpful. I hope the line is a bit more clear. Now just on my second question, my follow-up, as you spoke about, capital discipline is one of the priorities going forward. And I'm curious on -- we're seeing net debt year-over-year increase. Earnings are, of course, coming down at the moment. Can I get your thoughts on the ongoing share buyback scheme? Is that something that you think should be continued going forward? Or do you have any, let's say, preferences for capital allocation elsewhere? A.C. Tempelman: Well, it's not that we don't have a capital allocation now, and I'll leave it to Zeljko to comment on that. But my promise was more around, I -- coming into this role, you talk to customers, partners, colleagues, but of course, also to investors. And I think what many investors rightly so ask for is, "Hey, what is your road map to sustainable growth"? What about your footprint and your portfolio? But also what about your capital allocation going forward? And I think we owe you that clarity, and we will include that in the Capital Markets Day mid next year, likely June, yes. Operator: The next question comes from Wim Gille from ABN AMRO -- ODDO BHF. Wim Gille: My first question is around Nexperia. Obviously, there's a lot of turmoil around this company at this point in time in terms of supply. And given that both Nexperia as well as you guys are at Philips. Are there any connections left there in terms of supply chain? And should we be looking into this in relation to your business? And the second question is, can you be a bit more specific around, let's say, the market share that you are looking at in the United States in terms of volumes? In particular, when I compare the performance of acuity versus you guys and if I did take into account a large part of the market used to be Chinese, which are no longer welcome there, I would have expected a bit more clarity on kind of your ability to win market share in terms of volumes in the U.S. Zeljko Kosanovic: Yes. Maybe first on the -- your question on Nexperia. So the Nexperia components are used in some Signify products. However, we do not anticipate a material impact to our supply in the near term. It's a very limited impact and mostly in the OEM business. And also at the same time, we do have an active and proactive supply chain risk management, right? So we continue to monitor the situation. And we always consists -- constantly review all the alternative sources. So that has allowed us to, in this specific case, also to apply with a lot of agility, the required mitigation. And yes, I think overall, I think we are seeing limited impact and we do have -- and the teams have been able to, of course, very, very fast, adapt and mitigate. And that's part of the strategy we have of proactive supply chain risk management and multiple sourcing to be prepared for those kinds. So limited impact for us in the near term. A.C. Tempelman: And then on the U.S. questions, are we keen to grow market share in the U.S.? Of course, we are. The -- but we need to make sure it's on strategy, right? So on the project side, clearly, we are doing well, and we are aiming to continue to grow. As I mentioned that we are probably a bit below par in the trade channel, and that is also where you see that dynamic indeed of the Chinese products. We are adding products into our portfolio that better fit that trade channel. So indeed, we see opportunities, right, in the U.S. to continue to grow our market share. Wim Gille: And then lastly, in terms of your priorities at the last slide, you also mentioned that you're looking to rationalize your portfolio. Are we then talking about significant chunks in terms of sales that you might exit or divest or whatever? Or is this more fine-tuning around the edges and it should not have a major impact on sales? A.C. Tempelman: Now let me just emphasize, Wim, that at this point, I say we are reviewing our portfolio. Don't read that as rationalizing because it's too early for me to say, "Hey, we're going to cut this or add that." It's too early. Now that said, I mean, I think, ultimately, the portfolio choices should follow your strategy. So what we'll do is we will create clarity about where -- what is the narrative for the company, where do we want to go on a 3-, 5-year horizon. If this is the company we want to build, then these are logical steps to take in terms of portfolio. And you should not only think line of business level there, but also around, "Hey, we are currently present in over 70 countries." We play in many different segments. But indeed, we also need to create clarity around how the different lines of business hang together and how we want to take that forward. So the answer is it's a review and all is included. I don't want to exclude anything at this point, nor do I want to create false expectations given where we are today. Operator: The next question comes from Marc Hesselink from ING. Marc Hesselink: A question is actually I mean two things related, both, one on gross margin and one on the OpEx. So I think given what you said before, it's likely that the lower gross margin versus previous quarters is here to stay or maybe even increase -- the pressure will increase a bit. In the quarter itself in third quarter, you really offset that by significantly adjusting your -- predominantly your SG&A cost. Is that also the way forward that when the gross margin remains under pressure that you will take more action in your short-term SG&A cost? Zeljko Kosanovic: Yes. Marc, thanks for the question. So I think, look, first of all, on the dynamic of the gross margin, what's very important to see in the dynamic. And as you said, comparing to -- I think we had 7 consecutive quarters with a margin -- gross margin above 40%, which typically would be on the higher end of the -- what we indicated as an entitlement. I think when we look at professional and consumer business in the last quarter and as we expect moving forward, we continue to see a very robust gross margin. So the -- let's say, the sequential decrease to 39.5% is entirely linked to the two headwinds I was mentioning earlier, first on the OEM business. So there is -- there are clearly the implications of the magnitude of the decline we see in OEM business on the manufacturing productivity. So this is really linked to the OEM business. And second, the temporary or transitory increase or headwinds on the manufacturing cost base of the conventional business, which we do expect to normalize by mid of next year. So I think in the dynamic of the gross margin, very clearly, very strong professional, very strong consumer. When we look, of course, at the dynamic for Q4, consumer having it's strongest quarter. And that, of course, will have a positive sequential implication on the evolution of the gross margin. So I think the dynamic on those two key pieces of the business are -- remain very strong and remain very much in line. Actually, we even saw sequential expansion of the gross margin in the Professional business quarter-over-quarter and a very limited, let's say, a decrease compared to last year, which was a very high comparison base with some one-off elements. So look, the trajectory of our gross margin remaining very strong. The two specific elements which are impacting on the OEM business linked to the volume and on the conventional business, which is more transitory. Now to your question on the evolution of the SG&A or the cost base indirect costs. As we indicated earlier, we are, of course, driving and further driving the optimization, making sure that we are deploying the investments needed to support the execution of our strategy, and this is what we are seeing clearly delivering on the connected parts and the specialty part of the business. And then, of course, at the same time, continuing to optimize and to adjust where needed, where we do see the most challenges. So I think this is a combination of those two elements that you see in the dynamic of our indirect cost base and that we expect to move forward. But the most important point is really the robustness of the gross margin absolutely sustained and confirmed for consumer and professional. Marc Hesselink: Great. Clear. And then maybe on the CapEx because also in last quarter and this quarter, the CapEx is a bit higher than last year. Is it a bit of timing? Or do you have -- is there a reason why CapEx would be increasing a bit? Zeljko Kosanovic: So there within the CapEx, I think you have, on the tangible part of CapEx, it's a limited increase, but it's more linked to some of the intangible product development. So there, we do have some -- but again, in the magnitude, I think it remains on a relatively low base, while the business remains a very low CapEx intensity. So you're right, we've seen sequentially some increase, but this is linked mostly to capitalized developments in innovation, R&D and also in the digitalization part. Operator: The next question comes from Elias New from Kepler Cheuvreux. Elias New: Just wondering on your other segment, which has seen strong momentum over recent quarters, but in the current quarter, seen a sequential decline in sales. Could you just perhaps give us some color on what is driving this? And how you would expect this to develop going forward? Zeljko Kosanovic: Yes, maybe to -- what is included in others is linked to the ventures business, and we do have one specific venture that has been developed and positioned on the connected consumer space in China. And as you mentioned, we've seen a very strong momentum. I think this venture that is continuing to perform very well. However, there were some, I think, favorable, let's say, contribution or propelling drivers coming also from the subsidies that were deployed by -- in China that were supporting an accelerated level of growth in the last quarter, which has normalized as we've seen in the third quarter. So this is the main -- the main element behind, but this is one of the ventures that is seeing a very successful traction and very well positioned in one part of the Chinese market, which is overall challenging, but that's one part of the market that has a good dynamic. And indeed, the translation of that has been lower in the last quarter compared to the previous quarters, but still substantially growing year-over-year. Operator: The next question comes from Sven Weier from UBS. Sven Weier: It's just one. And I think we've discussed a lot about relative performance of Signify against other lighting players. But I'm more curious about the relative performance of lighting within construction against other construction segments. And we're obviously seeing quite a bit of an underperformance here of lighting against other segments in the last couple of years. I guess my suspicion has always been around the renovation side that you see the kind of lagging effect of a higher LED installed base and longer replacement cycles, which I think has kind of been a bit denied by the company. I was just wondering if you're also aiming for the Capital Markets Day to provide us more color on that very point because I think it could be an important point to get a sense when does that kind of underperform potentially start to phase out and provide us more visibility on that item. That's my question. A.C. Tempelman: Yes. Thanks, Sven. And it's important so that we always start with market, not ourselves. And indeed, I think we -- the market is at the final wave of ratification, if you want, but we are not at the end of it just yet. So you still see that then having an impact, I guess, on the lighting sector in comparison with other construction-related sectors. On your question, will we create some clarity, yes. I think we'll create some clarity about how we see the harvesting road map for conventionals, but also how we see the market when it comes to ratification. And also where we see the growth opportunities because, clearly, beyond the hardware, we see then, of course, a lot of growth in connected, and that presents us with good opportunities as well. Yes. Short answer is yes, Sven, we will come back to that. Sven Weier: And so you agree that this could be a factor that you especially see on the renovation side out of the longer replacement cycles? Would you agree that this could be potentially one of the drags relative? Zeljko Kosanovic: Maybe what I can say on -- look, when we look at the dynamics of the market, how it translates because we, of course, have leading indicators that to understand exactly what you are pointing out, the look -- in short, I think the way -- the market, and of course, renovation is the most important piece of our exposure. I mean we are higher -- our indexation to the renovation is higher than to the new build in the professional nonresidential space. So to your question, I think, when you look at the different dynamics market per market, I would say, the answer to your -- or at least the conclusion you are taking is not the one that we would have. So I would understand that this has to be probably better articulated on how we see it forward, and we'll take note of your comment. But that's not what our analysis would indicate at least with the data we have. Operator: We have time for one last question, and it comes from George Featherstone from Barclays. George Featherstone: It's just about the capital allocation going back to some of the questions you've had already. Cash on the balance sheet is down about 35% year-over-year. Free cash flow is down 40% year-over-year on a year-to-date basis. You're obviously now guiding for lower cash generation ahead. How concerned are you about these trends? And do you plan to take any proactive actions to conserve cash given the weaker market trends that you talked about already? Zeljko Kosanovic: Yes. Thank you for your question. So first of all, if we look at the -- as part of our capital allocation policy and priorities, I think we've been very clear and that's what we've been driving consistently also over the past year to ensure and to sustain a strong capital structure, a strong balance sheet and a level of leverage that is supportive to an investment-grade rating sustained. So when we look at our leverage year-over-year, it has slightly decreased. So it's in line with what we expected. We have just completed, as was communicated also our refinancing with now a longer tenure for the EUR 325 million that was at maturity in the last quarter. When we look at the dynamic of cash generation versus the implementation of our capital allocation policy defined for 2025, I think there is no change or no concern to your point because we look at -- we are well on track on the execution of our share buyback program. We are able to define the priorities supporting growth as we intended. So look, no, I think the dynamic and the adjustment that we have indicated are not leading to a correction on the overall equilibrium, let's say, on the cash generation versus cash utilization that we defined in our policy for 2025. So no major change there. George Featherstone: Okay. And just specifically on the buyback, do you intend to complete that? I mean I think it's on the guidance you've given is an up to EUR 150 million. Is your intention to go all the way to EUR 150 million at this stage? Zeljko Kosanovic: So for now, we are well on track with the plan for the year. And yes, we are intending to complete, as what was committed again in our capital allocation policy, which still fits totally with the plan we have defined. So there, we are on track and expect to complete as was indicated. So in short, we had given a clear capital allocation policy for implementation in 2025, and we are executing to it consistently and expect to do so for the rest of the year. Operator: And with that, I will now turn the call back over to Thelke Gerdes for any closing remarks. Thelke Gerdes: Ladies and gentlemen, thank you very much for joining our earnings call today. If you have any additional questions, please do not hesitate to contact us. And again, thank you very much, and enjoy the rest of your day.
Operator: Good morning, ladies and gentlemen, and welcome to Universal's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Arash Soleimani, Chief Strategy Officer. Arash Soleimani: Good morning. Thank you for joining us today. Welcome to our quarterly earnings call. On the call with me today are Steve Donaghy, Chief Executive Officer; and Frank Wilcox, Chief Financial Officer. Before we begin, please note today's discussion may contain forward-looking statements and non-GAAP financial measures. Forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information, please see the press release on Universal's SEC filings all of which are available on the Investors section of our website at universalinsuranceholdings.com and on the SEC's website. A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the quarterly press release and can also be found on Universal's website at universalinsuranceholdings.com. With that, I'll turn the call over to Steve. Stephen Donaghy: Thanks, Arash. Good morning, everyone. It was a solid quarter with a 30.6% adjusted return on common equity. Our unique organic business model allows us to consistently generate deep double-digit ROEs, making us particularly well positioned to succeed in the much improved Florida market. Additionally, we commenced our annual actuarial review process considerably earlier this year and our findings are very encouraging. As we've discussed in recent periods, our reserving process has become more conservative with a focus on protecting and increasing the resilience of our balance sheet. When we look at our current and prior accident year reserves in the aggregate, we believe we're in a very strong position, further increasing our optimism as we turn a new chapter in the revamped Florida market. I'll turn it over to Frank to walk through our financial results. Frank? Frank Wilcox: Thanks, Steve, and good morning. Adjusted diluted earnings per common share was $1.36 compared to an adjusted loss per common share of $0.73 in the prior year quarter. The higher adjusted diluted earnings per common share mostly stems from a lower net loss ratio and higher net premiums earned, net investment income and commission revenue. Core revenue of $400 million was up 4.9% year-over-year, with growth primarily stemming from higher net premiums earned, net investment income and commission revenue. Direct premiums written were $592.8 million, up 3.2% from the prior year quarter. The increase stems from 22.2% growth in other states partially offset by a 2.6% decrease in Florida. Overall growth mostly reflects higher policies in force, higher rates and inflation adjustments across our multistate footprint. Direct premiums earned were $534.1 million, up 5.2% from the prior year quarter, reflecting direct premiums written growth over the last 12 months. Net premiums earned were $359.7 million, up 4% from the prior year quarter. The increase is primarily attributable to higher direct premiums earned partially offset by higher ceded premium ratio. The net combined ratio was 96.4%, down 20.5 points compared to the prior year quarter. The decrease reflects a lower net loss ratio, partially offset by a higher net expense ratio. The 70.2% net loss ratio was down 21.5 points compared to the prior year quarter, with the decrease reflecting the inclusion of Hurricanes Debby and Helene in the prior year quarter and the lack of hurricane activity in the current year quarter. The net expense ratio was 26.2%, up 1 point compared to the prior year quarter, with the increase primarily driven by a higher ceded premium ratio and higher policy acquisition costs associated with growth outside Florida. During the quarter, the company repurchased approximately 347,000 shares at an aggregate cost of $8.1 million. The company's current share repurchase authorization program has approximately $7.1 million remaining. On July 9, 2025, the Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock payable on August 9, 2025, to shareholders of record as of the close of business on August 1, 2025. With that, I'd like to ask the operator to open the line for questions. Operator: [Operator Instructions] Our first question comes from Paul Newsome with Piper Sandler. Jon Paul Newsome: And was -- maybe you could follow on a little bit more on your reserving comments. Does this foreshadow any change in how you think about profit margins prospectively and the exit year loss ratio or any change in how you think about loss picks? Stephen Donaghy: Yes. Paul, thanks for the question. We feel as though we have come through a very fraudulent time within the Florida market. And we have seen all the all the things in the past go through the book. There's still things to deal with in the future, as you know, Florida is an ever-changing market. However, we've never had as many dollars up in the aggregate as we do right now. And our file count or claims count is dramatically reduced, and our claims folks are getting the claims much faster as a result of the market that we're in. So we've seen considerably positive effects on the book and on our reserving philosophy, so to say. As we look to the future, we want to get through the year before we make any substantial adjustments and retain our conservative approach but that will be something we will look at seriously as we get into the beginning of '26 and close out 2025. Jon Paul Newsome: A different follow-up question. Any thoughts on the competitive environment. We hear all sort of talks about rate decreases in the Florida market in particular. But could you give us some general thoughts about what you're seeing both in and out of the Florida markets from a competitive perspective? Stephen Donaghy: Yes. I think, again, just to address outside of the Florida market, we're more of a niche provider, and we have our markets that we like and our rates are adequate in certain spots. And it's very -- it's highly competitive outside of Florida, and you have all the big names there as well. Within Florida, there are a lot of new players showing up. There's a lot of new players that maybe don't understand what we've understood for 25 or 26 years now. So we see a lot of various behaviors. We do not chase premium. We are sticking to rate adequacy and trying to drive a high level of service to our insurers and profitability to our shareholders. So it is competitive. There are a lot of markets. I think the agents continue to prefer to write with established providers when competitive. And so I think -- and I would say unlike other times, that's now consistent across the state. It's not just in specific markets in Florida. And I think there's different carriers that look at different geographic areas in Florida very differently. So we do -- but we continue to write new business and new policies as you've seen from last quarter. So we feel good about our position and our relationship with our agency force. Jon Paul Newsome: The last big question and then I'll let other folks ask. Capital management, you made some comments this quarter. But you now have a high-class problem here in the sense that your ROE is well above the growth rate of the company. What's your priorities there? Should we expect substantial or at least some repurchase activity prospectively as part of your sort of ongoing business given where the returns are now? Stephen Donaghy: I don't know about new purchase activity, Paul, but we consistently view our shares as a positive within our capital management. So as we look to the future and we have access to capital. We'll continue to work with the investment committee and establish guidelines and change those guidelines as we go. But we feel very confident in any acquisition of our shares that we can do at the appropriate times. Operator: Our next question comes from Nicolas Iacoviello with Dowling Partners. Nicolas Iacoviello: I just had one. Was there any net prior year development booked in the current quarter following the annual actuarial review? Frank Wilcox: Yes, there was. It's about $3.9 million related to prior year cats. Nicolas Iacoviello: All right. And I'm assuming there was nothing on the claims handling side from last year's storms, correct? Frank Wilcox: That's correct. Yes. Operator: I'm showing no further questions at this time. I would now like to turn it back to Steve Donaghy for closing remarks. Stephen Donaghy: I'd like to thank our associates, consumers, our agency force and stakeholders for their continued support of Universal and wish all a nice weekend. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Primis Financial Corp. Third Quarter Earnings Call. [Operator Instructions] And I would now like to turn the conference over to Matt Switzer, Chief Financial Officer. You may begin. Matthew Switzer: Good morning, and thank you for joining us for Primis Financial Corp.'s 2025 Third Quarter Webcast and Conference Call. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate site, primisbank.com. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. How a non-GAAP measure relates to the most comparable GAAP measure will be discussed with the non-GAAP measure is used, if not readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Zember. Dennis Zember: Thank you, Matt for that introduction, and thank you to everybody that's joined our conference call this morning. We believe our third quarter results reflect much of what we've been talking about in recent quarters, and we're excited to see the improvement and the lack of noise honestly in the current quarter. For the current quarter, we are reporting $6.8 million in net earnings and about $0.28 per share, which compares to core income of $2 million and $0.08 per share in the same quarter in '24. Our ROA and ROTCE in the current quarter improved to 70 basis points and 9.45%, respectively. We mentioned this in the press release, and I know Matt's going to give more current -- or more color. But our current profitability levels are higher than what we're reporting. When we adjust for some certain items that we know aren't permanent, we see a core ROA that's closer to 90 basis points and puts us right in line to be successful reaching the 1% ROA that we've been targeting. I know Matt is going to give more details on that. But from a high level, I want to recap some of the impactful things that happened this quarter and that give us the confidence that a 1% ROA is within reach. First, we're reporting our core margin in the quarter at 3.15%, which is up from 3.12% in the second quarter of this year, but up about 35 basis points compared to a year ago. At this point, we've replaced about half of the loans that we sold with the life premium business a year ago at yields that are at least 200 basis points higher. Importantly, we have -- importantly, we have the pipeline and the momentum to get the remaining portfolio replaced. And with current levels and margins that we see across our business, we expect that to add another 6 to 8 basis points of ROA and about -- excuse me, of margin and improved pretax earnings by about $1.6 million per quarter. We've also driven results on the deposit side. Compared to a year ago, we've grown noninterest-bearing checking accounts by about 16%, which has materially improved our deposit mix and taken our cost of deposits down by almost 20%. At the end of the quarter, alongside the rate cut by the FOMC, we were able to move lower again on the deposit side across our footprint -- across our business, both digital and in our core business. And thanks to our focus on core relationships, we've experienced very strong retention across the bank. Very little of this last move is reflected in our results due to the timing at the end of the quarter, but we expect this to be meaningfully positive to our margin and our results in the fourth quarter. When I look through the improvement in margin, I see new asset yields holding in strong, being funded incrementally at very attractive levels. Matt, I know it has more details on this. But in the current quarter, our new and renewed loans came in at about 7.16% compared to 7.57% in the second quarter of this year. New deposit business is a mix of us competing hard on new businesses, commercial businesses and driving down the overall cost with new checking accounts. New deposit business came in at around 2.51%. And so taken together, our new activity across the entire bank, all of our divisions produced spreads of about 4.65%. These kind of incremental margins on balance sheet growth is important because we're still relying on operating leverage to drive our results to where we know they should be. Our table in the press release reflects how steady we have been on operating expenses, showing that we came in at just $100,000 or so from our 5-quarter average. Looking ahead, we are confident that we can continue to hold growth in OpEx to a very minimal level, managing very tight in this environment and letting the investment that we've made in past quarters pay dividends with growth at the attractive levels we talked about. On our operating divisions, real quickly, I'm getting pretty excited about the investments we've made that are tied to residential mortgage. We've built our mortgage division from about $20 million a month of production to about $100 million to $120 million a month over the past few years. We've done this profitably too, slowly reinvesting enough of our earnings to build our production staff to what it is today. We've focused on culture and service as well as just products and pricing, and all of this work continues to pay dividends. In the third quarter, we had continued recruiting success that built annual production by about another $120 million or 10% of where we stood at the beginning of the quarter. Core results for the quarter showed pretax earnings of about $1.9 million, which is 58 basis points on closed volume and our strongest quarter yet. For core results in mortgage, we are excluding some legal fees associated with some recent hires that totaled about $900,000, and we expect this to moderate back to normal levels very rapidly. Mortgage warehouse continued to grow nicely and continued -- and shows real [ pace ] for the bank and for our earnings. To illustrate this, we had average balances in the quarter of about $210 million, but ending balances of about $327 million. Today, we have over $1 billion of uncommitted lines approved and in place and a pipeline of new opportunities working through the system of about $300 million. For the quarter, the warehouse group showed pretax earnings of about $1.6 million and moved their efficiency ratio down to about 27%. Long term and at scale, this business can be 2 to 3x its current size on our balance sheet with operating ratios that are accretive across the board and taken together with our mortgage company, we have the ideal -- we have ideal and sustainable exposure to residential mortgage that produces fee income and balance sheet growth that nicely augment what our core bank is doing. Panacea continues to gain steam and momentum. Loan balances moved higher in the current quarter to $530 million on average compared to $385 million in the same quarter a year ago. Deposits was really impressive, growing at a faster rate, ending at about $132 million in the current quarter, which is about 50% higher than they were a year ago. Importantly, Panacea's cost of deposits reflect a blend of technology, customer service and deep brand endorsement. For the current quarter, their cost of deposits came in at 1.37%, lower than our core banks and compares very nicely to 2.28% in the same quarter a year ago. I have -- obviously, I have a lot of conviction about the kind of value that we're creating here because the industry deeply values traditional community and commercial banking and honestly, rightfully so. And while Panacea and what we're doing here does have somewhat of a fintech flare to it, operating nationwide with deep embedded technology versus physical branches, it's producing dynamite credit results focused on C&I and owner-occupied CRE with excellent yields to one of the most, if not the most coveted customers out there. And it's funding the balance sheet at extremely attractive levels, lower than most established community banks. Strategies like this in the past didn't garner meaningful value because they focus on real easy credit and funded with flimsy or expensive solutions like CDs or institutional borrowings. But Tyler and his team is focused on relationships and technology and a customer experience that's proven to be more meaningful. And lastly, before I turn it to Matt for some more details, a few comments on credit. We noted in the last quarter that we've had a few downgrades that were centered on loans that weren't delinquent but did have weaker prospects and weaker guarantor support. Our negative exposure to 2 office real estate properties in the Northern Virginia market are reflected in our quality numbers, with both being in substandard and one being in nonaccrual. Both properties have improving NOI and strong leasing activity, but tenant improvements -- tenant improvements, leasing commissions and rent abatement have stressed the borrowers' cash levels and their ability to support the property. These properties are ideally situated outside of the district in very desirable locations. And it's important to note that the market here is stable to slightly improving compared to areas inside the District of Columbia. The remainder of our nonaccruals are centered in 2 loans. One is a $7.5 million loan to a private equity-backed company with proven value. Recent capital raises for the company indicate a strong enterprise value that puts us at about 35% loan-to-value. Matt's impairment testing on the company using pretty deeply discounted cash flows, continue to show no impairment on this loan. The other loan is a nationwide operating business with positive debt coverage, that's working several strategic opportunities to either be recapitalized or sold. On both of these loans, the banks working with the borrowers to exit the relationships through sales or refinance. And at this point, we don't believe there's additional losses or costs to be incurred. Outside of these properties, we really have virtually no exposure to office in any of our markets, but especially the D.C. metro area that is still not operating ideally. I don't want to minimize or gloss over any credit issue, but I don't believe we have exposures that should be causing problems or costs going forward. Okay. With that, Matt, I'll turn it to you. Matthew Switzer: Thank you, Dennis. As a reminder, a discussion of our financial results can be found in our press release and investor presentation located on our website and in our 8-K filed with the SEC. Beginning with the balance sheet. Gross loans held for investment increased almost 9% annualized from June 30 to September 30, including the Panacea loans reclassified to held for sale, gross loans would have increased approximately 15% annualized, led by growth in Panacea and mortgage warehouse. Importantly, average earning assets increased 10% annualized in the third quarter, positioning us to fully replace earning assets sold a year ago with the Life Premium Finance sale. Deposits were flat in Q3 due to limited runoff at the end of the quarter after the Fed rate cut, but we're still up 7% annualized using average balances for the quarter. Even more impressive noninterest-bearing deposits increased 10% annualized in the quarter, with a strong contribution from the core bank and mortgage warehouse. As Dennis discussed, our focus has been making sure we execute on the strategies that drive the ROA higher from here, which we've done. Our net interest margin in the third quarter was 3.18%, up from a reported 2.86% last quarter and 2.97% in the year ago period. We had limited impacts on net interest margin and margin -- this quarter from the consumer program and expect that to be the norm from here. The margin was impacted by interest reversals on loans moving to nonaccrual in the quarter and would have been 3.23% on an adjusted basis without those reversals. We're still booking new loans with yields near 7%, and we have a substantial amount of loans repricing later this year and next that will continue to move yields higher and help the margin. The core bank cost of deposits remains very attractive at 173 basis points in the quarter, down 6 basis points linked quarter. In addition, we used the Fed cut in late September as an opportunity to move digital rates down more aggressively by lowering rates of 35 basis points at that time, which should benefit us meaningfully in the fourth quarter. Our provision this quarter was a small release driven by growth in the loan portfolio tied to categories with lower reserve requirements, low core charge-off activity and the release of reserves for moving a portion of the Panacea loans to held for sale. Noninterest income was $12 million in the quarter versus $10.6 million in the second quarter when excluding PFH stock sale-related gains with increased mortgage revenue as the primary driver. Mortgage revenue and profitability bounced back in Q3 with pretax income of approximately $1.9 million versus $0.1 million in the second quarter and which had been impacted by cost tied to new teams onboarded at the end of March. To give you a sense of the scale we're building in mortgage, we funded 59% more loans in September of 2025 than we did in September of 2024. We also closed $26 million of construction of perm loans in the quarter, where we won't see material profitability at closing, but generate attractive gain on sale revenue in a couple of quarters. On the expense side, when you exclude mortgage and Panacea division volatility and nonrecurring items, our core expenses were $21.6 million versus $22.3 million in the second quarter. There are a handful of items described in the earnings release that are onetime in nature but don't rise to the definition of nonrecurring for reporting purposes and totaled approximately $1.8 million, including one more month of technology contract savings. Normalizing for these items, core noninterest expense was approximately $19.8 million, putting us only slightly higher than the year ago quarter. We are laser-focused on driving that number down further even in the face of inflationary pressures that would otherwise move it higher. In summary, as we detailed in the earnings release and investor presentation, our reported ROA was 70 basis points in the third quarter. Adjusting for the expense items we just highlighted, pretax earnings were close to $11 million, and ROA would have been approximately 90 basis points in Q3, with growth and repricing of earning assets, pretax earnings will grow to over $13 million in the near term, which equates to our 1% ROA goal with upside still from there. We're pleased that the third quarter showed meaningful progress on profitability with much fewer -- many fewer onetime items that have masked our core earnings power before. As I stated last quarter, we have substantial tailwinds from here that get us to strong profitability ratios without Herculean efforts just straightforward blocking and tackling. We recognize that one quarter is not considered a trend, but we firmly believe that we are seeing that trend play out and look forward to demonstrating our earnings power from here. With that, operator, we can now open the line for Q&A. Operator: [Operator Instructions] And our first question comes from the line of Russell Gunther with Stephens. Russell Elliott Gunther: I wanted to begin on loan growth, please. And it would be helpful to get your guys' thoughts on how you're thinking about overall growth for the fourth quarter, given maybe some potential mortgage warehouse seasonality, continued consumer runoff and then thinking ahead into '26 as well in terms of order of magnitude and mix. Dennis Zember: Russell, I'll start, and Matt can -- Matt can correct me, probably. I think on mortgage warehouse, we've got so much potential and so much still kind of maturing there that I think what's probably at scale, we would have more runoff in the fourth quarter. I don't know that we're going to have that same kind of runoff. I don't -- again, we only averaged $200 million or so, I think $210 million in the second quarter -- excuse me, third quarter. I think we can sustain those levels, maybe where we ended the quarter, we might not sustain that. Matt's probably got a little deeper understanding there. I think for Panacea, honestly, we could probably take the Panacea loans to whatever level we want the -- I think an annual production capacity there is probably about what their balance sheet is. We've got some other parties that are going to take some of that production. And Matt and I don't really want Panacea to take over the whole balance sheet. But I think we're ending at $550 million. I think we may sell a little bit of those loans in the fourth quarter to sort of get into some of the flow agreements with the larger bank, the third party. But I think for next year, $150 million or so, I think is definitely possible there. And on the core bank, I think we probably could squeeze out 7%, 8% growth there. I think for all of next year, if you're asking me, I think this point in time next year, we could be comfortably up, call it, 10% to 12%. Matt, what you -- what's your thoughts? Matthew Switzer: Yes, I agree with all that. I mean a lot of our growth this quarter was mortgage warehouse related. We would normally expect seasonality, but as Dennis mentioned, I mean, they're still on the growth path in terms of adding customers and loans. So even though utilization may drop some in the fourth quarter, the additional lines there they're bringing on is going to offset some of that growth. So they'll probably be up some on an average basis in the fourth quarter. Russell Elliott Gunther: Okay. That's great color, guys. And then my next question was in regard to Slide 11 of the deck, kind of 2 parts. One, the timing of when you'd expect to get to that 3.30% margin that you said is average earning asset driven. I think maybe just expand upon what you are referring to when you talk about continued shifts in deposit mix will then become focused. Dennis Zember: Go ahead, Matt. Matthew Switzer: Yes. I mean we'll -- I think we'll be closer to 3.30% margin as we exit this year, so probably first quarter next year. And then the deposit mix change is -- I mean, we've talked about this for a couple of quarters now. And I mean you can see it in the balance sheet results. We are 100% focused on increasing our proportion of noninterest-bearing deposits. We have, I wouldn't say a long-term goal, more of a medium-term goal to have that number closer to 20% of total deposits. It's about 20% in the core bank, but we wanted to be 20% for the entire institution. So '26, that is a focus of ours, just like it has been in '25, getting noninterest-bearing percentages up. So that's really the remixing we're talking about. Dennis Zember: Russell, I would add that if you look at the bank as a whole, we probably -- we have -- there's no probably -- we have more technology, and more strategies focused on driving low-cost deposits at a pretty fast clip than we do on the loan side. And we've got pretty notable loan strategies between warehouse and Panacea and the life business -- life premium business that we sold. But V1BE in and around our markets is driving massive pipelines and massive success. I mean, we've looked -- our peer group is up 5% in checking accounts and we're up 16%. And I'd attribute some of that to what we're getting in the lines of business as well as in the core footprint. So we really believe that our long-term value here of sort of being unique is centered more on the deposit side than the loan side. Right now, we're driving real success in the margin and with replacing the earning assets, as Matt showed you here in this graph. But I think as soon as we sort of tap out on replacing all those assets, the thing that will drive it is what Matt was saying, getting the deposit mix situated right, thanks to some of the technology that we got at play. Operator: [Operator Instructions] And our next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Christopher Marinac: I wanted to ask about deposits. And Dennis, the point you made on deposit costs incrementally with interest rates going down, does that get harder to do? Or does it get more easier or flexible for you to drive more deposits in at kind of the appropriate rate to push up margins? Dennis Zember: I guess it really could go either way. I think the -- you look at our universe or our competition, Chris, I mean, a lot of them are sort of looking at falling rates, the Fed cuts, they're looking at that to be -- I mean the whole industry honestly has been looking at that to be the sort of driver to get some of our margins back. So we suppose -- Matt and I both suppose that the competition is going to be using most of that to get the biggest beta possible. I think the fact that we're driving as many checking accounts into the bank lets us be sort of more aggressive on business money markets, business checking, consumer, even CDs and still sort of maintain a cost of deposits that's at or below our period. And I mean, we're more of a growth bank. So we have to sort of balance where we're bringing in or where we have things priced versus just straight for profitability. So that checking account growth is absolutely key to us keeping deposit flows at the right level. Matt, and I don't want to fund the balance sheet with brokered CDs and institutional borrowings like Federal Home Loan Bank. We want to be core funded. And we don't want that to eat into the margins or the operating leverage we want. The only thing we can do to stay competitive and we're very competitive is are those checking accounts. And as long as we're driving checking counts in a sort of better than 10%, I think we can be very competitive on the rate-oriented products, Chris, and still punch out good growth and good profitability. Christopher Marinac: Got it. That's helpful, Dennis. And I guess, just kind of another point because you've now been doing the digital bank process for several quarters, a couple of years now, are you finding evidence that these are more sticky customers, which is really differentiating Primis in the rest of the pack? Dennis Zember: 100%. And Matt can give you more color here, but I mean our average customer has over $50,000. The average customer, I think we're right, maybe a month from having average customers' deposit relationship for 2 years. Over 90% of our customers have either more than one deposit account with us or more than one product or they refer to a customer. Questionably these are stickier than what the industry believes. Chris, I would still caution you though, we -- these are not customers that are in the branch. These are customers using a digital experience that's by far better than what most banks are rolling out. Still, they're more rate sensitive than the traditional community bank so -- community bank customers. So we're not going to get ahead of ourselves and push -- try to push these rates down to Fed funds minus [ 150 ]. That's not going to be these customers. But we've moved rates 3 or 4 times now, Matt, can correct me. And we've got retention rates over 90%. Matt, help me make sure I'm right on most of that. Matthew Switzer: You're 100% right. And as I've mentioned in my remarks, Chris, we were aggressive after this last Fed cut because we were seeing still growth in balances without any advertising and based on our read of the deposit base, it looked like we were probably a little bit high relative to the rest of the market. So we actually had -- we cut rates a little bit more than the Fed cut in September, and we did see a little bit of runoff, but nowhere near the runoff you would have expected from a deposit base that was truly hot money based or rate sensitive. I mean there were some rate-sensitive customers in there, but frankly, no more than we would have in the core franchise. So we're pleasantly surprised with how sticky these deposits have been as we've lowered rates with the Fed and it's been a very valuable funding source for us. And as we talked about in previous quarters, allowed us to protect the core bank deposit base, which is still very low cost and very sticky. Dennis Zember: Chris, I'd add one more thing. Speaking on a panel a few weeks ago and people were asking about digital. And the industry -- and I mean, I'll be honest, I had this too. The industry believes that kind of digital customers that you never see or touch have some sort of hotness to them in their hot money. Honestly, every customer -- we have 20,000 customers, maybe 25,000 when you include all the lines of business, every single one of those customers has a banker. And every single banker's cell phone is in the hands of every single customer. We're available to them 24/7 is what we pitch. Our bankers and our call center. We offer premium banking products, we offer the full suite of banking products. I mean, yes, the digital products are deposit oriented. But if any of those customers needed anything, loans, deposits, loans, mortgages, HELOCs, anything, we are ready to do this. That's the reason, honestly, that they're sticky. I don't think that the industry is wrong about whether these customers are sticky or not or rate sensitive or not or how rate sensitive. I think we just sort of neutralize that by working hard to -- just to build relationships with these customers and sort of, I guess, I hate to say it, but sort of community bank style. And I think that's been successful. And really, we're proving it out with what Matt just said. Christopher Marinac: Understood. I had a asset quality question, which is the -- and thanks for the information you gave on a couple of loans. Do you see any of those things resolved in the next 2, 3, 4 quarters? And even though it's only a few basis points of margin difference, do you see any of that helping you in the next few quarters? Dennis Zember: The larger C&I -- the C&I property that's sort of the operating business. I think there's a chance that could be resolved -- sold, potentially the business sold or recapped in the fourth quarter, that would improve the margin, obviously, because that one is on nonaccrual and was for the whole quarter. The others are still sort of -- we're still sort of receiving payments and working with the borrowers. I think the real estate deals in Alexandria are not going to be resolved in the current quarter, although I think if you gave us probably a couple of quarters or maybe to the midpoint of next year, just given the leasing activity and Matt and I are personally involved in these loans and in the leasing activity and just to have very relevant right now data. I think by June of next year, given the leasing activity we're seeing, those properties could be strong enough to be and have strong enough debt coverage to at least not be on nonaccrual. Both of the properties right now are at 1x debt coverage on interest on P&I. One is above debt -- one is above 1, one is like [ 105 ] and the other is not. But the leasing activity on the one that's on nonaccrual, I think June of next year, we could have it above 1x debt coverage on a P&I basis. So I would tell you, really, we just got one that could be resolved in the current quarter and the others, I don't -- I mean I hate them being in nonaccrual and such [ and all ], but I believe we're in the best possible place we could be with those. Christopher Marinac: Great. That's good background. And then just last question, just to connect that what you said at the beginning of the call, but the expense number should continue to get better given the operating difference as you outlined in the release, and we'll just see that quarter-to-quarter. I suspect it's not just the fourth quarter phenomenon, but it will go over the next few quarters. Matthew Switzer: Yes. Yes. Operator: [Operator Instructions] And with no further questions, I will now turn the conference back over to Mr. Dennis Zember for closing remarks. Dennis Zember: Okay. Thank you, everybody that's joined our call. Matt and I are available if you have any further comments or questions. And if you don't, I hope everyone has a safe and happy weekend, and we'll talk to you soon. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to Kinsale Capital Group's Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. Before we get started, let me remind everyone that through the course of the teleconference, Kinsale's management may make comments that reflect their intentions, beliefs and expectations for the future. As always, these forward-looking statements are subject to certain risk factors, which could cause actual results to differ materially. These risk factors are listed in the company's various SEC filings, including the 2024 annual report on Form 10-K, which should be reviewed carefully. The company has furnished a Form 8-K with the Securities and Exchange Commission that contains the press release announcing its second quarter results. Kinsale's management may also reference certain non-GAAP financial measures in the call today. A reconciliation of GAAP to these measures can be found in the press release, which is available at the company's website at www.kinsalecapitalgroup.com. I will now turn the conference over to Kinsale's Chairman and CEO, Mr. Michael Kehoe. Please go ahead, sir. Michael Kehoe: Thank you, operator, and good morning, everyone. Bryan Petrucelli, our CFO, Brian Haney, our President and COO; and Stuart Winston, our EVP and CUO, Chief Underwriting Officer, are joining me on the call this morning. We announced some management changes last night, the most significant of which is Brian Haney's recent election to the Board of Directors and the announcement of his retirement and new role as Senior Adviser beginning next year. We congratulate him on his election and are encouraged that he will continue to have a prominent role in the governance and direction of Kinsale. Brian and I have worked together for almost 30 years at three different E&S companies. He was one of the original founders of Kinsale and has made tremendous contributions to our success over the almost 17 years we have been in business. It's been a great run. And needless to say, we are fortunate that he will continue contributing to Kinsale as a Director and as a Senior Adviser with a focus on investor communications. I'd also like to congratulate Stuart Winston on his promotion to Executive Vice President and Chief Underwriting Officer. Stuart and his team have delivered some of the best underwriting results in the industry. So this recognition is well earned, and under his leadership, we have great expectations for continued profit and growth in the future. In the third quarter 2025, Kinsale's operating earnings per share increased by 24% and gross written premium grew by 8.4% over the third quarter of 2024. For the quarter, the company posted a combined ratio of 74.9% and a 9-month operating return on equity of 25.4%. Our book value per share has increased by 25.8% since the year-end 2024, and our float has increased by 20%. E&S market conditions were steady in the third quarter, generally competitive with our growth rate varying from one market segment to another with our overall growth rate at 8.4%. Our Commercial Property division saw premium dropped by 8% in the third quarter compared to a 17% drop in the second quarter. The overall third quarter growth rate, excluding our Commercial Property division was 12.3%. And Brian Haney is going to provide some commentary on the market here in a moment. Kinsales' disciplined underwriting and low-cost business model is a consistent winner in an industry where the customers are intensely focused on cost. As the E&S market has become more competitive over the last 2 years, Kinsales' efficiency has become a more significant competitive advantage, by allowing us to deliver competitive policy terms to our customers, without compromising our margins. Likewise, in a moment in the P&C cycle characterized by loose underwriting standards, Kinsales' control of its underwriting process and superior data and analytics helps deliver consistent and attractive results. And with that, I'll turn the call over to Bryan Petrucelli. Bryan Petrucelli: Thanks, Mike. As Mike just noted, we continue to generate great results, with net income and net operating earnings, both increasing by 24% quarter-over-quarter. The 74.9% combined ratio for the quarter included 3.7 points from net favorable prior year loss reserve development, compared to 2.8 points last year with less than 1 point in CAT losses this year compared to 3.8 points in the third quarter of last year. We continue to take a cautious approach to releasing reserves. Gross written premium grew by 8.4% for the quarter, while net earned premium grew by 17.8%, which was higher than the gross written premium due to an increase in retention levels upon renewal of our reinsurance program on June 1. We produced a 21% expense ratio in the third quarter compared to 19.6% last year. Higher expense ratio is attributable to lower ceding commissions, generated on the company's Casualty and Commercial Property quota share reinsurance agreements, as a result of the higher reinsurance retention levels that I just mentioned. On the investment side, net investment income increased by 25.1% in the third quarter over last year, as a result of continued growth in the investment portfolio generated from strong operating cash flows. Kinsales' flow, mostly unpaid losses and unearned premium grew to $3 billion at September 30 up from $2.5 billion at the year-end 2024. The annual gross return was 4.3% for the first 9-months of this year and consistent with last year. New money yields are averaging slightly below 5%, with an average duration of 3.6 years on the company's fixed maturity investment portfolio. And lastly, diluted operating earnings per share continues to improve and was $5.21 per share for the quarter, compared to $4.20 per share for the third quarter of 2024. And with that, I'll pass it over to Brian Haney. Brian Haney: Thanks, Brian. First, let me say it's been an absolute honor and privilege to have worked at Kinsale for the last 17 years. There's no better E&S company in the business, and there's no better group of people to work with. Kinsale has come a long way from its first days in 2009 when we were just starting out with Bryan Petrucelli, Mike, myself as well as Bill Kenney, [ Emery Morrison ] and Ed Desch, who I see is on the phone call today. I'm grateful for the opportunities I've been giving by Mike and the Board over the years. I'm proud to have played whatever part I could in the success of Kinsale. It's a tremendous honor to have the opportunity to serve on this Board with so many talented Directors, whom I've worked with over the years, and I'm really pleased that I will continue to be associated with this great company. And I am very confident in our future. We have built an amazingly deep bench. We have great young executives like Stuart and many others like him. The investors should rest assured that this company is in great hands and will continue to be going forward. With that said, on to business. The E&S market remains competitive, as Mike said, that the intensity varies by division. The shared layered Commercial Property continues to be very competitive. But it appears we hit an inflection point sometime early in the third quarter, perhaps late in the second, where the rate of decline is abating. When you look at all the Property business in total, including the Small Property, Agribusiness Property and in the Marine, the book actually grew in the third quarter. In other areas, we're seeing the most growth in Commercial Auto, Entertainment, Energy and Allied Health. Although the market is competitive, our model of low expenses and absolute control over the underwriting and claims handling works well in any market. I would argue it works better in a competitive market because it makes our expense ratio more telling, also the fastest-growing participants in the market today are largely funding companies, whose risk-bearing partners must contend with expense ratios often double ours or higher. And that math isn't going to work out for them. Submission growth was 6% for the quarter, which is down from 9% in the first quarter. That decline is driven by our Commercial Property division. Our pricing trends are similar to the Amwins Index, which reported an overall 0.4% decrease. Commercial Property rates are still declining, but we feel we have reached that inflection point, as I mentioned, where the rates are -- rate declines are stabilizing, and I expect we will see rates in the Commercial Property market, moderate going forward. Overall, we remain optimistic. Our results are good. Our growth prospects are good and as the low-cost provider in our space, we have a durable competitive advantage that should allow us to continue to gradually take market share from our higher expense competitors, while continuing to deliver strong returns and build wealth for our investors. And with that, I will turn it back over to Mike. Michael Kehoe: Thanks, Brian. Operator, we're now ready for any questions in the queue. Operator: [Operator Instructions] Our first question will come from Bob Huang from Morgan Stanley. Jian Huang: So Brian, congratulations on the new role and the retirement. But just maybe if we go into your business outside of Commercial Property, can you maybe comment on where you think the future opportunities would be? Especially given it seems like there's a little bit of a growth deceleration for the quarter. Just kind of curious outside of Commercial Property, what are the areas that you think that are very attractive for you? And what are the areas you think you want to pullback a little bit? Brian Haney: Well, I think we've got opportunity across the whole book. I would say some of our newer areas that we've developed recently would be the Transportation segment and the Agribusiness segment. But I think there's still a great opportunity in Casualty. And then some of the other property-related lines, I think there's still a great opportunity, high-value homeowners and our Personal Lines, it is an area we're putting a lot of emphasis into. We think that's a great opportunity. So I think it's really by the spread. There's a lot of different places we can grow. Michael Kehoe: Yes. For the quarter, all of our Property Lines, except for the Large Commercial Property division, all the other property-focused lines grew at a double-digit clip. So I would reiterate what Brian said. We're pretty confident. Jian Huang: That's very helpful. My second question is with regards to technology, obviously, that's one of your core competencies here. But just curious if you can give us a little bit of color in terms of new tech innovation and implementation into the business? And then just curious as to how you're incorporating emerging technology into your business and where are the areas you feel that would be advantageous for Kinsale going forward? Michael Kehoe: Well, Bob, this is Mike. When we started the business 17 years ago, we talked about making tech, a core competency of our company alongside of the underwriting and the claim handling. And I think we've done that. We build our own enterprise system over the years, took a long time. And about 2 or so years ago, we started what we call target state architecture, which is a complete rewrite of that entire enterprise system. It's an enormous undertaking, but it kind of puts us in a position to really speed up the implementation of new technologies and whatnot. So that target state is an enormous project. We're always enhancing and expanding our product line, that involves our technology department. We've been making ample use of the new AI tools that have come out, both in our IT department, as well as underwriting and claims, trying to drive automation in our business process. So I mean there's a there's a million ways, but I think it goes a long way to explaining why we're able to operate at such a significant cost advantage over our competitors. And I think a lot of it is, hey, we've got a really well-designed enterprise systems, specifically for our company. We don't have legacy software going back 20, 30, 40 years. We don't have thousands of legacy applications. I think we're just in a really attractive spot. Operator: Our next question comes from Michael Phillips from Oppenheimer. Michael Phillips: I wanted to touch on one line of business, the construction liability line. I was curious, was there any change in assumptions in that segment that affected your current year loss pick? Michael Kehoe: I don't know that there were any changes there specifically. We do a quarterly review of our loss reserves by stat line of business. And that goes -- we're in our, I think, 16th accident year. We've got about a dozen lines of business. So there's a high degree of complexity in that analysis -- could very well have picked up some adjustments in the construction, but I just don't know off the top of my head. I think in general, we feel great about the quarter. I think our losses continue to come in below our expectations. There's a little bit of variability in the loss ratios when you roll everything together, and I think that's normal. But again, we feel really positive about the loss performance. Michael Phillips: Okay. And then second one would be on your Excess Casualty segment. Could you talk about that segment, what you're seeing? Is there any growth opportunities there? And what you're seeing maybe for loss trends in that segment? Stuart Winston: Yes. Michael, this is Stuart. We're still seeing good opportunities in Excess Casualty. Rates are holding strong. We're seeing some pressure in the market at the high excess attachment points, where those are being more attractive for various competitors. But that's typically not where we play. We're typically in the lead or the first $10 million on most of our placements. So there's still a good opportunity for growth and rates are holding strong, where we participate in the market. Operator: Our next question comes from Mike Zaremski from BMO Capital Markets. Michael Zaremski: Going back to Casualty, but broader brush on all Casualty ex-Property, which is kind of your core business. You saw a bit of a sequential de-cel in premium growth there. Any color you can offer on just the state of the marketplace, Casualty-specific, pricing? You talked about MGAs in the past as well. Is that still -- are they still just as competitive? Michael Kehoe: I'll start, Mike, and then I'll maybe get Stuart to make a few comments. But I would just remind you that we write Casualty business across many specific underwriting divisions, each one focused on a different industry segment or coverage, and they never move in tandem, right? There's always variability as you go from one area to the next. But in general, I think things are still going well. Stuart Winston: Yes. The long-tail Casualty lines, we're seeing moderate competition, but there's a lot of rational actors out there with the adverse development over the last couple of years in the market. But there's segments like -- areas like Excess Casualty, Social Services and the Allied Health Group that are still really strong and the market will experience some dislocation, the same with Premises Liability, so General Casualty, Entertainment groups like that, it's still a very strong market there for growth. Michael Zaremski: Okay. I mean, I guess that's very helpful. So if we look at the Casualty trend, though it's still kind of -- it's decelerating from a growth perspective. I'm not saying growth, we want profitability, not growth. But is your view -- you shared your view that shared layer, things are becoming less negative, I guess, from a pricing standpoint, I'm assuming. Do you think the Casualty is also getting less competitive or it will remain -- increasing competition will remain kind of impacting the top line? Michael Kehoe: Mike, it's Mike again. I would say we're in a very competitive period in the insurance cycle. Again, it varies a little bit, division by division. But I think the -- you've seen over the last 2 years, the Kinsale growth rate has kind of come in from kind of an extraordinary 40% rate to this quarter's high single digits. I think we've reiterated many times that over the cycle, we think 10% to 20% is a good conservative estimate of our growth potential. I think that's probably the best commentary we can offer. I mean it's a diverse product line. It's a very competitive market. We've got a very competitive business strategy with the control we exercise over our underwriting. It drives a more accurate process. And then when you look at the cost advantage we have over competitors, it's extraordinary. So I think we're in a great spot. We were encouraged that the growth rate going from the second to the third quarter ticked up from 5% to 8.4%. Brian Haney highlighted the fact that if you took the Commercial Property out, that put us in the low double digits. Admittedly, that was down from -- it went from 14% to 12%. But to me, that's just kind of normal variability quarter-by-quarter. I wouldn't read too much into that 2-point decline. Michael Zaremski: Okay. That's helpful. And just to sneak one last one in. Part of your -- I think part of your special sauce, I believe, uniquely allows Kinsale to, I guess, maybe not need to [ profit share ] commissions to some of your broker partners. Is it ever a consideration, especially in more competitive times like today to rethink that strategy or that's not on the table? Michael Kehoe: The profit commissions are typically associated with delegated underwriting, right? So many companies, especially in the SME area, aren't able to handle the volume of transactions internally or for whatever reason, right? It's very common to outsource underwriting to MGAs and MGUs. And I think a lot of companies try to put some sort of profit or growth contingency into the compensation mix for the broker in order to better align incentives. We're not in that space, and we're not considering it. Our business model is to control the underwriting, provide the best customer service in the industry. I think we also offer the broadest risk appetite. So a lot of the business we write, falls out of the delegated or binding programs that are in the marketplace. So really for those reasons, no, we're not considering a change in our compensation model. Operator: Our next question comes from Mark Hughes from Truist. Mark Hughes: Congratulations, Brian, and also Stuart. Current accident year loss ratio was up a little bit. Was that mix? Was that competitive pressure? What would you say that was caused by? Michael Kehoe: Mark, I would just kind of write that off to normal variability. The overall numbers are phenomenal. The reported losses are coming in below expectations. We're always trying to be cautious with our reserving. You can look around the industry. There's a lot of examples of companies that are too optimistic in their loss reserving. We never want to be in that group. So can I would look at the loss performance is good news. Admittedly, it was up a couple of points. But to me, that's just normal kind of variability. Mark Hughes: Yes. Bryan Petrucelli, the ceded premium at 17% and then the expense ratio at 21%, given the kind of the reinsurance structure at this point to ceding commissions? Are those reasonable starting point for the next few quarters? Bryan Petrucelli: I think so, Mark. So the first full quarter that we've had with the new reinsurance terms. So it's a pretty good match for you. I would say mix of business is always going to drive a little bit of variability in that. But I think as we sit now, as good a guess as you can -- we can give you. Mark Hughes: Very good. And then one final question. The state E&S data in some of the coastal states, Florida, Texas, New York, it looked like your growth is a little faster there kind of implying that maybe in other states, growth was a little slower. Is that a correct perception? Is there anything we should read into that or the non-coastal state perhaps a little more competitive? Is there anything to think about there? Brian Haney: Mark, this is Brian Haney. I wouldn't read too much into it. We don't -- we don't know exactly how those numbers are calculated, and we don't do anything to try to match them up with our own data. Michael Kehoe: I think it's better to look at those state tax numbers over a number of months. I think there's a little bit more credibility to further look back. Mark Hughes: Well, if we put those numbers to the side, we say there's any sort of dynamic where non-coastal, the kind of those traditional E&S states, the New York, California, Texas, Florida. Are they -- are you seeing more opportunity there perhaps than elsewhere? Or would you not see it that way? Stuart Winston: I think it stayed relatively the same since Mark, it's Stuart. Relatively the same since we've been in business with obviously, the core E&S states are going to the largest bulk of our business. But I haven't seen a mix in that. Or change in that. Operator: Our next question comes from Andrew Andersen from Jefferies. Andrew Andersen: I think maybe 5 to 7 years ago, you kind of had talked about how there were certain areas you don't write like public company D&O or trucking. Maybe just bigger picture, pockets that 5 to 7 years ago, you did not write and now you're kind of rethinking that and perhaps see some new opportunities for growth? Michael Kehoe: Well, there's a bunch of examples. We've made a bigger push into homeowners. We started an Agribusiness Division. We started an Aviation Division, Ocean Marine, we're always enhancing the product line. Brian Haney: Yes. We're always looking at new products not that we don't, right that. We want to write it on our terms and our pricing to maintain our margin. So if you look at commercial auto, - we write a lot of auto adjacent, wheels adjacent business, but we will look at some small fleets at tighter terms. It's just not the large trucking schedule. So we will take a look at these out, but it's going to be a little more control. Andrew Andersen: Got it. And on the net commission ratio, about 10.5% in the quarter and recognizing there was some change to reinsurance, but the direct commission was pretty much unchanged. But if we go back a few years when the mix was more tilted towards casualty, it was kind of in a 12% to 13% range. Could we see it getting back up to that level? Or are there some offsets within there that might help keep it maybe around 11% or so? Bryan Petrucelli: Again, I think the 10.7% is as good a guide as we can give you. If we did have a change in mix of business, you could see that move around a little bit. Whether that goes up to 12% or 13%, who knows. But I think the best guide we can give you is what we have here for this first full quarter since those agreements have been in place. Operator: Our next question comes from Andrew Kligerman from TD Cowen. Andrew Kligerman: Congrats to Brian and Stuart. And first question is on the net reserve release of $10 million or 3.7 points. Just curious as to what the kind of mix on that was short tail versus casualty maybe on the casualty side vintage. Just kind of curious on the breakdown of that release. Michael Kehoe: Andrew, this is Mike. I would say, without getting too specific, the last couple of quarters, maybe even the last 2 years, including the quarter, most of the release -- the releases have been disproportionately on our first-party business. So short-tail business like property. Andrew Kligerman: Got it. Okay. And I've been noticing when talking to some of your competitors, some of them starting up micro and small, maybe even mid businesses. But I'm seeing a lot of micro and start-ups in the E&S area. Could you talk a little bit about maybe the number of competitors you're seeing in that area versus, say, 3 years ago? Michael Kehoe: I think we have more competitors today than 3 years ago, but it's not just insurance companies. There are hundreds and hundreds of MGAs that have started in the last several years. There used to be one fronting company. Somebody told me the other day, they're now 30. So a lot of capital has come into the industry, and there's just a lot more competition that reflects that. And that's certainly not new. I mean, it's always been a cyclical business, and we're hardwired to compete and win in this environment, I think. Andrew Kligerman: Got it. And the last one, in your commentary, you talked about rates in property. I heard the word stabilizing. I heard moderate. Could you possibly put some numbers around where rates were in property? I think you said that it started to inflect at the end of the second quarter. Maybe where were rates early in the second quarter going? And maybe where are they now? Just to kind of get some numbers around the commentary? Brian Haney: I don't have the exact numbers in front of me. I would have said it was double digits in the second quarter, down. If I had to guess now, I would say it's probably single digits, down. Let's call it, high single. I don't have it in front of me. So that's just an absolute speculative guess. But I do get the sense that at least in the market we're in, you have seen that inflection point, and I would expect to see that trend continue. Like I think it's going to normalize relatively quickly. Operator: Your next question comes from Ryan Tunis from Cantor Fitzgerald. Ryan Tunis: I guess just a follow-up on the underlying loss ratio. It sounded like you attributed kind of the 2-point year-over-year increase to just normal variability. Does that imply that we're not yet seeing pressure on that ratio coming from property lines? Michael Kehoe: No, we're not seeing pressure on our loss ratio from property lines because we've over-performed in property. That's why a disproportionate amount of the reserve redundancy has come from the short-tail lines like property. We've had great experience on property. And I think that's a tailwind. I think where we're being more cautious, and it's not because we're seeing any kind of a negative trend. It's just that on long-tail casualty, there's a higher degree of uncertainty. It just takes time for those accident years to mature, and coming out of a period a few years ago where we had a significant uptick in inflation, all sorts of supply chain disruptions with COVID. We saw some of our long-tail lines develop a little bit higher and a little bit later than we would have anticipated. And starting several years ago, we've addressed that with much more conservative loss picks. And so we're maintaining that conservatism to make sure that we -- we always have more than enough. We want our reserves to kind of develop favorably year by year. And when that happens, it just has a very therapeutic effect on the financial performance of our business. Ryan Tunis: That makes sense. And then I guess just a follow-up on the property. Yes. I guess it makes sense naturally that there'll be less price pressure in the third quarter simply because there's fewer like Florida [ shared and layer ] renewals. I mean to what extent is the improved pricing environment just sort of a function of seasonal mix? If you will. Michael Kehoe: Well, I'm going to start by just saying we didn't say it improved. It deteriorated at a slower rate. Brian Haney: Yes. I would characterize it more as rates were going down so fast that -- the faster rates go down, the quicker they're going to normalize, because the industry can't go around giving double-digit rate increases indefinitely. And I think we've reached that point where you're starting -- you saw that second order derivative turn positive. So I don't think it's based on the third quarter being less hurricane-intensive. Operator: Our next question comes from Joe Tumillo from Bank of America. Joseph Tumillo: Most of my questions have been answered, but I guess the first question is kind of thinking about. I appreciate the submission rate was decelerating a little bit to commercial property. If we exclude commercial property, has the submission rate kind of remained steady? Or has that also kind of decreased along with the ex property premiums? Brian Haney: It's closer to around 9%, excluding Commercial Properties. Joseph Tumillo: Okay. Great. And then the other question, just thinking about -- I saw you guys kind of stepped up the share repurchases this quarter from the $10 million from the previous ones. just kind of thinking, was that just more opportunistic where you saw the share price going? Or is that more of a function of kind of lower growth and a lot of the cash flow? I know you guys have mentioned before about kind of keeping the business kind of efficient capital. Michael Kehoe: I think it's the latter, Joe. We're generating mid-teens ROEs on a year-to-date basis and I think our year-to-date growth rate is high single digits. So we're definitely producing a lot of excess capital. And our first goal is always to grow the business. And then secondarily to that, the last couple of years, we've been looking at a very small dividend and a very small share repurchase, but I think both of those could continue to grow. Operator: Our next question comes from Pablo Singzon from JPMorgan. Pablo Singzon: So first question, with premium growth having slowed, how do you think about other underwriting expenses over the next 1 to 2 years, right? So I think over the past several years, it's been a good story. But given that growth has slowed, are you managing that line to sort of trail the growth in premiums? Or just given where you think opportunities might lie, there's a chance that you might see some degradation as you're building out new opportunity? Michael Kehoe: I think we have always worked like crazy to be as efficient as we can as a business. Given the industry that we compete in. And I think the other underwriting expenses will gradually come down over time as we drive productivity gains in the business through technology, et cetera. I don't think it's going to be sudden, but I think a gradual decline is what investors should expect. Pablo Singzon: Okay. And then, I guess, second question also related to expenses, right? So clearly, Kinsale has an expense advantage over the rest of the industry. I'd be curious to hear your thoughts about whether or not you're willing to trade some of that expense ratio to generate higher premiums and underwriting income? And I guess even if that trade is possible to begin with, right? Or are you sort of happy with the current configuration of pricing, profitability and volume? Michael Kehoe: Look, I mean, I think there's just a clear recognition that the customers we serve, principally small business owners, are intensely focused on limiting how much money they spend on insurance. And so we're doing everything we can to be as efficient as possible, to give them competitively priced insurance policies but also to protect our margins. So I don't see an advantageous trade where we would deliberately raise our costs, become less competitive and somehow that's going to net a better opportunity for our company. I was just going to say, we're going to continue to work -- do everything we can to be the efficient insurance provider in the E&S space. Pablo Singzon: Got you. And then just one small one. On reinsurance retention, do you think that could go up again in the next couple of years or you don't see any change from current status quo? Bryan Petrucelli: Yes. Again, I think what you're seeing this quarter is our best guess. Now if we had some dramatic mix of business, it could move one way or the other. Michael Kehoe: But our retention has changed many times over the years. Right. We've taken a bigger net position over and over again, and that's just consistent with our growth as a business. Operator: Our last question comes from Casey Alexander from Compass Point. Casey Alexander: Yes. And congrats to Brian and Stuart, particularly to Brian on his retirement. I'm sure that's something that we all look forward to. So not to beat a dead horse. Not to beat a dead horse, but Brian, I am particularly taken by your comments that the property rate decline is stabilizing, simply because the 20 years of covering property in the Southeast particularly in the Southeast U.S. when you have a year like this, it has a particularly low level of cat activity, at least up-to-date fingers crossed, right? You never know what happens in the month of November. It tends to attract alternative forms of capital that see very low loss ratios and think that they can get into the business and they tend to get into the business in commercial, because its than quicker than residential, and it's irrational. And so I just wondered, does that not concern you that you're possibly going to see alternative capital in 2026 enter the property market and leading with some irrational price structures? Brian Haney: You might be right. I was kind of referring more to the dynamics in the third quarter. So who knows? Operator: We have no further questions in queue. I'd like to turn the call back over to Michael Kehoe for any closing remarks. Michael Kehoe: All right. Well, we appreciate everybody joining us and look forward to speaking with you again here in a few months. Have a great day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to Procter & Gamble's quarter end conference call. Today's event is being recorded for replay. This discussion will include a number of forward-looking statements. If you will refer to P&G's most recent 10-K, 10-Q and 8-K reports, you will see a discussion of factors that could cause the company's actual results to differ materially from these projections. As required by Regulation G, Procter & Gamble needs to make you aware that during the discussion, the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with useful perspective on underlying business trends. and has posted on its Investor Relations website, www.pginvestor.com, a full reconciliation of non-GAAP financial measures. Now I will turn the call over to P&G's Chief Financial Officer, Andre Schulten. Andre Schulten: Good morning. Joining me on the call today is John Chevalier, Senior Vice President, Investor Relations. I will start with an overview of results for the first quarter of fiscal '26 and spend a few minutes on strategy and innovation, and we'll close with guidance for fiscal '26 and then take your questions. First quarter results reflect strong execution of our integrated strategy in a difficult geopolitical competitive and consumer environment. This marks 40 consecutive quarters of organic sales growth and keeps us on track for the tenth consecutive fiscal year of core EPS growth. Organic sales rounded up to 2%. Volume was in line with prior year. Pricing and mix were each up 1%. Growth continues to be broad-based across categories and regions, with 8 of 10 product categories growing or holding organic sales. Skin & Personal Care led the growth, up high single digits. Hair Care, Grooming, Personal Health Care, Home Care and Baby Care each grew low singles. Oral Care and Feminine Care were in line with prior year, and Fabric Care and Family Care were each down low single digits. 6 of 7 regions held or grew organic sales. Focus markets were up more than 1%. Organic sales in North America were up 1%. Consumption in our categories decelerated throughout the quarter, with unit volumes essentially flat for both markets and P&G brands. Price mix added a point of growth. The pricing for innovation and supply chain costs that was announced on June 15 went into effect on September 15. This caused some trade inventory volatility in the quarter, but shipments were largely in line with offtake for the full quarter. European focus markets organic sales were equal to prior year with strong growth in France and Spain, offset by a softer period in Germany and Italy. Greater China organic sales grew 5%, another quarter of sequential improvement and positive momentum. 6 of 7 categories grew organic sales in quarter 1 with Pampers and SK-II each growing double digits. This progress is the result of interventions made across the digital commerce and distributor business, along with strong innovation and execution of the integrated strategy. Enterprise markets grew more than 1% for the quarter. Latin America organic sales were up 7%, with strong growth across Mexico, Brazil and the balance of smaller markets in the region. Organic sales in the European enterprise region were in line with prior year and the Asia Pacific, Middle East, Africa enterprise region was down low singles. Global aggregate market share was down 30 basis points, 24 of our top 50 category country combinations held or grew share for the quarter. On the bottom line, core earnings per share were $1.99, up 3% versus prior year. On a currency-neutral basis, core EPS also increased 3%. Core gross margin was down 50 basis points and core operating margin was equal to prior year. Strong productivity improvement of 230 basis points with healthy reinvestment in innovation and demand creation. Currency-neutral core operating margin was up 40 basis points. Adjusted free cash flow productivity was 102%, a very strong Q1 results. We returned $3.8 billion of cash to shareowners this quarter, EUR 2.55 billion in dividends and EUR 1.25 billion in share repurchases. In summary, a solid quarter to start the year in what continues to be a challenging environment, including heightened competitive activity in the U.S. and in Europe. Moving on to strategy. Given the market and competitive challenges we face now is the time for increased investment in and flawless execution of our integrated growth strategy consumer firmly at the center of everything we do. We will drive superiority in every part of our portfolio across all value tiers where we play, all retail channels and all consumer segments we serve to grow categories, provide value to consumers and customers and create value for shareowners. We will strengthen the integration of all vectors of superiority starting with a very strong innovation program this year, building stronger core brand propositions and growing bigger adjacencies and forms to enhance consumer delight, core and more. In U.S. Fabric Care, we recently started shipments of Tide's biggest upgrade to liquid detergent in 20 years. Tide's boosted formula combines its ultimate grease and stain fighting technology with an advanced perfume innovation, resulting in laundry that's cleaner, whiter, brighter and fresher. The significant innovation on liquid detergent strengthens the core of the Tide franchise as we continue plans for expansion of Tide evo, our new laundry detergent developed on our breakthrough Functional fibers platform. evo has started its first stage of national expansion with an online launch of Tide evo Free & Gentle. evo offers superior cleaning performance in a recyclable package, no plastic bottles or water. In test market stores, evo sales have been highly incremental to category growth and retailer demand has been well above initial expectations. We're in the process of adding manufacturing capacity to prepare for an eventual national launch. We have a strong bundle of innovation launching across U.S. Baby Care business -- the U.S. Baby Care business this fall, including improvements on Pampers, Easy Ups, Swaddlers, Cruisers, and the first phase of restage to our mid-tier Pampers Baby Dry line. Each are important upgrades to drive consumer trial and delight, especially considering the ramp-up in competitive promotional activity in the category. In Greater China, premium body wash innovation on both the Safeguard and Olay brands drove 9% Personal Care growth in the quarter. Safeguard Detox Body Wash is designed to provide superior deep for cleansing and skin transformation. The recent restage across all elements of the superiority has accelerated market conversion from bars to liquids and from basic products to premium offerings. Olay premium body wash launched in July, contains Olay facial skin essence and the first ever sparkling liquid to provide visible skin benefits and an unforgettable showering experience. Since launch, the new premium line has grown over 30% in off-line channels and 80% online, driving category growth and Olay share growth. In Latin America, Personal Healthcare grew organic sales plus 15% in quarter 1, driven by improved execution of the integrated superiority strategy. The combination of strong product and packaging innovation on the Vicks brand compelling consumer communication, strong retail execution and superior consumer value drove both growth across markets and the region. Brazil led the growth up nearly 30%, along with growth in Mexico, Peru, Colombia and smaller distributor markets. Our innovation program is designed to strengthen the core brand propositions combined with full media and in-store support across the portfolio. where we add new elements to our brands, like we are doing with Tide evo, we ensure the more is sufficient in size to warrant full brand communication and go-to-market support. Superiority integrated across all 5 vectors. We will continue to accelerate productivity in all areas of our operation, including the recently announced restructuring work to fuel investments in superiority, mitigate cost and currency headwinds and drive margin expansion. We have an objective for growth savings in cost of goods sold of up to $1.5 billion before tax, enabled by platform programs with global application across categories with Supply Chain 3.0. We have line of sight to savings for improved marketing productivity, more efficiency, greater effectiveness, avoiding excess frequency and reducing waste while increasing reach. We're taking targeted steps to reduce overhead as we digitize more of our operations. Visibility to more savings opportunities is increasing as the businesses continue to build their 3-year rolling productivity master plans and as we accelerate productivity with our restructuring efforts. We will continue to actively manage our portfolio across markets and brands to strengthen our ability to generate U.S. dollar-based returns in daily use categories where performance drives brand choice. The portfolio choices we are making as part of the restructuring program include different go-to-market choices in some geographies and surgical exits of some categories, brands and product forms in individual markets. We've announced several steps so far, redesigning our business model in Pakistan to an import model with local distributors managing trade relationships, discontinuing laundry detergent bars in India and the Philippines, exiting several low-tier oral care products in some enterprise markets, focusing the Olay brand on the most productive European markets, and streamlining our grooming device portfolio and focus and enterprise markets. These steps are aimed at accelerating growth as we move further through the restructuring program. Also, these portfolio moves enable us to make related interventions in our supply chain, rightsizing right-locating production to drive efficiencies, faster innovation, cost reduction and even more reliable and resilient supply. As part of the 2-year program, we are making additional organization process and technology changes to enable an even more agile, empowered and accountable organization, making roles broader, team smaller and faster and work more fulfilling and more efficient, actively reducing, eliminating or automating internal work processes, supporting teams with data and technology to increase capacity and capability to focus on integrated plans to deliver superior propositions to our consumers versus spending time internally. We expect to reduce up to 7,000 nonmanufacturing roles or up to 15% of our current nonmanufacturing workforce over this fiscal year and fiscal '27. We're making very good progress with organization designs to deliver this objective. While not easy, we firmly believe this will further empower our highly capable and agile organization that is ready to step forward to create value for our consumers, customers and shareowners. We will continue our efforts to constructively disrupt ourselves, our industry, changing, adapting, creating new ideas, technologies and capabilities that will extend our competitive advantage. These strategic choices across portfolio superiority, productivity, constructive disruption and our organization will continue to reinforce and build on each other. We remain confident in our strategy and its importance, especially in challenging times to drive market growth and to deliver balanced growth and value creation. Long-term focus on the strength of our brands and categories is the best way to position ourselves for stronger growth when the economic climate and consumer confidence improves. This starts with a strong innovation plan and healthy investment to drive trial and user growth, the plan we are executing. As we said in the July earnings call, there are times when bigger steps are needed to both the growth and value creation. The teams are on it. Moving on to guidance for fiscal 2026. As you saw in our press release this morning, we're maintaining all guidance ranges for the fiscal year. Organic sales growth of in line to plus 4%. Global market growth for our portfolio footprint is around 2% on a value basis at the center of our guidance range. As a reminder, this guidance includes a 30 to 50 basis point headwind from product and market exits that are part of restructuring work. As we consider phasing of top line growth, recall that Q2 last year benefited from 2 spikes in orders related to port strikes. The actual port strike that took place early October and the concern of another strike in January, these dynamics will likely result in quarter 2 this year being the softest growth quarter for the year with stronger growth in the back half. On the bottom line, core EPS growth, in line to plus 4%, which equates to a range of $6.83 to $7.09 per share or $6.96, up 2% in the center of the range. While we delivered strong EPS growth in quarter 1, we expect modest earnings growth over the balance of the year as investments in innovation and competitiveness increase, particularly in the U.S. and in Europe. This outlook includes a commodity cost headwind of approximately $100 million after tax and a foreign exchange tailwind of approximately $300 million after tax. Our fiscal '26 outlook now includes approximately $500 million before tax and higher costs from tariffs. While this is an improvement to the isolated tariff impact. Keep in mind that these -- that there are other offsetting impacts, including related supply chain investments and adjustments to pricing plans also assumed in our guidance. Below the operating line, we continue to expect modestly higher interest expense versus last fiscal year and a core effective tax rate in the range of 20% to 21% for fiscal '26 combined a $250 million after-tax headwind to earnings growth. We are forecasting adjusted free cash flow productivity in the range of 85% to 90% for the year. This includes an increase in capital spending as we add capacity in several categories, and as we incur the cash cost from the restructuring work. We expect to pay around $10 billion in dividends and to repurchase approximately $5 billion in common stock, combined a plan to return roughly $15 billion of cash to shareowners in fiscal '26. This outlook is based on current market growth estimates commodity prices and foreign exchange rates. Significant additional currency weakness, commodity or other cost increases, geopolitical disruptions, major supply chain disruptions or store closures are not anticipated within the guidance ranges. So again, a solid start to the year, growing sales and earnings and returning strong levels of cash to shareowners as we look to strengthen investments in demand creation throughout the balance of the fiscal year. We continue to believe the best path to sustainable balance growth is to double down on the strategy, excellent execution of an integrated set of market constructive strategies delivered with a focus on balanced top and bottom line growth and value creation, starting with a commitment to deliver irresistibly superior propositions to consumers and retail partners. We are taking proactive steps to improve the execution of the strategy and our ability to deliver our growth and value-creation objectives. With that, we'll be happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Dara Mohsenian of Morgan Stanley. Dara Mohsenian: So I just wanted to touch on the restructuring you announced back in June, given you're now a few months into putting the initial plans into place. A, just how do you think the organizational changes are being received internally by your workforce, given there's a significant reorg and also rationalization of the job roles at P&G? And then just b, the context externally is a more difficult top line environment in general in CPG, that's also volatile. So I just love a high-level overview of what the reorg does for the organization and P&G's competitiveness relative to that challenging broader industry landscape. Andre Schulten: Dara, thanks for the question. Yes. So let me both -- take both elements here in turn, starting with the progress we are making. We are right now perfectly on track on all elements of the restructuring execution. This is never easy, especially when we're talking about reducing our enrollment. I think the organization is taking it in stride because the mission is clear. We have now constructive plans in every business around the world on which roles to reduce and how to organize ourselves with the vision of creating a more agile and faster executing -- better executing organization for the future. So if you go through the 3 components of the restructuring program. On the portfolio side, this is just the regular execution of portfolio discipline. We have now reviewed all brand country and category combinations to ensure that we can add value and in those where we found that we cannot add value, you see us changing the business model or reallocating resources. You heard us just talk about the projects that we can announce today, which is the business model change in Pakistan and some of the portfolio streamlining across our Fem care business et cetera. So those elements are now clearly defined. We are working through the execution, and I feel very good about the progress we are making. We'll end up with a faster-growing and more effective portfolio when we're done. On the supply chain side, these portfolio choices give us flexibility to take another look at our supply chain. And again, I think the product supply teams around the world now have firmly confirmed what the interventions are they want to make, and we are in execution mode. This will give us both a cost savings element but also an agility and supply assurance element which we feel very good about. The third component, the up to 7,000 non-manufacturing head count reduction really is the enabler for us to create smaller teams that are better set up. We are fully digitally enabled data access and analysis to focus on the consumer and focus on brand building. And those org designs have now been developed. They are slightly different in every category as they should be because the context and the work in every category is different but they have the consistent objective to create smaller teams that are focused on the brand. They are digitally enabled, and we're building some of these technologies and platforms globally. Some of them are individual. And they will ultimately result in what I see as the third step of the organization evolution when we went from the ticket to fully enabled category end-to-end now to smaller brand teams that are enabled by technology to be much faster and much more consumer-centric. And that, combined with Supply Chain 3.0, which will change the way that our supply chain operates via automation and digital towards is very exciting for us. The short-term benefit is cost and fuel for us to be able to invest over the next 12 to 18 months into the very strong innovation programs that we're launching. I think the longer-term benefit is just an even strengthened portfolio and a strengthened organization. Operator: Your next question will come from the line of Peter Galbo of Bank of America. Peter Galbo: Andre, I just wanted to maybe click in a bit more on some of the subcategories in North America. And in particular, on Fabric Care, and Baby Care, where you noted a bit more, I think, competitive activity. Obviously, there's a list of innovation that you outlined over the coming year. But maybe you can just give us a bit more detail on what you're seeing real time from a competitive standpoint, both in North America Fabric Care and Baby Care. Andre Schulten: Yes, Peter, look, both are obviously big and important categories for us. And as you will have seen in the results, both are not delivering at the level that we want them to deliver. And as you pointed out, what we see is a heightened competitive environment, which is not unexpected, where consumers are a bit more careful in terms of purchase decisions and consumption. The market gets tighter. And some of the response -- competitive response is increased promotion and that's certainly what we're seeing both in Fabric Care and in Baby Care. Our response to a more competitive environment has to be a more integrated answer, which is what we are executing across both baby and Fabric Care. So when we talk about driving integrated superiority, that's what we mean. And while value or promotion might be a component to that answer, the real solution here to create sustainable growth is to drive innovation and drive superiority, communicate that innovation with the right claims, meaningful to the consumer, meaningful to the retailer, get the retailer support online and in physical stores and thereby create value for the consumer that is attractive. Where we've done that, specifically on Baby Care, we're seeing the results. So we've continued to innovate and stay ahead on Swaddlers, on Cruisers 360, on the pants business, and we continue to do so, and we see share growth. We have intervened on the value tier with Luvs Platinum innovation which we've launched in the fall of last year, and we have been able to grow share even competing in what is probably the most pressured tier within the Baby Care portfolio. And we are now expanding that same approach to the mid-tier, launching the first wave of Baby Dry, which is our mid-tier innovation in the fall. And the second part of that innovation in the spring and we are confident that the share pattern will follow the same playbook as we've seen. You've heard us talk about the innovation in Fabric here. The Tide liquid innovation is truly exciting. The biggest upgrade in 20 years, a significant investment, great commercialization. We believe that is the right answer to drive trade-in, trade-up and continue to create category growth. We're adding on Tide evo, which will add a completely new form to the category. And again, that's the path forward to drive category growth, share growth in a sustainable way. Last comment, this plan takes longer. It's not as easy as throwing promotion funding out there. But again, we believe that is the way to both create value for our consumers and for our retail partners and shareholders. Operator: Your next question will come from the line of Lauren Lieberman of Barclays. Lauren Lieberman: Just wanted to touch on the market share stats, the global market share down 30 basis points. I know that can be very impacted by geographic mix to some elements, but even just at the 24 of 50 category country combinations are holding or gaining share is on the low side. So I'm asking for you to walk through the 26 that are troubled. Maybe just where might you call out some particular hotspots of activity things where is it a matter of macro and positioning and relative affordability at this time? Is it a matter of the innovation that's yet to come, you think will be the answer, but it was a pretty stark statistic, and I'd love to get your thoughts on that. Andre Schulten: Lauren. Yes, global aggregate share, as you point out, is down 30 basis points over the past 3 and past 6 months. if you look the past 1 month, we're closer to flat. So the last reading is minus 0.1%, but I would view that as normal variability. I think the hotspot. So let's talk with the U.S. Let's start with the U.S. I think we're coming from a very strong base period. And there are some categories where we clearly see increased promotional activity. We touched on Baby Care. We've seen very aggressive rollbacks and promotion activity in the Baby Care mid-tier section. We also see very intense promotions in Fabric Care. We've seen a period of intense promotion in Oral Care. So certainly, the competitive aggressiveness has increased. And the way we respond is more structural. It takes a bit more time. While we will remain value competitive in the short term. We truly believe the right answer here is to drive integrated superiority with innovation and investment in our brands. And the positive read of the U.S. shares would be that if you look sequentially, we are actually increasing absolute share. So past 12, past 6, past 3, past 1 month, our absolute share in the U.S. went from $33.6 to $33.9 to $34.1 to $34.9. So absolute shares are moving in the right direction. We are still annualizing a relatively high base period, but the plans are clearly in place, I think, to exit the year with share growth in the U.S. Europe is a very similar situation. Competitors have been not very active over the past years, and we see some of our competitors headquartered in Europe, get back in the arena which, if it's driven by innovation is a good thing in our mind. It drives attention to the categories. But in some cases, it's also very heavy promotion. So if you look at Fabric Care, for example, in our Germany business, we were up last year same quarter, 33%. We are down this year because we have competitive activity in the market. the playbook is the same. We will continue to invest in integrated superiority. On the other hand, if I look at our China business, very strong progress. We probably started the right interventions in China because of a difficult market environment earlier about 2 years ago. And with the interventions in innovation, the interventions in go-to-market capability, we now see solid progress in a difficult market environment, again, China Mainland up 6%, SK-II up, Baby Care up 20%. So it gives us confidence that these interventions were driving. They take some time, but they ultimately result in what we want in terms of market growth and share growth. Last example I'll give you on the success. If we do this right, is Latin America, again, 7% growth in the quarter, broad-based in Mexico, in Brazil and in a lot of smaller markets driven by a strong portfolio with strong innovation. Operator: Your next question today will come from the line of Steve Powers of Deutsche Bank. Stephen Robert Powers: Andre, maybe talk a little bit more elaborating on China picking up on what you had just spoken to. A good result this quarter with Greater China, up 5%. Maybe just a little bit more perspective about what you've seen evolving on the ground in that market, how the business was trending entering the quarter versus how it exited. And just how confident you are in the relative progress you've seen so far just sustaining through the year? Andre Schulten: Thank you, Steve. Let me maybe start with the team on the ground and the interventions they have made. I think it was clear to the team that the consumer environment will not get easier. The competitive environment will not get easier. And therefore, we had to fundamentally change many of the variables that drive the business. And that's, I think, what the China team has done very successfully. They basically lifted up every part of the business model across all categories. They completely changed the go-to-market model, including the incentive system for the distributor network, which is critical in China. They've launched consistently strong innovation grounded in local insights. When I think about our Baby Care business growing 20%, that certainly is driven by absolutely superior consumer insights and innovation that matches those insights. And lastly, they've changed the way we communicate with consumers and the way we collaborate with our most strategic customers, many of them online businesses. So all of that has resulted in, I think, a good turn of the business. It is China. So I'm not pretending that this will be a straight line. this can go up and down. But now we have 2 points on -- that we can connect and both points are pointing in the right direction. But again, I would urge us to be also cognizant of the fact that we're dealing with a volatile market environment. A couple of examples that we are particularly proud of, number one, SK-II, just the discipline with which the team worked on the brand fundamentals on strong innovation, having the courage to launch a super premium in addition to the core I think is paying dividends. SK-II up 12% and even the travel retail business has now turned positive. We have streamlined our Fabric Care portfolio, launched innovation that is truly superior. The business is up 5 points. The Hair Care business where we've been able to innovate is growing. And on the Skin Care business, the mass Skin Care business, Olay is growing and Skin & Personal Care in aggregate is growing 8%. And I mentioned Baby Care. So while the consumer sentiment is still somewhat less confident. I think the team has found a way to break through. Don't expect it will be a straight line, but I feel very good about the progress we've made. Operator: Your next question will come from the line of Rob Ottenstein of Evercore. Robert Ottenstein: Great. I want to swing back to the U.S. and there was a lot of talk about the need for competitive promos that are going on in the market. And I guess my question is, as you look at the other side of that, which is the consumer side and the research you're doing on the consumer, has affordability become a bigger driver of consumer choice in the quarter? Do you expect that to continue? And then specifically, if that is the case, that it is a bigger driver, how do you look to address affordability apart from innovations, but looking at whether it's a change in shift in channel strategy, RGM, price pack architecture, other ways to get at affordability issues. Andre Schulten: Thanks, Robert. I wouldn't call it affordability. I would say value is clearly in the center of the equation and value defined as price over integrated performance, which is the other 4 vectors that we're talking about. We continue to see consumers trade up, price/mix is positive, mix is positive in the U.S., where the value equation is attractive for consumers. In some channels, we see the majority of growth in our categories in the premium end, not in the value end of the lineup. We also see continued decline of private label. Actually, private label shares in the U.S. are now down 50 basis points. So for the first time, private label shares dropping below 16%. And which was kind of the historical threshold. And as I mentioned, our sequential value share is actually improving by more than 1 point even though we've not quite caught the base period yet. I think the right answer to the environment we're in is to serve the consumer where they want to shop and with the cash outlay and the value tier that they are prepared to go after. And I think we have built very strong price ladders across different pack sizes. We continue to optimize those. So we find in some channels that we might have crossed price points relative to competitive offerings we need to adjust. We will adjust those quickly. But we are present in every channel across the U.S. so we can compete with the right price points, both on shelves and in promotion as we need to. We continue to innovate across every value tier. You heard me talk about Luvs, for example, in Baby Dry -- in Baby Care, but we're also innovating at the top end, and both are successful if we do it if we do it right. I think the channel play is interesting because the consumers continue to move into a good part of the consumer continues to move into larger pack sizes. They shop in mass, in club and online. And so we need to make sure that we have the right value offering there, and we're working on that with all of our retail partners. And then some consumers continue to live paycheck to paycheck, and they are looking for smaller cash outlay. They're really looking at low promoted prices so they can stretch the paycheck a little bit longer and we're, again, very intentionally driving our competitiveness there. But again, I come back to where I started. I wouldn't say it's affordability. I think it's sharper value and how we present that value to the consumer is critical. And we don't believe it's just price. We believe it's the combination of all factors that we need to integrate. Operator: Your next question will come from the line of Chris Carey of Wells Fargo Securities. Christopher Carey: I wanted to follow up on your commentary in China, Andre, I think it sounds like SK-II and Olay and as such, your broader personal care business in China were similar to last quarter. Correct me if that's wrong, but I do think it implies then that you're seeing improvement in businesses outside of that Skin & Personal Care segment in China. Would you agree with that assessment and are you seeing signs that improvement is durable? Or were there any factors that are specific to the quarter that may have helped that business. So I just wanted to test that just a little bit. Andre Schulten: Yes. Chris, no, good pressure test. You're right. I think we're seeing our Skin and Personal Care business is moving along. It's slightly accelerating in terms of growth rate, but we see consistency in terms of results getting better. We also see the other categories picking up pace. As I mentioned, Fabric Care is up now 5%. We made portfolio interventions. We have strong innovation out there. We're driving distribution. Our Fem Care business is growing. Our Hair Care business is growing with a more streamlined and focused portfolio. Baby Care continues to accelerate with 20% growth. So the breadth is comforting. And the other comforting fact is that we understand what we did and what it's doing in the market. So our approach to how we define the priority and how we execute it, I think it's paying dividends. So that's reassuring that better consumer understanding, innovation that is grounded in that understanding with better shelf and retail execution, online and in stores is paying dividends. So I have a high level of comfort with the results and the breadth of results and how we accomplish them. It's still China. So we will continue to observe. I would -- we continue to expect some volatility here. We continue to expect strong competitive activity. But if I had to summarize, I think we are well positioned to continue to build the business in China. The market, hopefully, will strengthen over time, which will be a tailwind, and we'll keep track of where we are over the next 2 quarters. Operator: Your next question today will come from the line of Andrea Teixeira of JPMorgan. Andrea Teixeira: I was trying to -- Andre to dive into a little bit more on the price/mix and then by categories. I know you had invested more in Luvs and in particular, in diapers in the U.S. So I was hoping to see if you've seen response from the consumer. You did say that consumers in general have been into premiumization, but obviously, that's a picture -- overall picture. I wonder if you can kind of give us some examples of ways the Procter has been more active in pivoting for that low-income consumer and in categories where they are looking for value not only in diapers but also in paper goods. Andre Schulten: Thanks, Andrea, for the question. The first part of my answer will sound familiar, but where we choose to play, we choose to be superior. And that's across all value tiers. So when we innovate, we innovate across all tiers. So for example, the most recent Auto Dish innovation on Cascade was a formula upgrade across the super premium, the premium and the mid-tier. As we've talked many times on this call already, we've upgraded our product lineup on the super premium, the premium side and diapers the value side of diapers and we are about to upgrade the mid-tier. The same is true across categories. In Olay, for example, the most successful lineup is the super serum lineup right now, and that's at a premium to the market. And we're driving innovation on the Jars business with better execution, better packaging, a shelf reset, which is going into the market starting in O&D. And when we get this right, the consumer responds. We see volume share growth and value share growth, and we see trade in and trade up, which is ultimately what we're trying to accomplish. So when we're upgrading Tide liquid, we're also upgrading the other forms and tiers within the laundry lineup, for example, we're upgrading the gain lineup as well. And that combination of tier approach with the right pack sizes, as Robert pointed out, with the right channel distribution and the right promotion strategy to drive trial is what drives the response. Now we've not done that across the full portfolio in the U.S. And that's really the work that we are approaching over quarter 2, quarter 3 and quarter 4 that is enabled by the productivity progress, by the restructuring that allows us to push the investment, and I feel very good about the aggregate of the plan, but you're pointing exactly at the right thing. We need to be sharp on integrated superiority in every value tier in which we play. If we do that, the consumer response, and we have the examples that I just mentioned to confirm that, that still works. Operator: Your next question will come from the line of Filippo Falorni of Citi. Filippo Falorni: Andre, I wanted to ask on some of the items that you called out in the guidance. You clearly lowered the headwind from commodities and tariffs. So maybe if you can give us some more color on what drove that lower headwind on those 2 items. And then if you sum up all the items that you call out, it's now like a $0.19 headwind before it was $0.39. So you have some flexibility about $0.20, but obviously, the EPS guidance is unchanged. So can you walk us through like what is the offsetting factor? It seems like there's probably more investment in promotion in marketing to offset some of the competitive environment that you're seeing in the promotional environment. But maybe help us understand where is the incremental $0.20 of benefit being invested in. Andre Schulten: Thanks, Filippo. The commodity headwinds, you see the news on the petro complex oil is not -- is coming down. That's helping us from the energy side. And the tariff environment continues to be volatile, but the biggest help on tariffs has been exclusion of materials, natural materials and ingredients that cannot be grown in the U.S. So when you think about eucalyptus pulp, when you think about psyllium, which is the core ingredient in some of our PHC products that is imported from India. So the administration having an open year to adjust policy where product or ingredients cannot be produced in the U.S. retaliatory tariffs coming down, Canada, resending retaliatory tariffs of 25% which just happened before the last quarterly call. And so those components in aggregate are representing the commodity and tariff headwinds. On the question of guide impact. I will tell you there's really -- you called it out, right? Number one, we're in quarter 1. So it's still very early. And as you can see, the tariff environment can change very quickly. You heard the administration's comments on Canada. And so there's still volatility in the impact for the year. Number two, a lot of the commodity -- a lot of the tariff changes. So for example, Canadian tariff rescinded was linked to pricing. So as the tariff goes out, so does the pricing. So the net effect on the P&L within the year is limited. So volatility, it's still early, and you're very right, we want to absolutely preserve our ability to continue to invest because we have proof and we continue to be convinced based on the consumer reaction to where we successfully invested in integrated priority that this is the right path forward. It is the path to stimulate category growth back to 3% to 4%. and within that, the path for P&G share growth in a sustainable way. So early in the year, still volatile reserve investment. Operator: Your next question will come from the line of Peter Grom of UBS. Peter Grom: So I wanted to ask a follow-up on North America. Andre, I think you mentioned consumption decelerated throughout the quarter, and you alluded to some of the phase-in considerations related to the port strike a year ago. So just maybe first, how do you see underlying category demand evolving from here? I know it might be a little bit harder now because you're lapping some of the impact, but just curious whether you would expect this deceleration to continue? And then just related on the comment on the port strikes that will make 2Q the soft this quarter. Is there a way to frame how much of an impact these laps will have? Or maybe how much of a step back you would expect from where we started the year. Andre Schulten: Peter. Look, I think the North America consumption decelerated. So that's correct. We are -- we probably entered the year at about a strong 2%, 2.4% value consumption. We're now a weaker 2. So 1.8%, 1.9%. Some of that is just variability of base periods. But I do believe that for the next 2 quarters, the consumption will be around the 1.5% to 2% range. And as you said, particularly in quarter 2, because of the port strike in October and then the threatened port strike in January, what we expect to see is that the run rates of consumption, both on the market side and P&G side is probably going to continue. But you have a point higher base period. So that's probably the best way I can describe what we're expecting. And if there's 2 things you need to take away is quarter 2 is going to be lower than quarter 1 and half 2 is going to be higher than half 1. That's about the best logic I can give you. Over time, maybe last comment in the not too far future, if we are successful with everything we're doing with the investment, we expect category growth to return to 3%, both in the U.S. and at a global level. And again, that's job 1, 2 and 3, drive more users in the category, drive more usage and drive value per use. That's how we get back to 3%. Operator: Your next question will come from the line of Olivia Tong of Raymond James. Olivia Tong Cheang: Two questions for you, Andre. First, in terms of the regional outlook. Obviously, you just talked about the U.S., you've been pretty guarded in terms of China. But what about rest of world, just thinking through dynamics with respect to demand, how the consumer is doing in Western Europe and Latin America, in particular. And then in terms of some of the restructuring actions that you've taken, you mentioned some of the portfolio changes in the Middle East and then also in Fem Care. If you -- can you expand on that a little bit in terms of potentially bigger changes to the portfolio to make a step change in terms of the growth trajectory, either more culling -- more substantial culling of the portfolio or potentially looking the opposite way in terms of filling some of the gaps with inorganic growth. Andre Schulten: Thanks, Olivia. Dynamics in Western Europe, very similar to North America, volume growth in the categories that we're in about 1%, value growth, around 2% weak 2%, and effectively, the same dynamics I described in North America. L.A. continues to be strong. We saw 7% growth in the quarter. Last quarter was very strong. And we continue to drive market growth in the region. Strength in Brazil, up 6% or 7%, Mexico up 4%. So the LA region is doing well from a consumer standpoint and from a P&G standpoint. Asia, Middle East, Africa and Europe enterprise markets more muted, both geopolitically from a consumer standpoint and from a competitive standpoint, I expect that not to change. So in aggregate, I would say, enterprise markets probably around 3%, 4% developed markets, Europe, North America, around 2%. China is the wild card, still negative in terms of market growth. But again, we're making good progress. So that's as much perspective as I can give you. On the bigger portfolio changes, look, the portfolio actions we are executing are really on the fringes, right? We are making sure that we do what we should do is ensure that we can create value in every category country combination in which we are, and if not, make the appropriate changes. And the type of change you've seen us announce in this release, that's about the type of change you should expect. There's nothing more dramatic that we're planning to do. We're very comfortable with the core portfolio that we're in. We've chosen these 10 categories very carefully and we continue to believe these are attractive categories in which P&G can continue to drive growth. We have talked about the growth opportunities within the existing portfolio across regions driving our brands in North America, serving underserved consumers in North America is a $5 billion opportunity, getting Europe consumption in the European markets to best-in-class in Europe from a household penetration standpoint is $10 billion. And driving enterprise market penetration in those markets that are similar to GDP per capita as Mexico, to the same level of consumption in those categories in Mexico is about $15 billion. And as I said last time, these are numbers on the piece of paper until you start allocating resources to those ideas, and that's exactly what we're doing. That's exactly why we want flexibility to invest. So we can drive the consumer insights, we can drive the innovation that goes after these growth opportunities. And if you add them up, you find that they will allow us to grow with an algorithm for the next 5 to 10 years. So there's no need to have any transformational acquisition on inorganic growth opportunity added. If there is an attractive opportunity, we'll always look at it. Operator: Your next question will come from the line of Nik Modi of RBC Capital Markets. Nik Modi: Andre, I was hoping maybe you can just kind of opine on agentic commerce and how you think P&G can leverage some of the advantages you have in kind of the brick-and-mortar shopping environment to this kind of new world that we're walking into, especially given the announcement with OpenAI and Walmart. So just any thoughts you have. I mean, the big question I have is just how do suppliers get their products in the actual basket if people are shopping through prompts? Any thoughts would be helpful. Andre Schulten: Thank you, Nik. Indeed an interesting question. And the way I think about it is it is all opportunity, right? I mean if you think about it, we're in business for 187 years. We went from Kendall store to supermarkets to hypermarkets to online shopping to social commerce, all an opportunity. We went from newspaper ads to radio to TV to Internet to social media, all an opportunity. So I think it's about getting ready for that reality. And I do believe that it opens up new possibilities for brands to make themselves visible. And it all comes back to the underlying fundamentals, do you understand the consumer, do you understand how they look for information, how the agent will find your product, how the agent will extract the information to decide whether your product should be in the basket or not and how you work with your retail partners to ensure that you have the best understanding and the best access to these algorithms so that you can communicate your superior brand proposition every day and every shopping opportunity. And that's the path forward. I feel we're well positioned. I feel our data infrastructure, our consumer understanding, our collaboration with retail partners is very good. And so again, for me, this is all opportunity. Operator: Your next question will come from the line of Kaumil Gajrawala of Jefferies. Kaumil Gajrawala: Just a couple of clarifying questions. There was a commentary around tariffs and sort of natural products being exempted as Were there any particular deals or maybe just that the threat wasn't as much as what perhaps you had estimated earlier. And then on China, a lot of conversations around distribution and distribution changes. Was there anything onetime in there as it relates to sort of a near-term benefit from flipping into a new distribution structure? Or is what we're seeing more related to an improvement in consumption. Andre Schulten: Thanks, Kaumil. The change on the tariff side was before these products or these materials and ingredients were included in the overall tariff structure. And I think what the administration that has done is basically grant exceptions, broad exceptions in some of these tariff frameworks for those materials that cannot be grown in the U.S., which is highly appreciated and makes sense. On the China question, we've made these interventions on distribution network in the fall -- summer and fall of last year. I know there were not any onetime distribution gains that drive these results. It is just a streamlining and changing the incentive system for the distributor network. So we have fewer distributors. They are better aligned to what we're trying to do in terms of quality execution in stores and online, and that is starting to pay dividends. So this is not a onetime effect or onetime bump. This is actually the new go-to-market approach starting to pay dividends. And if everything goes well, I expect that benefit to actually slowly accelerate over time. Operator: Your final question today will come from the line of Robert Moskow of TD Cowen. Xin Ma: This is Victor on for Rob Moskow. Two for me as well. So I think previously, there was a discussion of taking a mid-single-digit pricing on about 25% of your U.S. SKUs to mitigate the tariff impact. So now that the tariff impact is half of what it was before curious on how that affects your pricing strategy, if at all? And then on LATAM, we've heard from competitors of consumer weakness and from a challenging macro backdrop, are you seeing this impact your trends at all? And if so, how are you performing so well? And did you gain other category share in the region? Andre Schulten: On the pricing question, yes, we've taken in the U.S., we've announced pricing in July. It's gone into effect in September. Most of the pricing was innovation-driven and in aggregate, it's about a 2%, 2.5% price increase across the entire portfolio. The underlying tariffs that have contributed to the need for pricing has not really changed. The biggest change in the tariff exposure has been retaliatory tariffs on the other side. And those pricing effects have been taking out, I was talking about Canada. But in the U.S., the majority of the pricing was underlying innovation-based with tariffs being a contributor, but not the main contributor, so no change to pricing approach. I think we've talked about the consumer backdrop in the U.S., plenty. We've talked about the share development. While we haven't fully annualized our base, we continue to make sequential progress in absolute share, and we expect to exit the U.S. with neutral to share growth by continuing to give the consumers better value propositions, we are integrated superiority every day. So I'll bring it back to integrated superiority to end the call. So if there are no more questions, I want to thank you for your time, and thank you for your support of the company. We continue to double down on the strategy. We feel we are well set up both from a funding standpoint, from a strategy standpoint with the right innovation at hand, and we'll continue to drive forward. Thank you very much. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.