加载中...
共找到 5,140 条相关资讯
Operator: Welcome to the Eastern Bankshares, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded for replay purposes. In connection with today's call, the company posted a presentation on its Investor Relations website, investor.easternbank.com which will be referenced during the call. Today's call will include forward-looking statements. The company cautions investors that any forward-looking statements involve risks and uncertainties and is not a guarantee of future performance. Actual results may materially differ from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described in the company's earnings press release and most recent 10-K filed with the SEC. Any forward-looking statements made represent management's views and estimates as of today, and the company undertakes no obligation to update these statements because of new information or future events. The company will also discuss both GAAP and certain non-GAAP financial result measures. For reconciliations, please refer to the company's earnings press release. I'd now like to turn the call over to Bob Rivers, Eastern Executive Chair and Chair of Board of Directors. Robert Rivers: Thank you, Joelle. Good morning, everyone, and thank you for joining our call. With me today is Eastern's CEO, Denis Sheahan; and our CFO, David Rosato. Eastern recently celebrated its fifth anniversary as a public company. Before Denis and David walked through our results, I wanted to take a moment to acknowledge this important milestone and share why I'm excited about our future. As shown on Slide 2, today, Eastern is a $25.5 billion organization with the fourth largest deposit market share in Greater Boston, and we are the largest independent bank headquartered in Massachusetts. Since our IPO, we have very intentionally expanded our footprint across attractive markets and build the scale we need to invest in the business while maintaining the understanding, accessibility and engagement that makes us our regions hometown bank. This strategy and most importantly, our people, our culture and our extensive community involvement are what enable us to expand and deepen customer relationships, attract top talent and capture growth opportunities. This has driven meaningful improvement in earnings, profitability and shareholder returns. One of the keys to our success has been our ability to stay true to who we are while growing and positioning Eastern for the future, that includes bringing in talented people to complement the many long-time Eastern employees who have contributed to our success. I'm so proud of what we've accomplished together. We are well positioned to serve our customers and communities with excellence, which underpins our ability to drive continued shareholder value. Now I'll turn it to Denis. Denis Sheahan: Thank you, Bob. As someone who's been in the Boston market for more than 3 decades, I can attest to how impressive the transformation of Eastern has been over the last 5 years. I'm incredibly proud to be part of this team and I share Bob's enthusiasm about the future and the opportunities ahead. Turning now to the quarter. We are very pleased to have received the required regulatory approvals for our merger with HarborOne which is on track for a November 1 close. This partnership strengthens Eastern's leading presence in Greater Boston and expands our branch footprint into Rhode Island, providing even more opportunities for organic growth. We're excited to bring together 2 banks that share a strong commitment to customers, community partners and employees. I want to thank the teams from both organizations for their outstanding efforts, and we look forward to welcoming our new customers and colleagues to Eastern as we build on the strong legacies of both institutions. We're also pleased to announce today the resumption of our share buyback program, which underscores our confidence in the future. Third quarter operating earnings of $74.1 million increased 44% from a year ago and generated solid returns. Operating return on assets of 1.16% was up 34 basis points from the prior year quarter and operating return on average tangible common equity increased 300 basis points to 11.7% over the same period. On a linked quarter basis, operating income was down from a very strong second quarter, which benefited from higher-than-expected net discount accretion due to early loan payoffs at fee income. Our ongoing strategic investments and hiring talent and commercial lending continued to deliver strong results. Over the past year, we have increased the number of relationship managers by approximately 10%. The Eastern has become an attractive destination for high-quality talent, particularly those with large bank experience. We have the size to matter competitively, yet are small enough for them to apply their trade and provide a sense of ownership in building a business. Our loan growth continues to reflect the impact of this strategy. Total loans grew 1.3% linked quarter and 4.1% year-to-date, driven primarily by strong commercial lending results. The commercial portfolio has grown just under 6% since the beginning of the year, and the pipeline remains solid ending the quarter at approximately $575 million. Wealth management is an important component of our long-term growth strategy, and the wealth demographic and our footprint provides significant opportunities. Beyond strong investment solutions and results, we provide comprehensive wealth services, including financial, tax and estate planning as well as private banking. Assets under management reached a record high of $9.2 billion in the third quarter driven by market appreciation and modest positive net flows. We've been pleased with the integration of the Eastern and Cambridge Trust wealth teams and the strong retention of clients and talent since the merger. We're also enhancing our internal distribution capabilities. Our retail branch network through training and greater awareness is becoming a meaningful driver of referrals. Notably, in the first half of this year, retail generated more funded wealth business than Eastern achieved in any prior full year. On the commercial side, the strengthening alignment between our wealth management and banking businesses is in the early stages, but beginning to produce results. There is still a lot more work ahead, but we are encouraged by the momentum of our wealth business, which was recently named the largest bank-owned independent adviser in Massachusetts for the second consecutive year. Finally, our capital position remains robust, and we continue to generate excess capital. Tangible book value per share at quarter end was $13.14, an increase of 5% from June 30 and up 10% from the beginning of the year. In addition to using capital for organic growth, we are committed to returning capital to shareholders through opportunistic share repurchases and consistent and sustainable dividend growth. As such, we are very pleased the Board authorized a new 5% share repurchase program of up to 11.9 million shares. David, I'll hand it over to you to review our third quarter financials. R. Rosato: Thanks, Denis, and good morning, everyone. I'll begin on Slides 4 and 5. We reported net income of $106.1 million or $0.53 per diluted share for the third quarter. Included in net income is a GAAP tax benefit related to losses from the investment portfolio repositioning completed in Q1 that accrues over the course of 2025. On an operating basis, earnings of $74.1 million or $0.37 per diluted share decreased from a very strong second quarter which benefited from higher-than-expected debt discount accretion and fee income. Compared to the prior year quarter, operating net income increased 44% reflecting margin expansion of 50 basis points and significant improvement in the efficiency ratio from 59.7% to 52.8% driven by higher revenues and thoughtful expense management. We are pleased with the continued strength of our profitability metrics. While operating ROA of 116 basis points and return on average tangible common equity of 11.7% were down from second quarter metrics, both meaningfully improved from a year ago when operating ROA was 82 basis points and operating return on average tangible common equity was 8.7%. We remain focused on driving sustainable growth and profitability and delivering top quartile financial performance. Moving to the margin on Slide 6. Net interest income and margin declined from the second quarter primarily due to higher deposit costs and lower net discount accretion. Net interest income of $200.2 million or $205.4 million on an FTE basis, decreased 1%. Included in net interest income with net discount accretion of $10 million compared to $16.5 million in the second quarter, which was higher than expected due to early loan payoffs. Excluding net discount accretion, net interest income would have increased approximately 3%. The margin of 3.47% was down 12 basis points from 3.59%. The yield on interest-earning assets decreased 6 basis points, while interest-bearing liability costs were up 7 basis points. Net discount accretion contributed 17 basis points to the margin compared to 29 basis points in the prior quarter. Excluding net discount accretion, the margin would have been flat quarter-over-quarter. Turning to Slide 7. Noninterest income of $41.3 million declined $1.6 million from the second quarter. On an operating basis, noninterest income of $39.7 million was down $2.5 million. The decrease was driven primarily by $1.9 million in lower income from investments held for employee retirement benefits compared to a very strong Q2. This decline was partially offset by $1 million in lower benefit costs reported in noninterest expense. In addition, miscellaneous income and fees were down $1.2 million due primarily to a loss on sale of commercial loans from our managed assets group and lower commercial loan and line fees. These headwinds and fee income were partially offset by deposit service charges and investment advisory fees, which both increased $300,000 in the quarter. Turning to Slide 8. We highlight wealth management, our primary fee business. Assets under management reached a record $9.2 billion, driven by market appreciation and modest positive net flows. Wealth management fees, which account for nearly half of total noninterest income were up $300,000 or 2% from Q2, primarily due to higher asset values. In addition, the prior quarter benefited from approximately $700,000 in seasonally higher tax preparation fees. Moving to Slide 9. Noninterest expense was $140.4 million, an increase of $3.5 million from the second quarter due to higher operating expenses and merger-related costs. Merger costs of $3.2 million were up $600,000 from the prior quarter. Operating noninterest expense was $137.2 million, up $2.8 million. The increase was primarily driven by $3.3 million in higher salaries and benefits, primarily due to higher performance-based incentives, one additional pay period in Q3 and seasonal staff. In addition, technology and data processing costs increased $1.4 million, and occupancy and equipment expenses were up $500,000. These increases were partially offset by a $2.3 million reduction in other operating expenses. Moving to the balance sheet, starting with deposits on Slide 10. Period-end deposits totaled $21.1 billion, a decrease of $104 million or less than 1% from Q2. A decline in checking balances was partially offset by higher balances in money market accounts and CDs. On an average basis, deposits were up 1.4%. We continue to benefit from a favorable deposit mix with nearly half of deposits and checking accounts, providing a stable and low-cost funding base. Importantly, we remain fully deposit funded with essentially no wholesale funding which further enhances our balance sheet strength. Total deposit costs of 155 basis points increased modestly from the second quarter as the cost of interest-bearing deposits increased 8 basis points primarily driven by money market accounts. We remain focused on growing deposits to support our funding strategy. As competition for deposits has become heightened in our region, we are disciplined in balancing the needs of our very strong deposit base with that of the margin. Looking ahead, as we thoughtfully integrate HarborOne deposits, we anticipate deposit costs to remain somewhat elevated. However, as the Fed eases, we will work deposit costs down and target deposit betas like our experience during the most recent tightening cycle or about 45% to 50%, with lags relative to Fed actions. Turning to Slide 11. Period-end loans increased $239 million or 1.3% linked quarter led by further strength in commercial. Continued momentum from Q2 and CRE drove balances higher by $133 million, while strong broad-based growth at C&I increased balances by $104 million. Consumer home equity lines continued a steady trajectory of quarterly growth, adding $45 million in outstandings. Commercial has delivered strong year-to-date performance with nearly $700 million of loan growth from year-end. This performance reflects the impact of our opportunistic hiring of growth-oriented talent, continued strength of Eastern's brand and our long-tenured relationship managers. Our combination of meaningful scale, which allows us to offer a broad suite of products and services and deep local expertise and presence is what differentiates us. Slide 12 is an overview of our high-quality investment portfolio. The portfolio yield was up 1 basis point to 3.03% from Q2. In addition, the AFS unrealized loss position continued to decline as it ended the quarter at $280 million after tax compared to $313 million at June 30 at $584 million at year-end. Turning to Slide 13. Capital levels remain robust as indicated by CET1 and TCE ratios of 14.7% and 11.4%, respectively. Consistent with our commitment of returning capital to shareholders, the Board authorized a new share repurchase program of up to 11.9 million shares or 5% of shares outstanding after completion of the HarborOne merger. The program expires on October 31, 2026. In addition, the Board approved a $0.13 dividend to be paid in December. As displayed on Slide 14, asset quality remains excellent, as evidenced by net charge-offs to average loans of 13 basis points and reflects the quality of our underwriting and proactive risk management approach address the issues quickly and previously. While nonperforming loans rose $14 million linked quarter to $69 million, the increase was driven primarily by a single mixed-use office loan which has been in managed assets for some time. A portion of this loan was charged off during the quarter and had been previously reserved. Importantly, we continue to believe the worst of the office loan problems is mostly behind us. We remain cautiously optimistic in our outlook on credit as overall trends continue to be positive. Reserve levels remain strong, as demonstrated by an allowance for loan losses of $233 million or 126 basis points of total loans. These metrics are consistent with $232 million or 127 basis points at the end of Q2. Criticized and classified loans of $495 million or 3.82% of total loans increased modestly from $459 million or 3.6% at the end of Q2. Finally, we booked a provision of $7.1 million, down from $7.6 million in the prior quarter. On Slides 15 and 16, we provide details on total CRE and CRE investment -- investor office exposures. Total commercial real estate loans are $7.4 billion. Our exposure is largely within local markets we know well and is diversified by sector. The large concentration is the multifamily at $2.7 billion, which is a strong asset class in Greater Boston due to ongoing housing shortages. We have no multifamily nonperforming loans, and we have had no charge-offs in this portfolio for well over the past decade. We remain focused on investor office loans. The portfolio of $813 million or 4% of our total loan book decreased $15 million linked quarter. Criticized and classified loans of $138 million were about 17% of total investor office loans compared to $118 million or 14% of total investor loans at the end of Q2. In addition, our reserve level of 5.1% remains conservative. As disclosed last quarter, the investor office loan portfolio includes our relatively limited exposure to the lab life science sector, consisting of 4 loans totaling $99 million or less than 1% of total loans. None of these loans were originated as speculative construction transactions. All loans are accruing, and we continue to monitor these loans as part of our ongoing review of the office portfolio. Before turning it back to Denis, I wanted to give a brief update on the HarborOne merger, which is expected to close November 1. We are reiterating the key assumptions we announced earlier this year and are on track to deliver on our estimated cost savings, onetime charges and gross credit market. We will disclose updated interest rate marks on our fourth quarter call in January. As a reminder, the original announcement assumed 80% stock consideration, the midpoint of the range. Based on the performance of our stock, our current estimate assumes 85% stock consideration. Furthermore, we continue to plan for the sale of HarborOne securities portfolio, the deleveraging of HarborOne's securities portfolio with proceeds intend to pay down FHLB borrowings. HarborOne's period-end loans and deposits at September 30 were $4.763 billion and $4.433 billion, respectively. And it didn't, if approved, we intend to early adopt the changes to the CECL accounting standard designed to remove the current double counting of expected credit losses. I'd now like to turn it back over to Denis. Denis Sheahan: Thanks, David. We are pleased with this quarter's results and are excited about closing the HarborOne merger. We're the leading local bank in Massachusetts, and this merger strengthens our presence south of Boston and into new markets in Rhode Island, providing opportunities for organic growth for many years to come. The continued improvement in our profitability will allow us to return meaningful amounts of capital and enhance shareholder value. This concludes the presentation. I will now open the call for questions. Operator: [Operator Instructions] Your first question comes from Damon DelMonte with KBW. Damon Del Monte: First question, just with regards to -- I know it's a tricky quarter because you have HarborOne closing next week and we're in the middle of the fourth quarter here. But David, as we kind of think about the margin, obviously, a bunch of noise on the fair value accretion side of things. But if you look at the core margin, as you noted, it's flat quarter-over-quarter. Do you think that kind of -- can hold steady here in the fourth quarter and then kind of grind higher into '26? Or do you think that the competitive pressures on deposits will probably weigh on that a little bit? R. Rosato: Let's talk about both sides of that, Damon, and good morning. So the core eastern margin, there's 2 key drivers, right? There's accretion income, which unfortunately, in Q3 was down $6.5 million. That's the wildcard here. The average run rate is, call it, $11 million to $12 million. So last quarter, we were above trend. This quarter, we were a little below trend. And you saw that ripple through asset yields, that's the wildcard. On the other side, on the deposit side, the competition has heated up here. We've talked -- I think we talked about this last quarter as well in retail and government banking. I think that pressure remains in Q4. So that leads me to roughly flat deposit costs with a little bit of a wildcard on the asset side. The -- from a -- and then just as a reminder, we'll have 2 months of HarborOne in our Q4 numbers. Our thinking is that the original margin expansion and numbers that we put out back in April for the combined institution are still good numbers. Damon Del Monte: Okay. Great. And then how about as far as just like on the expense side, it was higher this quarter, you had some elevated comp and benefit type costs and stuff. Again, kind of looking at the core Eastern expenses, do you think that kind of stays at a similar level here going into fourth quarter? Or could it tick even higher just given year-end accrual true-ups and things of that nature? R. Rosato: I think we were a little inflated on the comp line this quarter. I think that will tend to settle down in Q4. There's been a little uptick in tech expense. That is -- will probably be consistent. So I'm not overly concerned about our expense base at this point. And with telegraph roughly flat in Q4 overall to down a touch. Damon Del Monte: Okay. Great. And then with the deal closing here next week, kind of just curious on your updated thoughts on appetite for additional deals over the coming months or in 2026. Is that something you guys are considering? Or I think messaging has also been more about a focus towards organic growth. So just kind of wondering how you balance those 2 avenues. Denis Sheahan: Damon, it's Denis here. And that sort of remains consistent. Look, our focus right now is clearly on continuing to build on the good organic growth that we've had in recent quarters on the important integration of the HarborOne merger. We feel good about that opportunity and are looking forward, as I said in my comments earlier, to working with our new customers, our new colleagues at HarborOne but as you can well imagine, there's a lot of work to do there on that integration. We have no plans in terms of additional mergers in the near term. But that said, we think if a merger opportunity were to arise, it's in our shareholders' best interest for us to evaluate the opportunity. It doesn't mean we would execute but certainly, it's lower on our list of priorities when we think about capital allocation. But as Bob indicated with his opening statements, and you look at the progress at Eastern Bank since we had our IPO, the performance improvement is very material and significant and the opportunity of the new markets that those mergers provided are a meaningful contributor to our operating performance so we think it's -- if the opportunity arises, it's in our best -- shareholders' best interest to consider it, but it's not our focus today. R. Rosato: I would just add to that. It's clear when you think about deployment of capital from our perspective, nothing has changed. It's organic growth. It's now we're excited that with the Board's approval of the share repurchase, so we can be back in the market. It's supported the dividend. And then by far, #4 is anything around M&A. Damon Del Monte: Got it. Okay. Great. And then just lastly, David, real quick. You had mentioned before, like last quarter about the possibility of another restructuring, but it would kind of depend on market conditions and kind of how you felt the best use of capital once HarborOne has closed. Any updated thoughts on that if you're considering that still? Or is it the focus more on organic growth and buybacks only? R. Rosato: It's really -- we're really not focused at all on any type of further portfolio restructuring of Eastern Bank. It is organic growth, where -- which we've had a very good track record of success year-to-date. As Denis referenced, the pipeline is robust, and our brand is resonating in the market. So it's that, it's being back in the market for buybacks. And it's not no contemplation at all right now of any type of further portfolio restructuring. Operator: Your next question comes from Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: David, you had mentioned in your comments earlier on the Wealth Management business. I think there was $550 million increase in AUM this quarter. A lot of that was market driven. Could you break out for us how much of the $550 million was market-driven versus flows? R. Rosato: Yes, it was predominantly market-driven good equity and fixed income markets. The net flows in the quarter were a little over $50 million positive. Mark Fitzgibbon: Okay. Great. And then secondly, are there plans within the wealth management business to hire more people or to acquire other RIAs or wealth businesses? Denis Sheahan: Mark, this is Denis. So yes, we are looking for talent, and we have brought on some existing talent in the wealth area. We're active and engaged in opportunities to bring in talent, whether it be in business development or portfolio relationship management. So hopefully, you'll hear more from us about that in the coming quarters. And in terms of M&A in the RIA space, no, we're not interested in that to any degree. It's challenging for those opportunities to work from a variety of perspectives. One being culture and integration and another being the financially challenging to make them work. So we're not interested at this point in any kind of M&A there. Mark Fitzgibbon: Okay. And then Denis, I guess I'm curious, and I know it's a little awkward, but any comments on the slide presentation that Holdco put out earlier this week. I guess I'm curious do you agree with it? Do you plan to implement any of the things that they've proposed and do you plan to meet with them? Denis Sheahan: Well, Mark, as you know, we're very open to engaging with our shareholders. We do a lot of investor conferences and investor road shows, et cetera, and we're happy to engage with any of our investors and we've -- what we believe is a shared goal, we and our investors of driving the performance of the company even higher than we've already done and to build long-term value creation for our shareholders. So we welcome that dialogue from whomever. But I would say most importantly, I really want to turn our focus to the future and think about -- we're excited about the future of the company. We feel very well positioned here today and even more so with the combination with HarborOne to execute the strategy that we've built to really drive that top quartile financial performance, that's the mantra at the company. That's what we're aiming for. That's our aspiration. And that's what we're really, really focused on. And we think that's going to deliver very, very attractive shareholder returns. So that's our focus. I'm not going to comment on anything in any particular disclosure that someone has made. But rest assured, that this team is focused on driving performance, and that's what gets us up every day. That's what gets us excited. And as I said, we're going to continue to focus on that. Operator: Your next question comes from Laurie Hunsicker with Seaport Research. Laura Havener Hunsicker: Just wanted to go over to Slide 16, your office exposure here. And I just want to make sure I'm reading this right. It looks like your office nonperformers jump linked quarter. But I guess what's also new is you've got $19 million now in nonaccruals maturing in the first quarter there at '26. And so I'm just wondering how we should think about that with respect to the provision just since that's new, can you help us understand that a little bit? Denis Sheahan: Sure, Laurie. So it's one loan that -- just with a little background, that loan was originated in 2016. It's been -- so pre-COVID, we've been watching it since COVID, so for quite a few years here. This is consistent with what we've said all along, there will be a couple of loans in the portfolio that we'll have to deal with. In the grand scheme of things, small numbers, this loan, we started building reserves that will mature next year. That's why it hit the schedule. We will have it probably full resolution, probably not in Q4 but into Q1. It's on our books at what we believe will be the final resolution economics. So there's real -- it is one loan, but there's really no story there or anything different worth mentioning about that loan or about the rest of the portfolio. Laura Havener Hunsicker: Okay. And then just with respect to that loan, I mean, can you share with us occupancy or anything around that? Or if you expect to extend or just how you think about it. Denis Sheahan: I will share one fact. It's 85% occupied. Laura Havener Hunsicker: That's great. That's helpful. Okay. And then spot margin, do you have an update on that for September? Denis Sheahan: Did you say spot margin? Laura Havener Hunsicker: Yes. Do you have a September spot margin? R. Rosato: Yes. So it was 3.48%. So 1 basis point higher than the quarter. Operator: Your next question comes from Janet Lee with TD Cowen. Sun Young Lee: Apologies if I missed it in the prepared remarks earlier, but if I were to interpret your comments around NIM, so basically, as we look into 2026, although maybe deposit costs were a little bit more elevated this quarter because of competition as rates come down, you're able to still sustain your NIM? Or is that the way -- where is that the right way to think about this? R. Rosato: Yes, generally true statement. What I was trying to elaborate on a little bit from Damon's question, is 2 drivers, right? There's the accretion income, which bounces around last quarter is a little above trend. This quarter is a little bit below trend. Hard to predict, as we all know. On the deposit side, we've -- in Q3, we were -- there was one Fed move so far. We were slow in our repricing down. So less than our historical long-term beta of 45% to 50% competition in our market remains intense or heavy. We're 5 days away from seems to be a foregone conclusion the Fed's going to move again followed by another move in December. So we will be pricing down as we get covered from the Fed. Our message is, in the near term, a little slow, a little slower to maintain and eventually grow market share, but longer term through this full cycle we should expect us to achieve our full betas. Sun Young Lee: Got it. That's helpful. And a follow-up on higher -- bigger picture. So Denis, it's been a little over a year since you joined Eastern from Cambridge. So I believe you have assessed Eastern franchise or the business overall. So given its historical roots as a mutual conversion and given a lot of the M&As that you guys have done, I mean growth has been slow or slower versus, I guess, stand-alone Cambridge or Eastern. As you look at Eastern's franchise, like what parts of the business are perhaps underutilized? Or where do you see the most upside to growth or increase in profitability? I get that you guys are seeing acceleration in C&I opportunities, but are there other parts of the business where you think could be improved? Denis Sheahan: Janet, thanks for your question. So I would reflect on it this way. We have seen very significant increase in the company's profitability. That's really riding on the back of the strategy that the team before David and I had, very significant, and it positions us well. In terms of continuing to grow profitability, I think of it about the areas that you hear us emphasizing in our comments, the commercial lending team, it was, frankly, one of the things that attracted me when I was thinking about merging Cambridge into Eastern is the journey that Eastern has gone on for several years, including as a mutual and when it converted to build out that commercial banking division. The talent on the team is terrific. They can execute. They're excited about the growth that we're -- we have and that we're continuing to embark on. So I think the Commercial Banking division is certainly one. Second, and this isn't necessarily an order of priority. All our businesses are important, but wealth management. The market in Massachusetts and New England broadly, from a demographic perspective, we don't have significant population growth, but what we do have is a very good wealth and household income demographic. So our ability to lean into that business, further, over the years, it takes time. I've seen this in my past and how you build out a wealth management business successfully. I think we will significantly improve our performance. It's low capital intensive, very beneficial to ROA. And we have a good -- a really strong capability in that area. I think about our retail and deposit franchise. We have new leadership in that area, a terrific team, and I feel very good about our prospects in that area of the company as well. So that's a lot, Janet, but we're fortunate to have a lot. And it comes down to the talent on the team and our ability to execute in the market, including our newer markets. When I think about our markets, you have to really -- the merger integrations well done take years. If I go back to the Century merger, in my view, is not fully integrated. Have we maximized the potential of our opportunity in this old Century markets, in the old Cambridge markets and the soon-to-be HarborOne markets? Absolutely not. So I think there's a lot of opportunity ahead. The management team is excited. We're pumped. So that's how I would answer your question, Janet. Operator: There are no further questions at this time. I will now turn the call over to Bob Rivers for closing remarks. Robert Rivers: Well, thanks again, everyone, for joining us this morning. Best wishes for a very happy and healthy holidays, and we look forward to talking with you again in the new year. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Thank you for standing by, and welcome to the First Financial Bancorp Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] I'd now like to turn the call over to Scott Crawley. You may begin. Scott Crawley: Thank you, Rob. Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's third quarter and year-to-date financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer; Jamie Anderson, Chief Financial Officer; and Bill Harrod, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section. We'll make reference to the slides contained in the accompanying presentation during today's call. Additionally, please refer to the forward-looking statement disclosure contained in the third quarter 2025 earnings release as well as our SEC filings for a full discussion of the company's risk factors. The information we will provide today is accurate as of September 30, 2025, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn it over to Archie Brown. Archie Brown: Thanks, Scott. Good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our financial results for the third quarter. The third quarter of '25 was another outstanding quarter for First Financial. Adjusted net income was $72.6 million and adjusted earnings per share were $0.76, which resulted in an adjusted return on assets of 1.55% and an adjusted return on tangible common equity of 19.3%. We achieved record revenue in the third quarter, driven by a robust net interest margin and record noninterest income. We have successfully maintained asset yields while moderating our funding costs, which combined to result in an industry-leading net interest margin. In addition, our diverse income streams remained a positive differentiator for us with our adjusted noninterest income representing 31% of total net revenue for the quarter. Expenses continue to be well managed. Excluding incentives tied to strong performance and the record fee income, total noninterest expenses were flat compared to the second quarter. Our workforce efficiency efforts continued during the period. And to date, we've successfully reduced our full-time equivalents by approximately 200 or 9% since we began the initiative 2 years ago. We expect further efficiencies subsequent to the integration of our pending acquisitions. Loan balances declined modestly during the quarter, falling short of our expectations. Lower production in our specialty businesses along with a greater percentage of construction originations, which fund over time drove the modest decline. Loan pipelines are very healthy as we enter the fourth quarter, and we expect to return to mid-single-digit loan growth to close out the year. Asset quality metrics were stable for the third quarter. Nonperforming assets were flat as a percent of assets and annualized net charge-offs were 18 basis points, which was a slight improvement from the linked quarter. We're very happy that our strong earnings led to continued growth in tangible book value per share and tangible common equity during the quarter. Tangible book value per share of $16.19 increased 5% from the linked quarter and 14% from a year ago, while tangible common equity increased 47 basis points from June 30 to 8.87% at the end of September. I'll now turn the call over to Jamie to discuss these results in greater detail. And after Jamie is done, I'll wrap up with some additional forward-looking commentary and closing remarks. Jamie? James Anderson: Thank you, Archie, and good morning, everyone. Slides 4, 5 and 6 provide a summary of our most recent financial results. The third quarter was another exceptional quarter with outstanding earnings, robust net interest margin and record fee income. Our net interest margin remains very strong at 4.02%. Asset yields declined slightly while we managed deposit costs to a modest increase. Loan balances declined slightly during the quarter as production slowed in our specialty lending areas and slower funding construction originations increased as a percentage of the portfolio. Average deposit balances increased $157 million due to higher broker deposits and money markets, offset by a seasonal decline in public funds. We maintained 21% of our total balances in noninterest-bearing accounts and remain focused on growing lower-cost deposit balances. Turning to the income statement. Third quarter fee income was another record, led by our leasing and foreign exchange businesses. Additionally, we had higher syndication fees and income on other investments. Noninterest expenses increased from the linked quarter due to an increase in incentive compensation, which is tied to fee income. Our efficiency efforts continue to impact our results positively and remain ongoing. Our ACL coverage increased slightly during the quarter to 1.38% of total loans. We recorded $9.1 million of provision expense during the period, which was driven by net charge-offs. Overall, asset quality trends were in line with expectations with lower net charge-offs and nonperforming asset balances remaining flat. Net charge-offs were 18 basis points on an annualized basis, while NPAs and classified assets were both relatively flat for the period. From a capital standpoint, our ratios are in excess of both internal and regulatory targets. Tangible book value increased $0.79 to $16.19, while our tangible common equity ratio increased 47 basis points to 8.87%. Slide 7 reconciles our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $72.6 million or $0.76 per share for the quarter. Noninterest income was adjusted for a small loss on the sale of investment securities, while noninterest expense adjustments exclude the impact of acquisition and efficiency costs, tax credit investment write-downs and other expenses not expected to recur. As depicted on Slide 8, these adjusted earnings equate to a return on average assets of 1.55%, a return on average common equity of 19% and a pretax pre-provision ROA of 2.15%. Turning to Slides 9 and 10. Net interest margin decreased 3 basis points from the linked quarter to 4.02%. Asset yields declined 2 basis points from the prior quarter, while total funding costs increased 1 basis point. Slide 12 illustrates our current loan mix and balance changes compared to the linked quarter. Loan balances decreased $72 million during the period. As you can see on the right, the decline was driven by decreases in the Oak Street, ICRE and C&I portfolios, which outpaced growth in Summit and consumer. Slide 14 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $157 million during the quarter, driven primarily by a $166 million increase in brokered CDs and a $106 million increase in money market accounts. These increases were offset by a seasonal decline in public funds. Slide 16 highlights our noninterest income for the quarter. Total fee income increased to $73.6 million during the quarter, which was the highest quarter in the history of the company. Bannockburn and Summit both had solid quarters. Additionally, other noninterest income increased $2.8 million for the quarter due to higher syndication fees and elevated income on other investments. Noninterest expense for the quarter is outlined on Slide 17. Core expenses increased $5.7 million during the period. This was driven by higher incentive compensation related to fee income and the overall strong performance by the company. Turning now to Slides 18 and 19. Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $180 million and $9.1 million of total provision expense during the period. This resulted in an ACL that was 1.38% of total loans, which was a 4 basis point increase from the second quarter. Provision expense was primarily driven by net charge-offs, which were 18 basis points for the period. Additionally, our NPAs to total assets held steady at 41 basis points and classified asset balances totaled 1.18% of total assets. We continue to believe that we have modeled conservatively to build a reserve that reflects the losses we expect from our portfolio. We anticipate our ACL coverage will remain relatively flat in future periods as our model responds to changes in the macroeconomic environment. Finally, as shown on Slides 20 and 21, capital ratios remain in excess of regulatory minimums and internal targets. During the third quarter, tangible book value increased to $16.19, while the TCE ratio increased 47 basis points to 8.87%. Our total shareholder return remains strong with 33% of our earnings returned to our shareholders during the period through the common dividend. We maintain our commitment to provide an attractive return to our shareholders, and we continue to evaluate capital actions that support that commitment. I'll now turn it back over to Archie for some comments on our outlook. Archie? Archie Brown: Thank you, Jamie. Before we conclude our prepared remarks, I want to comment on our outlook for the fourth quarter, which can be found on Slide 22. As we close the year, we expect origination volumes to increase, which should accelerate our growth. Specific to the fourth quarter, excluding Westfield, we expect loan growth to be in the mid-single digits on an annualized basis. We expect core deposit balances to increase and combined with seasonal public fund inflows to result in strong deposit growth. Our net interest margin remains among the highest in the peer group, and we expect it to be in a range between 3.92% and 3.97% over the next quarter, assuming a 25 basis point rate cut in both October and December. This includes a modest bump in margin from the addition of Westfield in early November. We expect our fourth quarter credit cost to approximate third quarter levels and ACL coverage to remain stable as a percent of loans. We're estimating fee income to be between $77 million and $79 million, which includes $18 million to $20 million for foreign exchange and $21 million to $23 million for the leasing business revenue. This range includes the expected impact from Westfield. Noninterest expense is expected to be between $142 million and $144 million and reflect our continued focus on expense management. This range includes the impact from Westfield, which is expected to approximately -- to be approximately $8 million for the month of November and December. While we remain confident that we will realize our modeled cost savings, we expect the majority of those savings to materialize in the middle of 2026 once Westfield has been fully integrated. With respect to our pending acquisitions, we have received formal regulatory approval for the Westfield transaction and anticipate closing in early November. Our initial preparations for the BankFinancial close are underway, and we are more excited than ever to expand our reach into the Chicago market. We have filed the necessary applications and expect to receive approval from the regulators in coming months, eyeing a close during the first quarter of 2026. We're very excited to have the Westfield and BankFinancial associates join our team. In summary, we're very proud of our financial performance through the first 9 months of the year, which resulted in industry-leading profitability. We expect to have another strong quarter to close 2025 and build positive momentum as we head into 2026. With that, we'll now open up the call for questions. Rob? Operator: Your first question today comes from the line of Brendan Nosal from Hovde Group. Brendan Nosal: Maybe just starting off here on a topic that's of interest today, NDFI loan exposure. I think if I look at your reg filings from last quarter, it's a little over $450 million or 4% of loans. I know that it's not huge, but can you just kind of walk us through that book and let us know whether that exposure falls into any of the known commercial verticals that you already have today? Archie Brown: Yes. Brendan, we'll have Bill Harrod cover that. All right. Great. We've got, as of the end of the quarter, about $434 million in the NDFI portfolio. It's a diversified, conservatively managed and anchored in high investment grade tier with currently no adversely rated credit. The bulk of the portfolio is made up of traditional REITs of about $304 million across 46 notes, averaging about $7 million, consisting of a variety of public traded or privately held entities with investment grade or equivalent. We do have a securitization book within that portfolio of $73 million across 7 relationships with loans structured using S&P methodology to high investment-grade ratings. And we monitor those on a monthly basis with borrowing bases and independent third-party exams on a routine basis. And that makes up the bulk of what we have in that NDFI portfolio. Brendan Nosal: Awesome. That's really helpful color. Maybe turning to the net interest margin. I totally get the guide for next quarter, no surprise given recent and forthcoming rate cuts. I'm just kind of curious, so if we get those 2 cuts in the fourth quarter, how should we think about margin early in next year? I think in the past, you said that each cut is 5 to 6 basis points of near-term pressure before it grinds back up on lag funding costs. So any color there would be helpful. James Anderson: Yes, Brendan, this is Jamie. So on the margin, and again, so the other thing you have to keep in mind is we have Westfield coming into the mix. So that's going to create a little bit of noise, and it actually helps us going forward here, mitigate a little bit of our asset sensitivity. So -- but if you look at kind of the legacy, the legacy company and the margin, the way that it reacts to those 25 basis point cuts, like I said, and you mentioned it as well, we get about 5 basis points of margin pressure for each of those 25 basis point cuts. And the way -- the timing of that, the way that will kind of fold in is that you get a little bit more pain immediately from the cut. And then as deposit costs catch up, we start to actually move that back up. So -- but really 5 basis points of pressure. So if you think about our margin right now in that 4% range, if we get those 2, then we kind of start the year in that [ 3.90-ish ] range. But then when you factor in Westfield and with the purchase accounting and how that will work, we get a little bit of improvement in the margin from them. So it starts to help mitigate some of that pressure if we have those expected rate cuts here at the end of the year. Operator: Your next question comes from the line of [ Mark Shootley ] from KBW. Unknown Analyst: Maybe one more on the margin. I'm trying to think about on the asset side, loan yields were strong and actually ticked up in the quarter. So I was just curious like what new loan originations are coming on today with you guys sort of returning to growth and what you're expecting for the total sort of portfolio yield in the near term? Archie Brown: Yes, Mark, this is Archie. I'll start, and Jamie, you can kind of comment on me if you want to amplify. But the rate cut certainly that we had affects origination yields as well. And so we were probably before the cut around 7% on origination yields, and it's closer, I guess, high 6s. So you said 6.80%, 6.90% and it's going to come in closer to the mid-6s you look at the month of September, it was probably right around 6.50%, maybe 6.50% and change. So we'd say sort of right now in that range, maybe drop down a little bit more with some more rate cuts because, again, a lot of we do is commercial oriented tied to variable rates. James Anderson: Yes. And Mark, I mean, like we've talked about in previous quarters, if you -- again, looking at the legacy First Financial portfolio, absent Westfield, we still have about 60% of our loan book that moves on the short end. So obviously, those cuts will impact the yield on the loan side. Unknown Analyst: Yes, that makes sense. And then maybe just on the growth -- so you mentioned the pipelines are strong, and I was just curious like what specific verticals or markets you expect to drive that growth over the next couple of quarters? Archie Brown: Yes, Mark, this is Archie again. Yes, maybe talk about loan growth kind of overall. Our production, if you just look at total commitments, Q3 was on par with Q2. So pretty strong. I would argue it's the strongest of the year in both cases. But we saw the actual fundings from that drop compared to what we saw in prior quarter. So lower fundings, primarily construction related. And then we did see a dip in line utilization on the commercial side that accounted for a little bit of the -- little bit of lower overall growth in the quarter. As we look in Q4, strong commercial is the biggest driver. We've got different verticals within commercial, but strong commercial is the big driver. Summit funding, this is always their peak quarter for production. So that will be another big driver. Commercial real estate will have a little bit of growth is what we're projecting in Q4. And probably the only vertical that has a little bit of pressure is in our Oak Street Group. Just it looks like they've got a lot more payoff pressure that we're expecting here in Q4. But the combination of it all gets you to the number that we're projecting of 5% annualized growth. Operator: [Operator Instructions] your next question comes from the line of Daniel Tamayo from Raymond James. Daniel Tamayo: Maybe just one on the fees and expenses. So the 4Q guide pulling out Westfield just for a second was higher than what we were looking for and certainly what the 3Q number was. Just curious if there's something seasonal, unusual, unique in the fourth quarter? Or maybe if you can kind of give us some indication of what the run rates would look like going into '26. James Anderson: Yes, Danny, it's Jamie. Really, the big impact from the third quarter to the fourth quarter in that -- like again, I think you're looking at just ex-Westfield kind of the legacy First Financial numbers is really coming from Bannockburn. The forecast that we're getting from them for the fourth quarter is a little higher even than what we had in the strong third quarter. A little bit of bump as well as the Summit related to the operating leases. And then our wealth department, especially on the M&A and the investment banking side, up just a little bit from that division that we have there. So it's really those 3 areas, primarily though, driven by Bannockburn. And like we have talked before, Dan, I mean, they can -- that can bounce around a little bit. So I mean, to kind of talk about that long, long term, we look at that business kind of year-over-year now is growing in that -- generally in that 10% range. Archie Brown: Yes. And Dan, those are all commission-based kind of businesses. So when they do well, you're going to see more commission paid out, which drives the salary costs. James Anderson: Yes. Daniel Tamayo: That's great. That's very helpful. And my other question, I guess, on the credit side. So a good quarter from a credit perspective, guiding to similar credit costs. Just curious how long you think those play out? I think in the past, we've talked about a little bit higher run rate on the charge-off side. Any read-throughs in the near term past the fourth quarter on credit? Archie Brown: Yes, Dan, this is Archie. I don't -- I mean, I think it's kind of steady as we go. We've, I think, been saying all year, 25 to 30 basis points, kind of mid-20s seems to be the run rate for us in the current environment. And I think over a period of quarters, that's what we would expect. Daniel Tamayo: Understood. Okay. And then lastly, on the capital front, so you got the 2 deals closing here in the near term, take a little bit of a hit to capital. But curious, you'll still have pretty strong CET1. How you're thinking about buybacks? You probably think the stock is a little undervalued right now. Once we get past the deals, like if there's a bogey you're looking at on the capital side or any color there would be great. James Anderson: Yes, Dan, this is Jamie. So yes, I think you said it well. What we'll do here over the next really probably 2 to 3 quarters is let the deals flow in and kind of see where we're shaking out in terms of capital ratios at that point. I mean we are building TCE relatively and tangible book value relatively quickly at this point. And we will take -- so the TCE takes about 120 basis point hit in the -- once we close the Westfield deal just because of the all-cash nature of it. And then -- so we'll let the next 2 or 3 quarters kind of play out and then see where we are and see where we're trading in terms of multiple at that point. If we're trading anywhere in that 150% of tangible book value or below, we would potentially look at buybacks at that point. Operator: Your next question comes from the line of Terry McEvoy from Stephens. Terence McEvoy: From talking to some of the other banks that are in your metro markets in your footprint, kind of surprised with the deposit competition a bit stronger than I would have guessed. And your cost of funds up a few basis points quarter-over-quarter. So can you maybe just talk about deposit competition? And you didn't have loan growth this quarter. Next quarter, you're guiding towards that. Does that kind of drive those deposit costs higher as you look to fund that growth? Archie Brown: Yes, Terry, this is Archie. I'll start. It was modestly up for the quarter. I mean I would argue it is flattish. And with the rate cut that occurred, we did take some, I think, decisive actions on the deposit side that went into effect really this quarter. So now we have more -- of course, more short-term rate cuts coming. But we would expect a reduction in our deposit cost going forward in Q4. I mean it was pretty -- did a pretty aggressive cut. And yes, I mean, the market is competitive, but if you look at our current loan-to-deposit ratio, and we felt even with some loan growth, we felt we could take a little bit more aggressive actions. And we'll look to do more here with more Fed cuts. And then I think one of the things we like about BankFinancial, again, one, they have lower deposit and funding costs than we do. And that market from what we can see, still has a little more rational pricing than what we're seeing here kind of in Southwest Ohio. James Anderson: Yes. The other thing, Terry, to keep in mind, I mean, we do have the a little bit higher -- some loan growth in the fourth quarter and then going forward. But we don't think that puts a lot of pressure on our deposit costs because of the liquidity that we get coming in -- especially in the BankFinancial deal. If it closes in the first part of '26. So they already have a relatively low loan-to-deposit ratio, and then we're selling the multifamily portfolio, which will then create even more liquidity for us to utilize for loan growth or to pay off borrowings or to reinvest. Terence McEvoy: That's great. And nice to see the FX trading and the 4Q guide higher at $18 million to $20 million. I just want to make sure that run rate looking out into '26, do you think that is more consistent of next year? Or is this more of just a couple of strong quarters and next year we will go back to some of your prior comments on the outlook for that revenue line? Archie Brown: Well, certainly, Q4 would be a peak for them, Terry, if they hit the numbers that are being projected. And as Jamie said, it sort of bounces around. We look at it more on kind of an annual kind of 4-quarter basis rolling even. They will -- we've owned them now for quite a while. And what we've observed is they grow, they may flatten out a little bit, then they hit another growth spurt. But if you think 5% to 10% kind of growth rate I think you're in the ballpark for what we would expect them to do. James Anderson: Yes, Terry, this is Jamie. As we get into -- as we look out kind of into '26, I mean, that will -- I wouldn't annualize this fourth quarter number that we're talking about. So I would look more into '26 at like a $65 million to $70 million type of a run rate for them. Operator: Your next question comes from the line of Jon Arfstrom from RBC. Jon Arfstrom: Jamie, in your prepared comments, you touched on the workforce efficiency efforts. And can you talk a little bit about where you are in that journey? And then when you look at the 2 acquisitions, what kind of opportunities do you see there? Because it seems like you're going to apply this framework over the top of those 2 deals. Archie Brown: Yes, Jon, this is Archie. I'll start. We're probably 90% of the way through the company, the First Financial legacy company now. So there's a little bit left in some areas, but it's probably going to be a couple of quarters more to get a little bit of opportunity out of those areas. So as I think we alluded to in our comments that we think the opportunity to continue to get efficiency comes from the 2 acquisitions. And I think in the Westfield case, we had said around 40% expense reduction from the combination. And we're -- I think we're well on our way to achieve that, maybe slightly exceed it. BankFinancial was maybe just a little bit less because there's bigger branch count. But what we had modeled, again, we're well on our way to exceed that. And that includes us in both those markets, adding back roles to drive more revenue. Some of the businesses we have that maybe those banks didn't have, we're adding the appropriate people to help us grow in those markets. And even with that, we would still achieve the expense that we've -- reductions that we modeled in those deals. Jon Arfstrom: Yes. Okay. That makes sense. Yes, some good opportunities there, obviously, for production. And Terry took a couple of my questions on deposits. But Jamie, can you just remind us of the typical seasonal flows on deposits that you see in the fourth quarter? James Anderson: Yes. So we -- just -- yes, to remind you and everybody else, we get a seasonal bump in public funds, mainly from Indiana, where property taxes reduced. So we get those in May and November. And so typically, we will get, call it, around $150 million to $200 million kind of extra of deposits in those quarters on average. And then they -- a little bit more skewed, I would say, to the second quarter, but call it, $150 million to $200 million in both of those quarters, and then they run out in the subsequent quarter and kind of go back down to the base level. But that's pretty much like clockwork. I mean it happens pretty much every quarter. And then so that's what you saw here in the third quarter where those public funds running down by $100 million to $150 million. And then we just replaced those with -- sometimes we just replace those with brokered CDs or borrowings. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Archie Brown for closing comments. Archie Brown: Thank you, Rob. I want to thank everybody for joining us today. We really feel great about the quarter we had and are excited about fourth quarter and the momentum we're building for 2026 with the pending acquisitions. We look forward to talking to you again in a quarter. Have a great day and weekend. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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: Ladies and gentlemen, welcome to the Sika 9 Months 2025 Results Conference Call and Live Webcast. I am Mathilde, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dominik Slappnig, Head of Communications and Investor Relations of Sika. Please go ahead. Dominik Slappnig: Thank you, Mathilde, and good afternoon, everyone, and a warm welcome to our 9 months results conference call. Present on the call today is Thomas Hasler, our CEO; Adrian Widmer, our CFO; Christine Kukan, Head of IR; and Jomi Lemmermann, IR Manager. We are excited to share with you the highlights and key messages for the 9 months. Earlier today, we published our results and made the investor presentation available on our website. With this, Thomas Hasler and Adrian Widmer will provide further details on the results and the outlook. Afterwards, we will be ready to take your questions. I hand now over to Thomas to start with the highlights of the 9 months. Thomas Hasler: Thank you, Dominik. And also from my side, a warm welcome to this afternoon call. And let me quickly summarize the publications of today and some highlights underlying that we would like to share with you this afternoon. Sika has delivered a resilient performance in the first 9 months in a market that has -- remains to be dominated by uncertainty of various kinds. We have been able to increase our sales by 1.1% in local currency despite a heavy impact from our China construction business with a double-digit decline. Also this year, we are facing an unprecedented foreign currency impact. It's almost 5% and primarily due to the weaker U.S. dollar. But let me summarize a little bit our regions. And here, starting with EMEA. EMEA has seen for the whole year so far, a very nice double-digit growth in the area, Africa and Middle East. This is in line with the trend we have seen from last year, and it's strong also to continue. At the Eastern Europe business, we see green sprouts of growth. Eastern Europe is moving back to growth. It's mainly coming from the residential, so from the retail side, but it is clear this has picked up in pace and will also support the future evolution in EMEA. The region overall has reached 1.5% organic growth in the first 9 months. Americas on the other side, offers huge opportunities in the U.S. Here, we are collecting everyday data center opportunities that are unprecedented and growing and are not impacted at all by the uncertainties that are influencing other segments. The data center business has become a cornerstone of our direct business in the U.S. Just similar to our infrastructure business, which is doing very well in the U.S. Also here, we see more and more the impact of the Infrastructure Act that is delivering us opportunities from the East to the West Coast. We also see that the U.S. currently has some uncertainty that holds back on the reshoring. But here, plenty of these projects are ready to start, and we are also expecting that soon there will be more clarity and then production or construction start -- can start soon. We also see in the mature market of North America, a huge backlog in refurbishment, which is an opportunity to come soon as this backlog cannot pushed out very long. When I come to Asia Pacific, this is the region which has been most challenged, mainly influenced by the decline in our China construction business. If you would take the China construction business out of the equation, actually, the region, Asia Pacific would have been the region with the highest growth -- organic growth of around 4% in local currency. This comes from Southeast Asia and India with high single-digit growth. But as I mentioned, the China business is challenged and also we have taken here decisive measure to take here the margin and profit orientation above the volume orientation. But let me now move further into the P&L. And here, I would see the material margin increased to 55%, a significant demonstration of the synergies that we have been able to further increase from the MBCC and other acquisitions, efficiencies in our operations, and also a good cost management on the input cost side. This has also then trickles down to the EBITDA margin, which has rise by 10 basis points to 19.2% compared to prior year. Also here, the bottom line impact by the FX is quite significant. It is almost CHF 100 million when we look at the EBITDA alone. As mentioned before, we are taking decisive actions. This is in line with our manage for results key principle. We introduced our Fast Forward investment and efficiency program today, which builds on our leadership position. It will enhance customer value. It will improve operational excellence through digital acceleration and therefore, drive growth and profitability in the future. This program is built on a few blocks like investments CHF 100 million to CHF 150 million in the coming years. It is also coming with a shorter-term oriented structural adjustments in markets where we see ongoing weak momentum. Here, the China construction most pronounced, where we are making adjustments, which come with one-off costs of roughly CHF 80 million to CHF 100 million in '25 and the workforce reduction of up to 1,500 employees. The program overall will drive annual savings of CHF 150 million to CHF 200 million per annum with the full impact to come then implemented in the year of 2028. But now I hand over to Adrian to provide us more details and flavors to the financial 9 months performance. Adrian Widmer: Thank you very much, Thomas, and good afternoon, good morning to everybody attending. After Thomas' highlights, I would like to now put additional insights here to the financial results. In a market environment that remains challenging, as we have heard, we have achieved a modest sales growth in local currency of 1.1% in the first 9 months of the year, driven by acquisitions, while organic growth was flat year-to-date, owing to a minus 1.1% decline in Q3, driven by China. Without China, organic growth year-to-date in local currency was 1.7% or close to 3%, including acquisitions overall. Acquisition growth primarily came from the initial contribution of the 5 transactions we have consummated this year, including some residual impact of last year's bolt-ons, overall adding 1.1% of additional growth in the first 9 months of 2025. Sales were clearly adversely impacted by foreign exchange effects, especially as mentioned, related to a weak U.S. dollar, but also the RMB and the general strengthening of the Swiss franc. Overall, adverse foreign exchange effects reduced local currency growth by 4.9 percentage points in the period under review with a Q3 impact of minus 5.9%, slightly improved from a more significant impact in Q2, but still above the overall run rate. Corresponding growth, therefore, in Swiss francs was minus 3.8% for the first 9 months. Looking at the regions, region EMEA showed a similar Q3 trajectory as in the first half year, growing 2.1% overall, 1.5% organic and 0.6% through acquisitions. As Thomas has highlighted, business performance was particularly strong in the Middle East and Africa, where we recorded double-digit growth, but also with a good momentum in Eastern Europe. Here, foreign exchange effects at minus 3.3% year-to-date remained unchanged in Q3. Sales in the Americas region increased by 2.9% in local currencies, while Q3 growth was in line with Q2. Overall, year-to-date organic growth was 0.8%, while acquisitions continued to add 2.1% of growth in the period under review. While the business year got off a good start, U.S. trade policy measures triggered the mentioned uncertainty in the markets and slowed down momentum. While this caused Sika's growth in the U.S. and Mexico to soften, performance remained solid in Latin America overall, but also in the U.S., as highlighted by Thomas, some strong momentum in several areas. Here, adverse foreign exchange effects were most profound and reduced local currency growth by minus 7% in the region in the first 9 months, driven by particularly here the strengthening Swiss francs against the U.S. dollar of more than 10% starting in Q2, but also the devaluation of the Argentinian peso. Sales in Asia Pacific declined by minus 3.9%, while organic growth was minus 4.3% for the period. This result is mainly attributable to the challenging deflationary market environment in the Chinese construction sector for which we are focusing here on protecting our margins and driving efficiency. If we exclude here the impact, sales in the region would have been around 4% in local currencies. And also here, most -- or the strongest market was in India and Southeast Asia and also in Automotive & Industry, where Sika continued to expand its share in its technologies in both the local as well as international manufacturers. Also here, an M&A impact, namely the acquisition of Elmich contributing here 40 basis points of growth, an adverse foreign exchange impact at minus 4.6% reduced here local currency growth to minus 8.5% in Swiss francs in the first 9 months. Now turning to the full P&L and looking at material margin. Here, we have, as highlighted, driven up gross result by 30 basis points year-on-year due to also a very strong Q3 expansion, 55% of net sales in the first 9 months. This is also in spite of the deflationary environment in China and a small dilution of 10 basis points coming from M&A, but also overall material cost in recent months, also driven by our procurement initiatives showed a slightly declining trend. Reported operating cost this year, including personnel costs as well as other operating expenses, decreased slightly under proportionally in the first 9 months of the year versus the same period of 2024. Here, continued strong MBCC-related synergy trajectory as well as efficiency measures were offset by ongoing yet reducing cost inflation, currency impacts as well as initial onetime cost of around CHF 18 million in Q3 related to our structural cost reduction program. In looking at personnel costs specifically, which were down by minus 0.3% year-on-year on a reported basis, we have seen continued underlying wage inflation at around 3.5% per annum on a like-for-like basis. This is partially and increasingly being offset by cost synergies as well as operational and structural efficiency initiatives, but negatively affected by this initial fast forward severance expenses. Other operating expenses decreased strongly over proportionally by minus 6.5%, driven by accelerated efficiency measures and MBCC synergies. Overall, the integration of MBCC is largely concluded, while strong delivery of synergies is ongoing. Realized total synergies amounted to CHF 130 million in the first 9 months of '25 an incremental CHF 41 million versus the same period of last year, representing an annual run rate of CHF 166 million and therefore, well on track to push towards the upper range of the increased guidance of CHF 160 million to CHF 180 million for this year. Overall, EBITDA margin, as highlighted, increased by 10 basis points to 19.2%, up from 19.1% in the first 9 months. Absolute EBITDA decreased under proportionally by minus 3.3% from CHF 1.702 billion to CHF 1.645 billion due to foreign exchange translation effects, broadly in line with the effect on the top line also here highlighting our strong natural hedge and decentralized cost base in line with invoicing currency. Depreciation and amortization expenses were virtually flat in absolute terms at CHF 407 million or 4.8% of net sales as favorable translation effects were offset by PPA effects on the intangible side as well as a slightly higher depreciation rate. As a result, EBIT ratio decreased by 10 basis points to 14.4%, while absolute EBIT also was impacted by currency translation effects. If we turn below the EBIT, here, net interest expenses decreased and continued to increase significantly by CHF 16 million to CHF 105.5 million in the first 9 months. This compared to CHF 121.6 million in the same period of last year. Decrease is largely related to the scheduled repayment of our first Eurobond in Q4 '24 that was taken out for the financing of MBCC. And in addition, other financial expenses also showed a favorable development, representing a net income of CHF 10.2 million, up roughly CHF 7 million compared to the same period of last year, unfavorable hedging cost development, lower inflation accounting effects and also higher income from associated companies. On the tax side, group tax rate increased from 21.5% to 23.8% in the first 9 months. This is largely related to a positive onetime effect in the previous year. This is primarily the deferred tax benefit relating to a foreseen legal restructuring. And this year, we had also higher withholding tax on internal dividends distributed in the second quarter this year. As a result, net profit ratio was modestly down to 10.1% of sales. This is 20 basis points lower than last year. And also here, absolute net profit of CHF 870.9 million was impacted by currency translation effects. On the cash flow side, operating free cash flow in the first 9 months was CHF 630 million, which continues to be about CHF 220 million lower than cash flow in the same period of last year. However, cash generation in Q3 was strong and in line with last year. And the reduction here is primarily due to unfavorable currency movements compared to last year, particularly impacting here hedging of intercompany financing, but also partially due to a modestly higher seasonal increase in working capital slightly higher CapEx as well as higher cash taxes. For the full year, we expect to partially close the gap in Q4 and full year operating free cash flow in line with our strategic targets of higher than 10% of net sales, additionally supported by group-wide working capital initiatives. With this, I conclude my remarks on the 9-month financials and hand back to Thomas for the outlook. Thomas Hasler: Good. Thank you, Adrian. Yes, let me be short and brief on the outlook. We have published our outlook, and we confirm for '25, our expectation of modest increase in net sales in local currency for 2025. And our EBITDA margin of approximately 19%, including the one-off costs from the Fast Forward program, which I referred to earlier. The medium-term guidance, we confirm our profitability and cash flow expectation with reaching the band of 20% to 23% EBITDA in 2026. And we have created here a new guidance based on the revised growth assumptions for the market of 3% to 6% local currency net sales growth for the period of '26 to '28. Dominik Slappnig: We are -- with this, basically, we are now opening the line for your questions, please. Operator: [Operator Instructions] The first question comes from the line of Ben Rada Martin from Goldman Sachs. Benjamin Rada Martin: I have three questions, please. My first was on, I guess, the annual savings you've introduced today, the kind of $150 million to $200 million amount. Could you maybe break down the source of these between the two programs being the efficiency program and investment program? The second would just be on pricing growth. I assume you're starting to have some conversations around 2026 pricing. Could you maybe just give us a steer on what kind of level of pricing growth you expect at the group level? And then finally, on China construction, thank you for the disclosure today around that business. I'd be interested for our kind of housekeeping side, what share of the China business would be in construction at the moment? And what would be the split between, I guess, the channel side and the project side within China construction? Adrian Widmer: Yes. Thank you, Ben, here for the question. I'll start with the first one. We will provide more granularity here on, let's say, sort of the breakdown and the content of the impacts here then in November. But maybe at this stage, we expect about CHF 80 million out of the CHF 150 million to CHF 200 million to hit the P&L in a positive way in 2026. On maybe the pricing, and I'll take this one here, too, we had about 0.6% price increase year-to-date here, excluding China. China in a negative environment with negative pricing, but about 60 basis points for the first 9 months, which we're expecting to sort of roughly stay at that level for the full year basis. Thomas Hasler: Good. And to the third question in regards to our China business, our China construction business is about 70% of our China business. The remaining 30% is related to the automotive industrial manufacturing business, a business that is growing nicely in line also, let's say, with the transformation to e-mobility and the increased volumes overall. The 70% of the construction-related business, the larger portion, also roughly about 70%, 75% is the indirect business. It's the business that is related to the tile setting business in the residential area. And then the 25% direct business is especially strong with sensitive infrastructure programs and with the foreign direct investments of multinationals building in China. As we all know, the residential business in China has some challenges with huge inventories still being around and the foreign direct investment business has declined this year substantially, roughly 25%. These are the two drivers for the very soft business that we are facing and also then mandating that we take here decisive steps to structurally adjust to this condition as we don't see that quickly to resolve in the near future. Operator: The next question comes from the line of Priyal Woolf from Jefferies. Priyal Mulji: I just got two actually. So the first one is just on the rebasing of the midterm local currency sales growth. Would you mind just reminding us what the contribution was from market growth back when the target was 6% to 9%? Was it around 2.5%? And I'm just asking that in the context that you've obviously cut the midterm target by 3%. Are you effectively now implying that market growth will be flat or possibly even down for the next couple of years? Or is there something else sort of buried in the target cut today in terms of lower outperformance or lower pricing or lower M&A. And then the second question is just on the CHF 120 million to CHF 150 million investments that you're talking about. Is that CapEx? Or is there some sort of P&L cost involved with that? Thomas Hasler: Okay. Thank you, Priyal. I'll take the first one. And here, you are absolutely correct. Our former guidance was built on a 2.5% market expansion. And our current or our adjustment is basically correcting for the current, but also for the foreseeable future and here is more neutral or slightly negative. The elements of the strategy, the market penetration and the acquisition are from our side, unchanged, but the market has changed substantially longer than anybody could have anticipated. And therefore, we made this readjustment, but it's mainly -- or it is the market that really is unpredictable at this point, and we have taken that down to a neutral, slightly negative level. Adrian Widmer: Then the second one here, Priyal, on the investment program, the CHF 120 million to CHF 150 million. This is largely CapEx. There is about a 30% OpEx element as this is also relating to implementation of platforms, ongoing support digitalization, also training activities and so on. So about 30% of this is ongoing here OpEx, which we don't see as sort of onetime costs, but really sort of ongoing implementation and support cost. Operator: We now have a question from the line of Paul Roger from BNP Paribas Exane. Unknown Analyst: It's [ Anna Schumacher ] on for Paul today. I have two. Does the rightsizing China suggests you believe the slowdown is structural rather than cyclical? And will it impact your distribution strategy in the country? And secondly, when do you expect to see any benefits of reshoring in the U.S.? And how meaningful could it be? And what are your expectations for U.S. infra next year? Thomas Hasler: Okay. Thank you. Yes, I think on -- we have to differentiate in China between the two segments. I think the residential market expectation also for the next 1 or 2 years are still on a very low level. So this overbuild is not being addressed and it is also of less a priority for the Chinese government. So here, this is a market that will remain challenged probably for a year or 2 longer. And therefore, our, let's say, adjustments are structural in nature by now serving the reduced volumes with our market leader position that we have in that segment and also adapting the portfolio to the key application, the tile setting and waterproofing area, where we have a dominant position and also, let's say, discontinue low-margin sections of that market. The distribution channels are well established. They are the backbone that we serve. Here, actually, we are adapting that distribution channel to increase the spread and be able to further get closer to the market. So here, actually, we are increasing, and this is also helping to get better coverage and build on our market leadership in the segments where we have very good margins and where we also see possibilities to outperform the market. The construction direct business is a business where we believe that this is cyclical in a way that this foreign direct investment has an impact. But at the same time, we have in China also a more maturing, let's say, base infrastructure in place that requires more refurbishment and renovation. We are working in building up this in China with our competencies. So here, I would say the foreign direct investments, not that speculative how fast that will normalize, but we have there also possibilities to offset. And here, we are structurally adjusting also to be more dominant in the refurbishment, which when you look at mature markets like Europe or the U.S., this is the core of our business in construction. It has been relatively small in China so far, but that's a great opportunity for us to offset some other weaknesses. And then on the U.S., I'm always optimistic about the U.S. market. The U.S. market has seen a great start into the year. It has then been challenged with uncertainties and unpredictabilities, which many projects for industrialization or reshoring have been put on hold, ready to go. These projects have been, let's say, engineered to the level where it can start digging and building. And this is now a bit speculative question when will enough clarity be there. But I think with the tariff discussions, things are more and more becoming, let's say, not predictable, but it is easier for corporations to make conclusions. And I expect that we see in '26 on the reshoring, some nice progression as this holdback of projects as we see at the moment, will probably then be overwhelmed by also serving the increased demand. The consumption in the U.S. is not that bad. And I think this is a bit artificially pushed back. And here, I'm more optimistic that this will take place going into'26. Operator: The next question comes from the line of Elodie Rall from JPMorgan. Elodie Rall: I have three, if I may. First of all, on the China restructuring, you're talking about reducing headcount by 1,500. So can you give us a bit of color about how much that this represent as a percentage of China headcount? And also how much does this represent versus the CHF 80 million to CHF 100 million total cost savings? How much is China from there? And how could we think about China growth in H1, therefore, next year, given still the hard comp, I believe. So all the growth will be H2, I believe. Second, you talk about other weak markets driving this midterm growth outlook cut. So maybe you can elaborate on what they are? And lastly, on dividends, I was wondering if you would aim to protect the dividend level given additional cost savings -- costs this year. Thomas Hasler: Okay. Let me start with the China restructuring. The 1,500 employees and the largest portion from a single country comes from China. And it is a substantial reduction. It's a double-digit reduction of the Chinese workforce that is ongoing. This is something we are implementing without any further delay, but this is substantial. But we also have other markets that are -- or segments of markets is maybe the better way to put it because it's not countries or markets. It is actually segments that have softer performance. And here, this will then, in some, come up with the 1,500 employees. You asked about the China impact in H1 next year. it is clear that we will have some spillover from this year into next year as the effects that you have seen in Q3 and that we also expect to be significant in Q4 will, of course, compared to the base of the first half of '25, still be negative, but it will then also turn in the second half of next year and the impact will also, let's say, reduce. And as I mentioned before, Asia Pacific has a strong performance. It is the strongest if we exclude China. So here, we're also confident that Asia Pacific will contribute to the overall group growth next year, having strong engines in Southeast Asia and India. Then the dividend, maybe. Adrian Widmer: Well, maybe on the dividend, obviously, this is then a decision by the Board. This has not been taken yet, but I'm not expecting here that, let's say, the program will have a negative impact here on our dividend policy. Elodie Rall: And sorry, just to come back on China. How much does this represent in terms of the overall CHF 80 million to CHF 100 million cost savings -- cost this year, cost restructuring? Thomas Hasler: This is a bit too early. I mean we are going to really make an effort then in 4 weeks' time to give you more granularity about the program in regards to the investments, but also in regards to the cost split and so on. But it's clear, it is significant. I mean that's -- but it would be premature now to go into the details, but China is a large portion of the structural adjustment. Elodie Rall: And just to finish up on my previous question, what are the other markets that you have identified as weak? Thomas Hasler: Yes. The point is, as I mentioned, markets are soft. Weak is something I attribute to segments, segments where you see that, for instance, in Europe, we had a very good initiative on energy savings initiative coming from the Green Deal. These are fading. These are implications that we are, of course, considering also in our business. But the markets overall are soft. Europe is soft, but we see Eastern Europe is coming back. We also see that the northern part of Europe. So here, when I look into '26, I'm quite optimistic that we will see positive trends. Operator: We now have a question from the line of Ephrem Ravi from Citigroup. Ephrem Ravi: So two questions. Firstly, given the reduction in the overall growth target to Priyal's point, 2.5% was the market. But does this change your view on the market going forward? Or this is strictly a function of the fact that last 2 years, the growth has been less than your 2023 to 2028, 6% to 9%. So you're just resetting for the -- for what's already happened and your medium-term actual view in terms of how the markets are going to grow hasn't really changed. So it's just mainly a mark-to-market of what's already happened in terms of local currency growth so far? And secondly, China, I thought it was about CHF 1.2 billion of sales last year. And if it is down double-digit percentage, probably goes down to closer to CHF 1 billion. So given the low base, do you expect that to kind of be less of a drag going forward? So in theory, you should see faster growth just because of the mix effect of China not being a drag being on the numbers? Thomas Hasler: Yes. I think what is very important in our adjustment of our midterm guidance, this adjustment is related to our assumptions of the market compared to the original assumption. For us, most important is the outperformance of the market wherever they are. And this is in our strategy clearly outlined with the market penetration. We have not changed our ambitions on the outperformance of the competition and the market. And we also haven't changed our approach to be the consolidator in a very fragmented market through our acquisition activities, which I think also this year, we see with 5 transactions and the full pipeline of prospects. I think we are very confident on those elements where we have it in our hands. The markets, we had to reflect and also consider that there is also not a balancing act between the regions. We have a situation where actually softness is a global topic, with a few exceptions like maybe the Middle East, but not so relevant in the global scheme. So here, it is -- this is the driving factor for the adjustment is that we do reduce the market aspect, but do not change our commitment to outperform organically and then also on the acquisition, we will deliver as we originally have indicated. Operator: The next question comes from the line of Martin Flueckiger from Kepler Cheuvreux. Martin Flueckiger: Martin Flueckiger from Kepler Cheuvreux. I've got three questions. And I suppose I'll take one at a time. Firstly, I'd just like to go back to your statements regarding pricing in the 9-month period. If I understood you correctly, you were talking about 0.6% up year-to-date, excluding China. Now I was just wondering what does that mean for the group overall because that's really the number, I guess, that interests most people. That's my first question. I'll come back with the second one. Adrian Widmer: Yes. I mean, this means overall, it's pretty much a flattish picture for the group overall. Martin Flueckiger: Okay. And then secondly, you were talking about -- I think Thomas was talking about data centers being ramping up pretty rapidly in the U.S. Can you -- if I remember correctly, in the U.S., data centers account for about 8% of sales -- construction sales. Has that number changed in the 9-month period? And what kind of growth do you expect from this vertical in 2026? That's my second question. Thomas Hasler: Yes, you are right. This is about the magnitude. And this is the fastest-growing segment in construction and therefore, also logically, the contribution to the overall construction business in the U.S. is increasing, but it's about 8%. And what makes us very optimistic, I mean, these are also projects that are lined up. They are executed. They are actually rushed in execution whenever possible. So the lineup of projects that we have visibility gives us high confidence for the next 18 to 24 months. So this is a business that we like very much as it is also a premium business. It is driven by customers that buy not, let's say, products or systems, they buy peace of mind. They want to have undisrupted operations 24/7, 365. And that's a key element of our unique position in that market. Not only in the U.S., this spreads all over the globe because the owners of the data centers have very similar names at the end, and they don't want to take risks when they go abroad. And therefore, we are also leveraging that very much into Europe and other parts of the world. Martin Flueckiger: Okay. But sorry, just to clarify, when you say it's the fastest-growing segment in the U.S., I guess that's not really surprising. But I was just wondering whether you could tell us what kind of growth Sika is expecting from data centers in the U.S. in 2026. Do you have any broad idea at this point in time? Thomas Hasler: Of course, I have. And I would sum it up this is double-digit growing and this is significant. So it is not 10% or 11%. It's really a business that has drive and where we also put full focus on. This is the time. Martin Flueckiger: Okay. That's helpful. And then finally, my third question, could you talk a little bit about competitive pressures in construction chemicals this year, what you're seeing on the ground and whether it's intensifying or whether it's stable, whether there are any particular regions apart from China where you're seeing competitive pressures easing or worsening? Thomas Hasler: I think here -- I mean, China is a particular case, and I think Adrian indicated, China is, of course, price is super relevant. And as he mentioned, the overall group is at 0.6% without China. With China, we are at neutral. So China is a market in itself. But when I look at the rest of the globe, you can say -- when you have a booming market, pricing is probably less pressures because it's about getting the jobs done. We don't have booming markets everywhere. Therefore, I would say this is a normal situation where price is of high relevance, but nothing exceptional. Nothing -- would you say this is kind of strange. This is a normal behavior of markets when volume are slow, and this comes from small, medium, large. This is nothing in particular, nothing has really changed. But of course, when you have soft markets, then here, the tendency is that you have more pressure on price. But I think our performance in the first 9 months demonstrates we do have pricing power. We have here a leadership position that we can. This is probably for small players, midsized player, a bit less convenient as they are suffering more in soft times. Operator: We now have a question from the line of Cedar Ekblom from Morgan Stanley. Cedar Ekblom: I've got some follow-ups, please. On the growth for 2026, the exit rate at the end of this year is likely to be breakeven, maybe even modestly negative if trends don't really change in your core markets. I'd like to understand how we get to 3% in 2026. I think Elodie touched on this question, but I'd like to hear explicitly if you actually think 3% is the right number for 2026 based on what you see today, appreciating that things can change or if in 2026, we should actually be anchoring around a number below that range within the potential for growth to accelerate into '27 and beyond. So that's the first question. And then the second question, just in terms of the guidance on year-on-year margin improvement into 2026. So this year, I think it's 19.5% to 19.8% without the costs. And then if I've got the moving parts right, you have CHF 80 million of cost saves from the program next year. You have CHF 40 million synergies still to come if I look at the midpoint of what you're guiding to. So that gives me about 100 basis points of margin improvement. But I'd expect your leverage is still going to be negative. I mean, if I look at that chart on Slide 8, I think it is, you have negative operating leverage this year with growth that's probably not dissimilar to what the growth is going to be like next year unless anything doesn't change. So what other levers should we be thinking about into next year that actually allow us to see margins rise? Is there something we should be thinking about on gross margins improving? Is there some other kind of cost initiative that we should think about beyond this CHF 80 million program, just like sort of ordinary course of business efforts that's sort of coming on top of the CHF 80 million sort of special program? So those would be the two questions. Exit rate on growth is clearly below the 3%. How do we get to 3%? And then how do we actually get higher margins year-on-year even withstanding the 100 basis points or so of improvement that comes from this program plus synergies not yet come through from MBCC. Thomas Hasler: Okay. Thank you, Cedar. And I take the first question, and it's probably the most difficult question because it is clear. We don't know what's going on to happen next year. So let me phrase it in a way. This is not a guidance for next year. But if we assume everything equal, China, Europe, North America and so on, your assumptions are correct, that the exit rate at the end of the year will be low modest growth going into next year. We will still have spillovers from China. We will have benefits from trends that are supporting, but the magnitude to the lower end of our midterm or our adjusted midterm guidance is still there. So this is not yet a guidance, but it's also not a promise that every year of the coming 3 years will be within that range. I think the first year is probably the one that has, let's say, the highest challenge, but we also anticipate that there's a good likelihood in '27, '28, where we can substantially also move on that depending on how markets are evolving. So here, I think we have to be clear. This is not a straight line. This is also a line of recovery, which we can drive to some degree ourselves. I think we have a healthy acquisition pipeline. We see there some opportunities. I think also when we look at the pricing power that we have and also expecting that China is going to, let's say, be less impactful. So we have this element as well. But this is not a guarantee at this point of time that this 3% to 6% will be applicable to every of the consecutive years. Over the 3 years, we are very confident. But going into next year, we will assess the situation, of course, we will assess the markets and then we will establish our proper guidance for 2026. Adrian Widmer: And on the, let's say, the elements here of the margin improvements, and it's essentially the ones we're driving. I think there is also an opportunity on, let's say, the material margin, the gross margin to continue to drive. I mean, you have the synergies, as you mentioned, there will be another 30 to 40 basis points. And our improvement, let's say, bucket, which will clearly be driven here by Fast Forward program here, let's say, the sort of the CHF 80 million impact plus the ongoing activities we have, but there is not going to be an additional, let's say, program on top of it, but really sort of driving the different elements to an EBITDA of above 20%. Operator: We now have a question from the line of Arnaud Lehmann from Bank of America. Arnaud Lehmann: Could we talk a little bit about the gross margin? I guess that was quite a solid performance in the third quarter. I think a 5-year [indiscernible] when there was back in Q3 2020. So is this the new normal? Is 55%, you believe the new normal going forward for Sika and into 2026? That's the upper end of your historical range? Or do you think there could be upside to this? My second question is coming back on the Fast Forward plan. Is it something you've been thinking about in the last years or in the last months, let's say, was it something you were going to do anyway? Or is this more of a reactive move on the back of the recent decline in Chinese volumes or maybe a little bit of both? And the third question and last one on -- you hinted in the previous question around M&A activity. Considering the slower trends in underlying markets, do you think you could ramp up M&A activity while remaining within the criteria of your A- credit rating? Adrian Widmer: Let me take here the first one. Thanks, Arnaud, for the question. I think here, of course, the 54% to 55%, that's is for us clearly sort of also a range where we sort of monitor and steer the business. I mean it's never been sort of a very sort of dogmatic, let's say, hard target. And I think there is several elements obviously impacting here material margin, which, again, for us is an important element to steer the business. I think we're obviously here that the pricing element, selling value, driving innovation, also being able for us to position our solutions at the higher value point is important and an ongoing activity. I think on the input cost side, we have more recently seen, I would say, a more favorable picture also driving here clearly initiatives to improve it. So I think there is obviously a bit of upside here on the material margin, although this is influenced by many sort of different elements. So I think it's obviously something we actively steer as one of our here profitability buckets overall. Thomas Hasler: Okay. Then Arnaud, on the Fast Forward question, it's an interesting question because it has both elements. Digitalization is something we have highlighted as a megatrend in our strategy. And we are doing quite well in progressing. We are doing -- we bring digital solution. We just announced this week our Sika Carbon Compass. You can say, yes, we do. We are implementing SAP across the globe. But honestly, the speed of adoption, the speed of implementation is, in my view, not the speed that I would like to see. Digitalization has a different speed than construction industry and the construction industry is our great opportunity to be here the unprecedented leader in digitalization. So this has been, let's say, something I have observed over a longer period of time than 2, 3 months. And I see this as a great opportunity here to make firm steps, invest into the customer value. The customers are challenged in many different ways. Digitalization can ease, let's say, those complexities, can make business easier to execute and focus on core things. I think this is something that we want to drive, and this is the opportunity to integrate it also into this fast forward program. We have done great. I mean, Sika has a unique data pool. It's the leader in the market, the innovation leader, it's the market leader. We have data all over the globe. We are creating a pool that we can exclusively use to do data mining and leveraging those competencies. So for me, I'm a big fan of this digitalization, and I'm happy that Fast Forward gives us now also the possibility to accelerate substantially, let's say, on the tools, on the solutions, but also upskilling our organization that we also here can adopt much faster than in a regular environment. The other part, let's say, the China, the restructuring in general is something that has become in line with our, let's say, guidance adjustment for the midterm. Markets are soft, markets, we cannot change them. But in markets that are soft, this is the best time to make substantial adjustments. This is the time to act because when you act at this time out of a position of strength, you can then -- when backlogs are worked off, when markets are turning, you are in the strongest position to benefit from a boom in construction that will come, that has to come. The underlying demand is there. It's not served. So it is also a point that came to our realization over the course of this year and then more pronounced in the second half, which ultimately results in this Fast Forward program with the two elements that are super relevant, short term improvements, but of course, then also more midterm, let's say, benefits for the customer, driving our growth and utilizing the unique, let's say, digital footprint that we can have and that we want to have going forward. This is something I consider these digital capabilities, a key competitive advantage that we are going to achieve. Here, size matters. The globalization matters. We have a global input. We have it from Japan, China, India, Middle East, Europe, North and South America. Now all these bundled together gives us huge opportunities, which I want to tackle with our Fast Forward in an accelerated way. Arnaud Lehmann: And on M&A? Thomas Hasler: Sorry, M&A. I think here, I come back to the prior question. I mentioned smaller and midsized companies are more challenged when it comes to pricing power in soft markets. And we see here a clear, let's say, pain level reach for small and midsized player that they are considering selling their companies, even so it is probably not the best time to get the best price, but they hang in there and they consider selling much more now than maybe a year or 2 ago. And yes, we do have here also opportunities to, let's say, to acquire for attractive multiples business that maybe a year or 2 ago would have rejected to entertain. And I do think with our strong cash generation that we also have the ammunition to serve those increased possibilities. But it's also -- I think as always, every challenge has its opportunity. The opportunities on M&A are excellent, and we have the power and the will also to take advantage. Operator: The next question comes from the line of Ghosh, Pujarini from Bernstein. Pujarini Ghosh: So I have a few. So my first question is on the EBITDA margin guidance for this year. So without the restructuring costs, you have not cut your margin guidance. And in 9 months, you've done 19.2%. So to get to the bottom end of the range without the restructuring, you would need to do something like 20.5% in Q4. And looking at the historical trends, we've never seen such a big jump between Q3 and Q4. So could you explain why this year might be different and the various levers that you could pull in Q4 to get close to your target? And my second question is just a housekeeping. So what is your current guidance on the tax rate for the full year and for future years? And finally, coming back to the China restructuring plan. So could -- so of the CHF 150 million to CHF 200 million cost savings, could you give the split between how much of this would come from the restructuring in China and how much from the investment program that you're going to do? Adrian Widmer: Thanks, Pujarini. I'll take here the question one by one. On the 2025 EBITDA guidance here, I think a couple of points. On the one hand, you're right, the 19.2% here in the first 9 months. As I mentioned here before, we have about CHF 18 million of here one-off costs already included in Q3. So that's one element that basically puts here, let's say, the anchor at 19.4% and also in terms of, let's say, the one-offs we're guiding for the CHF 80 million to CHF 100 million, not everything is EBITDA relevant. We have about 25% to 30%, which is more sort of write-downs and impairments overall, which obviously then for Q4, yes, means, of course, a solid profitability quarter to, let's say, get at least here to the lower range here of the 19.5% to 19.8%. On the tax rate, here we had in previous years as reported, also one or the other positive impact, one-off effect. I'm expecting here for this year sort of around 23% in terms of the overall tax rate, which is also the level here of the next years to be expected roughly. And thirdly, on the question here of, let's say, sort of the China impact and the breakdown, again, I would like to defer here the answer and more granularity then to our November event where we will provide more sort of granularity on the various aspects of the program. Operator: We now have a question from the line of Patrick Rafaisz from UBS. Patrick Rafaisz: Two questions. One is on your cash conversion targets. You confirmed the 10% plus for this year. I was just wondering with the extra spending for the Fast Forward program, both on the cost and the CapEx, would you already fully commit to a 10% plus cash conversion also for '26? That's the first question. Maybe related to that, can you also talk a bit about the phasing of these investments? And then the second question would be on China and the portfolio adaptation you talked about. Can you add some color around the share within the China business that we are talking about that you are exiting due to the maybe market conditions or too low profitability? And also how long that will take to implement? Adrian Widmer: Good. Well, let's -- thanks, Patrick. I'll take the first two on the cash conversion, yes, clearly also confirming for '26 here, the targets to remain in place in terms of the cash conversion of at least 10% of net sales. Obviously, here, there is an additional element of CapEx, but that will be within that threshold. Second one on the phasing, again, I'll try again to convince you that we will provide more granularity then on the various sort of elements of the program, also the impact and the phasing then at the end of November. Thomas Hasler: Good. And then Patrick, on the China business. Our China distribution business is built on exclusive distributors all over China. And with the start of the softness of the market, our China team has tried to introduce, let's say, lower-margin trading products to support our distributors so that they can take a bigger share of wallet. And this came, of course, at the backside that the top line was then still showing some progression, but dilutive on material and profit margin. And this came then to a level where we had to say this needs to be reversed. So this has been a rather short-term element that has been introduced, and it is also something that we can flush out relatively soon. But it will be visible this year and next year as we -- some part is still in this year from the first half, and it will be out in the second half next year. So we will have some comps there that are maybe not so clear to read, but this is rather something that has been used tactically, but had to be revised. And that's what I mean with the core range. The core range, which is our tile shaping range and waterproofing range, which we produce ourselves and not tolling products that are adjacencies. Operator: The next question comes from the line of Alessandro Foletti from Octavian. Alessandro Foletti: Just on the automotive business, maybe we don't speak much about it. Obviously, it has been growing strongly in China, but how is it doing in the other regions, particularly also, yes, Europe and the U.S., I would guess. Thomas Hasler: Yes. I take that lately. I think, yes, we haven't talked much. But as you have seen, our growth in the industrial area is at organically 0.8%. It is doing better than our construction organically. It has here support from China, but also our business in Europe and in North America is holding strong despite a declining volume situation. And also, especially in Europe, we have still, let's say, a bigger, let's say, variation of models in the market, which means we are carrying more complexity serving, let's say, our customers. And despite that, we can still have above the build rate top line and especially also maintain a very healthy bottom line in that business. It is having a different direction. I think in Europe, we see also going forward, probably a comeback of the incentives for the electrification. This will be very positive. Germany is considering this for the years to come. So I'm on the automotive side in Europe, with the conversion, we will have more contribution. We have more opportunities. So I think we will see a positive trend in Europe. And in North America, we have there a bit the holdback with the tariffs. The automotive business in North America is highly, let's say, linked between the three countries with the supply chain. We serve the market out of Mexico and of the U.S. But also here, there's a different demand. The electrification is less of a relevance. It is truck and SUVs, pickups are relevant. These are for us higher contribution vehicles anyhow. But we also expect that when the new North American trade agreement is finalized, which hopefully takes place by the beginning of next year, then there will be also clarity and investments in automotive so that they can come back with competitive offerings to the end market, which at the moment is hesitant to buy in North America. I'm optimistic. I mean the business also in Brazil is doing very well. The business in Southeast Asia is doing very well. They are, of course, of smaller volumes than the three main markets. But I think we will have year-over-year, nice contribution from the automotive or industrial side. Alessandro Foletti: Right. But I'm not sure I get it right. It seems from your talk that maybe both in Europe and the U.S. is maybe still slight negative or flattish? Thomas Hasler: Yes. Yes. I mean the build rates are minus 3%, minus 4%, the car build rates. And we are flattish in Europe and slightly below in North America. Operator: We now have a question from the line of Yassine Touahri from On Field Investment Research. Yassine Touahri: Just two questions on my side. We've seen oil prices coming off over the past couple of months. Does it mean that we should see limited raw material inflation in -- at the beginning of 2026? Or -- and also a relatively muted pricing environment? Should we think of the coming quarter being close to what we've seen with relatively prices up a little bit and costs broadly in line with this pricing? And then my second question would be on the competitive landscape. Do you see -- I think some of the largest building material company in China, CNBM and [ Conch ] have started to invest in mortar, in construction chemicals. Do you see competition in China being tougher today than it was 5 years ago? And another one on this -- on the competitive landscape. I think Kingspan in the U.S. is planning to open a PVC roofing membrane next year. Do you think it could have an impact on your activity? Or do you believe they will target different segments? Thomas Hasler: Okay. I think the first question was on oil prices, right? Yassine Touahri: Yes. And whether it means that we should continue to -- we could continue to have an environment with limited price increase and limited cost inflation. Thomas Hasler: Yes. I mean we -- this is quite volatile. It is low at the moment. This is, in general, for us a positive. But I would say it's limited. I mean, this is also what we have talked about this year. There is -- some commodities have some softening, but others are still increasing cement, for instance. So I think on the input side, I think we are having here as far as we can predict, we have a relatively stable environment. So that is giving us also the possibility to make our price adjustments in line with our margin expectation. So I'm not concerned. But of course, things can change if one source comes unavailable and prices could rapidly move upwards. But at the moment, it's not a major concern. The -- and the second question was on the competitive landscape in China. I mean, here, you have to see that we are the only remaining sizable international construction chemical player in China for years. This is not just yesterday or the day before. This is our position in China. We have an exclusive position in the direct construction market. This is -- these are the higher-end construction. I talked about the multinationals, but I also talk about, let's say, sensitive infrastructures, nuclear power plants and others, airports and so on. So we have been able -- I mean, there are thousands of players in China and super aggressive in all aspects, but we have been able to hold strong in this market. And I believe our possibility to benefit through our, let's say, global excellence in a market that is maturing in a market that is also demanding higher building codes. The government is pushing for higher building codes as they see the adversal effect of cheap, let's say, infrastructure built 10 or 20 years ago. And we have a reputation in China that is outstanding, and we can also enlarge our addressable market in China through this trend. So this is on the direct side. On the indirect side, I talked about our distribution. I talked -- but you have to see that this is an application where our company has a market-leading position in China. Our brand, our international brand stands for reliable products to the homeowners. Homeowners, they buy, let's say, expensive tiles from Italy and homeowners do care that they are installed with a brand of trust. That's our unique -- of course, our products are up to the highest standards. But it is also our network that involves not only the applicator, but also the owner bring across this value. And this is very difficult for, let's say, the mainstream Chinese competitors to attack us. They attack themselves. So it is Oriental Yuhong and Nippon Paints that are crossing each other's way left and right and through brutal price war try to steal each other's market. Our market is much more protected through our unique positioning with our brand in China. And then... Yassine Touahri: Kingspan, yes. Thomas Hasler: I think -- I don't know if I should comment. I mean, I don't see it as a threat, not at all. I mean the North American roofing market is huge, and it has sizable players. I mean, sizable. And we are active in a very, let's say, clear designated area with large commercial buildings, where we have a reputation, where we have specifications, where we have applicators, I feel well protected. I have no fear. But if you go in such a market where there are the big boys playing, I would say I have respect for the courage to go into that market, but that's not me to comment and it's not me to make assessments there. It is an attractive market. I agree. It is for us, a fantastic market. But I think we have here also a unique position with our focus on the high end on durable and sustainable solutions with owners, with the focus on clear commercial large-scale roofs. Dominik Slappnig: Thank you very much. I think this brings us to the end of our call. We take this opportunity as well to highlight the date of our Fast Forward Investor and Media Conference on November 27. The conference will be held in Zurich, Tüffenwies, and it will start at 10 a.m. CET. So for all these who would like to fly in and out the same day, I think this will be possible. With this, we thank you for listening to our call and for your interest in Sika. We wish you all the best. Thomas Hasler: Thank you. Adrian Widmer: Thank you very much. Bye-bye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: 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.
Coinbase (COIN) saw up to a 10% rally on Friday's trading session thanks to a bounce back in Bitcoin and a price target raise from JPMorgan. Rick Ducat notes the stock's close correlation to Bitcoin prices and outperformance compared to the SPX as stock highlights.
Operator: Good day, everyone, and thank you for joining us for today's ITW Third Quarter 2025 Earnings Webcast. [Operator Instructions] Also, please be aware that today's session is being recorded. It is now my pleasure to turn the floor over to our host, Erin Linnihan, Vice President of Investor Relations. Welcome. Erin Linnihan: Thank you, Jim. Good morning, and welcome to ITW's Third Quarter 2025 Conference Call. Today, I'm joined by our President and CEO, I'm joined by our President and CEO, Chris O'Herlihy, and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's third quarter financial results and provide an update on our outlook for full year 2025. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2024 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy. Chris? Christopher O'Herlihy: Thank you, Erin, and good morning, everyone. As detailed in our press release this morning, the ITW team continues to perform at a high level, successfully outpacing underlying end market demand and delivering solid operational and financial execution within a stable yet still challenging demand environment. For the third quarter, revenue increased 3%, excluding a 1% reduction related to our ongoing strategic product line simplification efforts. Organic growth was 1%, a solid performance relative to end markets that we estimate declined low single digits and a 1 percentage point improvement from our second quarter growth rate. Favorable foreign currency translation contributed 2% to revenue. Focusing on the bottom line, we achieved GAAP EPS of $2.81, grew operating income by 6% to a record $1.1 billion and significantly improved our operating margin by 90 basis points to 27.4%. We maintained excellent execution in controlling the controllables as enterprise initiatives contributed 140 basis points and effective pricing and supply chain actions more than covered tariff costs and positively impacted both EPS and margins in the quarter. Consistent with our long-term commitment to increasing annual cash returns to shareholders, on August 1, we announced our 62nd consecutive dividend increase, raising our dividend by 7%. Additionally, year-to-date, we have repurchased more than $1.1 billion of our outstanding shares. Furthermore, I'm encouraged by the significant progress on our next phase strategic growth priorities. We remain laser-focused on making above-market organic growth, powered by customer-backed innovation and defining ITW strength. The strategy is working, and we remain firmly on track to deliver on our 2030 performance goals, which include customer-backed innovation yield of 3% plus. As we stated before, ITW is built to outperform in challenging environments. As we look ahead to the balance of the year, we are narrowing our EPS guidance range, confident in our ability to continue leveraging the fundamental strength of the ITW business model, the inherent resilience of our diversified portfolio and the high-quality execution demonstrated every day by our colleagues worldwide. I will now turn the call over to Michael to discuss our third quarter performance and full year 2025 outlook in more detail. Michael? Michael Larsen: Thank you, Chris, and good morning, everyone. Leveraging the strength of the ITW business model and high-quality business portfolio, the ITW team delivered solid operational execution and financial performance in Q3. Starting with the top line, total revenue increased by more than 2%, driven in part by 1% organic growth, an improvement of 1 percentage point from Q2. Geographically, while North America organic revenue was flat and Europe was down 1%, Asia Pacific was a standout performer with a 7% increase, which included 10% growth in China. Consistent with ITW's Do What We Say execution, we continue to demonstrate strong performance on all controllable factors. Our enterprise initiatives were particularly effective this quarter, contributing 140 basis points to record operating margin of 27.4%, which expanded by 90 basis points year-over-year. Furthermore, our pricing and supply chain actions more than covered tariff costs and positively impacted both EPS and margin in Q3. Free cash flow grew 15% to more than $900 million with a conversion rate of 110%. GAAP EPS was $2.81 with an effective tax rate in the quarter of 21.8%. As detailed in the press release, the rate was driven by a benefit related to the filing of the 2024 U.S. tax return, partially offset by the settlement of a foreign tax audit. In summary, in what continues to be a pretty challenging demand environment, ITW delivered a strong combination of above-market growth with a revenue increase of 2% and solid operational execution, resulting in consistent improvement across all key performance metrics as evidenced by incremental margins of 65%, operating margins of more than 27% and GAAP EPS of $2.81, an increase of 6%, excluding a prior year divestiture gain. Turning to Slide 4 for a closer look at our sequential performance year-to-date on some key financial metrics. As you can see, ITW's organic growth rate, operating income, operating margins and GAAP EPS have all continued to improve in what has remained a mixed demand environment. Turning to our segment results and beginning with automotive OEM, which led the way on both organic growth and margin improvement this quarter. Revenue was up 7% and organic growth was up 5% with growth in all 3 key regions. Strategic PLS reduced revenue by over 1%. Regionally, North America grew 3%, Europe was up 2% and China was up 10%. The team in China continues to gain market share in the rapidly expanding EV market as customer back innovation efforts drive higher content per vehicle. In our full year guidance, we have incorporated the most recent automotive build forecasts, which are projecting a modest slowdown in the fourth quarter. For the full year, we continue to project that the automotive OEM segment will outperform relevant industry builds by 200 to 300 basis points as we consistently grow our content per vehicle. On the bottom line, strong performance again this quarter with operating margin improving 240 basis points to 21.8%, and we're well positioned to achieve our goal from Investor Day of low to mid-20s operating margin by 2026. Turning to Food Equipment on Slide 5. Revenue increased 3% with 1% organic growth. While equipment sales were down 1%, our service business grew by 3%. Regionally, North America grew by 2%, driven by 1% growth in equipment and 4% growth in service. Demand remained solid on the institutional side. International, however, was down 1%. Operating margins improved 80 basis points to 29.2%. For Test & Measurement and Electronics, revenue was flat this quarter as organic revenue saw a 1% decline. The demand for capital equipment in our Test and Measurement businesses remained choppy as revenues declined 1%. In addition, Electronics declined 2% as demand slowed in semiconductor-related markets. On a positive note, operating margin improved 260 basis points sequentially from Q2 to 25.4%. Excluding 50 basis points of restructuring impact in Q3, margins were 25.9% and both operating margins and revenues are projected to improve meaningfully in the fourth quarter. Moving to Slide 6. Welding was a bright spot, delivering 3% organic growth with a contribution of more than 3% from customer-back innovation. Equipment sales increased 6%, while consumables were down 2%. Industrial sales increased 3% in the quarter as North America was up 3% and international sales grew 4% with China up 13%. Operating margin of 32.6% was up 30 basis points as the Welding segment continued to demonstrate strong margin and profitability performance. In Polymers & Fluids, revenues declined 2%. Organic revenue declined 3%, which included a percentage point of headwind from PLS. Polymers declined 5% against a difficult comparison in the year ago quarter of plus 10%, while Fluids was flat in the quarter. The more consumer-oriented automotive aftermarket business was down 3%. But although the top line declined, the segment expanded margin by 60 basis points to 28.5%, supported by a strong contribution from enterprise initiatives. Moving on to Construction Products on Slide 7. Revenues were down only 1% as organic revenue declined 2% in the quarter, significantly better than last quarter's 7% organic decline. Revenue was also impacted by a 1% reduction from PLS. Regionally, revenue in North America declined 1%, Europe was down 3%, and Australia and New Zealand decreased 4%. Despite market headwinds, the segment improved operating margin by 140 basis points to 31.6%. For Specialty Products, revenue increased 3% with organic revenue up 2%. Revenue included a percentage point of headwind from PLS. By region, revenue in North America declined 1% against a difficult comparison in the year ago quarter of plus 8%, while international was up 7%, driven by consistent strength in our packaging and aerospace equipment businesses. Operating margin improved 120 basis points to 32.3%, supported by a strong contribution from enterprise initiatives. With that, let's move to Slide 8 for an update on our full year 2025 guidance. Starting with the top line, we remain well positioned to outperform our end markets in Q4, and we continue to project organic growth of 0% to 2% for the full year. Per our usual process, our guidance factors in current demand levels, the incremental pricing actions related to tariffs, the most recent auto build projections and typical seasonality. Total revenue is projected to be up 1% to 3%, reflecting current foreign exchange rates. On the bottom line, we're highly confident that the ITW team will continue to execute at a high level operationally on all the profitability drivers within our control. This includes our enterprise initiatives, which we now expect will contribute 125 basis points to full year operating margins, independent of volume. Additionally, we expect that tariff-related pricing and supply chain actions will more than offset tariff costs and favorably impact both EPS and margins. Our operating margin guidance of 26% to 27% remains unchanged. After raising GAAP EPS guidance by $0.10 last quarter, we are narrowing the range of our guidance to a new range of $10.40 to $10.50. Our EPS guidance range includes the benefit of a lower projected tax rate of approximately 23% for the full year and factors in that the top line is trending towards the lower end of our revenue guidance ranges. With those 2 elements effectively offsetting each other, we remain firmly on track to deliver on our EPS guidance, including the $10.45 midpoint, which, as a reminder, is $0.10 higher than our initial guidance midpoint in February. To wrap up, we remain highly confident that the inherent strength and resilience of the ITW business model, combined with our high-quality diversified portfolio and most importantly, our dedicated colleagues around the world, all put us in a strong position to effectively manage our way through a challenging macro environment. However, the demand picture evolves from here, we remain focused on delivering differentiated financial performance and steadfastly pursuing our long-term enterprise strategy, which is squarely centered around making above-market organic growth, a defining strength for ITW. With that, Erin, I'll turn it back to you. Erin Linnihan: Thank you, Michael. Jim, will you please open the call for Q&A? Operator: I'd be happy to. Thank you. [Operator Instructions] We'll hear first from the line of Jeff Sprague at Vertical Partners. Jeffrey Sprague: Maybe just 2 for me, hit 2 different businesses, if I could. First, just on construction. Clearly, you've been working the playbook. I mean one of the things that just jumps off the page to me is this is the 11th quarter in a row of organic revenue declines and the margins are still going up in the business. Maybe just anything in particular beyond kind of the normal 80/20 blocking and tackling that's behind that mix changes or other things? And just your confidence to be able to move those margins up further if and when the revenues do ever inflect positively. Christopher O'Herlihy: Sure. Yes. So Jeff, I think the margins in construction are squarely related to 2 things. Number one, I think the quality of the construction portfolio. As we often say, we tend to operate in businesses which -- there's a cyclicality and above that long term are fundamentally very healthy. And our strategy is always to try and operate in the most attractive parts of those markets. And that's what you're seeing in construction. We're in the most attractive parts of the market. We are executing very well from a business model perspective against those particular parts of the market. And that's ultimately what drives the margins. It's ultimately also what will drive the high-quality organic growth going forward. So very confident that not only will we grow in construction when markets recover, but grow at very high quality. Jeffrey Sprague: Great. And then maybe you could elaborate a little bit on, it sounds like you've got a fair amount of visibility on Test & Measurement improving in the fourth quarter. Maybe you could speak to that, anything in particular that you're seeing orders, end markets -- I'll leave it there, let you answer. Christopher O'Herlihy: Yes. So I think it's -- Test & Measurement had a normal cyclical improvement in Q4, which we expect to achieve again this year. Q3 was a little bit mixed, obviously. We saw continued slowdown on the CapEx side. Really, we would believe on the basis of the tariff uncertainty in Q2, ultimately having a spillover effect in terms of CapEx demand into Q3. So we expect that to improve a little bit. And then the other thing we saw in Q3, which should improve is we saw a little bit of a deceleration in semi, which only represents about 15% of the segment, but where we saw some real green shoots in Q2, we saw somewhat of a deceleration, still growth, but a deceleration in Q3, and we expect that to get a little better. Operator: Our next question will come from Andy Kaplowitz at Citi. Andrew Kaplowitz: Chris or Michael, you obviously didn't change your organic revenue growth guide for the year. I think last quarter, you talked about embedded in it was 2% to 3% organic growth for the second half, which means you still need a big uptick in Q4. I don't think comps get a lot easier for you in Q4 versus Q3. So it's just more pricing that's laddering in Q4? Because I think you just said, right, you're run rating as usual. Any other businesses get better in Q4 versus Q3? Michael Larsen: Well, I think what we are -- to give you a little bit of color on Q4, and you have to factor in what we said in the prepared remarks that we are trending towards the lower end of the organic growth guidance for the full year. We typically see a sequential improvement from Q3 to Q4 in that plus a couple of points of growth, primarily driven by the Test & Measurement business as Chris just mentioned, and offset by the typical seasonal decline that we're seeing in our construction business. So Q3 to Q4 revenue is up maybe 1 point or so. On the margin side, what we also typically see from Q3 to Q4 is a modest decline sequentially of about 50 basis points or so. So still in that 27% range and with a nice improvement on a year-over-year basis. And then the kind of the key driver of Q4 is then a more normal tax rate. So that's about a $0.10 headwind relative to Q3. So Q4 looks a lot like Q3 with the normal tax rate, and that's how you get to kind of the implied midpoint of our guidance here. Maybe just a comment or 2 on Q3. I think it was a little bit of an unusual quarter in the sense that we came into Q3 after a strong June. We had a strong July, perhaps related to some of the tariff announcement and related pricing actions. And then we saw a little bit of a slowdown in August -- actually pretty pronounced in August and then a more normal September, and really a mixed bag in the quarter with a stronger automotive performance, certainly, but also some of the green shoots we talked about last quarter in the order rates in places like Test & Measurement, and semi didn't really materialize for us. So I think at the end of the day, though, we're able to offset some of this choppiness, this macro softness with strong margin performance and as we typically do, we found a way to deliver a pretty solid quarter from a margin, earnings and free cash flow standpoint. Andrew Kaplowitz: Michael, helpful color. And speaking of that, I mean, you're well up already in your range in auto in terms of margin, almost 22% in the quarter. And auto markets, as you know, overall don't feel that great yet. So can you actually -- I know you did 5% organic growth, but can you actually push to the higher end of your low to mid-20s over the next couple of years? How should we think about that given you're kind of already there? Michael Larsen: Yes. I think we're pretty confident in the margin, the target we laid out kind of low to mid-20s by next year. I think there's still a lot of opportunity here from an enterprise initiative standpoint, primarily. You also see a pretty healthy dose of product line simplification again this quarter, which that's all short-term headwind to the top line, but really positions the remainder of the portfolio for growth and higher margin performance as we exit some of the slower growth and less profitable typically product lines. So the market builds will be what they are next -- in Q4, they will be a little bit lower probably than what we saw in Q3. So we won't have the same amount of operating leverage, but we'll still outperform as we have historically in the builds. And next year, you should expect kind of our typical 2 to 3 points above build. Whatever that build number is, obviously, as we sit here today, we don't know that. So... Christopher O'Herlihy: And Andy, just to add to that, the other big driver of margin improvement in auto is customer-backed innovation. We're getting a real nice healthy contribution from that this year. We expect that to continue and indeed accelerate over the next couple of years. And ITW innovation always comes at higher margin. Operator: Next, we'll hear from Jamie Cook at Truist Securities. Jamie Cook: The guidance relative to earlier in the year, I think earlier in the year, you assumed FX headwind of $0.30 that went positive or neutral last quarter. What's embedded in the guide? And you also have the benefits now from the lower tax rate. So I guess, Michael, I'm just trying to understand the puts and takes because it sounds like we have at least $0.40 of tailwind. You're lowering your organic growth to the -- sorry, your sales to the lower end, but it still seems like, I don't know, the guidance should be better, I guess, than what it is just based on those tailwinds. So if you can help me understand that, I guess. Michael Larsen: Yes. I think the short answer is that just given the choppy demand environment, we're maybe taking a more measured, a more cautious approach to our guidance here as we go into Q4. We're off to a solid start in October, but things can change quickly as we saw both -- as an example, the auto builds, the swing in auto builds, semi not really panning out. So I think we're just being a little bit more measured in our guidance here with 1 quarter to go. And as always, we have a path to do a little bit better than what we're laying out for you. You cut off initially, but I think you're talking about FX, what's embedded here is the current rates. As of today, and obviously, they can change a little bit, they are a little bit of a headwind -- tailwind now relative to a headwind earlier in the year, but we're talking pennies. So I think in Q3, FX was favorable $0.04. But then other things like restructuring were unfavorable by a couple of pennies. So there's some puts and takes there. And we've also embedded, obviously, as we said in the prepared remarks, the lower full year tax rate of 23%. And we expect a more typical 24% to 25% tax rate here for the fourth quarter. So hopefully, that's helpful. Operator: [Operator Instructions] We'll hear from Tami Zakaria at JPMorgan. Tami Zakaria: A medium- to long-term question for you. Given all the policy changes to incentivize bringing auto production back into the U.S., do you perceive this to be an opportunity down the line given your market share with the big 3? Or would onshoring not be a net gain because you already supply parts to manufacturing overseas? So how to think about that onshoring opportunity in auto? Christopher O'Herlihy: Yes. So Tami, I would say that largely, as we've said before, we're a producer we sell company. And so we've already -- we're positioned to supply our auto customers anywhere in the world wherever they are based on our current manufacturing setup. And that will continue. So business coming back to the U.S. would just mean more production for our U.S. factories, but they're already here. So we don't see -- I mean, there wouldn't be a huge net benefit that we can see based on the fact that we're a producer we sell a company. Tami Zakaria: Understood. And one question on PLS. I think it's about a 1% impact. Should we expect this to continue at that 1% range for the next few years? Or is this year more of a heavy lifting, so it might fade as we go into next year and beyond? Christopher O'Herlihy: Yes. So we haven't the planning process completed yet, Tami. But basically, what I would say is that for us, PLS is a bottom-up activity. It's driven by our businesses. It's very much an essential part of the ongoing kind of strategic review that we do and a critical part of 80/20 in our divisions. And obviously, deep into the company, we have this very tried and trusted methodology, requires a lot of discipline, but there's a lot of benefit that our divisions get from this. But the point is that there's -- it's bottom up. We don't have the numbers for 2026 yet. But whatever it is, it's something that makes sense in the context of -- it makes sense from a long-term growth perspective, in terms of it provides strategic clarity around where we want to focus, effective resource deployment on the back of that. And also from a margin improvement standpoint, obviously, there's some cost savings, which are a meaningful component of enterprise initiatives. A lot of these projects have a payback of less than a year. So we very much see PLS, whether it's 50 bps or 100 bps as an ongoing value-creating activity in our divisions. And like I say, we've got a lot of positive experience and expertise on this. But it's going to be a bottom-up number basically. Operator: We'll hear next from the line of Joe Ritchie at Goldman Sachs. Joseph Ritchie: I know that you'll typically like guide the trends, and -- but I guess as we're kind of thinking about 2026 and a potential initial framework with the moving pieces that you know today. Any color that you can kind of give us on how you're thinking about it, at least like this early on and what 2026 could look like? Michael Larsen: Yes. I mean I think as you say, Joe, we don't really give guidance until we've gone through our bottom-up planning process here and talk to the segments about their plans for 2026, and that doesn't happen until in November here. To give you a little bit of a way to think about this, maybe I think you should expect that per our usual process, our top line guidance will be based on run rates exiting Q4. We'd expect some continued progress on our strategic initiatives, including the contribution from customer-backed innovation. We'd expect some market share gains and the combination of those things leading to above-market organic growth again in 2026. And then the big question is really what will the market give us. On the things within our control, we'd expect to see continued margin improvement and a healthy contribution from enterprise initiatives. You should expect to see some strong incremental margins that are probably above our historical average. And I think those are kind of the big items. Then there'll be some puts and takes around price and FX and lower share count that may skew favorably. I'd expect a similar tax rate to this year. And then as usual, like I said, we'll update you in February, which -- and will include our usual kind of segment detail to help everybody kind of think through what the year might look like. Joseph Ritchie: Okay. Great. That's helpful, Michael. And then I guess just on capital deployment. I know you guys are doing the $1.5 billion buyback. It seems like you've got probably some room on your balance sheet if you wanted to lever up a little further and still stay investment grade. Like how are you guys thinking about the right leverage for you going forward? And put that in the context of potential M&A opportunities and what you guys are looking at across your different businesses? Michael Larsen: Yes. I mean I think we're sitting here at about 2x EBITDA leverage, which is right in line with what our long-term target has been. The buyback specifically is really the allocation of the surplus capital that we generate, which is a big number for ITW, about $1.5 billion, and that's what is being allocated to the share buyback program and leads to a reduction in the overall share count of about 2%. But all of that only happens after we have invested in these highly profitable core businesses for both organic growth and productivity. We're fortunate that only consumes 20% to 25% of our operating cash flow. The second priority here is an attractive dividend that grows in line with earnings over time. Chris talked about this being our 62nd year of consecutive dividend increases of 7%. And then when all said and done, we still have a lot of capacity on the balance sheet for any type of M&A opportunities. As you may know, we have the highest credit rating in the industrial space. We have arguably the strongest balance sheet. And so there's a lot of room here if the right opportunities were to present themselves. Operator: Next question today comes from Stephen Volkmann. Stephen Volkmann: So I'm curious whatever commentary you might wish to provide around what you're seeing on sort of price cost and obviously, it didn't impact you in the quarter. But are you seeing suppliers raising prices and you're kind of able to offset that however you choose? Or do you think maybe they're holding back and that's still to come? And then in that vein, just how do you ascertain that you will cover whatever costs? Will it be dollar for dollar or also on margin? Michael Larsen: Yes. I think, Stephen, the biggest driver of cost increases this year has been the tariff-related cost increases. And I think we've responded with both pricing actions that we've talked about and also supply chain actions. As you know, we are largely a produce where we sell company. I think the 93% or so of the company is produced where we sell. We had a little bit of exposure that we talked about earlier in the year. We've worked hard to mitigate that and put ourselves in a really good position. We've been able to, through those actions, offset the impact from tariffs this year. And in Q3, as we said in our prepared remarks, price/cost was positive both from a dollar-for-dollar earnings standpoint and also from a margin standpoint. So I feel like at this point, we're kind of back to a more normal environment. At this point, from a price/cost standpoint, we are not completely caught up yet, but we've got a quarter to go. And then for next year, who knows what the tariff environment might be for next year. But I think we feel very confident given our track record here in terms of being able to manage whatever those cost increases, whether they are typical inflationary increases or tariff increases might be as we head into next year. Stephen Volkmann: Super. Okay. And then just pivoting, China was obviously really good for you guys this quarter. I'm wondering if you might be able to drill in there a little bit and give us a sense of what's driving that? And I don't know, maybe some of the CBI initiatives or something. Michael Larsen: Yes. Do you want to go ahead, Chris? Christopher O'Herlihy: Yes. So basically, Stephen, what's driving China right now is auto in China, in particular, I think our penetration on EV in China, particularly with Chinese OEMs. We continue to make great progress on CBI and market penetration in China, particularly with Chinese OEMs. We continue to grow content per vehicle. As you know, China represents mid-60s in terms of percentage of worldwide EV builds. And we're growing nicely there, particularly with a strong position with Chinese OEMs. In addition, you mentioned CBI, I would say that China, even though it represents about 8% of our revenues, we certainly get a disproportionate amount of our patent activity from China in terms of the level of innovation activity that's going on. So yes, innovation in China, particularly in automotive is what's driving our progress there. And we're basically penetrating at a level well above the market. Michael Larsen: Yes. And maybe to put some quantification around it, if I just look at kind of year-to-date in China, as Chris said, the big driver is our automotive business, up 15%. That's our largest business in China, but also Test & Measurement, Electronics up in the mid-teens, Polymers & Fluids up 10%, welding up 20% plus. I mean, I think the fueled by CBI, certainly, in most cases here, I think the team is doing a really nice job overall, up 12% in China on a year-to-date basis. And pretty confident that the things, again, that are within our own control will continue to be -- have a positive contribution to the top and bottom line in Q4 and headed into next year. Operator: Next, we'll hear from the line of Julian Mitchell at Barclays. Julian Mitchell: Maybe just wanted to start with the operating margins. So I think you mentioned, Michael, that next year, you should be above the historical incremental. And I guess you have that sort of placeholder of 35% to 40% dating back to the Investor Day. So it's presumably in reference to that. But just wanted to understand as you look at next year on the margin side of things, is there a big kind of payback from the restructuring efforts that happened this year coming in? Price/cost maybe for this year as a whole is margin neutral and then that flips positive next year, maybe just any sort of fleshing out of the thoughts on some of those margin moving parts, please? Michael Larsen: Yes. I think, Julian, the biggest driver of margin performance for, I'm going to say, the last decade or so has been the enterprise initiatives. And we've consistently put up 100 basis points of margin improvement from our strategic sourcing efforts and from our 80/20 front-to-back efforts. And so we would expect that to continue to be the case next year. Whether that's exactly 100 basis points or not, we won't know until we've rolled out the plans, but that will far outweigh any contributions from price cost, for example. And then the other big element and which is a function of really what end market demand will do is if you look just at our performance year-to-date or in the third quarter, our incremental margins are significantly above kind of our historical 35% to 40%, including 65% in the third quarter. And you look at the margin performance this quarter in the automotive OEM business, where 5% organic growth translates into income growth of 20% plus. So it's just an illustration of we don't need a lot of growth to put up some really differentiated performance from a margin and profitability standpoint. So I can't tell you as we sit here today what the incrementals might be for next year on the organic growth. But I would tell you, I believe that they -- it will probably be above the historical range that we just referenced. Julian Mitchell: That's helpful. And then just maybe one for Chris. Looking at Slide 8 and that CBI contribution of sort of over 2 points to sales and the sort of partial offset from PLS headwinds that you discussed earlier on this call somewhat. And I realize this isn't how you look at it, and it's sort of really bottom-up driven. But if we're thinking about that spread of, say, CBI versus PLS enterprise-wide, is the assumption that, that should be more and more of a net positive as those CBI efforts that you talked about at the Investor Day a couple of years ago increasingly get traction? Just trying to understand how to think about the delta between those 2, understanding that they are independent bottom-up process. Christopher O'Herlihy: Yes. I'm not sure there's a huge amount of correlation between the 2, Julian. I mean, CBI is really referencing our efforts around improving the quality of execution on innovation, whereas PLS, we typically -- and our business is typically used for kind of product line pruning. I think the only correlation between the 2 is that they're both connected to differentiation. PLS results is as a result of where we feel we're on the same level of differentiation and we're product line pruning accordingly, whereas CBI, we're leaning in to basically create and develop more differentiated products. For sure, you're going to see an improvement in CBI over time. You've already seen that. The number has actually doubled since 2018, directionally in the 1% range. It was 2% last year, trending 2.3% to 2.5% this year, well on track to get to 3-plus by 2030. PLS is a circumstantial and ongoing review of our businesses by our businesses of their product lines and they react accordingly. And as I said earlier, we see this as there's a lot of value creation comes from PLS, but in a different way. So I'm not sure there's a huge amount of correlation between the 2. I kind of think of 2 kind of differently. Julian Mitchell: But the sort of net spread of them should be increasingly positive, I suppose. Christopher O'Herlihy: It should be -- no, absolutely. Driven by improvements in CBI. Correct, that's correct. Michael Larsen: I mean PLS, as Chris said, is an outcome of a process or 80/20 front-to-back process. We've talked about kind of in the long run, maintenance PLS being in that 50 basis points range. We have a little bit more this year. We've talked about specialty and kind of strategically repositioning that segment for faster organic growth. And then as Chris said, CBI will continue to improve from here. So that spread, to your point, will widen. But my thought for putting them right next to each other on Slide 8. They're completely independent of each other. And so I just want to make sure that's clear that there's no linkage between the 2. But mathematically, the spread will grow between the 2. And net-net will be a more positive contributor to organic -- above-market organic growth as we go forward. Operator: Our next question today will come from Joe O'Dea at Wells Fargo. Joseph O'Dea: Can you talk about the tariff impact a little bit? There were periods of time earlier this year where the math would have suggested something up to 2% kind of price requirement to offset. And it seems like we're in an environment now where the pricing required is probably less than 1%. But anyway, any thoughts around that? And then stepping back, it would seem like that's not necessarily a big hit to demand. And so the tariff kind of overhang would be more uncertainty related than magnitude of pricing required at this point related, but your thoughts on that? Michael Larsen: Yes. I think price cost from -- in terms of kind of combined with supply chain actions, our ability to offset tariffs, I think, is not really the main event at this point. I think we've demonstrated that we know how to do that, and we've further mitigated the risk of any tariff related specifically to China. So I think that part of the equation, we feel really good about. I think the impact on demand is probably something we talked about also on the last call that it may have led to a little bit of demand -- orders being frozen back in the April kind of Q2 time frame. And there's probably a little bit of overhang still from that. I mean I think we saw what's been a pretty choppy demand environment. As I said earlier, we had some positive order activity in June, July, then it slowed. April, May, kind of pretty choppy also. So I think the impact maybe from a demand standpoint, at least initially was maybe more significant. And who knows kind of where we go from here into next year. But I think it's largely behind us at this point, certainly from a cost standpoint and maybe from a demand standpoint, this is no longer -- tariffs are no longer the kind of the main event here. Joseph O'Dea: And so like what do you think the main event is in terms of seeing kind of an unlock of better demand, right? Because you're outgrowing markets, but that market growth rate, not kind of all that inspiring at this point. And so in sort of this protracted kind of challenged demand environment, if tariffs are kind of easing as a headwind, what do you think is the key to the unlock? Christopher O'Herlihy: Yes. So I think, Joe, we think we take a long-term view here. We believe fundamentally, we're in really good markets for the long term. We're obviously going through a period right now where there's quite a bit of contraction and uncertainty and so on and so forth in areas like construction. But our fundamental thesis is that we're in markets which we believe for the long term are attractive. We want to make sure we're in the best parts of those markets, and we believe that we are. We believe we can see quite clearly in areas like automotive and construction and historically in Welding and Food Equipment that we're outgrowing the markets at the point at which the cycle turns, we'll be really well positioned. And to Michael's earlier point, not just for growth, but for even higher quality of growth on the basis that our incrementals have strengthened from historical levels on the basis of portfolio pruning around sustainable differentiation, coupled with very high-quality execution on the business model. So we feel pretty good about the long term where we're just going through a period where we see some short-term demand issues. But we feel we've got a really good portfolio for long-term growth. Joseph O'Dea: Maybe just tying that into Test & Measurement and what you're seeing there. It seemed like in an environment, you're investing in CBI, like we hear a number of companies talking about innovation. It would seem like they need your equipment. Are you seeing this kind of build up in terms of what would have kept them on the sidelines, but if they want to invest in innovation, it would seem like they're going to need your help. Christopher O'Herlihy: Absolutely, that's correct. I mean Test & Measurement is a really fertile space for us in terms of long-term growth. There's lots of new materials being developed. There's increasing stringency in innovation standards and quality standards, all of which are requiring more and more exacting -- testing equipment. And that's where we play. So again, short-term issues here around CapEx environment and so on. So a little bit of compression in Q3 relating to some CapEx freezing in Q2. But for the long term, this is a really, really healthy environment for us -- will be a healthy environment for us on the basis of the quality of innovation in Test & Measurement and also the end markets they're lining up against like biomedical and so on, all of which have very strong fundamentals going forward. Operator: Next, we'll hear a question from the line of Nigel Coe at Wolfe Research. Nigel Coe: We covered a lot of ground here. Just want to go back to the comments around strong start to the quarter and then it sort of pared out. Do you think there's any unusual behavior with distributors around price increases or tariffs. Obviously, we had the big tariff event middle of the quarter. Anything you'd call out there, number one? And then number two, restructuring actions in the first half of the year, did we see the full benefit in 3Q? Or was there still some benefits to come through in 4Q? Michael Larsen: Yes. So let me start with kind of the cadence as we went through the quarter. And I'm not sure we have a great answer for you, Nigel. I mean I think like we said, June and July were really some of our better months with meaningful organic growth on a year-over-year basis, then a slowdown in August and a recovery in September. And if you look at net-net for Q3, we were actually pretty close to kind of typical run rates. But -- so the point I think we're trying to make, it's just a pretty choppy environment and things can change pretty quickly, but we're not really making any long-term forecast in terms of kind of what that may mean on a go-forward basis. Some of it may be related to the tariff announcements and the associated pricing, but really hard to tell. Restructuring for us, it's a little bit of a misnomer. I mean these are funds that are expenses that are funding our 80/20 front-to-back projects. And so there's no big restructuring initiative going on inside of ITW. Our spend this year will be similar to last year, in that $40 million range. We try to kind of level load things and do a similar amount every quarter. But it's really a function of the timing of tens of projects across the company and when the divisions want to execute on those projects. So those restructuring savings are -- these are projects with paybacks of less than a year. So it happens pretty quickly, but -- and it's part of what's funding the enterprise initiative savings that we're getting next year. But these are not big kind of restructuring -- traditional restructuring projects. These are all tied to 80/20 front-to-back as per usual. So... Nigel Coe: Yes. Okay. That's helpful. A quick one on Welding. We've seen, I think, now 2 quarters of nice inflection in growth on Equipment, but Consumables remains sort of step down in that low single-digit decline territory. Is that primarily a price differential between Equipment and Consumables or anything else you'd call out? Christopher O'Herlihy: Yes. So Nigel, I think it's mainly because the consumer is more of a discretionary purchase. I mean, Commercial or Consumables? Michael Larsen: Consumables, I think, right? Is that right? Nigel Coe: Consumables and Equipment driven up nicely. Michael Larsen: Yes. Yes. I think it's a little bit of a head scratcher, to be honest with you, Equipment up 6% and Consumables down 2%. Within that, there are -- some of the Welding -- some of the filler metals are actually showing positive growth. The other thing what we're seeing is a pickup on the industrial side. So these are typically large heavy equipment manufacturers. And then the commercial side or the consumer side is a little bit slower, where it's a little bit more of an exposed to the kind of consumer discretionary spending. So it's a little bit of a mixed picture. I think the real positive in Welding is this growth is fueled by CBI. And so it's not that the markets are picking up. It's really new products, primarily on the equipment side as well as both in North America and international with some really nice growth in our European and in our China business. So that's probably the best answer I can give you. Operator: Our next question will come from Avi Jaroslawicz at UBS. Avinatan Jaroslawicz: So I appreciate that you're saying that you're trending towards the lower end on the sales guidance. Can you just talk about some of the thinking for leaving that range unchanged and just kind of wider than you typically would for this time of year? I assume you're still thinking there could be some upside to get you to the midpoint or better for the year. And would that come from any particular segments or it sounds like more from demand than pricing. So just -- is that the right way to think about it? Michael Larsen: Yes. I mean I think typically, we update guidance kind of halfway through the year. And at this point, with a quarter to go, we're well within the ranges. And so we didn't see the need to kind of update the whole thing. And the decision was to narrow the range and to explain why we're not flowing through the benefit of the lower tax rate, which is really due to the fact that we're trending towards the lower end on the revenues. So that's our way of being as transparent as we can be around the guidance. I think the -- your question kind of Q3 versus Q4, I think we've kind of covered that. Again, the segment that typically shows the biggest pickup from Q3 to Q4 is our Test & Measurement business, and then that's partially offset by the Construction being down kind of typical seasonality. And when all is said and done, revenues from Q3 to Q4 should be up by 1 point or so. Certainly, we've also factored in, I should say, the lower auto build forecast there's been -- which is done by third-party kind of industry experts. And there's been some noise around some supplier issues for some of our customers, and all of that is included in our automotive projection here for the fourth quarter based on everything that we know as we sit here today. So hopefully, that answers your question. Operator: Our next question will come from Mig Dobre at Baird. Mircea Dobre: I also kind of want to go back to the PLS discussion. And I guess my question is this, when you sort of look at your comments for delivering above normal incremental margins, how reliant are you on PLS in order to be able to do that? How important is PLS in that algorithm? And I guess, given how high your margins are, and I'm kind of looking almost across the board in your businesses, you are pretty much outperforming anyone else out there that I'm looking at. Is there a point in time here where it's rational to sort of say, hey, look, maybe we can throttle back on PLS because we can actually deliver more earnings growth and more return for shareholders by just trying to accelerate organic growth rather than pruning the portfolio? Christopher O'Herlihy: Yes. So Mig, I think there is a relationship between PLS and incrementals and so on, but it's not the only factor. I mean PLS is an element of 80/20, it's not holistic 80/20. So I think the implementation of the business model, again, the quality of the portfolio is ultimately what drives the incrementals ultimately drives the margins. In terms of your comment on -- I guess, the comment on organic growth versus margin. And so from our standpoint, I mean, organic growth and operating margin and margin expansion kind of go hand in hand. And we talk about quality of growth. And I think we've demonstrated that for instance, coming out of the pandemic, we saw very healthy growth and margin expansion while over that period, we were investing in a very focused way in our businesses in innovation, strategic marketing, and that very much continues today. So really, it's about the quality of the organic growth, 35% incremental historically. We're now well above that, comfortably kind of into the 40s. And that's again at a time when we are very much investing in our businesses in a very focused way around innovation and strategic marketing and so on, and so for us, the math is pretty simple with margins at 26% and with growth in incremental margins at 35% plus or even 40-plus right now, it's the operating leverage that is really driving the margins forward from here. And as we look at 2030 and our 30% goal, that's a goal that's not going to be achieved through structural cost reduction. That's going to be achieved through continuous improvement in organic growth at high quality and high incremental margins. So we see the 2 as being correlated, I would say. Mircea Dobre: Understood. But in terms of maybe the framework for '26 asking the question that somebody else asked earlier, right, if CBI is contributing 2.3% to 2.5%, maybe you can rethink product line simplification to some extent and maybe the end markets get better. Again, from my perspective, being able to get your organic growth back to that 4%, 5-plus percent range is really the thing that at this point seems to be needle moving in terms of both maybe investor sentiment as well as overall earnings growth. So I'm curious if -- I understand it's early for 2026, curious though, if you think that it's plausible that we could be looking at that kind of growth as we think about next year? Michael Larsen: It's -- I think, Mig, we're probably, as we said earlier, running a little bit higher on PLS than kind of the normal maintenance run rate. We're doing that specifically in a business like Specialty Products, where we've talked about we're strategically repositioning that segment for growth. I will tell you that in other segments and industries that I know you follow like Food equipment and Welding, that number is significantly lower, maybe even 0 in some cases. So it's not an across the board. And it's also not a number that we want to or even could manage from the corporate -- from corporate. This is such an integral part of our 80/20 front-to-back process, it's a bottom-up number. And if we were to say -- and it's tempting, I know what -- I understand how you're thinking about it, it's tempting to say, okay, no more PLS. That also would say no more 80/20 front to back. And that is certainly not in anybody's long-term interest. I can promise you that. Operator: Ladies and gentlemen, that was the final question in our queue for today. We'd like to thank you all for your participation in today's session, and you may now disconnect your lines. Please have a good day.
Operator: Good day, and welcome to Phillips Edison & Company's third quarter 2025 earnings call. Please note that this call is being recorded. I will now turn the call over to Kimberly Green, Head of Investor Relations. Kimberly, you may begin. Kimberly Green: Thank you. I am joined today by our Chairman and Chief Executive Officer, Jeffrey S. Edison, President Robert F. Myers, and Chief Financial Officer John P. Caulfield. Following our prepared remarks, we will open the call to Q&A. After today's call, an archived version will be published on our Investor Relations website. Today's discussion may contain forward-looking statements about the company's view of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filings, specifically in our most recent Form 10-Ks and 10-Q. In our discussion today, we will reference certain non-GAAP financial measures. Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings press release and supplemental information packet, which have been posted on our website. Please note, we have also posted a presentation with additional information. Our caution on forward-looking statements also applies to these materials. Now, I would like to turn the call over to Jeffrey S. Edison. Jeff? Jeffrey S. Edison: Thank you, Kim, and thank you, everyone, for joining us today. The PECO team is pleased to deliver another quarter of solid growth. Given the continued strength of our business, we are pleased to increase our guidance for NAREIT and core FFO per share. The midpoints of our increased full-year 2025 NAREIT and core FFO per share guidance represent a 6.8% growth and a 6.6% growth, respectively. I would like to thank our PECO associates for their hard work in maintaining our unique competitive advantages and driving value at the property level. The market continues to focus on tariffs and U.S. economic stability. As it relates to PECO's grocers and neighbors, we continue to feel very good about our portfolio. PECO has the highest ownership percentage of grocer-anchored neighborhood shopping centers within our peer group. 70% of our ABR comes from necessity-based goods and services. This provides predictable, high-quality cash flows and downside protection quarter after quarter. This also limits our exposure to discretionary goods, which we believe are at risk of greater impact from tariffs. PECO continues to deliver strong internal growth. Our neighbors benefit from their location in the neighborhood, where our top grocers drive strong foot traffic to our centers. We have high retention and strong leasing demand from retailers wanting to be located at our neighborhood centers. And we continue to see a healthy pipeline for development and redevelopment. In addition, the PECO team continues to find smart, accretive acquisitions that add long-term value to our portfolio. Including assets and land acquired subsequent to quarter-end, this brings our year-to-date gross acquisitions at PECO share to $376 million. A few shout-outs for the quarter: The operating environment and PECO's ability to deliver growth continues as it has for the past several years. Our leasing activity and occupancy remained very strong. We continue to operate from a position of strength and stability. Moving to the transactions market, activity for grocery-anchored shopping centers remains competitive. The strength of our activity in the first half of the year allowed us to be more selective in the second half. We remain committed to our unlevered return targets, and we remain confident about our ability to deliver on our full-year acquisition guidance. Including acquisitions closed after the quarter-end, we acquired $96 million of assets at PECO's share since June 30. This activity includes two unanchored centers. These centers offer reliable fundamentals similar to our core grocery-anchored properties with a stronger long-term growth profile. They are located in the same trade areas as our grocery-anchored centers, growing suburban markets with strong demographics. With a focus on everyday retail, neighbors located at these centers are delivering necessity-based goods and services within their respective communities. We will share more details on why we believe these everyday retail centers are a natural complement to PECO's long-term growth strategy during our upcoming virtual business update. This webcast is planned for December 17. We also continue to make great progress with our joint ventures. During the third quarter, our JV with Lafayette Square and Northwestern Mutual acquired The Village at Sand Hill. This is a grocery-anchored shopping center located in a Columbia, South Carolina suburb. Our pipeline for the fourth quarter and 2026 also includes additional assets for our JVs. Lastly, we are actively expanding our development and redevelopment pipeline. We build in our parking lots and acquire adjacent land to our centers. And this quarter, we acquired 34 acres of land in Ocala, Florida. While it is too early to share details of this project, we are working with partners to build a grocery-anchored retail development. As you know, these take a long time. We will share more details on this project as we are able to update you. We are very pleased with our results for the quarter and our outlook for the balance of 2025. And we are actively growing our leasing and transaction pipelines for 2026. We believe we are the most aggressive operator in the shopping center space. The PECO team is continuously looking for opportunities to grow our business better. We look forward to updating you on our long-term growth plans during our December 17 business update. I will now turn the call over to Bob. Bob? Robert F. Myers: Thank you, Jeff, and thank you for joining us. PECO continues to deliver strong leasing activity driven by our grocery-anchored neighborhood centers and necessity-based neighbor mix. This momentum is clear in our operating results again this quarter. Our neighbor retention remained high at 94% in the third quarter while growing rents at attractive rates. High retention rates result in better economics with less downtime and dramatically lower tenant improvement costs. PECO delivered record-high comparable renewal rent spreads of 23.2% in the third quarter. Comparable new leasing rent spreads for the quarter remained strong at 24.5%. Our continued strong leasing spreads reflect the strength of the retail environment. We expect new and renewal spreads to continue to be strong for the balance of this year and into the foreseeable future. Leasing deals we executed during the third quarter, both new and renewal, achieved average annual rent bumps of 2.6%. This is another important contributor to our long-term growth. Portfolio occupancy remained high and ended the quarter at 97.6% leased. Anchor occupancy remained strong at 99.2%, and same-store inline occupancy ended the quarter at 95%, a sequential increase of 20 basis points. Given our robust leasing pipeline, we expect inline occupancy to remain high throughout the remainder of the year, which is very positive. As it relates to bad debt in the third quarter, we actively monitor the health of our neighbors. Bad debt remains well within our guidance range. We are not concerned about bad debt in the near term, particularly given the strong retailer demand. We continue to have a highly diversified neighbor mix with no meaningful rent concentration outside of our grocers. Turning to development and redevelopment, PECO has 22 projects under active construction. Our total investment in these projects is estimated to be $75.9 million, with average estimated yields between 9-12%. Year-to-date, 14 projects stabilized through September 30. This represents over 222,000 square feet of space delivered to our neighbors and incremental NOI of approximately $4.3 million annually. As Jeff mentioned, we continue to grow our pipeline of development and redevelopment projects. This activity remains an important driver of our growth. I will now turn the call over to John. John? John P. Caulfield: Thank you, Bob, and good morning and good afternoon, everyone. Our third quarter results demonstrate what we have built at PECO, a high-performing grocery-anchored and necessity-based portfolio that generates reliable, high-quality cash flows. As Jeff said, the PECO team continues to operate from a position of strength and stability. Third quarter NAREIT FFO increased to $89.3 million or $0.64 per diluted share, which reflects year-over-year per share growth of 6.7%. Third quarter core FFO increased to $90.6 million or $0.65 per diluted share, which reflects year-over-year per share growth of 4.8%. Turning to the balance sheet, we have approximately $977 million of liquidity to support our acquisition plans. We have no meaningful maturities until 2027. Our net debt to trailing twelve-month annualized adjusted EBITDAR was 5.3 times as of 09/30/2025. This was 5.1 times on the last quarter annualized basis. As Jeff mentioned, we are pleased to update our '25 guidance. We are reaffirming our guidance range for 2025 same-center NOI growth. This reflects solid full-year growth of 3.35% at the midpoint. As we have said previously, the timing of our same-center NOI growth in 2024 presents difficult comparisons to 2025. Specifically, the recoveries in 2024 were weighted to the fourth quarter, whereas they are more even quarter to quarter in 2025. Our current forecast for 2025 reflects same-center NOI growth between 1-2%. We estimate this growth rate would have been closer to 3% if the recoveries in 2024 were more evenly distributed. While we are not providing 2026 guidance at this time, I will remind everyone that we believe this portfolio can deliver same-center NOI growth between 3-4% annually on a long-term basis. As Jeff mentioned, our increased guidance for 2025 NAREIT FFO per share reflects a 6.8% increase over 2024 at the midpoint, and our increased guidance for 2025 core FFO per share represents 6.6% year-over-year growth at the midpoint. Our guidance for the remainder of 2025 does not assume any equity issuance. Importantly, our FFO per share growth is a function of both internal and external growth. PECO is not dependent on access to the equity capital markets to drive our strong growth. As it relates to dispositions, the PECO team plans to sell $50 million to $100 million of assets in 2025. Year-to-date, including activities subsequent to quarter-end, we sold $44 million of assets at PECO share. The private markets are more appropriately valuing anchored shopping centers than the public markets. This gives us an opportunity to lean into portfolio recycling. We have an active pipeline for the fourth quarter, and we have plans to do even more in 2026. We plan to share more details during our December 17 business update. Long-term, the PECO team is focused on recycling lower IRR properties into higher IRR properties to help drive strong earnings growth. We believe that performance over time and consistent earnings growth should be rewarded in the capital markets. We also reaffirmed our 2025 full-year gross acquisitions guidance. We believe our low leverage gives us the financial capacity to meet our growth targets. We have diverse sources of capital that we can use to grow and match fund our investment activity. Match funding our capital sources with our investments is an important component of our investment strategy. We continue to believe the PECO platform is well-positioned to deliver mid to high single-digit core FFO per share growth on an annual basis. We also believe that our long-term AFFO growth can be higher as more of our leasing mix is weighted towards renewal activity. We believe our targets for growth in core FFO and AFFO will allow PECO to outperform the growth of our shopping center peers on a long-term basis. We look forward to updating you on our long-term growth plans during our December 17 business update. In addition to what Jeff mentioned, we plan to share preliminary 2026 guidance. We also plan to share new analysis and insights related to our unanchored investments or everyday retail centers. We look forward to updating you on our internal and external growth plans. With that, we will open the line for questions. Operator? Operator: Thank you. For any additional questions, please re-queue. And your first question comes from the line of Andrew Reel with Bank of America. Please go ahead. Andrew Reel: Good afternoon. Thanks for taking my questions. First, can you just share more on your thinking around acquiring development land at this point in the cycle? Why is right now the right time to pursue opportunities like this? And are you evaluating other ground-up development sites at this point in time? Jeffrey S. Edison: Well, Andrew, thank you for the question. Bob, you want to talk a little bit about this specific project? Robert F. Myers: Yes, absolutely. Thanks, Jeff and Andrew. Thank you for the question. We are really excited about this opportunity. We had a nice partnership with a national grocer that was interested in the growth aspects of Southern Ocala, 10,000 new homes in residential opportunities coming into the market over the next five years, a lot of positive growth. It's going to be a 34-acre site. And we will end up selling part of it to the grocer, and then we will have seven outparks available for us to continue to do what we do year over year. I mean, we have developed 51 out parcels in our portfolio over the last five years. And we will either do ground leases or build to suit. So this is kind of a one-off scenario. Will we continue to look for sites in the future? Yes, if it makes sense. In this particular asset, we are going to deliver about a 10.5% unlevered return. So we feel really good about not only being some of the landlord's largest of the retailers' largest landlords, but this is a great opportunity for us to step in, in the right market. Andrew Reel: Okay. Thank you. That's helpful color. And then if I could just ask a follow-up. Could you maybe just provide more detail on the makeup of your current acquisition pipeline and just how much more incremental volume could you potentially close before year-end? I know Jeff, you had mentioned you're being a little more selective in the second half now. So just curious on where we might shake out relative to the acquisition range. Thank you. Jeffrey S. Edison: Yes. I'll give you and Bob follow-up as well. The way we're looking at it, kind of given you guidance. We're pretty comfortable. We're going to meet the bottom end since we're already about $25 million above the bottom end of the raise that we've given. And we continue to see good product and we're continuing to see a volume of product that we feel comfortable will be in good shape, but in terms of our ability to buy. As you know, going quarter by quarter is a little bit difficult because stuff moves month or two and that's just the closing process. So it's always a little bumpy. Feel really good about the products we bought. We had a really great first half. It's a little slower, but I would tell you that we feel good about what we're getting. And we bought $400 million the midpoint is about $400 million this year. It was $300 million last year. Pretty good that's a pretty good increase. And we see that continuing to happen. So Bob, anything else on the Robert F. Myers: Yes. I would like to add that we've acquired 18 assets this year for $376 million and we do have deals that have been awarded and under contract to close before year-end. So we feel really good about we're going to be well within the range. The other thing I would mention is just we're delivering unlevered returns above a nine in all these categories. So we feel real good about the acquisitions. The other thing I would mention is these blend to like a 91.5%, 92% occupancy going in. And when you look at our portfolio at 97.7 this continues to give us internal growth in the future for same-center NOI growth. So it is it's a dual path in terms of growing earnings and NOI. We're really excited about what we've acquired so far and early indications would suggest that we're operating them extremely well and we're getting continued leasing momentum. Andrew Reel: Okay. Thank you very much. Jeffrey S. Edison: Thanks, Andrew. Operator: Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Please go ahead. Caitlin Burrows: Hi, everyone. Maybe sticking on the acquisition side. So looking at leverage now, it's at 5.1 times, which say is totally reasonable. But I guess it sounds like going forward, you might be in or willing to increase leverage. So wondering if you could discuss for a little bit what the kind of upper level is on leverage and how you think about that as a funding source? Jeffrey S. Edison: Yeah. Caitlin, I'll I'll give you an John follow-up as well. What we've said and continue to believe is we want to be in that 5.5% or below range debt to EBITDA on a long-term basis. And we are we'd be willing to move around that if we had a clear vision of bringing it back down into that sort of mid to the mid-5s to lower 5s. And we're very happy with where we are. We've got good capacity to continue to grow our acquisition. Program. And so it's it's nice to be where we are right now. And if the opportunities come, as as you know, we're prepared to take advantage of them if we can. Anything else John? Nope. I think that's good. Operator: And then just, as the other kind of source of funds, it sounds like you might lean more into dispositions. And so if we look at the you guys have done historically, you do give great disclosure on the cap rates of the acquisitions versus dispositions. Historically, the dispose have been at higher cap rate. So I was wondering going forward, are there assets that you would be, I don't know, maybe newly looking to sell that would make that process accretive? Or how are you thinking about that acquisition disposition cap rate and kind of the types of properties you'd be looking to sell and who the buyers are and what they're willing to pay for them? Jeffrey S. Edison: Yeah. John, you wanna talk about them? John P. Caulfield: Sure. Thanks, Caitlin. So I think the dilution or accretion on their cycling of assets is going to depend on the mix of assets sold and acquired. I mean, as you know, we are IRR buyers and sellers. So we believe that right cycling will be beneficial to our earnings per share over time. And as owners of about 8% of the company, that's really important to us. So I I think as we look at it in terms of we are achieving victory on a lot of these. We've already sold some some properties this year, and we're gonna look to do that. But ultimately, mean, repeat, we believe we can do mid to high single digit FFO per share growth. And although we're not giving guidance until December, I think that is going to be true in 2026 as well. So not exactly answering your question because it's gonna depend upon the mix of the timing of the closing, but but we're managing that very closely. And the relationship you're describing has been true historically, I think it's gonna tighten and improve as we look forward, but it again, it depends upon the mix. Caitlin Burrows: Thank you. And Caitlin, would just add, I mean, I think the way we think about it is we're going to be trading out of lower growth for higher growth properties and that is the strategy of the disposition program. There is some derisking in that, but mostly it's going to be trading to areas where we can get more growth. Operator: Your next question comes from the line of Haendel St. Juste with Mizuho. Please go ahead. Ravi Vaidya: Hi there. This is Ravi Vaidya on the line for Haendel. Hope you guys are doing well. I wanted to ask about redevelopment here and broader redevelopment pipeline. What's your target size for this to be? And how should we consider funding? Is this need primarily through free cash flow or through further dispositions? Thanks. Jeffrey S. Edison: Okay. Ravi, when talking about that, are you talking about all of our redevelopment, including the outlawed stuff that we're doing? Or is that what you're you're focused on there? Ravi Vaidya: Yeah. Both ground up new development and redevelopment of existing pads or any k. Outlook kinda work. Great. Okay. Jeffrey S. Edison: Bob, you wanna take that? Robert F. Myers: Yeah. No. Absolutely. I appreciate the question. So over the last three or four years, we've generated between $40 million and $55 million in our ground-up redevelopment bucket. And those years we were solving for between a 9-12%. We find that this is a wonderful complement to our same NOI growth and we are hopeful to get 100 to 125 basis points towards it through this pipeline. We have a nice pipeline out for the next three years that would be consistent of approximately $50 million to $60 million a year. To contribute to that. So we don't see anything slowing down on the development side or redevelopment side, and we've seen a lot of success with generating solid returns. Got it. That's helpful. And maybe just one on the on the bad debt Would you say that this quarter's, you know, bad debt expense in the current tenant credit landscape is that appropriate to consider as a a run rate going forward into fourth quarter and into '26? Thanks. Jeffrey S. Edison: John, you want to take that? John P. Caulfield: Sure. Thanks, Ravi. So I would say that, yes, I think that, when you look it, whether it be on the same store, total portfolio, we've been between, let's say, seventy five and eighty basis points. I do know that the midpoint of our guidance range is 90 basis points. And it's more just giving ourselves a little bit of the elbow room. I will say for the '25 and for '26, we don't actually see the environment materially changing. So we think that, you know, this 70 to 80 basis points in the range that we have is pretty reasonable. I do think that, you know, again, when you look at at PECO's demographics at $92,000, we are 15% above The US median, and our retailers continue to be very, very successful. So our watch list is lower than, anyone else's and very consistent with historical around 2%. And so we feel really good about it, but I think, you know, this is a good run rate as we look forward. Ravi Vaidya: Got it. Thank you so much. Operator: Your next question comes from the line of Ronald Kamden with Morgan Stanley. Please go ahead. Ronald Kamden: Hey, thanks so much. Just going back to sort of the occupancy and more of the inline occupancy here. You're getting good retention rates. You're you're pushing rents. Remind us what the message is to the team, how much more occupancy upside you sort of think that is there? Is there? And just strategically, how are you guys messaging sort of pushing rents here? At the expense of retention rates? Thanks. Jeffrey S. Edison: Sure. Bob, you want to grab that one? Yeah, absolutely. So thank you for the question. So currently, we're at like 94.7%. And we believe that we can generate another 125 to 150 basis of inline occupancy. The demand and the retailer interest that we're seeing in all the meetings in our national account team shows very good momentum. The visibility I have out for the next six months, seven months with our pipeline would suggest that we should move in that direction. So feel very good about moving the needle on inline occupancy. I think in terms of growing rent, on the renewal question, in particular at 94% retention, that's a very solid retention number. And I think last quarter, we spent $0.60 a foot in tenant improvements In this quarter, we spent $1 to generate 23.3% renewal spread. So we feel very good about the retention at 94% and the current spreads we're seeing. So again, I don't see any new supply coming online to compete with that. And I think we'll just keep our neighbors profitable and healthy and look towards the future. I don't see anything slowing down. Great. And then if I could ask a quick follow-up, just on the unanchored centers We talked about it last quarter, but as you're sort of looking at more of the opportunities, just what's the update in terms of the opportunity set and sort of the conviction in that strategy? Thanks. Robert F. Myers: Yes. Another great question. I'm really excited about the strategy. We've acquired eight properties in this category for about $155 million And we've seen very positive momentum operationally. I believe our centers currently from what we paid, were about $300 $3.00 $5 a foot. We are seeing unlevered returns between 10.5-12% early indications. We're seeing new leasing spreads above 45% and renewal spreads above 30%. So again, we're going to continue to define the criteria. You'll hear more about this in our December update. But early indications this is going to be a great complement to growing our same-center NOI in the future. So we're really excited about it. Jeffrey S. Edison: Thank you. Ron, yes, it's a great question. And one thing, I mean, have built a phenomenal team at leasing. This we kind of look at this as just having more neighbors. We have a way of bringing this finding more neighbors that we can put the machine to work on and get these kinds of returns that Bob was talking about. So we're excited about it. Again, it's as you know, it's a small very small piece of the overall portfolio and it's but it's very consistent with our focus on necessity retail and giving the consumer what they want and being locally smart at the property level. So all those pieces are encouraging to us as well as the results Bob talked about. In terms of investment in that product. Ronald Kamden: Really helpful. Thank you. Operator: Your next question comes from the line of Michael Goldsmith with UBS. Please go ahead. Michael Goldsmith: Good afternoon. Thanks a lot for taking my question. My first question, Jeff, is when you said in the prepared remarks about being more selective in the second half. What do you mean by more selective? Are you looking more on price? Is it more on location? Is it more on shopping center formats? Just trying get a sense of of where that selectivity is leading you. Jeffrey S. Edison: I think it's it's it's tougher underwriting. It's not a difference in terms of what we like, what we do. But in terms of underwriting, with the potential risks of the stability of the economy, I think we took a tougher we were tighter on some of our rent spreads. We were tighter on some of our pace of leasing. That's really what I'm saying in terms of volume. And that translates into us offering lower prices than than we would at other times to get to that nine unlevered IRR. And so that's I think that's what slowed down some of our our pace a bit. It's important to know that, I mean, at the midpoint, we're buying $400 million of assets on an individual basis. That's the most I think in the space on an individual basis by far. And we think that that is we that's $100 million more than we bought last year. We're taking our share of the market. And I think we've had it's shows the discipline that we've had for thirty years in this business You've got to be disciplined and you've got to make sure that you're not getting ahead of yourself or too aggressive or not aggressive enough. In the market. And that I think that's what we kind of bring to to the market on that. Michael Goldsmith: Thanks for that. And my follow-up is, right, on the competition, you said it remains competitive. Has gotten any more incrementally competitive in the last quarter? And then just like, if you can provide some color on deals that you don't who are you losing to? Is it is it new yeah. Is it new entrants or or is it kind of the the same folks that are still bidding on I don't yeah, I don't think it's gotten more competitive. I think it's but it's fairly stabilized. I mean, is good demand out there and it is it's the full gamut. I mean, it's some of the REIT peers, it's some of the some institutional players and as well as private players. So you have a pretty wide range of people looking in the space. So that our feeling is that it's kinda it's stabilized at where it is and really has been for the last couple of quarters. And we think that that's kind of going to be is more normalized and probably what we're going to see for the next quarter and certainly or maybe the next few quarters as the and the beauty is with what we've done, we have we look broadly at country and we're looking for that number one or two grocer to buy. And that breadth gives us the ability to find product consistently over, you know, year after year after year. And so we feel comfortable we'll have another good year next year. We're not that's not a concern. It's just it's a little harder shopping to buy than when a lot of others have gotten into the space that we've been in for thirty years. Michael Goldsmith: Thank you very much. Good luck in the fourth quarter. Thanks. Operator: Your next question comes from the line of Omotayo Okusanya with Deutsche Bank. Please go ahead. Omotayo Okusanya: Hi, yes. Good afternoon, everyone. I was wondering if you could just give a view on the outlook for grocers in general. I think, your your sales are going up. But I just but, again, we just gotta hear a lot conflicting noise around you know, more selective consumer, you know, inflation is kind of causing volumes or trips to to grocers to kind of slow down. Just kind of if you just kind of give us an update in general kind of what you're seeing and how you think that space is evolving, we'd appreciate that. Jeffrey S. Edison: Yeah. I I want to take a shot, Bob, to join in as well. From our conversations with the grocers, they continue to see a very resilient customer. And we're not hearing any sort of pullback, any kind of like dramatic concerns. It's kind of business as usual and in some for some of our grocers, see it as really, really positive. I mean, when you talk to publics and HEB and some of the the Trader Joe's, mean, are they are actively growing. And so they see things very positively. And so I would say our feedback overall is that the grocers are thinking long term, they're very positive about what the environment is today and their ability to pass on increases in cost. To the consumer they're always going to be nervous because they're nervous all the time and they should be because it's a tough it's a really tough business. But they're really good at it and they're great partners for us the shopping centers that we have. Omotayo Okusanya: That's helpful. And then how do you think about when we kind of think about sources and uses of capital how does potential stock buybacks kind of fit into the equation at kind of current stock prices? Jeffrey S. Edison: The way we look at it is a tool. Just like selling properties, just like raising public equity. And it's a tool to be used at the right time when you when it's the best investment and the best use of your your free cash flow. So that's the way we think about it. We so it's it's one of the tools and we wouldn't be hesitant to use it at the right time. And But we're not also eager to use it if we particularly environment where we are today where we have really good uses of our capital that we think we can grow significantly. So that's it's a great question and it is one that is part of our sort of regular conversation about where we should be depending on where the stock price is. Omotayo Okusanya: Got you. And then one quick last one for me. How do we think about that position Again, you already had $376 million year to date guidance $350 to $450. I'm just kind of curious whether there's some conservatism in that number or the way 4Q is shaping up. There may not be a lot of deal activity. Jeffrey S. Edison: I would say, $100 million a quarter is pretty decent activity and we'll we that gets us to $400 million for the year. We feel which is the midpoint of the guidance we feel good about that. And I wouldn't be overly feel more a lot more aggressive than that we would we change guidance and we but we don't feel that we won't meet that either. So we're we think the guidance is a pretty good place to be looking at. Operator: Thank you very much. Your next question comes from the line of Todd Thomas with KeyBanc. Please go ahead. Todd Thomas: Hi, thanks. First question, just regarding dispositions. You commented it sounds like next year will be will be higher than this year's $50 million to $100 million target. Is there a segment of the portfolio or kind of a larger portion of the asset base that you ideally would like to recycle out of? Is there any insight around much you might look to sell over time and also whether the plan is to sell assets on a one-off basis or if there could be some larger transactions perhaps given the increased competition that you're saying? Jeffrey S. Edison: John, do you want to take that one? John P. Caulfield: Sure. And then Bob, you can after that. So Todd, I would say that, you know, we're looking at multiple ops because I think we do think that as there is great competition for grocery-anchored shopping centers in the market, there are a lot of them that we've taken to stabilize place. And there are buyers out there that are just interested in more of a completely solved button-up solution. So that is something you're gonna see. I think you will see us sell more next year. It's hard to say because, again, similar to the acquisition timing, it can move quarter to quarter or things like that. I wouldn't say, and this is where Bob will come in, I I wouldn't say we're looking at anything specific on an an individual region or things. It's more the IRRs. It's that if we look at forward and realize that we've taken most of the or achieved most of the growth, in the asset that we will look to sell that. And I think we look to sell it individually or as a portfolio. Bob, anything more? Robert F. Myers: Yeah. I'll just add that I think we'll end up selling between $100 million and $200 million next year. And I believe that it will all be done on one-off basis. So I don't see a portfolio there because we do want to be very surgical being active portfolio managers. So Jeff touched or Jeff and John touched on it, but certainly 100% stabilized assets that when I look at our forward IRRs would generate 6.5-7% returns. We think we can replace those assets with these 9%, 9.5-1 unlevered return deals and pick up 200 basis points in spread over the long term. That's what we're focused on and that will be our strategy. Todd Thomas: Okay. Got it. So so it sounds like little more of an ongoing portfolio sort of asset management process just to you know, the plan is to remain net acquirers just sort of prune the portfolio over time by selling lower growth assets and and upgrading quality. And improving growth. Robert F. Myers: Yeah. It is. I think that makes a lot of sense. Todd Thomas: Yeah. Okay. And then, my last just for for John, real quick. Can you just talk about the drivers behind the interest expense decrease underlying the updated guidance? And are there any updates on the swap expirations in November and December? John P. Caulfield: Sure. So the, with regards to the the guidance and interest rates, I mean, I think part of it was conservatism for us and and then the timing of the acquisitions relative to the guide. I don't think there's anything much much farther than that. With regards to the swaps, you know, we're we're 5% floating today. If those burn off and nothing changes, we can be about 15% floating today. We do have a long-term target of about 90%. Ultimately, those if they went based on where today's rates are and no further cuts, they'd be kind of around 5.3%. You know, we can issue in the long-term debt markets wrong 5%, but I think we are in a position now where interest rates are coming down. Down. At least that is the perspective of the market. And so we were gonna do what we do, which is we are looking opportunistically at extending our balance sheet. We do like the idea of being a repeat issuer in the long-term bond market. And and that's where there'll be capacity. So I think we're comfortable right now with if those expire and we remain floating with that floating rate, but we will be looking to access the bond market out point out we don't have any meaningful maturities until 2027. And we our actions will be consistent with what we've done in the past. Todd Thomas: Thank Operator: Your next question comes from the line of Cooper Clark with Wells Fargo. Please go ahead. Cooper Clark: Great. Thanks for taking the question. Just given the supply backdrop and current strength in the leasing environment, curious how we should think about long-term upside to NOI growth on an occupancy neutral basis as you capture upside on spreads, improve escalators and other lease structures? Jeffrey S. Edison: John, do you want to break I think that's probably best broken down in terms of what we see as the pillars of that growth. John P. Caulfield: Cooper, I think the pieces for us is we're going to look to deliver 3% to 4% on a long-term basis. You know, our our rent bumps are 110 basis points. And and I'll point out that that's up I think, 50 basis points over the last couple of years. So we think that we've got good continued growth there. And our leasing spreads continue to be very strong on both renewal and a new leasing basis. So I think as we look at it, there's a combination of the new leasing, the rent bumps, the development that we're able to do on the outparcels that are already part of our existing properties to really drive that towards that, know, keeping us in that 3% to 4%. I think that we will continue to buy assets that Jeff or Bob referenced earlier, with occupancy availability that'll allow us to kind of continue that momentum move up from there. Bob, I don't know if you have anything you wanna add. Robert F. Myers: I don't have anything to add, John. Cooper Clark: Great. And then you noted, though, you expect that $100 million and $200 million of dispositions next year. Curious how we should think about additional funding sources in your current cost of capital with respect to the $350 million to $450 million annual long-term acquisitions target? John P. Caulfield: Yeah. John, do you want you want to just give the the latter on Sure. As as we had said on the call, I would say, you know, funding sources are gonna be the 100 over a $100 million of free cash flow that we generate and retain after the dividend. Which I would also highlight we just raised almost 6% this quarter. We have the cash flow that we generate. We have the growth in the base. We are levered at 5.1 times in the last quarter annualized. And this disposition is going to allow us to recycle at using management strategies like Todd just talked about. That is going to be able to drive us and propel us forward in executing our growth plans. Cooper Clark: Great. Thank you. Jeffrey S. Edison: Thanks, Cooper. Operator: Your next question comes from the line of Floris Van Dijkum with Ladenburg. Please go ahead. Floris Van Dijkum: Hey, guys. I've got two two questions. By the way, so you guys had, I think, it 23% almost 23% renewal spreads But if you look at your overall spread, there were only 13% because I think 46% of your leasing activities were options. Can you and obviously, what would the growth have been if you didn't have those options? What would the growth have been in your same store NOI And what are you doing in terms of your you know, new leases where are you limiting, you know, options, etcetera, so that you can, you know, mark to market more rapidly? Jeffrey S. Edison: So, Bob, want to talk about the options? John, do you want to talk about the what Flores was by the way, hello Flores. Good to hear your voice. And the on the options and then John, if you could just kind of walk through what that impact would have been without the so the growth without options. Robert F. Myers: Sure. Floris, good to hear from you. And great question on the options. This is absolutely an area that we're very focused on, on structuring any new renewal or any new lease. Is something that we've approved over time. I know directionally for our team, I give direction that we don't want to give any tenants an option unless there's a 25% increase in the option period. The challenge with it is national retailers are making a large investment in this space So they do want to have options, three, five-year options as an example. And they certainly want to negotiate that number. But as a foundation to our strategy, you know, we're always starting with no options. And, you know, there's a lot of reasons why we say that because as the landlord has nothing to gain from it. So we want to push back hard on that. As as we negotiate options. John P. Caulfield: And with regards to the math, I would say that it's it's tough because the option, the biggest portion is coming from our grocers isn't part of the strategy as we look back at the combined leasing spread of all of it, it was 16% last quarter. It's 13% now. I think as Bob said, we have strategies to do that. But I do think this is where the compliments come in of more neighbors and other ways. But, you know, the new leases was almost 30% over the last twelve months and 21% on renewals or less so in the volume of footage is about the same. So you'd had 25% net growth. Instead of the 13% net growth adding to your NOI. So it's very strong, but I do think the options are something we try to mitigate, but but are still, you know, part of the part of the portfolio. Floris Van Dijkum: Thanks, guys. John, I appreciate that. We've Can I my follow-up question is regarding and maybe I get your view on cap rates? I mean, we hear that cap rates for grocery anchors are very low relative to other retail types. You've been able to acquire an average 6.7% cap rate. Jeff, what is your view on what's going to happen to grocery-anchored cap rates they going to go up or are they going to go down? And then also, what is your appetite for you know, if there is such strong institutional, appetite, maybe maybe doing a larger JV with part of your portfolio. To where you benefit from, you know, getting management fees maybe not for your lowest growing assets, but, you know, to to to free up some more capital and to prove to to the market that your stock is undervalued? Jeffrey S. Edison: Alright. That that Lars, you asked, like, four questions there. So let me let me start with the, you know, the the the supply demand dynamic right now is it's fairly stabilized. We don't see a major compression in cap rates from where we are right now. It will be by segment. And again, when we generalize about cap rates, it's a broad brush you're painting with because it really as you know, it's a market by market event and it's going to be very different in the Midwest than it's going to be in Florida. And you've got a lot of variety to talk about there. But I mean, think generally, would say that the supply demand dynamic is fairly stabilized and the the amount of product coming on the market is taken care of the increase in demand. From some of the primarily institutional players that have sort of come into market and added a additional capital into the market. So that would be the our answer on that. In terms of JVs, I mean, we do have two active JVs that we're growing. We do see that as a way of having growth and getting better returns as you point out through the fee structure and owning less of the overall equity. So that is an opportunity. It's not a major part of our business. But it is an opportunity to continue to find places to put the PECO machine to work and create value. And that's what we do and that I think that will be continued to be something that we look at. And And we'll look at our disposition program too because there are other ways to take assets that are slower growth, but that would be we'd like to own a long-term basis and maybe take a little less equity in those. So those are all things that we're looking at. As opportunities in a market where the values are compressed in our space So we've got a lot of options and we'll continue to use those. Floris Van Dijkum: Thanks, Jeff. Jeffrey S. Edison: Yep. Thanks, Lars. Operator: Your next question comes from the line of Hong Zhang with JPMorgan. Please go ahead. Hong, your line is open. Hong Zhang: Hi. Can you hear me? Jeffrey S. Edison: Yep. Hong Zhang: Yeah. We got you. Oh, cool. Thanks. I guess just just a question on funding your acquisition pipeline from next year. You've traditionally funded your acquisitions through with with majority debt. I I guess what is the thinking around changing that composition to be more with dispositions next year, especially with rates falling where they are. Because correct me if I'm wrong, but once you get more of a spread, if you were to fund fund your acquisitions on debt currently, Jeffrey S. Edison: I'll take the first and then John you can the question. We are we always have been and will continue to be focused on keeping a really good balance sheet so that we can take care of we can take advantage of our opportunities as they arise. That doesn't really change based upon exactly where the rates are. We're really focused on making sure that we have the right depth of capacity. Right now, we have capacity in terms of our target of 5.5. But that's going to be used when we have great opportunity. And that's we are very protective of our balance sheet. So John, do you want go on to talk a little bit about dispose and how we use that? John P. Caulfield: Yeah. Hong, the piece that I would say is that at 5.1 times in the last quarter annualized and a long-term target of 5.5x, We do think we have capacity there in addition to the $100 million of cash flow that we retain. The other piece I would say is that we believe that on a leverage neutral basis, we can buy $250 million to $300 million of assets a year So leaning into disposition gets to what Jeff was saying, which is that in a market where we believe there are great acquisition opportunities, and an opportunity to recycle assets that we have achieved and stabilized the growth plans that we have that's something we're going to do. So when we talk about the dispositions, it is balanced based on the acquisition opportunity. We have a very solid portfolio and nothing that we're you know, that's melting that we're looking to get rid of quickly. So we're gonna be thoughtful and prudent but it's ultimately so that we can recycle into better IRRs and and that kind of balanced balanced plan. Got it. And then I guess I guess just on thinking about the cap rate on your potential disc dispositions. I mean, you've talked about selling, I guess, stabilized centers. I guess, could you you give a general range of what cap rate those centers would trade out today? Robert F. Myers: Yeah. I'll take that one. Go ahead, So based on some of the assets that we currently have in the market, we believe that the assets will trade anywhere between a 6.3 and a 6.8 Got it. Thank you. Operator: Your next question comes from the line of Paulina Rojas with Green Street. Please go ahead. Paulina Rojas: Good morning. Among your early positions, you you had the sale of Point Loomis, which to my knowledge, included a Kroger store that recently closed And I understand the buyer is a small grocery operator. So when you consider the sale price of that property, how do you think the store's closure impacted value, if at all? Compared to what it might have been had Kroger not closed? Jeffrey S. Edison: Well, Pauline, it's thank you for the question. Bob, do you want to talk about Point Loomis? A great story, actually. Robert F. Myers: Well, it is a good story. I mean, it's an asset that we've owned now for I believe, around eight years. And we ended up doing some redevelopment in the parking lot and build a little small outparcel development. We had a really nice bank, Chase Bank. We had Kohl's as an and then we had Pick n Save. We knew that Pick n Save was struggling for the last I would say five to seven years. So we had worked with them on two-year renewals. And finally came to a point when they announced that they were going to close those 60 stores that this would be on the list. So it wasn't a surprise. The good news is that we did have another grocer lined up who was an owner-operated operator that that purchased it that we've recently closed. So it was time for us to move on from the asset and we did well with it. And I think specifically, Jeff may have a different answer than I do on this, but I think when you lose a grocer like a Kroger, it could certainly impact your cap rate 100 to two fifty basis points. Jeffrey S. Edison: Yes. The only thing I'd add there, Bob, is once you know that the grocer is in trouble, which we've known for seven years, The cap rates already changed. So you're not going to not going to see 200 basis point change in that cap rate the day that they close. It will have already happened. And that's what happened here. That's when we bought the property, we bought it at a cap rate that was very high. And so it was we were we knew we were taking on that risk from the very beginning. That's why we've made a lot of money on that property, even though it didn't it's not very pretty, but we made a lot of money on it. So that is how we you know, the the we think about it. And that's why you've gotta be very you got to be thinking really long term because the the moment there is question about the grocer, that's when the cap rate hits. Paulina Rojas: Yeah. That that makes sense. And somehow related a little bit, but regarding the the new development that you mentioned, I think I heard an IRR of around expected IRR around 10%. And I also believe you mentioned that you plan to sell a portion to the grocer and so I presume you will focus on on small shops mostly in that center. And and my question is, how much would your IRR defer if if you retained ownership of the grocery store rather than selling it to the to the retailer. Right. Jeffrey S. Edison: So, we are going to answer that question December 17 for you We really we can't really answer that. I think we really want to answer that right now. Early and we want to make sure that we're far off on. But your point is well taken. If we had to grow if we kept the grocer the IRR would be less. But we'll get we'll talk more about that in in December. If that's okay. Operator: Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Please go ahead. Juan Sanabria: Hi. Thanks for the time. I'm just curious if the plan for '26 may include moving the acquisition volume or focus more towards that unanchored given presumably higher yield or or if that's not necessarily the case. And and as part of that do the unanchored centers that you're interested in buying also have that previously mentioned occupancy upside? Or is that not part of that particular story? Yeah. Robert F. Myers: No. That's yes. That's a great question. And answer the question, we're going to speak more in December in terms of our guidance next year. But early indications would suggest that we'd be in the same ZIP code of where we were at this year. In terms of the unanchored strategy, we are going to look more aggressively in that category next year we are already seeing great results from it and better returns. So I can't tell you specifically if we'll buy $100 million or $200 million of the product next year, but we are finding there's 65,000 opportunities in the market in that category and given our operating expertise, we feel like this something that we can step into. So we'll be highly selective. We'll be solving for above 10% unlevered returns in the strategy. But again, I just think it's a very solid complement to what we're doing. Juan Sanabria: Okay. And then just the last one for me. G and A went up the guidance there. If you could just provide a little color as to why and how we should think about growth should it '26, is that more in line with inflation? Is there any sort of tech or other type of investment opportunities you're looking at that may seem to increase it higher a bit. Relative to history next year. John P. Caulfield: Sure. It it's primarily related to performance-based incentive compensation. Ultimately, last year, our growth was lower, and and therefore, you know, we have, an environment that we incentivize for results and so you're seeing improvement in that. As well as investments as we talked about in in in technology and resource that are going to allow us to scale as we look forward. So when I I think about going forward, you know, I I would think we would be, you in this range here. I still think that we are quite efficient when we look at it on a variety of metrics. But the key piece for us is gonna be driving that mid to high single digit FFO per share growth. Going forward? Operator: Your next question comes from the line of Richard Hightower with Barclays. Please go ahead. Richard Hightower: Hey. Good afternoon, guys. Thanks for squeezing me in. I think, just one for me, but maybe put a a different twist on Juan's question You know, you you guys have mentioned it a couple of times on the call, so it's strikes me as as something that's fair game. But when you when you acquire assets, with, you know, fairly significant occupancy upside, you know, does that represent sort of a material component to the long-term three to 4% same-store NOI target. And then, you know, is just just so I understand it, is there any sort of qualitative element about the asset in particular or or even in general, you know, where you have sort of low occupancy going in, is there is there anything to read into the quality of the assets or the location, you know, when that circumstance occurs? Thanks. Jeffrey S. Edison: I don't know, Bob, you want to take sort of the qualitative part? And then John, maybe you can talk about the impact on the of the lease up. Robert F. Myers: Yeah. I definitely believe that the strategy is to find assets. And if you look at what we've acquired, the eight so far, we've been anywhere from 82% occupied to about 100%. So it's all over the map. But there's so much criteria that goes in the decision based on our thirty years of experience and then the growth in the market and the criteria around foot traffic configuration and upside. So we certainly right now we're at like a 6.7%, 6.8% cap rate on what we've acquired and we're in the mid-10s on the unlevered return And certainly, our average around 92% occupied on a blended basis will help us get to those returns. I wouldn't say that there's any quality creep or actually the markets that we've acquired in have stronger demographics, than our core portfolio. So we are staying very disciplined disciplined in terms of what we're buying and we feel really good about it. John P. Caulfield: I think as it gets to the NOI growth, one of the pieces that I would highlight is a lot of times you know, that asset class doesn't have the exclusives or option that some of the larger ones do. But ultimately, we look to our forward NOI growth, the I think this gets a little bit to why we we don't often try to talk about cap rates and we're IRR buyers because there's a direct, you know, tie or, you know, between the going in cap rate and ultimately where what the growth in that asset is. I think the other piece that I would say from a quality standpoint is true on all the assets that we acquire. We're looking at inefficiencies in the market. Ultimately, for undermanaged assets, where an experienced operator with the capital to invest in the asset and the platform that has the leasing expertise and the legal expertise to really maximize the value there, that is what is really driving the IRR growth that we have. And so I think these are those and all of the growth rate anchored assets that we acquire are really, you know, just kind of pushing through that that PECO way of of delivering on the growth, and that that's where we excel. Richard Hightower: Okay. Great. Thanks for the color. This concludes our question and answer session. I will now turn the conference back to Jeffrey S. Edison for some closing remarks. Jeffrey S. Edison: Thank you, operator. So in closing, the PECO team continued our solid performance in the third quarter. And we're pleased to increase our full-year 2025 earnings guidance for NAREIT FFO and core FFO per share. Because of our grocer-anchored neighborhood shopping center format, and our unique competitive advantages, we believe PECO is able to deliver mid to high single-digit core FFO per share growth annually on a long-term basis. The PECO team remains focused on delivering on this expectation and driving value at the property level. Given our demonstrated track record through various cycles, we believe an investment in PECO provides shareholders with a favorable balance of quality cash flows, mitigation of downside risk, and strong internal and external growth. In summary, we believe the quality of our cash flows reduces our beta and the strength of our growth increases our alpha. Less beta, more alpha. On behalf of the management team, I'd like to thank our shareholders, PECO associates, and our neighbors for their continued support. Thank you all for your time today. Have a great weekend. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the GrafTech Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Mike Dillon, Vice President of Investor Relations. You may begin. Michael Dillon: Thank you, Desiree. Good morning, and welcome to GrafTech International's Third Quarter 2025 Earnings Call. On with me today are Tim Flanagan, Chief Executive Officer; and Rory O’Donnell, Chief Financial Officer. Tim will begin with opening comments, including an update on the commercial environment. Rory will then provide more details on our quarterly results and other financial matters, and Tim will close with additional comments on our outlook. We will then open the call to questions. Turning to our next slide. As a reminder, some of the matters discussed on this call may include forward-looking statements regarding, among other things, performance, trends and strategies. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by forward-looking statements are shown here. We will also discuss certain non-GAAP financial measures, and these slides include the relevant non-GAAP reconciliations. You can find these slides in the Investor Relations section of our website at www.graftech.com. A replay of the call will also be available on our website. I'll now turn the call over to Tim. Timothy Flanagan: Good morning, and thank you for joining GrafTech's third quarter earnings call. Today, we'll provide an overview of our third quarter performance, share key operational and commercial updates and discuss our outlook for the remainder of 2025 and beyond. I'm pleased to share that GrafTech delivered another quarter of meaningful progress in the third quarter of 2025, reflecting our team's commitment to disciplined execution and operational excellence in a challenging market environment. During the quarter, we achieved 9% year-over-year increase in sales volume, reaching nearly 29,000 metric tons. To achieve this, we are actively leveraging our strong customer value proposition and capitalizing on the commercial momentum we have built to expand our market share and drive continued volume growth. In fact, reflecting our full revised full year 2025 sales volume guidance that Rory will speak to in a few moments, we are on track to achieve cumulative sales volume growth of over 20% since the end of 2023. This is impressive growth in any market, but is particularly noteworthy given that graphite electrode demand has remained relatively flat for the past 2 years. It's a clear indication that our customer value proposition is compelling and we're outperforming the broader market. In addition, we continue to focus on optimizing our geographic sales mix, particularly in the United States, where our sales volume grew by 53% year-over-year in the third quarter. This strategic shift towards the U.S. market, which remains the strongest region for graphite electrode pricing is a direct result of our efforts to capture opportunities in regions with more favorable pricing dynamics and to strengthen our competitive position. On the cost side, we delivered a 10% year-over-year reduction in our cash cost per metric ton for the third quarter and increased our full year guidance for cost reductions, as Rory will discuss. As a result, for the full year of 2025, we're on track for more than a 30% cumulative reduction in our cash cost per metric ton since the end of 2023. This achievement underscores our ability to control our production costs and adapt our operations to varying levels of demand. Regarding profitability, we generated positive EBITDA adjustment -- positive adjusted EBITDA of $13 million for the quarter. We also generated $25 million in net cash from operating activities and $18 million in adjusted free cash flow, further strengthening our liquidity position to $384 million as of the end of September. This cash flow performance and ending liquidity position exceeded our expectations for the third quarter. While we're encouraged by these reported results, and as we previously noted, we'll never be satisfied with this level of performance. Yet we view this as a further demonstration of growing momentum and that these are constructive advances in the right direction, providing a solid platform to build upon as the market recovers. Turning to the next slide. Let me provide our current thoughts on the broader steel industry. On a global basis, steel production outside of China was approximately 206 million tons in the third quarter of 2025, up nearly 2% compared to the third quarter of last year, resulting in a global utilization rate for the third quarter of approximately 66%. On a year-to-date basis, global steel production outside of China is relatively flat. Looking at some of our key commercial regions using data published by the World Steel Association earlier this week. For North America, steel production was flat year-to-date compared to the prior year. Specific to the U.S., World Steel reported that on a year-to-date basis, steel production grew 2% compared to 2024. In the EU, steel output decreased 4% year-to-date compared to the same period in 2024 and remains well below historical levels of steel production and utilization for that region. Although the overall steel sector is still experiencing short-term challenges, however, early indications of a rebound in the steel markets have started to appear, and recent developments have provided additional reasons for encouragement. Earlier this month, World Steel published their most recent short-range outlook for steel demand. For the U.S., World Steel is projecting a 1.8% steel demand growth in 2026 behind a number of factors including pent-up demand for residential construction and easing financing conditions, while favorable trade policies will support domestic steel production. In Europe, World Steel is projecting a return of steel demand growth in the near term, forecasting demand growth of 3.2% for 2026. This reflects some of the demand drivers we have discussed previously, including initiatives to increase investment in infrastructure and defense spending, representing key steel-intensive industries. To further support the European steel industry, earlier this month, the European Commission announced new trade protection measures that should drive higher levels of production in this key region for GrafTech. Specifically, the measures when effective next year, will cut steel import quotas by 47%, significantly increased the out-of-quota tariffs and introduce melt and pour provisions prevent circumvention. These measures are in addition to the provisions within the Carbon Border Adjustment Mechanism or CBAM that is expected to provide further support to the EU steel industry once implemented at the beginning of 2026. These developments are a structural positive for the EU steel industry with some analysts projecting the trade projections to drive the steel imports lower by more than 10 million tons on an annualized basis. This alone could drive EU steel capacity utilization rates, which have averaged just over 60% for the past couple of years to nearly 70%. Finally, on a global basis, World Steel is projecting global steel demand outside of China to grow 3.5% year-over-year based on many of the same factors, a further easing of geopolitical tensions and improved macroeconomic conditions could support further growth. Against that backdrop, we are having active and ongoing dialogue with our customers on their needs for the upcoming year. While it's too early in the process to draw any conclusions, our compelling customer value proposition positions us well to continue the share gains we've achieved over the past 2 years, including further market share growth in the United States. At the end of the day, we're unwavering in our commitment to serve our customers with excellence and be the most trusted value-added supplier of high-quality graphite electrodes. Consistent with our focus on nurturing long-term partnerships built on performance, reliability and mutual success. We look forward to sharing more on our 2026 outlook during our year-end call. Before turning the call over to Rory, I want to sincerely thank our entire team around the world for their remarkable efforts, resilience and commitment during this pivotal time. Their dedication continues to drive our progress and position us for long-term success. But most importantly, I want to thank our employees for their unwavering commitment to a culture of safety. This is a non-negotiable priority across the organization, and we're pleased to have maintained strong momentum in this area, putting us on track for our best safety performance in years. As we move through the end of the year and into next, sustaining and building on this momentum is a must and must remain a critical focus. Our ultimate goal is zero injuries, and we continue to work relentless toward that standard every single day. With that, let me turn the call over to Rory to provide more color on our commercial and financial performance. Rory O'Donnell: Thank you, Tim, and good morning, everyone. Starting with our operations. Our production volume for the third quarter was approximately 27,000 metric tons, resulting in a capacity utilization rate of 63%, while representing a modest sequential decline in production compared to the prior 2 quarters. This was planned as annual maintenance activities at our European manufacturing facilities occurred during the third quarter, consistent with our historical practice. On a full year basis, our expectation remains to balance our production and sales volume levels. Turning to our commercial performance. In the third quarter, our sales volume was approximately 29,000 metric tons. This is a 9% year-over-year increase and represented our highest sales volume performance in 12 quarters. Of particular note is our success in actively shifting a significant portion of our volume to the U.S. as we have discussed. For Q3, our sales volume within the U.S. grew 53% year-over-year. Year-to-date, we have grown sales volume in this region by 39% compared to last year. This is an impressive result given year-to-date steel production in the U.S. is up less than 2%. On a full year basis, we now expect our total sales volumes to increase 8% to 10% in 2025. The modest change from our previous guidance of 10% year-over-year sales volume increase reflects our disciplined approach of foregoing volume opportunities where margins are unacceptably low. To this last point, we continue to face challenging pricing dynamics across nearly all of our regions. While this is partially attributable to flat market demand, it further reflects the increased level of low-priced graphite electrode exports from China and others that we have spoken to previously, which has resulted in an unsustainable level of excess electrode capacity in the rest of the world. Against that backdrop, at times, we are making decisions to walk away from certain commercial opportunities where we are not being adequately compensated for our value proposition. This is consistent with our commitment to a disciplined, value-focused growth, not volume for volume's sake. Expanding on the topic of price. Our average selling price for the third quarter was approximately $4,200 per metric ton, which represented a 7% decline compared to the prior year and sequentially was in line with the second quarter. The year-over-year decrease was largely driven by the substantial completion in 2024 of the higher-priced LTAs along with persistent challenges with market pricing that I just discussed. Our focus remains on mitigating these impacts in the near term, including the previously mentioned geographic mix shift towards the United States. Similar to all regions, average pricing in the U.S. is below 2024 levels, but it remains our strongest region for graphite electrode pricing. In fact, we estimate that the higher mix of U.S. volume boosted our weighted average selling price for the third quarter by over $120 per metric ton and by a similar amount on a year-to-date basis. As a result, when comparing our year-to-date weighted average price of approximately $4,200 per metric ton, to the non-LTA price of $3,900 we reported in the fourth quarter of last year, we saw an increase of nearly 8%. Despite the demand climate, our strong commercial progress highlights the effectiveness of our approach to engaging customers and demonstrates the significant benefits we provide them. Our value proposition is founded on several essential pillars. These include our unparalleled technical expertise associated with the architect furnace productivity system, which is further enhanced by the support of our exceptional customer technical service team. We also continue to make substantial investments in research and development, reinforcing GrafTech's leadership in graphite electrode and petroleum needle coke technology and innovation. Another distinguishing factor is our unique vertical integration into needle coke, ensuring a reliable supply of this crucial raw material. Additionally, our flexible and integrated global manufacturing network provides enhanced supply dependability, an increasingly significant benefit given the changing landscape of global trade regulations. Ultimately, we are dedicated to fostering and enhancing lasting customer relationships, aiming to provide mutual benefit and ongoing shared achievements for the long term. Turning to costs. For the third quarter, our cash costs on a per metric ton basis were $3,795, representing a 10% year-over-year decline. We continue to outperform our expectations in this area and are increasing our full year cost savings guidance. In response to our revised sales volume outlook, we have implemented additional measures to enhance the efficiency of our production schedules and further optimize production costs. We now anticipate an approximate 10% year-over-year decline in our cash COGS per metric ton for 2025 on a full year basis compared to our previous guidance of 7% to 9% decline. Achieving a full year 10% decline would translate into cash COGS per metric ton of approximately $3,860 for the full year. While this is above our year-to-date run rate, as we have noted previously, we will have periodic quarter-to-quarter fluctuations in our cash cost recognition as a result of timing impacts. However, we are pleased to be outperforming our initial expectations for the year and that our cost structure continues to trend in the right direction. Remarkably, achieving our full year cost guidance would represent a 30%, 2-year cumulative decline in our cash COGS per metric ton compared to the full year of 2023. Our teams continue to do extraordinary work in identifying and executing cost reduction opportunities across various components of our variable and fixed costs. Let me highlight a few examples. Drawing on our extensive experience in research and development, along with our commitment to innovation, we are consistently working to reduce the consumption of specific raw materials, all while maintaining the high standards of our product. By leveraging our recent investments in technology, we are able to lower our total energy usage. In addition, we are optimizing our production schedules to make the most of lower electricity rates available during off-peak periods. Our efforts to implement procurement initiatives have also yielded impressive results. Notably through broadening our supplier network, helping us to minimize our variable costs even further. Furthermore, our ongoing initiatives to reduce fixed costs have positively impacted our production costs while the higher volume has enhanced our fixed cost leverage. Lastly, our team continues to effectively manage the potential cost impacts caused by evolving global trade policymaking and specifically, the impact of U.S. tariffs. To expand on this point, as we have consistently noted, our integrated global production network gives us flexibility around where we can manufacture our products, allowing us to serve end markets efficiently and reliably. In addition, we maintained strategically positioned inventories across key geographies, allowing us to meet customer demand even in dynamic market conditions. As a result, we are well positioned to minimize the potential impacts imposed by current trade policies, and we continue to expect the impact of the announced tariffs to have less than 1% impact on our 2025 cost, which is reflected in our updated cash COGS guidance. Overall, through disciplined execution and a relentless focus on efficiency, we've made remarkable progress in driving down costs and enhancing the overall agility of our operations in order to control production costs at various levels of demand. Further, we are achieving all this while maintaining our dedication to product quality and reliability as well as upholding our commitments to environmental responsibility and safety. Turning to the next slide and factoring all of this in. For the third quarter, we had a net loss of $28 million or $1.10 per share. This compares to a net loss of $36 million, $1.40 per share in the prior year as the reduction of our costs more than offset the year-over-year decline in weighted average pricing. For the third quarter, adjusted EBITDA was $13 million compared to a negative $6 million in the prior year. As noted in our earnings release, our current quarter EBITDA included an $11 million non-cash benefit from recognizing previously deferred revenue following the resolution of a long-standing commercial matter. Turning to cash flow. We were pleased to report positive cash flow for the first time in 4 quarters. For the third quarter, cash provided by operating activities was $25 million, while adjusted free cash flow was $18 million, with both measures comparable to the prior year. Our positive third quarter cash flow reflected a favorable change in net working capital as was expected. Taking a step back, we had a $45 million built-in our net working capital through the first 6 months of the year, most notably driven by inventory as first half production exceeded sales volume. As we have previously noted, this was planned as we had intentionally built inventory in the first half of the year, reflecting one of our cost savings initiatives, which is to level load our 2025 production while balancing production and sales volume levels on a full year basis. As we unwind this inventory timing impact, our built-in net working capital through the first 9 months of 2025 was reduced to $14 million despite an $11 million working capital impact in the third quarter from the non-cash earnings related to the recognition of previously deferred revenue. With this strong working capital performance in the third quarter, on a full year basis, we remain on track for working capital to be favorable to our cash flow for 2025. This is being realized through a combination of production cost improvements and inventory management, while maintaining adequate safety stock of pins and electrodes. Overall, we continue to track ahead of our initial cash flow projections for 2025 and remain encouraged by our momentum in this area. Turning to the next slide and expanding on this point. We ended the third quarter with total liquidity of $384 million, consisting of $178 million of cash, $107 million of availability under our revolving credit facility and $100 million of availability under our delayed draw term loan. As a reminder, this untapped portion of our delayed draw term loan is available to be drawn until July of 2026, and our expectation remains to draw this residual ports prior to its expiration. As it relates to our $225 million revolving credit facility, which matures in November of 2028, we had no borrowings outstanding as of the end of the quarter. However, based on a springing financial covenant that considers our recent financial performance, borrowing availability under the revolver remains limited to approximately $115 million, less currently outstanding letters of credit, which were approximately $8 million as of the end of the quarter. Overall, we believe our strong liquidity position, along with the absence of substantial debt maturities until December of 2029, will support our ability to manage through near-term industry-wide challenges. In summary, our focused execution, operational discipline and strategic positioning are enabling us to deliver results today while building for a strong foundation for long-term growth. I am proud of the progress we have made, and I am confident in our ability to continue creating value for our customers, our shareholders and all of our stakeholders. To that end, I would like to echo Tim's sentiments and extend my gratitude for the outstanding commitment and hard work demonstrated by our team members worldwide. I will now turn the call back to Tim for some final comments on our outlook. Timothy Flanagan: Thanks, Rory. In summary, we laid out a disciplined plan in response to evolving industry dynamics and heightened macro uncertainty, and we're executing against that plan. Our objectives are clear and include to increase our sales volume and gain market share, improve our average pricing, most notably by shifting the geographic mix of our volume to higher-priced regions, to reduce costs and working capital requirements and to ultimately improve our liquidity and strengthen our overall financial foundation. As it relates to our third quarter, we're pleased that our efforts across all of these areas are beginning to translate into improved bottom line performance. This reflects signs of progress and momentum towards accelerating our path back to normalized levels of profitability as the market recovers. To this last point, I spoke earlier here to a number of potential catalysts to support a rebound of the steel market in the near term. Longer term, we remain bullish on the structural tailwinds that support the ongoing shift towards electric arc furnace steelmaking. Globally, based on data published by the World Steel Association, the EAF method of steelmaking further increased its market share in 2024, accounting for 51% of steel production outside of China. This is a continuation of the steady share growth that the EAF industry has experienced for a number of years. And driven by decarbonization efforts, we expect this trend to continue. In the U.S., which produces approximately 80 million tons of steel annually, over 20 million tons of new EAF capacity has either recently come online or is planned for the coming years, with further announcements expected as we move ahead. This will drive further share gains for electric arc furnace steel production in this key region. In the EU, while some European steelmakers have announced temporary delays in their EAF transition plans, other projects continue to move forward, and we continue to expect a meaningful mix shift towards EAF steelmaking within the EU in the medium to longer term. Further, with graphite electrode inventories remaining at low levels in Europe, an increase in European EAF steel production should lead to an outsized increase in graphite electrode demand. Given the expected growth in demand and tariff protections impacting certain foreign graphite electrode producers, the U.S. and the EU remain important strategic regions for GrafTech for the long term. With our strong commercial momentum in these regions and our focus on meeting the evolving needs of our customers, we are well positioned to capitalize on this demand growth. Expanding briefly on the topic of trade protection. We are continuously assessing a range of potential tariff outcomes and how those scenarios could influence steel industry trends and shape the commercial environment for graphite electrodes and more broadly synthetic graphite. Speaking to the U.S, we are encouraged by the steps that the administration is taking to create a more level playing field from a trade perspective and to protect critical industries. As it relates to the steel industry, with the expanded Section 232 tariffs that have been implemented on steel imports into the U.S., we continue to expect these tariffs will be stickier than the broader tariff programs that have continued to evolve. As it relates to critical minerals, which includes synthetic graphite made from petroleum needle coke, we expect to see growing demand in this market driven by the growth in the EAF steelmaking and the building of western supply chains for battery needs, whether for electric vehicles or energy storage applications. However, the establishment of those western supply chains from raw material manufacturer through to the OEMs remains in early stages, and we're operating in an industry that is suffering from overcapacity in China. Against this backdrop of market dominance, earlier this month, China announced expanded export controls on synthetic graphite. While it remains too early to assess the longer-term impact of these measures, we believe that the potential for international trade disruptions further highlights the strategic importance of the West, reducing its reliance on China for critical minerals such as synthetic graphite to accelerate the development of the domestic supply chain with the support of policy making. To that end, earlier this year, the Department of Commerce announced preliminary anti-dumping tariffs of 93.5% being imposed on graphite active anode material imports from China. This stacks on top of previously announced tariffs resulting in a combined tariff of 160% on Chinese anode material imported into the U.S. While further policy measures will be needed, we welcome this important development, which, along with recent announcements related to initiatives on sourcing of rare earth and other critical minerals, demonstrates a strategic intent on the part of the U.S. government to foster an ex-China supply chain for these key materials. As it relates to GrafTech, given the fluid nature of global trade policy, and the heightened attention on critical minerals, we are taking proactive measures that seek to minimize the risk to GrafTech, capitalize on emerging opportunities and promote fair trade in their key markets. All of this is consistent with our approach on advocating for ourselves in order to optimally position GrafTech and its stakeholders for long-term success. In closing, this is a pivotal time for GrafTech. We made tremendous progress on our strategic initiatives, and that progress gives us confidence. We are in a strong position to benefit from the long-term structural trends that are set to shape the future of our industry. As a result, we're energized by the opportunities that lie ahead. We remain fully committed to executing our strategy, delivering value for our customers and driving long-term sustainable growth for our stakeholders. This concludes our prepared remarks. We'll now open the call for questions. Operator: [Operator Instructions] And our first question comes from the line of Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: So I guess, first off, I guess -- do we -- should we expect any other kind of deferred revenue benefits? Or what did that arise from? And is that kind of onetime in nature, I guess, first off? Rory O'Donnell: This is Rory. You should not expect any further. I mean, we don't have anything deferred left on the balance sheet. You'll note that in the upcoming disclosures in our SEC filings. So consider it one-time, it relates to long since collected receivable that is no longer going to impact -- or the results going forward. Arun Viswanathan: Sure. And then just on kind of price and volume. So your average price came in a little bit lower than what we were thinking. Mainly that was maybe our own kind of mismatching of your contract roll-offs. But I guess, what do you guys think about the current kind of demand and price environment? It does appear that utilization rates are still kind of globally at a point that wouldn't necessarily support higher electrode pricing? Or maybe you can just comment on that? And if you need to weave in some thoughts on needle coke and how that's progressing as well, that would be helpful? Timothy Flanagan: Yes, Arun, I'll start by saying I'm going to be careful about talking too much about pricing. Certainly, anything forward-looking just given the fact that we're in the middle of our negotiations with customers, both in the U.S. and Europe and globally right now. But I mean, I think we commented quite a bit about this in the second quarter call. I mean it's an oversupplied market right now. And so therefore, that makes it challenging to push pricing in such a market. That being said, I think you're starting to see some positive momentum across the steel industry and whether that's because of infrastructure and defense spending in Europe, whether it's because of trade actions that have been ongoing for now more than 6 or 7 months in the U.S. and recently announced in Europe. I think we're starting to see some momentum where we expect not only steel demand, but also steel production to predict -- to pick up in those regions. So all in all, it still remains a challenging market, but I think we're still optimistic that we'll start to see some more positive momentum on the pricing side as we look out going forward. And certainly, to the longer term, I think we still firmly believe that you're going to see a big influx of additional EAF production I commented on the 20 million tons or so that we're seeing in the U.S. right now already. As it relates to needle coke, needle coke continues to remain relatively flat from an overall pricing perspective globally. And I think, again, that's a reflection of where the electrode market is right now. I think the trade case that you're seeing play out right now in the Department of Commerce against the active anode material in China. The 93.5% tariff rate that we mentioned that will be finalized depending on when the government reopens, Q1 of next year, I think that will start to underpin and give all of the producers of anode material more confidence to continue to invest in their projects. And I think that will continue to support the overall demand for needle coke, and you'll start to see that market tighten up and pricing improve, and that will have a knock-on effect into the electrode market. So it's where we are today, and I think greener pastures ahead as we look out into the future. Arun Viswanathan: Great. And then if I could just ask on the idea of supplying into the battery-related materials market. I guess you just mentioned that the market is oversupplied for electrodes. So I guess, is there any way to accelerate the commercial applications? Where are you on that timeline? And we've been in an oversupplied market on electrodes for a while now. So is there any limitations to moving forward to pivot some of your portfolio into that market as well? I think our understanding is that you guys have maybe 180,000 tons plus of capacity and maybe 130,000 tons is used in electrodes. So there does appear to be some latent capacity that you maybe you could direct into that market. What's taking this long? And where are you kind of in that journey? Timothy Flanagan: Yes. No, I think that's a fair question, and I think consistent with what we've said in the past. We continue to develop our capabilities. I think where we have a distinct advantage to the market right now is the vertical integration with Seadrift and the ability to supply needle coke and raw materials into that market. As you noted, there is excess graphitization capacity, both in the U.S. and the EU, given that we're operating at roughly 60% to 65% utilization rates. But to be able to maximize that, you need to have batteries being produced by those that want to be non-Chinese suppliers in those regions, right? And right now, all of the battery material continues to be supplied by the Chinese, which is why that trade case is so critically important to allow those that want to have broader aspirations of producing anode material, establishing battery factories in the U.S. and the EU to be able to support their financing activities and make a market that otherwise is competitive and constructive for them. We've said all along that we don't see ourselves as a stand-alone add-on producer. We're somewhat balance sheet constrained from that standpoint. But I think that we would be a good partner for someone who's looking for raw material supply and/or someone who's looking for interim bridge supply of graphitization capability and/or graphitization expertise given that, that's what we do. So we think there's still opportunities out there. But that market is still developing, and it will take some time. I think the finalization of the trade case next year will be an important milestone to start to see that market unlock itself somewhat. And I think we're still pretty optimistic not only just because of batteries for EVs, but probably equally and almost more importantly is energy storage systems as we look forward on the electricity needs that the world is going to face here, which has been a very popular topic of late. Operator: Our next question comes from the line of Bennett Moore with JPMorgan. Bennett Moore: Congrats on the solid quarter. I wanted to start quick on the 50% tariffs on India material. I think those have been in place since August. Have you seen any material impact on imports into the U.S. as a result? And do you think these tariffs could help drive share gains or some of your conversations regarding 2026 commitments? Timothy Flanagan: Yes. Again, I think we're confident, as we said, that we will continue to see gains in the U.S. I think we have a full expectation that we'll continue to grow volume in whole or in total as we head into next year, but we'll continue to focus a lot of energy into the U.S. market. Really, again, as a market that I think customers recognize the value proposition, the technical services, and all of the capabilities we bring to the table. So certainly do think that, that remains an opportunity for us. With respect to the Indian tariffs, right? I think -- that presents an opportunity in the market, right? I think certainly, anybody facing a 50% tariff is going to have a hard time overcoming that economic hurdle and should be supportive for negotiations as we head into those negotiations here in the fourth quarter. And maybe I'll take an opportunity to step back and editorialize a little bit, right? I mean I think both the Chinese and the Indians have really overbuilt their electrode capacity to multiples and multiples greater than their domestic EAF consumption could ever reach and I think if we look back to 2022, the Indians are exporting almost 60% more material than they did then. They've lowered their prices by 40%, the Chinese have lowered their prices by more than 30%. And I think a combination of those reasons and the ongoing war in Russia and the financing of that war through the purchasing of oil as well as the supply of electrodes into the Russian market, really, to me, is a strong reason and basis or justification for keeping those tariffs in place and hope that they don't just become a bargaining chip as the Trump administration works to settle out the trade disputes that are ongoing. So it's an opportunity for us, but certainly look forward to the negotiations here in the fourth quarter with that as a backdrop. Bennett Moore: That's great color. And then my last follow-up here is regarding some commentary last quarter, you discussed GrafTech being an attractive candidate for public-private partnership. Since then, we've seen some additional deals unfold, including government entities, providing financial support for the graphite industry. So just wondering if GrafTech's had any sort of new engagement on this front since last quarter? Timothy Flanagan: Yes. Thanks for that question, Bennett. I think you really need to take a step back and think about the work that the government is doing on critical minerals as well as trade policy and take that all into consideration as we think about how we promote a strong and domestic industrial base and in particular, steel making, right? I mean 70% of this deal in the U.S. is made via the EAF. 50% of steel in Europe is made via EAF. You can't produce that steel without electrode. So it's really important that not only are we protecting the steel and the downstream industries for steel, but we also have to think about the supply chains and the base that supports the steel industry, and we really need to see a healthy electrode industry to support that. As we think about what's going on and some of the announcements that you mentioned, we said this on the second quarter call and still stand by it that we're really applauding what the Trump administration is doing on that front and what the Department of War is doing to support the development of critical mineral supply chains, both in the U.S. and with its allies. We've talked about the 93%. So I won't go back down that path. But I think just this trade tit for tat that you're seeing between the U.S. and China around critical minerals really highlights kind of that importance, again, of creating that strategic supply chain. And I think synthetic graphite squarely fits into what the aim of that is. I think as it relates to GrafTech, I think we're uniquely positioned as a 139-year-old industry leader, technical innovator as well as being the only vertically integrated producer of synthetic graphite with Seadrift down in Texas. And we're confident that will play a critical role in supporting the domestic supply chain now and into the future. I think we remain confident that we can be a good strategic partner in this space and we'll continue our advocacy efforts to propose GrafTech's interest now and into the future. As it relates to any further commentary, I just think at this point, it wouldn't be appropriate or useful for me to comment further. Operator: And our last question comes from the line of Jay Spencer with Stifel. Jay Spencer: So you mentioned your selling price on average is $4,200 per ton. And you mentioned that the U.S. volumes, I believe you said boosted the average price by $120 per ton. Is that -- is it fair to say that U.S. pricing has improved sequentially from the prior quarter? Rory O'Donnell: I would say -- this is Rory. I would say it's flat to slightly up compared to the prior quarter. Timothy Flanagan: Remember that you typically see U.S. contracts negotiated on an annual basis. So you don't see a lot of price movement within the U.S. on an annual basis. Jay Spencer: And as us analysts looking for indicators of pricing, we've looked at China graphite electrode pricing on Bloomberg historically, even though that's not the price you guys actually realized it was -- it provided some information in terms of directionality. But given the increase in tariffs for active anode material and given your focus on the U.S. Is that kind of that Bloomberg metric no longer useful? Or how should we think about that? Timothy Flanagan: Yes. So that Bloomberg price, we've seen quite a bit of volatility over the last 12 to 18 months. I think it serves at least as a directional indicator of what you're seeing in the market, maybe not at those exact levels, just given kind of the delta between the domestic market, the export market and what that looks like. But China pricing -- the Chinese export pricing is always going to be a proxy for what the rest of world pricing is. So those regions that are less focused on quality and are focused on buying the cheapest electrodes available to the market. So that Chinese pricing is going to see -- or have a bigger impact in the Middle East, Turkey, Africa, South America, in particular. As it relates to the U.S. and the EU, it doesn't necessarily influence those prices to the same extent, just given the fact that you do already have trade protections in place against Chinese electrodes to some extent in the U.S. and certainly to a bigger extent in the EU. So it certainly is an influence, but it isn't the ultimate driver in those 2 end markets. What becomes the challenge is the amount of volume that gets put into the rest of world by the Chinese, exporting 300,000-plus tons of electrodes into the rest of world markets puts a lot of pressure on the western suppliers to focus their energies in the markets that have better pricing. And it just has this knock-on effect as you think about globally. So that's why the commentary on the excess capacity and exporting their excess capacity becomes so relevant. Operator: That concludes the question-and-answer session. I would like to turn the call back over to our CEO, Tim Flanagan for closing remarks. Timothy Flanagan: Thank you, Desiree. I'd like to thank everyone on this call for your interest in GrafTech, we look forward to speaking with you next quarter. Have a great day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Good day, everyone, and welcome to the Mohawk Industries Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to James Brunk, Chief Financial Officer. Please go ahead. James Brunk: Thank you, Jamie. Good morning, everyone. Welcome to Mohawk Industries quarterly investor conference call. Joining me on the call are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Paul De Cock, President and Chief Operating Officer. Today, we'll update you on the company's third quarter performance and provide guidance for the fourth quarter of 2025. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our 8-K and press release in the Investors section of our website. I'll now turn the call over to Jeff for his opening remarks. Jeff Lorberbaum: Thank you, Jim. Our third quarter net sales of $2.8 billion were in line with our expectations, slightly ahead of prior year as reported and flat on a constant basis. Though economic conditions across our regions weakened more than anticipated compared to the prior quarter, we believe we outperformed in most of our markets. Our sales and product mix continue to benefit from the success of our premium residential and commercial offering and collections introduced during the past 2 years. Our adjusted earnings per share of $2.67 reflected benefits from ongoing productivity and restructuring initiatives as well as the impact of favorable currency exchange and lower interest expense, offset by higher input costs and temporary plant shutdown. Across our markets, material and energy expenses are now improving from peak levels, though higher costs from early in the year will still impact our fourth quarter earnings as expected. With our markets remaining challenged, we're executing targeted actions across the organization to drive performance such as operational enhancements, administrative process improvements and technology advancements. We are lowering our cost structure without impacting our long-term growth potential when the market recovers. We've identified additional restructuring opportunities to rationalize less efficient assets and streamline logistics operations and administrative functions. These new actions will result in annualized savings of approximately $32 million at a net cash cost of approximately $20 million after asset sales. Combined with our previously announced restructuring actions, we anticipate delivering $110 million in savings this year. During the quarter, we continue to focus on our working capital management and generate approximately $310 million in free cash flow. We repurchased 315,000 shares in the quarter for approximately $40 million as part of our current stock buyback authorization. Year-to-date, we've purchased $108 million of our outstanding shares. Across our geographies, consumer uncertainty continues to limit discretionary spending on large projects, particularly if financing with debt is required. Postponement of large renovation projects and declining home sales have been the primary driver of weakness in the residential remodeling during the current cycle, while the commercial sector has remained stronger. In most of our markets, central banks have lowered interest rates to encourage economic growth and benefit housing turnover. The Federal Reserve's September rate cuts and potential future actions should benefit the U.S. housing market by bringing in potential buyers who have waited for better rates. As the supply of existing homes on the market rises, price increases have slowed, which should benefit future sales. Builders are attempting to offset weakness in the new home sales with price cuts, rate buydowns and closing cost assistance. The Fed's actions should also stimulate future business investment in nonresidential new construction and remodeling. European consumers have accrued record levels of savings since the pandemic and are now experiencing lower inflation rates, both of which should encourage greater discretionary spending. To address the ongoing housing shortage in Europe, several governments are initiating programs to incentivize new home construction. Our industry is currently at various stages of passing through the impact of higher tariffs on imported products and should compensate for increased product cost over time. As previously stated, we continue to address the situation by optimizing our supply chain and implementing price adjustments on affected product categories. Ocean freight costs have been declining and are partially offsetting the tariff impact for U.S. importers. Based on the recent changes, engineered wood and laminate imports will now be subject to reciprocal tariffs like our other flooring product categories, which should benefit domestically produced products. Because the evolving tariff situation will require some time to reach equilibrium, we will continue to adjust our strategies with the changing rates and market conditions. With that, Jim will review our financials for the quarter. James Brunk: Thank you, Jeff. Sales for the quarter were just shy of $2.8 billion. That's a 1.4% increase as reported and flat on a constant basis as our hard surface and commercial business continued to outperform the overall residential channels. In addition, FX benefited our business on a reported basis. As we noted in the earnings release, Q4 has 1 additional shipping day. And for planning purposes, Q1 of 2026 will have 4 additional shipping days and Q4 of '26 will have 4 less. Gross profit for the quarter was 23.7% as reported and 25.3%, excluding charges, as strengthening productivity of $57 million and favorable impact of FX of $15 million were offset by higher input costs of $39 million, continued pressure on price/mix of $20 million and lower volume and temporary shutdown costs of $23 million. SG&A expense for the quarter was 18.8% as reported and 17.9% excluding charges. That gave us an operating income as reported of 5%. Nonrecurring charges for the quarter were $69 million, primarily related to our ongoing restructuring initiatives. Combining the projects announced in Q3 with our previous actions, we should have savings of approximately $110 million this year. It gave us an operating income on an adjusted basis of 7.5%. That's a decrease of 130 basis points as the impact of inflation of $52 million, lower volume and temporary shutdown costs of $22 million and unfavorable price/mix of $20 million offset the benefit of productivity and restructuring actions of $62 million for the quarter. Interest expense was $5 million. That's a decrease versus prior year due to lower overall debt balance and the benefit of our interest income activity. Our non-GAAP tax rate was 17% versus 19.8% in the prior year, mainly due to geographic dispersion of our income. We are forecasting in Q4 and for the full year a tax rate of approximately 18%. That resulted in earnings per share as reported of $1.75 and on an adjusted basis of $2.67. Turning to the segments. Global Ceramic had sales of just over $1.1 billion. That's a 4.4% improvement as reported and 1.8% on an adjusted basis due to favorable price/mix in both channel and product categories, partially offset by lower unit volume. Operating income on an adjusted basis was $90 million or 8.1%, which was a decline of approximately 50 basis points as higher input costs of $31 million and lower sales volume were partially offset by favorable price/mix of $8 million and strong year-over-year productivity gains of $24 million. Flooring North America had sales of $937 million. That's a 3.8% decrease as residential new construction and remodeling remain under pressure. From a product perspective, our LVT and our laminate categories continued with positive gains versus prior year. Operating income on an adjusted basis was $68 million or 7.2%, which is a 190 basis points decline versus the prior year as productivity gains of $29 million were offset by higher input costs of $22 million and the impact of lower sales and increased temporary shutdown costs of $17 million and unfavorable price/mix of $10 million. In Flooring Rest of the World had sales of $716 million. That's a 4.3% increase as reported and an increase of 0.9% on an adjusted basis. The volume growth was driven by expansion in our insulation and panels business as well as in our laminate flooring category, partially offset by continued pressure in price and mix. Operating income on an adjusted basis was $59 million or 8.3%. It's a 220 basis point decline versus the prior year, primarily due to unfavorable price/mix of $18 million, partially offset by continued productivity gains of approximately $8 million. Corporate costs for the quarter were $12 million, in line with the prior year and for the full year should be approximately $50 million. Turning to the balance sheet. Cash and cash equivalents were $516 million with free cash flow for the quarter of $310 million. Inventories were just shy of $2.7 billion. That's an increase of approximately $80 million, primarily due to the impact of foreign exchange and inflation and some increase in imported goods. Property, plant and equipment were just shy of $4.7 billion with CapEx of $76 million and D&A of $170 million in the quarter. We have lowered our full year CapEx plans to approximately $480 million with D&A of $640 million. Overall, the balance sheet is in a very strong position with gross debt of $1.9 billion and leverage at 1.1x, positioning the company to be able to take full advantage of the changing market conditions. Now Paul will review our Q3 operational performance. Paul De Cock: Thank you, Jim. In the Global Ceramics segment, our performance benefited from our premium collections, commercial sales and expanded distribution. All of our markets faced pricing pressure due to excess industry capacity, though we were able to offset due to the strength of our product and channel mix. Across our markets, our commercial business is stronger as the A&D community embraces our industry-leading product innovation and design. Tile market trends are shifting to 3D surface applications that create premium visuals and our advanced technology and design expertise position us to lead the market in this transition. We are the only manufacturer in our markets to offer coordinated collections for very small to oversized options for both floors and walls, which makes selecting our products for a project easier for consumers. In the U.S., our commercial performance outpaced residential due to growth in the hospitality, health care and education sectors. We are leveraging our national distribution footprint to expand our relationships with contractors, specialty retailers and commercial specifiers. In the period, we announced price adjustments based on the current tariff rates. Due to importers building inventories earlier in the year, the tariffs have not significantly impacted the U.S. ceramic market at this point. Our countertop business grew in the quarter through new retail and high-end builder partnerships that will support increased production from our new quartz line that features advanced veining technology for greater realism. In Europe, we improved sales volume in a difficult market. Pricing pressure persists with low market demand and our mix and productivity gains offset higher-than-anticipated input costs. Residential remodeling and new construction remain constrained, while the commercial channel shows continued strength, particularly in hospitality. Across Europe, our regional showrooms and education sessions for architects and designers are enhancing sales of premium collections and our commercial participation. Our porcelain panel sales continue to grow due to our advanced printing technology, yielding more authentic marble and stone looks. In Latin America, markets have softened due to persistent inflation and weakness in housing. In Mexico, we are capturing volume by introducing new textures and a wider variety of sizes and expanding our distribution. In Brazil, our volumes increased across most channels as we enhanced promotional activity. In both markets, we are enhancing our product offering to improve our mix and lowering our cost with productivity and restructuring actions. In our Flooring Rest of the World segment, our results benefited from strength in panels and insulation with rising volumes increasing plant utilization. Our core European markets continued to experience weak remodeling and new construction, which is constraining flooring sales. In response to these conditions, we implemented selective price increases, continued to reduce our cost structure and lowered input costs by optimizing our supply chain. In the segment, we are rationalizing less efficient assets, consolidating operations and reducing administrative and manufacturing overhead. During the quarter, sales outside Western Europe were more stable, with the U.K. performing better as the government increased investments in social housing. With the laminate category remaining under pressure, we have increased participation in the DIY channel, and we are expanding our distribution in Southern and Eastern Europe. Pricing and mix remained difficult during the quarter, and we are executing promotional activities to optimize our sales. The European LVT market is becoming more competitive, and we are addressing this with product innovation, including new battling technology and parquet wood looks. We're expanding sales of both loose lay and glue down LVT, which is used in commercial applications. We are also reorganizing our sales teams to maximize opportunities with residential builders. In a difficult market, our panels division delivered sales growth in MDF boards and decorative panels, which we are expanding into new markets. Our insulation business delivered solid results in a competitive market. We increased our customer base and volumes, which improved our utilization. To support our forthcoming insulation plant in Poland, we are growing sales in Eastern Europe, where the economy is growing faster. In Australia, our expanded hard surface offering is gaining traction with our customer base, while pricing actions and productivity initiatives benefited our soft surface results. We have entered into an agreement to purchase a small New Zealand manufacturer of premium wool carpet, which we will integrate into our existing business. In our Flooring North America segment, we believe Mohawk's hard surface categories outperformed the overall market due to our growing relationships with major retailers and builders, successful promotions and our innovative products with superior visuals and performance features. Our restructuring projects in this segment remain on track as we retire high-cost assets, consolidate logistics operations and reduce overhead. We delivered productivity gains that offset higher energy, material and labor costs flowing through. Retail volume was affected by low consumer confidence that continues to impact large purchases, though some retailers reported improvement in store traffic as the quarter progressed. Market pricing remained competitive and in response to recent tariff changes, we announced pricing adjustments. To address pressure from input and labor costs, the industry also announced price increases in carpet collections. Our hard surface volume rose during the quarter as we expanded placement of our industry-leading laminate, hybrid and LVT product offering. As we expand our accessories portfolio, consumers are increasing attachment of these accessories with our hard surface collections. To grow our commercial participation, we continue to increase sales and marketing activities to expand our customer base. We are implementing promotions to grow volume in main street soft surface sales, and we also enhanced our commercial LVT offering to align with current decorating trends. I will now return the call to Jeff for his closing remarks. Jeff Lorberbaum: Thank you, Paul. All of our markets face a shortage of available housing as supply has failed to keep pace with household formation. To meet growing demand, new home construction and remodeling must expand, which will also lower housing inflation pressures. Most central banks have shifted from prioritizing inflation reduction to stimulating economic growth. Declining interest rates in the U.S. and around the world should gradually encourage increased home sales and remodeling. While we believe these actions will benefit the housing market over time, we remain focused on optimizing the controllable aspects of our business, including our sales strategies, product innovation and operational productivity. Our previously announced restructuring initiatives continue to benefit our results by streamlining our operations and reducing our cost structure. We have identified additional restructuring projects that should deliver approximately $32 million in annualized savings. We are leveraging the scope of our product portfolio, distribution advantages and industry-leading brands to expand our relationships with current and new customers. Our product mix continues to benefit from our premium collections and commercial sales, which is mitigating some of the pricing pressures in our markets. We are managing the impact of tariffs on our U.S. imported product offering through pricing actions and supply chain optimization, and we are reinforcing the value of our domestic manufacturing. Based on current trends in our regions, we believe that market volume should remain soft through the end of the year. Given these factors, we expect our fourth quarter EPS to be between $1.90 and $2 with 1 additional shipping day and excluding any restructuring or other onetime charges. For more than 3 years, the flooring industry has been impacted by both consumers postponing large discretionary purchases and low home sales, which have reduced new construction and remodeling activity. Housing turnover has a significant effect on our industry with U.S. consumers spending an estimated 5x as much on remodeling their flooring in the first year after buying a home than nonmovers. Declining interest rates, increased disposable income and higher home equity should support greater home sales and remodeling in our markets. The housing stock in our regions is aging and requires significant renovation to preserve property values. During the cycle, we have enhanced our operations, cost position and product offering to capitalize on the future market recovery. While the inflection point remains unpredictable, market fundamentals, significant pent-up demand and Mohawk's unique business strengths support long-term profitable growth. We'll now be glad to take your questions. Operator: [Operator Instructions] And our first question today comes from John Lovallo from UBS. John Lovallo: The first one is, in July, I believe you guys noted that 4Q EPS could potentially outpace the normal seasonal decline of about 20% quarter-over-quarter. I guess the question is, what do you view as the most significant changes that have occurred since then that sort of lowered those expectations? And how are you thinking about revenue and margins by segment embedded in that outlook? James Brunk: John, conditions did weaken since we last talked during the quarter with interest rates remaining elevated. The other aspect is consumer confidence decline, which affected our remodeling. Builders have actually slowed a little bit from a construction standpoint and international markets have softened. Inflation has eased, but our costs are still higher than the prior year. John Lovallo: Got it. Okay. That's helpful. And then there was a couple of mentions of outperforming the market. I know hard surfaces in North America was one area you called out in particular. But just curious if there were other product categories and regions where you guys outperformed? And what do you kind of attribute the outperformance to? Jeff Lorberbaum: Our ceramic sales in the third quarter grew, we think, more than the markets due to our improved product and channel mix. We have a larger commercial business than our other segments, which also enhances it. We benefited from new product introductions as well as operational improvements. And then we continue to get benefits from the restructuring in the Flooring Rest of World, as we mentioned in the original remarks, we also had the insulation business and the boards business whose volumes were up. And then across the business in the U.S., we had our hard surface business we're doing well as some examples. Operator: Our next question comes from Matthew Bouley from Barclays. Matthew Bouley: Question on the price increases that are related to the tariffs. I'm curious, it sounded like some of the initial price increases may not be fully flowing through yet, if I heard you correctly, given some of the inventory in the channel. So if you can just kind of delve into a little detail on kind of what's happened with the initial price increases and then some of these additional price increases that you've announced, when might those begin to benefit you guys? Paul De Cock: Yes. So the priorly announced price increases are flowing. And so we have also announced in the third quarter additional price increases, both to recover the tariffs and to recover inflation in carpet. For the tariffs, we announced an additional price increase between 5% and 10%. And for carpet, we have announced approximately 5%. And so as they are now announced and as we see realization of that, that will take us some time until it reaches equilibrium. And then given the volatility, we will also adjust our strategies if tariffs would change or market conditions would change because things are quite volatile, as you know. Jeff Lorberbaum: Just as a comment. Most of our tariffs today range between 15% and 50% of the pieces. We've taken actions to optimize the supply chain, which is negotiating different pieces, moving products between countries, dropping and adding different product categories, and we're implementing price increases to offset the balance. We've also got some benefit from lower freight rates that have been declined during the period, which is helping. And it will take some time for the market to equilibrate as he said. Matthew Bouley: Okay. Got it. Maybe I guess that then leads to the tariff question then. I'm just curious, since the reciprocal tariffs ended up in place over the summer, if there's an update or if you can quantify perhaps sort of the mitigated or unmitigated headwind and if any of that is in your fourth quarter guide or if we should think about more of a Q1 impact as those tariffs flow through? Jeff Lorberbaum: If you take the average of what we're paying, it's probably approximately 20% on all the imported products in general. That relates to, on an annual basis, about $110 million impact before any mitigations that we've done is that with the -- we just talked about the different things we were doing is that we have announced price increases, and it will take a while for them to flow through in the markets to absorb them as we go through. So we think as we go into next year, we're hoping to have everything aligned. James Brunk: And Matt, right now, to answer the second part of your question, we have seen some impact from a cost perspective in the third quarter. I expect to see it continue in the fourth quarter. But also, we've seen the benefit of the initial price increases, both in the third quarter and the fourth. And yes, it is contemplated in our guidance. Operator: Our next question comes from Collin Verron from Deutsche Bank. Collin Verron: You guys also called out raw material and energy costs have come down from their peak. Can you just help us think about the magnitude of declines that you've seen in your raw material costs? And maybe how early in 2026 they'll begin to help margin just given the normal lag from when it will move from your balance sheet to your P&L? And maybe touch on the order of magnitude we can expect in each segment. James Brunk: From an inflation standpoint, in the fourth quarter, we will see raw material prices easing from their peak earlier in the year. Energy and wages will continue to be higher than last year. And as I just noted, tariffs will also increase our costs. We do anticipate continued inflation in our input costs next year, and those can be across both from a material perspective, wages and benefits and energy. Collin Verron: Okay. Understood. That's helpful color. And then Rest of World, they reported adjusted sales growth, I believe, in the quarter. It was a little bit better than normal seasonality from 2Q to 3Q. I was just wondering if you could comment on if you think you found the bottom here in Rest of World? And are you anticipating year-on-year growth in the fourth quarter in that segment? Paul De Cock: Yes. Conditions in general in Europe and the housing market in Europe continue to be slow. We also have the geopolitical events in Europe that are reducing consumer confidence. And most of the Western European countries budgets are stretched. And so we think with the decreasing interest rates down to 2% in Europe, that housing should improve over time. We also know that households have built record savings levels and that inflation is coming down in Europe. And so both of those would fuel a recovery. And then lastly, also energy prices have continued to decline a little bit in Europe. That's kind of the European conditions we see at this moment. Operator: Our next question comes from Rafe Jadrosich from Bank of America. Rafe Jadrosich: I just wanted to follow up on the last question. Just on the material costs, like looking at oil prices have come down and natural gas has come down, I think some recycled like poly is lower. understanding like there's a lag when you guys realize it. Like what's sort of the visibility on inflation into 2026? Like could there be a relief as we go into next year? James Brunk: Well, to answer the first part of your question, it usually takes 3 to 4 months for it to cycle through the inventory. And as I stated, as we look forward into Q1, you'll have the normal wage and benefit increases -- and right now, we still see impact on the tariffs, obviously impacting Q1 and still some minor impact on the higher material costs. Rafe Jadrosich: Got it. Okay. And then can you just -- the cost savings initiatives that you've -- the previously announced and then the additional one that you just announced this quarter, can you just walk us through like the cumulative tailwind to the fourth quarter and then what you expect to carry into 2026? And then just remind us, do you expect additional productivity on top of that? Or is that inclusive? James Brunk: Sure. As we previously said, we were looking at savings about $100 million, fairly evenly spread across the quarters with the additional actions we announced, plus with a little better performance on the previous ones, we're up to about $110 million, so a little bit more in the fourth quarter. As I look forward to 2026, just from the restructuring actions, we should have approximately $60 million to $70 million of favorable impact next year. And again, fairly evenly spread across the quarters. In addition to that, you are correct that we continue to have our normal ongoing productivity initiatives really across the business. Operator: Our next question comes from Susan Maklari from Goldman Sachs. Susan Maklari: My first question is going back to the new products and knowing that there's a lot that's going on across the business, but maybe focusing mostly on the North America piece. Can you talk about where those launches are in terms of their life cycle? How much more momentum we could see next year? And any plans for additional products that could come through that could allow you to realize favorable mix or even outgrow the market in 2026 if the macro and the housing environment stay more challenging? Jeff Lorberbaum: Every one of the businesses has product innovation coming through it. So in ceramic, the business is going towards 3-dimensional tiles and different surface textures to make them look different. There's also new decorating technologies to enhance them further. In the LVT collections, they are updating the decorating trend as well as we're introducing PVC alternatives that we just lump into a group we call hybrid. We have a new quartz countertop line that's coming in that should be helpful today with the increased tariffs on those, especially because a large part comes out of India is it. So that's starting up, and it has new technology that will introduce new looks that I don't believe anyone else in the world can make. And then we continue to always increase the realism in the laminate, introduce new formats and sizes and shapes. And then continually, all the businesses are incrementally improving the offering. Susan Maklari: Okay. That's helpful. And then, Jeff, can you talk a bit about how you're thinking about the path for margins next year? How do we think about what the businesses can achieve given the company-specific elements in the macro that you'll likely be facing? And how that compares to the longer-term target that you've set for the business in kind of that high single, low double-digit range? Jeff Lorberbaum: Jim and I can get that together for you. First, in next year, we're looking at next year as being a transitional year from the cyclical low, and we're expecting it to improve somewhat as we go through. Central banks, we believe, with the lower interest rates everywhere should improve spending on housing around the world. We see the mortgage rates are declining. There's high home equity rates as the prices of houses have gone up and the increased housing supply around the world should help and benefit the category. There's also where we're going into, and this is a really long cycle. I don't remember one, I think, in my career that's lasted more than 3 years like this one has. And so there's a huge pent-up demand in the remodeling business as people have postponed larger projects. We anticipate with this higher volume and improved pricing and mix next year, we should see the restructuring and productivity initiatives that Jim talked about earlier should help lower our costs and improve the margins. And the exact point of the inflection point and when it's going to happen, we don't know exactly when, but we know it's going to. And then when it happens, there's usually multiple years of above-trend growth as we recover from the bottom of the cycle. James Brunk: And I would build on to that, certainly emphasizing the cost structure reductions that we've made should leverage our margins as we start to see those volumes increase. Input costs as we go into the first quarter of next year, as I said, will continue to go up in total, but productivity and tariff price increases should help us offset. And as Jeff said, it's tough to predict when the turn actually happens, but we're anticipating better results for the year based on the combination of our product innovation and our cost reduction actions. Operator: Our next question comes from Sam Reid from Wells Fargo. Richard Reid: I wanted to know if you could quantify the benefit to ceramic volumes in the third quarter from that new Daltile initiative into Lowe's. And then any sense as to whether there's plans for additional sell-in benefits in the fourth quarter that might be embedded in the guidance? Jeff Lorberbaum: Lowe's purchased ADG. And so we were a long-standing partner of both of them. At this point, it really hasn't impacted the business in the third quarter one way or the other. Our goal with every -- like with every customer is to optimize our business together and maximize our results together. Richard Reid: That helps. And then maybe just more of a housekeeping question. But if I heard correctly, I believe there's going to be 4 additional shipping days in the first quarter and then a corresponding 4 fewer days in the last quarter of '26. Can you be able to just quantify the impact from those shipping days, maybe the top line and to bottom line, especially in that first quarter, just so we have some context there for modeling? James Brunk: Well, it is a reset year for us in terms of the calendar. And so those 4 additional days from a year-over-year perspective, it's about 6.5% benefit on the sales line. And obviously, it really depends on by segment, the flow-through of which products and such for a margin perspective. But from a sales perspective, you could plan on kind of every day is roughly 1 point to 1.5% change. And then the fourth quarter obviously has, as you pointed out, has the same reduction in days. Operator: Our next question comes from Keith Hughes from Truist. Keith Hughes: One of Paul's comments about some improved retail traffic in the quarter. I didn't show up on sales it looks like. Can you talk more about that, where you're seeing it? And has that continued into October? Paul De Cock: Yes. As we went through the quarter, we saw a slightly improving retail traffic. We had some information from our customers. But in general, the current consumer uncertainty continues to limit remodeling activity. And so the postponement of large discretionary projects and also the declining home sales have significantly reduced the flooring sales through the specialty retailers. And so we are now, like Jeff said, 3 years into consumers deferring these projects. And so we anticipate when it turns that it could lead to a relatively strong recovery in that channel. Operator: Our next question comes from Michael Rehaut from JPMorgan. Michael Rehaut: I just wanted to start off with maybe just going back to tariffs for a moment. And I wanted to better get a sense of -- I think you kind of started to quantify a little bit of the impact from a cost standpoint on your own business. Just wanted to make sure -- maybe if you could just repeat those numbers. And what I'm really looking for is if you kind of think about 1Q, 2Q, 3Q now, what the cost impact has been on your business? And for each of those quarters, what have you been able so far to recover in price? I understand you expect 2026 for it to be fully offset, but kind of where we are today in that quarter-by-quarter? James Brunk: As Jeff talked about earlier, right now, we're doing -- we're seeing about an average impact of about 20% or just over $100 million to $110 million before the mitigating action. Again, that's an annualized amount. We've started to see in Q3, as I previously stated, some impact on -- from a cost perspective. But as planned, we are offsetting that with pricing both in Q3 and in Q4. And then we'll continue, I imagine, to see it build as you go into the first quarter of next year. But remember, from a pricing perspective, we are on our second price increase due to the tariffs on those specific products that are impacted. Michael Rehaut: Okay. I appreciate that. I guess, secondly, I just wanted to shift to the balance sheet and capital allocation. I know you kind of edged down, I believe, your CapEx outlook for this year. Your balance sheet remains pretty strong. I know you bought back a little bit more stock this quarter. Just trying to get a sense of what's kind of holding you back for being a little more aggressive in the share repurchase department. I know historically, all else equal, if it's a healthy market, you have a pretty active M&A program and certainly like to keep a certain amount of dry powder. I'm wondering if the reason for maybe this more continued restrained share repurchase approach is you have eyes on the M&A market over the next couple of years, if there are certain assets that are coming up because otherwise, I feel like people might have expected a little bit more on the share repurchase side. James Brunk: Well, really from share repurchase, just to recap, we bought about $108 million back year-to-date, and that's on free cash flow from a year-to-date perspective of about $350 million. We're going to continue to use that as part of our overall capital allocation strategy, and we expect to continue investments in our businesses as the market improves. Remember, that's one of our priorities to try to drive an increase in our margins and our results. We'll optimize our product offering and continue to increase productivity during that period. We should see, to your point, more opportunities to acquire businesses as the environment strengthens. And again, share buybacks will continue to be part of our strategy as we go forward. Operator: Our next question comes from Adam Baumgarten from Vertical Research. Adam Baumgarten: Given some kind of relative stability on the tariff front, again, relative being the key term, are you finding that the industry now is a bit more coordinated from a tariff-driven price increase perspective versus maybe over the summer when things were a bit more hectic and everyone was trying to figure things out, maybe it's a bit more kind of broad-based at this point? Jeff Lorberbaum: I'm not sure it's coordinated. The whole industry has the same impacts from the tariffs going up. the industry, like other ones, tried to increase inventories, not knowing what's going to happen to reduce it. So there's high inventories going into it. So -- and then with the changes in place, we put through an increase to the first of the year. At the moment, most of the industry has announced increases about now going into the fall, and it has to flow through all the pieces and get done. And we're assuming it will take until the first of the year for it to level out, given there's -- everybody has got different inventories and different strategies. But we assume that somewhere about the first of the year, it will equalize out. Adam Baumgarten: Okay. Got it. And then just on commercial, I know that's been a nice outperformer relative to residential for a while now. But you had at least last quarter, kind of talked about maybe some leading indicators pointing to some potential slowing. Are you actually seeing any signs of demand in that channel is slowing at this point? Paul De Cock: So yes, you're correct. Around the world in the different markets and segments that we are active, the commercial channel continued relatively to outperform the residential market and our backlogs have remained stable. But we also see in some markets and segments some slowing activity. And so we are trying to compensate that by pushing our higher-end products with unique advantages, which helps in pricing and in margins. And in general, also our Ceramic segment and our ceramic businesses have a higher exposure to the commercial segments than Flooring North America and Flooring Rest of World. Operator: Our next question comes from Philip Ng from Jefferies. Philip Ng: Now that you actually have a better view on where tariffs could land, remind us how you stack up from a cost standpoint in the U.S. in some of your major categories versus your competitors, like whether it's ceramic, laminate, LVT and then of course countertops, as you kind of pointed out, a lot of that's coming from India. So there's some pretty sizable tariffs coming in. Is your laminate product becoming even more competitive versus other laminate products and a better substitute for LVT? And have you started seeing any new placement from your channel partners, whether it's the builders, retailers or the R&R side of things? Paul De Cock: Yes. So you're right. Our waterproof laminate collections continues to be an excellent alternative to LVT, and we are indeed seeing builders shifting to our laminates given its performance and aesthetic and also installation advantages. And so with imported laminate now also included in the reciprocal tariffs, this should benefit us because, as you know, all our laminate products are produced here in the U.S. Philip Ng: Okay. Do you have a big cost advantage for most of these at this point, your products, some of these bigger categories that are impacted by tariffs? Paul De Cock: I mean laminate is a very good value-oriented product in the market compared to other options. And so with our domestic assets in North Carolina, we have a very competitive setup in that category. James Brunk: And then in ceramic, most of our portfolio comes -- is manufactured in the U.S. and Mexico, which is advantaged of tariffs increase. Philip Ng: Okay. That's helpful. And then A lot of moving pieces. Certainly, there's a price/cost element lag for your prices coming through early next year. And then obviously, input costs have come down, and there's a lag associated with that as well, and you got the productivity gains. I think, Paul, in your prepared remarks, you mentioned the word equilibrium. And then Jim, can you kind of help us unpack all that? I know a lot of moving pieces here. But when we look to early next year, is the goal that productivity restructuring plus price cost is kind of neutral and then whatever volume growth you have will ultimately drive EBITDA and profitability. Is that the right way to think about things? Jeff Lorberbaum: Jim will answer, but the equilibrium we were talking about was in the tariffs and the passing the tariffs through and the industry equilibrating so that it's a little confusing with the different inventories and strategies as people implement them. So we think by the first of the year, the tariff situation will equate. Jim, do you want to answer the second part? James Brunk: Yes. The second part, Phil, is if you kind of start with Q1, we'd expect somewhat normal seasonality, obviously, adjusting for the 4 extra shipping days, I noted. Input costs -- and again, when we say input costs, it's everything. So it's not only material, it's wages, it's labor, it's energy and shipping costs, and that should continue to go up, but productivity and tariff price increases really should offset. And although it's difficult to kind of predict the volume trajectory, we do anticipate that the results should improve from a year-over-year perspective. Philip Ng: So Jim, did I hear you correctly, the productivity and price and all that should offset the inflation that's like in equilibrium? Is that? James Brunk: Yes. The combination of all those, that is the plan right now. They should be able to basically offset. Operator: Our next question comes from Stephen Kim from Evercore ISI. Aatish Shah: This is Aatish on for Stephen. Just going back to the commercial question. Can you give us an idea of how large the commercial piece is for the company overall and by segment as well? And then which of the larger verticals, maybe like on a dollar profit basis, are you seeing strength in and which ones are the most challenged? James Brunk: Well, overall, from a company perspective, we have about 25% exposure to commercial, but a larger piece of that is in our Global Ceramic segment. And so you see strength not only in the U.S. but in Europe as well. And then in our U.S. business in Flooring North America, you have seen the backlog remained fairly stable, led by the government and education channels. Jeff Lorberbaum: And the Rest of World channel has the lowest amount with very limited commercial in it. Aatish Shah: That's helpful. And then just kind of taking a step back, overall, during this kind of challenged period, how are you managing your sales force? And then is there any distinction between how that's managed between commercial and resi? Any kind of color there would be helpful. Jeff Lorberbaum: [ Shah ] what you're looking for. The sales forces -- we have different sales forces in each business in each region. Depending upon the region and the size of the business, they are more or less specialized depending on where it is. The most specialized ones would have very specific sales groups calling on retail. They have national accounts. They would have multifamily would be separate and builder. And you would have a unique sales force calling on each one of those. And then same thing and you get in the commercial categories, they would be broken down by different segments and each of the segments would have specialists in it to be able to convey the value of the products to each. Now those would be the most specific. And then depending upon country and product category and how big it is, it could be very limited segmentation up to the extreme of every category segmented. Operator: Our next question comes from Trevor Allinson from Wolfe Research. Trevor Allinson: A follow-up question on the latest round of restructuring. Can you just talk about what you're accomplishing with this round that you didn't play with the previous restructuring? Is it just incremental capacity coming offline? And does the recent restructuring impact either different product categories or geographies and previous actions? Just how should we think about that being distributed across your segments? James Brunk: It's fairly spread, Trevor, across all 3 segments. The segments continue to kind of challenge each of their structures. And so there's nothing necessarily specific, but we're looking at unprofitable products or plants that we could do a consolidation in as well as just exiting inefficient assets. Jeff Lorberbaum: And it's also taking out costs in the administration as well as sales and marketing in addition to the operational costs everywhere. Trevor Allinson: Okay. That's helpful. And then I think Paul mentioned the LVT market in Europe becoming more competitive. Do you think that's due to more product moving into Europe from Asia due to the U.S. tariffs? Or is it simply just due to a weaker European market overall? Paul De Cock: Yes. The LVT is the largest imported category in Europe. And although it's a lot smaller than in the U.S., it's also growing a little faster than the market. And so imports from China are growing and the market continues to be competitive. And then in Europe, we are combining both manufactured and sourced products to optimize our position in the market. Operator: And our next question comes from Mike Dahl from RBC Capital Markets. Christopher Kalata: This is Chris on for Mike. Just going back to North America price/mix. I'm just trying to get a better sense of net of the tariff dynamics, the key drivers there. Could you just provide a little more color on the competitive pricing pressures you talked about? How much of that is driving the inflection lower in price mix this quarter? And how much is just mix down? James Brunk: Sure. What we're seeing, obviously, is demand is lower and less than last year that's creating -- competition is very aggressive and promotions are being used. Residential remodeling is probably impacted the most by consumer confidence, which is deferring projects and also creating some trade down. Internationally, political events are certainly constraining those markets. And in the midst of all this, we are continuing to see our ceramic with its commercial penetration outperforming the other segments. Christopher Kalata: Got it. Okay. And then in terms of the outlook on price/mix and layering in the tariff pricing out there, do you guys have a best guess in terms of when we could see that segment return to positive price/mix or some of the offsets and uncertainty around tariffs still leave that uncertain? James Brunk: From an overall company perspective, I would anticipate from a year-over-year variance that we will see some improvement in the fourth quarter as more pricing comes online. And then again, as we go into next year, continued improvement in that area. Christopher Kalata: And just to clarify, is that improvement sequentially in terms of still year-on-year headwind but moderating or year-on-year growth? James Brunk: I'm talking about year-on-year. Operator: We do have one additional question. It looks like it's from Timothy Wojs from Baird. Timothy Wojs: Maybe just one clarification and one question. So the clarification just on Phil's question, when you were talking, Jim, about kind of pricing and productivity kind of offsetting material costs. Were you talking more as you kind of enter 2026? Or are you kind of saying that should kind of be the expectation for '26? James Brunk: I was talking about as we entered 2026, looking at the first quarter into even the second quarter, depending on, obviously, what happens to material prices as we exit the year. Timothy Wojs: Okay. Okay. And then the second question, just in areas like ceramic, where your competition is raising prices because of tariffs and you're advantaged, how are you kind of approaching situations like that with regard to kind of optimizing price and volume? Are you trying to take price at the same time? Or are you kind of keeping price consistent and really pushing for volume and placements? Jeff Lorberbaum: This is really a balance between all of them. You have to take each market, each product and what's going on. And dependent, you can see in our carpet business, the industry has been absorbing the pricing for 3 years where we haven't had a price increase. We have inflation every year. So the industry -- or we announced prices and the whole industry has announced prices to try to get some of the coverage of the inflation back. We have to go through each product and category and evaluate it at the time. Operator: And ladies and gentlemen, with that, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Jeff Lorberbaum for closing remarks. Jeff Lorberbaum: Mohawk is taking many actions to prepare for the recovery of the markets that we're in. We are at the bottom of the cycle. We can't determine the exact inflection point, but there is significant demand for housing, remodeling that's been postponed. And with the interest rates coming down, we know we're going to see better times ahead. We just can't pick the moment. We appreciate you joining our call, and thank you for taking time to be here. Operator: And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to EastGroup Properties, Inc. Third Quarter 2025 Earnings Conference Call and Webcast. At this time, note that all participant lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. And if at any time during this call, you require immediate assistance, please press 0 for the operator. Also note that this call is being recorded on Friday, October 24, 2025. I would now like to turn the conference over to Marshall A. Loeb, CEO. Please go ahead, sir. Marshall A. Loeb: Good morning, and thanks for calling in for our third quarter 2025 conference call. As always, we appreciate your interest. Brent W. Wood, our CFO, is also on the call. And since we will make forward-looking statements, we ask you to listen to the following disclaimer. Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and our earnings press release both available on the Investor page of our website and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under the Securities Act of 1933, the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements in the earnings press release, along with our remarks, are made as of today and reflect our current views on the company's plans, intentions, expectations, strategies, and prospects, based on the financial information currently available to the company and on assumptions it has made. We undertake no duty to update such statements or remarks whether as a result of new information, future or actual events, or otherwise. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Please see our SEC filings, including our most recent annual report on Form 10-Ks for more detail about these risks. Thanks, Casey. Marshall A. Loeb: Good morning, and I would like to start by thanking our team. They have worked hard this year, and we are making solid progress towards our 2025 goals. I am proud of our results. Our third quarter results demonstrate our portfolio quality and resiliency within the industrial market. Some of the results produced include funds from operation at $2.27 per share, up 6.6% for the quarter over the prior year. And now for over a decade, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year. Truly a long-term trend. Quarter-end leasing was 96.7% with occupancy at 95.9%. Average quarterly occupancy was 95.7%, which, although historically strong, is down 100 basis points from the third quarter of 2024. Quarterly releasing spreads were 36% GAAP and 22% cash for leases signed during the quarter. Year-to-date results were slightly higher at 42% GAAP and cash, respectively. Cash same-store rose 6.9% for the quarter and 6.2% year-to-date. Finally, we have the most diversified rent roll in our sector with our top 10 tenants falling to 6.9% of rent, down 60 basis points from last year. We target geographic and tenant diversity as strategic paths to stabilize earnings regardless of the economic environment. In summary, we are pleased with our results and the increase in prospect activity we are seeing. Converting that activity into signed leases still takes time, but we are pleased to see the growing pipeline. In terms of leasing, the third quarter improved materially from a slower second quarter in both the number of leases signed and square feet. From another angle, those metrics were also markedly improved versus the third quarter of 2024. Similar to last quarter, the market remains somewhat bifurcated such that we are converting prospects 50,000 square feet and below. Our larger spaces have prospects, and we are cautiously optimistic with improved activity in these spaces. In the meantime, with larger prospects being somewhat deliberate this year, it is impacting us in several ways. First, delaying expansion means the portfolio remains well leased and is ahead of initial forecasts. Our quarterly retention rate rising to almost 80% is an indicator of tenants' cautious nature. On the other hand, our development pipeline is leasing and maintaining projected yields but at a slower pace. This in turn lowered development start projections from earlier in the year. And our starts, as we have stated before, are pulled by market demand within our parks. Based on current demand levels, we are reforecasting 2025 starts to $200 million. Longer term, the continued decline in the supply pipeline is promising. Starts were historically low again this quarter. Couple this with the increasing difficulty we are experiencing obtaining zoning and permitting, and as demand increases, supply will require longer than it has historically to catch up. This limited availability and new modern facilities will put upward pressure on rents as demand stabilizes. And as demand improves, our goal is to capitalize earlier than our private peers on development opportunities based on the combination of our team's experience, our balance sheet strength, existing tenant expansion needs, and the land and permits we have in hand. From an investment perspective, we are excited to acquire the previously announced properties in Raleigh, North Carolina, new development land in Orlando, where we will break ground this quarter, and new buildings and land in the fast-growing supply-constrained Northeast Dallas market. Brent W. Wood: Brent will now speak to several topics, including assumptions within our updated 2025 guidance. Good morning. Our third quarter results reflect the terrific execution of our team, the solid overall performance of our operating portfolio and the continued success of our time-tested strategy. FFO per share for the quarter exceeded the midpoint of our guidance at $2.27 per share compared to $2.13 for the same quarter last year, an increase of 6.6%. Our outperformance continues to be driven by good fundamentals in our 61 million square foot operating portfolio, which ended the quarter 96.7% leased. From a capital perspective, we took advantage of favorable equity price early in the year, which allowed us to enter the quarter with a reserve of about outstanding forward shares agreements. During the third quarter, we settled all our outstanding forward shares agreements for gross proceeds of $118 million at an average price of $183 per share. Our guidance for the remainder of the year contemplates that we utilize our credit facilities, which currently have $475 million capacity available and issued $200 million of debt late in the fourth quarter. As we often emphasize, our evaluation of potential capital sources is a fluid and continual process that can result in varying outcomes depending upon market conditions. Our flexible and strong balance sheet with near-record financial metrics allows us to be patient when evaluating options. Our debt to total market capitalization was 14.1%, unadjusted debt to EBITDA ratio of 2.9 times, and our interest and fixed charge coverage increased to 17 times. Looking forward, we estimate FFO guidance for the fourth quarter to be in the range of $2.30 to $2.34 per share and for the year in the range of $8.94 to $8.98, representing increases of 7.9% to 7.3% compared to the prior year. Our same-store occupancy for the fourth quarter is projected to be 97%, which would be the highest quarter for the year. As a result, our revised guidance increases the midpoint of our cash same-store growth by 20 basis points to 6.7%. We lowered our average portfolio occupancy by 10 basis points due to the conversion of a few development projects prior to full occupancy. Considering the slower pace of development leasing, we reduced construction starts by $15 million. Our tenant collections remain healthy, and we continue to estimate uncollectible rents to be in the 35 to 40 basis point range as a percentage of revenues, which is in line with our historic run rate. In closing, we were pleased with our third quarter results and remain hopefully optimistic that signs of macro uncertainty subsiding and consumer and corporate confidence strengthening setting the stage for next year. Now Marshall will make final comments. Marshall A. Loeb: Thanks, Brent. We are pleased with our execution this quarter and year to date, moving us ahead of original expectations. Market demand seems to be dusting itself off and beginning to move forward again. Regardless of the environment, our goals are to drive FFO per share growth and raise portfolio quality. If we can do those, we will continue creating NAV growth for our shareholders. Stepping back from the near term, I like our positioning as our portfolio is benefiting from several long-term positive secular trends such as population migration, nearshoring and onshoring trends, evolving logistics chains, and historically lower shallow bay market vacancy. We also have a proven management team with a long-term public track record. Our portfolio quality in terms of building and markets improves each quarter. Our balance sheet is stronger than ever, and we are upgrading our diversity in both our tenant base as well as geography. We would now like to open up the call for any questions. Operator: Thank you, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touch-tone phone. You will then hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press star followed by two. And if you are using a speakerphone, you will need to lift the handset first before pressing any keys. And also note that out of consideration to other callers and time allotted today, we ask that you please limit yourself to one question and get back in the queue should you have any follow-ups. Thank you. And your first question will be from Samir Upadhyay Khanal at Bank of America. Please go ahead. Samir Upadhyay Khanal: Marshall, thank you for your commentary. I guess maybe expand on leasing a little bit. Kind of the color that you provided, especially as it relates to the development pipeline. Know you have got World Houston, other projects in Texas. You also take, you know, said the conversion to sign leases are taking longer for those bigger sort of boxes there. So maybe talk around, maybe expand on your comments a little bit and maybe what these prospects need to see to get to the finish line? Thanks. Marshall A. Loeb: Okay. Hey, good morning, Samir. Good question. I will try to cover it. I think I would say a couple of things. One, we are certainly more encouraged at the tenor of those conversations is kind of each month gotten better. Maybe starting in May, which is really, was May was when we felt kind of the tariff impact through today. So better than say, when we were I got asked that question earlier in the week when we were at your conference in September, for example. In our portfolio, and maybe we are a little unique in that so much of our of that a third of our development leasing is existing tenant expansion and movement within a park. So we have seen and you seen it in our numbers, we our retention rate especially in third quarter, ran pretty high at almost 80%. So the portfolio is benefiting our same store numbers are benefiting. And then on the flip side of that, and we have we have hit the pop the slow button on our development pipeline or starts, a few times kind of each quarter, bringing it down of like, look, and and we do have more prospects than we have had as the years played out. It is getting them and and I do not know. I was hoping you know, one, if we have one interest rate cut, According to Your Economist, we will get another one coming, at least the emails I am seeing. This morning and things like that. So hopefully that, maybe a little bit of ceasefire in The Middle East, things like whatever it takes to get business sentiment a little bit better, and I would say it it is. I people got beyond the shock factor. But look, we know our task at hand, which is to lease these development projects once they will the ones that are in lease up where we finish the construction and the ones that have transferred over. So we are we are not assuming any spec leasing in the balance of the year budget. So I am hoping there is potentially upside there. We are running out of time this year. But we also build out spec suites in our our vacancies. So if someone needs to move quickly, which they all do in these smaller spaces, we are able to accommodate that. So things are better, but they are not it just it has been an odd year that you send out leases, and they have not always come back. I remember that more. That has been more eventful this year than it has been in the prior five years. Thank you. Sure. Thank you. Operator: Next question will be from Blaine Matthew Heck at Wells Fargo. Please go ahead. Blaine Matthew Heck: Great. Thanks. Good morning. Following up on development, can you just talk about how construction costs have trended more recently and whether that has been a constraint on starting more projects. And kind of related to that, where do you think market rents are relative to rents that would generate acceptable yields for you guys on those development projects? Marshall A. Loeb: Good morning, Blaine. We are we have seen construction pricing come down really with a lot of it is we have we have been watching with everything going. We have not had labor issues. And usually what our construction teams will say is that we get pricing. It may be a little high, but once they realize you are really serious, that that has come down maybe 10 to 12%. Because people are so hungry for projects given just the lack of outside of data centers. No other sectors are really going as quickly. And I guess thinking of data centers, we do getting transformers and the electrical equipment is challenging. So we can get those, but there is a lot of demand and a long lead time. So the the land we acquired this quarter, we will usually underwrite it on today's rents. Not forecasting any growth I hope it grows, but we are not forecasting that. And today's construction pricing And everything is still kind of penciling out into the seven or low sevens. It is not easy to find the land, the permitting and zoning on these infill sites gets harder and harder, but we are pleasantly pleased with how that is going. It is not construction costs that have slowed us down. So much as demand, which was really strong in fourth quarter a year ago, and first quarter slowing in second quarter. It picked up In third quarter, we got more leases and more square footage than we did in second. Quarter or third quarter last year, so we are pleased with that. We just need to keep that momentum and get our look at our potential revenue get leased up what we have already spent the capital on, and we will look, it is more fun to go as fast as the market tells you to go. But this year, we are trying to go as slow as the market tells us to go as well. Great. Thank you, Marshall. You are welcome. Operator: Next question will be from Craig Allen Mailman at Citi. Please go ahead. Craig Allen Mailman: Hey, guys. Not to dwell on the development pipeline, but the incremental leasing there was was pretty muted quarter over quarter. I I saw you did get some leasing done at Dominguez, but you also kind of pushed out the stabilization date there. But I guess my my bigger my bigger question here is, you know, you talked about sending leases out but not hearing back. I mean, if you look at the availability and the development pipeline, how how much of that availability has active prospects on it? Versus, you know, just quieter from a tours and and interest perspective. And you know, is there a is it rent related where you can toggle that up or down or can concessions, or is it just if people do not want to make a decision because of concerns, they are just it it other pricing stuff does not matter as much. Marshall A. Loeb: Yeah. Hey, Craig. Good morning. I would say during the quarter, kind of since the last call, we ended up with about you are at total, I wish it was a bigger number, about $6,215,000 roughly, 215,000 square feet. What is I guess, being more specific, at least on Dominguez, we oddly enough, we sent out five leases on that space and the fifth one is the one that came back. And so as we threw out a bigger net, we said we would subdivide the building, or even consider a cell, which we are we have not ruled out that, although we have gotten part of it at least. And in subdividing the building, we are adding an an office component on the other end of the building. So that is what we decided, again, trying to rather than lease it as one two sixty that we would break the building up, so it is delayed the delivery adding more a few thousand more feet. Of office in LA. And then kind of broadly speaking, you know, the other thing within our development numbers, and I do not remember us doing this, we got a a 97,000 foot development lease signed for full building in Texas And within a week, and they had a broker, an attorney, they reach back out to us to tell us they have changed their mind. So it has been a little bit of a maddening year and terms of leases sent out that did not come back or this case a signed lease that someone and we are working through the termination and some things like that, but and that is not in our account. So I am leaving that lease Even though it was a signed lease, we pulled that one back out. Now I do not think they are going to occupy. So that is odd or atypical for most years. And in terms of kind of looking at our development schedule, I would say about about everything has some degree of activity You know, we need to get it signed. I am trying to think, and and some of these are are odd, where to me, it it hits me like I am looking at the list. Horizon West 5, where it is probably our seventh building in a park, same architect, same broker, but that building is a little bit slower than we would like. Although we have got activity and Orlando is a good market, that is just it tells me where the market is, where where it is the seventh, eighth building in a park, which usually goes faster than the first buildings in a park, but they are taking a little bit longer. So we have activity. You know, the other thing I will say, and I will say it carefully, we have in the last thirty days, more large tenant more kind of prelease. Again, given that lack of supply, activity, what, 92% of our revenue is from tenants under 200,000 feet, and we have several deals. They will take a few quarters that we are working on with tenants or and or prospects that would materially move that number where we would be building up a non shallow bay building that they are out, that they like our land or their existing tenants who need to expand. So that is promising, and I am hopeful, but I would rather show you those But the good news is there is more in the pipeline and about every building has a certain amount of activity. It is just where things shook out, you know, between third quarter through today's call. So we just we know we have got our officer meeting next week. We are all getting together, and we know our task at hand, which is to get you know, sign space, collect rent. Thank you. Operator: Next question will be from Nicholas Patrick Thillman at Baird. Please go ahead. Nicholas Patrick Thillman: Marshall, you kind of commented on the overall operating portfolio and the leasing volume you have there. As you are kinda looking at the expiration schedule for next year, rents are a little bit lower here as we look at the mix, it is pretty much in line with your exposures Could we see another kind of just overall strong year in spreads here in the mid-30s for a gap Just just kinda looking at the mix and what you guys have been seeing on that activity level. Marshall A. Loeb: Yeah. Good morning, Nick. Yes. I believe we will and if a couple of things. Third quarter was a little lower. One difference and again, maybe offline, welcome for feedback. We are a little bit of an oddity in the industrial REITs in that we report releasing spreads on leases that got signed during the quarter where most of our peers report on what commenced So our numbers we like I think invest trying to be investor friendly. It is a little more real time than what may have gotten signed a few quarters ago that commenced in third quarter. But I guess that and then really focusing on your question, yes, I think we could kind of maintain those third quarter levels. Certainly, next year, end of next year, where I I keep waiting, and I know one of our peers made the comment, this is the best setup they have seen in forty years. I have not I have not done this forty years. I have done it a long time. I am not that level, but I really like the low supply. I saw the deliveries in third quarter nationally were the lowest level since 2018. So it is hard to get inventory built and becoming harder and there is not much of it out there in the shallow bay. So look, I think our we have embedded growth. I think it will level out And then I think when demand turns, it will not take much because there is about 4% vacancy in our markets in shallow bay and there will be a flight to quality as people expand too. So I think we will have another leg up in rents. I think if things stayed where they were, we could keep at that level. But I am hopeful between you know, maybe now and the end of next year that there is you know, in a midterm election year, maybe the headlines will be a little bit less that people will when things turn, they surprise me how quickly they turned at the end of last year. And in the first quarter. It has gotten to where the headline risk has more impact than probably I thought it would, looking back the last the headline in fourth quarter, the headlines in April, and maybe next year if we can avoid some headlines I think you could have a kind of a rent squeeze. Someone used the quote. There is a cost to waiting on leases. And things like that in our peer group. I am not sure we are there exactly yet, but I could easily see that coming. And I again, I would rather I am better at calling things in hindsight than forecasting, I will admit. Nicholas Patrick Thillman: Very helpful. Thank you. Operator: Next question will be from Connor Mitchell at Piper Sandler. Please go ahead. Connor Mitchell: Appreciate all the commentary so far. And Marshall, you have given a couple of specific examples on some of your markets, but just wondering if you can kind of provide a bigger picture or even drill down a little bit on just kinda what you are seeing for the regional breakouts, whether it is Texas, Florida, California, some of the other markets, where where you are seeing some more of the the strength in those markets or weaknesses in those markets for you know, the retention rate that you mentioned, but then also, adding some new tenants into the pipeline as well. Just kinda get a feel for how you are thinking about each of the markets and almost like a ranking of them in a sense. Marshall A. Loeb: Sure. I guess hey, Connor. Good morning. I would say the Eastern Region, you know, with a broad brush has been strongest region or had the strength kind of from mid year on. Florida has been broadly speaking, a good, really strong market there. I wish we were bigger in Nashville, but that is a really good market. And you have seen us growing in Raleigh. We like that market a lot. Texas, generally, you know, we are we like that You saw us acquiring more land there. At the moment, we have got too many buildings and too many tenants, but I will thank our our Texas team. We are a 100% leased in Dallas. So we need expansion space that land for tenants to expand. So we are happy there. The other market, I will complement our team in Arizona, there is a lot of vacancy in the Arizona market. There was a lot of supply that came in, but we are 100% in Phoenix, 100% in Tucson, and been able have been able to push rents and our development leasing is there. So those would be on the good side. On the a little bit of a beat the same drum. I will The California markets are still slower. Than our other markets really with LA, The Inland Empire had positive net absorption but LA has had I think it is 11 consecutive quarters of negative So I would love to have just a flat quarter in the city of LA, a little over a million square feet. Negative in third quarter. I thought they would turn. I am glad we got the activity we did. On Dominguez and got that signed. And then Denver is another market that has been a little bit slower for us. We are not all that big in Denver, but those, if you said, what are the markets where you are kind of thinking a little more Denver has been a little bit slower for us on our development leasing there than we would like. And California has been a tough market for eighteen months or longer. Connor Mitchell: Appreciate all the color. Thank you. Marshall A. Loeb: You are welcome. Next question will be from Richard Anderson at Cantor Fitzgerald. Please go ahead. Richard Anderson: Thanks, and good morning. So back to the releasing spreads, the 22% cash based number for the third quarter, let us just say hypothetically that this deliberate tenant thing continues, for whatever reason. And, you know, it is two years from now, and and we are still sort of on a treadmill ish type of thing. How how much time do you have for that that 22% to sort of close in on a fairly pedestrian single digit type number? I mean, how much more bites of the apple do you have? Do you think, before you need to start to see activity really start to ramp so that starts to revert the direction starts to reverse? Again. Marshall A. Loeb: Hey, Rich. Good morning. I will I will take a stab at it and let Brent add color. I think the one I think I have kidded. I do not remember much about econ one zero one, but when I just look at supply and it would not take much demand to kind of tilt the rents. But but but hearing your question, if we stayed steady state, we typically you know, next year, I think we have got 14% doing this from memory from our supplement, rolling. And so it would take several years before we could address those leases. Again, the later the latter you got into that, what, that would be seven years, but some of those there is a number of leases pending term of that lease that just got signed in the last couple. So there is probably not maybe 20% rent growth in there. But it would take a while just I guess when the market is good, it takes us a while to get to that embedded growth. And as the air goes out of the balloon, which may be kind of your it will take a while for the air go out of the balloon with kind of most of our leases are somewhere between three to ten years. It would take a while for us to move all those to market. And and and I cannot yes. So if that happened, that is how it would play out. I cannot imagine the market seems to net for better or worse, never stays flat like that. Brent W. Wood: Yeah, I would agree, Rich. Hey, this is Brent. Yeah, I mean, when you are rolling 15% to 20%, of course, you can do the math and figure out when when you start having flat and how long in terms of rental rates. Could say four to five years and how far are you into that already. But and again, know that is a hypothetical, but it feels much stronger than that with supply. Supply really in my career and time, seeing supply get this tight really kind of excites me because it would not take much shift in sentiment and some execution for, I think, the markets development starts and those type things to turn very quickly, much quickly, more quickly. I think people are thinking. And kind of along those lines, question of rents and does that impact construction starts. I think the good news there when you kind of think of this as as a four legged stool and the cost side as Marshall said decreasing generally Rents have been very sticky because talking about the third leg supply is very tight. It really comes down to that last leg being demand. As we have talked about, there is there is interested parties there, there is demand there. We are getting leases signed and certainly getting very acceptable yields. It is not a function of cutting rates or trying to increase activity that way. It is just strictly confidence gaining to the point where they are pulling the trigger and then we can move that conveyor belt of new starts along a little more quickly. But yeah, back to your question, how long would it take I think we would still be a number of years out But I do not feel like the table is set for that to play out. Certainly hope we are not on that treadmill you referred to there, Rich. Richard Anderson: Yep. Okay. Agreed. Second question, while you guys are kind of a consumption oriented story, not so much a supplier manufacturer story. Do you agree though that with everything that has happened during the pandemic in terms of simplifying supply chains, and now with tariffs, you know, with one one, you know, result possibly being more in the way of manufacturing, onshoring. Is that the leading sort of dynamic to to help industrial overall get out of, this like, the current sort of, you know, sort of lackluster, situation? Manufacturing lead it followed by consumption? Is that your way of thinking about it? Or do we have that, you know, kinda completely wrong? Marshall A. Loeb: You it it is hey, Richard. It is Marshall again. You may be right, and one, the consumer is certainly our strategy has been to always be how close can we get to a growing number of kind of higher disposable income consumers But that said, the consumers carried the economy a long time. I do not know how much upside there is. Hopefully, the economy gets better and they continue to push the economy You are right though, that new source of demand is, I think, through our portfolio and especially kind of our our markets we are seeing the manufacturing companies and the relocations a lot into Texas, and we do not you are right, that could, that will be a driver in that we do not have we have a number of Tesla suppliers in Austin, and in San Antonio. The new chip plant with Intel's building in Phoenix. We have we actually have Intel related to construction there, a supplier to Intel. Same thing with the Texas Instruments Plan as I am kinda thinking out loud and Northeast Dallas. We have a supplier there. So we do pick up a lot of suppliers. And as those plants get built, it is I guess my hesitancy in putting consumer ahead of or manufacturing ahead of consumer, I think it I think you said, and maybe our children's children, really get the benefit of that, but we are certainly seeing onshoring and nearshoring, we are having those type conversations in Arizona as well of we need more man light manufacturing space. We have got relocations from California type discussions going on. And things like that. So it I would like to think of kinda like ecommerce. It is an it was a new additional tenant within our portfolio. We were already pretty full, but we have seen a pick with e commerce. It was one more demand source And I think now we are you are right, we are seeing it for supplier source for these big plants. And a lot of them are getting built in The Carolinas, and in Texas and Arizona and markets like that. They probably have an outsized market share Richard Anderson: Great color. Thanks, Marshall. Thanks, Brent. Marshall A. Loeb: You are welcome. Operator: Next question will be from Jon Petersen at Jefferies. Please go ahead. Jon Petersen: Oh, great. Thank you. Good morning, guys. So, actually, I wanted to ask you. Is there any change, or can you give us the level of bad debt in the quarter and then related any change in the tenant watch list? Brent W. Wood: Yes. Good morning, John. The bad debt continues to be thankfully a non factor. We are still in that 30% range or something like that. And really the last two quarters have been at a run rate about half of the prior five quarters. Again, it tends to be contained amongst just a small number of tenants. Our watch list has been very consistent this year. In terms of the number of tenants, nothing really growing there. So that has felt good and testament to portfolio and the credit and the groups, the tenants we have in place. But yes, we are still seeing that 30% or so, 30%, thirty five basis points relative to total revenue. As being pretty consistent here over the last couple of quarters. Jon Petersen: Okay. Alright. That is helpful. And then you know, as we are seeing interest rates come down to ten years, just a touch below 4% right now, You guys have allowed your your debt levels to come down. You have leaned more on equity. I guess, what is the right interest rate where we would expect your leverage levels to kinda start to tick back up to to your long term target? Brent W. Wood: Well, think that is a component of a few things. I mean, it would be the interest rate, but relative to say what is our equity opportunity and what are other opportunities. So we are constantly weighing those out. And yeah, in the guidance we showed bumping some capital proceeds, which was and I think I said in my prepared remarks, we are looking here in the fourth quarter doing $20,000,000,250,000,000 dollars maybe in in the way of unsecured term loan. Think that could price in the low $3.04, 4 type range, which we view as very attractive. I would just backing up for a moment, the two and a half, three years we are into these higher interest rates now, take a lot of pride that we have not not that we would be anything wrong with it, but we have not issued debt even with a five handle at this point. And yet, we have continued to fund our growth and we have, as you point out, delevered the balance sheet now to a 2.9 times debt to EBITDA. So very, very low. We have a lot of dry powder there. So I think you are going to see us in the fourth quarter begin to dip into that. We continually are monitoring public bonds, the public debt markets Certainly at some point in the future, whether it is near term, long term, whatever it is, we will be there. But you weigh all that, you weigh your equity, cost of equity. And the balance of that and where you are And so it is all kind of a fluid moving situation. But the other thing I would point out, John, is that our over time, the revolver balance or the revolver rate now, though it is variable, it is much more tied, a little more to how the Fed fund rate moves. And that is now moved into like a 4.7 ish sort of range. So we will probably begin to keep a little bit of balance on our $675,000,000 revolver there. And that gives us time and availability to be patient and look for our different opportunities there. So we feel real good about our capital position, our ability to to tap into that debt. And thankfully, team, three good acquisitions this quarter, continue to to make a way through our development pipeline. And so they continue to we continue to have a need for capital because they are finding good way to put it to work and accretive for the shareholders. But we are in a good spot and feel like things are turning the right way and giving us more options. We are excited about that. Jon Petersen: Alright. Thank you very much. Appreciate it. Brent W. Wood: Yep. Operator: Next question will be from John P. Kim at BMO Capital Markets. Please go ahead. John P. Kim: Hey. Good morning. I was wondering if you could provide the average rent per square foot signed year to date and how we should compare that to the 2026 expiring rents which at the beginning beginning of the year were at $8.42. I know there might be a a mix or timing discrepancy between the two, but just trying to see some of the building blocks for the gap same store NOI next year. Brent W. Wood: Yes. Good question. We can dive into that. I could go off line and see if we can get some numbers for that. I would give you the standard answer that across all of our markets, the average rent per square foot can move around quite a bit. California is certainly very high rates relative to some other areas the country even though there is been softness there. But looking at our average role next year in of where that square footage is rolling, What I would say, John, maybe give you some color backing up for a moment is, even though we have seen rental rates come down off their peak or highs, they still, as I alluded to earlier, they are still very sticky and certainly they have moderated a little bit from the highs, but getting rental rate out of deals has not been the big part of the equation. It is just been more the sentiment and the demand pace more than anything else. But we are not sensing a lot of headwind to still having, as Marshall alluded to earlier in the call, having strong rental rate growth numbers. So I guess what I am trying to say there is we do not see anything there that is going to change that in a material manner. But in terms of numbers on an average per square foot, we could circle offline and give you some color there. We would have to run a few numbers there. John P. Kim: Then maybe as a follow-up, can you comment on the acceleration you saw the Gap same store NOI this quarter and whether or not that is that is a good run rate going forward? Well, Brent W. Wood: the gap yeah. We are having really think, of an untold story here is we are having a terrific operating year in our existing portfolio. I mean, obviously, there is been a little more slowness in the pace of which we have moved our development leasing than we would like But I would point out that our same store guide up into the approaching 7% and you could do the math and work backwards, but to get to our midpoint cash same store for the year guide, we are looking at like 8.2% fourth quarter cash same store number. And that is based off of, as I said in my comments, a 97% exactly ninety 7% same store occupancy number. So the operating portfolio, when you look back, we really hit the low point in fourth quarter last year, at 95.6% in our same store occupancy then that moved in first quarter to 96% and to 96.3% and then the third quarter 96.6%, we are projecting 97% for fourth quarter So a very good steady stable growth story in the operating portfolio at an 80% retention. So all of that feels very good. That momentum feels very good going into next year and hats off and compliments to our team for putting that together. But yeah, in terms of your run rate, we feel good about where we are, where the numbers are trending, throughout this year has been pretty consistent stabilization in operating portfolio as we lead into next year. John P. Kim: Thank you. Brent W. Wood: Yep. Operator: Thank you. Ladies and gentlemen, a reminder to please limit your yourself to one question and get back in the queue, please, if you should have any follow-up. Thank you. Operator: Next question will be from Brendan James Lynch at Barclays. Please go ahead. Brendan James Lynch: Great. Thank you for taking my question. Historically, I think you focused more on stabilized acquisitions and you had a few this quarter as well. When you think and the rationale was that you want to limit lease up risk to the development pipeline, As you kind of bring down the development pipeline now, does that change your perspective on acquiring vacancy going forward? Marshall A. Loeb: Good morning. A good question and this is Marshall. I would say the way we think about it is try to at the end of the day, we want to own well located kind of shallow bay near consumer buildings. And at different points in the cycle, the risk reward shifts. There for a while, I thought that the tariffs cap rates might go up. But they really those have been sticky. And so what we have bought has been pretty strategic. And usually, what we have liked is it and we have got a couple of things we are working on. They are in submarkets. Where we are strong and have we have been for years, and they are immediately accretive is another way we look at them, probably. And and they have all been one off. The portfolio deals get more expensive, but broad brush, we are usually about we have been around up six or just north of a 6% net effective return, new buildings, and so I would put them in the top third of our portfolio. So maybe in a kind of a flatter market where we have been a little bit acquisitions, you are right, are more attractive. I think what we will turn, you will see us be a more active developer And then in that and it is been maybe another interesting trend that I think is a good sign, we have had more inbound calls to us looking for us to to be the equity partner or get involved with a local regional developer. I am not sure the market is quite there yet. You are seeing it in our own development numbers, but it is telling me there is not a lot of capital for development starts. But as the market kind of heats up, we did a number of that or the leasing where we bought vacant buildings or partnered with people to help them build buildings. So we will you know, we will try to step on the gas and that is why we like having a safe balance sheet. When things are good to create that value and sometimes you are better off, you know, again, trying to be patient and find the right quality and kind of build our cluster our buildings that we try to do in the right parts of the markets we like. But that is and again, I think the trick is being nimble enough to turn the dial, kind of figuring out where the market is. And it is usually based on inbound calls of where the best risk return is right now. Brendan James Lynch: Great. Thank you. Marshall A. Loeb: You are welcome. Operator: Next question will be from Todd Thomas at KeyBanc Capital Markets. Please go ahead. Todd Thomas: Hi. Thanks. Good morning. I wanted to follow-up on some of that commentary a little bit. And also around the pace of development leasing and how you are seeing conditions thaw out a little bit. It sounded like some of your peers may be leaning in a little bit to development. Your comments were constructive around the broader environment for starts, which was you mentioned that a low dating back to 2018. And I am just curious if some of the delays on your side push into '26 and you ramp back up with a higher amount of starts? Or if you think the slower pace could sort of persist a little bit further and put a little more pressure on starts in the near term as you think about 2026? Marshall A. Loeb: Hey, Todd. Good morning. I guess it is hard to look, I have been calling the recovery. I have missed it by several quarters. I keep thinking we are about there. It feels like you are at the starter's block. And it keeps getting delayed. I am hopeful next year, and it it would not take a lot, you know, when I look at our development pipeline or our transfers, it is not a huge amount of square footage that is not, you know the if I take out what is under construction, you know, we do not need a lot of quantity of leases. And like the one where the lease as I think about it, where it it flipped, where we had a signed lease, which meant we were out of inventory, We were getting ready to break ground on the next building and the tenant changed their mind on it. So it can kind of just flip that quickly. I would like to think next year, I would to think we will be north of $200,000,000 in STAR That may be back depends on when things pick up. But if the market is not there, I think we should we owe it to our investors to come down from 200,000,000 But if the market picks up, the the beauty of having the parks and the team we do and the sheet is our team will say part of their job is to have the permit at hand. And we can build the building and call it eight to ten months. So as things turn, and we feel pretty confident about the last project leasing up or running out of space, or tenants needing expansion, we will go ahead and break ground. So it will be fun when we reach that point, and we are just trying to be patient and see the demand maybe rather than call the demand on it. Because I think do not think that we really will get punished too badly in any market for being I would rather be a slightly late than than too early. And right now, we are seeing the activity. We just need some signed leases, and that will pull that next that next round of starts. Operator: Thank you. Next question will be from Omotayo Tejumade Okusanya at Deutsche Bank. Omotayo Tejumade Okusanya: Sorry to beat a dead horse about the the mark to market this quarter, but I just wanted to understand or clarify the deceleration this quarter was that mainly a mix related issue, or was there also some pricing pressure? Brent W. Wood: I think this is Brent. I think it is more just a mix Like I say, certainly if you look back a few quarters and look at our peak and high, we are certainly off that a little bit. But it is within reason and modestly. And as Marshall alluded to, we report leases signed which we think obviously gives you direct information about what we did this quarter. If you were to look at just leases commenced for the third quarter, as opposed to a 35% GAAP number, which is what we reported, we would have been 45%. So look, but that being said, can be a different mix, but again, as we talked about that that mid-thirty, 30 range of GAAP leasing increases feels very sticky. Like I say, the the vacancy continues to be tight. When you look at vacancy in the less than 100 square foot space range, which is where we live, work and play, I mean, that is looking at like 4.5%. So again, part of our challenge that potential prospects compare us to eight other options in the market and you are to figure out a way to whittle your rate down to make the deal, it is it is more so just having someone that is really committed to moving their business into and occupy a new space. And once you do that, you have pretty good leverage on the rent side because there are not many options. So certainly from a quarter to quarter, it could move five percent one way or the other just based on the mix. But by and large, it feels like that area that we are in, that 30% gap sort of range is, as I keep saying, pretty sticky. Omotayo Tejumade Okusanya: Thank you. Operator: Yes. Thank you. Next question will be from Michael William Mueller at JPMorgan. Michael William Mueller: Yeah. Hi. You kinda touched on this before, but going going to development, you started the project in Dallas. But out of curiosity, when you look at the overall pipeline at kind of 9% pre leasing, based on what is under construction and recently completed. Does that come into play at all? Like when you are thinking about what to start or not? Is there is there some sort of a cap on spec development lease up space that you want to have? Or is it really the opportunity you are looking at is going to dictate whether or not you put a shovel in the ground? Marshall A. Loeb: Yeah, I guess hey, Mike. Good morning. It is Marshall. And I am trying to be cute. From your answer, it is probably yes. I think it is a It is a little of both. And that we do look at kind of call it risk at the entity level. Yes, there is a level we should have I am not sure we have got a calculation. We have usually looked at it as a percent of assets, kind of valuing it. It may have ended up doing it like maybe 6%. Things like that, and we have not been close to that. And that could be a combination of land value add, meaning unleased build and what is under development. So we do track that on a quarterly basis. We have thankfully been below that. And then really more day to day, it is you know, part by part, submarket by submarket of what is the activity do we have there, and you try to stay ahead of it, but maybe only a little bit ahead of it of you know, it would be Brent and I calling you saying, hey. We are 50% leased. I have got good activity on the balance, and a couple of tenants say they want more space. So that is when we will we will break ground and build the next building or two. So it is I have I have always said, what I what I like about our model versus a lot of the traditional developer model, it is not us pushing supply into the market. It is really getting pulled by our teams in the field saying, I need more inventory And so that is where you know, look, we have we have pulled back and slowed the manufacturing line where we said, okay, you have got the inventory. You do not need anymore. Let us get that accounted for. And then we will we will try to keep the factory going as fast or as slow as the market tells us it wants it. But right now, again, it is yep. I am happy, as Brent mentioned earlier, happy where the portfolio is. It is exceeding our expectations this year. I like our same store numbers. I would like to think our occupancy has more upside. We were coming off record highs, and so we have been battling occupancy declines on same store for several quarters that that have a chance to pick it up on rent and occupancy. And then development is really look, the capital is been spent. The office space has been built out. And a large amount of these spaces that we have either transferred over and lease up, and so we just need to to kinda get those prospects to convert next. And that is what we need to show you. Sure. Got it. Michael William Mueller: Okay. Thank you. Operator: Welcome. Next question will be from Ronald Kamdem at Morgan Stanley. Please go ahead. Ronald Kamdem: Hey, just, I guess, a quick one. Just on the the death starts, coming down, just can you talk through just which markets did you think could pencil or did you want to stuff at the beginning of the year that you maybe have pulled back on currently is part one. And then just if I could just ask a quick follow-up on I think you talked about next year maybe getting a chance occupancy gains and, you know, you have the rent escalators and so forth. So is the spreads really going to be the big sort of delta for you guys as you are thinking about same store for next year? Thanks. Marshall A. Loeb: Well, I will maybe touch on hey, Ron, good morning. And I will touch on developments and maybe Brent or between us will on the on the same store. Look. I we always have kind of a list of starts that that you feel comfortable about and then potential starts based on if a leasing falls one way or the other. So it is not any one market, although I will say one of the Texas markets where we had the signed lease we were out of space in the park and we were starting the next building. That was probably $2,025,000,000 dollar swing. That we you And, again, it is it is okay. We will work our way through it long term. It is not an issue. It just you know, based on what we knew at one point in time, we thought we needed to build another building and And today, we have got inventory we need to backfill. So that is probably the swing there. And and again, there is still I think there is only a couple of three starts this quarter that we have got programmed in. Feel pretty good about those. But but, again, that is some of that is based on leases that are out for signature that would pull that next ticket. And so Yeah. And in terms Ron, good morning. In terms of the same store certainly on the rent side, as I mentioned earlier, it is still feels although off the highs, it is still from the cash standpoint that 20% range still feels sticky. So if you figure you are rolling 20% of your portfolio in any given year, maybe you have got 4% to 5% there in terms of potential growth then as I mentioned earlier, began this year '25 at about a 96% same store occupancy and we are projecting to finish the year closer to 97%. So as you flip the calendar, if we can maintain that or even incrementally build on that, then then for the first few quarters of early next year, ideally that should stack up favorably. Now we obviously have not looked at numbers or looked in specific on that. But certainly, we feel like the ingredients are there for a solid same store run rate going into next year. Kind of tag along with what Marshall says, It excites me that we have been in in the top of our peer group, really in the top one or two in FFO growth Last year, we grew our earnings at about 7.9%. This year, we are four forecasted about 7.3%. So 15% combined. And we have done that despite slower development leasing, which is can be at times a really big catalyst to our growth. And so to have this space poised and ready to go, as Marshall said, money spent office space ready to go, just an incremental increase in activity and signings and confidence and then that would be an entire cylinder that could fire more strongly than it has been that could even give us more lift. So again, feeling that could be a lift to us going into next year. Ronald Kamdem: Helpful. Thank you. Operator: Yep. Next question will be from Michael Anderson Griffin at Evercore ISI. Please go ahead. Michael Anderson Griffin: Great. Thanks. Wondering if you can give some color around leasing costs and how you expect those to trend maybe over the next couple of quarters? And Marshall, maybe specifically as it relates to the development could you look to get more aggressive, whether it is you know, TIs or or other aspects to kinda get these deals over the finish line, or are you expecting to remain pretty judicious and the leasing cost perspective? Marshall A. Loeb: I think and and I will say California, we have seen in terms of lease true dollars out of pocket or maybe on the construction costs, those have been pretty sticky and really lease by lease. We have, with the increase in rents, we will spend I am just looking at, you know, usually a dollar 10, a dollar 20 a square foot, and the it is gotten to where more of that is the commissions. Than the actual cost per pocket. One advantage we have in a as a as a larger entity, and in some cases, the smaller developers who are usually they have a bank loan or this or that, they can be more limited on TI. They can offer tenants, whereas if the credit is there and we can protect ourselves on the credit side, we can certainly fund more TIs than some of our smaller peers can, thankfully. So and it is it is not that I would say it is not that good questions. But it is not that companies do not like the rent. They do not like the TI package or this or that. It is it usually comes back in a one where they took they wanted a full building, then they took the space down and we got a lease signed. This is all this year or in the last few months and now we are talking them about an expansion, which I am glad we are, but it is really people trying to predict their businesses more than the economics we are offering. And I think as they get more comfortable, which they seem to slowly be doing or kind of mentioned, dusting themselves off and ready to kinda look at I have got a run my business in spite of whatever headlines are out there. Then we we are making market deals and those make sense. I do not think near term, I think given the lack of construction going on nationally, I would think our commissions will probably continue trending up just because they are a percent of rents. And our TI should hold pretty steady and look, those are those call it a dollar 20 a foot per year lease term, Thankfully, for industrial compared to other property types, we are we are getting off life. From that front. It is easier to do the credit risk. It is lower. Michael Anderson Griffin: Great. That is it for me. Thanks for the time. Marshall A. Loeb: Okay. Thanks, Michael. Thank you. Operator: Next question will be from Jessica Zheng at Green Street. Please go ahead. Hi. Good morning. It sounds like the smaller tenants have been more active on new leases. Just wondering if you are seeing any changes in overall tenant credit quality or lease term preferences on these leases. Brent W. Wood: Yeah. No. This is Brent. I it is really been same type tenancy that we have seen. As we talked about earlier, our bad debt being good, our we are always betting credit depending on the deal, but we have seen nothing really changing there. And as Marshall alluded to, really the TI packages and that type of thing, it is all been thankfully for us, we are still in that twelve, percent office finished rest warehouse. Any particular deal might have some nuance to it. But all of that continues to be to be pretty consistent. So, really no changes in terms of the specific type or credit of tenant that we are seeing or evaluating relative to any other time, really. Jessica Zheng: Okay. Great. Thanks for the color. Marshall A. Loeb: Sure. Operator: Next question will be from Michael Albert Carroll at RBC Capital Markets. Please go ahead. Michael Albert Carroll: Yeah. Thanks. Marshall and Bren, I would I wanted to tie and try and tie together some of your comments that you made throughout this call. I know that you seemed encouraged about the improving leasing prospects but the company also reduced its occupancy guide, I mean, modestly. The development start guide and pushed out a few development stabilization. So I mean is both true that you are seeing better prospects, but your expectations were a little bit too aggressive last quarter, so you needed to right size those? Or are we just seeing this temporary law right now and things should bounce back as you kind of get into 2026? Marshall A. Loeb: Yeah. Good morning. I think on our occupancy, it is really the the portfolio is more full than we same store portfolio occupancy has gone up. It is the first time I can remember the last two quarters, we have raised our same store guidance but as you said, slightly lowered our occupancy. And that is a reflection of developments rolling in a little bit more slowly. So development leasing as a whole has certainly, over the course of the year, the portfolios outperformed the revenue from developments has not we were aggressive in our underwriting on that. That is come in light. Glass half full or half empty, that is our as Brent touched on, that is our potential for next year to go from zero to whatever those rents are there. So that is the opportunity ahead of us. But that is probably where it is and developments really, I guess, if I am tying the comments together, look, the best way to lease up phase two within our park is not to deliver phase three. So we have slowed down our development starts simply as a fact a function of we have the inventory available. It is still on the shelf. We do not need to create more inventory. So we have slowed the developments. And I think with our retention rate of 80%, things like that, that tenants have been sitting still given kind of some of the headlines. I am more in if I go back, call it sixty, ninety days, our prospect conversations are materially, in terms of just number of prospects and then the size range of a few of those conversations. Give us a couple of quarters, and we will we need to get those turned into signed leases. But I am more encouraged by the prospect activity. Certainly, it is much better than we saw in June. But until it turns into a signed lease, it it it is just that. It is prospect activity. So that is if that helps, I am trying to be consistent and kinda paint, but that is how that is where we have had it direction wise. And we will just kinda go as fast as the market allows us to. Michael Albert Carroll: Great. Perfect. Thanks. Operator: You are welcome. And at this time, Mr. Marshall, we have no other questions registered. I am sorry, Mr. Loeb. We have no other questions registered. Please proceed. Marshall A. Loeb: Okay. Thanks, everyone, for your time. We appreciate your interest in EastGroup Properties, Inc. If there is any follow-up questions or thoughts feel free to reach out to us, and we hope to see you soon. Brent W. Wood: Thank you. Operator: Thank you, gentlemen. This does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good weekend.
Operator: Good day, and thank you for standing by. Welcome to the Orchid Island Capital Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Melissa Alfonzo. Please go ahead. Unknown Executive: Good morning, and welcome to the Third Quarter 2025 Earnings Conference Call for Orchid Island Capital. This call is being recorded today on October 24, 2025. At this time, the company would like to remind the listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on the management's good faith, belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements. Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results changes in assumptions or changes in other factors affecting forward-looking statements. Now I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir. Robert Cauley: Thanks, Melissa. Good morning. Hope everybody is doing well, and I hope everybody has had a chance to download our deck as usual. That's what we will be focusing on this morning. And also, as usual, turn on Page 3, just to give you an outline of what we'll do. The first thing we'll do is have our controller, Jerry Sintes go over our summary financial results. I'll then walk through the market developments and try to discuss what happened in the quarter and how that affected us as a levered mortgage investor. Then Hunter, I will turn it over to Hunter who'll go through the portfolio characteristics and our hedge position and trading activity, and then we'll kind of go over our outlook going forward. And then we will turn it over to the operator and you for questions. So with that, turn to Slide 5, Jerry. Jerry Sintes: Thank you, Bob. Slide 5, we'll go over the financial highlights real quickly. For Q3, we reported net income of $0.53 a share compared to 29% loss in Q2. Book value at 9/30 was $7.33 compared to $7.21 at June 30. Q3 total return was 6.7% compared to negative 4.7% in Q2, and we had a $0.36 dividend for both quarters. On Page 6, our average portfolio balance was $7.7 billion in Q3 compared to $6.9 billion in Q2. Our leverage ratio at 9/30 was 7.4% compared to 7.3% at 6/30. Prepayment speeds were at 10.1% for both Q3 and Q2. And our liquidity was 57.1% [indiscernible] parity, up from 54% at June 30. With that, I'll turn it back over to Bob. Robert Cauley: Thanks, Jerry. I'll start on Slide 9 with market developments. What we see here on the top left and right are basically the cash treasury curve on the left and the SOFR swap curve on the right, there are 3 lines in each, red largest represents the curve at June 30. The green line is as of 9/30 and then the blue line is as of last Friday. And the bottom, we just have the 3-month treasury bill versus the tender note. So what I want to point out though, basically the curve is just slightly steeper for the quarter, just reflecting the fact with the deterioration labor market, the market's pricing in Fed cuts, so the front end of the curve has moved. If you look at basically the movements on these 2 lines, I think it's the same for both from the red to the green line, that just reflects the deterioration of the labor market. Ironically, the way the quarter started the first event of the quarter was really on the fourth of July when President Trump signed a new law, the One Big Beautiful Bill Act. And initially, the market sold off 10 years point slipped off by about 25 basis points. And at the end of July at the Federal Open Market Committee meeting, the Chairman was actually fairly [indiscernible] that was on July 30. And then quickly on the first of August, the [indiscernible] payroll number came out it was weak, but also it was very meaningful downward provisions and that kind of started the extremes, which started to pin a very clear picture of a deteriorating labor market, the QCEM, which are the revisions to prior payroll numbers through the first quarter of 2025. We're much more negative than expected. And then, in fact, ADP in the last 2 months were negative. So that changes the picture that changed the way the Fed looked at the world. And then the market started to price in Fed easy, and that's what you exceed here, which you've seen between the green and the blue line, so to speak, is what's happened since the end of the quarter. Basically, the government shut down, absent today's data, we basically have had very little data to go on -- and basically, you see really what would be described as just a ground for yield. There are a few securities that offer a yield north of 4% and the long end of the treasury curve has seen pretty good performance quarter-to-date. The bid continues. In fact, that's even present in the investment-grade corporate market where in spite of the fact, if credit spreads are very tight, you're still seeing strong demand. And it's probably just because there's a lack of alternative investments that you can buy with that kind of a yield. But I guess if I had to summarize it, from our perspective, it was actually a net -- a very quiet quarter rates were essentially unchanged. And importantly, law was down, and I'll get to that more in a minute. And then of course, the Feds in place. So a steepening curve, low interest rate volatility always good for mortgage investors. Turning to Slide 10. On the top, you see the current coupon mortgage spread in a 10-year and then on the bottom, we have 2 charts that just kind of give you some indication of mortgage performance. The 10-year treasury is a typical benchmark people look at when they think of occurrences on mortgage or to kind of appraise mortgage attractiveness and this makes it look like the [indiscernible] is off the lowest to a large extent because, for instance, if you look at where we were in May of 2023, that spread was 200 basis points and tap since then, it's 100, but I think you have to keep in mind that the 10-year treasury is a great benchmark over very long periods of time. But the current coupon mortgage does not have a duration anywhere close to the 10-year fact, it's about half. Most street shops at the hedge ratio for the current coupon, somewhere around in here of 5 years -- or 5 or half of the 10 years. So a more appropriate benchmark might actually be a 5-year treasury and of course, swaps. We have some charts in the appendix. For instance, if you look on Page 27, and you look at the spread of the current coupon mortgage to the 7-year swap in particular, and I'm just going to go there. Now if you don't mind, on Slide 27, I just want to give you a more accurate picture of what we're looking at. The blue line there just represents the spread to the 7-year swap. That's kind of the center point for our hedges and this is a 3-year look back. And I just want to point out that if you look at this chart, you see that we're currently at the low end of the range, but we're still in the range. Whereas with respect to the tenure, we've broken through that. I think that just reflects the fact that the curve is modestly steep, and you're basically benchmarking a 5-year asset against a 10-year benchmark. And so it looks like it's tightening when, in fact, it really isn't. And the other thing I would point out to, and we've talked about this in the past as well. If you look at Slide 28, I think this is important is what this shows are the dollar amount of holdings and mortgages. The red line represents the Federal Reserve and of course, they're going through Q2. So that number just continues to decline, but the blue line is holdings by bank, and they are the largest holder of mortgages that there are. You could see this line while it's increasing, is very, very modest. In fact, what we hear most of their purchases are just in structured product floater and the like. And I think until they get meaningfully involved, mortgages are not going to screen tighter. So there is some attractiveness, if you will, in the mortgage market. And I suspect that that's going to stay, as I said, until the banks get involved. If you look at the bottom left, you kind of see the performance. And as you saw, we did tighten -- and if you look at this chart on the left, one I show every time, it's normalized prices for 4 select coupons. So all you do is you take the price at the beginning of the period, you said it to 100. And you can see most of the move upward was in early September. And the reason I point this out is if you think of it this way, but with the bank's absent, the marginal buyer of mortgages are basically either money managers or REITs. And what we saw around that period were in addition to the prolific ATM issuance by REITs, we also saw 2 preferred offerings by some of our peers and a secondary by another at large. So those were kind of chunky issuances. And I think that's what drove that kind of spike tighter. If you were to look at the spread of our current coupon mortgage to the 5-year treasury, you see a spike down right around that day. It was over about a 2-week period. At same time, we've kind of plateaued. And so mortgages have still retained some attractive carry. Hunter is going to get into that in more detail. I don't want to bring on his grade, but I just want to point out that mortgages, while we had a good quarter, are still reasonably attractive. On the right, you see the dollar roll market. Generally, dollar rolls are impacted by anticipated speeds with the rally in the market. That's become a big issue. And I would just point out one of these. If you look at the little orange line, again, this is like a 1-year look back. That orange line represents the Fannie 6 role. And you can see towards the end as we entered September, with the rally that rolls cut way off and the market's pricing in extremely high speeds. And as a result, spec poles, which are the beneficiary of their call protection and performed well in a [indiscernible] have done extremely well. The cash window list that we've come out every month. In October this month, they did very, very well and I suspect they will probably continue to do so going forward. The next chart on Page 11, again, this is very relevant for us as a levered mortgage investors since we're short prepayment options. And you can see on the top, this is just normalized mall. This is a proxy for volatility and interest rate market. The spike there, which was in early April, that was liberation Day. And you can see since then, it's done nothing to come down -- continue to come down. In fact, if you look at the bottom chart, this is the same thing, but with a much longer look back period. And you can see the spike there around March of 2020, that was the onset of COVID it's always a very volatile event. [indiscernible] need it after that, we had extremely strong [indiscernible] part of the Fed bonds, treasuries and mortgages. So it's kind of like a rate suppression environment where they're buying up even and driving rates down, which is a byproduct of that is that they drive volatility down. And as you can see on the right, we're getting near those levels. And I don't think that means that rates are going to 0. But what we are seeing is interest rate volume pushed down I think part of what's behind us is the fact that we all know that next year, the Fed chairman is going to be replaced when his term ends in May. In all likelihood, that's going to be by someone who's pretty [ dullish ]. So the market expects kind of a very dullish outlook for Fed funds in range in general. And of course, to the extent that, that happens and needs to say that it will, but it would also continue to be supportive for us as a levered agency MBS markets because mortgages, you would think would continue to do well in that environment. Turning to Slide 12. This is a relatively important slide because this really is focused on funding markets. And this is what's really become a hot topic, if you will, so what we see on the left are just swap spreads by tenure. And if you'll notice in the case of the purple one, which is the 10-year and the green one, which is the 7 year, they've all kind of turned up. In other words, they're less negative. So we would say they're widening even though it's counter to if there's a spread to the cash treasury is actually getting narrower, but is what it is. What happened here was that the Chairman recently in a public his comments mentioned that the end of Q3 was in the next few months. Most of the market participants were expecting that in the first, if not the second quarter of 2026. So that was news. And more importantly, what we've seen since, especially this month, is that SOFR has traded outside the 25 basis point range for Fed funds, which is between 4% and 4.25%. In fact, it's been consistently well outside that range, which points to potential funding issues and will in all likelihood address that and quite possibly at the meeting next week. What that means, if they [indiscernible] QT is that the runoff in their portfolio, which we saw in that chart in the appendix is going to start just plateau, but they'll likely do, and I don't know this, of course, with certainty, but I suspect it's the case, the treasury paydowns will be reinvested back in the treasuries and mortgage paydowns since they don't want to hold mortgages long term. We'll also be invested -- reinvested in the treasuries probably more so in bills. And what that means then is going forward, given that the government is remaining large deficits is that the treasurer that the Fed will become a buyer of treasuries. As a result, the cash treasuries will not continue to cheapen as they have in swap spreads, which have gotten really negative have gone the other way. And that just reflects the anticipation by the market that the Fed as a buyer of treasuries is going to keep issuance in check and keep issuance from flooding the market and driving spread wider and term premium higher. And that is significant for us because if you look at the right-hand chart, this is our hedge positions pie chart, obviously, by DV01. In other words, the sensitivity of our hedges to movements in rates. And as you can see, 73.1% of our hedges are in swaps by DV01. So obviously, this movement has been beneficial to us to the extent it continues. Of course, it will continue to be beneficial. In fact, I just look at swap spreads before I came in on the call today. And if you look at pretty much every tenor outside of 3 years, every 1 of them on a 1-, 3- and 6-month look back at their [indiscernible] after we picked 100% of the wides. So that's a significant movement. That being said, as we did mention, there has been some issues with the funding market with super being outside of the range and spreads -- funding spreads to SOFR have been a little bit elevated. We typically used to be in the mid-teens. It's there to the high teens now. But the fact that the Fed is very much on top of this is good for us because it means they're going to be a tenant to it and keep us for repeating what we saw, for instance, in 2019. The next slide is 13, refinancing activity. And this kind of paints a very benign picture, frankly. I just want to talk about it. If you look at the top left, you can see the mortgage rates in the red line and the refi index. And while rates have come out, some the refi index has bumped up. It's not much. In fact, if you look at the left axis, you can see we were at 5,000 level in December of 2020, and we're far below that. The second chart on the right just shows primary secondary spreads and they've just been very choppy. There's really not a story to be told from that. But what I want to focus on is the bottom chart. And what this shows is the percentage of the mortgage universe that's in the money. That's the gray shaded area, and then you have the refi index. And as you can see on the right-hand side of this chart that this is -- there's some gray area there, but it's very modest. So again, it paints a very benign picture, but it's misleading. And the reason it is so is because this is the entire mortgage universe. Most of the mortgages in [indiscernible] today or a large percentage of them were originated in the immediate years after COVID. So they have very low coupons, 1.5, 2, 2.5, 3, and they're out of the money. But if you were to do the same chart for just '24 and '25 originated mortgages, it would be an entirely different picture. It would be a much higher percentage of the mortgage university in the money, probably be north of [ 50% ]. And since we, as investors in the space and like our peers, we own a fair number of '24 and '25 provisioning mortgages. In fact, to some extent, somewhat of a barbell in the sense that most of our discounts are very old and most of our newer mortgages, the higher coupons are lower wall. And so that really means security selection is important. And in a moment here, I will turn the call over to Hunter, who will talk about what we've done in that regard in great depth, but I just want to point out this picture that this chart is someone dating. Before I turn it over to Hunter. As always, I'd like to say a bit about Slide 14. Very simple picture. There are 2 lines on this chart. The blue line just represents GDP in dollars, and the red line is the money supply. And what it points out is the continuing fact that the government or fiscal policy, if you will, is still very stimulus. The government is running deficits between $1.5 trillion to $2 trillion. That's in excess of 5% of GDP. And the takeaway is that in spite of what might be happening with respect to tariffs or the weakness in the labor market or geopolitical events, but government is supplying a lot of stimulus to the economy, and you can't re-get that looking forward. And that's probably why in spite of the tariffs, among other reasons, obviously, but while the economy really has not weakened materially. And with that, I will turn it over to Hunter. George Haas: Thanks, Paul. I'd like to talk to you a little bit about our portfolio of assets evolved over the course of the quarter. Our experience in the funding markets, our current risk profile our portfolio is impacted by uptick in prepayments and give a little bit of my outlook, I suppose, going forward. So coming out of [indiscernible] second quarter, we took advantage of attractive entry point by raising $152 million in equity capital and deploying it fully during the quarter. The investing environment allowed us to buy Agency MBS at historically wide spread levels. During the second the second half of the quarter, equity rate has been slowed, but our -- but the assets we purchased in the third quarter were tightened sharply during that second half over the third quarter. As discussed on our last earnings call, our focus has been 35.5, [ 6s ] and to a lesser extent, 6.5 coupons. And those didn't tighten quite as much as the [indiscernible] coupons, but we feel like they offer a superior carrier potential going forward. The portfolio remains 100% Agency RMBS with a heavy tilt towards call-protected specified pools. These tools help insulate the portfolio from adverse payment behavior and reinforce the stability of our income stream. Newly acquired pools this quarter, all had some form of prepayment protection. 70% were backed by credit-impaired borrowers like low FICO scores or loans with high GSE mission density scores. 22% were from states experiencing home price depreciation or where refi activity is structurally hindered. Those pools were predominantly Florida and New York geographies. 8% were loan balance pools of some flavor. As a result of these investments, our weighted average coupon increased from 5.45 to 5.53, effective yield rose from 5.38 to 5.51 and our net interest spread expanded from 2.43 to 2.59. Across the broader portfolio, pool characteristics remain very diverse and defensive towards prepays exposure, 20% of the portfolio now is backed by credit-impaired borrowers Florida, Florida pools, 16% New York pools, 13% investor property pools and 31% have some form of low [indiscernible] story, if you will. We have virtually no exposure to generic or worse to deliver mortgage securities, and we were net short TBAs at 9/30. Overall, we improved the carry of our prepayment stability of our portfolio while maintaining conservative leverage posture and staying entirely within the agency MBS universe. Turning to Slide 17. You can see sort of visual representation of what I just discussed, you can clearly see the shift in the graphs, the concentration building in the 5.5 and 6 coupon buckets across the 3 graphs. These production coupons remain the core of our portfolio and continue to offer the best carry profile in the current environment. And I'd like to discuss a little bit about the funding markets repo lending market continues to function very well and Orchid maintains capacity well in excess of our needs. That said, we observed friction building in the funding markets, particularly in the -- during the weeks of heavy treasury bill issuance and settlement. These dynamics have led to spikes in overnight so and the tri-party GC rates relative to the interest paid by the federal reserve on reserve balances, particularly around settlement dates. This is largely attributable to declining reserve balances and continued heavy bill issuance. Orchid typically funds through the term markets, which has helped insulate us from some of the overnight volatility, but still term pricing has been impacted. We borrowed roughly SOFR plus 16 basis foods for most of the year, but in recent lease that spread has drifted up a couple of basis points, say, SOFR plus 18 more recently. Looking ahead, we expect the Fed to end QT potentially as early as next week's meeting and begin buying treasury bills through renewed temporary market operations. If and when this occurs, it should provide a positive tailwind for our repo funding costs, especially if it's paired with further rate cuts by the FOMC. This would help with the continued expansion of our net interest margin. Just wanted to make a brief note about this chart on this page. It might seem a little bit counterintuitive. The blue line on the chart represents our economic cost of funds. This metric, as you can see, is slightly higher in spite of the fact that rates are coming down, then this is really due to the fact that as we've grown. There's a diminishing impact of our legacy hedges on the broader portfolio. So recall that this metric economic cost of funds includes the cumulative mark-to-market effect of legacy hedges. So it's sort of [indiscernible] to the rate paid on taxable interest expense with the deferred hedge deductions factored in. On the other hand, the red line, which has been moving lower, represents our actual repo borrowing costs with no hedging effects. As the Fed cuts raise any unhedged repo balances will benefit directly from this decline. As of June 30, 27% of our repo borrowings were unhedged, and that increased to 30% more recently modestly enhancing the benefit to lower -- or potential benefit to lower funding rates. Turning to Slide 19 and 20, speaking of hedges. On September 30, Orchid's total hedge notional stood, as I said, $5.6 billion, covering about 70% of our funding liabilities. Interest rate swaps totaled $3.9 billion, covering roughly half the rebook balance with a weighted average pay fixed rate of 3.31% at an average maturity of 5.4 years. Swap exposure is split between intermediate and longer-dated maturities, allowing us to maintain protection further out the curve while taking advantage of lower short-term for funding costs. Short futures positions totaled $1.4 billion comprised primarily of SOFR 5-year, 7-year and 10-year treasury futures as well -- I'm sorry, SOFR 5-year [indiscernible] 7-year treasury futures as well as a very small position in year swap futures. On a mark-to-market basis, our blended swap and futures hedge rate was 3.63 at 6/30 and 3.56 at 9/30. If you think of this metric as the rate we would pay if all of our hedges had a market value of 0 at each respective quarter end part rate, if you will. Our short TBA positions totaled $282 million, all of which were, I think, Fannie 5.5%. A portion of this short is really part of a bigger trade where we're long 15-year 5, a short 30 year 5.5%, so a [ 15, 30 ] swap structured to provide production against rising rates in a spread-widening environment. The remainder of the short position was just executed in conjunction with some pool purchases late in the quarter following a period where spreads have tightened materially. So we didn't want to take the basis exposure quite yet. Orchid held no swap [indiscernible] during the quarter, which was [indiscernible] as a sharp decline in volatility at June 30, approximately, as I mentioned, price a 27% of our repo borrowings were unhedged. That figure then increased to 30% by September 30. This increase reflects the impact of the market rally and the corresponding shorter asset durations, which allowed Orchid to carry a higher unhedged balance while maintaining minimal interest rate exposure. In other words, this shift does not indicate that the portfolio is less hedged. In fact, at June 30, our duration gap was negative 0.26 years. And by September 30, it grown to negative 0.7 years. So still highlights a very flat interest rate profile. Speaking of which, Slides 21 and 22, get a real pitch sense of our interest rate sensitivity. Agency RMBS portfolio remains well balanced from a duration standpoint with the overall rate exposure very tightly managed. Model rate shock showed that a plus 50 basis point increase in rates would estimate -- we estimate would result in a 1.7% decline in equity, while a 50 basis point decrease would reduce equity by 1.2%. So again, it's a very low interest rate sensitivity, at least on a model basis. The combination of higher coupon assets and intermediate long-term longer-dated hedges reflect our continued positioning that guards against rising rates and a steepening curve. This positioning is grounded in our view that a weakening economy and lower rates across the curve while potentially introducing short-term volatility should be positive for Agency MBS and the broader sector in general. As such environments are offered often accompanied by stress in equity and credit markets and investors often seek safety and fixed income and REIT stocks. Conversely, if the economy remains strong or inflation proves sticky, we would expect a corresponding rise in rates and basis widening in the belly of the coupon stack with outperformance shifting to shorter duration high-coupon assets, which are currently making due to prepayment exposure. And that's a perfect segue to Slide 23, where we talk about our prepayment experience. This has been something that we've largely glossed over for the past couple of years. other than a brief period of time following a 10-years brief run at [ 360 ] last September. In the third quarter, speeds released in the third quarter, including the September speeds released in early October, Orchid experienced a very favorable prepayment outcome across the portfolio. lower coupons continue to perform exceptionally well. 3, 3.5 and 4s was paid it at 7.2, 8.3 and 8.1 CPR compared to TBA deliverables, significantly slower at 4.5, 2.9 and 0.7. 4.5s and 5 paid 11 and 7.5 CPR for the quarter versus 2.3 and 1.9 on comparable deliveries. Among our low premium assets, which are 5.5 largely through up most of the quarter. These were largely in line with the deliverables, 6.2 was our experience, 6.2 CPR versus 5.9. However, in the most recent month, generic 5.5 jumped up to 9 CPR while our portfolio held steady at 6.3, really underscoring the benefit of pool selection and the relatively low wall of the portfolio. In premium space, 6s and 6.5s have paid 9.5 and 12.2 CPR for the quarter compared to 13.8 and 29.5 on TBA deliverable as refi activity spiked in September, the various forms of call protection embedded in our portfolio predicts very sharp divide though in the most recent month, our 6s paid 9.7% versus 27.8% for the generics and our 6.5 paid 13.9 versus a 42.8 CPR on the generics. So you can really see the benefit and potential carry above and beyond TBA for those coupons. Overall, the quarter's results highlight our disciplined pool selection where call protection -- what call protected specified collateral continues to deliver materially better prepaid behavior than the TBA deliverable, as I mentioned. Just a few concluding remarks for me. In summary, we experienced a sharp rebound in the third quarter, more than offsetting the mark-to-market damage done during the vote liberation day widening in the second quarter. Orchid successfully raise $152 million during the quarter and deploy the proceeds into approximately $1.5 billion of high-quality specified pools. The pool required a historically wide spread levels and a certain meaningful driver of increased earning power for the portfolio in the coming quarters. While our skew towards high coupon, specified pools and bare steepening bias resulted in slight underperformance relative to our peers with more sellers to belly coupons, we remain highly constructive on our current asset and hedge plant. We believe our positioning will continue to deliver great carry and be more resilient in a selloff, particularly given our call protection and 1 of the convexity exposure. Looking ahead, we're very positive on the investment strategy. So I have mentioned, several factors that could provide significant tailwinds to the Agency RMBS market and our portfolio for the quarters ahead are continued Fed rate cuts, the anticipated end of QT, a renewed treasury open market operations to help stabilize the repo and build markets, potential expansion of GSE retained portfolios, a White House and treasury department that are openly supportive of tighter mortgage spreads. We also continue to see strong participation from money managers and the REITs, as Bob alluded to. There's potential for banks to reenter the markets more meaningfully as funding and regulatory capital conditions improve. Taken together, we believe the current opportunity in Agency RBS is still among the most attractive and recent memory, and we're well positioned to capitalize on that. With that, I'll turn it over to Bob Robert Cauley: Thanks, Hunter. Great job. Just a couple of concluding remarks, and then we'll turn it over to questions. Basically, just to reiterate kind of our outlook. I think that it's kind of hard to say where we go from here from in terms of the market and the economy. I think that we're possibly at a crossroads. On the one hand, we've seen a lot of labor market weakness, and it's gotten the Fed's attention and they appear ready to cut rates, which could lead to a prolonged low rate environment, but we also see a lot of resiliency in the economy, very strong growth. Consumer seems to be in sync shape. And as I mentioned, the government is running large deficits, plus you have the benefits of AI and the CapEx build out, all that tied into the One Big Beautiful Bill and a very favorable tax components of that. So I think the market in the economy go either way. But the important thing is, as Hunter alluded to, is that the way the portfolio is constructed with the high coupon bias with hedges that are a little further out the curve and the call protected nature of the securities we own. I think that we can do well in either. So for instance, if we do stay in a low rate environment and speed stay high, we have very adequate call protection. And to the extent that the opposite occurs and the economy restrengthens and we start going into a higher rate environment. We have most of our hedges further out the curve and we have higher coupon securities that would do well in the sense they have enhanced carry in that environment. So I guess one final comment is that we do expect now, especially after the data today that the Fed will likely cut a few times. And over the course of the next few months, we're probably going to potentially adjust our hedges to try to lock in some of that lower funding and maybe had a little uprate protection because we think if the fact the Fed does ease a few times that in all likelihood to move after that's a hike. So with all that said, we will now turn the call over to questions. Operator: [Operator Instructions] Our first question is going to come from the line of Jason Weaver with JonesTrading. Jason Weaver: Congrats on the results in the quarter and the growth I guess, first, given the relatively consistent leverage and even greater liquidity now as well as sort of the positive net as we mentioned in the prepared remarks, especially lower vault. Is there anything particular on the horizon macro-wise that you'd be looking for to change overall risk positioning, maybe like notably like maybe leaning more into leverage? Robert Cauley: Well, as I kind of said at the end, be -- we could with leverage. I mean, like I said, there's 2 paths. I see the market following. One is where we kind of stay where we are. The Fed continues to cut rates stayed low in that environment, we're going to benefit obviously from the first few rate cuts because the percentage of our funding that is hedged is on the low side. I think in the event that we do see that, as I mentioned, I think we'll probably look to lock that in. And if we do so, we probably would be comfortable taking the leverage up some. To the extent the market -- the economies rebound and we see a strengthening, which I think is very possible. Frankly, I would say I would take the under on the number of rate cuts between now and the end of next year. Then I would say we would not be taking leverage up. We would be looking to kind of protect ourselves one lock in funding as they look to protect ourselves on the asset side from extension and rate sell-off impact on mortgage prices. Jason Weaver: Got it. That's helpful. And then second, referencing the remarks on the high coupon spec pool you purchased just as of late. Do you have any view on pay-ups upside potential here, especially if we see more refi momentum growing? George Haas: We've really seen pay-ups a ratchet and higher in the beginning part of this quarter. This most recent cycle of the GSEs, we saw pay increase sharply. A lot of that is attributable to the fact that there were people who were long TBAs as kind of strategy when the roll markets were more healthy. And that those that carry from those roles has just completely evaporated. And so you've seen people who might have had heavier concentrations in TBAs really be forced to dive in and just start buying everything they could find to to supplement that income. We fortunately didn't have that problem. And most of the best pools we bought was really kind of the first half of the quarter. So yes, that's just to reiterate that point. I mentioned we had the spike tighter in mortgages like in early September. I -- forgive me, you mentioned this, I missed it, but of the capital we raised in the quarter, 70% of that was deployed before then. So we benefit from that. And then also, I just -- we talked about this at the end of the second quarter. At that time, the weighted average price of the portfolio was basically par, it was like 99.98%. And most of what we added all of that we added were higher coupons. But that being said, the average price of the portfolio now is a little over 101-- [ 101 and 7 ] and our average payoff is 33 ticks. So while we've been adding call protection, we're not paying up for the highest quality. Frankly, we don't think that it's been warranted. Not get too into the weeds of what we own, but we've gotten, as you saw in our realized prepayment speeds, very good performance out of those securities without having to pay extremely exorbitant pay-ups. I don't know that we're ever going to get back to where we were in '20 or '21, just by comparison, back then, our higher coupon, New York, whatever coupon they were the pay-ups were multiple 4 and 5 points. I don't know that we're going to see that anytime soon, but it's -- we've done quite well without having to go anywhere near those kind of levels. Operator: Our next question will come from the line of Eric Hagen with BTIG. Eric Hagen: I think you guys have kind of talked a little bit around it. But are there scenarios where dollar roll specialness would return to the market in a more meaningful way? How do you feel like special sort of effect like trading volume and kind of market dynamics overall going forward? Robert Cauley: Sorry about that. I don't know that -- I mean we saw that really in space back in the early days of QE when the Fed was buying everything. I don't think we're going to see QE. In fact, it's been made pretty clear by the Fed that when they reinvest pay-downs with respect to mortgages, they're only going to be buying treasuries would probably build. So I don't know I don't really see the specialists of the rural market coming back in a big way. We've historically not been big players in that regard, as you probably know. So I don't see it as a core -- one, I don't think it's like going to happen; and two, I don't -- it's never been a core element of our strategy. George Haas: No. It's looking as long as -- especially in the upper coupon, that's really being driven by fear of prepayments and the speeds that are being delivered into these worse to deliver rules that are being delivered in the TBAs are pretty bad here. So I mean I would expect them to continue to be so for the next couple of months. So I think it's going to stay depressed, at least in that space. until we pop out of this. It will either pop out of this rate environment that we're in there. So turns back to the top or middle of the recent rate range or [indiscernible] rate is meaningfully lower. But I think we're kind of in a spot here where we're not going to see too much in the role space. Eric Hagen: Okay. Yes. That was interesting. Can you talk through some of the -- what the supply and availability for longer-dated repo looks like right now? I mean do you see that as like an effective hedge for the Fed not cutting as much as what's currently anticipated? Robert Cauley: We like to be doing so. We've looked into it a lot. Unfortunately, the spreads are just too wide. We've done some and we will continue to do so. But as Hunter mentioned, we were historically in the mid-teens. We're approaching the higher teens, but you're getting above that when you start going out in terms. So we have done some just to try to lock in as much as we can. And we do it opportunistically. So for instance, if we were to see, let's say, the government reopens and you get some [indiscernible] non-payroll number in, the market prices in 7 or 8 cuts that's when we try to do those things. So it opportunistically. George Haas: Yes, it's been -- Eric, it's been more effective to do in future space for us, and we do so from time to time. I think I alluded to the fact that we have a pretty good chunk of the portfolio that is hedged right now. So we can certainly have room to move in and do some shorter-dated short futures in the first year or 2 of the first couple of years of the curve or some kind of a swap or something like that with a relatively low duration. But we joke around that repo lenders are always very quick to price in hikes and very reluctant to price cuts. So that's been kind of the experience that's kept us from -- and you just think about the dynamics of what usually happens when the Fed gets involved and it has to cut 5 or 6x. It's usually coincides with a credit market rolling over or a weakening economy and doesn't not particularly comfortable environments for repo lenders. Operator: Our next question will come from the line of Mikhail Goberman with Citizens JMP. Mikhail Goberman: Hope everybody is doing well. You guys talk about call protection. About what percentage would you say of your portfolio is covered with call protection and if rates were to go down, say, 50 basis points in a sharp manner? George Haas: Almost 100% of the portfolio has some form of call protection. We have little pockets of what we call our kind of lower pay-up stories like LTV, that sort of thing. We're still constructive on those in spite of the fact that they are relatively low at low in terms of PAP. But we have housing market that's under pressure and borrowers doing -- it's difficult for borrowers for high LTVs to turn around a refi at every opportunity. They will ultimately be able to do so, but -- it's not very cost effective for them. So a little -- it's not the lowest hanging fruit, I guess, the more generic stuff is. So almost all of it is. We have some stuff that we keep around just in case we have a dramatic spread wiping, some really low pay-up pools that that if we ever have to get in a situation where we need to quickly reduce leverage by just delivering something in the TBA. But the rest of the portfolio has got some form. And most of it's been working out really well for us. Robert Cauley: And as far as the rally, as I mentioned, our weighted average price at the end of the quarter was a little over 101. I think the average coupon is still high 5s. So we're -- it's premium, it's in the money, but it's not so extreme, so another 50 basis point rally gets you obviously, like a north of the 6, which is like a 12 or 3 price. So they're going to be faster. But what the call protection we have, I don't think the premium amortization is going to be so detrimental. In fact, I think our premium amortization for this quarter was very, very modest. So it was uptick of you from there, but it's nothing like [indiscernible] what we saw in the immediate aftermath of COVID when those numbers were very, very large. As we bounced around kind of this rate range, where we have bought the more expensive, I guess, or the higher quality stories has been kind of in that first discount space. And the rationale there is just they're relatively cheap at that point in time. So like when rates were a little bit higher 5s were 98, 99 handle. We bought a lot of New York 5s in the very beginning part of the quarter where rates were a little bit higher. And so those will do very well as if we continue to rally. Mikhail Goberman: That's helpful. And if I can ask one about the -- flesh out your comments a bit about the hedge portfolio. If swap spreads were to widen back out, how much benefit do you guys see to the portfolio? Robert Cauley: We said, why not they've been widening, right? I know it's unusual. Mikhail Goberman: Continue to widen, yes. Robert Cauley: Yes, continue to benefit from that. I mean it's -- I don't know if we have a dollar amount on it, but it was -- if you look at. George Haas: its around 2 million DV01, so you can think of it in those terms yes. Robert Cauley: Like it's like the long end is like a negative 50. So let's say you went to 40%, obviously, something like that or I don't know how much further you can go, though, because you could argue that the market is really priced in the end of Q2 and the Fed stepping in to reinvest paydowns in the treasuries. I think in order for that to happen, you'd almost have to see meaningful culture investing pay down. But what Hunter said. So $2 million [indiscernible] wants it to get like another 10 bps, what is that, and it's something like $0.15 or something like that or $0.12 book. Mikhail Goberman: Fair enough. And if I could just squeeze in. Any update on current book value month to date? Robert Cauley: It is up a hair basically, we don't audit that number every day because we get $1 -- an amount every day, it's up very, very modestly from quarter end. Operator: Thank you. And I would now like to hand the conference back over to Robert Cauley for any further remarks. Robert Cauley: Thank you, operator. Thank you, everybody, for taking the time. As always, to the extent anybody has any questions that come up after the call or you don't get a chance to listen to the call live and you wish to reach out to us. We are always available. The number here is 772-231-1400. Otherwise, we look forward to speaking to you at the end of the fourth quarter, and have a great weekend. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
Operator: Good morning, and welcome to the Byline Bancorp Third Quarter 2025 Earnings Call. My name is Carly, and I'll be the conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. Please note this conference call is being recorded. At this time, I'd like to introduce Brooks Rennie, Head of Investor Relations at Byline Bancorp. Brooks Rennie: Thank you, Carly. Good morning, everyone. And thank you for joining us today for the Byline Bancorp Third Quarter 2025 earnings call. In accordance with Regulation FD, this call is being recorded and is available via webcast on our Investor Relations website along with our earnings release and the corresponding presentation slides. As part of today's call, management may make certain statements that constitute projections, beliefs, or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are subject to certain risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed. The company's risk factors are disclosed and discussed in the SEC filings. In addition, our remarks and slides may reference or contain certain non-GAAP financial measures, which are intended to supplement, but not substitute for, the most directly comparable GAAP measures. Reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure can be found within the appendix of the earnings release. For additional information about risks and uncertainties, please see the forward-looking statement and non-GAAP financial measures disclosures in the earnings release. As a reminder for investors, this quarter, we plan on attending the Hubby Financial Services Conference in Naples, Florida, and the Piper Sandler Financial Services Conference in Miami in November. With that, I would now like to turn the conference call over to Alberto Paracchini, President of Byline Bancorp. Alberto Paracchini: Thank you, Brooks, and good morning, everyone, and thank you for joining the call this morning to go over our third quarter results. With me today are Chairman and CEO, Roberto Herencia, our CFO, Thomas J. Bell, and our Chief Credit Officer, Mark Fucinato. This quarter, we streamlined the format to focus on key highlights for the quarter and our financial results so we can move quickly to Q&A and allow ample time for discussion. Before we get started, I'd like to pass the call over to our Chairman, Roberto Herencia, for his remarks. Roberto Herencia: Alberto, thank you, and good morning to all. Appreciate you spending some time with us here this morning. The quarter capped a string of 12 consecutive quarters of very strong financial performance for Byline Bancorp and highlights the consistency of our execution, the resiliency of our business model, and the optionality and flexibility we strive to maintain in our operating model. The team continues to run a very good bank, and for that, we have to thank our team members and employees. Results reflect each and every one of their contributions, which we value dearly. This quarter, our SBA team went above and beyond anticipating a government shutdown, allowing us to end the quarter strong and prepare us well for the end of the shutdown whenever that comes. Profitability metrics for the quarter were once again top quartile, as Alberto and Thomas will review. Credit quality continues to be stable to improve in some segments, which against the backdrop of macroeconomic uncertainty, heightened geopolitical tensions, and more recently, the federal government shutdown, has been surprising to the positive. We continue to be vigilant over those risks. Capital flexibility is a major differentiator. Our capital ratios are strong and continue to build, commit strong profitability, and solid revenue growth. Our primary deployment options, Alberto has covered clearly in the past, continue to be the same. Our stance on the $10 billion asset threshold and M&A remain unchanged. We are open to disciplined deals that make sense like the ones you have seen in the past. We have the capital to be opportunistic and believe we can deliver strong financial results on our own without the need to force a deal. On the things that truly matter, what our employees have tangibly achieved since we last spoke to you, we were recognized by the SBA in early August with the 2024 SBA 7(a), 504, and Export Lender of the Year Awards. For the second year in a row, the Chicago Sun-Times has named Byline Bank one of Chicago's best workplaces. We now rank as one of the top 25 workplaces in the city and sit among large companies. These results are based on our workplace policies, practices, philosophy, in addition to employee survey results measuring the employee experience. Byline was also named once again to 2026 America's Best Workplaces by Best Companies Group as a result of our high level of employee engagement scores on our annual survey. We continue to be very focused on employee engagement, development, and attracting the best talent. We continue to experience, as a result, low levels of employee turnover. With that, I'm happy to turn over the call to Alberto. Alberto Paracchini: Great. And thank you, Roberto. In terms of the agenda for today, I'll kick us off with the highlights for the quarter, followed by Thomas, who will cover the financials in more detail. I'll then return with closing comments before we open the call up for questions. So with that, let's turn to our results. For the quarter, we delivered net income of $37 million or $0.82 per diluted share on revenue of $116 million, a strong performance driven by solid execution. Revenue and EPS grew both quarter on quarter and 13.6% and 19%, respectively, on a year-on-year basis. Our performance continues to reflect excellent profitability with pretax pre-provision income of $55 million, pretax pre-provision ROA of 2.25%, ROA of 1.5%, and ROTCE of 1%, which remains comfortably above our cost of capital notwithstanding continued growth in our capital base. The margin expanded nine basis points from last quarter to 4.27%, supported by an improved deposit mix and higher asset yields. Expenses remain well managed, and while our efficiency ratio is strong at 51%, we continue to actively look for ways to become more efficient and invest in the business at the same time. Moving on to the balance sheet. Loans grew 6% linked quarter and 11% on a year-to-date basis, ending at $7.5 billion. Deposits totaled $7.8 billion at quarter end and were up 1% linked quarter and 7% on a year-to-date basis. Demand for credit remains stable from last quarter with originations coming in at $264 million, driven by our commercial banking and equipment leasing team. Moving to credit. Credit costs declined this quarter with a provision coming in at $5.3 million, a decrease of $6.6 million compared to last quarter. Asset quality metrics all improved with NPAs, NPLs, and net charge-offs all declining compared to the prior quarter. The allowance remains strong at 1.42% of total loans. Turning to capital. Capital levels continue to grow and remain robust with CET1 surpassing 12%. Annual book value per share grew nicely this quarter, up 5% linked quarter and 12% year on year. This quarter, we also refinanced $75 million in subordinated debt. We leveraged the upgrade to our credit rating earlier this year with strong market demand to issue debt at an attractive level that reflects a 266 basis point improvement in our credit spreads. With that said, we continue to build capital to support balance sheet growth, future M&A opportunities, and increased capital flexibility. With that, I'd like to turn over the call to Thomas, who will provide you with more detail on our results. Thomas J. Bell: Thank you, Alberto, and good morning, everyone. Starting with our loans on Slide five. Total loans increased $107 million or 6% annualized and were $7.5 billion at September 30. As Alberto mentioned, origination activity was solid for the quarter with $264 million in new loans, up 25% compared to a year ago. Payoff activity decreased $41 million from Q2 and stood at $205 million. Loan commitments grew, and draw activity added to the loan growth for the quarter, even as line utilization remained relatively flat at 59%. As we look ahead for Q4, we expect loan growth to continue in the mid-single digits. I would like to note that our loan growth could be impacted somewhat by the higher government loan impact somewhat higher by the government shutdown that goes into effect maybe in 2026. As a result, our government-guaranteed loan originations will remain on balance sheet until the government is reopened. Turning to Slide six. Total deposits were $7.8 billion for the quarter, up slightly from the prior quarter. The uptick in deposits was due to non-interest-bearing accounts increasing $160 million or 9% linked quarter, which was driven by seasonality in deposits. This was offset by decreases in time deposits driven by lower brokered CDs and CDs shifting into money market accounts. We saw continued improvement in the mix, which drove deposit costs lower by 11 basis points to 2.16%. Turning to Slide seven. We had record net interest income of $99.9 million in Q3, up 4.1% from the prior quarter, primarily due to organic loan growth and lower rates paid on deposits. This was offset by higher interest expense related to refinancing of the $75 million of sub debt this quarter, which contributed a seven basis point drag on NIM. The net interest margin grew to 4.27%, up nine basis points linked quarter. And year over year, NIM expanded 39 basis points. Specifically, we saw lower interest expense on deposits and higher rates on earning assets. As a reminder, our SBA loans reset on a quarterly lag. As a result, the mid-September rate cut is effective October 1. With the market expectations of two Fed cuts in the fourth quarter, we expect net interest income of $97 million to $99 million. I would note that earning asset growth and disciplined pricing have generated growing NII in this declining rate environment. Turning to Slide eight. Noninterest income totaled $15.9 million in the third quarter, up 9.5% from the last quarter, primarily due to a $7 million gain in sale on loans sold driven by higher volumes. The SBA loan pipeline is solid. However, due to the government shutdown, we are currently unable to sell and settle loans in the secondary market. Timing will determine the impact of our gain on sale income for Q4. As a result, we will not be providing gain on sale guidance for the fourth quarter. Turning to Slide nine. Our noninterest expense came in at $60.5 million, up 1.5% from the prior quarter. The increase reflects higher salary employee benefits, including a $2 million in higher incentive compensation accruals due to higher performance. A $1.5 million increase in noninterest expense, which includes $843,000 of remaining expense associated with the call sub debt. These were partially offset by merger-related and secondary public offering expenses recorded in the second quarter. Our efficiency ratio stood at 51% compared to 52.6% in the second quarter, an improvement of 161 basis points. For Q4, we expect noninterest expense in the same range as Q3 results. Turning to Slide 10. In the third quarter, we saw credit metrics improve. Our allowance for credit losses decreased slightly to $1.057 billion, representing 1.42% of total loans, down five basis points from the prior quarter. The decline was primarily due to individually assessed loan resolution in the quarter, offset by loan growth and higher adjustments to economic factors. We recorded a $5.3 million provision for credit losses in Q3, compared to $11.9 million in Q2. Net charge-offs decreased to $7.1 million compared to $7.7 million in the previous quarter. NPLs to total loans and leases decreased to 85 basis points in Q3 from 92 basis points in Q2. NPAs to total assets decreased to 69 basis points in Q3 from 75 basis points in Q2. Moving on to capital on Slide 11. This quarter, our capital increased further with CET1 at 12.15%, and tangible common equity ratio was 10.78%. We increased our tangible book value per share by $1.2, up 5% linked quarter and up 12% compared to last year. For the quarter, our total capital was 15.81%, which grew meaningfully due to the sub debt issuance. If you exclude the sub debt that was called on October 1, total capital is approximately 15.14%. With that, Alberto, back to you. Alberto Paracchini: Thank you, Thomas. So to wrap up on Slide 12, we continue to execute well against our strategic priorities and are focused on building the preeminent commercial banking franchise in Chicago. Earlier this year, we announced the expansion of our commercial payments business and the hiring of an experienced team to lead that effort. We've been focused on putting the infrastructure in place, establishing the requisite controls, and I'm happy to report that our pipelines are starting to build. Looking forward, we're focused on onboarding customers and scaling the business in 2026. We're also getting closer to the $10 billion asset mark. We anticipate crossing the threshold during the first quarter of next year, which means we will not see the effect of Durbin and higher insurance assessments until 2027. Looking ahead for the rest of this year, our pipeline remains healthy, and we're optimistic about our ability to continue to execute for customers and deliver results for our shareholders. I'd like to thank all of our employees for supporting our customers and for their contributions to our results this quarter. With that, operator, we can open the call up for questions. Operator: Thank you very much. We'd now like to open the lines for the Q&A. Our first question comes from David Long from Raymond James. David, your line is now open. David Long: Morning, everyone. Alberto Paracchini: Good morning, Dave. Thomas J. Bell: Good morning, Dave. David Long: You know, let's talk about the margin here and net interest income. The bank screened as asset. You look at Slide seven, and it indicates each 25 basis point cut in a ramp scenario hits your NII by about $2.5 million. What are the assumptions that are built into that right now? Thomas J. Bell: Hi, Dave. Good morning. It's Thomas. I mean, we have been beating the model assumption as I think it's in part due to what the competition is offering us as far as rates resets on deposits. I think, again, we talked a little bit about in the past some of the premiums that were maybe paid during the liquidity events of years past. And we continue to look at the competition and look at where we can adjust rates, and I think that's what we've been really disciplined on. Alberto Paracchini: Dave, to add to what Thomas just said, I think also analytically, we're better and we have gotten better. So in addition to just the competitive environment in Chicago overall improving over the years and becoming, for those of us that have been in the market for a long time, certainly much more rational over the years. I think analytically, we're getting a bit better in being able to segment customers, being able to basically drive improvements in cost related to accounts and the different segments of our business, which has contributed to what Thomas just said, which is essentially just outperforming our model a bit. So I think that's you're seeing the effect of that. Thomas J. Bell: And I would also just add, you can look at the yields on loans. And given the rate declines, we are seeing loan yields come down just from the resets based on the mix between fixed and floating. We have benefited a little bit more too because rates have been higher, so any of the fixed rate refinancing that have been coming cash flowing out is we've improved nicely on including securities. David Long: Got it. No, that's some very good color. And then the quarter, the obvious, obviously, the funding side, real nice change in the mix. Your funding, your deposit costs, in particular, came down. What wiggle room do you have on the funding side in the deposit side to still lower those costs, giving you an opportunity to continue to beat this model? Thomas J. Bell: Again, I think we are asset sensitive, and we do expect I gave guidance on NII. We have obviously asset growth that's helped us nicely too. But we have some room on the CD book. It continues to reprice lower. We've been very short on the CD book. And I think there are certainly some rack rate deposits that we're not going to be able to reprice. It's kind of a mix, Dave. David Long: Don't really. Thank you for taking my questions. Love this. Thomas J. Bell: Sorry. Operator: Thank you very much. Our next question comes from Adam Kroll from Piper Sandler. Adam, your line is now open. Adam Kroll: Hi. Good morning. This is Adam Kroll on for Nathan Race, and thanks for taking my questions. Alberto Paracchini: Yes. Good morning, Adam. Thomas J. Bell: Hi, Adam. How are you? Adam Kroll: Yeah. So I guess, given the recent pickup in M&A activity, especially in the Midwest and with your capital continuing to build up pretty strong cliffs, I'd be curious just to hear your updated thoughts on M&A and how you're thinking about managing capital levels? Alberto Paracchini: Yes. So I think, Roberto touched on it right at the beginning of the call, Adam. And I think we're certainly open for M&A. So we're, you know, in terms of the usual discussion around how our conversations, I think we actively engage in conversations. So I think that remains consistent. So we're certainly open and actively looking at opportunities that may present themselves in the marketplace here. But that's going to be, I think, consistent with the discipline around transactions that make sense for us to do, that we think deliver value for shareholders. So with that caveat, I think, you know, we continue to look at opportunities and, you know, are hopeful that we'll be able to continue to find situations that make sense as we have done in the past. As far as capital priorities, I think those also remain consistent. We want to fund the growth of the bank. We want to have capital that we can use opportunistically for M&A. We want to have, you know, a stable, you know, and growing, you know, dividend that we can, you know, comfortably afford. And we have the safety valve, which is we have a buyback authorization in place. And when we have opportunities to acquire our stock at attractive levels, we have the flexibility to do that. Adam Kroll: Got it. And then, I appreciate the comments about crossing $10 billion organically next year. But I was just curious if you could size up the estimated impact from Durbin. Alberto Paracchini: I think I'm glad you asked the question because we have not been asked that question directly on the call. So I think for Durbin today, as we would look at the impact, it will be somewhere between $4.5 million to $5 million, and that includes the FDIC effect as well. And that would, you know, as you know, if we cross at any point in 2026, the Durbin impact doesn't really go into effect until July 1 of the following year. So that would be 2027. Whereas the effect of higher insurance cost comes after four consecutive quarters above $10 billion. Adam Kroll: Got it. I appreciate the color there. Thank you for asking. Alberto Paracchini: Yes. No, and thank you for asking the question. Now we have that on the record. Adam Kroll: Yeah. No problem. If I could squeeze in one more, just, you know, I appreciate the comments on Byline anticipating and preparing for the government shutdown. I was curious if you could just touch on how the government shutdown has impacted your SBA business so far. Is there an upcoming deadline where it will materially impact your gain on sale in the fourth quarter? Alberto Paracchini: Very good question, and as you know, we have been in the SBA business for some time. So we've had to navigate through shutdowns before. So our team is very experienced in terms of being able to navigate through usually the short-term impact of a shutdown. So I think the first thing I would say is from an origination standpoint, we continue to be active in originating SBA loans. We continue to market, continue to try to originate new business. On things that are in the pipeline, what we do is we tend to, in anticipation of a shutdown, we pull PLP numbers so that we can continue to fund and close those loans given that we have the highest designation in the program as a under the preferred lender program. The thing that potentially gets impacted, and it typically is a timing issue, is during a shutdown, we cannot sell and settle loans. So to the degree that we have loans that are available for sale and ready to be sold, and the shutdown is still in effect, then we are effectively holding those loans until the government is back to work. And we can then sell the loans in the secondary market. And that's typically a timing issue. So I would say in the short run, unless we really get here in a protracted shutdown where we're here, let's say, mid-November or so, and the government is still not back to work, that that may impact the timing of loans that we would otherwise be selling in the fourth quarter, we may then sell probably in the first quarter. So that would be the short-term impact. And, you know, obviously, that has a positive effect too because we're essentially, even though we can't sell them, so, yes, there might be a delay or a timing issue with gain on sale income, we actually earn the carry on the loan because we'll carry the loans on our balance sheet. So, but that's hopefully that answers your question, and I think that's in short the summary on that. Adam Kroll: Yeah. I really appreciate the color, and thanks for taking my questions. Alberto Paracchini: Thanks, Adam. Operator: Thank you very much. Our next question comes from Brian Martin from Janney Montgomery Scott. Brian, your line is now open. Brian Martin: Hey, good morning, everyone. Congrats on the quarter. Alberto Paracchini: Thank you, Brian. Thomas J. Bell: Thanks, Brian. Brian Martin: See, Thomas, you mentioned in your remarks, I think, on the deposit mix change. So it sounds as though maybe that may bounce back a little bit with the DDA just in terms of how to think about, you know, NII margin of that was seasonal, the strong growth this quarter and the mix changes that think it's kind of sustainable where that mix is at today? Thomas J. Bell: No. That's correct. It's seasonality. There were outflows that DDA in later in quarter. Brian Martin: Yep. Gotcha. Okay. Alright. And then, you know, can you just talk a little bit about you guys talked about the competitive landscape. Have I guess, heard from several other banks recently just the competition has gotten stronger on the deposit side and even on the loan side in the market, what you're seeing competitively? Is it like it's gotten a little bit easier from your commentary, but that's over time rather than just kinda recently. But just competitive landscape, just a little commentary if you can on loans and deposits. Thomas J. Bell: You know, it's still competitive. I would just, again, remind everyone, right, we're still a relationship bank. We bring in core deposits with our commercial accounts, and that helps support our margin and our spreads. So it's not all at the margin funding that's going on here. So that we're benefiting from that. And then I think just being short on CD book has allowed us to reprice given the expectations of more cuts to come here. So it's still competitive. Alberto Paracchini: I think you can see where the market is trading or, you know, offers are for new money, to speak. But it's more about the relationship and the small business banking relationships than our commercial relationships. Brian Martin: Brian, just to add to one thing on the question on the particularly on the asset side. I think Thomas is spot on, in that, you know, that it's always competitive. But look, when you look at markets in general, whether it's investment grade, whether it's high yield, spreads are at all-time tight levels. So it's not inconsistent to think that some of that would spill into kind of the market. And from, and yes, do we see some of that? Yes. Some businesses have gotten a little bit more competitive or there's more competition. People are willing to trade off a bit more in pricing in order to get high-quality transactions. But it's always competitive. And it's you just have to manage your business accordingly. Brian Martin: Gotcha. No. I appreciate that, Alberto. And maybe just one back for the margin, just one comment, Thomas. I guess it sounds like obviously good expense in the quarter, but it sounds like you even with that expansion, you kind of went through the benefit from you had the impact from the sub debt and they're just to get a sense for maybe, if you can talk or give a little thought on where the margin kind of ended the month or exited the quarter in September? This is kind of a starting point as we look forward. Thomas J. Bell: You know, Brian, I, you know, our NII guidance is still right in the same range. It's a little bit lower on the low end just because we are expecting two cuts here in the fourth quarter. So we are still asset sensitive, and we will have some slight decline in net interest income from that. So the margin would go down a little bit, I would say. You know? To be determined based on the Fed cut. Brian Martin: Okay. Alright. And maybe just the last one. Yeah. Sorry. I hear you. Thomas J. Bell: Lot of pull. No. It's okay. You know, related. About a million and a half dollars related to the interest expense on the sub debt. That goes away. So that benefits us. You know, we have earning asset growth that benefits us. So, you know, we still think we're in the same range around the month on NIM. Brian Martin: Yeah. Okay. I appreciate that, Thomas. And then last one for me was, can you guys just give a little commentary, just talk a little bit about the commercial payments team and kind of where that, you know, kind of what that business is and where it's, you know, what your expectations kind of high level are without, just so we can watch that going forward. And thank you for taking the questions. Alberto Paracchini: Sure. You bet. So I think earlier in the year, we announced and there was some, we actually got some picked up in press in that we had hired a team, some experienced bankers, some of our bankers here had worked with these individuals before. So we had an opportunity to really bring on board high-quality talented individuals, and we were fortunate to do that. But the gist of that business is really a commercial payments. So think about high trying to do business with businesses that originate a lot of ACH transactions, process payroll, for example. So you would have, you know, payroll process in that business, as well as looking to be a sponsor bank for issuing and acquiring debit or prepaid cards. So that in summary, Brian, that's kind of the gist of the business. I like to use the term commercial payments because it's really more on the commercial banking side as opposed to this is not a retail product or it's not something that's targeted at consumers. It's really trying to, you know, do business with program sponsors that are high users of, you know, payment products. And so far, I think, as I said on the comments, initially, it's about building the having the proper controls, making sure that we have the necessary hires to support the team, not just from a sales standpoint, but operationally and from a risk management standpoint. So that's been completed. We've been actively calling and trying to start building the business. The pipelines are growing. We have customers that we're in the process of onboarding. These are, as you could probably imagine, these are not, these are, there's more to onboarding high-volume type commercial customer as opposed to a, you know, a simple, you know, simpler, you know, kind of loan and deposit basic. So the onboarding process is a little bit lengthier. But we feel good where the team is, the pipeline is building, we'll start seeing the impact of that in 2026 and beyond. So we're super excited about that segment of our business. Brian Martin: Got you. And just to clarify, those credits are typically, are they smaller granular credits? Are they larger credits? What's kind of the typical, you know, size range in those transactions? Alberto Paracchini: Yeah. There's very little in credit, if any. It's really just a function more on the deposits side and on the treasury management side. Brian Martin: Right. Gotcha. Okay. I appreciate that. Thanks, guys. Alberto Paracchini: Brian. I'm glad to. Thank you, Brian. Operator: Thank you very much. Our next question comes from Brandon Rudd from Stephens. Brandon, your line is now open. Brandon Rudd: Hi. Hey, Brian. Most of my questions have been asked and answered already, but maybe just one modeling question here. Do you have the amount of fixed rate loans that are maturing over the next twelve months and how those yields compare to your new origination yields? Thomas J. Bell: Yes. For 2026, it's roughly, like, $750 million. And I would say that, you know, again, depending on what happens with the forward curves, rates are at or slightly higher than where we are today. Brandon Rudd: Okay. Got it. So there's still a lot of items there. Reset. Thomas J. Bell: Yes. Brandon Rudd: Gotcha. Okay. And maybe just one because of the topic early in the earnings season, I should ask. Can you remind us of your NNDFI exposure and what clients fall into that bucket for you? Alberto Paracchini: Yes. It is a general comment. So Brandon, we have roughly around $221 million that we would categorize in the call report as NDFI. So that represents just under 3% of our total loan portfolio. The one thing I would tell you about that, that consists of commercial-related transactions and business that we have done for, you know, for a long time. So we are not, that doesn't include anything. We haven't started anything, for example, to have a business that's focused on financing private credit funds or financing structured asset-backed structured transactions. These are things like we finance, for instance, the acquisition of practices where a registered investment adviser acquires another small registered investment adviser, and we finance that practice. So there's a lot of granularity in that exposure. And it's not the, I would say it's an exposure that's materially different than, for example, the couple of cases that you guys saw this quarter related to MDFI lending by some other institutions. Brandon Rudd: Got it. Okay. Thank you. And then, Thomas, I think your comment on expenses in the fourth quarter is similar to 3Q. So $59-ish million on a core basis. Is that also a good run rate to start off with for 2026 and then later on in inflation and growth there? Thomas J. Bell: You know, we're not really giving guidance on 26%, but I would say that there's incentive comp that's built in this year that, in theory, we reset for next year. So higher performance this year is warranting higher incentives. We start over, and I would expect those expense numbers to be lower. Brandon Rudd: Got it. Okay. Thanks for taking my questions. Alberto Paracchini: You're back to you. Thanks, Brandon. Operator: Thank you very much. Our next question comes from Rafi. Matthew Rent from KBW. Matthew, your line is now open. Matthew Rent: Hey, everybody. Hope everybody is doing well today. Just a follow-up to the expense question. I appreciate the guidance for next quarter. In the prepared remarks, you mentioned that you believe you can get the efficiency ratio lower. So I was wondering if there's any initiatives you were contemplating or if there's any new technologies you were investing in that could drive operational efficiency? Alberto Paracchini: Yes. Good question, Matt. I think maybe the right way to think about it is, this is something that we're constantly looking at. We're constantly looking for ways in which we can operate more efficiently. As you see, if you look at the trend with our efficiency ratio, you know, it tends to bounce off. I think we've been in that kind of 49% to 52% range, which compared to others, compared to peers, I think we fare very well with it. What I would highlight with that is it's something that we always want to be focused on because it provides us with investment capital to reinvest back into the business. So I wouldn't view it as just we have a program that we're doing and we're trying to execute against that program. We're constantly looking for ways in which we can try to drive that efficiency as low as we can or at least we can maintain it at the levels kind of where it's at today. So that we can generate opportunities for reinvestment back into the business. Matthew Rent: Got it. Thank you. I appreciate the color. I'll step back. Operator: Thank you very much. Next question comes from Yunaro Bohane from Hope Group. Yannara, your line is now open. Yunaro Bohane: Hi. Good morning. This is Anir on for Brendan from Hope Group. Good morning. Okay. First question is, just to do with capital. We noticed that the share repurchase thing kind of went down this quarter. Any thoughts on creating a more active repurchase program again and how you're thinking of reinvesting capital? Alberto Paracchini: Yes. I think consistent with the priorities that we mentioned earlier on the call, Yunera, it's I think capital priorities is to be able to support the growth of the company, support organic growth, have capital flexibility to pursue M&A consistent with, you know, transactions that, like transactions we've done in the past, transactions that make sense, that meet our criteria. We certainly want to be able to execute on that and have the flexibility to do so. Maintain a growing, you know, comfortable dividend over time. And the last thing is really the safety valve, which is really if we find ourselves having excess capital and we have opportunities to acquire the stock at what we think are attractive levels for shareholders, then we would do that. Yunaro Bohane: Perfect. Thank you. And then my follow-up question has to do with new loan yields. So you guys originated $260 million originations this quarter. Can you speak to where new paper price this quarter in relation to the portfolio yield of 7.14%? Thomas J. Bell: Sure. This is Thomas. I mean, we again, depending on the asset class, you know, you do have different yields. But I would say that spreads are 250 over, sulfur to 300 over, and then obviously the SBA business is higher than that. Yunaro Bohane: Thank you. That's all my questions. Alberto Paracchini: Great. Thank you. Operator: Thank you. Thank you very much. Our next question is from David Long from Raymond James. David, your line is now open. David Long: Guys. Just wanted to follow-up on credit. Two things. One is the reserve level. Like reserves were released in the quarter. Was that more a function of loan mix portfolio performance, or the economic outlook? Alberto Paracchini: I think it was more around the resolution of loans with specific reserves, David. So we work those assets out. You know, we took the charges against the specific reserves, and we don't have those reserves anymore. David Long: Got it. And then with the SBA shutdown, how is that going to impact your reserving? I mean, if you're gonna hold on to these loans potentially a little bit longer, can you just talk through that process and how you think about that? Alberto Paracchini: I mean, we would look, we would kind of, if we're holding, I think that it's a good question. So thank you for asking. So if we're holding the full loan as opposed to the, call it just the unguaranteed portion only, we would have to be thinking about more protracted shutdown, David, you know, we would still probably carry those loans as held for sale. But to answer the philosophical question as to how would we think if we were balance sheeting those loans, how would we think about setting reserves? I think we would look through the guaranteed portion and look at the unguaranteed exposure and then reserve accordingly. David Long: Okay. Awesome. Guys. Appreciate it. Alberto Paracchini: You bet. Thanks, Dave. Operator: Thank you very much. Next question is a follow-up from Brian Martin from Janney Montgomery Scott. Brian, your line is now open. Brian Martin: Yes. Guys. Just one last one for me was on the going back to the M&A for just one moment. I was given that greater priority than the buyback, can you just remind us, Alberto, just in terms of what you're looking for in a transaction, what's important on the M&A opportunities you're gonna consider, and does it matter larger or smaller today? Would you think about doing multiple deals at once? Just trying to understand that dynamic. Thank you. Alberto Paracchini: Yeah. I think the still very consistent with what we think is the opportunity set here in Chicago. So broadly, Brian, I think institutions between, let's say, $400 million and up to maybe a couple of billion dollars. Obviously, we've grown a bit, so we have the ability to tackle something a little bit larger today than, let's say, what we did two years ago or three years ago. The geography is still consistent. The Greater Chicago Metropolitan Area, that means, does that mean strictly just the city limits of Chicago? No. Greater Chicago, the suburbs, maybe going all the way up to Milwaukee, maybe going down a bit into Northwest Indiana. I think that's, those are markets consistent with that. Financially attractive, strategically attractive, and we pay, as you know, we pay a lot of attention to deposits. If we think about the last three transactions that we've done, those were essentially transactions for us to acquire deposits, and then, you know, redeploy those funds over time into the different lending businesses that we have. So it would have to be consistent with that. But each opportunity is different. Each situation is different. And the good news is we've built a team, and we have a lot of experience with the team that's here that's done transactions here as opposed to just general experience that we may have from just being in the business and having done M&A over the years. So we feel good about our team, our process, our playbook. And I think hopefully, as you guys can have seen, the results show that in our results, I should say. Brian Martin: Yep. Alright. Thank you for the insight, Alberto. I appreciate it. Alberto Paracchini: Right. Operator: Thank you very much. We currently have no further questions, so I'd like to hand back to Mr. Paracchini for any further remarks. Alberto Paracchini: Great. So thank you, Carly, and thank you all for joining the call today and for your interest in Byline. We want to wish you a Happy Halloween, a Happy Thanksgiving holiday, a Happy holiday season, and we look forward to speaking to you again in the New Year. Thank you. Operator: As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.
Van: Thank you for standing by. My name is Van, and I will be your conference operator today. At this time, I would like to welcome everyone to Nikolay Bancshares Inc. Merger Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Mike Daniels, Co-Founder, Chairman, President, and CEO. Please go ahead. Mike Daniels: Thank you, and good morning to everyone for joining us today to discuss Nikolay Bancshares' acquisition of MidWestOne Financial Group, Inc. My name is Mike Daniels, I'm Co-Founder, Chairman, President, and CEO. Also joining me on today's call from Nikolay are Phil Moore, our Chief Financial Officer, and Brad Hutchins, Executive Vice President, Chief Credit and Risk Manager. In addition, Charles N. Reeves, CEO, and Barry S. Ray, CFO of MidWestOne Financial Group, Inc. are on the call with us. After market closed yesterday, we issued a joint press release announcing Nikolay's agreement to acquire MidWestOne Financial Group, Inc. We've also provided an investor presentation that can be accessed either on the Investor Relations section of our website or as part of our 8-K filing on this announcement. I would like to start off by saying how excited I am to announce this partnership with MidWestOne Financial Group, Inc. As you know, MidWestOne Financial Group, Inc. is a strong, growing, and well-run community bank headquartered in Iowa City, Iowa, with 57 locations throughout Eastern and Central Iowa, the Twin Cities, parts of Wisconsin, and Denver. As of 09/30/2025, it had $6.2 billion in assets and adds over $3.4 billion in assets under management to the combined franchise. Page seven of the investor presentation provides an overview of MidWestOne Financial Group, Inc. and the markets it serves. Before we discuss the details of the transaction, I want to take a step back to where Nikolay was after our last acquisition in mid-2022. We had then completed three acquisitions in eighteen months and had doubled the size of our balance sheet. Shortly thereafter, interest rates began to increase sharply and quickly, and within six months, everyone was questioning the viability of community banking following a few high-profile regional bank failures. This period shined a light on unrealized losses in the vast majority of banks' investment portfolios. While this period impacted Nikolay as well, we were one of the very first banks to reposition our balance sheet. In 2023, we recognized then that to get back to the business of being who Nikolay truly was—a growing, highly profitable community bank—we needed to act quickly, which we did by selling $500 million of U.S. Treasuries. That action, coupled with paying down higher-cost funding, positioned Nikolay in the best way possible. At the time, I said that this move was consistent with Nikolay's long-term thinking mindset and that it should quickly get us back to our position of producing top quartile shareholder profitability metrics. I even spoke to The Wall Street Journal about this. While we did not know this at the time, we ended up being right. The repositioning resulted in ten straight quarters of improving or holding our net interest margin and ten quarters producing an ROAA and ROATCE that placed us in the top quartile, if not top decile, of publicly traded community banks. Also, during this period, we took a pause from M&A to integrate our past acquisitions and prepare for the next challenge of crossing the $10 billion in assets threshold. Granted, the market helped with that pause as bankers were trying to understand how to deal with unrealized losses as well as the volatility in the markets. However, knowing our balance sheet was rock solid and we were on an upward trajectory, we were able to integrate these banks into our culture as well as make a number of investments to prepare us for the next acquisition that would likely bring us over the $10 billion mark. During this period, a number of you would ask us about our M&A strategy, knowing it wasn't a matter of if but when. We were consistent in our message that we wanted to be very intentional about the next bank we partnered with. We were not looking to acquire to just get bigger, but we wanted to find a bank that also made Nikolay better while also providing us with the needed scale to offset some of the costs and revenue hurdles that came with passing the $10 billion mark. At the same time, we didn't want to use our currency just because we could, as many investment bankers reminded us. Investors have long rewarded Nikolay with a well-earned premium valuation compared to many of our peers. This premium is a result of top quartile to top decile profitability, consistent asset quality, and a core funded and transparent balance sheet. Our shareholders earned this premium, and we were not going to just give it away for the sake of doing the deal. I am pleased to say that our collective patience has paid off, and we are thrilled to partner with the team at MidWestOne Financial Group, Inc. I got to know Charles N. Reeves shortly after he became CEO three years ago. We have stayed in contact since then, often seeing each other at conferences and events. As many of you know, MidWestOne Financial Group, Inc. had many of the same challenges that banks around the country had, and that they had a robust investment portfolio that had significant unrealized losses, which was dragging on margins, profitability, and ultimately their stock valuation. I applaud MidWestOne Financial Group, Inc.'s Board of Directors, Charles N. Reeves, Len D. Devaisher, Barry S. Ray, and the entire MidWestOne Financial Group, Inc. team for steering the company through this period and making a difficult decision a year ago to raise the necessary equity to then reposition the balance sheet. You saw over the past several quarters, this action vastly improved MidWestOne Financial Group, Inc.'s profitability, and we believe they are in the upward swing going forward. What you have now are two banks with very complementary and transparent balance sheets that, when combined, will be positioned to be one of the largest and most profitable community banks headquartered in the Upper Midwest. Page 12 of the investor deck shows our loan and deposit portfolios side by side. You will notice very little difference between the two. What you see combined is a diversified loan portfolio and a core funded deposit base. The combined loan-to-deposit ratio of 85% allows us to continue to focus on organic growth while we integrate the two banks and cultures. It also positions us well for future M&A going forward. As you can also see from the investor presentation, the deal is financially attractive to both shareholders of Nikolay and MidWestOne Financial Group, Inc. From Nikolay's standpoint, the pricing aligns with past acquisitions we have completed. It offers full-year fully phased-in EPS accretion of approximately 35% to 40% and is only slightly dilutive to our tangible book value per share, resulting in a negligible earn-back period. Additionally, the pro forma company is expected to produce peer-leading profitability metrics, as you can see on page 10. While there is significant accretion math in those figures, I expect the combined core profitability of the company to keep us well within the top quartile of publicly traded banks we've been accustomed to being part of on a quarterly basis. While our 2026 expectations do not account for the impact of Durbin, which is estimated at roughly $8.5 million, future expectations only assume 25% cost savings, a number that we think is conservative by industry standards. Likewise, we do not model any revenue synergies yet have identified several, including throughout wealth, commercial, and ag. MidWestOne Financial Group, Inc. will double our branch footprint and bring us in Eastern and Central Iowa. The markets of Iowa City, Dubuque, and Muscatine are all markets where we have a number one or number two deposit share position. They are very similar to our current markets like Green Bay, Eau Claire, Appleton, and Marquette, Michigan. They are all vibrant markets with growth potential, but also markets where we can easily matter in something that is at the foundation of why we exist. Now, some of you may question the position in the Twin Cities, as to date we have largely avoided larger metropolitan markets. However, we have always stated we wanted to be in markets where we can matter, and that we struggled to enter larger metro markets without a sizable acquisition that will allow us to matter. Well, MidWestOne Financial Group, Inc. does that in the Twin Cities. With over $1.2 billion in loans and deposits and 15 branches, we have the perfect opportunity to matter in the Twin Cities. Now, there is plenty of room for growth in that market, and M&A may play a part in that growth. But in the short term, we are excited to introduce the Twin Cities to community banking the Nikolay Way. Denver also presents an opportunity and remains one of the fastest-growing markets in our footprint. Mattering in Denver will require additional scale, it is something we have talked with the MidWestOne Financial Group, Inc. team about and are excited to evaluate going forward. Let me highlight our diligence, as Page 13 of the investor deck has much more details about that process. As we have been in one-off negotiations with MidWestOne Financial Group, Inc. for the past couple of months, we have been able to complete a comprehensive and exhaustive due diligence process. Specifically, as it relates to our credit diligence, we reviewed in excess of 70% of the commercial and ag credits, including over 95% of criticized and watch balances. As a reminder, we do all our own credit diligence during this process, and as such, we do tend to be tougher graders on credits we didn't originate. Lastly, I want to touch on our integration plan, as it will deviate from what we have done in past acquisitions. In the past, we closed and converted all systems the same weekend. This allowed us to achieve cost savings much quicker as well as begin the cultural integration from the start. Given the timing and size of this merger, we expect to follow the script of most other companies. At this point, we are targeting a legal closing in 2026, followed by a systems conversion during the summer or early fall. As a result, we have only modeled 50% of the cost savings in 2026. In closing, I want to emphasize how excited I am by this partnership. I have gotten to know Charles N. Reeves, Len D. Devaisher, Barry S. Ray, and several other members of the MidWestOne Financial Group, Inc. team and Board over the past months. From the start, our discussions have been collaborative and transparent, and both sides have kept employees, customers, and shareholders in mind with their actions. There are many cultural similarities between us that allow me to believe Nikolay Bank's shared success model, which is built on the mutual benefit of its three core groups—customers, employees, and shareholders—will continue going forward. I'd now like to turn it over to Phil Moore, our CFO, to share some thoughts on the deal metrics. Phil? Phil Moore: Thank you, Mike. I echo your sentiment and excitement for this merger. Let me highlight a few of the financial metrics of the transaction as well as the forecasted financial results based on current analyst estimates. The transaction structure can be found on Page six of the investor presentation. MidWestOne Financial Group, Inc. shareholders will receive 0.3175 shares of Nikolay for each share of MidWestOne Financial Group, Inc. in this all-stock transaction. Based on Nikolay's Wednesday's closing price of $130.31, the implied per share purchase price is $41.37 for a total transaction value of approximately $864 million when you include MidWestOne Financial Group, Inc.'s outstanding shares and restricted stock that will fully vest. The purchase price is approximately 166% of tangible book value and 11.5 times MidWestOne Financial Group, Inc.'s consensus estimated earnings per share for 2026. And while the one-day stock premium appears high by comparable standards, I should point out that the pay-to-trade ratio of roughly 0.71 is among the lowest of transactions this size over the past several years and is also consistent with the handful of past transactions reflecting Nikolay's premium valued currency. We believe the pro forma financial metrics are compelling to our existing shareholders. As noted on Page nine of the investor deck, on a pro forma basis for 2026, we are modeling fully phased-in EPS accretion of 37%. There is very minimal dilution to our tangible book value, and as such, the earn-back period is largely negligible. This includes all merger-related charges. Clearly, the pro forma earnings include significant accretion from the interest rate marks that will be amortized over the next few years. However, we still anticipate core EPS accretion in the high single digits, which excludes the accretion math. On a pro forma basis as it stands today, Nikolay shareholders will own approximately 70% of the combined company, with MidWestOne Financial Group, Inc. shareholders owning the remaining 30%. We expect the combined company to have a higher percentage of institutional ownership and believe all shareholders will benefit from greater liquidity in our stock going forward. Let me quickly address some of the significant financial modeling assumptions that you'll find on Page 16. We are modeling approximately $38 million of pre-tax cost savings, or roughly 25% of MidWestOne Financial Group, Inc.'s core non-interest expenses, with 50% of that being realized in 2026 given the likely later integration date. We are expecting deal-related costs of approximately $60 million on a pretax basis, which include many larger ticket items, like change of control contracts, contract cancellation costs, and professional fees. We expect to take a 1.65% all-in credit mark on MidWestOne Financial Group, Inc.'s loan portfolio and exclude the CECL double count that was eliminated by FASB earlier this year. Our other fair value marks include a $125 million interest rate mark to the loan portfolio that we will accrete back into earnings over 2.25 years, $73 million in unrealized available-for-sale investment loss portfolio already accounted for in equity to be accreted over 3.5 years, and approximately $9 million in interest rate marks on funding liability amortized over the remaining lives of those instruments. Finally, as Mike mentioned, we estimate an $8.5 million negative impact to our interchange income going forward beginning in 2027 as a result of crossing the $10 billion threshold. Approximately 80% of additional expenses associated with crossing the $10 billion threshold are already included in our core expense run as we've been preparing for this transition. So we don't believe we have any remaining significant investments to prepare to make that hurdle. Finally, let me address capital. Our pro forma CET1 ratio is forecast to be 10.5%, with a TCE ratio of 8.4% at close. Our strong earnings on a standalone and pro forma basis allow Nikolay to grow its capital quickly, so there will not be any need to raise subordinated debt or equity as part of this transaction. However, we are evaluating our options given the excess liquidity the combined company will likely have and may use that to pay down some higher funding costs, thus shrinking the balance sheet and nominally boosting our capital ratios. With that, now let me turn it over to Charles N. Reeves for some remarks. Charles N. Reeves: Thank you, Phil and Mike. First, I want to thank and express my extreme gratitude to our MidWestOne Financial Group, Inc. team for their commitment to our customers, to one another, and to getting better these last few years. We transformed our organization for the good while maintaining our award-winning culture. And on behalf of our team, we are extremely excited to be joining Nikolay Bank. As Mike mentioned, we've known one another for three years, and we and our organizations share similar mindsets and values. We both have an extreme focus on team and customer as we create shared success. And we both absolutely abhor mediocrity. It's rare to have two organizations, both in an upward performance trajectory, come together. Well, that's what we have here today. We cannot wait to help build the combined Nikolay into the best midsized bank in the Upper Midwest. We look forward to making that a reality for our team, our customers, and the communities that MidWestOne Financial Group, Inc. has served so well for decades. Mike Daniels: Thank you, Charles N. Reeves. As you can tell, we are all thrilled about this combination and what the future holds. We pride ourselves in our long track record of seamless and timely closings and integration and fully expect the same experience with MidWestOne Financial Group, Inc. Our plan is to continue to remain opportunistic yet disciplined when it comes to future M&A. Both legacy Nikolay and MidWestOne Financial Group, Inc. shareholders can rest assured that we don't take your investment in our company for granted. Our combined Board and management team remain committed to keeping Nikolay who it always has been—a strong, growing community bank that matters to its employees, customers, and shareholders. That concludes our prepared remarks. Now we welcome your questions at this time. Van: Your first question comes from the line of Brendan Jeffrey Nosal from Hovde Group LLC. Please go ahead. Brendan Jeffrey Nosal: Hey, good morning everybody. Hope you're doing well. Maybe just to start off here, Mike, one for you. I think over the years, I've probably lost the count of the number of times you've said the words, lead local to me and how Nikolay asked the are in your communities. It sounds like for the Twin Cities, there's a definitive commitment there. Denver sounds like it's a little bit more up in the air. Maybe just unpack your thoughts on Denver a little bit. And how you evaluate the potential investment needed there versus maybe stepping back from that market? Mike Daniels: I think it's the second inning of a baseball game. We look forward to looking at it. Don't really have a lot to unpack there yet. But what I can tell you is consistency matters. And lead local matters and mattering matters. And look forward to looking at all of that, but I don't have by any means at this time, set a set direction or expectation other than what has been the consistent team, as you mentioned, to our history. Brendan Jeffrey Nosal: Okay. That's fair. Maybe turning to a little more conceptually, just the idea of culture. I think this is the first time you've done a deal where you had to hop on a plane to visit the markets that you're acquiring and getting into. Do you guys go about maintaining your culture let alone export it to some extent to places like Iowa City, Des Moines, and the Twin Cities just given that increased distance? Mike Daniels: It's five hours and fifteen minutes by car to Iowa City. It's about three point five hours to Minneapolis. Maybe four by car, but yes, can get there via airplane too. I think as in every deal, right, I it's a long way to Sault Ste. Marie, Michigan and Traverse City, there was a big bond in the way. When we did that. So it's intentionality and transparency in all we do in our communication. Right? And it's at every level of the organization. It's a commitment as to why we show up across the footprint. Wherever that footprint is, every day to matter to customers, matter to community, matter to one another and create that shared success which are belief has been, if we do that, do that exceptionally well, we'll produce top quartile, if not top decile shareholder results and performance. We've proven that thesis over the over our history and continue to do it again. It requires intentionality, right? But more than words, it has to be seen in our actions. But as with anything we've done, that is as big as the systems part a critical piece of the integration. Having people understand what that means and living that I think the two cultures align in certain ways, but never our two cultures exactly the same. But I think we have a really good start basis to start from and how they approach relationship banking and mattering in the markets in which they operate. Okay. All right. Thanks. Brendan Jeffrey Nosal: I'm going to sneak one more in there. Just to Nikolay, your own results for the quarter, which were quite strong. I think margin expansion was a big driver of this quarter's strength. Can you just offer a little color on how you expect your core margin to behave over the next few quarters? With coming rate cuts in store before you layer on the impacts of MidWestOne Financial Group, Inc.? Mike Daniels: Sure. Think when we talked at the end of the second quarter, my thought would be be we expected doing our back book repricing and our deposit deposit positioning, to continue to go up. I didn't see 14 basis points for the quarter, but we had we had really nice deposit growth back end repricing was solid that got us there. There's no real there's no real additional accretion from anything in there that that's a pretty solid quarter number. With a couple of rate cuts, And I would hoping to stay flat. We might get a give a bip or two back here at year end. And then it'd be shampoo effect, Brendan, where I think the typical margin movement we have seen over the last couple of years depending on the deposit outflow in the first quarter, and what that looks like. Year over year. This year, it wasn't as bad. So our margin was stronger and held in there. But I don't expect I definitely don't expect us to give a lot of ground back. New asset generation remains solid. But I definitely think a win for us is to try to deliver a fairly flat margin in the fourth quarter. Brendan Jeffrey Nosal: Okay. Fantastic. I appreciate you guys taking the questions. Van: Our next question comes from the line of Terence James McEvoy from Stephens. Please go ahead. Terence James McEvoy: First off, Mike, congrats to you and your team and same to you, Charles N. Reeves. And thanks for addressing the questions on culture, that topic. Definitely came through your earnings release last night. Couple of questions, maybe first one on the MOFG side, there's been an upgrade of talent within commercial banking, private banking and I'm sure others. Could you just talk about retention of some of those new hires? Then MidWestOne Financial Group, Inc. has also invested in digital. Any of those tech or digital upgrades kind of complement Nikolay going forward? And then the last one there, any lines of business kind of especially lending businesses come to mind? Any of those maybe don't complement Nikolay on a pro forma basis? Mike Daniels: Yes. I mean, I'll jump on that in Charles N. Reeves can jump in. I think retention of people is key. The lack of overlap definitely helps in that matter. So I would expect us to I don't know if you're here and on the revenue side, given the opportunity on what this combination provides, why you wouldn't want to be a part of it. But we're very focused on that, both on Nikolay and MidWestOne Financial Group, Inc. side. Talent is the key. That's the first one. The second one, I think the technology improvements they've made are areas that we are we're just looking at. So the ability to look at those and see how those marry up are part of the integration process and plan. The teams have already started looking at I mean, there are more like vendors that unlike vendors. And providers in this deal that that are being looked at and examined. So I don't think there's a lot of upheaval or disruption there. It feels good. What was the fourth one? What was the third one, Terry? Yes. Terence James McEvoy: Business ones. Mike Daniels: I mean, I think both companies are fairly chocolate and vanilla, right? I mean, we do common things uncommonly well across our footprint. So there's no national real national line of business that that either of us do. We do things that matter in the markets we serve and take advantage of the opportunities in those markets to bring a relationship banking focus. So I don't expect any major any major changes there. I think the approach to C&I lending and relationship banking regardless of the asset classes, first and foremost. Right? And you've heard me say it, all of you have heard me say it time and time again, it's not about the loan, it's about the relationship. We don't make loans. We invest in relationships regardless of the asset class. Or what we do. And I expect that message to carry the day and carry through in the combined company. I don't know, Charles N. Reeves, if you want to jump in and add anything to those. Charles N. Reeves: Yes. You articulated well, Mike. Terence James McEvoy: Okay. Thanks, Mike. And maybe a quick one for Phil. When I pulled the call reports, see $25 million of pre-tax interchange revenue over the last year and that's at both banks. Just so I'm clear, $8.5 million of pretax Durbin impact a, that's both companies and that's the non-credit card interchange revenue part that I'm unable as an outsider to separate? Phil Moore: That is correct, Terry. That is the reason that your number may have thought differently at first, but that is correct. Terence James McEvoy: Okay, perfect. Thanks for taking my question. Back into the math there. Phil Moore: Perfect. I'll do just that. Thanks. Thanks for taking my questions. Van: Good to talk to you. Our next question comes from the line of Nathan James Race from Piper Sandler. Please go ahead. Nathan James Race: Hey, guys. Good morning. Thanks for taking the questions and congrats on the deal as well. Mike, going back to your comments around the Twin Cities, obviously, MidWestOne Financial Group, Inc. has invested in some production talent, given some of the M&A related disruption within that market recently. Curious to what extent you can accelerate some opportunities to gain market share in the Twin Cities by deploying the model that's obviously been really successful in Green Bay over the last two point five decades or so at your franchise. And just how you see the overall kind of organic growth of the company trending on a combined basis? Mike Daniels: Yes. I think I look forward to that and think that's the opportunity, right? But as I said, earlier, in the context of how we do it and how we look at the world relationship. Relationship based, what's the opportunity, what's the depth of relationship, how can we matter. I think that we can and will. I think the talent that MidWestOne Financial Group, Inc. has been able to add across its footprint things that way. So I look I look forward to that. Okay. I look forward to hearing from them and the teams as they pull it together to say, this is what we think we can do. As you know, the primary and driving focus from a commercial standpoint is always on C&I. If it's CRE, it has to be relationship based. Transactions don't work. Not a fan of them. We never have been. But where there's a relationship, we want to matter and will. So I think the two aligned nicely and look forward to what we can do across the footprint. Right? Not just there. Throughout Iowa, Denver, and the Minnesota marketplace. Got you. Then Well, as long as continue to do what we do in Wisconsin, and Michigan. Understood. Makes sense. And then is there any anticipation that some of the cost saves from the integration could be reinvested in some production hires, whether it's in the Twin Cities, Denver, and some of the Iowa MSAs that you'll be adding? Or do you feel pretty good about some of the production capabilities that are coming over? From MOFG. I feel really good where we are. Right? I think I think we're positioned well. I think we I think I mean, we did want to come in with some big hairy cost save number that made the deal look we did things in typical Nikolay fashion as real as they can be transparent. But I feel good about talent across the footprint and the leadership. Delivering that talent and have high expectations as I do for for our legacy legacy revenue and relationship people. Got you. And if I could just sneak one last one in. Obviously, it's a pretty big integration here. Adding one of the biggest retail franchises that you have in your previous deals. And the Nikolay brand probably isn't too well known across Iowa. So just curious if there's any changes or differences in kind of your integration playbook as you look forward in terms of how to integrate MOFG and just ensure kind of seamless retention across the deposit franchise in Iowa? Mike Daniels: Yes. I think as with everything, I think that's people focused, that's people delivery. Right? There's not a lot of overlap. But the matter to customer, to community, matter to one another and share success environment, they only works if it's real and it's got to be real on the street. So the introduction and retention about shared success has got to be delivered by the folks in the markets. I know you've heard me say there's not much I can do from Green Bay, Wisconsin. To make us matter in the footprint if our people don't believe that they matter. That they can't prove that out in the relationships and in the communities. I think it's very solid across the Nikolay legacy footprint as well as the MOFG footprint. And I fully expect that's a challenge to the people. I expect them to carry the day on the relationship because that's what matters. Okay, great. I appreciate all the color. Congrats again guys. Thank you. Van: Thanks, Dave. Thanks, Dave. Dave. Our last question comes from the line of Damon Paul DelMonte from KBW. Please go ahead. Damon Paul DelMonte: Hey, good morning guys and congrats on a very exciting announcement both organizations. Just wondering, Mike, are there any like products or services, either on the Nikolay side or the MidWestOne Financial Group, Inc. side where you see opportunity to leverage the expertise from one side or the other to create greater synergies? Mike Daniels: I mean, the revenue enhancement, the largest opportunity might be on across the wealth book. And across the customer base. We do as you know, employee benefits are part of our makeup. And across the MidWestOne Financial Group, Inc. platform, they don't have that offering. We look forward to bringing that to the customer base, the C&I customer base and enhancing that rollout. That's a $9 million under management I think there's tremendous amount of upside. But I think both companies do common things uncommonly well, right? I mean, it's relationship banking and relationship focus at its finest. How can we matter across the whole wealth of revenue lines to each customer and at each community. So I don't know that there's any special, special sauce other than what both companies do really well. And then show up, get after it matter in their markets and deliver top notch relationship based service with the customer always the focus and mattering in the markets. And the customers understand that and look at it in the same lens of shared success that business is personal. It is personal to our customers. We know that, so it's personal to us. Damon Paul DelMonte: Got it. Okay. And then could you just go back to your comments from a previous question on the Denver part of the footprint. Were you saying that you're evaluating the strategy there? It's like you're going to maybe look to invest more way of like de novo or potentially future M&A? Or is this an area that you may ultimately decide is not the best fit for the footprint? I didn't quite hear what was said there. Mike Daniels: That's exactly what I said. All of those things, right? I mean, what I said maybe in a convoluted way is I don't know, and I look forward to looking at it. I think it's an exciting market. And we just got to look at how it fits in, right? I mean, probably the biggest thing that can't get lost everyone gets all excited is first and foremost, relative to the and communities showing up and getting after it mattering, But secondly, I mean, what it means to the shareholders, we are always going to look at this from the lens of the shareholder, right? I mean, it's I sound lost on you, Damon, that we're still a founder driven organization and it's still you know, 95% of my of my of my family's worth and wealth. So everything we do and every way we look at it, on both sides is through the lens of the shareholder. And what is the best course of action and I think some of that's part of the reason we don't let median slip in our conversations. Right? We expect top quartile, top decile, and we expect to deliver that as a result of the reason and why we show up every day and what we do. And the reason isn't to produce the shareholder results. That's our responsibility. Reasons to matter in the markets and as a result of the depth of that, we will deliver those top quartile, if not decile results to the shareholders. Because it matters and we understand that. So we'll always take a look we'll always look at every opportunity in the in in the lens of the three circles. And as you know, we want those circles to have as much overlap as possible. But it's not bigger. Bigger isn't better. Better is better. And we'll always look at what better means. Damon Paul DelMonte: Got it. Okay. And then just lastly, just from a modeling standpoint, believe the slide deck to the illustrative example there was a three thirty one. Is that that's reasonable for us to assume in our our models when we go to layer in the transaction? Mike Daniels: It is she. Yeah. Her Rezak's telling me yes. Damon Paul DelMonte: Okay. Got to be right then. Okay, great. That's all that I had. Thank very much for Mike Daniels: I mean, we're going we're kind of vague there, but I mean, know us. We're going to do things in Nikolay Way and try to get this thing to and roll and to the extent we can and but we also understand we're not in control of everything, but I mean, the goal is that, Damon, is to get it closed by then. Damon Paul DelMonte: Okay, great. Okay, that's all that I had. Thanks a lot. Appreciate it. Van: I will now turn the call back over to Mike for closing remarks. Mike Daniels: Thank you. I appreciate everyone who attended the call today and can't tell you how we look forward to bringing these two companies together in the success that I think it provides across our footprint. As I just finished saying, be focused on the three circles of customers, employees, and shareholders and the overlap in the shared success environment. It sounds simple, yet it takes focus and commitment to make happen. And and and I think our track record speaks well for what we've been able to do. But our expectation at the end of the day is this combined entity will be a top quartile, it's not just out performing company delivering exceptional shareholder returns. Hopefully, you've seen it if you've been a Nikolay shareholder. Over the past ten quarters as to where we're headed. There is absolutely that expectation that, that will happen here again. We don't take the work involved for granted. We take the cultural integration or the systems integration for granted. But we will get after it and we appreciate your investment. We take it seriously. And if there's ever any questions or additional follow-up, please reach out. On behalf of Charles N. Reeves, Barry S. Ray, and their entire organization, as well as Nikolay, thank you for being part of the call and we look forward to talking to you more. Van: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Anette Olsen: Good morning, everybody, and welcome to this third quarter 2025 presentation. My name is Anette Olsen. I am the CEO of Bonheur and Fred. Olsen & Co. As usual, today, Richard Olav Aa, our CFO, will start the presentation going through the main figures and then the different CEOs for the individual companies will present to you. And we will take questions and answers at the end. Today, we have Samantha Stimpson with us, the CEO for Fred. Olsen Cruise Lines. So she will also present to you. So welcome. Richard, I give the word to you. Richard Olav Aa: Yes. Thank you, Anette, and also a hearty welcome from me to this third quarter presentation. Before we go into the numbers, I would like to give some reflections on the report. I think the Bonheur Group of companies delivered a solid set of numbers this quarter. But we can also say that there are room for improvements in the numbers. We see cruise lines improving utilization, but still room to grow. We see Windcarrier, vessel at yard also this quarter, and we also see downtime in renewables. So yes, a good set of numbers, but definitely more room to grow the earnings on existing assets. So with that in mind, we can move over to the highlights. And my colleagues will go through the main strategic and operational highlights of the quarter within each company. So I will limit myself to comment on the more financial aspects of the highlights. But starting on renewable energy, reporting an EBITDA slightly below last year, some NOK 40 million plus NOK 40 million down on EBITDA, mainly related to reduced generation and reduced prices of REGO that Sofie will cover in more detail. Things to be aware on the financial side that there will be a grid outage on Midhill now this winter, Midhill being a significant wind farm. So that will impact earnings and EBITDA going forward. And then we'll be notified on another downtime next winter. And these downtimes don't have any automatic compensation and [indiscernible] works heavily on mitigating actions on this downtime, especially the second one, which will come -- Sofie will come back to. But no doubt, if they last as long as they are stated there, they will have impact on the earnings going forward. Wind Service, an EBITDA from -- up from NOK 435 million to NOK 577 million, which is coming off of a good operational quarter, both in FOWIC and also in GWS. I'll come a little bit back to the underlying improvement in Wind Service on the next slide because there are some special items both last year and this year. I'm also happy to see the backlog increasing and 2 new contracts signed, and it's the firm contract that is reflected in the backlog, while the reservation agreement is not reflected in the backlog. Haakon Magne will cover that more in detail. On Cruise, I will leave that to Samantha, but all in all, an improved quarter. EBITDA up with close to NOK 100 million coming off improved occupancy yield and good cost control. Then in the other investments, NHST continued to deliver healthy results and the margin levels are at higher levels than we have seen in this company before. Also under other investments, we had a refinancing of a NOK 700 million green bond this quarter. utilizing a healthy market and also utilizing the Bonheur Group of companies good standing in this market, we were able to place that bond at the lowest spread we have ever seen of 215 basis points above NIBOR. Fred. Olsen 1848 will present later by Per, continuing to progress technologies. And today, we will cover more detail on the floating solar. Moving on to the segment analysis per third quarter '25. We have showed you these graphs a few quarters now. We think they are very good to also focus on how the group develops in the longer term. Maybe not so much reflection on the revenue side this quarter, but on the EBITDA side, where this quarter is another quarter that builds on the momentum we have seen coming out of COVID where we have been able to lift the running EBITDA of the Bonheur Group of companies to a level actually on an average, somewhat north of NOK 3.5 billion on a 12-month rolling basis compared to pre-COVID of around NOK 1.5 billion plus. And we see all 3 segments have significantly better earnings than pre-COVID, especially the Wind Service segment. Yes. Briefly comment on revenue and EBITDA per segment. We have covered the EBITDA already, but there are a few items to note, especially on Wind Service, which I mentioned on the previous slides. We see on Wind Service that the revenues are down by NOK 281 million and that is really related to that in the third quarter last year, we had a big contract with the Shimizu vessel Blue Wind, which contributed by more than NOK 500 million to the revenue. So excluding that and excluding UWL being included in the third quarter '24 and not third quarter '25 as we successfully sold that last quarter. There is a strong underlying revenue improvement in Wind Service. And we can see that more on the EBITDA on Wind Service, which has an improvement of NOK 142 million. I think if you exclude the Shimizu contribution, the one-off we also now have related to the Ocean Wind termination fee and UWL, we see an underlying improvement in EBITDA in Wind Service of more than NOK 200 million year-on-year this quarter. So on back of that, we come out with an EBITDA of NOK 1.117 billion compared to NOK 938 million third quarter last year, which is an improvement of NOK 179 million. And remember that figure when we move now on to the consolidated summary, so we can start with the EBITDA line. And again, the same numbers there, an improvement of NOK 179 million, and I will briefly comment on other P&L items. Balance sheet, I'll cover on the next slide. Depreciation is down by NOK 36 million. That's really related to a one-off and reversal of an impairment in the media company. So the improvement there is a one-off. Net finance. Interest cost at a quite normal level on a net basis this quarter around NOK 70 million. And then we have these unrealized currency and interest rate effects, mainly related to the interest rate swaps in the U.K. that goes up and down each quarter, but I really point out that, that's unrealized. So -- but also an improvement there of NOK 28 million. So earnings before tax is at NOK 680 million, which is an improvement of NOK 242 million. Taxes are up mainly related to better results. So the net result is NOK 561 million, which is an improvement of NOK 210 million. What is worth noting is that a bigger share of this result flows to the shareholders of the parent, the shareholders of Bonheur because more of the results comes from 100% controlled entities. So the NOK 561, NOK 461 flows to the shareholders of the mother company. So actually, we're delivering earnings per share of more than NOK 10 per share this quarter, which is quite strong. Then final slide for me is the group capitalization per third quarter. First to the left, our financial policy that we obviously reiterate every quarter because it's very important to us. And it's also important to check that we are in line with the financial policy, and we can confirm that our numbers are fully in line with the financial policy. Then going through the numbers. And if we start with the table above with 100% owned entities, we see that we now sit with more than NOK 5.3 billion in cash and close to NOK 3.4 billion in debt, and then a net cash position slightly below NOK 2 billion. So a few things to note there is that Wind Service, we have dividended out the proceeds from the successful sale of UWL and also some dividend up from FOWIC up to Bonheur this quarter. So there is a big change in the cash position between Wind Service and Bonheur ASA in the quarter. And that you will also see in the mother company's results, which are attached in the report that the mother company delivered profit close to NOK 900 million this quarter due to the dividends up from Wind Service. Despite that dividend, Wind Service still sits with close to NOK 1 billion in cash and very little debt left on [indiscernible] around NOK 300 million and net cash position of NOK 675 million. Renewable Energy, that is the Scandinavian wind farms plus the development portfolio is debt-free and a small cash position there of NOK 338 million. Point to note, Cruise Lines paid down the final installment on the seller credit on the 2 new vessels this quarter. So Cruise Line have no -- 0 external debt. So a small milestone for Cruise Lines there. And Earnings are improving. So a cash position of NOK 605 million, also Cruise lines is paying down its debt to Bonheur that they took up during COVID. And then finally, Bonheur, with the refinancing of the bond and the dividends out of wind service sits with NOK 3.4 billion in cash and net debt around NOK 3.1 billion and a net cash position of slightly more than NOK 300 million. So a solid position of what we control 100%. If we look below what we don't control 100% on renewable energy, which is really the joint ventures. Debt of NOK 4.3 billion and NOK 767 million in cash on net NOK 554 million. But remember, this we consolidate 100%, so Bonheur is 51% of this net debt position. Wind Service, it's Blue Tern and also GWS, almost now debt-free in combination and other investments also close to debt free. So all in all, a strong balance sheet, fully in line with the financial policy. So with that, back to you, Anne. Anette Olsen: Thank you. First to present today is CEO of Fred Olsen Renewables, Sofie Olsen Jebsen. Sofie Olsen Jebsen: Thank you. This quarter, we saw production lower than the same quarter in '24. There are some reasons for that, the Crystal Rig 1 recovery project, which I've told you about earlier, that has early generation turbines. Also, we have some market reasons at our Swedish wind farm that is ancillary services, low prices and grid export limits in addition to blade issues. We've also seen lower revenues due to lower REGO prices this quarter and REGO's renewable energy guarantees of origin, those are certificates that are issued per megawatt hour produced that can be bought by consumers wanting to offset their carbon emissions. In the last years, we've seen quite high prices on this before they have been decreasing back to the current levels because more renewable energy is coming into the market with subdued demand. Then we also have construction work of our 2 wind farms progressing well this quarter. Our business model, as you have seen before in Fred. Olsen Renewables, outlined on this slide, and there are some changes this quarter that I'm happy to report. If you see under the consented column, we have some projects that have received consent, 2 solar projects, one in the U.K. and one in Italy. In addition, we have received consent for Wind Standard 1 Repower, which is our first repowering project receiving this. And we are advancing and maturing these projects through our normal development process to ensure long-term value creation. Taking a step back and looking at the market, the prices have been steady. We see that there is now lower gas storage levels in the EU, which is a change in regulation there. This means that changes in weather or colder weather for longer times could mean an increase in prices. But what we also do see is that the long-term trends are pointing towards softer prices as there is an expansion of LNG supply. Moving on then to talk about production. The generation was below estimates this quarter. I mentioned the Crystal Rig 1 recovery project with the early generation turbines. This is increasing availability steadily, which is good to see. We've also had the lower production on Högaliden and Fäbodliden in Sweden. That is mainly due to market then shutting down due to low prices and provision of ancillary services, grid export limit and blade issues. In terms of the ancillary services, we have recently entered that market and are offering to turn down production of our wind farms in order to help the system operator, which is [ Svenska Kraftnet ] in this instance to balance the grid. And we see that this provides revenues, and we are offering this service on an hourly and 15-minute basis together with our balancing system provider. The blade issues I commented on the last quarter. We have 3 turbines offline with suspected blade cracks and are working together with the manufacturer to assess and perform necessary repairs. We also see grid outages this quarter. And as mentioned by Richard, we have a planned grid maintenance work at Mid Hill. That has been going on from the 15th of September and will last until May '26. And then we have a further estimated outage of from November '26 to April '27. There is no automatic compensation from the grid owner here. We are working on mitigating actions, especially on shortening the -- trying to shorten the second outage with Technical Solutions there. And I think it is fair to note that this quarter, we actually had more production from Midhill Wind Farm than the previous same quarter the last year. That was because last year, Midhill was out due to a failure at the external Fetteresso substation. That was a highly unusual event. And it is although still quite unusual that we see this length of grid outage that we now are in with Mid Hill and that we also have in front of us. I would like to point out that grid outages are, in general, infrequent. And when they do occur, it's normally due to scheduled maintenance, and it's quite specific for each substation. This outage we are in the middle of now is because of an upgrade of the substation at Mid Hill, which is still quite unusual. And we are notified of all the outages in advance and also monitoring to keep overview ourselves. So moving on then to talk about our construction projects. Crystal Rig IV has good progress this quarter. We have 5 turbines installed, most likely 7 by the end of this week. There has been a delayed transport of components that has postponed the installation start, and that has been due to low capacity on police escort in Scotland. We are taking mitigating actions to this and currently operating with 2 cranes for installing to use all available weather windows. We also saw blade damaged by the storm Amy that was under -- or the blade was under the manufacturer's responsibility, and we are working together with the manufacturer to see how this will might affect us. Then moving on to our second construction project, Windy Standard III, more in the Southwest of Scotland. The project is progressing well as well. We have 2 wind turbines foundations successfully poured. These are gravity-based foundations where you need to pour the concrete and the civil works are progressing according to plan. So that was all for me this quarter. Thank you. Anette Olsen: Thank you, Sofie. Next is Lars Bender, CEO of Fred. Olsen Seawind. Lars Bender: Thank you, Anette. Yes, and I will take you through the highlights for Fred. Olsen Seawind this quarter. First of all, we remain confident in our projects. We have good projects in attractive markets with strong political support, both Codling in Ireland and Muir Mhòr in Scotland are in markets with political support and where offshore wind is a focus area in the energy transition. We still, as I have alluded to before, deploy very diligent development strategies on our projects, which basically means that we have focused on having lean spend profiles. We limit pre-FID commitments, and we focus on progressing the projects and creating incremental value quarter-on-quarter. Then this quarter, we have received a request for further information for Codling in Ireland. This will postpone the expected consent determination, and I'll come back later in the presentation to what this exactly means and also put it into the context of the consenting process in Ireland. Then the fourth bullet, we have secured a landfall area and onshore substation area for the Muir Mhòr floating project. This is naturally a good milestone and good progress for the project. I'll also come a bit back to that later. So as I mentioned before, we are in the consenting process in Ireland with Codling. We submitted our consent application last year, and we have now in this quarter, received a request for further information. That request for information will postpone the expected consent determination. The content of the request for further information is a range of surveys, including offshore surveys, which we have to conduct. Then we have to, on the back of that, analyze the data and then put it into a report, which needs to be submitted to the consenting authorities. It's important to note that other Phase 1 projects have received similar requests for information, and we very much see this request for information as a clear sign from the Irish planning body that they want a diligent and process and very robust consent determinations at the back of that. So we have already started this work and we will naturally continue this at pace. Just to maybe recap the process around consent in Ireland because I think it's important to put this RFI into context. First of all, the RFI was from our perspective, expected. It is quite usual in offshore wind to have a request for further information. And also in Ireland being a new offshore wind regime and a new planning body, it was also expected in that context. As I said before, we submitted our consent application last year. That was then sent into consultation. And now we have received this request for further information from the government. On the back of that, the planning body will make a consent determination, which is basically the planning body's decision on our application. There is no fixed time lines to that, as I've said before on the quarterly presentations. And when the consent determination is issued, there is in Ireland, a risk of judicial review, which basically means that any person or any company can challenge the government's decision. We will not be parties to such challenge, but it is a risk that's sitting on the back. So this process, as I've said before, has some time uncertainty attached to it. But it's important to note a couple of things in that connection. First of all, our development strategy, as I mentioned before, we have been expecting that we had to be flexible in relation to timing. So we have been geared for that. Secondly, on the financial side, we have 100% indexation of our CfD until FID. And then I think thirdly, and that's my third bullet, we are in an environment in Ireland with a government with strong support, which also very much are supporting the build-out of offshore wind and taking measures to support the industry, which, again, of course, gives us confidence in the project. That leads me to the fourth bullet. We are still pushing ahead with the project and preparing all procurement processes and engineering and so forth for the project. So we are ready on the back of the consent determination to move the project forward towards FID. If we then go to Scotland, as I said before, we have secured land for both landfall and onshore substation this quarter. This is something we've been working on for a while. The area where we are connecting in north of Peterhead is a very attractive area for connection, and therefore, it has been important for us to be one of the first projects to secure this area because it is, of course, a very important precondition to develop the project that we have access to land and grid. Secondly, consent is progressing as planned. I said before that we received the onshore consent and we're awaiting offshore consent. When we have the consent, we are basically in a position to bid into a CfD auction. So currently, I would say the pieces of the puzzle, consent, grid, land are falling into place, and that also very much supports the strategy that we have deployed of being one of the first mover projects on floating wind in Scotland, and that continues to be our direction and also what we aim towards. And with those comments, I'll give the word back to you, Anette. Anette Olsen: Thank you. Per Arvid Holth, CEO of Fred. Olsen 1848. Per Arvid Holth: Thank you, Anette. So as mentioned by Richard and not visible on the first slide there, we'll focus on floating solar. And the backdrop for this presentation is that earlier this month, the International Energy Agency updated their annual report on renewables. So we'll allow ourselves to zoom out a bit and go through some of the results. So on this slide, I think we'll jump to the graph on the right side. This is one of the main conclusions to me. This is showing the actual product, the electricity produced until today and expected to be produced from renewable energy sources until 2030. If we look at wind first, then this shows a good momentum both in offshore and onshore wind as well, but it's solar that is sticking out, having started a significant momentum today, and that is expected to continue until 2030. So if we compare the sources a bit here, then more terawatt hours of electricity will be produced from solar than from onshore wind this year already. combined onshore/offshore will be surpassed by solar next year. And in 2028, 1 year earlier than was projected last year, it is expected that more electricity will be produced from solar panels than from hydroelectric plants around the globe. So that is quite significant. I also added the capacity expectations of installed capacity until 2030. And it's a bit more complicated looking at that when it comes to electricity production. But it gives an indication of how much solar needs to be installed to produce the power that is visible to the right there. And it's a significant amount. It's around 3,600 gigawatts, which is expected to be installed until 2030. So in conclusion, by 2030, amongst renewables, solar is expected to become the largest source and it will require a significant amount of panels. So then the question is whether the supply chain can supply those panels. So that is the next slide. And there are 2 things here. One is that the short answer is really yes. The panels -- panel production capacity is there. Already, there has been a significant increase in growth, but the utilization of the production facilities in the supply chain is quite low. And this fierce competition that exists, that has also resulted in a significant drop in prices. So it is -- now the global spot price is down to $0.09 per watt peak, and that is quite affordable. So if you add then that -- when it comes to solar PV, it's usually quite easily installed and it's available and quite affordable, then that is why that growth is picking up as shown in the first slide. But it does require a lot of area. And if we go then to the next slide, where does that leave us, 1848 promoting our floating solar technology, BRIZO. We, of course, see this as very positive. Solar PV is area intensive, and we see that the market for utilizing water surfaces for installing solar PV is growing. So that is positive. But of course, with the amount of solar that is expected, we believe that it's important that there is a high flexibility in the application areas and our technology can facilitate that, either utility scale in hybrid setups with hydro or storage or indirect industrial applications as well. So all in all, these offer a stable and flexible and robust solution, which serve the application areas that we see for floating solar and has a potential for opening up new areas. So that is it. Thank you. Anette Olsen: Next in line is Samantha Stimpson, CEO of Fred. Olsen Cruise Lines. And Samantha, you're joining us on Teams this time. So please go ahead. Samantha Stimpson: Thank you. Good morning. So an update from Cruise Lines. We've seen growth in revenue and EBITDA. This is through improving our occupancy and our yield as well as putting some cost control measures in place. I'll also update you in a bit more detail from customers telling us that they are happier, and that's through measurements of customer surveys, focus groups and the introduction of Net Promoter Scoring. And I'm also pleased to announce that the future bookings performance is good as well. If we move on to the next slide, I'll be able to talk you through some details. So our passenger numbers are up 19% in quarter 3. This is predominantly due to us taking the decision to introduce more shorter duration sailings. This was a decision taken to encourage new to Fred. Olson cruise line customers, introduce them into the business as well as giving our loyal customers more choice to sail with us during the summer months. And I'm pleased to say this has worked. Our occupancy in quarter 3 was up to 81%. And it's easier to achieve that through the warmer months of quarter 2 and quarter 3. So it was a good decision. If we then look at our yield performance, yield has improved by 13%. And this is due to some product mix. Every year, our itineraries and destinations and durations across the fleet change. In addition, we've made some decisions around how we manage our revenue performance pre-cruise and during the cruise. And all of the above initiatives have supported the growth that you can see here with our EBITDA. If I then talk to you about Net Promoter Score, I'm pleased to say this has increased from 68 -- from 63, sorry, to 68. That's a 5-point improvement in Net Promoter Score. We are investing a lot of time to understand where we need to make improvements with our customer satisfaction. And this is to ensure that we are improving retention and satisfaction rates. We're making good progress, and this is something as an organization, we are committed to continue to improve. If we look at the forward sales, during quarter 3, we had our 2027 World Cruise on sale. We had the rest of 2025 to continue to sell, and we had the year of 2026. And I'm pleased to say that a big focus on 2026 has driven the improvement in the forward sales performance that you see here of plus 12%. We understand in the organization the importance of filling our ships, and we understand that one of the best ways of doing this is to ensure that we get guest commitment further in advance. And if we move to my final slide, you'll be able to see during quarter 3, the number of departures that we took for each of the vessels and some of the key destinations that we visited. And what I'd like to highlight is that Norway continues to be a positive performing destination as did the U.K. during the period of quarter 3, and that's predominantly supporting the shorter duration cruises that we've been able to see improvement in occupancy through. And that's it for me. Thank you. Anette Olsen: Thank you, Samantha. Haakon Magne is now standing here to talk about Fred. Olsen Wind here. Haakon Magne Ore: Thank you, and good morning. Very happy that I can start the summary, as I've done the last time by reporting about a very good performance also this quarter. The vessels that has operated has been above 99% utilization, and we are delivering one of the best financial performance in the history. Further on the positive side, we have, during the quarter, signed 2 new installation contracts for installation in '27 and '28, respectively. And on the market, I think we reiterate what we have said for the last year that there is an increasing volatility on demand side, which impacts visibility and some uncertainty towards the end of the decade. If we go down to what the vessel has done during the quarter, Bold Tern that commenced the work offshore under the Saipem drilling campaign. It took almost 5 months to make the vessel ready for operations with all the equipment and is now performing well offshore. Brave Tern went into yard to do the same work as we did on Bold Tern to prepare her for a generic 3 turbine sea fastening setup with 15-megawatt generator. So we can easily switch between the different models. We also had to do some carryover work from our stay in Navantia on the crane upgrade last year. Blue Tern, it completed its second major on campaign with Siemens this quarter and went straight in direct implementation over to a third campaign with Vestas early October. Blue Wind, there, we completed the Hai Long in the quarter. If we then go over to the financials, as I said, good performance and good results. We had one vessel in yard. That's why we only were able to sell 67% of the days. But of the 67 days we were able to sell, we got paid over 99% of it. And that is decent. On the revenue side, we had revenues of around NOK 60 million with an EBITDA of close to NOK 43 million. Just note, I think, as Richard also mentioned, that around 4 of those are related to some -- the last accounting effect of the termination fee of a contract that was terminated in 2024. If we look to the bottom right of the slide, you see the development of annual performance. And year-to-date, we are close to 2024, which was a record year for us. So that is good. If we then go over to the market and the backlog slide. Yes, that appears not to be included in the slide. But I can take it anyway. If you see, I think order intake for the general industry has, to a larger extent than normal been driven by delayed projects and major O&M campaigns that has been triggered by quality issues on some of the turbines. But I think we are then happy to report that this quarter, we actually signed 2 contracts. We signed one contract for installation in 2027, and we signed a preferred supplier agreement for execution on the Gennaker project in 2028. Both contracts are for more than 60 turbines. Our backlog for the quarter stands at NOK 360 million, slightly up from last quarter. But please note that, that does not include the reservation agreement as we do not report that in the backlog to the market. On the market, as I think, we are giving the same measures as we have done now for some time. You see in the medium term, there is very limited vessel availability of the high-spec vessels. So their impact on the demand side could have a quite strong impact on the outcome. The uncertainty and the issues that we see in the offshore wind value chain in general industry, again, that impacts the volatility of demand. And that we continue to see. But given the lead times in our industry, that doesn't impact the next year performance. So it's more impact the end of this decade. But I think this is the pick we have seen for some time. So the trend is the same in this quarter as we have seen before. So I think that concludes my comments. Then I give it back to Anette. Anette Olsen: Yes. Thank you. We will now open up for questions. So please. Operator: [Operator Instructions] We will now take the first question from the line of Daniel Haugland from ABG Sundal Collier. Daniel Vårdal Haugland: Congratulations on great results, even though it's been maybe a little bit difficult quarter for some of the businesses. I think it's still great results. I have 4 questions. I think I'll just do them by segment. So just kind of a simple question on renewable energy. So the grid outage at Midhill, why is that not compensated given that -- yes, it's a grid outage, which seems to be controlled by someone else? Sofie Olsen Jebsen: In general, grid outages are not -- or planned grid outages are not compensated in the industry. Those are due to maintenance. In this case, it's upgrades of the grid. And yes, that's how it is. Daniel Vårdal Haugland: Okay. And then one question on Sea Wind. So the Codling consent, if I heard correctly, that is -- it's postponed a little bit. So I don't know if are you able to give any comments on when a potential FID on that project could happen? Obviously, I'm asking for kind of guidance here, but kind of more like are we now into maybe a '26, '27 decision or maybe even later? Lars Bender: I can, of course, understand the question, but we cannot guide on the FID time line. As I said earlier in the presentation, the process does have uncertainty attached to it, and we are dependent on the government in relation to this. So we are currently awaiting the determination. We are handling this RFI now where we have extensive surveys we have to do. We have to analyze the data. We have to submit it back. They need to issue the determination, which then again has uncertainty around whether it will be subject to a judicial review or not. So for me, to give an indication of FID would be very arbitrary at this point. But it is important to say that we remain confident in the project and the diligent development strategy that we are deploying currently for the project. Daniel Vårdal Haugland: Okay. And then I have one question for Haakon Magne on Wind Service. So just on the demand picture right now, you touched a little bit in on it being volatile. But if I'm kind of just thinking a little bit loudly here, so Ørsted canceled Hornsea, Hornsea 4 earlier this year. We're seeing Vestas and Siemens Gamesa now pausing expansion at some offshore wind factories that they planned. And we also saw Maersk cancel and almost finished WTIB. So other than kind of just the very short to medium term here, how do you see kind of the outlook a little bit more out? Is it possible to give any kind of comments around this? Haakon Magne Ore: Yes, thanks for the question, but I think it's a very hard question to answer. But I think I would like to start, I think that the main drivers behind offshore wind is still there. We see that the government in the key areas that building offshore wind still is supportive for the industry. We still see new countries coming in with plans. But unfortunately I think every industry has a tendency to get some growth. So I think it's very hard for me again to explain when exactly this growth then will come back into the growth trajectory. So I think it's a good question, but I think it's very hard for us to answer. Daniel Vårdal Haugland: Okay. I appreciate you don't have the answer, but do you kind of agree that the, should I say, 2028 to early 2030 picture looks a little bit different now than it did, let's say, 1 year ago or you don't see it that way? Haakon Magne Ore: No, I think we have been quite consistent in our focus on this last year on the quarterly presentations. Daniel Vårdal Haugland: Okay. And then I have a last question, and then I'm going to hand on to the line. I think this maybe will be for Richard. So you now have a lot of cash, and I've been asking almost the same question for a couple of quarters. But given that the outlook for offshore wind might have deteriorated a little bit at least in kind of the period I mentioned. Have you kind of changed any view on, for example, ordering a new wind vessel? Are you kind of able to share any thoughts with shareholders on what to do with the cash? Richard Olav Aa: Thank you for the question, Daniel. I think I'll then just relate to our capital allocation policy that we spent quite a bit of time with the Board to develop during the winter and that we announced in connection with our annual report, where we obviously are very aware of our duties of maximizing shareholder values and balancing what we invest in to secure that they create good value up against distribution to shareholders. So that is our starting point. Having said that, a lot of cash is relative. If we look at the capital intensity of the industries we're in, one single investment can easily relate to several billions of kroner. Just an example as wind farms, not the biggest wind farms in the world, but still sizable wind farms, but NOK 3 billion approximately in gross CapEx just on those 2 wind farms. You also have to put the cash position relatively to the investment sizes we are facing. But again, I'd like to reiterate to all listening to this call to read our capital allocation policy because you'll find very valuable information there about the thinking of the governing bodies of the Bonheur Group of companies. Operator: We will now take the next question from the line of Ral Hardison from Clarksons Securities. Unknown Analyst: Congratulations on a very strong quarter. I want to touch a bit on the Cruise segment. So your occupancy there stood at 81% this quarter, as far as I can see, the strongest on this side of the pandemic, but still a little bit behind what you saw during the strongest quarter before the pandemic, which could reach into the high 80s. So with that in mind, do you think there's still room to lift occupancy further for the cruise segment as bookings seems strong? And do you believe that the high 80s figures that we occasionally saw prior to the pandemic still is attainable for the summer quarters going forward? Anette Olsen: I think Samantha is there, hopefully, to answer your question. Samantha Stimpson: Thanks for the question. Yes, occupancy and retaining the focus on filling the ships is a priority for us within the organization. Definitely continuing to improve the increase as high as we can to the top part of the 80s, as you referenced pre-pandemic is something that we are focused on. Just to also reiterate that part of our focus as well has been to introduce additional sailing volumes. So that's where the passenger growth has come from. We've increased the number of sailings as well as trying to fill the vessels. So sometimes it's not a like-for-like comparable, but it is something that we're focused on finding the balance for sure. Unknown Analyst: And then on, I guess, a continuation of the question that was asked previously, but you are making quite substantial upstream dividends this quarter, freeing up cash to the parent company level. And I'm not going to ask about the return of -- or potential return of capital to shareholders because I think that has already been addressed. But should we view this as a step to increase flexibility and potential reallocation of capital within the group? And of course, I appreciate that you can't give any details there, but any color here is welcome. Richard Olav Aa: I think.. Yes. I think the distribution of dividend up to the parent comes also fully in line with our financial policy. Excess cash should not sit on the balance sheet of the subsidiary. It should be upstreamed to the mother company as then the mother company will have full flexibility in future capital allocation and can also do a better treasury activity than having excess cash spread around in the system. So the upstreaming of the UWL proceeds and the dividends out of FOWIC is just a normal upstreaming according to the capital allocation -- sorry, the treasury and financial policy. So it's nothing more than that. Operator: [Operator Instructions] We will now take the next question from the line of Helene Brondbo from DNB. Helene Brondbo: I have 2 ones on FOWIC. I can just start with sort of -- I just want to understand or maybe if you just could address sort of how are you addressing the situation with the higher uncertainty in FOWIC? How do you approach that when going into tenders, contract negotiations, et cetera? Are you, for instance, doing any planning for maybe taking on longer-term O&M agreements to secure a baseline of utilization? How are you thinking around this? Richard Olav Aa: I think we all think a lot of what we are doing, not necessarily in this situation. But I think it's hard for us, I think also back to Bonheur's general, I think it's very hard for us to comment on what we going forward. Helene Brondbo: Okay. I fully appreciate that. And I also wonder what -- in light of this, what do you see as a general trend in day rates given this market volatility? Richard Olav Aa: I think the market is well functioning, but I think we do not never go into details or into specific day rates neither on what we have or what we are bidding. But in general, we see a healthy market. Helene Brondbo: So you would say that day rates in the market are keeping up with levels seen before? Richard Olav Aa: I'm not saying anything. I'm saying that I think we do not comment specifically on day rates. You are saying that, but I'm not saying that. Operator: Thank you. There are no further questions at this time. I would like to hand back over to the speakers for closing remarks. Anette Olsen: Okay. Thank you very much, everybody, for joining us today, and have a nice weekend.
Line Dovarn: Good morning, and welcome to Munters' Q3 presentation for 2025. My name is Line Dovarn, and I'm Head of Investor Relations, joined here with -- by Klas Forsstrom, our CEO; and Katharina Fischer, our CFO. We will begin with a presentation of today's results, and we will then kick off the Q&A session. So if you do have questions from the webcast, you can post these questions throughout the presentation by using the chat function below, and we will address them at the end. So Klas, let's go. Klas Forsström: Thank you, Line. And once again, good morning, and very much welcome to this Q3 report. Let me start, as always, to give you some summarizing a few words of the quarter that has passed. A very strong order intake and invoicing complemented with robust profitability in an operating working capital development that pleases me very much. Data center technology in FoodTech, very well positioned for continued strong growth in the years to come. That thanks to the strategic decisions we made and the execution on those decisions. We see solid underlying demand drivers of both business areas, data center demand and the digitization of the food supply chain and our offer is very well fit to capture this growth. AirTech in general is meeting a continued tough battery market and a generally tight industrial investment climate in U.S. and EMEA. To offset these headwinds, we are resetting AirTech to be better fit for the future. They will be well positioned to capture growth when the demand returns with modern factories, continuous sharper R&D and a clearer commercial drive across several sectors. Yet Munters are creating a business with several legs to stand on in a world of continued tariffs, geopolitical tensions and general unpredictability , so this makes us well equipped for continued growth and market share gains. So over to the quarter then that has passed. Strong growth and solid profitability. That is what I think is the headline of the quarter. And drilling into the different components of this. Order intake a 57% increase. If I deduct the currency, it is 70% growth in comparable currency. AirTech showing growth, positive development in APAC and to some extent in Americas when it comes to order, Data Center Technologies increased, continued strong demand in Americas. And as you later will see also margin improvements and market gains in Asia as well. FoodTech, increased as well, solid demand in Americas, EMEA. Toward the backlog, 2% smaller backlog, but compensated to currency actually adjust 4% up. This has mainly been driven by Data Center Technologies. And the orders we receive now that brings us into 2026 and 2027, a pleasing book-to-bill of 1.1. Moving over then to net sales, 17% up, 9% currency, so that would end up in 20% in comparable currencies. AirTech, here, it declined, lower sales across all regions. Data Center Technologies, continued increase, successful execution on the backlog and also FoodTech increased and were driven mainly by controllers in this quarter. Very pleasing to see controllers, an area that we have allocated a lot of more resources into. Solid profitability, as I said. EBITDA margin of 13.5%, driven by DCT, the volume growth, production efficiency, still pleasing product mix and continuous lean improvements. FoodTech, strong contribution, although impacted by continued investments and to some extent, the product mix, as we all know, I mean, a software product has a higher margin than a controller, even if controllers is also on a good level. AirTech, impacted by lower volumes, unfavorable product and regional mix as well as uneven capacity utilization. This has been, to some extent, offset by cost and efficiency initiatives. And in the quarter, we had currency headwinds and more specifically, tariff impacts in DCT, and this I will come back to later on. A fair description of how the world looks like right now, variations in between regions and end markets. Americas represents close to 70% of our total order intake. EMEA about 20%; and APAC, 12%. If I divide it in between the different business areas, you can see that DCT, if I start with that, is -- continues to be dominated by the U.S. market, but very pleasing to see that we have started to make inroads into Asia already now. And when it comes to EMEA or Europe, I would say it is not us. It is the European weaker market that is holding our growth in Europe back. AirTech then more even balanced, 44% in AirTech in Americas and about 1/3 in EMEA and about 1/4, 25% in APAC then. And FoodTech then very much American and EMEA focused. Drilling down in Americas, AirTech the market remains soft, pockets though of growth. DCT continued to rapidly expand, led by hyperscaler investments and a drive across the full sector, to some extent definitely AI-driven. FoodTech, a growing market. Yes, avian flu, bird flu is controlled, but a pickup will take, as always, after that type of outbreak, some time to recover. EMEA, a mixed market sentiment across the sectors, competitive price environment when it comes to AirTech. As I alluded to earlier, DCT, slower markets with signs of picking up, focusing on energy efficiency, and that is good for us because we have the most energy-efficient solution there is in the data center market. And FoodTech positive market outlook, driven by increased regulation and push for better practices in this sector. APAC, signs of improvements in China, though continued high competition, Southeast Asia and India also showing growth as markets. Very pleasing to see that we are making inroads into Asia with data center. That is according to the plan, but it's always good to see that you're executing on the plan as well then. And FoodTech, China is not the focus market, but still, we are making inroads into China and Southeast Asia. Moving over to AirTech then. All in all, a stable growth situation in a challenging environment. You've heard me say many times that I have predicted that the battery segment would be in between 10% to 20% in the coming quarters. Now we were at the low end of 10%, and I will come back with some outlooks on the battery and what is happening there later on. Besides that then, about 50% of AirTech's markets do have a slight positive outlook moving forward. So you can see the blue arrows then in about 50% of the total market of what we have today, that is slightly positive. The order backlog decreased, highlighting here that is clean technology generated good growth in the volatile organic compound area, and that has been supported with good execution of the acquisitions we have done. And then in other areas, as I said earlier, that remained at the flat level in all regions, but not at a lower level. This is one of my favorite pictures. And you can have different views on this. If I take it on the long term, I would say that it's a fairly flat, solid demand across the segments. If I go into a couple of other inroads here, one inroad that as you can see, if you compare quarters to quarters, i.e., quarter 3 over the years, I see a small uptick in each and every quarter, and this is a currency adjusted graph then. And then if you see then last year compared to this year, I will also say, in general, a slight up pick on the total of the year, so to speak. But if I summarize this then, battery is still being in this 10% to 20%. Clean Technology continued to slowly increase, creating another leg to stand on and the other industrial, fairly stable, but a weaker investment climate in Americas. And that, I think, is something that you've heard from all industrial companies that it's a damp industrial economy in Americas at current. Moving over to sales then, lower volumes and profitability. I'm not pleased with the profitability that we generated. It has been affected with some not strong enough execution on move of factories and how we have been able to work with our internal areas. I'm not worried about this. I mean I look upon this as a quarter or 1.5 quarters delay on certain of that, but I'm not really pleased with this. The other side of the coin, that is that it is also a continued weak market as such. I would have anticipated that we would have seen somewhat of an uptick then. And all of this is also leading into that we then, as I will talk about later, are increasing our traction on how to reset AirTech for the future. Also very important, something that makes me very proud. That is, how do we drive investments then. Investment -- or should I say, innovation. Innovation can be driven by that we only innovate internally. For me, innovation is more and more about collaboration, collaborative work. This can be done with academia. This can be done with companies. This can be done by co-investing in certain areas. And here, you see a couple of examples where we have, over the last couple of years, made minority investments in different companies to fuel our innovation. Some highlights, ZutaCore, DCT being very, very close to the ship and how to handle that. AgriWebb and Farmsee FoodTech, when it comes to how to drive digitalization and software in different areas. And Capsol, the latest then addition, where we started to invest a little bit more than a year ago, and we have now invested even more. And now we talk about carbon capture and moving forward in clean technology. For me, this shows that we can co-innovate with others not only inside our own house, so to speak. Coming back then to AirTech. We have come to the conclusion, and this is something that is needed to be done that we need to reset AirTech. That means that we will intensify our cost out and how we work with AirTech. The market demand is lower than expected, and I foresee that it will continue to be flattish, especially when it comes to batteries moving forward. So we need to reset AirTech, position AirTech to the right level at current, but continue to keep it ready for a strong recovery when the market returns. What are we doing then here? We adjust on investments. We drive footprint optimizations. We are more selective on where should we then fuel certain investments. We are optimizing the workforce. We are balancing capacity while safeguarding core competencies. And all in all, we expect here to have an impact of some 200 positions globally. We drive increased efficiency. And you may say, I mean, okay, you don't have enough load in the factory, but you continue to drive efficiency. Yes, that is the never-ending story you have to do because when the market returns, you have an even more modern, even more efficient factory layout that can then have a very, very positive drop through on the way down. And we're on top of that also driving our commercial activities to reach out in wider sectors. All in all then, this will generate a net cost saving of about SEK 250 million to SEK 300 million at the end of 2026. It will generate a restructuring charge of about SEK 150 million, the majority taken in Q4 this year and some of it taken in Q1 next year. This is on top of the previously announced cost savings that are delivering according to plan. It is about resetting and be fit for the future when it comes to AirTech. What about battery? As you saw today, we announced a battery order. And I think this is really telling the story about battery sector. First of all, there is a battery sector. It is not dead, but it's a sector where decision processes are taking much longer time. I can take this as an example. This project that we then recently received, we have been discussing, working, talking about this for about a year. And then they put the thumb on the green button, so to speak, and they released it. I think that tells the story about the battery sector right now. We are working with 3, 4 different projects of some 100 million sizes moving forward. But what is clear, what earlier took perhaps half a year to decide, in current capital squeezed market, especially in the automotive sector, that can take up to a year, sometimes even longer. My other point here, that is, we have the best products in the marketplace. Here, we talk about, I mean, you that are nerds, into dehumidification then a minus 78 degrees Celsius. That means that we can extract humidity at a very, very low temperature, a high-performing type of product. All in all, this generated a USD 30 million towards a U.S. battery cell manufacturer and the planned deliveries for mid and end of 2026. Moving over to another reality. I'm so pleased to see that our strategic initiatives, our execution of those, are delivering order intake where it should be. So an order intake that generated a book-to-bill of close to 1.4 in the quarter, orders that we delivered into 2026 -- during 2026 and into 2027. We received it across the full product portfolio. And I think this is something that's extremely important. We have widened our assortment. And even if I'm a little bit biased, I still say we have the widest and in my book, the most competitive product offering in the cooling market of data centers. EMEA did grow, especially driven by CRAHs and service offer. APAC started to show good growth as well. So all in all, when it comes to orders, I'm very pleased. And I'm also looking forward, I'm very optimistic for the underlying market. But as always, some quarters are very, very high in orders and others could be lower. But with that said, I'm continuous very optimistic moving forward. If we move over to the other side then, net sales increased, successful delivery on the backlog, SyCool and CDUs, CRAHs the full assortment something to highlight. This is the last quarter with SyCool, so that will generate some product mix changes moving forward. We generated an adjusted EBITDA margin that continued to be strong. We had some tariff headwinds of 2 percentage units in the quarter. And here, I can say, I'm not happy to have this but I'm not too disappointed either because what we have, that is the most innovative and efficient chiller product in the market. And at current, we cannot produce that in U.S. We are building up capacity here. And I'm happy that we take and receive orders, so this tariff headwinds, I'm willing to eat, and I know that also data center because we gain market share moving forward. So all in all, we invest in strategic growth initiatives. We had solid volume growth in the quarter and also high production utilization. So a very strong quarter in all aspects in data center this quarter. And here, you can see that we are filling up, and this is just examples of publicized orders and other orders of significant size that and how they are delivered moving forward. In summary, you can say the majority of the orders we receive now that is for 2026 and 2027. Now I have to balance here in between trying to explain this is in as simple words as possible. And at the same time, when I return back to the Munters headquarter also get good enough grades from my experts then saying that I was not shortcutting this too much. But if I try to balance that then, liquid cooling is about the full scheme. It is the large loop, and liquid cooling is about dissipation, capture, transfer and release. You can say in simple terms that this consists of 2 different loops. One loop that is in the dissipation that is close to the chip, very, very close to the heat source, that is one loop then. And then you have the larger loop, the loop where we are the market leader in. That is the capture, transfer and release loop then. Let's call one technology loop and let's call one facility rejection loop. And the thing here that is we have all the products in the facility loop and we have the products that creates this plug and play in between. It is the connection in between the CDU and the LCDs that created this link. So I think what we should remember that is when we talk about liquid cooling, it is 2 loops. And those loops are connected, and they work together. And we have solutions to whatever is happening in the technology loop, we can attach and we can capture, reject and transfer it out. And then on top of that, we are also collaborating with the key players in the dissipation area. So I'm super excited about the different technologies that are here, and I'm super proud of what we have delivered when it comes to innovation and collaboration in this area. On another side then, but I'm also very, very happy about that is, I think that we have started to be the trend finder. I think we have started to be the trend setter. I think we have started to be the trend innovator. And what do I mean with that then? Let me give you a couple of examples. We brought to the market SyCool split, the first and very energy-efficient type of non-water coolant solution. We brought new CDUs of never before seen efficiency to the market. And we decided that either we develop the best chillers in the market, or we acquire the company that provides the best chillers in the market, and we decided to do the second. So we acquired Geoclima. We spotted the trends on where they were going, we developed that, and we brought it to the market. And I can tell you that customers are really saying that we are leading the innovation and technology game here. So that brings me to another trend, a trend that is emerging. I call it modularity in a different way. You have heard me talk about modularity many times. Then we talk about components that can be used in different type of products, and that drives efficiency internally. But when it comes to data center, it's another type of modularity. Look upon this as a little bit of Lego blocks that you put together subsystems and then you can build those subsystems. You can have 1, 2 or many together then. This is a trend that will complement other trends. And I can just tell you that we are also trend setters, trend spotters and working actively with the ones that are driving those trends in the market. So once again, I think we are ahead of the curve in this area as well, super excited about this. If I then go into another area, FoodTech. Here, I think we have something that we can really be proud of. We have made a transition of FoodTech from a more classic old equipment driven company to be now a fully-fledged digital and software company. Many, many companies are talking about this change. Here, we have done this. And this is just in the beginning of what this can deliver. So when it comes to order intake, it increased. Software is growing. Controllers, the new acquisitions and what we had inside our own house are generating good order intake. Synergies is worked in between the old controller companies and the new controller companies. And the order backlog increased in a good way. When it comes to ARR, we are continuing to increase in between 20% to 40% quarter-by-quarter. Here, we have decided to show this in U.S. dollar to take away the currency effect because now we have definitely currency headwind. But here, you can see more volume-driven type of increases and apples-to-apples. Super excited about this, and we are just in the beginning of this trend shift then. So what about artificial intelligence? Artificial intelligence are driving data center growth, yes. But what can a company get out of artificial intelligence using it. Let me introduce to our recently new employers. One, Calvin that are driving internal efficiency and one, Clarity that is driving how to work with our customers. Calvin, that is how do we program in a better way? How do we automate? How are we doing code reviews? How are we becoming faster and more efficient in developing software? And I'm amazed to see how much efficiency, how much innovation can be driven by this new employer, asked them. Controllers, the other area, not software. Here, we have Clarity. An agent that is a virtual assistant that is driving training for us, that is driving training for customers, that are generating customer support online and so on. And look upon those, yes, it is perhaps not tens of thousands of customers, but for Munters and FoodTech, there is an increasingly large amount of the users that we have. 1,300 users have joined Munters Academy. We have more than -- close to 200 training videos. We received more than 3,000 inquiries that was answered by Clarity, and we support 20 languages with our new digital-driven agent and Clarity. So 2 examples of what we do with artificial intelligence to drive efficiency and customer satisfaction. With that, I hand it over to you, Katharina, and please take us through the numbers. Katharina Fischer: Yes. Thank you, Klas. I'm pleased to talk about the continued strong performance for the group. In the third quarter, organic growth contributed with 56% to order intake and 15% to net sales. This was complemented by nonorganic growth of 14% and 11%, respectively. At the same time, we continued to experience negative currency effects of minus 39%. Worth highlighting is also the order backlog, that currency adjusted developed well and then increased about 4% in the quarter. The adjusted EBITA margin remained solid at 13.5%, although lower than prior year's exceptionally high level. Here, data center and FoodTech continued to deliver very strong margins, so really demonstrating operational discipline across the business. As you heard Klas say, the margin in AirTech declined, both compared to prior year and also versus -- slightly versus prior quarter. And this was due to lower volume, unfavorable product and regional mix and then also continued dual site costs for the transition into the new factory in Amesbury, which has taken longer than anticipated and is expected to be fully operational by the end of the year. A key achievement in the quarter was the continued improvement in operating working capital. Here, we have reduced to now 8.3% of net sales. which is well below our target range of 13% to 10%. So this is a clear result of very disciplined work across the organization. Our net debt increased, and this is mainly reflecting then the acquisitions made, debt finance acquisitions and also the higher lease liabilities due to the new facility in Amesbury. Looking at the margin development then. As mentioned, the margin remains solid then at the 13.5%, even though it was lower compared to the high -- tough comparison last year. The different factors then, volume growth for data center and FoodTech had a positive impact on the margin. And for AirTech, it was a negative impact from volume, obviously then. I'm pleased to see that we continue to drive positive net price increases, mainly in data center and FoodTech. We also saw a negative mix impact, both for AirTech due to the higher mix from APAC and also product mix, regional mix from FoodTech. Also then, as Klas has highlighted, we had negative impacts from tariffs in DCT with 2 percentage points, and this is something that we anticipate to remain until the U.S. production of US chillers is up and running then in the U.S. On the operational side, the under-absorption in AirTech weighted on the margin, although there was a positive offset from the high factory utilization in data center. And then it's worth mentioning also that all business areas continue to drive very strong efficiency improvements. We also continue to invest in our strategic initiatives, as we have mentioned in prior quarters, and this has to do with building digital capabilities, system support and further strengthening our footprint across the globe then. And then finally, the currency had a negative impact for this quarterly result. Turning to cash flow then. If we look at the main cash flow movements, cash flow was strong for the first 9 months, although slightly lower than prior year, and this was due to lower -- slightly lower operating earnings and also a less favorable development in working capital. If we look at the individual business areas, data center continued to deliver very solid cash flow, supported by customer advances and strong profitability. And in AirTech, there was a negative cash flow then due to the weakness in the battery market and also the continued under-absorption. If we look at cash flow from investments, you see that the main part there is that we, earlier this year, bought the remaining shares in the software company, MTech, and also the continued investments in the manufacturing footprint and mainly in Amesbury. Also, this slide is showing the continuing operations. If you look at the discontinuing operations, you will also see the SEK 1 billion that we received for the divestment of the FoodTech equipment business earlier this year. And we, of course, continue to maintain a very strong focus on cash management, and I'm very pleased to see the positive effects of all the efforts that we have ongoing to increase operational efficiency and also the capital discipline across the group. Looking at investments then. We maintain a highly disciplined approach to the capital allocation. We focus our investments in the areas that generates the strongest long-term growth and also supports profitable, sustainable growth. In the third quarter, the ratio CapEx to net sales was 3.9%. And if you look 12 months rolling, it was 6.7%, so although the quarterly level was a little bit lower in Q3, in the near term, we expect it to be somewhat elevated above the historical levels, as we continue to invest in automization and innovation and digital capabilities. And an example of this, of course, in the coming quarters, is the ongoing expansion of the Virginia site for data center, where we are setting up chiller production then in the U.S. and also investing in a new test lab. And these investments, of course, strengthen our technological capabilities and also the regional manufacturing footprint. So we are very well positioned then to remain and be able to capture future growth in this area for Americas. Looking at leverage. The leverage ratio was 2.8, which is then unchanged compared to the second quarter. if you compare to Q3 last year, it's somewhat elevated then, and this is due to the acquisitions made recently, and then also the increased liability for Amesbury. And in the coming quarters, I want to highlight that we will be paying some holdbacks relating to some acquisitions made recently, including Geoclima and MTech. And we maintain our ambition to keep leverage within 1.5 and 2.5%. And we are comfortable staying above this level temporarily since this is due to the strategic investments that are so important for us to really further develop our competitive position and support our long-term growth. I also want to mention that we, in the third quarter, issued our second green bond, so now we have more access to the credit market, and we have been able then to diversify our funding beyond the bank, traditional bank loans. Moving to service then. So expanding service is, of course, a key priority across all our business areas. And in the quarter, we had an organic growth of 6% for service. And of course, here, we want to keep our systems running for our customers in a very efficient and sustainable way through the whole life cycle. But of course, also for Munters, it creates stable and recurring earnings base for us. So that is also important. And service is defined as aftermarket service across the business areas and then also the software revenue for FoodTech. Components has also developed well in the quarter. And this is, as you know, sold mainly within AirTech. So here, we have dehumidification rotors and evaporative pads as growth drivers. And the group's ambition for service and components is to be above 1/3 of group net sales. And in the quarter, we were at 24%. And also if you look 12 months rolling, it was on 24%. And then if we look to the individual business areas, you can see that both AirTech and data center increased their service shares. So AirTech is at 22% and data center at 5%. FoodTech here has 21%, which is a decline compared to last year, but that has to do with this year, we have a higher mix of controller sales and they don't have as much service. So going forward, we will continue, of course, to build on our growing installed base and continue to invest in smarter and more connected and even more energy-efficient products that creates value for our customers and make our products even more reliable. And then looking at our sustainability initiatives here. So here, we continue to make very meaningful progress. Circularity is something that is part of our daily operations. And one example of this is the circularity program that we have been running them with Combient Pure. So this is about how we can increase circularity within AirTech with regards to their processes and products. So it's about designing for reuse, recycling and do it more efficiently. And here, we have identified opportunities for even higher materiality circularity with 15% and there is also a possibility then to further reduce Scope 3 emission by developing our service offering more broadly. Just recently, we also announced a very interesting collaboration around innovation. So here, the residues from our rotor production will be reused for plasterboard manufacturing. So this is a really innovative initiative where we will turn waste into new material and really strengthen our regional circular value chain. So I think 2 really good examples within circularity. And of course, this is a continued focus for the group. We will further expand this across the organization, and we will also deepen the supplier engagement further going forward. With that, I would like to thank you and hand it back to you, Klas. Klas Forsström: Thank you very much, Katharina, and let me then start to summarize the quarter before we move into Q&A then. How are we performing towards our overall financial targets? The numbers that is in the quarter. So currency adjusted growth, 26%, adjusted EBITA, 13.5% and operating working capital, 8.3%. So operating working capital ahead or below in positive terms of the target. Adjusted EBITDA a little bit shy of the set target and adjusted currency growth then ahead of the target. And I think this is very much the pattern that we've had the last -- very often, we have 2 out of 3 then beating or be very close to it. So all in all, we continue to progress towards those targets. If I summarize the quarter, strong performance driven by growth in key industries, predominantly data center and FoodTech. DCT, maintaining a strong momentum, and I said it in the past, and I say even stronger now, I am very confident for the future. We are delivering the right products to the right customers and expanding it to more than just one region. FoodTech advancing on the fully digital business, something that I think has not really brought full attention with one exception. Our customers are very, very interested in this. And then AirTech navigating short-term challenges, building a long-term strength, as I said, resetting it to current circumstances, but then also be fit for the future with very efficient factories, continued strong innovation and an even more focused sales force that's spread out not only in certain categories, but across the different industrial segments. So with that, let's go over to Q&A. Line Dovarn: Absolutely. Thank you, Klas, and Katharina now. So we are now ready for Q&A session. [Operator Instructions]. Operator: [Operator Instructions] The next question comes from Joen Sundmark from SEB. Joen Sundmark: Congrats on a very nice order intake in data centers. If we start with the margin there, you talked about tariffs impacting margins of some 2 percentage points in data centers. Do you sort of expect to get those 2 percentage points back once you have the new factory in the U.S. up and running? Or will sort of change mix offset that improvement once we are there? Klas Forsström: Thank you for the question. So if I divide it into 2 sides then on this coin, as you have heard me say several times, Joen, that is then, yes, we will have a gradual change in the mix, and that will start to intensify next quarter. And then later on then, when we have moved up chiller production and moved it in to be closer to the market, I mean, the mix will start to change back again, the normal pattern. The more we produce, the better it will become, so to speak. So that is the mix movement, so to speak, and that is according to what we have said for several quarters then. When it comes to the tariffs then and here, we look upon it like this. We have a fantastic product that we know that we will start to produce in U.S. first quarter next year. This product is very sought after. So when we sell it, at current, we will send it over from Europe to U.S. That's the reason why we have the tariffs impact this quarter. And I can say like this, if we need to take some more tariffs, i.e., if we sell more, I'm happy to take that for a short time period because that generates market share. When we have the production up and running, I mean then the tariffs are gone and at the same time, they have also become much, much better in producing those chillers. So you can say we balance it out over the long run. Joen Sundmark: Okay. Very clear. Then as you're talking about more measures taken in AirTech, when you sort of look into 2026 and your ability to reach this 13% to 16% margin range. How confident would you say that you are to reach those levels having both cost measures in mind, but then also combined with the current lower demand situation overall? Klas Forsström: Also a good question. I mean, the reason why we are driving those cost measures that is, as I said in the beginning, it was a weaker market than we foresee in the beginning of the year. At current, we say that the battery sector will continue to be subdued during the majority of 2026. But with that, and on and off, we may pick up orders, but it will continue to be in the range of 10% to 20% of the total order intake. So that is one thing then. So then we are resetting the organization to be handling that level. What we need to have in order to come up to the numbers that would please me, the 13% to 16%, of course, that is also more volumes. And that is the reason why we are resetting now and with modernization of the factories that we've done and continued efficiency then we will gradually start to move towards that target. But as I said in earlier statements, I think that we now have a prolonged period of somewhat weaker margins then, and that's the reason for the program. Line Dovarn: We'll take another question from the telephone conference. Operator: The next question comes from Adela Dashian from Jefferies. Adela Dashian: Klas, it'd be difficult to limit myself to just 2 questions after today, but I'll try my best. Just firstly, on the book-to-bill in DCT, you did promise a ratio above 1 last quarter, and you did deliver that today. So congratulations to you and Stefan and the rest of the team. Should we expect some quarterly volatility going forward? Or are you interpreting this as a new norm given the very strong market drivers that you're seeing in the market? Klas Forsström: Adela, thank you for the congrats, and thank you for the question and this is the silver bullet question, I think. My best way to phrase it, that is like this. I see a very strong market that continues for years. I see us having a very, very strong product offer. And then I see customers that sometimes are putting many orders, sometimes are waiting for a longer period. With all that said, I think that we have a strong market, a strong offer and a great team, so I'm optimistic for the future. If I would say a certain level, the only thing I can guarantee that is that I would be wrong. But I'm very positive moving forward. But to predict, I mean, what will come in orders in a quarter, then I should buy me a lotto ticket at the same time then, but I'm positive. Adela Dashian: Well, this quarter, you were right, so and for my second... Klas Forsström: And I bought the ticket. Adela Dashian: For my second question, I'm going to just try to push 2 into 2 and be a bit broader here. On the order book composition in DCT, I believe so far, the majority of the orders have still been for the traditional air cooling. But you do mention some CDU orders here, and I also noticed that the share of indoor units is increasing. So are you entering now a phase where liquid cooling solutions are starting to gain real traction? And then on the, I guess, flip side, SyCool is now diminishing as a share, but we did hear one of your paper partners announce an integrated platform for waterless direct-to-chip, so could this potentially reinstate the interest in refrigerant-based systems? Klas Forsström: I try to answer this expanded question with one answer as well. The first one, that is that we have now, in my book, the widest product offer when it comes to different cooling solution there is. And we have also, and here I'm biased, I know, but I say it anyhow, the most energy efficient and modern assortment. Our vitality Index for the group is about 40, i.e. of what we are selling, what is -- 40% has an age of less than 5 and in data center, much higher than that. Yes, you're right. We are shifting more and more to what we call them the liquid cooling universe. And here, we have really targeted right type of products. We have 2 different, call it, shifts when it comes to portfolio. One shift is towards the CRAHs that have a weaker profitability. And then we have the CDUs and we have the chillers that have higher than the average of what we have done. We are shifting out the SyCool that had the highest. And then to just complicate this, short term on the chillers, everything we sell into U.S. at current, we have a tariff then surcharge, but that will, of course, disappear. So if I shorten this up, we will have a headwind when it comes to mix on the quarters to come, but that will then gradually turn around when tariffs and more and more production of chillers, et cetera, are driving through efficiencies. So a little bit tougher moving forward, and then it will lease up. That is what I predict. Adela Dashian: Could you just expand a bit about the SyCool and what the trends that you're seeing and... Klas Forsström: Absolutely. Here, super excited. I think that we will have opportunities here. But as always, when it comes to this cooling very close to the chip, I mean, the euro is still there, but I'm optimistic for that. I don't see that we will generate short-term billion Swedish krona orders on it, but I'm definitely, call it, looking forward to see orders coming in, in that area. And here, we are unique. Line Dovarn: Let's take another question from the telephone conference. Operator: The next question comes from [ Karl Degenberg ] from DNB Carnegie. Unknown Analyst: So 2 questions from my side. And first of all, on the backlog of SEK 6.6 billion DCT, I just wanted to hear, could you give any sort of quantification of how much of that is for delivery in '26? And a related question to that as well is on invoicing capacity in DCT, I think we had that discussion on the last quarter results again. And that's around, I think you've been at around 1.5% in the revenues in DCT now for roughly 3 quarters. And I just wanted to understand, given the capacity that you're adding and so forth, for '26, '27, what kind of quarterly run rate could you achieve given the capacity additions? Klas Forsström: If I generalize, you can say, with current footprint in DCT with one exception that I will come back to then, we could definitely without -- if we add shifts, if we tighten the chip to some extent, we could easily deliver 30% more deliveries out of our factories. And then we have one exception, and that is now we are definitely, we cannot deliver much more when it comes to chillers short term from our European setup to U.S. But as soon as we have that up and running, I mean, we will have close to double capacity of chillers also in U.S. And then, of course, we don't have to pay the tariffs on that, so to speak. So we have plenty of room to grow. But in one area, we are short term, a little bit squeezed, but that is according to plan. Unknown Analyst: Yes, yes, very well. And then I'll maybe take my follow-up on the same topic. I mean I guess the chiller exposure came predominantly from the acquisition of Geoclima, correct me if I'm wrong. And given that you -- I mean remembering when you bought that business, it was obviously quite an addition for the division but given that it has a 2 percentage point impact now on the imports on the margins, it sounds like the growth has been very, very significant since you acquired the entity. So could you say anything, what's the share now? And maybe if you look at your own portfolio, let's say, transformation away from SyCool and so forth, what do you expect the mix to be, let's say, '26, '27 without giving any absolute forecast? Klas Forsström: No. What I can say that is -- and now I don't have that picture in front of me, but you see the graph there on one of the slides where we have the different components and how that is spread. There you can have some indications. But if I'm a little bit more straightforward, I'm super pleased with acquisitions of Geoclima. I mean it is the world's best chiller, and we have a very strong sales force. So in my book, we have achieved or we have overdelivered on what the chiller sales could generate here. And then according to the plan that we deliver on then to add this into the U.S. setup and then we have an in the region, in the market for the market. And suddenly, we also get rid of this volatility when it comes to tariffs then. And here, I just want to underscore, you can never be happy to pay tariffs. But if I have to choose in between having no chillers, and paying tariffs, I'm happy to pay tariffs because we have the world's best chiller in the market. Line Dovarn: Sorry, we need to break that, we are running out of time. Thank you very much for that. We do have more callers on the line, but we will reach out to you separately. We also have received some questions here. And I will just finish off with one last question for you, Klas, that you can answer quickly, if you can. Klas Forsström: I will try. Line Dovarn: What is Munters' biggest challenges going forward, Q4 and further on, 2026 to 2030? Klas Forsström: That was a broad-based question. I think that -- and I don't call this a challenge that is we should continue to be on the toes when it comes to drive innovation, when it comes to be very, very close to the customers. And then we need to get best use of our decentralized setup. We have 2 skyrocketing divisions at current and one that has tougher. And that is in the decentralized way. I mean then we handle the opportunities when we are skyrocketing, and we handle the challenges when we have tougher and that is what I think we will continue to work with. Line Dovarn: Great. Thank you very much. Thank you, Klas and Katharina, for presenting. Thank you, everyone, for listening in. And we will, as I said, reach out to those of you that we did not have time to talk to. With that, thank you and wish you a nice weekend. Klas Forsström: Thank you. Katharina Fischer: Thank you.
Operator: Welcome to the conference call. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead. Anand Srivatsa: Okay. Thank you, and welcome again, everyone. This is Anand Srivatsa. I'm the CEO of Tobii. Joining me today is Asa Wiren, who is our Interim CFO, along with Rasmus, who heads our Investor Relations. I want to remind you that I have announced my decision to resign from Tobii in August of this year. My intention is to move back to the United States for family reasons, and my family has already relocated. I will remain with Tobii in my current role until the end of January 2026, and the Board is in the process of looking for a new CEO. And at this point, we do not have any additional information to share on the process. Now let's move on to the quarterly results. Q3 was a weak result for Tobii on both the net sales basis as well as on overall results. The net sales reduction is related to the end of acquisition-related revenue as well as lower-than-expected revenue in all 3 segments. In the Products & Solutions segment, we saw a year-on-year decline in revenue because of weakness in the U.S. market, while other regions demonstrated growth. In the Integration segment, we saw weakness in our XR NRE project pipeline, but we do expect to see some improvement in Q4 as customers shift their focus to new smart glasses type of solutions. On the Autosense side, we had a reduction in year-on-year revenue, but this is related largely to revenue recognition timing based on NRE projects. We expect that the Autosense business will show robust growth on a full year basis, and we expect that quarterly revenue levels will become more stable as we transition from NRE to license revenue over the next couple of years. The overall lower levels of revenue resulted in lower overall result, but we have still taken steps to move towards profitability with one clear example of our -- being our cash-related OpEx being 30% lower than the comparable quarter last year. Beyond the financials for the quarter, this was a milestone quarter for our Autosense business with our single camera DMS and OMS offering launching at IAA Munich. I will speak more about the significance of where we are with Autosense at the end of this presentation. Finally, we continue to be extremely focused on addressing our financing needs for the company. This has been an explicit focus over the last 1.5 years. Evaluating where we stand at the end of Q3 2025, we assess that we need additional cash to ensure that we are adequately financed for the next year. We intend to take the following steps to address this. We're taking a new cost savings target to reduce cash-related OpEx by SEK 100 million versus our Q2 2025 baseline for the 12 months that follow that timeline starting in Q3 2025. We're also continuing our strategic review process, including the divestment of assets, and this effort has made progress over the quarter, and we expect that a successful outcome will substantially strengthen our cash reserves. The Board has also selected an external adviser to evaluate capital market options as a backup for these strategic initiatives if needed. With the combinations of these tools, we believe that we can address our financing need for 2026. Before we discuss our financial results in detail, let's take a quick overview of our 3 business segments. Tobii is organized into 3 business segments with each of them at different stages of maturity and scale. Our expectations are that the Products and Solutions and Integration business segment will be profitable in the near-term, while Autosense is still in an investment phase. The Products & Solutions business delivers vertical solutions to thousands of customers every year, ranging from university research labs to enterprises and PC gamers. In Q3 of 2025, the Products & Solutions business represented 53% of Tobii's net sales. The EBIT result of Q3 of negative SEK 22 million is a slight improvement versus our last year results despite revenue decline because of our lower OpEx level. The Integration business segment engages customers who integrate Tobii's technologies into their offerings. This segment also includes some revenue from acquisition-related revenue. The onetime effects of that have ended in Q2 2025. In Q3 2025, this business represented 43% of Tobii's net sales, and this business was profitable for the sixth straight quarter. The result for the quarter does reflect temporary effects of the Dynavox contract that we signed in Q2 2025. The Autosense business segment sells driver monitoring and occupancy monitoring software solutions to automotive OEMs and Tier 1s. In Q3 2025, this business represented 4% of Tobii's overall net sales and delivered overall net sales. The business delivered minus SEK 42 million EBIT, a slight improvement versus last year despite a lower revenue level, lower capitalization and higher levels of depreciation. We expect the Autosense business to show solid revenue and profitability improvement on a full year basis. Now over to Asa for the detailed financials. Asa Wiren: Thanks, Anand, and good morning, everyone. Needless to say, Q3 was a weak quarter. Product & Solutions has its market challenges, for example, in the U.S., integrations, where the last part of the Dynavox deal did not fully compensate for the acquisition-related revenue that ended in Q2. For Autosense, we see a timing matter. Operating result and margin have decreased compared to last year, even if our cost levels is significantly lower. On that note, I will already now put some more flavor to our new savings target that Anand mentioned. When we presented our Q2 results, we emphasize that our cost reduction and efficiency focus still remains. Our target is to lower cost by at least another SEK 100 million for the 4 quarters starting Q3 2025 compared to Q2 2025. This is the same methodology we used for our previous initiative for which we reached savings of SEK 263 million, SEK 63 million above the target. This demonstrates that we have the ability to deliver. The savings will further rightsize the company for us being able to continue our product development and meet customer demands. That being said, let's move to Page 6 and look at some group details. I've already commented on the figures as such, but what this illustrates is the impact of the work that has been done. We see overall EBIT and EBIT margins lower than the comparable quarters last year. This is, of course, driven by lower revenue levels, but also by lower levels of capitalization and higher level of depreciation in this quarter. If we normalize for effects of capitalization and depreciation, we would have an improved level of profitability in this quarter. This improvement is due to the significant progress we have made on cost reductions. We are on the right track, but more work needs to be done. Turn to Page 7 for some Product and Solutions comments. The negative sales trend continues with a decline of 5% in organic growth and is mainly related to the Americas. Cost level is lower than previously. And to remind ourselves, in Q2 this year, write-downs of SEK 33 million impacted EBIT. Turn to Page 8 for some integrations comments. The last part of the Dynavax prepurchase deal did not fully compensate for the acquired imaging-related revenue that ended in Q2. As mentioned in Q2, from Q3 and onwards, there is a quarterly minimum guarantee in the Dynavax deal until 2029. We also saw fewer nonrecurring revenue projects during the third quarter. Turn to Page 9 for the Autosense segment. This segment is still in a phase with lumpy timeline dependent revenue as well as with nonrecurring revenue. These elements impact both how revenue is recognized and cost, such as capitalization and depreciation, as mentioned before. In Q3, revenue was pushed forward, capitalization decreased and depreciation increased. Let's continue to Page 12 for comments on our balance sheet and cash flow. During Q3, Tobii repaid SEK 91 million of its COVID-related tax release. This remaining -- the remaining debt has been reclassified to short-term and long-term interest-bearing debt previously reported as current liabilities. In Q4, we received the last SEK 45 million from Dynavox prepurchase deal. Where we are right now, there is a risk of insufficient financing for the coming 12 months. Having said that, with the measures taken and in progress, I repeat that we believe we can address the financing needs for 2026. With that said, thank you for your time, and over to you again, Anand. Anand Srivatsa: Thank you, Asa. Now I'm going to spend a few minutes talking a little bit more about Autosense. Q3 2025 was a milestone quarter for this business, and I want to share with you where we stand in our journey to become a leader in automotive interior sensing. First, let's take a look back at what has happened since our acquisition of the FotoNation business in February 2024. Since making the acquisition, we have built a comprehensive and combined road map that enables us to offer a leading in-cabin sensing product portfolio. This was capped off with the successful launch and final release acceptance of our SCDO product in Q3. We have continued to demonstrate our credibility in bringing our solutions to vehicles on the road over the last 1.5 years. We've increased the number of OEMs who are choosing Tobii solutions from 9 to 12, and our solutions are being deployed in volume from 300,000 vehicles on the road at the time of the acquisition to more than 800,000 vehicles currently. We are working hard on ensuring that our solutions meet the demanding requirements of the automotive industry in terms of quality and process. Notably, we have achieved ASPICE Level 2 for our SCDO program operating as a software Tier 1 to a leading European OEM. Our solutions have also achieved regulatory approval with EU homologation for both our DMS and SCDO offering. Finally, we have built an efficient and empowered team where Autosense engineering has been consolidated into Romania, and the organization has more centralized responsibility to deliver on our ambition by having functions from engineering to sales reporting into the same leader. We have realized the investment synergies as part of getting this efficiency by reducing our investment levels by more than 40% versus our 2024 peak. Looking back, I would say that we have substantially realized the rationale for the acquisition, including the synergies we expected. We have done this by reducing our overall investment, building a leading product portfolio and increasing our credibility in the automotive industry. A critical aspect of building automotive credibility is showing that your technology can get through the rigorous testing and validation of OEMs and start shipping in vehicles on the road. Tobii's Autosense Interior solutions have been shipping in vehicles on the road in 2019, and we continue to see significant growth in this footprint. As of the end of Q3 2025, we have more than 875,000 vehicles on the road with Tobii solutions, and we expect that this number will continue to accelerate as our high-volume passenger car wins get into production in 2026. Now I want to talk a little bit more about building a leading product portfolio for in-cabin sensing. The rationale for making the acquisition of FotoNation was the realization that for success in this space, Tobii required a full offering, not just driver monitoring systems. We could already see in 2023 that RFQs were looking for offerings that could support both driver and occupancy monitoring. Our belief was that the market would see increased adoption of DMS and OMS to the point that they would both become required capabilities. We are already seeing the early stages of this play out as we expected. Camera-based DMS is already a requirement in the EU starting in 2026. And we now see that Euro NCAP requirements for 5-star safety require more occupancy monitoring capabilities over the next few years. We believe that for new platform shipping in 2028, OMS will be required to get a 5-star rating. Tobii has been shipping DMS and OMS systems into vehicles in the road since 2019 and 2021, respectively. We recognize that while in DMS, we are not the market leader, our bet has been to move -- that move into a leading position in the space is based on our leadership in single camera DMS OMS and that this method will be the preferred deployment for in-cabin sensing systems in the future. Over the last 3 years, Autosense has pitched single-camera DMS OMS, but this approach has been met with skepticism as companies were unsure whether DMS from a rearview mirror location would get regulatory approval. This concern from the industry reflects the fact that DMS methodology from a rearview mirror position is quite different than the typical DMS systems that are deployed today, which have a much clearer and closer view of the driver's face. Given this context, our achievement this quarter is extremely meaningful in both getting EU homologation for our support regulatory approval and getting acceptance for our final release for our premium European OEMs launch in the second half of this year. We expect that our SCDO system will start shipping with our OEM in the second half of 2025 and be in end customers' hands in early 2026. Now we have expected over the last year -- last 3 years that a single camera DMS and OMS solutions mature, that the industry as a whole will also validate our view that this approach is not only feasible, but the most cost-effective approach for in-cabin sensing. The question, of course, is when would the industry take notice of SCDO and share their view on this approach? I am thrilled that we have seen significant industry momentum already this month with the keynotes and presentations at in-cabin Barcelona 2 weeks ago. At the event, Volkswagen, Magna and Gentex, leading OEMs and Tier 1s in the industry, shared their view of the suitability of doing DMS and OMS from the rearview mirror position. Volkswagen was even more specific, as you can see the slide that's shared on the screen about the benefits that this approach offers over traditional DMS and OMS systems that require 2 cameras. They shared that the single camera approach from a rearview mirror position saved over 30% of BOM cost, implementation cost, design complexity, et cetera. This is a stunning number that validates our view that SCDO will likely be the volume deployment for in-cabin sensing in the future. The outcome from this event is certainly surprising to us, but surprising for industry analysts as well. To quote Colin Barnden, principal analyst from Semicast Research from his post on LinkedIn following this event, he says, "What came over me in Barcelona is the sudden shift in industry awareness of the viability of both driver and occupant monitoring from the mirror. For several years, it has been clear there was a campaign of misinformation from some parties saying that the mirror is unsuitable for driver cabin monitoring. Those voices magically have become advocates of this idea already. He declares in his post that after the event, the question is, why wouldn't an OEM do DMS and OMS from the mirror? We at Tobii could not agree more. With a proven and mature offering that has gone through grueling acceptance test at one of the most demanding OEMs in the world, Tobii is well positioned to win as more OEMs come to the conclusion that DMS and OMS from the mirror is the most cost-effective and scalable approach for in-cabin sensing. Okay. Let's wrap up. Q3 2025 was a mixed quarter where we saw significant milestones achieved in Autosense, but where we saw weak revenue in the quarter that resulted in lower profitability. Our ambition in the long-term is clear that we intend to be leaders in all of our business segments and execute in a profitable and financially self-sustainable way going forward. We are already leaders in our Integrations and Products and Solutions business segments. And the progress that we have made so far in the Autosense business segment and industry validation of our approach puts us in a great position to build a leadership position as SCDO scales in the market. In the near-term, we have a key focus on addressing our financing needs. We will address this with 3 major approaches. The first is our new cost reduction target, which will reduce our cash need in 2026. We're also executing on a strategic review, which includes potential divestments, and our belief is a successful outcome in this area will substantially strengthen our cash reserves. Finally, the Board has engaged an external adviser to evaluate capital markets options as a back for these strategic initiatives. We are confident that with these tools, we will be able to resolve our near-term financial needs and allow us to focus on our objective to achieve sustained profitability, which we remain fully committed to. With that, thank you, and over to Q&A. Operator: We have received several questions about our combined DMS and OMS solution, how our offering compares to our competitors, what Tobii's position in the market is relative to our competitors and how we view the time line regarding ramp-up of SCDO. Can you please provide a comment on these questions? Anand Srivatsa: Absolutely. As I shared in my deeper dive on Autosense, we believe that we have been the clearest voice around the fact that the most scalable and most cost-effective approach for in-cabin sensing is a single camera DMS and OMS offering from the rearview mirror position. There are other players who have launched hardware solutions. And from our proprietary research, we believe that at the time of our launch, we have the most complete offering as well as an offering that delivers both DMS and OMS. We believe that our position in this space is that we have the leading offering here as well as an offering that has both proven itself and has matured as we have had to go through acceptance as a software Tier 1 for one of the most demanding OEMs in this space. We acknowledge that, of course, in this in-cabin sensing arena, we are not the -- driver monitoring systems, but our bet for getting to a long-term leadership position is that as SCDO sales, our leading position will put us in a great place to go and win future RFQs. We recognize again that over the last couple of years, there has been industry skepticism about whether a single camera approach will work, especially because the position of the sensors are farther away from the driver. We believe that a lot of these concerns are being addressed now with the successful launch that we have enabled, and we believe that RFQs will increasingly request this type of approach, and we are well positioned to win in the space. Operator: Is Tobii provider for eye tracking to Samsung Moohan? Anand Srivatsa: Samsung announced a new high-end VR headset. We are not the eye-tracking provider for that headset. Operator: Did you receive the SEK 30 million out of the SEK 100 million in Dynavox revenue in cash this quarter? And did you also receive the SEK 45 million in royalty from Dynavox from previous quarter this quarter? Anand Srivatsa: And I'll let Asa take that and clarify that question. Asa Wiren: We received the SEK 30 million in Q3 and the SEK 45 million in Q4. Operator: What types of assets are you planning to divest? Would you consider divesting one of the business units? Anand Srivatsa: Again, as you can imagine, these strategic reviews are extremely sensitive. We're not going to go into details of exactly what assets we are planning on divesting except for the fact that we believe that a successful outcome here will substantially strengthen our cash reserves. We will share more details as possible as these activities progress into maturity. Operator: Thank you for this presentation. On Autosense, in materials from Qualcomm, Tobii is a pre-integrated partner. What does this mean? Also, this seem to be a much wider opportunity than with EU regulatory requirements. What is your look on this? Anand Srivatsa: One of the big advantages of the engagement that we have had is that our solution is shipping on Qualcomm's Snapdragon Ride platform with our premium OEM. This has meant that we have done substantial work to go and pre-integrate the solution. Qualcomm's expectation is that they want to sell a pre-integrated solution that delivers their domain controller type architecture along with their ADAS functionality. The ADAS functionality does depend on capabilities that are enabled by in-cabin sensing technologies that we have -- like we have. We believe this is a big asset for Tobii, not only that we've gone and delivered a mature and proven platform, but that partners like Qualcomm see our solution as pre-integrated and an easy way for them to scale their offerings into the automotive industry as well. Operator: What is the total cost in absolute numbers for OMS and DMS for the car manufacturer? Please elaborate on the topic. Anand Srivatsa: We cannot, of course, share algorithm pricing levels. And in terms of overall system cost, you will have to go and speak to the Tier 1s who typically provide the hardware. Again, what I think is super meaningful as we look at the in-cabin sensing opportunity as a whole is that DMS and OMS are increasingly becoming requirements in this market. And therefore, from a regulatory perspective, these are required systems. And again, there's high interest from the OEMs to offer these in the most cost-effective and scalable way possible. The fact that Volkswagen has been clear that there is a substantial cost savings by offering DMS and OMS from a rearview mirror position in a single camera offering validates our view that this will be the way that in-cabin sensing is typically delivered to go and ensure that you can meet your regulatory needs. Operator: Is it correct to assume that you are involved in Samsung XR through your collaboration with Qualcomm? Anand Srivatsa: So you should assume that we are talking to lots of different companies in the XR space. We're talking to most of their leaders. We understand that people make decisions on their choices of algorithms for a variety of reasons. As I've mentioned before, on the specific Samsung Moohan VR headset, we are not the eye tracking provider in that system. Operator: Is the total Dynavox royalty SEK 52 million or SEK 45 million from Dynavox? In that case, when are the remaining SEK 7 million received in cash? Asa Wiren: The total is SEK 52 million, and the cash was delivered in Q4. Operator: Congratulations to fast acting. Is Tobii eye tracking integrated in Sony Siemens XR headset? Anand Srivatsa: I don't think we have made any announcement there. We will -- again, we will not comment on that particular headset. Okay. Thank you very much. That's the end of the Q&A section. Thank you all very much for participating, and we look forward to sharing our next set of results with you in 2026. Thank you. Operator: Thank you.
Operator: Good afternoon, everyone, and thank you for joining us today for Ategrity's Third Quarter Fiscal Year 2025 Earnings Results Conference Call. Speaking today are Justin Cohen, Chief Executive Officer; Chris Schenk, President and Chief Underwriting Officer; and Neelam Patel, Chief Financial Officer. After Justin, Chris and Neelam have made their formal remarks, we will open the call to questions. [Operator Instructions] Before we begin, I would like to mention that certain matters discussed in today's conference call are forward-looking statements relating to future events, management's plans and objectives for the business and the future financial performance of the company that are subject to risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are referred to in our press release issued today, our final prospectus and other filings filed with the SEC. We do not undertake any obligation to update the forward-looking statements made today. Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is also available in our press release issued today, a copy of which may be obtained by visiting the Investor Relations website at investors.ategrity.com. I will now turn the call over to Justin. Justin Cohen: Good evening, and thank you all for joining Ategrity's third quarter 2025 earnings call. This is Justin Cohen, and I am joined here today by Chris Schenk, our President and Chief Underwriting Officer; and Neelam Patel, our CFO. Ategrity delivered record results this quarter. Gross written premiums grew 30% year-over-year, including accelerating growth in property lines. Our combined ratio improved to 88.7% as we began to demonstrate operating leverage. With investment income, our adjusted net income was $22.8 million, translating into 78% year-over-year growth. These results were ahead of guidance despite industry data pointing to a deceleration in the E&S market. We believe that's because we are executing a model that is truly differentiated. It's built on specialization, analytics, automation and distribution, and we are capitalizing on these strengths to drive sustainable growth and profits. This was a quarter characterized by expanding top line, operating leverage and improved economics. First, on top line growth. We achieved a 30% increase in gross written premiums, supported by 70% submission growth. That's 7-0, not 17. Our distribution network is exceptionally large for a company our size, and we are driving deeper engagement by bringing new and attractive solutions to the market. Second, on operating leverage. Our operating expense ratio improved 2.7 percentage points as prior investments in infrastructure and process efficiency began to deliver. Expense growth moderated while earned premiums accelerated, and we are realizing this upside even as we invest in new lines of business and next-generation technologies that are expected to drive the next phase of leverage. Finally, on improved economics. Our policy acquisition ratio improved 1.8 percentage points as we continue to optimize our business mix. We have been deliberately increasing the percentage of our premiums written in our brokerage channel where acquisition costs are lower. This has been underway for several quarters and is now earning through in our results. Now turning back to the broader E&S market, where headwinds have emerged in certain areas. Competitive intensity has increased, but conditions remain rational in the small- and medium-sized space. This segment has remained relatively insulated given the challenges that new entrants face in trying to profitably write $10,000 policies without the requisite scale. Against that backdrop, we are focused on extending Ategrity's structural advantages of speed, competitive products and technical pricing to drive disciplined share gains. So with that, I'll now turn it over to Neelam for the financials. Neelam Patel: Thanks, Justin. We delivered another strong quarter of financial performance. Adjusted net income came in at $22.8 million, up from $12.9 million in the same quarter last year, driven by top line growth, improving margins and higher investment income. Let me walk you through the main line items, starting with premiums. Gross written premiums grew by 30% in the quarter. Casualty premiums increased by 41%, while property premiums went up by 11%, both contributing meaningfully to our overall growth. Net written premiums grew by 42%, reflecting a higher retention rate year-over-year. Net earned premiums were up by 29%, reflecting the natural led earnings recognition of our growth trajectory and a quota share reinsurance treaty we placed in 2024. Net earned premium growth accelerated sequentially, consistent with our prior comments of abating headwinds in the second half. Our fee income came in at $2.2 million compared to $0.2 million a year ago, reflecting higher policy fees as we continue to implement standard market practices. Turning to underwriting results. Our underwriting income for the quarter was $10.6 million, up nearly 208% year-over-year. This translates into a combined ratio of 88.7%, an improvement from 95.3% last year due to reductions in both our loss and expense ratio. The loss ratio declined 2.1 points to 60% with strong underlying results in our property business. In the current quarter, we had no prior year development compared to 1.7 points last year that were related to a change in how we reserved for legal expenses. Catastrophe losses represented 4% of net earned premium this quarter, down from 12.1% last year, which had an active hurricane season. Our expense ratio declined 4.5 points to 28.7%, reflecting improvements in both operating efficiency and business mix. Operating expenses represented 10.8% of net earned premiums, down 2.7 points from last year and also lower than the second quarter of 2025. The declines were driven by expense leverage and higher fee income. Policy acquisition costs as a percentage of net earned premiums declined to 17.9% from 19.7%. The improvement was primarily driven by favorable mix shift as growth has been concentrated in lines of businesses carrying lower gross commission rates and higher ceding commissions. Moving on to investment results. Net investment income was $11 million in the third quarter, up from $6.8 million last year, driven by increased assets from our IPO and higher yields on our fixed income portfolio. Realized and unrealized gains contributed another $9.2 million, supported by strong results in our absolute return portfolio. Our effective tax rate for the quarter was 20.6%, bringing the net income to $22.7 million. Adjusted net income, which adds back IPO-related compensation costs was $22.8 million or $0.46 per diluted share. Turning briefly to the balance sheet. Our cash and investments grew by $86 million from the second quarter to $1.1 billion, reflecting strong operating cash flow. Book value increased by $29 million, driven by $23 million attributable to increased retained earnings and the rest to increased AOCI. Our book value per share ended the quarter at $12.24. With that, I will hand it over to Chris to talk about our underwriting and operating performance. Chris Schenk: Thanks, Neelam. Ategrity grew 30% and improved margins this quarter. I'll talk to you about the contributors to those results, and then I will provide some perspective on why our differentiated underwriting approach is resonating in the current market. I'll start with top line production. Retentions remained stable. We achieved mid- to high single-digit renewal rate increases. That was in both property and casualty and new business growth was very strong. Four key points illustrate the quality of this growth. First, there was record high demand for Ategrity quotes. This was in both property and casualty, where we saw submissions increase more than 70% year-over-year. Second, we saw stronger partner engagement. Our 2023 and 2024 distribution cohorts contributed meaningfully. They delivered same-store growth in the range of 80%. Third, we expanded our distribution reach. After more than doubling our distribution network from 2022 to 2024, the number of active distribution partner once again grew this year by another 25%. This extends our runway for growth. And fourth, we maintain discipline underwriting. Our hit ratio was in line with plan. That is low single digits in brokerage, and this is because we are staying selective and firm on price. Last quarter, we highlighted 3 growth initiatives: the retail trade vertical, which we launched in brokerage, our professional liability lines and Project Heartland, our Midwest regional strategy. Each once again contributed meaningfully in Q3. Together, they accounted for about half of our growth. Turning to underwriting margins. In our property book, we experienced lower frequency and lower severity. And relative to expectations, casualty losses are developing favorably. We recorded a conservative firm-wide loss ratio of 60%, although our pricing loss ratio is meaningfully lower. From an operating leverage standpoint, while net written premium grew more than 40%, we realized efficiency gains across our business. This translated into only moderate expense growth. In Q3, we processed record submissions and quotes and manage a larger in-force book, all while delivering the speed and service that our brokers expect. As we maintain a conservative hit ratio, automation continues to safeguard operating margins. We also reduced acquisition costs. This is because we wrote more business in our broker channel and capitalized on 2 new growth initiatives. The first initiative is our digital brokerage channel. We launched a technology-enabled solution that provides small business agents with streamlined access to our brokerage product. These agents occasionally need to place midsized policies and have limited options to do so. Through Ategrity's digital brokerage, they can now receive quotes on midsized accounts with what we believe is market-leading response times. The second initiative is a specialty offering for our real estate vertical. We innovated a product that addresses the evolving lending requirements for multifamily developers. These requirements are imposed by Fannie Mae, Freddie Mac and the larger banking sector, and we have developed a casualty product that responds to those requirements. This is very different than our standard casualty offering. And as far as we know, there's nothing comparable in the market. As a result, we have been able to distribute it while achieving superior policy acquisition economics. Finally, turning to our competitive positioning. In Q3, a record number of brokers wanted to present an Ategrity quote to their clients. As we have talked about, our pricing tends to be higher than our competitors. So we believe that this demand is driven by the appeal of our product. Instead of relying on unfair exclusions and wording ambiguity, we deliver fast, high-quality quotes with coverage that the insured actually needs. And for that, we charge a fair and technically sound price. Brokers are telling us that they want an integrity quote because they know and trust our product. With tighter lending standards and a more volatile political and judicial environment, there is heightened focus on coverage quality and contract certainty. And our product strategy, which offers clear comprehensive coverage with only the necessary exclusions is standing out in a very crowded marketplace. So those are some of the dynamics behind our results. In short, Ategrity's productionized underwriting model is doing exactly what it was designed to do. It's delivering disciplined growth and expanding margins and at the same time, it's strengthening our position in the market. With that, I'll hand it back to Justin. Justin Cohen: Thanks, Chris. This was another strong quarter for Ategrity. It reflects an organization that is analytical, efficient and innovative. We are a company that does what we say we're going to do, and we remain focused on driving towards sustainable world-class returns. For the second quarter in a row, we delivered gross written premium growth more than 20 percentage points above the E&S market. As we look toward the fourth quarter, we believe we have the partner engagement, submission flow and delivery capabilities to achieve that outcome again. Based on the industry's current growth pace, we believe that would translate into roughly 30% year-over-year growth. From a margin perspective, we are aiming to deliver a 90% combined ratio in the fourth quarter. Finally, we look forward to spending time with investors and analysts in the days ahead. In addition to discussing our results and strategy, we would love to hear investor input on balancing additional insider support through open market purchases with the desire to increase public float. We intend to increase our float in the course of time at appropriate valuations, as other specialty insurance companies have after their IPOs. We greatly care about doing the right thing for investors, so I would appreciate your feedback on this topic. With that, I thank you again for your time and interest in Ategrity. Operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Alex Scott with Barclays. Taylor Scott: First one I had is on the property market and just what you're seeing in the environment. On the casualty side, it sounded like some of the things you're doing are pretty bespoke and nuanced. Do you feel like as we head into 2026, you're going to be able to continue growing in property, the rates you've been growing though? Justin Cohen: Yes. In property, if you'll recall, we talked about last quarter that in the third quarter of 2024, we began raising rates actually somewhat materially in small- to medium-sized property. In the third quarter of this year, therefore, we lapped those rates. We're not going to get into 2026. But as we're looking forward, you see that we accelerated. Well, you see that we accelerated in this quarter from the growth from last quarter, and we're hopeful that we can achieve the same. It is more of just doing -- executing our business model and having now gotten ahead of the curve on pricing. Taylor Scott: That's really helpful. Second thing I wanted to ask you about is just some of the continuation of what we've been doing with technology, but I think it was mentioned earlier on the call that you were looking to advance some of that further. And I was just interested in some of the things you're working on, some of the areas you might push on the tech front to further what you're doing in the market. Justin Cohen: Great. I'll pass it over to Chris to talk about some of the innovations that are actually launching now and others as well in the future. Chris Schenk: Yes. So as you know, we've been launching pre-price solutions and some OCR AI-enabled intake automation processes and a number of different innovations across the business. We have an innovation lab that we funded about a year ago that is now bringing all of these stand-alone solutions into one single platform. That is going to be a critical unlock for us in the coming quarters. But what it does, it makes delivery of innovation much more efficient and which we already have an efficient approach to development. But in terms of maintenance of an innovation ecosystem, having everything in one platform allows us to get more value out of it and also enhance it as technology evolves. Operator: The next question comes from the line of Pablo Singzon with JPMorgan. Pablo Singzon: With the employment picture and small business optimism softening a bit, have you seen any change in the economic health of your clients? Justin Cohen: We have not seen any direct change, but it really matters vertical by vertical. Pablo Singzon: Yes. So in the small -- you said change in our clients? Justin Cohen: Yes, the end clients. The end clients. So there is a dynamic of what we call nano accounts. Nano accounts are accounts that they're very -- they're priced at admitted market pricing. So let's say, a small business with sub-$1,000 pricing. That business is always in between E&S and admitted and there is some pulling back of it into the admitted space. Sometimes a lot of that business also go away. So it has never been core to us, and they don't provide really good economics because lower retention and they could be volatile. So we are seeing that sort of disappearance again of the nano accounts. So it's not a lot of premium. Chris Schenk: It can be volume. But in terms of the -- we are 2 degrees removed from our end clients, but we do study that, and we study the economy. We talked about last quarter how each of our verticals has a different sensitivity. But overall, we have not seen any material change in our end clients' financial and economic health. Justin Cohen: Yes. So what -- where we are seeing some change in consumer preference or insured preferences is in the midsized middle market clients. So think of a family real estate investment firm, 5 apartment buildings. They're now facing tougher lending requirements from Fannie Mae and Freddie Mac. Banks are scrutinizing their financing. Meanwhile, there is regulatory uncertainty that's being driven by adoption of building codes on the property side as well as some things like even the New York City municipal elections, which would affect housing and real estate development. So you have all these dynamics that they are really attentive to coverage. So I've had the privilege of meeting some of our retailers and actually some end insurers over the last quarter. And that's what I'm hearing from them. They're worried about these developments and how they will affect coverage. Pablo Singzon: Okay. And then my second question, the submission volumes, interesting data point there. Are you able to process and quote as much of those submissions as you're seeing? Or is there any bottleneck in your operations right now? Justin Cohen: No, we have a very efficient operation, and that's been part of our story is to be able to handle this kind of volume, and we've done it. And we talked about during the IPO process, how we had front-loaded the investments ahead of growth to be able to manage these. One thing we have done is we've been very conservative about the box and our underwriting appetite. Chris, do you want to talk about that? Chris Schenk: Yes. So on the underwriting -- sorry, the restriction. Ultimately, what you're seeing is a lower hit rates for our business or stable hit rates at relatively low levels, which really speaks to the conservatism of what we're doing, but we can handle this volume. Justin Cohen: Yes. Sorry. Yes. So in one of the -- in my comments, I said also quote volumes went up, right? I think that's a really strong story for us because we have been investing in the technology capability to handle high volume at the top of the funnel, the top of the funnel being submissions, right, where you need to sort through a lot and not everything is going to fit the box, and we have been tightening the box in each of our channels. So we are able to -- we were able to handle and absorb that volume with significantly lower relative cost. And when it comes to quotes, our streamlined quoting process for the small to medium-sized to low medium-sized accounts, which is our simplified productionized underwriting where we're looking at the essential things that matters for the risk at hand and not following the industry's randomness, if you will. For that category, we were able to crank through a lot of quotes with the resources we had in place. Operator: Your next question comes from the line of Elyse Greenspan with Wells Fargo. Elyse Greenspan: My first question, within the fourth quarter guide, right, you guys said that you expect to continue to grow about 20% above the industry. Is that a target? Like when we think out to '26, '27 and beyond, is that something that you guys think you can kind of hit on a consistent basis? Justin Cohen: So thanks for that question. We're not going to talk about '26 guidance, but this is the way we think about the business. And you can -- as we come to the next quarter, you'll hear from us in how we describe how we expect to take share, and we measure that in outsized growth relative to the market. We obviously think we have a big runway here. Our network continues to grow, and we have lots of -- not only our existing growth initiatives that you've been hearing about are still in the early days. We also have new growth initiatives in the pipeline that are to come. As you heard, these type of growth opportunities are really truly proprietary to us, and therefore, we think we have an edge to be able to continue taking share in the market. Elyse Greenspan: And then the fee income, right, piece continues to grow a little bit over $2 million in the quarter, and I think, right, just around 2.4 points a contra on the expense ratio. Is that -- how do we think about modeling going forward just relative to the fee income contribution? Chris Schenk: Yes. The fees can be variable depending on the type of business that we write in the quarter. This happened to be a quarter that lined up for higher fees. We think that we'll even guide to here that as we look to Q4, we think the number would be more like $1.5 million. But furthermore, when you think about how you model that as well, there are direct third-party expenses that go along with those fees. So it's not just a pure top line adjustment. Justin Cohen: So it's really important to understand there's a service at the end of the fee, right? So if the service is required for the insured at hand, that's when we charge it. So depending on what we're writing, it's not premium driven, it's volume driven. Elyse Greenspan: That makes sense. And then from a loss ratio perspective, it doesn't sound like there was anything one-off in the loss ratio. Obviously, some shifting with mix shift towards casualty. But anything within the loss ratio? I know there was no PYD and a small amount of cat, but anything else you would call out in the quarter? Chris Schenk: No. I would just describe that if you're looking at our ex-cat ratios, for example, and you will see that there was some increases there. This is really all associated with conservatism in property. And so we have had a lower, effectively a lower amount of claims. But as a public company, we are not taking any risk in terms of late claims coming in. So we have booked at higher losses. So that's really the dynamic that you're seeing there, conservatism in our property. Elyse Greenspan: And with the conservatism in property, would you settle that in the fourth quarter like in the current year? Or if there's favorable development? Or would that be something you would think about next year? Chris Schenk: It really is rolling, and it's really actuarial based. And so we leave that to our Head of Reserving to do that and look at it on a claim-by-claim basis as well as the trends and the expected downside in terms of late reported claims. Operator: Your next question comes from the line of Andrew Kligerman with TD Cowen. Andrew Kligerman: Justin, I think you guided to just a little while ago to like a 90% combined in the next quarter. And I was -- I thought that the expense ratios were particularly compelling, particularly the operating expense ratio at 10.8%, but the acquisition expense ratio worked better than I had expected as well. Should we be looking at the overall expense ratio at about 29%, maybe a touch less than that as a run rate in that 90% combined ratio that you just cited? Justin Cohen: Yes. That is not far from it. We -- there will be some small benefits coming through on the commission ratio sequentially. but that is going to be an overtime type situation. On a gross basis, it is -- there are strengths there. Remember also that we have the quota share rolling off, which is going to provide more income to us, but that will be an offset as we move forward as well. And then with the operating expense ratio, with the adjustment in fees, there will be a tick up in the fourth quarter, but we are very enthusiastic about our ability to continue to drive operating leverage over time. And so those are some of the dynamics there, and that would lead to that 90% combined. Andrew Kligerman: Got it. That was helpful. And yes, I mean, pretty exciting 70% increase in submissions and I know earlier you were talking about the hit ratio not being super high. But what I'm kind of interested in is the expansion of your distribution and the type of expansion? Is this coming mostly from the brokers as opposed to the agents that are doing kind of smaller ticket stuff? Like maybe a little color around the type of distribution expansion you're seeing more of. Justin Cohen: Yes. It is very broad-based across both brokers and agents, and it also weighs in with our growth initiatives, which are -- we're obviously opening new relationships for these growth initiatives. I'll pass it over to Chris to talk further about the details there. Chris Schenk: So we're attracting sort of a broad spectrum of agents and brokers who focus on the small and medium-sized risk that we are aligned to plus those who have access to unique geographies such as the Midwest. So it's really exciting to watch the numbers come in on our Midwest strategy because these are partners who are -- they are in South Dakota, and you may not think many of our peers would maybe not even visit them, and we have and we have built a strong relationship and explain the value proposition, it's appealing. So that's one demographic that's driving it. The other demographic is really what we've talked about before. It's the digital native brokers. It is that new generation of brokers who are a little bit fed up with the way the business is transacted in this space. And the 5 days -- waiting 5 days to hear back if you're even going to get a quote is just not working for them. we are able to offer something that is appealing. There's a lot of enthusiasm there. And then there is your sort of more established brokers within the larger agencies within the larger brokerages who really value just the straightforwardness of what we're offering to the market. They know what they're getting. They have gone through cycles. They've seen p gimmicks and they're kind of over it. And when you can speak plainly to them and say, this is what we offer, this is what we don't do, it works. Andrew Kligerman: Got it. And maybe if I can just sneak one more in. I was on the Chubb call this morning, and they talked about pricing being particularly soft in property in the large end of the market, and now it's kind of seeped into the larger end of mid but the lower end of mid, it just hasn't gotten there yet and certainly not in small per their commentary as well as many others. So my question to you is, how are you thinking about pricing down the road? Do you think your small business and maybe the lower end of mid will hold up for a long period of time? Or do you see this pricing pressure keeping in eventually and maybe sooner than later? Chris Schenk: Thanks, Andrew. We are endeavoring not to make a market call here. We are -- what we are seeing is we are getting mid- to high single-digit rate increases in property, which is in our space, which is really quite good. You'll remember that we -- I mentioned earlier that we had higher rate increases that we've anniversaried, but we're getting solid rates. Justin Cohen: Yes. So pricing is one of those foundation stones for us. Technical pricing cost, charging the cost of product is essential. So I mentioned product, and that's becoming more and more the requirement. It's not optional for the insured, right? So there's been this hypothesis that it's all about pricing, customers don't care about coverage once they're in E&S. Well, that's not the case anymore because there's a mandate. There's a requirement at the federal level. So I'll give you -- if you'll indulge me, I'll give you a very obscure example that is really impactful and what's happening in the industry right now is nobody else is thinking about it, which is a problem. So there were -- there's new national electrical codes that were established in 2023 that have to do with things like basically grenifying of buildings, right? So when there's a coverage on the property, ordinance and law, where you have to effectively coverage for bringing buildings back up to code once they are repaired. Well, these new requirements are driving up the requirements for ordinance law. So people might say property market is soft, but someone is going to get a loan and they need to now have 25% of their value -- building value towards ordinance and law. So when you start talking about coverage and what is required, they're going to pay a premium for that because they need the loan. So it's not a -- in that mid space, I don't see a soft market or a perceived soft market filtering up. I see actually maybe a hardening in that space because of lending requirements. Operator: The next question comes from the line of Matthew Heimermann with Citi. Matthew Heimermann: A couple of quick ones, I think. Just it's not like you're growing property very rapidly relative to total. But I'm just curious, how much more growth before we have to think about reinsurance structures changing relative to how you've historically articulated PMLs and other risk tolerance metrics. Chris Schenk: Yes. No. If you'll recall, we operate a limited cat strategy, and so we are not exposing ourselves to incremental amounts of cat risk. And our growth is manageable here, and it's well within the context of our existing reinsurance contracts. Matthew Heimermann: Okay. And that's just tying the -- or connecting the dots that's a lot of the property growth you talked about getting was going to come out of Midwest strategy, and that's effectively what we're seeing at this point? Justin Cohen: Yes. So we have talked about our geospatial spread approach to writing property. That's really coming through in the Midwest. There are about 730 hamlets, I'll call them across the Midwest where we never had a footprint, and we are now writing business there. Those are large spaces where we are spread out, right? So that geospatial spread element is coming through as we win in the Midwest. The Midwest, as I mentioned, was along with some other initiatives was responsible for about 50% of our growth, and that was particularly strong in property. So we are not adding in Florida. That's the thing. We're not adding in Texas. We're not only adding in Texas and Florida rather. We are everywhere. Matthew Heimermann: Okay. That's good. As a Minnesota kid, I never really thought about my backyard as the English Country side, but I appreciate the compare. The other -- a couple of other questions I have was just, can you give us any sense of just kind of what the growth rates look by maybe the premium cohorts because you add a couple of brokerage clients through your digital channel with a small agent in the Midwest, right, like that's a disproportionate kind of impact. So I'm just wondering if there's other -- another lens on growth kind of by account size or cohorts. Justin Cohen: Yes. The account size bands have not changed meaningfully in any way. We have -- as Chris mentioned earlier, we've written less of these nano accounts, but we're also writing small midsized accounts. So there are offsets there. So really, overall, the bands themselves are not changing very much. Matthew Heimermann: That's helpful. And I guess the last one is -- well, one numbers question quick was just can you give the -- can you split the utility income disclosure in the press release between kind of income and mark -- sorry, in your investment income disclosure, can you split the utility income between income and marks? Justin Cohen: Yes. It's less than $100,000 net in core NII for the utility and infrastructure investments in NII. Are you asking for further split in the realized and unrealized gains? Matthew Heimermann: No. If I've got that, I can -- I think I can back that out of the utility, and then I can wait for the queue for the rest. The other question was just can you elaborate -- you used this term improved economics, and it wasn't clear as I was listening and maybe I didn't hear what you were trying to say. But in your opening comments, you talked about improved economics. in the quarter. And it implied more than just kind of what's happening with the expense ratio, but I just wondered if you could revisit that if there's anything you'd embellish or clarify there. Justin Cohen: Yes. We were referring to the holistic nature of now that we have scale in brokerage that as we're writing more business in brokerage, that is accretive to our bottom line. And you're seeing that in the commission ratio. You can see it in the expense ratio, but you can't exactly see how that's coming through, but that's what's happening. Matthew Heimermann: That was helpful. I was trying to contrast that with your rate comment, and it wasn't obvious from that, but that would have in and of itself explain it. Justin Cohen: We're expecting for that to acquire an account to fill it. Operator: Your last question comes from the line of Alex Scott with Barclays. Taylor Scott: I just wanted to see if you could give any color on products that you may be prepping to expand into the brokerage area like going upmarket a bit. Can you talk about if you have any of that kind of activity going on over the next, call it, 6 months or so? Justin Cohen: Right. In terms of the -- this question of upmarket, what you've seen, we don't think of it that way. What we've done in the past 6 months is we have taken products and verticals that we underwrite and we have opened them in the brokerage channel. Those are paying off. And those -- we're going to continue to have those work over the next several quarters. Anything else, Chris, you'd like to add to that on product? Chris Schenk: Yes. So we launched a retail vertical, most recently in brokerage, that's an example of what's to come. In terms of true product launches, nothing on the road map that we can discuss now. And what we are continuously doing, though, for the micro segments we're in, we are genuinely studying the external environment and trying to model out those cause and effect scenarios and optimize our offering within each of those verticals. So when we think of product, we don't think about doing more products, we think about like really meeting the evolving needs of these markets that we're already in, and that's a huge opportunity for us. Operator: There are no further questions at this time. Management, do you have any closing remarks? Justin Cohen: No. We just want to thank everyone for joining and listening, and we look forward to catching up with many of you in the days ahead. Take care. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.
Baard Erik Haugen: Good morning, and welcome to Hydro's Third Quarter 2025 Presentation and Q&A. We will begin shortly with a presentation by President and CEO, Eivind Kallevik, followed by a financial update from CFO, Trond Olaf Christophersen. And as usual, we will finish off with a Q&A session. [Operator Instructions] When we get to the Q&A, I will then read your questions on your behalf to Eivind and Trond Olaf. And with that, I turn the microphone over to you, Eivind. Eivind Kallevik: Thank you, Erik, and good morning, and welcome from me as well. Safety, as always, is our key priority. It's the most important metric in our quarterly reporting. The health and well-being of our employees is fundamental to the success of the company. And we have had positive development and lowered the number of injuries and incidents for a long period of time. The downward trend continued also over the last few years has continued also this quarter. And I'm pleased to report that both the total number of recordable injuries and the number of high-risk incidents are lower compared to the last quarter. However, we're also well aware that good results and safety cannot be taken for granted. This situation can change rapidly. Maintaining these low numbers demands continuous attention and commitment from all employees across all our locations. Our strong safety culture is rooted in genuine care for our people, ensuring everyone remains healthy and safe while working for Hydro. The commitment to safety is also essential for keeping our operations stable and efficient 365 days a year. By fostering a safe work environment, we are able to achieve our strategic targets and to increase our long-term value creation. Now let's have a look at the key highlights this quarter. We will get back and dig deeper into this also later on in today's presentation. Challenging markets are affecting the results this quarter, leading to an adjusted EBITDA coming in at NOK 5.996 billion. Now despite this, I'm also happy to report a solid free cash flow generation at NOK 2.2 billion, yielding an adjusted RoaCE of 11%, which is above our target of 10% over the cycle. Measures have been taken to meet the uncertainty in the market, and many initiatives are being executed to further increase robustness. And we can already now report progress on our strategic workforce adjustment and the cost reduction initiative announced back in June. On the energy side, we are pleased to have added another long-term power contract to our sourcing portfolio. Alouette has signed an agreement in principle for continued long-term power supply. This quarter, we also received a final judgment in the Dutch court dismissing all claims against Hydro filed by Brazilian Cainquiama and 9 individuals back in 2021, based on both legal as well as factual grounds. And lastly, we can report concrete results coming from our targeted strategic approach to partnerships. We continue to advance our low carbon and circular solutions through close customer collaborations. Executing on strategic workforce and cost reductions as a response to market uncertainty, we did launch a new cost-cutting measure in addition to strategic workforce adjustment measures back in June. The workforce adjustment project aims to reduce white collar manning by 600 people in 2025 and another 150 people for 2026. In addition, we introduced the hiring freeze and limitation on travel and consultancy expenditures. The estimated gross redundancy cost is estimated to be around NOK 400 million this year and estimated cost savings are NOK 250 million. This gives us a net cost of around NOK 150 million in 2025. As we can see from the graph, annual net run rate savings included travel and consulting cost reductions are estimated to be NOK 1 billion from 2026. This gives an adjusted EBITDA improvement altogether for the improvement programs for 2030 of NOK 7.5 billion. Processes like these are always challenging, and we are doing our best to be considerate and to be transparent towards all our employees. And to ensure a professional process, we work in close collaboration with employee representatives. I do want to emphasize that this project is done in parallel with other ongoing performance and capital discipline measures. We still conduct our improvement program with undiminished strength. There is also a parallel restructuring process in Extrusions with large reductions in employees already taking place. And lastly, we have reduced our CapEx guidance announced last quarter. These initiatives aim to strengthen Hydro's ability to navigate global uncertainty. We're not pulling the brakes on our strategy, but we are ensuring that when we grow, we do it with the right structure and with the right priorities. Moving on to some good news on Alouette, where Hydro holds a 20% ownership stake. This quarter, Alouette has signed an agreement in principle to secure supply of power from 2030 to 2045. The agreement is signed with the government of Quebec as well as Hydro-Quebec. This will ensure long-term competitive prices in a market where the energy balance is tightening. As you can see from the graph, our total power consumption in the years to come requires us to constantly explore alternatives for renewable power sources in order to maintain our energy resilience. And this agreement is an important step to ensure stability for Alouette and to further strengthen Hydro's global portfolio of long-term renewable power. Now let's move to another strategic priority. It's been almost a year since we announced the phaseout of Hydro Batteries, a decision driven by persistent market challenges. And I am pleased to report that we have made progress on the phase-out process. We have recently done 2 battery portfolio transactions in line with Hydro's strategic ambitions for 2030. Earlier this month, Hydro Energy Invest entered a transaction to exchange its minority stake in Lithium de France for a minority shareholding in the listed company, Arverne Group. In addition, Hydro signed an agreement to divest its entire ownership stake in a maritime battery company, Corvus Energy, and the closing is expected to happen early November. Hydro continues to remain engaged in the energy transition, but these transactions help us concentrate on core business within energy and step up our ambitions within renewable power generation in line with the 2030 strategy. Another important event this quarter was the final judgment issued by the Rotterdam court in the case for against Norsk Hydro ASA and its Dutch subsidiaries on September 24. The court fully dismissed all claims, including claims of pollution caused by Alunorte following the heavy rainfalls in the region in February of 2018. The court's dismissal was based on both legal and factual grounds. During the proceedings, Hydro presented extensive evidence, including expert analysis as well as empirical data. On this basis, the court confirmed an established fact that there was no overflow from the bauxite residue deposits back in 2018. And consequently, no harm was caused to the environment. And this is an important confirmation supporting our position throughout the years since the lawsuit was filed. Lastly, I will round off my part of the presentation with 2 customer cases from the past quarter. A key priority in our 2030 strategy is to shape the market for greener aluminum in partnership with customers. We are pleased to see the results of our increased efforts in this area. Our strategic partnership with Mercedes-Benz has continued to accelerate over the years, aiming to decarbonize their value chain. This picture is from the last month where the new electric CLA cars produced with Hydro REDUXA 3.0 aluminum from Årdal, drove from Oslo to Årdal. Hydro can provide Mercedes-Benz low-carbon aluminum, ensuring a traceable and transparent value chain. And this is important for Mercedes to be able to deliver on their ambitious sustainability targets. Another exciting collaborative initiative this quarter and in fact, a large milestone for us is a new bridge in Trondheim called Hangarbrua. This is the first aluminum bridge built in Norway since 1995. The pedestrian bridge is made entirely from recycled aluminum sourced from the decommissioned Gyda oil platform from the Norwegian continental shelf. It is built by Leirvik in collaboration with COWI, partnered with Hydro, Aker Solutions and Stena. This project demonstrates that aluminum can be used in producing bridges of tomorrow, contributing to innovative solutions for the infrastructure sector. And it shows how end-of-life aluminum can be transformed into durable and valuable building materials. Although this project is relatively small, it's a tangible example of the significant potential for aluminum in public infrastructure development, a sector where demand is expected to grow substantially in the years ahead. So for me, these 2 partnerships illustrate the growing demand and potential for low-carbon aluminum and our success in expanding the market for circular and sustainable solutions. With that said, let me give the word to Trond Olaf for the financial update. Trond Christophersen: Thank you, Eivind, and good morning from me as well. So I'll start my part with the market side and starting with the bauxite and alumina markets. After an eventful 2024 dominated by refinery disruptions and bauxite supply challenges, the global alumina market balance has been normalizing since the start of 2025. Around 10 million tonnes of new alumina capacity is expected to come online from India, Indonesia and China this year with full impact expected in 2026. After the drop in alumina prices we saw in Q2 this year, alumina traded around USD 360 per tonne for most of Q3. With more capacity ramp-up, especially in Indonesian refineries, we saw alumina prices falling to around USD 320 per tonne at the end of the quarter. The excess supply is putting pressure on global refiners. If prices stay at the current level, we could see curtailments for high-cost refineries, especially in China. We would then expect a future tightening of the alumina market, pushing back prices to a more normalized level. According to CRU, a small surplus of around 500,000 tonnes is expected in '25, down to a 300,000 tonne surplus in '26 in the 58 million tonne world ex-China market. Consequently, the market would remain sensitive to any production disruptions. Moving to the primary aluminum market. Despite the rate increase to 50% of U.S. Section 232 tariffs on aluminum coming into effect in Q2, the LME and premiums continued to digest its consequences in Q3. Looking at the global primary aluminum balance, external estimates suggest that the market will remain roughly balanced in '25. The 3-month LME aluminum price rose during the quarter, starting at USD 2,599 per tonne and ending at USD 2,681 per tonne. The U.S. Midwest premium continued to surge in Q3, starting at USD 1,432 per tonne and ending the quarter at USD 1,631 per tonne, driven by 232 tariffs, the structural aluminum deficit and the need to attract metal into the U.S. In Europe, the quarter opened with a duty paid standard ingot premium of USD 185 per tonne, increasing to USD 258 per tonne at the end of Q3. As in previous quarters, Hydro's main concern remains the broader risk of a global economic slowdown from tariffs, which would weaken demand and challenge current price levels as a consequence. Then moving downstream. Extrusion demand stabilized at moderate levels in both Europe and North America during Q3 compared to the same quarter last year with light uptick in order intakes. In Europe, extrusion demand is estimated to have remained flat in Q3 '25 compared to the same period last year, but decreased by 20% from Q2 due to seasonality. Demand for building and construction and industrial segments has stabilized at historically low levels with some improvements in order bookings. Automotive demand has been negatively impacted by lower European light vehicle production, partly offset by increased production of electrical vehicles. For Q4 '25, CRU estimates that European demand for extruded products will increase by 1% year-over-year. Overall, extrusion demand is estimated to be flat in '25 compared to '24. In North America, extrusion demand is estimated to have increased 2% in Q3 '25 compared to the same quarter last year, but decreased 2% compared to Q2. Extrusion demand has continued to be very weak in the Commercial Transport segment, driven by lower trailer builds. Automotive demand has also been weak. Demand has been positive in the Building and Construction and Industrial segments, while the ongoing impact from the introduction of tariffs are still uncertain, order bookings have developed better for domestic producers due to lower imports so far this year. In Q4 '25, North American extrusion demand is expected to increase by 5% year-over-year. Overall, extrusion demand is estimated to decrease 1% in '25 compared to '24. Looking at our own numbers, Hydro Extrusions sales volumes increased by 1% year-over-year in Q3 '25. Similar to the previous quarter, transport volume developments were negative, but headwinds are moderating compared to previous quarters. Shipments to the U.S. transport market were down 5% in Q3 compared to minus 11% in Q2. Automotive sales in Q3 were still negative in Extrusions Europe, driven by continued moderate production at some car manufacturers. Automotive sales in North America increased 5% in Q3 from a low base than the same quarter last year, as negative overall market development was offset by increasing volume to key customers. Sales volume growth in the Industrial segment was stable in Q3, while sales in the Distribution segment increased by 8% in Q3, mainly driven by increased shipments in the U.S. After a significant increase in volumes in the HVAC&R segment previously in 2025, the trend turned negative in Q3 '25, mainly caused by tighter consumer spending and an inventory offloading at customers. For Q4, total sales volumes in Hydro Extrusions for EU and the U.S. are expected to be in line with underlying market growth expectations. Then moving to the financials. When looking at the results Q3 versus Q2, adjusted EBITDA decreased from NOK 1.8 billion -- from -- sorry, NOK 7.8 billion to NOK 6 billion. The main driver was normalization of eliminations. Realized all-in aluminum and alumina prices contributed negatively with around NOK 300 million. Upstream volumes had a net neutral impact where somewhat higher volumes in aluminum metal were offset by somewhat lower volumes in bauxite and alumina. Raw material costs contributed positively by approximately NOK 700 million, mainly driven by lower alumina costs in aluminum metal. This was partly offset by higher energy costs and a slight increase in other raw material costs. Extrusions and recycling margins and volumes had a negative impact of around NOK 300 million. 85% of the effect came from Extrusions and the remaining 15% from recycling in metal markets. The negative development in Extrusions was largely driven by lower sales, partly offset by positive impact from the metal effect through the higher Midwest premium. In Energy, lower production and lower prices impacted results for the quarter with a net negative impact of around NOK 100 million. Furthermore, fixed costs were around NOK 200 million lower compared to Q2 with positive Extrusions. Currency effects negatively impacted the results by around NOK 400 million with 70% of the effect related to aluminum metal and 30% to bauxite and alumina. This was mainly due to a stronger NOK compared to U.S. dollar. The largest negative effect this quarter was normalization of eliminations, which amounted to NOK 1.4 billion. In the second quarter, realization of previously eliminated internal profit had a positive contribution of the same size. Finally, net other elements had a net negative impact of around NOK 100 million. And this concludes the adjusted EBITDA development from NOK 7.8 billion in Q2 to NOK 6 billion in Q3. If we then move to the key financials for the quarter. Comparing year-over-year, revenue increased by around 1% to NOK 51 billion for Q3. Compared with Q2, revenue decreased by around 5%. For Q3, around NOK 200 million positive effects were adjusted out of EBITDA, mainly related to NOK 206 million unrealized derivative loss, mainly on LME-related contracts and a net foreign exchange gain on risk management instruments of NOK 66 million. The result also included NOK 116 million in rationalization charges and compensation for termination of a power contract, of which NOK 251 million is related to future periods. This results in an adjusted EBITDA of NOK 6 billion. Depreciations were around NOK 2.5 billion in Q3, resulting in adjusted EBIT of NOK 3.5 billion. Net financial income for Q3 was around negative NOK 450 million. This was largely driven by net interest and other finance expenses of around negative NOK 730 million. This was partly offset by an unrealized currency gain on around NOK 380 million, mainly reflecting a stronger NOK versus euro affecting embedded euro currency exposures in energy contracts and other euro liabilities. Furthermore, we have an income tax expense of around NOK 900 million for Q3, and the quarter was mainly impacted by high power surtax. Overall, this provides a positive net income of around NOK 2.1 billion and foreign exchange gains of approximately NOK 380 million are adjusted out together with the EBITDA adjustments mentioned earlier and partly offset by income taxes of around NOK 120 million. And this results in adjusted net income of NOK 1.9 billion in Q3. Adjusted net income is down from NOK 3.5 billion in the same quarter last year and down from NOK 3.6 billion in Q2. Consequently, adjusted EPS was NOK 1.02 per share. And let's then go to the business areas and give an overview of each of the business areas, starting with Bauxite & Alumina. Adjusted EBITDA for Bauxite & Alumina decreased from NOK 3.4 billion in Q3 '24 to NOK 1.3 billion in Q3 '25. This was mainly driven by lower alumina prices, higher fixed costs from a low level in Q3 '24 and negative currency effects caused by a weaker U.S. dollar against the NOK. This was partly offset by higher sales volumes and positive year-on-year effects from the full implementation of the fuel switch to natural gas. Compared to Q2 '25, the adjusted EBITDA decreased from NOK 1.5 billion to NOK 1.3 billion in Q3 '25, mainly driven by negative currency effects caused by a stronger BRL versus the U.S. dollar and lower sales volumes. Alumina realized prices decreased but maintained above market prices indications due to intra-group pricing mechanisms. Raw material costs were slightly higher Q3 versus Q2 and fixed costs remained stable. For Q4, we expect the production volume at nameplate capacity. And compared to Q3, we expect stable fixed costs and raw material costs are also expected to remain relatively stable. Moving then to Aluminum Metal. Adjusted EBITDA decreased from NOK 3.2 billion in Q3 '24 to NOK 2.7 billion this quarter. The main drivers year-on-year were negative currency effects caused by a stronger NOK against the U.S. dollar, partly offset by higher sales volumes and lower alumina costs. Compared to Q2 '25, adjusted EBITDA for aluminum metal decreased from NOK 2.4 billion, and this was driven by lower alumina costs, partly offset by higher energy costs, currency effects caused by stronger NOK against U.S. dollar and lower all-in metal prices, mainly caused by a sales mix pushing premiums to the lower end of the guiding. The raw material cost release was around NOK 700 million, which was lower than we guided for in the Q2 reporting. The reduction was lower than expected, mainly due to intercompany alumina pricing mechanisms, where the opposite positive effect is realized in higher B&A alumina price and result. These effects cancel each other out on the group level. Decrease in fixed cost was above guidance at around NOK 200 million caused by currency translation effects. And this brings me then over to the guiding for the next quarter. For Q4, AM has booked 72% of its primary production at USD 2,597 per tonne, and this includes the effect from our strategic hedging program. We have booked 40% [indiscernible] USD 423 per tonne, and we expect realized premiums to be in the range of USD 310 to USD 360 per tonne. On the cost side, we expect stable total raw material costs and increased fixed costs in the range of NOK 100 million to NOK 200 million, and sales volumes are expected to remain stable. Moving to Metal Markets. Adjusted EBITDA for Metal Markets decreased in Q3 from NOK 277 million in Q3 '24 to NOK 154 million due to lower results from sourcing and trading activities. And those were partly offset by increased results from recyclers. Excluding the currency and inventory valuation effects, the results for Q3 was NOK 174 million, down from NOK 375 million in Q3 '24. And compared to Q2, adjusted EBITDA for Metal Markets decreased from NOK 276 million due to lower results from recyclers and from sourcing and trading activities. Recycling results ended lower at NOK 93 million, down from NOK 136 million last quarter. The decrease was mainly due to seasonally lower volumes, partly offset by positive premium development. For Q4, we expect lower recycling results following continued margin pressure. In our Commercial segment, we also anticipate a lower contribution from sourcing and trading activities in Q4. As always, we emphasize the inherent volatility of trading and currency fluctuations. And given the realized results year-to-date, we have adjusted down the guidance for the commercial area adjusted EBITDA, excluding currency and inventory valuation effects to NOK 200 million to NOK 400 million for the full 2025. Moving to Extrusions. The adjusted EBITDA increased year-over-year from NOK 880 million to NOK 1.1 billion, driven by positive metal effects from increasing Midwest premiums, partly offset by pressure on sales margins. We saw 1% higher sales volumes as well as somewhat weakened sales margin primarily in Europe. Furthermore, lower recycling production negatively impacted the results with around NOK 100 million. And compared to Q2 '25, adjusted EBITDA for the Extrusions decreased from NOK 1.2 billion due to seasonally lower sales volumes, partly offset by positive metal effects and lower costs. Looking into Q4, we should always look towards the same quarter last year to capture the seasonal developments in Extrusions. External market estimates suggest a positive volume development year-over-year of 1% for Europe and 5% for North America. However, we foresee increasing pressure in both Extrusions margins and Recycling margins. We expect further metal effects year-over-year of NOK 50 million to NOK 150 million based on current spot Midwest premiums, reminding that metal effects are strongly dependent on the movements in the Midwest premium. And then moving to the final business area, Energy. The adjusted EBITDA for Q3 increased to NOK 828 million compared to NOK 626 million in Q3 '24. The increase was mainly driven by higher gain on price area differences, partly offset by lower production. Compared to Q2, adjusted EBITDA decreased from NOK 1.1 billion, mainly due to lower production and lower commercial results. The price area gain was NOK 330 million in Q3 at a similar level as in Q2. Looking into Q4, as always, we should be aware of the inherent price and volume uncertainty in energy. For the next quarter, production volumes and prices are expected to increase mainly due to seasonality. Furthermore, price area gains are expected to be lower following seasonal convergence between area prices. And then let's move to the final financial slide this quarter. Net debt decreased by NOK 1.9 billion since Q2. Based on the starting point of NOK 15.5 billion in net debt from Q2, we had a positive contribution in adjusted EBITDA of NOK 6 billion. During Q3, we saw a net operating capital build of NOK 1.4 billion, mainly driven by increasing inventories and receivables related to indirect CO2 compensation, partly offset by a release in net accounts receivables and accounts payables. Under other operating cash flow, we have a negative NOK 200 million impact, mainly driven by net interest payments, settlement of taxes and reversal of net income from equity accounted investments, partly offset by positive mark-to-market reversals and adjustments for noncash effective bonus accruals. On the investment side, we have net cash effective investments of NOK 2.2 billion. As a result, we had a positive free cash flow of NOK 2.2 billion in Q3. And finally, we also had negative other effects of NOK 300 million, and this was mainly driven by payments of new leases, partly offset by positive net currency effects on cash debt. As we move to the adjustments related to adjusted net debt, hedging collateral has increased by NOK 400 million since the end of Q2. And furthermore, during Q3, the net negative pension position decreased by NOK 700 million, turning into a net asset position of NOK 600 million positive. And finally, we had no changes in other liabilities during Q3. And with those effects taken into account, we end up with an adjusted net debt position at the end of Q3 of NOK 21.1 billion. And with that, I end the financial update and give the word back to Eivind. Eivind Kallevik: Thank you, Trond Olaf. Now as we conclude today's session, I'd like to summarize our continued priorities going forward. As always, health and safety remain our top priority, and we are fully committed to safeguarding the well-being of our employees. While we recognize that strong performance metrics can shift in just a moment of inattention, the ongoing positive trend in this area stands as a clear evidence of our dedication. We are navigating an increasingly volatile geopolitical situation that continues to affect our markets, but in response to these uncertainties, we are proactively refining our operational structure to target our most critical strategic priorities. This quarter, we have taken steps to execute on the phaseout of our battery operations in accordance with our strategy. We have several performance and capital discipline programs ongoing to help us better navigate global uncertainty and keep up the attention on profitability. We are seeing positive outcomes in our power sourcing portfolio highlighted by the Alouette recent long-term contract, which strengthens our energy resilience. Continuing to identify and pursue new opportunities in power sourcing remains essential to secure our future energy needs. Achieving tangible results on our 2030 strategy remains critical, and we are proud to see that we are taking steps in the low-carbon aluminum transition. Our market for recycled low-carbon products continues to advance, exemplified by the partnership with Mercedes-Benz and the infrastructure project in [ Tonya ]. We create growing markets through partnerships while we execute on our decarbonization and technology road map. And these concentrated efforts on growth and profitability ensure that Hydro continues to stay relevant. And we are committed to our decarbonization strategy, and we will continue to pursue our 2030 ambitions with unwavering determination. Thank you so much for your attention. And with that, I hand it over to you, Erik. Baard Erik Haugen: Thank you, Eivind, and thank you, Trond Olaf. We will then move into the Q&A session. [Operator Instructions] And we have a few already, so let's get started. First one is from Liam. Can you please give your latest thoughts on CBAM? Do you expect implementation from early 2026 or potential delays? Eivind Kallevik: Thanks, Liam. The way we look at this today, we do expect CBAM to be implemented from 2026. What we are, I would say, excitingly awaiting is any changes or adjustments to CBAM, for instance, around the scrap loophole. That remains to be seen as we get towards the tail end of this year. Baard Erik Haugen: And then there's a second question from Liam. Is it possible or likely that you will underspend versus the NOK 13.5 billion CapEx guidance for 2025? Eivind Kallevik: We are keeping the CapEx guidance at NOK 13.5 billion. Remember that Q4 is typically the quarter with highest maintenance and sustaining capital. Now if we have any updates to that, we will certainly be sure to give it at the Investor Day that we have in late November. Baard Erik Haugen: Then there's a question from Amos. Can you discuss the state of play with the Tomago's energy contract? Is it reasonable to assume that the smelter shuts in 2029? Eivind Kallevik: So Tomago is, of course, placed in an area where renewable power is hard to get in Australia and the power situation is pretty tight, leading to high energy cost. Currently, today, energy costs is roughly 40% of operational costs for the Tomago smelter. We continue to work with the stakeholders to see if there are any opportunities to get renewable power post the end of '28, but it is a challenging situation. And we will make sure that we update the market if and when there are news in this context. Baard Erik Haugen: And another one from Amos. Is there any change to guidance for Metal Markets trading and commercial EBITDA contribution for '25? I think that one was covered already. Trond Christophersen: Yes. So as I said, we have reduced the guiding to NOK 200 million to NOK 400 million, down from NOK 300 million to NOK 500 million, as we said in the Q2 report. So that is the reduction in the guiding. Baard Erik Haugen: And then a question from Matt. Considering the recent volatility in alumina prices and the increase in refinery capacity from Indonesia with potential developments in Guinea, how is Hydro approaching the balance between LME linked and PAX-based pricing for future alumina contracts? Also, could you please provide some more color on the Alba supply agreement in Q3? Eivind Kallevik: Yes. So when it comes to pricing of alumina, PAX remains the predominant pricing parameter and that I suspect you should also expect going forward for the new contracts that we enter into. When it comes to the Alba contract, it's a contract that we are very happy to enter into. It's a long-term partner in the Gulf. Other than that, I really cannot comment on specific commercial details of any contract. Baard Erik Haugen: And then there's a question from Hans Erik. Any news regarding potential tariffs on scrap exports from Europe? Trond Christophersen: Yes. So the commission in the EU had planned for an announcement late in Q3. That has now been postponed until late Q4. So that is the latest information we have. So then again, we expect the news at the end of Q4. Baard Erik Haugen: Question from Magnus. There seems to be a miss versus guidance of NOK 300 million on raw material costs, looking at the group combined. Can you explain the drivers here? Trond Christophersen: Yes. So Magnus, on the raw material costs, I think you need to look at bauxite and alumina and aluminum metal together. And we guided on NOK 1 billion to NOK 1.2 billion. We realized NOK 700 million. But if you add roughly NOK 200 million plus from B&A to that guiding due to the internal pricing mechanism, we are closer to the NOK 1 billion. And then with some slight increases in energy costs and less reduction of carbon costs, both below NOK 100 million. But if you add all that together, you are within the guiding. So that is basically the difference. Baard Erik Haugen: Then we have a question from Bengt. Looking at actual price changes for premiums during the quarter and your expected range of USD 310 to USD 350 per tonne, the midpoint implies lower realized premiums quarter-on-quarter, whereas premiums are up quarter-on-quarter. Are there a temporary change in sales mix that explains this? Eivind Kallevik: So thanks, Bengt. And you are correct. When we've looked to the value-added products market, both in Q3 and when we look into Q4, we do expect to produce somewhat more standard ingots compared to what our normal product mix would be. And that, of course, drags the average premium somewhat down. Baard Erik Haugen: Then there's a question from Ioannis. Market expectations were for a meaningful increase in extrusion volumes in 2026 from through levels. Q1 '26 outlook suggests just 2% to 4% improvement year-on-year. Can you provide some color on end markets and whether you are seeing any uptick in Automotive and HVAC going into next year? Trond Christophersen: So I would say that the overall extrusion market is the market where we see a lot of uncertainty. It is difficult to give sort of additional flavor on the expected volumes going into next year. We use the external CRU as a reference. And as we said this quarter, we roughly followed the development for CRU, which we also expect for the coming quarter. We have been expecting a recovery in extrusion market for quite some time now. But again, as always, it's very difficult to tell when we will see the market turn. Baard Erik Haugen: Then we have a follow-up from Bengt. Follow-up on the standard ingot. Is that normal seasonality or changes in end-user demand? Eivind Kallevik: So I think you need to look at this 2 ways. One is that demand in Europe has been relatively weak, as Trond Olaf has been through. That's part of it. Second part of it is that customers -- our customers is then also drawing down their inventories quite significantly, both in the U.S. and in Europe towards the year-end. And as such, we produce somewhat more standard ingots to get our operating capital also out the door. Baard Erik Haugen: Then there's a question from Magnus. Are we done seeing significant positive eliminations? Our impression was that there was more to come as the Q2 release was smaller than the buildup in the year before. Trond Christophersen: Well, eliminations are unfortunately difficult to predict also for us internally. But if you look at the total accumulation of negative eliminations through the price increase for alumina, we accumulated roughly NOK 2 billion. And now we have released, I think, yes, around NOK 1.76 billion in total. But the remaining level we keep in the balance will fully depend on the development of the alumina price. And I think sort of the positive twist on this is that since we now are generating much better cash flows in bauxite alumina compared to the situation before the alumina price surge we saw last year, we then will have a higher eliminations in the balance if the current market prices stay. Baard Erik Haugen: Then there's a question from Amos. What is your guidance for Q4 working capital movements? Trond Christophersen: Yes. So we maintain our guiding that we gave at the Capital Markets Day last year that we will deliver the NOK 30 billion at year-end. Baard Erik Haugen: Okay. Then there seem to be no further questions, in which case we will round it off here. Thank you all for joining us here today. Please don't hesitate to reach out to Investor Relations if you have further questions. And we wish you all a great day. Thank you.
Operator: Greetings, and welcome to the Boston Beer Company Third Quarter 2025 Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you Mike Andrews, Associate General Counsel and Corporate Secretary. Thank you, Mr. Andrews. Please go ahead. Michael Andrews: Thank you. Good afternoon, and welcome. This is Mike Andrews, Associate General Counsel and Corporate Secretary of The Boston Beer Company. I'm pleased to kick off our 2025 third quarter earnings call. Joining the call from Boston Beer are Jim Koch, Founder, CEO and Chairman; and Diego Reynoso, our CFO. Before we discuss our business, I'll start with our disclaimer. As we stated in our earnings release, some of the information we discuss and that may come up on this call reflect the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-Q and 10-K. The company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. I will now pass it over to Jim for some introductory comments. C. Koch: Thanks, Mike. I'll begin my remarks this afternoon with an overview of our strategy, operating results and brand updates and then turn the call over to Diego, who will focus on our supply chain and the financial details of our third quarter results, as well as our updated financial outlook for 2025. Immediately, following Diego's comments, we'll open the line for questions. I would like to start by thanking Michael Spillane for his service as CEO and for continuing to provide counsel to me as a member of our Board of Directors. While I've now stepped back into the CEO role, our company priorities remain unchanged. They continue to be innovation, supporting our full portfolio of brands with advertising investment and focused execution and driving margin improvement. I'll personally be particularly focused on our high-impact areas, including our innovation pipeline and ensuring that we are appropriately investing in our brands through both advertising and local end market execution. We've made strong progress on our margin improvement initiatives and to help continue those efforts, Phil Hodges has been named Chief Operating Officer. Phil has 30 years of operations experience in consumer packaged goods at Carlsberg, Mondelez and Kraft Foods, and he has led our supply chain efforts for the last 3 years. His team has delivered strong efficiency improvements in our breweries, which have positively impacted our gross margins. In his new role, Phil will continue to report to me and will focus on continuing to improve execution across all functions and implementing our previously announced margin enhancement initiatives. I'm excited to be back in the CEO seat and to partner with our highly experienced executive leadership team to execute our plans to improve volume trends and create long-term shareholder value. Now turning to the current industry environment. I mentioned on our last call that we were experiencing a challenging macroeconomic environment. And those trends continued into the third quarter. Economic uncertainty that has consumers more tightly managing their budgets as well as pressure on Hispanic consumers continues to impact consumer demand negatively across the overall beer industry. Moderation trends are also having an impact on demand and in certain states, hemp-derived beverages are competing for shelf space and drinkers. Despite these current industry headwinds, we continue to see long-term growth opportunities in the beyond beer category, also known as the fourth category. Beyond beer represents more than 85% of our volume. We believe that the beyond beer category share will grow as the drinker is younger and more diverse than traditional beer. Our brands are well positioned to participate in this growth and our strong innovation culture allows us to move quickly to add to the portfolio as consumer trends evolve. The latest example is Sun Cruiser, which was one of the top volume gainers in RTD Spirits so far this year. We're continuing to innovate and invest across our portfolio of brands to position us well for when the industry environment improves. As Diego will discuss in his remarks on our guidance, we are reinvesting some of our gross margin over delivery into additional advertising spend. This includes media spend as well as a new local market activation program. As part of this local activation, we're investing alongside our wholesalers to support local sponsorships, local radio, sampling teams, brand ambassadors and grassroots events support. With respect to innovation, we're currently testing a number of brands, and our goal is to further expand Sun Cruiser in 2026 and launch an additional innovation brand. With that as context, let's move on to our results and brand performance. In the first 9 months, our depletions were down 3% compared to an overall beer industry that we estimate to be down over 4% in volume. In the third quarter, our depletions were down 3% and as we expected, shipments were significantly below depletions at down 14%. As we mentioned in our last call, this was mostly driven by shipping ahead of depletions in the first half of the year due to the timing of wholesaler demand for Sun Cruiser as well as lower than target wholesaler inventory levels last June. In terms of depletions, we're encouraged by the strong consumer reception to Sun Cruiser, a second consecutive quarter of growth in Angry Orchard and positive drinker reception to our higher ABV offerings. However, industry headwinds are impacting our larger brands, particularly Twisted Tea, which are likely to persist for some time. Despite a softer volume environment that we planned at the start of 2025, we have delivered strong margin expansion and grown our EPS for the first 9 months of the year. This was primarily driven by continued progress on our profitability initiatives, which Diego will discuss in his remarks. And to a smaller extent, a positive product mix from our new product innovations. These efforts have allowed us to raise our gross margin guidance for the year, while we continue to absorb tariff costs. We also hit record high consumer service levels and reached over 50% gross margin in the third quarter, which is our highest gross margin since 2018. Our business generated over $230 million in operating cash flow in the first 9 months, which enables us to both invest in our brands and repurchase over $160 million in shares year-to-date. I'll now provide an update of our brand performance and plans. Twisted Tea had strong growth for many years and is the #10 brand family in the overall beer market with over $1.2 billion in annual retail sales in measured off-premise channels. Going into the year, we planned the brand to growth consistent with an FMB market that grew 7% in dollar sales in measured off-premise channels during 2024. During 2025, the brand has gained distribution but has declined in velocity and retail displays and features. Year-to-date, in measured off-premise channels, Twisted Tea is down 5% in dollar sales and losing share in an F&B category that is down 3%. We continue to believe that the macroeconomic environment is a significant driver of weaker alcohol trends and the deceleration in Twisted Tea performance. Inflation and general economic uncertainty below the middle income consumers has resulted in lower traffic at retail and fewer social occasions. The Twisted Tea drinker profile is particularly sensitive to these impacts as they typically have less household income than breakers of our other brands. Hispanic consumer buying rates remain challenged across the industry. Twisted Tea is slightly over-indexed with Hispanic shoppers compared to overall alcoholic beverage shoppers. They are a sizable portion of the Twisted Tea drinker base and have an impact on the brand's volume performance. In addition to these macro factors, we believe the Twisted Tea retail displays are being impacted negatively by retailers making additional space for RTD Spirits, which are currently their key category growth driver. As I mentioned on our last call, according to numerator data, approximately 20% of the drop in Twisted Tea is due to the Vodka tea category, of which Sun Cruiser is one of the brands. To the extent that Sun Cruiser sources volume from Twisted Tea. This is revenue and gross margin accretive for us. Twisted Tea brand equities remained strong with growing distribution of very large organic social following and the highest organic engagement among the top 10 beer brands. It is a clear leader in malt-based hard tea with over 85% market share in measured off-premise channels. So far this year, single-serve is performing much better than large packs, which tells us that the consumer interest in the brand remains strong. We believe that softness in larger pack sizes is driven by its higher absolute price point with more cost-conscious shoppers. To address this, we will refine our pricing in certain markets, as necessary. In addition, in certain markets, we have recently added an under $10 for package 16-ounce four pack to help increase lower price points and drive demand. Twisted Tea Light and Twisted Tea Extreme are growing shelf space and velocities, our packaging redesign has improved sales per point of Twisted Tea Light. Twisted Tea Extreme Lemon and Blue Raz are still the top 2 growth SKUs in the convenience channel among all FMBs. To meet drinker demand, we're planning to add a Twisted Tea Extreme variety pack early in 2026. We expect Twisted Tea Light and Twisted Tea Extreme to be growth drivers for the brand for the remainder of 2025 and beyond. We have strong advertising plans for the rest of the year to position the brand for future growth. Key campaigns to drive awareness for the balance of the year include our high-performing key drop ads along with our college football and fall fest programs with spends across ESPN, ABC and CBS during key college football matchups. Our college football program includes in-game advertising, sponsorships with ESPN, and expanded retailer programs with team specific packages in key markets. In the coming months, we're adding other promotions, key programs and partnerships and media that resonate with our drinkers, including Country music, NASCAR and WWE Wrestling, as well as NFL-related promotions. And lastly, we're increasing our investment in Hispanic and Spanish language brand content, including new media and digital content to continue to widen the brand's appeal to more drinkers. In summary, Twisted Tea is our largest brand, and we're continuing to support it with advertising investment and innovation. We continue to believe that despite near-term challenges, these actions, coupled with an improvement in the macroeconomic environment will return the brand to growth in the long term. Moving to Sun Cruiser now, which launched last summer and went national in January of this year. Sun Cruiser has been very well received by wholesalers, retailers and drinkers, particularly in the highly visible on-premise channel. Many consumers were introduced to Sun Cruiser in this channel, and we believe it is the right place to build the brand. According to Nielsen data, Sun Cruiser is the leading RTD spirits, tea and lemonade brand in on-premise bars and restaurants. Sun Cruiser has quickly grown to become the fourth largest brand in the RTD spirits category, continues to increase distribution and has one of the highest velocities of the leading RTD spirits brands. It is now on shelf in larger national chain retailers and has tripled its points of distribution compared to earlier in the year. This expanded presence is beginning to be reflected in measured off-premise channel data. However, given Sun Cruiser's strong presence in on-premise and independence measured off-premise data still only reflects a small portion of the brand's total volume. We believe Sun Cruiser will be the next iconic brand for our company and an important growth contributor for the beyond beer category. We are focused on building the brand's distribution, displays and retail promotion while investing in media and key sponsorships that keep the brand relevant throughout the 4 seasons of the year. From a product innovation perspective, we intend to keep a disciplined number of tea and lemonade styles while continuing to expand package options. Sun Cruiser will be available in the 19.2-ounce cans format in New England this month, which will be expanded nationally in early 2026. Advertising support for Sun Cruiser is built around the "Let the Good Times Cruise" brand campaign as well as sponsorships of sports and music venues, including NFL, PGA Golf and MLB media and sponsorship of the AEG music concert series. The media campaign also includes paid social and digital advertising and key influencers. Additionally, Sun Cruiser's presence in AVP Beach volleyball and the World Surf League further reinforce its positioning as a brand for sun, sand and fun. In summary, it is early, but we are very excited about the outlook for Sun Cruiser and its contribution to our hard tea portfolio. We will continue to increase investment in both Sun Cruiser and Twisted Tea with our goal for 2026 being to increase our share and grow volume in the overall hard tea category. Turning to Hard Seltzer. The overall Hard Seltzer category declined 4% in dollars in measured off-premise channels in the third quarter as consumer preferences continue to shift towards more premium RTD spirits-based beverages, while Truly continues to be a top 2 hard seltzer brand and top 4 Beyond Beer brand year-to-date, we're not satisfied with its performance. We are focused on improving Truly's brand message and relevance, promoting our lead flavor wildberry, bringing variety through seasonal rotator packs and building on the momentum of our high ABV innovation Truly Unruly. Our new creative platform we recently launched is built around, make your dreams come Truly. This includes new creative content and a significant investment in regional media in key markets and new retailer campaigns. Truly will continue to leverage its relationship with U.S. soccer as it's Beyond Beer sponsor and its recently announced sponsorship of the American Outlaws, the official fan club of U.S. soccer. Truly will launch a U.S. soccer collector set of singles to help promote the year-long lead up to the 2026 World Cup, which will take place in North America for the first time in more than 3 decades and include 11 cities and over 100 matches. High ABV offerings continue to be a bright spot in hard seltzer. Truly Unruly has grown to a 3% volume share of Hard Seltzer, and the Truly Unruly variety pack is the number $1 12 pack share gainer in Hard Seltzer in the last 12 months. Our second variety pack Truly Unruly lemonade launched in April and is helping Truly Unruly build momentum and gain shelf space. In Cider, Angry Orchard has returned to growth behind the consumer trend back to more flavorful options. Depletions grew in the third quarter and year-to-date, driven by a higher level of focus across the organization including increased investment and new sponsorships. The new campaign, "Don't Get Angry, Get Orchard" and our sponsorship of WWE Wrestling, positively impacted results and helped the brand gain shelf space. The brand's current programming is focused on owning Halloween, and we are executing an exciting program featuring Jason from Friday the 13th movie-themed advertising, promotions, packaging and displays for Halloween and the peak fall Cider season. Our beer brands, Samuel Adams and Dogfish Head have combined to hold share in a challenging craft beer category. We are excited that in early 2026, Samuel Adams will begin programs and promotions as well as launch limited edition packaging to help celebrate Americas 250th anniversary. For Dogfish Head, we are particularly pleased that Dogfish Head's grateful dead beer collaboration has helped fuel Dogfish Head's return to growth. In summary, I'm confident we have the right strategies and team in place. We're continuing to invest in our brands. We're building a strong innovation pipeline, and we're highly focused on our multiyear productivity initiatives. Importantly, we're focused on controlling what we can control. We're executing in the marketplace to improve share trends and to expand our margins. I'd like to thank our Boston Beer team, our distributors and our retailers for their continued support and remaining agile in a dynamic operating environment. I will now pass the call over to Diego to review our third quarter financial results and 2025 guidance. Diego Reynoso: Thank you, Jim. Good afternoon, everyone. As expected and as Jim noted, during the third quarter, our shipments rebalanced relative to our depletion, which unfavorably impacted third quarter shipments and revenue. Depletions decreased 3% and shipments decreased 13.7% compared to the third quarter of last year, primarily driven by declines in our Twisted Tea, Truly Hard Seltzer and Samuel Adams brands, that were only partially offset by growth in the company's Sun Cruiser and Angry Orchard brands. We believe distributor inventory of four and 1.5 weeks on hand as of September 27, is an appropriate level for each of our brands. Revenue for the quarter decreased 11.2% due to lower volumes, partially offset by increased pricing and favorable product mix. Our third quarter gross margin of 50.8% increased 450 basis points year-over-year, and it's the highest level we've had since 2018. Gross margin primarily benefited from procurement savings, improved brewery efficiencies, price increases and product mix, as well as a favorable comparison against higher inventory obsolescence in the prior year. These factors were partially offset by increased inflationary and tariff costs. Advertising, promotional and selling expenses for the third quarter of 2025 increased $16.8 million or 11.3% year-over-year primarily due to $20.9 million in increased brand media and local marketing investments that were partially offset by lower freight costs. General and administrative expenses for the third quarter increased $1.1 million or 2.5% year-over-year, primarily due to increased salaries and benefit costs. For the first 9 months of the year, the strong progress we have made in our supply chain initiatives enabled us to deliver 49.7% gross margin and generate $11.82 of EPS. Our 3 buckets of multiyear savings projects, which we are executing ahead of our initial timing expectations are positioning us to respond better to potential changes in the volume environment, product mix and tariffs. We are continuing to execute projects across all 3 buckets, which I'll now discuss. In brewery performance, we continue to see improvements in OEs driven by process improvements, which helped to increase our internal production capacity. In the third quarter, we produced 90% of our domestic volume internally compared to 66% in the third quarter of last year. Year-to-date, our domestic internal production increased to 83% of our volume compared to 71% in the first 9 months of the last year. In our procurement savings, our third quarter results benefited from lower negotiated pricing on certain packaging and ingredients. Our efforts year-to-date have resulted in procurement savings more than offsetting inflationary impact. In waste and network optimization, we're continuing our efforts to improve our customer ordering and inventory management system that we implemented last year. These efforts resulted in a 28% reduction in obsolete inventories year-to-date. Turning to our guidance. Given that 3 quarters of the year are behind us and our fourth quarter is seasonally smaller quarter, we are narrowing our volume guidance range and raising our gross margin and EPS guidance for the full year, inclusive of higher investment spending in our brands. We now expect our volumes to be down mid-single digits for the year. Our depletion trends for the first 42 weeks of 2025 have decreased 4% from 2024. We continue to expect price increases of between 1% and 2%. Based on strong gross margin performance year-to-date, combined with a lower-than-expected impact from tariffs, our gross margin guidance for the year is now 47% to 48%, up from 46% to 47.3% previously. We now expect tariffs to have an unfavorable impact of $9 million to $13 million, which is a gross margin headwind of 40 to 60 basis points. The change to our tariff estimate is due to lower-than-anticipated tariffs primarily on material source from Canada and exempt from the tariffs as a U.S. MC compliant goods. In the first 9 months, we have incurred $7.1 million in tariff costs. Given our strong margin performance, we are using some of the upside to increase our advertising investments in our brands in the fourth quarter. We now expect increases in advertising, promotional and selling expenses to range from $50 million to $60 million, an increase from our previous estimate of $30 million to $50 million. This does not include any changes in freight costs for the shipment of the products to our distributors. We are revising our full year 2025 EPS guidance range inclusive of tariffs to $7.80 to $9.80, up from $6.72 to $9.54. Tariffs are expected to have an unfavorable impact of $0.60 to $0.80 on earnings per diluted share. As you model our fourth quarter, please keep in mind the following factors. Due to seasonality, the fourth quarter is our smallest revenue quarter with the lowest absolute gross margin rate of the year. Meaningful improvement in our gross margin performance began in last year's fourth quarter, which we will be lapping. Additionally, we expect volume deleverage in the fourth quarter combined with a higher year-over-year shortfall fees. Turning to capital allocation. We ended the quarter with a cash balance of $250.5 million and an unused credit line of $150 million, which reprise us with flexibility to continue to invest in our base business, fund future growth initiatives and return cash to our shareholders through our share buyback program. For the full year 2025, we are lowering our capital expenditure guidance range by $20 million to between $50 million and $70 million, with a portion of the reduction driven by timing. We continue to focus our spend on supporting our productivity programs. During the 13-week period ended September 27, 2025, in the period from September 27, 2025 through October 17, 2025, we repurchased shares in the amount of $50 million and $12.1 million, respectively. As of October 17, 2025, we had approximately $266 million remaining on the $1.6 billion share repurchase authorization. This concludes our prepared remarks. And now we'll open the line up for questions. Operator: [Operator Instructions] And our first question comes from the line of Nik Modi with RBC Capital Markets. Nik Modi: A couple of questions, just clarifications. Maybe Diego, Jim, if you guys can talk about the timing of some of the spend you talked about promotional spend, perhaps behind Twisted Tea. I'm assuming that would be more behind the 12 pack. And then some of this local marketing spend, Jim, that you discussed at NBWA, just -- is this year thing? Or is this going to bleed also into next year? So that was the first question. And I guess the broader question is, given kind of what's going on with consumers and affordability, I hear a lot of pack size innovation coming from Boston Beer, but what about smaller pack sizes? I think the carbonated soft drink industry has had a lot of success with 8-ounce cans. Even Constellation has done some stuff with 7.5-ounce bottles. Just curious on your thought process there as it relates to maybe putting some of your core brands and some of those pack sizes? Diego Reynoso: Thank you, Nik. I'll start the question a little bit with the numbers and then I'll hand it off to Jim to talk a little bit more about the spend and where we're doing it. So I think if you remember at the beginning of the year, we said this year, we're really going to take up our spend and really support our brands. And so we've started this year. You've seen in our results, how part of it has already been in our numbers, and we're going to double down in the balance of the year, and that's why we're taking up a little bit our A&P spend guidance. We're working on next year's plan, but there's no reason why we wouldn't continue to invest in our brands, given some of the things that we're seeing in some of the innovation like Sun Cruiser and some of the great results we've had there. So I would say we'll come back in more detail for 2026, but definitely in the back end of this year, and we expect to kind of keep going into next year. We'll continue to support our brands, and we like the results we've seen coming back from. Jim, I'll hand it off to you a little bit more in the detail of what we're doing around that. C. Koch: Sure. Good questions around pack size. And we are figuring how to surgically implement some more promotional spending on Twisted Tea. So we are -- one thing that we've announced is a 4 times 16-ounce to a 4 pack of 16-ounce cans that will come under $10. It will be depending on the market, $8.99 to $9.99. So a more attractive entry point. And then on the 12 packs, which is the biggest source of weakness, singles are okay, but 12 packs in certain markets are notably weak and we believe that the pricing got pushed up well beyond the traditional space where Twisted Tea has lived, which is kind of in between mass domestic peers and above them, but below craft, below imports and below many of the other FMBs to we have a more blue-collar drinker. So in some markets -- I've been in markets where we were actually -- the 12 packs were priced above Modelo or Stella even, and that's probably the wrong price point. So we're going to be surgical about trying to bring -- puts the tea price point on a 12 pack under imports, under craft and in some cases, under other FMBs. With respect to like smaller sizes in beer, to me they're not that appealing. They don't represent much value. Consumers 10 to 12 ounces. And from a margin side, you start doing like the Coronado is a 7-ounce bottle, the costs are not that much less than a 12-ounce bottle. So per ounce, they're significantly more expensive. So in terms of the price pack architecture, we're looking ways to deliver comparable or more value. So on one hand, we'll have a lower entry point with a 460-ounce cans. And then on the other side, we will have right markets 18 packs and 24 loose packs that will present to the consumer more value. Operator: And the next question will come from the line of Filippo Falorni with Citi. Filippo Falorni: I wanted to talk on the gross margin performance, very strong performance again. So congratulations on that expansion. Maybe like what levels were you able to extract considering the volume deleverage this quarter that came in better than you expected? And then just more broadly, Diego, maybe like you talked about the high 40%, low 50% gross margin target in the next couple of years. Are you feeling better in terms of getting there maybe a little bit faster than you initially anticipated? And maybe what are the drivers of potentially getting to the target. Diego Reynoso: Thanks for your question, Filippo. First, just to clarify, I think I've always said high 40s, so I'm not sure I went to low 50s. But I look to -- we're really happy with gross margin. I mean we haven't had a quarter like this in a long time. And it's a result of constant projects, savings agendas and deliveries by our operations team and the rest of the organization, price mix, revenue management. So as we laid out a couple of years ago, we said, look, we think we can get to high 40s despite or in spite of volume changes because we had 3 big buckets, which was procurement savings, which was brewery efficiencies and with was our distribution footprint. And the reality is, what you're seeing now, it's a little bit of an acceleration of how long we thought we were going to take to deliver on some projects, but it's those same areas that are delivering. So I feel very comfortable of our ability to get to and maintain high 40s. Now in order to get past that line, then you do have some other things that we have to take into account volume being one of them. And then tariffs, for example, being another one where this year we only have a fraction of what the wraparound would be if nothing changes. So what I would say is we internally would definitely want to go past high 40s and get to 50s. But to get there, we need to, one, continue down the projects that we're currently running in our savings agenda. But two, we do have -- now at that level, we do have some dependencies with volumes and costs and inflation. So we will ensure that we get to the highest number that we can. But right now, we're very, very happy with where we are today. Filippo Falorni: Great. That's helpful. And then maybe just -- did you offset the shipment deleverage this quarter maybe were the levers that you were able to pull to kind of offset the negative this quarter? Diego Reynoso: Yes. That's a great question. And one of the things that I think it's important to remind people is it's really hard to look at quarter-to-quarter because although we talk about shipments and depletions, there is one other volume that we don't talk enough about, which is production. And therefore, it's not just how much you ship, but it's also how much you produce. And we had a strong production number, especially in our own footprint. So if you look at our percentage internal and external, it was up significantly versus last year. And therefore, that helped us that plus the brewery efficiencies plus the other buckets that I mentioned, helped us offset that from a volume point of view. So if going back to some of the numbers we had 90% in Q3, internally, we had 66% last year, as just as a matter of how we plan out the volume. So that helped us in the quarter. Operator: And the next question comes from the line of Peter Grom with UBS. Peter Grom: So I wanted to get some perspective on just how you see the top line growth evolving within your portfolio as you look out over the next 12 to 18 months. Obviously, some cruiser momentum has been impressive this year. You've been able to partially send the declines that you're seeing interested in Truly. But you highlighted some of the challenges which that are likely to linger. It seems like Truly could be under pressure as well. So just as you think about the path forward, and I know we'll get guidance ever. But just how do you think about the move pieces as you look ahead given what we know today? And maybe specifically, whether you think the growth or the contribution from Sun Cruiser can be as strong next year versus what we're seeing this year. Diego Reynoso: Perfect. Thank you for the question. I'm going to start the answer, and then I'm going to hand it off to Jim. So as you've mentioned, we're working on our 2026 plan. But there are things we're very happy with. Sun Cruiser, we're very happy with. It's 1 of the top brands, and we still think it has a lot of runway. So from that part of your question, yes, we still have strong hopes for the brand. We also have other innovations and things that we feel strongly about. But it's also important where the total market is. We like our portfolio. We like the ability to win share, but there is a question of where the market is going to go, and I think that will be a piece of it. So in that tone, I'm going to hand it off to Jim, and Jim, please, if you can share your view. C. Koch: Yes. In general, we are looking to at least maintain share for each of our brand families within their segment, if you will. So Sam Adams and Dogfish Head, and Craft Beer, which we were able to do this year, Angry Orchard and hard cider, it's actually gaining share as it grows. Our issues are Twisted Tea and Truly to be honest. Twisted Tea surprised us. It was couple of months of 2025 that was positive by -- it was growing maybe 5%. And then it's relatively quickly in this business flipped and if you look into kind of in the last 13 weeks, it's gone from plus 5% to down double digits. So our view of Twisted Tea is it ought to be able to maintain share within the FMB category. It's one of the two largest brands in that category. It's got significant marketing support ranging from what we believe are effective national advertising campaigns to a lot of local marketing and support with our wholesalers. So we would look to get that back to holding share within the category. And the same thing with Truly. It is, in fact, been losing share in Hard Seltzer. And we've seen some growth from both of the styles in Truly Unruly. So we're -- that's growing as a part of our portfolio, but we would like to get that close to the category. And we are, as you can see, ramping up brand support in all the different levers that we have with Truly, we're the sponsor of the U.S. soccer team. So we believe that the World Cup will be a major event in the U.S. We're doing special things in the 11 cities and our wholesalers and retailers are very excited using Truly as the World Cup ramps up and takes up a lot of the summer. So that's how we look at those 2, and that leaves Sun Cruiser, which we believe has significant runway. Next year, we will have full presence in chains. This year, we really missed most of the chain sets in the spring and had to kind of limp in during the fall resets, but next year we will have a full -- across all of the major chains, full representation. We're very happy with the performance this year just didn't have distribution, but we were the #1 in tea, and vodka lemonade in Walmart, where we did have good distribution. So we think we'll have a full year in market next year. We are focusing on some underpenetrated markets in that Atlantic area that are big vodka tea markets where we're not -- where we think our share should be. So we see another year certainly grown double digit, maybe even triple-digit growth for Sun Cruiser in 2026. Peter Grom: Great. And then just on the brand support, you mentioned -- how do you think about the balance of reinvestment versus kind of allowing savings to flow to the bottom line? I just -- I understand you have more flexibility and you want to support the brand longer term, but it doesn't seem to be shifting the depletion performance in the near term. So just how should we think about that moving forward? Diego Reynoso: Go ahead, Jim. C. Koch: You should think of us as having a bias towards growth. That is how we look at the world. We believe that we should be growing our revenue. As a company, we are heavily weighted away from traditional beer towards what people call beyond beer, I like to call it a fourth category because it's not just beyond beer, it's beyond liquor, beyond wine. And there's a bunch of different ways to define that beyond beer. But the way we're looking at it, it is -- there's a big growth gap between traditional beer, which this year looks like it's off by maybe 5.5%. We'll see where the numbers come in at the end of the year. And then beyond beer, which is down maybe 1 or 2. So there's a 4% gap. And we are thinking next year it won't be down were 5.5% for the overall beer category. We're thinking it will be down less, but we don't have a crystal ball. And we're thinking that the fourth category will return to a very modest growth next year. So we play in a part of the total beer and beer like SKUs much more heavily than the rest of the traditional beer industry. So we believe that we are playing in what will be a growth category over the long run, and we're investing accordingly. Diego Reynoso: Yes. I will also build on -- I will build on Jim's point just to clarify. If you look -- if you go back -- if you just look at this year, yes, you can say, well, the split between how much has gone to profit versus the brands. But if you look back 2 or 3 years, we've actually generated savings for both, right? We've improved our profitability and we've invested in our brands. So I think what we've shown that we are very good at is reacting to the market. So the market conditions and where our brands are, I think we're doing the right thing. But we're also -- as we go forward and plan for next year, I think where things are working, we'll invest more where we feel like we should drop to the bottom line or invest in something else, we will. So we will continue to share our capital allocation as we go forward with you guys. Operator: And the next question comes from the line of Eric Serotta with Morgan Stanley. Eric Serotta: Great. A couple of housekeeping items. First on the year-to-date, I think it's 42-week depletions were down 4% versus down 3% through the 39 weeks. Is that just rounding and maybe a case of down 3.4% versus down 3.6%? Or did the business slow in October? Diego Reynoso: So I mean, the numbers are very close. So it's not there was a significant change in the last period. It's, to your point, more about where the numbers end up. Eric Serotta: Okay. And then, Diego, your comment on the higher volumes and your own production footprint in the quarter and the higher production volumes overall. Do you see that as sustainable into the fourth quarter and early next year? And more broadly, where do you stand in terms of reconfiguring the third-party production that you guys have put in place several years ago now? Diego Reynoso: Okay. Let me break that into the different parts of the question. So no, we don't foresee that going into the fourth quarter, and our guidance reflects that. As we've said before, the fourth quarter is our lowest production volume of the year. And because of that, the lowest margin quarter by far. There is also -- we're also lapping, for example, Sun Cruiser had already started a little bit last year in the fourth quarter. So no, we're not projecting in our guidance for that production strength to continue into the fourth quarter. But that's why we focus on the full year guidance because quarter-to-quarter, it can easily move without it being significant to the full year guidance. 2026, we'll come back and we'll talk a little bit more when we give guidance for 2026. And the third part of your question is we are constantly updating our relationships with our third-party, but I do want to remind people that the volume need is not the only reason why we have co-packers. Part of it is also it has allowed us not to have to build a facility for any type of emergency or any reason we would have to stop our production in our own facility. So we always have a backup and then we feel that's important. And it's also geographically advantageous for some of our products. So we are continuing to review that, and we -- every couple of quarters, we look at upcoming renewals of contracts, and we'll brief you as those come up. Eric Serotta: Great. And then just one last housekeeping item. I believe you gave the shortfall fee outlook in the Qs, I'll have to check the latest, but can you just remind us the amortization of the prepaid expense. Does that step down next year? And sort of what's the magnitude there? Diego Reynoso: Yes, you are correct. Like there's 2 pieces to the shortfall fees. So the amortization does go away, but we continue to have the regular short part piece. So you can see in our 10-Q, you can see year-by-year what our forecast is for each one of the shortfall fees. And I'm happy to send it to you, if needed. Eric Serotta: I could check the Qs, but thank you. Operator: And the next question comes from the line of Robert Ottenstein with Evercore ISI. Unknown Analyst: This is Greg on for Robert. I was wondering if you could just talk a little bit about the impact from both hemp beverages and then the Hispanic consumer on your products. You talked about them both on like a higher level. But have you guys done any work into like how much of this 5% to 5.5% decline in the beer category is due to the weaker Hispanic consumer and then how much you think hemp beverages is impacting demand to your products? Diego Reynoso: Jim, would you like to answer that question? C. Koch: Sure. There isn't really great data on these things. So I'm going to be pulling numbers out of the air. I think for us, the -- about 20% of our drinkers for Twisted Tea are Hispanic, and that's broadly reflective of the total market. I would -- the biggest -- to me, the biggest 4 things are basically the overall macroeconomic situation, which kind of broadly is okay. But for the 80% of the population in the bottom 4 quintiles, it's not good. And that's -- those are heavily beer drinking. So that's weak. The second is health concerns. So those to me are the 2 biggest things. There's just lots of media on alcohol causes cancer despite the National Academy of Sciences and their more considered opinion. So we have that -- those 2 big things going on. Hemp, it's smaller, maybe of that 5.5%. It might be 1% because it's limited to only a smaller number of states and availability. And I guess so that's the economy and the health issues, I think, are the 2 biggest things, and maybe those represent over half of that 5.5% and then the Hispanic community and then hemp. And after that, you have a little noise things, GLP-1 and things like that. Does that help? Unknown Analyst: Yes. That's great. And then just maybe within the hemp beverages, when you guys see consumers like moving towards some of those products and like which of your products do you think are most exposed to those market share losses? Diego Reynoso: I don't think we have that level of detail, to be honest, just by each one of the brands because to Jim's point, it's such an evolving legal framework and category like every day you wake up and a state is in, it's out, et cetera. So that would be a hard question to answer. But as we go forward and things clarify, we can share that. Operator: Thank you. And our final question comes from the line of Bill Kirk with ROTH Capital Partners. William Kirk: So I asked a very similar question last quarter, but now year-to-date EPS is almost $12 a share. Full year guidance implies a 4Q loss of $4 a share to $2 a share. So when you look at 4Q, is there really no scenario where you see positive EPS. And I asked because before 2021, 4Q was always a positive earnings quarter. Since 2021, it hasn't been positive once, I don't think. But I guess, what changed with the earnings seasonality that makes 4Q a negative earnings quarter? Diego Reynoso: So well, clearly, you didn't like my answer last time. But I think -- look, we've been very clear how the fourth quarter is always the lowest quarter. But one of the things we did do this year and we -- from the beginning, we said is we were really going to try to produce a head of demand to avoid some of the issues that we saw in the summer last year and at the end of the year. And also, we had very high hopes for Sun Cruiser. So again, from a production shipment point of view, we went ahead -- and you saw our days kind of grow in the second quarter and start coming down in the third quarter. So there has been a change in our production and shipment pattern from previous years as we've really tried to make sure that our distributors and our customers had access. That would be one. The other one is we took up our guidance for marketing spend for the full year and that -- a lot of that will come in the fourth quarter. So we are going to invest significantly more in the fourth quarter than we did last year in our investments. So I think if you put those things together, that's why the full year guidance is we're improving it in total, but Q4 has a different shape than the year before. C. Koch: Bill, I can give you a little more color. Essentially, what's happened over the last, whatever it is, 5 or 6 years, our mix has moved to -- from primarily craft beer and hard cider to primarily Truly and Twisted Tea. That means we've moved more to very summer-oriented beverages like Truly, and Tea and now Sun Cruiser away from Sam Adams and Angry Orchard. And Sam Adams was always a trade up, much like the fourth quarter is the biggest quarter for spirits. It was a trade-up to Sam Adams when people were entertaining, they were out, on-premise was strong. And for Angry Orchard October and November are the biggest months because it's big Halloween, Thanksgiving, Apple Harvest, those kind of things. So our primary products move from more summer oriented away from more Q4 oriented. William Kirk: That makes a lot of sense. And then a few years ago in Vermont, right, they put spirit-based RTDs next to the malt products. At the time, I would guess that you wouldn't have supported that change. But now with Sun Cruiser, where does Boston Beer stand on channel access initiatives for spirits or even tax equivalency proposals? And are there any large legislative changes out there that are possible in the near term? Diego Reynoso: Jim, I will hand that over to you. C. Koch: Yes. Our position hasn't changed. We think that historically, I mean, going all the way back to, I think, 1794, the first sort of broad taxes in the U.S. that were not import duties, we're on whiskey. So spear and not on beer, beer did not get a federal tax to believe it or not to fund the civil war, which was a little while ago, but the tax hasn't gone away. So we support the historical tax structure and availability structure that's served the alcohol industry quite well since prohibition. So our position on equivalency hasn't changed. We believe there's a difference between beer is the beverage of moderation and our friends over in the spirits industry. We're still with the Beer Institute on this. Operator: And at this time there are no further questions. And now I'd like to turn the floor back over to Jim Cook for any closing remarks. C. Koch: Thank you all for joining us, and I'm looking forward to talking to you again in February when we can sum up this crazy year in the beer business. Cheers. Operator: Thank you. And this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.