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Operator: Good morning, and welcome to Hilton Grand Vacations Third Quarter 2025 Earnings Conference Call. A telephone replay will be available for 7 days following the call. The dial-in number is (844) 512-2921 and enter pin number 13751068. [Operator Instructions] I would now like to turn the call over to Mark Melnyk, Senior Vice President. Mark Melnyk: Welcome to the Hilton Grand Vacations Third Quarter 2025 Earnings Call. As a reminder, our discussion this morning will include forward-looking statements. Actual results could differ materially from those indicated by these forward-looking statements and these statements are effective only as of today. We undertake no obligation to publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our SEC filings. We'll also be referring to certain non-GAAP financial measures. You can find definitions and components of such non-GAAP numbers as well as reconciliations of non-GAAP and GAAP financial measures discussed today in our earnings press release and on our website at investors.hgv.com. Our reported results for all periods reflect accounting rules under ASC 606, which we adopted in 2018. Under ASC 606, we're required to defer certain revenues and expenses related to sales made in the period when a project is under construction and then hold off on recognizing those revenues and expenses until the period when construction is completed. For ease of comparability and to simplify our discussion today, our comments on adjusted EBITDA and our real estate results will refer to results excluding the net impact of construction-related deferrals and recognitions for all reporting periods. To help you make more meaningful period-to-period comparisons, you can find details of our current and historical deferrals and recognitions on Table T1 of our earnings release and the complete accounting of our historical deferral and recognition activity can also be found in Excel format on the Financial Reporting section of our Investor Relations website. With that, let me turn the call over to our CEO, Mark Wang. Mark? Mark Wang: Good morning, everyone, and welcome to our third quarter earnings call. We had strong operational and financial execution this quarter with 17% growth in our contract sales driving material improvements in our real estate business profitability versus the prior year. Those results enabled a near double-digit growth in our EBITDA for the period, along with maintaining our commitment to returning substantial cash back to shareholders. I was particularly pleased with how broad-based our sales performance was. We grew our tour flow and VPG in both owner and new buyer channels. All of our domestic geographic regions produced double-digit gains in VPG, and we delivered mid-teens contract sales growth at both our legacy and Bluegreen businesses. Our teams have been working hard on executing against our strategic initiatives to grow our lead flow, improve our execution and enhance our value proposition, and those efforts are continuing to produce results. The consumer environment has remained stable overall and travel demand continues to be healthy when looking at forward indicators and member surveys. While recent events have highlighted the continued volatility in the policy landscape, our focus on our strategic priorities has not changed. We're controlling the things we can control by executing against identified initiatives and highlighting our value proposition in the short term while continuing to invest in building our capabilities for the long term. We still have work to do around growing our new buyer mix and improving our cost efficiencies, but our results reinforce my confidence that we're making progress toward achieving those objectives and that the investments we're making today will drive sustainable value creation in the business. Looking ahead, we're carrying good momentum into the year-end, and we're reiterating our existing EBITDA guidance for the year, along with our expectation of achieving high single-digit contract sales growth. Turning to the results for the quarter. Reported contract sales were up 17% to $907 million, which was a record for the business on a pro forma basis. Adjusted EBITDA was $302 million with margins, excluding reimbursements of 24%. And as I mentioned, I'm encouraged by the composition of our sales in the quarter. Consolidated tour growth of 2% continued the consistent trend of improvement we've seen this year with both owner and new buyer channels contributing to the growth. We grew new buyer tours at our legacy and Bluegreen businesses, and we achieved that growth while executing on our tour efficiency initiatives and improving the overall quality of the tour pipeline. VPG was up 15% against the prior year with our performance also reflecting broad strength. Both owners and new buyers contributed to the growth. The gains were also relatively well balanced between our legacy and Bluegreen businesses. And geographically, we saw double-digit growth across every one of our Mainland regions. Looking at our forward demand indicators, which also remained healthy. Occupancy in the quarter was equal to the prior year at 83%. Consolidated arrivals in the fourth quarter are ahead of prior year, and our marketing and rental arrivals continue to be our strongest channels. Our package sales initiatives also continue to be successful with another quarter of double-digit package sales growth and a pipeline that remains near 750,000 packages. Moving on to our other business units. Our member count was nearly 722,000 at the end of the quarter and reflected the increased rate of recapture we discussed last quarter, which will support both embedded value creation and improved long-term cash flow generation. Our HGV Max members are our most engaged and active members, and we're maintaining a very steady pace of Max additions with both new buyers and owner upgrades. We added 70,000 members to HGV Max over the past 12 months. And in doing so, we achieved an important milestone, surpassing 0.25 million HGV Max members, including nearly 30,000 legacy Bluegreen members now enrolled in the program. So we continue to see robust demand for the Max program and the compelling value proposition it offers. In our rental business, continued travel demand supported growth in much of our portfolio. While the Las Vegas FIT rental market remained slow due to visitations and competitive dynamics. Our Vegas sales teams did a tremendous job in our sales centers during the quarter, driving near double-digit contract sales growth despite market challenges. And in our financing business, we continue to execute on our business optimization program that will enhance our cash flow over the long term. During the quarter, we repurchased 3.3 million shares of stock for $150 million. We're on track to hit our goal of returning $600 million to shareholders through our repurchase this year, and we remain committed to returning excess capital to shareholders. Turning next to an update on our initiatives and integration. We continue to make progress with our lead generation initiatives to drive package sales and activations. The packages we sold in the first 6 months of the year are starting to convert into tours and were a key contributor to our return to positive new buyer tours growth this past quarter. We also generated double-digit growth in the number of packages sold in Q3, exceeding our internal forecast for the second quarter in a row. Those packages will in turn help us to build out our tour pipeline into 2026. So while stronger-than-expected performance resulted in proportionately elevated marketing spend in the period and weighed on our flow-through, we view this investment as an important driver of future growth. As those packages convert into tours and ultimately into contract sales, we'll see the benefit of new buyers entering the system and adding additional lifetime value. Regarding our product enhancement initiatives, HGV and HVC Resorts began receiving Max members from Bluegreen this month with those members now able to easily use their points for stays at our resorts across all of our brands. And we plan to launch additional Hilton benefits for our newest Max members from Bluegreen, along with access to travel concierge service to help with the planning and making the most out of their next getaway. Turning to the Bluegreen integration, we continue to make good progress. We reached $94 million in our run rate cost synergies this quarter and remain on track with the targeted $100 million in savings. We fully rebranded our Bluegreen sales centers and rolled out our Envision sales technology in each of them. And with the recent completion of our Bass Pro kiosk rebrands, we have great brand synergy across our marketing channels, highlighting Hilton Grand Vacations quality of product and service backed by the Hilton brand. On the property front, we've rebranded our first 7 Bluegreen properties with the goal of having our targeted rebrands completed over the next 3 years. Our technology teams also continue to make great progress on our digital transformation path, rolling out additional tools for our teams while also introducing new enhancements to improve our member experience. This quarter, we've upgraded our proprietary -- my explorer chatbot to provide our members a personalized AI-powered tool tailored to their membership profile to help them with their booking and vacation needs. From a partnership perspective, we've been focused on executing and deepening our existing relationships. Through strategic alliances with Hilton, Bass Pro Choice and Great Wolf, we reach a broad, diverse and growing audience. And we're constantly working with those partners to test new marketing programs and increase the efficiency of our funnel to convert leads to new member transactions and drive lifetime value. So to sum it up, I'm proud of our performance this quarter, and I'm especially pleased with how broad-based our performance was across our KPIs, channels and geographies. Our teams have done a great job executing against the initiatives we laid out, and their hard work is producing results. We're focused on further improving our cost structure and flow-through along with driving additional new buyer growth. And I believe that the investments we're making in the business are setting us up for long-term value creation. So with that, I'll turn it over to Dan for more details on the numbers. Dan? Daniel Mathewes: Thank you, Mark, and good morning, everyone. Before we start, note that our reported results for this quarter include $99 million of sales deferrals, which reduced reported GAAP revenue and were related to presales of our Ka Haku and Kyoto projects. We also recorded $42 million of associated direct expense deferrals. Adjusting for these two items would increase the adjusted EBITDA to shareholders reported in our press release by a net $57 million to $302 million. In my prepared remarks, I'll only refer to metrics excluding net deferrals which more accurately reflects the cash flow dynamics of our financial performance during the period. We had a strong sales performance this quarter reflected across our channels, KPIs and geographies, leading to contract sales growth of 17%. That fueled an acceleration in both our top line and EBITDA growth with strength in our real estate, financing and club and resort businesses. Real estate margins had their second consecutive quarter of meaningful expansion and our recurring finance and club and resort businesses continue to demonstrate consistent growth. While we still have work to do on the rental business and our overall cost efficiency, I think we made solid progress in the quarter overall. We finished the quarter with 69% of our current receivables securitized as we continue to execute against our financing business optimization. And while our cash generation was lower this quarter due to the timing of securitization activity, we remain confident in our 65% to 70% cash flow conversion target for the year. Year-to-date, we've produced $342 million in adjusted free cash flow, and we're expecting to generate a material amount of cash in the fourth quarter, along with our final securitization deal of the year. Turning to the results for the quarter, total revenue before cost reimbursement in the quarter grew 12% to $1.3 billion, and adjusted EBITDA to shareholders was $302 million with margins, excluding reimbursements of 24%, roughly in line with the prior year. We've recognized $94 million of run rate cost synergies from our Bluegreen acquisition and are within sight of our goal of $100 million of run rate savings. Within our real estate business, contract sales were a record $907 million, up 17% versus the prior year. As Mark mentioned, the composition of our sales performance was encouraging with gains in both our owner and new buyer channels. New buyer mix remained steady at 27% of contract sales during the quarter. Tours were up 2% year-over-year to $232,000 with growth in owner and new buyer channels. We expect to see an acceleration in our fourth quarter tour growth, supported in part by our package sales performance in the first half of the year. Turning to VPG, our tour efficiency initiatives, HGV Max and Ka Haku launches underpinned an acceleration in growth to $3,900, up 15% year-over-year. As was the case with tours, both our owner and new buyer channels saw a step-up in growth from the second quarter rate. Cost of product was 12% of net VOI sales in the quarter, in line with the prior year. Real estate sales and marketing expense was 46% of contract sales, a 300 basis point improvement from the prior year. Similar to last quarter, we outperformed our package sales estimates, which will help support future tour growth. Due to the nature of timeshare marketing, the expenses related to that outperformance are realized upfront and will convert to EBITDA as we tour those package guests in the coming quarters. In Q3, the additional marketing expense was roughly $7 million. Despite the additional expense, however, real estate profit was $178 million in the quarter with margins of 27%, up 300 basis points over the prior year. In our financing business, third quarter revenue was $128 million and profit was $75 million with margins of 59%. Excluding the amortization items associated with our acquired receivable portfolios, financing margins were 62%. Looking at our portfolio metrics, our originated weighted average interest rate was 14.7%. Combined gross receivables for the quarter were $4.2 billion or $3.1 billion net of allowance. Our total allowance for bad debt was $1.1 billion on that $4.2 billion receivable balance or 27% of the portfolio. Our annualized default rate for the consolidated portfolios was 10.1% for the quarter, slightly better than our second quarter level. Our third quarter provision was 17% of owned contract sales in the quarter, 100 basis points improvement from the prior year. Delinquency rates across all portfolios are trending at or below last year. We continue to monitor our 31- to 60-day delinquency trends very closely as an early indicator and have not seen any signs of increased stress within our portfolio in recent weeks. In our Resort and Club business, our consolidated member count was nearly 722,000, reflecting recapture activity during the quarter. And as Mark mentioned, we crossed over 250,000 members in HGV Max, which is a great milestone. Revenue grew 8% to $193 million for the quarter due to fee increases and stable member activity rates and segment profit was $135 million with margins of roughly 70%. Rental and ancillary revenues were up 2% versus the prior year to $186 million, with a loss of $4 million driven by developer maintenance fees. Revenue growth in the period was driven by higher available room nights and relative stability in RevPAR across the portfolio as a whole. The Las Vegas rental market continues to remain soft, although recent trends have shown signs of stabilization. We'll continue to leverage our ability to reallocate room nights between marketing and rental in Vegas to adjust to rental demand dynamics. And as Mark mentioned, our team did a great job in that market driving strong contract sales with mid-teens growth in our Vegas VPGs. Bridging the gap between segment adjusted EBITDA and total adjusted EBITDA, JV EBITDA was $5 million, license fees were $56 million, and EBITDA attributable to noncontrolling interest was $4 million. Corporate G&A was $43 million or 3% of pre-reimbursement revenue, roughly in line with Q2 and last year. Our adjusted free cash flow in the quarter was $23 million, which included inventory spending of $77 million. Our cash flow was lower this year owing to the timing of our ABS deals. For the full year, we still anticipate that our conversion rate of adjusted EBITDA into adjusted free cash flow will be in the range of 65% to 70%, which would imply a material amount of adjusted free cash flow generation in the fourth quarter and a conversion rate that will be in excess of 100%. Using our third quarter ending share count of just under 87 million shares, this implies we'll generate $8 to $9 of adjusted free cash flow per share for the year, and we'll continue to return the majority of that cash flow to shareholders. During the quarter, the company repurchased 3.3 million shares of common stock for $150 million. From October 1 through October 23, we repurchased an additional 1.1 million shares for $47 million. Including these shares, we've repurchased a total of 12.4 million shares year-to-date for $497 million, representing nearly 18% of our public float coming into the year. We remain committed to capital returns as a primary use of our free cash flow and believe our shares continue to represent a compelling value. As of October 23, we had $531 million of remaining availability under our current share repurchase plan. Turning to our outlook. We are maintaining our 2025 adjusted EBITDA guidance to be in the range of $1.125 billion to $1.165 billion, which assumes that the environment remains consistent with what we see today. Moving on to our liquidity. As of September 30, our liquidity position consisted of $215 million of unrestricted cash and $632 million of availability under our revolving credit facility. Our debt balance at quarter end was comprised of corporate debt of $4.7 billion and a nonrecourse debt balance of approximately $2.5 billion. At quarter end, we had $300 million of remaining capacity in our warehouse facility. We also had $1.1 billion of notes that were current on payments but unsecuritized. Of that figure, approximately $586 million could be monetized through a combination of our warehouse borrowing and securitization. But we anticipate another $358 million will become available following certain customary milestones such as first payment, deeding and recording. Despite volatility in some portions of the credit market, our ABS market remains open and functioning. This fact, coupled with our $850 million warehouse gives us confidence we can execute on our previously discussed finance optimization strategy. Turning to our credit metrics. At the end of Q3 and inclusive of all anticipated cost synergies, the company's total net leverage on a TTM basis was 4.0x. We will now turn the call over to the operator and look forward to your questions. Operator? Operator: [Operator Instructions]. And our first question comes from Patrick Scholes with Truist Securities. Charles Scholes: I wonder if it's possible you could give us some initial high-level expectations or thoughts for 2026? And then specifically within that, talk about expectations for financing profit. Certainly, we've seen the last couple of years given the unfavorable direction of interest rates and the net spreads where that margin has been squeezed, given that, that seems to be going the other way, I'd like to hear just sort of high level for financing as well. If you can. Mark Wang: Sure. Yes. Patrick, thanks. Of course, we want -- we're very focused on finishing the year strong. So that's first and foremost. But -- and as usual, we'll provide guidance on our first call next year. But at a high level, I think we're really well set up with momentum heading into '26 and expect to get to the growth a bit differently than we did this year from a top line standpoint. We're continuing to see solid demand for leisure travel despite some of the noise out there and we expect good tour flow growth next year, resulting from the investments we made during the year and which is going to be the primary driver for contract sales growth next year. You have to remember, we're lapping the Max launch with Bluegreen and the Ka Haku property that we opened up or launched in launch sales in Hawaii. So -- and then, of course, the new buyer tour flow growth is going to weigh a little bit on our VPG. So it will be less of a driver on contract sales growth next year. But we're going to stay very focused on leveraging our fixed cost and expect some operational cost improvements. All of that said, we believe we're going to be able to continue to drive strong free cash flow. And we're still very committed to returning capital to our shareholders. So we look forward to sharing more details on our next call. I think I'll let Dan jump in and talk about the financing profitability that you asked on the second part of that question. Daniel Mathewes: Thanks, Mark. And Patrick, yes, absolutely. I mean, as Mark underscored, I think we're well positioned for 2026. When it comes to the financing business, one element that we will see in 2026 is some headwinds on that front just as we continue to maximize our finance business optimization program. As you recall, we expected that to take about 18 months, so that will run into next year. Now that will be slightly offset by a growing portfolio. And as you will recall, last quarter, we announced the first securitization in the Japanese market. We'll be looking to attack that market again next year, too. So hopefully, with the combination of all those things, you'll see margin hold despite the headwind and potentially grow seeing how rates play out but you can expect us to take full advantage of all those opportunities. Charles Scholes: And if I can ask just a follow-up question here, actually has to do with the VPG -- the very strong VPG results in 3Q, up 15%. Certainly, I follow a lot of travel and leisure companies, and we don't see much of anything growing 15% at the moment. If you had to -- and you kind of did this in your prepared remarks. But just boil it down and summarize how you're doing something that's growing 15% versus sort of the rest of the travel world not growing much of anything? Boil it down for me. Mark Wang: Yes. So Patrick, first of all, I'd say our team did a great job, great execution. And when you look at where and how we accomplished this. It's really a similar story from a geographic perspective. East, West, Mid-Atlantic, South, Vegas was even up 10% in a market that's struggling from an FIT standpoint. Orlando, New York, Hawaii, all double-digit gains across the business. And so why do we think we're seeing this? I think it really is a testament to the new club that we launched. We innovated and launched a brand-new club. And it was a reinvention of what we've done, and Max is performing extremely well. And it's been a catalyst for both owners and new buyers. We reached 250,000 members in just over 4 years. if you go back and you look at HGV legacy club, it took us 25 years to reach that mark, right? So -- and what's happening is -- and most importantly, is our Max owners are reporting higher satisfaction rates and engagement scores. And our sales advisers continue to deliver on great vacation solutions. So owners are upgrading earlier and more frequent than we have in the past and driving record VPGs. So -- and we're seeing that from our legacy club members upgrading into Max, and we're also seeing existing Max members who've joined over the last 3 to 4 years upgrade. In fact, I talked about the 250,000 Max members. We actually have 360,000 transactions in Max. So -- so I really attribute a lot of the performance to the great work our teams did rolling out this new membership program. It really has improved our value proposition. We've added a lot more Hilton benefits to connect our members to the broader Hilton ecosystem. And when you look at our base of members in Max, just above 50% of our Max members have a tenure in our system of less than 5 years. So what does that mean? That means that those members that are in our system for less than 5 years have 90% of their lifetime value sitting ahead of them. And then nearly 70% of our Max members have a tenure of less than 10 years in our system. So those members have 50% of their lifetime value sitting ahead of them. So anyways, the rapid growth in Max space really bodes well for our business and just great execution. Operator: Our next question comes from Ben Chaiken with Mizuho Securities. Benjamin Chaiken: I would love to touch on flow-through. You kind of -- you touched on it in the prepared remarks, but I want to dig in a little further. So top line was strong, but it just feels like there's a couple of things working against you. You mentioned higher tour packages. I think you said this was worth $7 million. So essentially, just to confirm, these are expenses incurred in the quarter, of which you get revenue in the future. And the $7 million would be the amount above the normal course of business. I guess, is that fair? And then it also looks like you had higher precision and reportability and other adjustments. Just anything you would flag in the P&L. And then to the extent you could quantify it, that would be great. Mark Wang: Yes. Let me touch on some of that, and then I'll let Dan jump in with some more detail here. But there's always a level of investment in the business for growth, right? And we continue to invest in high-tech and high-touch solutions really to reach a bigger audience. And -- and '25 has been a year of above-average investment in future customer acquisition. And that was by design. On the high-touch side, we've got great partners, right? We added 41 new marketing sites across Hilton, Great Wolf and Bass Pro this year. And we continue to invest in our digital channels. So these initiatives require upfront investment in staffing, technology. So the results have been great. 10% year-over-year package sales growth for 2 consecutive quarters. Now as you alluded to, that growth is still only partially reflected in our tour flow as it takes sometimes 9 to 12 months on average for a package holder to actually travel to one of our properties. And we're going to start seeing that growth in Q4 and beyond. So anyways, we expect the upfront investment will bring us some steady level growth in the future. And more importantly, as we move more forward out and we go into next year, we want to get on a more consistent cadence between our package sales and tour flow. And our expectations next year is that the level of investment will be more closely matched to the revenue. And then Dan, I think there's probably a couple of other... Daniel Mathewes: Yes. No, definitely, Ben, I’ll just address some of your specific questions. To your point, the marketing packages activity, that $6 million or $7 million it rounds to $7 million is above the ordinary course of business. As you'll recall, those are packages that will be traveling in the future. That's when we'll recognize the package revenue, but the cost is upfront. And obviously, as they come to the properties, their tour and we will recognize contract sales to the extent we sell them. So that's a piece of it. To your question on reportability, there is a piece associated with reportability. It's actually not a bad story. It's a good story. So during the last 10 days, if you look year-over-year, just from a rescission perspective, we sold more contract sales the last 10 days of this year compared to last year. That's roughly $8 million. So that's really effectively timing, just getting past that rescission period that consumers have. And then in addition to that, and this is part of the investment as well, from an FDI perspective, we have rolled out some of the higher cost FDIs to the entire system. That yielded a elevated level of FDIs in Q3. As you know, it's one of the tools we use to close a transaction. And it's a bit of a balancing act. But I would tell you that this quarter was elevated on an FDI perspective by probably 1 point to 1.5 points. So all of those things yielded some compression on the flow-through. Benjamin Chaiken: Got it. That's helpful. And then the rescission, that $8 million, that basically drops straight to EBITDA. Is that fair? Or how do I think about that 8 and the flow-through associated with it? Daniel Mathewes: There's some deferral, but we'll recognize all that as we flow into Q4. Benjamin Chaiken: Got it. And 1 to 2 points on the FDI side, is that $1 million to $2 million? Or when you say points, I didn't totally call that. Daniel Mathewes: So that's FDI as a percentage of owned contract sales or contract sales, call it. That would equate to between $9 million and on the higher end, $15 million for the quarter. Benjamin Chaiken: Okay. That's meaningful. Okay. Got it. And then switching gears a little bit. As we think about free cash flow conversion in '26, can you help us think about the puts and takes? I think we've talked about in the past maybe reducing some inventory spend, which obviously is a good guide for free cash flow conversion. And then I'm not sure if you have any big beautiful bill benefits. But just again as a percentage of EBITDA, so EBITDA free cash flow conversion in '26. What's kind of like -- is that a good ballpark? Daniel Mathewes: Look, I'll start with the taxes. Obviously, like every other operator out there, we're trying to take full advantage of what's in the big beautiful bill. But I think generally speaking, I would look for cash taxes to be roughly in that mid-teens level as a percentage of EBITDA, so call it, 13% to 16%, somewhere in that realm. To the degree we can take advantage, we will. From a cash flow and an investment perspective on inventory, last time I think we've talked about this, it's worth highlighting again. Right after the Bluegreen acquisition, we expected to be in a position where we would need to invest between $350 million and $450 million in inventory on an annualized basis. Since then, we're obviously capitalizing to a great degree on recaptured inventory, and that's going to allow us to lower that long-term level of investment from $350 million to $450 million down to roughly $300 million. Now we've been talking about this for a few years because we did push off inventory investments during COVID. So we're still wrapping up some of those larger investments, most notably Ka Haku and Maui and Hawaii. So this year, we will spend just under $400 million. That will be a similar level next year, and then you'll get to that average run rate of roughly $300 million on an annual basis, which includes new projects as well as recaptured inventory. Operator: And moving on to our next question, Chris Woronka with Deutsche Bank. Chris Woronka: I was hoping we could maybe talk for a minute about your first-time buyers and not sure if you want to maybe segment them across the different brands or some other way. But just how they're -- I know you said that all the metrics are up for first timers. But is there any difference you see between maybe a Bluegreen sourced first-time buyer and HGV depending on how you source them? Just thinking about in terms of close rate or VPG or things like that. Is there any way to segment any kind of trends for first-time buyer versus an existing buyer? Mark Wang: Yes. So, I've got a few data points here I'll share with you that -- as you know we're fully committed to new buyers, right? And really pleased with the progress the teams are making. On an absolute basis, we're sourcing more new buyer tours to our sales centers and driving more transactions than anybody in our sector. And that's really been the case for the last 15 years. So, we continue to be very, very focused. And we talked about the investment. I talked earlier about the investments we've made this year to even bolster that going into '26. And so, what I'd say is, number one, on the VPG front, new buyer close rate reached its highest level since Q2 of '23, and we're really pleased to see that movement there. From a generational standpoint, Gen X, Millennials and Gen Z made up 70% of our tour flow and close rate improved across all of those generations. And then when you look at it from an income tier standpoint, close rates were steady in the low net worth tier, and they increased in the middle and high-tier net worth customers. So, we're seeing it right now, the consumer is stable and we're very focused on executing on all the things that we can control. Chris Woronka: Okay. Very helpful. And then a follow-up question. How should we think about kind of getting that rental business back to 0 or better from a EBITDA standpoint? I know some of the challenges in unsold inventory. Maybe you could give us a little bit of a walk-through in terms of what has to happen and timing and how we should think about that for the next couple of years, if it's a step function or more of a grind? Mark Wang: Yes. No, absolutely. So, a lot of the momentum that we need to do is really driven off of contract sales. So, as we sell more and we get through the recapture bubble, that will allow us to lower the developer maintenance fee. That will contribute heavily to improvement on the rental side. Now we've talked about this last quarter to some degree. From a recaptured inventory standpoint, that is going to yield lower net owner growth over the next 24 to even 36 months. As you saw this quarter, it's relatively flat and it will go negative. But that's a big component of it. The other component that should help drive margin improvement, holding [all else equal], which I know is a big assumption, especially when you think about ADR rates, but it's converting properties over to the Hilton brand. We do realize ADR benefits from that standpoint, and we also realize cost benefits from an OTA perspective. But it's really a combination of all those components, and it is a long-term process to get there. Yes. And then I'd just add on to that, that I think our teams have done a really thorough job this year in the resort operations side, really looking for improved efficiencies in our operations. And I think we're going to see our members are going to see that the increases that we're looking for next year are by average standard we're going to be below what we've historically seen. And then I'd also say, look, we picked up a lot of good inventory in the acquisition. But we do have some of that inventory that's non-branded. And quite frankly, there's just not a investment case of putting the dollars in to get them to the standard we want. And so there may be some inorganic options here and what I mean by that, where we have maybe oversupply or a product that doesn't really fit the portfolio, where in the future, we can figure out a way to move that inventory off our balance sheet and move along to somebody else that can better utilize it. Operator: And moving next to Brandt Montour with Barclays. Brandt Montour: So, there's been a lot of talk across consumer land this earnings season and as well as in travel, right, about the high end versus low end and you're seeing it on the strip and you're seeing it in elsewhere in different travel verticals. Mark, you gave some great stats and you kind of cut it up a bunch of different ways. It doesn't sound like you're seeing anything. But if you just look at close rates for new owner sales across your properties and you look at the smaller properties, a lot of those were legacy Diamond versus maybe some of the bigger ones in Orlando or other markets. Do you see any divergence based that would sort of track that theme at all? Mark Wang: Well, I think Brandt, I think the divergence really is more execution than it is from a consumer standpoint. Like I said, our new buyer close rate reached its highest amounts or highest rate since the second quarter of '23. And I talked about it a number of quarters ago around the low net worth tier customers. That tier has really stabilized. It really hasn't come back to the historical levels. But what we've seen, Brandt, is that middle to higher net worth tier really improve. And we have spent a lot of time this year on optimizing our tour. And we continue to evolve how we use our data and analytics and our marketing to drive new buyers and really sharpening our qualifications and the discovery process to just gather better information early on. So, at the end of the day, we're trying to be much more effective in sourcing our customers. And so we're really focused on trying to steer trying to put our money and our focus to that mid- to higher tier net worth customer than the lower tier right now. And like I said, they've stabilized, but they really haven't recovered to the levels we've historically seen. Daniel Mathewes: And the only thing I'd add to that, just from a performance standpoint is when we look at our portfolio, as you can imagine, one of the things we look at on an almost daily basis is delinquency rates between 31 and 60 days is a leading indicator from a standpoint. And we slice that data to the end degree, but just to oversimplify it to some extent, if we look at those with FICO scores greater than 650 versus those with lower than 650, what I can tell you is sequentially and generally speaking, it's been trending actually positive greater than 650 and below 650 has been very stable. So even on that front, we see positive trends in totality. Operator: David Katz with Jefferies has our next question. David Katz: I appreciate all the detail around some of the momentary or pedestrian investments and growth as well as some of the timing issues that seemed a bit more momentary also. How do we think about, in a general sense, 2026, right? Are -- is that an investment year to some degree also? Or should we think about modeling this as kind of a year to reap what you've invested here? Mark Wang: Yes. David, I think as I mentioned just a few minutes ago, I think what you're going to see next year is the big lift in investment for really broadening and building out our new buyer marketing channels and on the digital side, there'll be some investment there, but it won't be at the same level and -- that we put into this year. And so our expectations are next year, we're going to be looking at tour flow growth that exceeds what we had this year. And we're looking more in that kind of low to mid-single-digit tour flow growth and with a little bit more moderated VPG next year. And so the investments on the package side is going to really -- we're going to get into a cadence where the growth on the package side is going to align much better to the growth on the tour flow side. So we start seeing the revenue generation more closely match up to the expense side. And so that's our expectation next year. And our goal for next year is -- our goal is to see -- is to be able to exceed bottom line growth rate or grow the bottom line at a faster rate than our top line. Daniel Mathewes: Yes. I mean another way to think about it is just from '25 to '26, it's kind of bridging to that long-term algorithm that we've historically talked about. Low single-digit tour flow growth, low single-digit growth in VPG to mid -- would translate into mid single growth in contract sales and then a focus on leveraging cost to drive hopefully higher EBITDA growth. Operator: Our next question comes from Stephen Grambling with Morgan Stanley. Stephen Grambling: Just wanted to follow up on some of the inventory and sales details, and specifically maybe digging into Hawaii and some of that inventory specifically. I guess how would you compare and contrast the mix of the inventory that's left to kind of sell specifically in Hawaii? And when you think you'd be kind of sold through that over the rest of -- as we think about next year and even maybe beyond? Mark Wang: Yes, Stephen, no, we're -- as far as a mix standpoint, we've been doing this for a long time, and it's -- we're very, very focused on a balanced mix. And so we're -- I think when we think about it, we're very much on track to be able to utilize the benefit of Ka Haku for a number of years. And I'd say the same thing around Maui and also on the Big Island. We're still converting parts of that hotel into units. So we're in a really good position from a deeded standpoint. Ideally, on a long-term basis, we want to be at about 2.5 years of deeded inventory. And right now, we're running a little bit over that. So we're in a good position there. In the long run, our goal is to bring our COP down and bring our balances down. And as Dan alluded to earlier, that will benefit our rental segment. So all in all, I think we're in a really good position from an inventory standpoint and especially that high-end inventory that has a lot of demand across the whole network. We're very measured in how we release that inventory to make sure it's balanced over a number of years. Operator: Moving on to Danny Asad with Bank of America. Dany Asad: Dan, and I think it was to Brandt's question, you called out or you mentioned that the delinquencies when it comes to the FICOs that are below 650 have been stable. Look, at the same time, we're reading about subprime auto delinquencies ratcheting up and like to Brandt's point, other pockets of the consumer is struggling. So I guess how do you square specifically how like the sub-650 bands of timeshare loans are stable here and there's no -- from a delinquency standpoint and then other places where it's kind of not. Daniel Mathewes: Yes. No, look, that's a great question. I think there's a twofold answer there. First and foremost, I would say, we are very focused on, when it comes to the consumers' mindset, on maximizing their desire to pay, right? And that comes down to how we interact with them from the starting point at the sales table, actually from selling them a package to the sales table and the experience they receive at that property. So there is a certain emotional attachment to timeshare and vacationing. So I think that element holds strong. And then to be quite blunt, the subprime FICOs are not our core either. So we probably have, just to a degree, lesser exposure than some of the -- some of our counterparties who are having a larger problem with it. But sequentially, we've held up well and the trending is positive on that below 650. And then even when I think about annualized default rates, again, in total, but annualized default rates sequentially have improved from even last quarter and year-over-year, they've actually improved more than they improved sequentially. So we're seeing -- as we sit here today, we're seeing everything hold stable to positive. Mark Wang: Yes, Danny, I'd just add too. I think Dan touched on this a little bit. And I mentioned it earlier. Look, our Max owners are reporting much higher satisfaction rates and engagement scores. And I think it's a testament to our club team and all of those that are touching our customers across the network, not just the upfront sales process. And as I mentioned, I gave some stats on the tenure within the Max program. And it's pretty impressive how young a base we have in the Max program. And I think you can't -- I can't underestimate or overstate the fact that high satisfaction and engagement scores are super important in people's willingness to want to pay. Dany Asad: Got it. And just as a follow-up, in the past, you've talked about a mid-teens expectation for loan loss provisions. Based on kind of what you're looking at and those trends, is that still where we're trending right now for either like Q4 or 2026? Daniel Mathewes: Yes. No, I think that's accurate. And I think we're effectively there at this point. Operator: And that does conclude our question-and-answer session. Before we end, I will turn the call back over to Mark Wang for any closing remarks. Mr. Wang? Mark Wang: All right. Thank you, Carrie, and thanks, everyone, for joining us today. I want to thank all of our team members, but a special shout out to our resort operations teams at our 200 resorts for delivering heartfelt hospitality and elevated experiences to our members and guests and to our members for trusting HGV with what matters most, moments with friends and family and experiences designed to inspire and connect you to the world. Thank you, everyone. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Operator: Thank you for joining Ingram Micro's Third Quarter 2025 Earnings Call. I'll now hand the call over to Willa Mcmanmon, Vice President of Investor Relations. Please go ahead. Willa Mcmanmon: Thank you, operator. I'm here today with Paul Bay, Ingram Micro's CEO; and Mike Zilis, our CFO. Before I turn the call over to Paul, let me remind you that today's discussion contains forward-looking statements within the meaning of the federal securities laws, including predictions, estimates, projections or other statements about future events, statements about our strategy, demand plans and positioning, growth, cash flow, capital allocation and stockholder return as well as our expectations for future fiscal periods. Actual results may differ materially from those mentioned in these forward-looking statements because of risks and uncertainties discussed in today's earnings release and in our filings with the SEC. We do not intend to update any forward-looking statements. During this call, we will reference certain non-GAAP financial information. Reconciliations of non-GAAP results to GAAP results are included in our earnings press release and the related Form 8-K available on the SEC website or on our investor relations website. With that, I'll turn the call over to Paul. Paul Bay: Good afternoon, and thank you for joining today's call. The third quarter was strong with revenues of $12.6 billion, up 7.2% year-over-year and above the high end of our guidance. Non-GAAP diluted earnings per share was $0.72, at the high end of our guidance despite a small impact from the ransomware incident in July. As I shared last quarter, our team responded quickly and effectively to the incident, restoring operations with minimal business disruption, which is reflected in our results. In terms of market dynamics, we believe we're gaining market share across most regions in the businesses we serve and are encouraged by the growing momentum of our Xvantage digital platform as we deploy it globally. Looking forward, we enter the fourth quarter with confidence in our road map and our guidance, which Mike will detail shortly. During the third quarter, we saw continued momentum across our core business lines and geographies. Enterprise sales remained strong and our SMB customer category achieved a third straight quarter of sequential growth, which is encouraging. Client and endpoint solutions delivered yet another solid quarter while advanced solutions was down slightly year-over-year, though both server and storage posted strong double-digit gains. Networking grew modestly driven by an increase in AI proof-of-concept activity and enterprise, partially offset by tough comparisons to last year's strong virtualization sales. As we all know, enterprise companies and technology vendors alike are navigating the unchartered territory of AI transformation. In the third quarter, the pace of change accelerated rapidly with a wave of new partnerships and investments across the industry. Today, we're seeing enterprise customers at varying stages of their AI proof-of-concepts, mostly on-prem and still primarily focused on the compute layer, often in conjunction with open models. The ultimate goal for these enterprises is to create purpose-built end-to-end solutions using agentic AI, solutions that will redefine their operations, elevate customer engagement and deliver strong returns. We are well positioned to support this customer journey particularly as it moves from early adopters to the broader market. To do this, we've invested ahead of the curve as we did in the early days of the Internet, advanced solutions and cloud. Following the same playbook over the past 3 years, we've been executing a multiyear plan to build an AI ecosystem. We stand at the center of the $5 trillion global technology landscape with more than 4 decades of experience helping customers embrace technology disruption. This, in conjunction with our proprietary AI innovation, puts us in a unique position to lead our customers on their AI journey. We are doing this with our internal expertise through our Xvantage platform alongside our external customer-facing Enable AI program that educates and equips partners to assess, sell and deploy AI. With Xvantage, we're driving real business outcomes from meaningful OpEx reductions to automated top line growth, powered by our intelligent digital assistant, or IDA, which we discussed last quarter. Xvantage was architected 3 years ago with a proprietary AI Factory that supports hundreds of machine learning models across vast data sets. It's not only a growth engine but a learning platform that fuels demand generation for our sales associates and customers. The AI Factory allows us to design integrated solutions that bring together AI, cybersecurity and cloud, which is crucial because collaboration across the ecosystem is critical to unlocking AI's full potential. Many of our vendor partners are now co-creating solutions with other vendors. With Xvantage, we can deliver these integrated bundles through a seamless self-service experience that combines hardware, software, cloud and services. For our customers and vendor partners, Ingram Micro's Enable AI program provides the tools to gauge readiness, sell AI solutions and deliver measurable business outcomes at scale. It provides a structured step-by-step path to AI success through maturity assessments, base camps for foundational learning, growth tracks with leading vendors and access the global centers of excellence. Since its launch in early 2025, the Enable AI program has engaged thousands of customers, supported by our leading vendor partners, to walk through the complex AI opportunity with clarity and confidence. As proof points of the program's early success, AI is the most viewed resource content category on Xvantage by our customers. Additionally, one of the world's largest hyperscalers is using our Enable AI program to simplify customer AI certifications, and a leading GPU vendor is collaborating with us on a multi-vendor AI solutions for key industries. Both these internal and external efforts rely on the accelerating momentum of our Xvantage platform, which is visible in our metrics. In the third quarter, IDA contributed hundreds of millions of dollars of incremental revenue. We also had rapid international adoption of IDA with IDA-driven revenue with non-U.S. operations growing by more than 100% in the quarter. IDA also drove Q3 quote-to-order conversion rates nearly double those of non-IDA engagements. Earlier this week, we announced our first enterprise-grade AI agent built with our Xvantage AI Factory and powered by Google's Gemini large language model. This demonstrates how we are combining our internal AI intelligence, which is more than 400 models strong, with Gemini's advanced reasoning and language capabilities. The new agent, known as Sales Briefing Assistant, introduces a new standard for intelligence: scalable sales enablement in the enterprise. The agent will also help IDA generate better quote conversion driving complementary intelligence for our entire sales life cycle and pipeline. These innovations demonstrated how our AI-first strategy is playing out in tangible measurable capabilities. As we enter the fourth quarter, it's remarkable how much has changed in just 1 year since our IPO. While the pace of change in our industry is staggering, we continue to focus on what always guides our road map, and that is our customers. We understand that our success is dependent upon them, and what matters most is that we enable them to capture and deliver the value to the millions of end businesses they serve each and every day. One of our long-time customers, Mark Sutor, President of Access Group and a Trust X Alliance community member, reminded us of this recently when he said, "In my 32 years in IT, I've never experienced a partnership like the one I have with Ingram Micro. I see my own vision reflected in your innovations. It feels like you're building and iterating with me, not just for me. As an example, with Xvantage, our year-end cloud billing process went from 3 full days to just 3 minutes." At the end of the day, regardless of the sophistication of technology we are enabling, our biggest differentiator is our ability to serve our customers wherever they are in their technology journeys. We are grateful for our customers, our partners and our team members for their dedication and creativity as we transform the B2B experience together. With that, I'll turn the call over to Mike. Mike? Michael Zilis: Thank you, Paul, and good afternoon, everyone. As Paul highlighted, we had a strong third quarter with results that either exceeded or hit the top end of each of our guidance ranges despite the impact of the July ransomware incident. As discussed on our earnings call in August, the incident prevented us from transacting for a handful of days in early July. At that time, we estimated a potential 1% to 2% top line impact and a $0.02 to $0.04 impact on EPS. With the incident now more than 3 months behind us, we estimate the overall impact landed within a tighter range of 1% to 1.5% of net sales and $0.02 to $0.03 per share. And most importantly, we couldn't be prouder of how our team and our partners around the globe responded to minimize the impact and return to business so quickly. Looking at the third quarter in more detail. Net sales of $12.60 billion were up 7.2% year-over-year in U.S. dollars and up 6.0% on an FX-neutral basis. Client and endpoint solutions grew most notably at nearly 13% on an FX-neutral basis as we continue to see strong demand for notebooks, desktops and related products. Advanced solutions sales were down 4.5% as growth in servers and storage was offset by softer results in virtualization and infrastructure software. We also saw a 4% decline in cloud. However, excluding the impact of one of our noncore divestitures during Q3, our cloud net revenues were up low single digits year-over-year. The year-over-year comparison of our cloud net revenues was also diluted by a higher mix of demand for product sales that are recorded on a net basis. Geographically, we had robust FX-neutral growth in the low teens year-over-year in both Latin America and Asia Pacific regions, while North America growth was more moderate at a bit over 3%. EMEA grew just slightly on an FX-neutral basis as the overall macro environment remains generally softer in parts of Europe. As I scan across our regional segments, solid growth in client and endpoint solutions, and particularly, the desktop and notebook refresh was a common threat globally. Similarly, servers and storage along with cybersecurity were amongst the largest gains within advanced solutions across most of our geographies. We also saw cloud growth in most geographies, most notably in Infrastructure as a Service and modern workplace solutions. Networking growth continues to be more moderated in general, while the softness in infrastructure software that I noted earlier was mostly attributable to a large project that closed in Q3 of last year in Europe and did not repeat with the same timing in the current year. Turning to our customer categories. Our overall mix and year-over-year growth remain more concentrated towards large enterprise customers, but we are also encouraged to see growth starting to accelerate in our higher-margin SMB category, a trend that first started in Q1 of this year. Moving to gross profit and gross margin. Our third quarter gross profit came in at $870 million compared to $845 million last year. The increase in gross profit dollars was primarily related to increased net sales. An improving margin environment, combined with some strengthening in SMB that I just noted, helped to drive a solid 34 basis point sequential improvement in gross margins. On a year-over-year basis, our gross margins were down 29 basis points due to the continued higher sales mix towards our lower-margin client and endpoint solutions as well as a mix within our advanced solutions product categories towards lower-margin server, storage and other AI enablement product sets. These higher growth areas are important to our strategic priorities, in partnership with several of our key vendors, where our wins come at lower margin but deliver strong returns on invested capital and serve as a foundational piece to our AI ecosystem strategy. Excluding sales from vendors associated with large GPU shipments, for instance, that were done on a low margin and low cost to serve basis, our total company gross margins would have been Q3 above 7%. Q3 operating expenses were $646 million or 5.13% of net sales compared to 5.33% in the same period last year. Third quarter operating expenses included a $5.5 million loss or 4 basis points of net sales related to the two divestitures we discussed earlier. The quarter also included $3.5 million or 3 basis points of net sales related to restructuring costs associated with programs to continue optimizing the business, primarily in North America and EMEA. The year-over-year improvement in OpEx leverage reflects continued benefits of optimization and automation from Xvantage, the cost actions we have previously discussed as well as mix factors associated with lower cost to serve categories. Adjusted EBITDA for the quarter was $342 million, up 3% in U.S. dollars and up 2% in constant currency. Our non-GAAP diluted EPS of $0.72, which was at the high end of our guidance range, came in flat to prior year. However, our non-GAAP net income was up 6.0% year-over-year, growing from $159 million last year to $169 million this year. The current quarter includes the impact of the July ransomware incident that I noted earlier. And as we've discussed in the past, our tax rate is also impacted by higher volumes of sales from our Latin American export business, which yields a higher gross margin but also bears withholding tax. This withholding tax impact was $0.03 per share in Q3 of this year versus $0.02 per share in the prior year. Turning to our balance sheet. We ended the third quarter with net working capital of $4.9 billion compared to $4.3 billion to close the same period last year. The higher investment in working capital this year is driven by the increase in net sales and investment needed to capture these opportunities. On a days basis, our net working capital was 32 days versus 29 days in the same period of 2024. The higher ratio of cloud sales recorded on a net basis had an unfavorable impact on working capital days. On a similar note, adjusted free cash flow was an outflow of $110 million, again, reflective of investments to grow the business, although this was better than typical Q3 seasonal norms and improved when compared to an outflow of $255 million in the prior fiscal third quarter. We returned $18.3 million to stockholders through dividends paid during Q3, and we announced a 2.6% increase to our quarterly dividend to be paid in Q4. We ended the quarter with $830 million in cash and cash equivalents and debt of $3.8 billion. Our gross leverage ratio was 2.8x and our net leverage ratio was 2.2x, both of which are roughly flat year-over-year, reflective of our investment in working capital to fund growth, offset by our debt paydowns over the past year. Shifting now to guidance for Q4 2025. We are guiding net sales of $14 billion to $14.35 billion, which represents year-over-year growth of more than 6% at the midpoint. We expect fourth quarter gross profit of $935 million to $990 million, which would represent gross margins of roughly 6.8% at the midpoint. This revenue and gross profit guidance is reflective of some fairly consistent trends in sales mix across products, customers and geographies to what we saw in Q3. We expect non-GAAP diluted EPS to be in the range of $0.85 to $0.95 per diluted share. Our EPS guidance assumes approximately 235.9 million weighted average shares outstanding and a non-GAAP tax rate of 33% for the quarter. In closing, as we look to Q4, we expect to continue our trend of year-over-year net sales growth, and our team remains laser-focused on scaling our Xvantage platform along with other strategic capabilities in which we continue to invest to capture additional market opportunities. With that, operator, we can turn the call over to questions. Operator: [Operator Instructions] Our first question is from Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: Paul, Mike, you talked about continuing strength in PCs, notebooks and desktops and some weakness in advanced solutions. I think you mentioned one large project that didn't renew. I think you said it's a timing issue. Given the dynamics that you saw this quarter and what you see for the December quarter, how should we think about margins going forward, either gross margins or operating margins? Do you think the trends can get better? And how does the mix of SMB versus large enterprise, how does that impact margins? If you can give us any color there. And I have a follow-up. Michael Zilis: Yes. Ruplu, this is Mike. I can start on that and then Paul can add for sure. So what you can see implied in the guidance that we gave on gross profit and revenue is still margins in the high 6s, around 6.9% at the midpoint. That would be still -- or 6.8%, I guess, in the 6.80s at the midpoint. So I think that's still looking at sort of seasonal norms where we see a little bit of a trend of more mix of the higher volume products that we usually see in the spike in Q4, but still less seasonal differential sequentially than what we normally see. And a lot of that is probably seeing the continued strength in SMB that we've seen gradually building over the last couple of quarters, which is very encouraging for us, of course. We see the advanced solutions, as you just called out from our comments, really more of a timing thing on one large project and a difference in virtualization from a year-over-year perspective. But we continue to see solid growth in servers and storage and we see the opportunity to continue to pursue some of the large GPU deals that we called out, which obviously could be a little bit dilutive from a margin perspective. But then lastly, cloud we see growing at a more robust level in Q4. So what's implied in our guidance from a growth perspective is client and endpoint probably more in the mid-single digits with still some legs on the desktop and notebook refresh. We see advanced solutions growing in the lower single digits and cloud growing mid- to upper single digits. And that's what's built into our guidance. Anything you want to... Paul Bay: I'd just say it's a geography mix again, too. So we continue to see Asia -- this is Paul. We continue to see Asia Pacific performing very well as a percentage of the overall business as we call out. It's a lower margin but a lower cost to serve also. Ruplu Bhattacharya: Got it. Mike, for my follow-up, if I can ask a little bit on inventory and free cash flow and cash conversion cycle. It looks like inventory sequentially went down a little bit. But as the hardware categories are recovering, how should we think about the pace of inventory reduction? And should we assume the fourth quarter also is a negative free cash flow quarter as you prepare for the first half of next year? So any color on how we should think about working capital and free cash flow going forward. Michael Zilis: Yes. So one of the things that we talked about in our last call is how we exited the end of Q2 with a little bit of buildup of inventory, which was mainly related to some large projects that we're going to sell through in Q3. And that did happen as expected, and that's what's contributing a little bit to the sequential decline you just noted and also a lower than normal seasonal investment into working capital in Q3, where we usually are stocking for the kind of the hockey stick that we see in Q4 sales. Now I would point you -- we don't give guidance on cash flow and balance sheet, per se. But I would look towards last Q4, where you can see we had quite a sizable positive cash flow in that quarter. And things would point to a very similar sort of trend dynamically as far as where we see the business mix between hardware, software and demand as we look at Q4 encompassing the mix factors that I just mentioned in answer to your first question. So we should see a solid cash flow quarter in Q4. Operator: Our next question is from Erik Woodring with Morgan Stanley. Maya Neuman: This is Maya on for Erik. Two questions from me. Maybe just to start, on the traditional hardware side, we've seen PCs growing for multiple quarters now, servers growing as well. Where do you think we are in the cycle kind of across those key like product markets? Paul Bay: So this is Paul. So thanks, Maya. Still seeing good trajectory on the desktop, notebook refresh. We're in the second half of kind of the refresh. But as we sit here today, we're still seeing good demand, not to the extent that we saw in the first half of the year. As you know, as we talked about coming into the year, it kind of progressed very quickly. So I would say we're in the back half or the later innings of the PC refresh. And if you look at server, that was a very good performance for us in the quarter within our advanced solutions. Networking still had growth. So there is still some of the refresh going on as we talked about previously some of the other categories, but there's still some legs to be there for those categories also. Maya Neuman: Got it. And then given what we're seeing in the memory market right now, in prior periods of component cost inflation, have you historically seen customers trying to pull forward spend to try and get ahead of rising component costs? Is this a topic in any conversations that you're having? Paul Bay: Yes. This is Paul again. No, we haven't had any of those conversations at this point in time in terms of pull forwards or from a pricing perspective. It's been pretty traditional from what we're seeing. Operator: Our next question is from David Paige with RBC Capital Markets. David Paige Papadogonas: Congrats on the great results here. I wanted to focus on Xvantage. It was good to hear the momentum with Xvantage, with IDA. I was wondering if you could help frame where the benefit Xvantage is being felt the most. Is that on the SMB side or more enterprise clients, customers using it? And maybe just help us frame like where the actual tailwind from the momentum is coming from. Paul Bay: Yes. David, this is Paul. So thanks for the question. So there's three phases really Xvantage. The first one is all about taking out friction, call it, cost to serve. The second phase is around demand generation, and the third phase is around using data and insights to help our partners drive profitable organic growth. And so what we're seeing is, to answer your question, within product category, actually it's across the board. Enterprise is using it for different reasons than SMB. SMB Is where they can really manage their whole business. So if you look at one of the things that we have talked about in terms of the benefits of this is you have a single pane of glass, one place to come where you have the customer, you have the vendor and you have our team members. And within the customers' visibility, there's multiple different personas that they can have in there, so effectively allowing small to medium-sized businesses operate and run their whole business. And that's one of the reasons that we continue to talk about our integrations hub or XI, which allows them to tie into their professional services platforms. And stuff they used to take minutes and months, they actually can do at the click of a button now into their ERP systems. We've given a couple of examples of that. Enterprise partners are using it, but it's more for the traditional pricing availability, partner lookup, does this go with that type of functionality. David Paige Papadogonas: Great. That's helpful. And then just to revisit the PC refresh cycle. I know you said maybe mid- to later innings. But looking ahead to '26, do you see maybe AI-powered PCs extending the cycle as people try to upgrade so the hardware could support more compute power that's needed for AI? Paul Bay: Yes. We're still in the early part of the cycle. What we see, and you've probably seen some of the other industry, people that play in this space or our vendors, probably 25% of our PC shipments today, refresh, is an AI PC. So that's still a low percentage. So that does, to your point, give a potential for a longer, smoother refresh kind of driven by AI PC. So I think it's still yet to be determined because the refresh we're still getting today -- because of only 1/4 of the PCs going out from an AI perspective are really around aged systems and the Windows' end of life. So it's yet to be determined. I think we'll know more kind of at the beginning of next year how AI could potentially provide a longer, smoother refresh cycle into 2026. Operator: Our next question is from Logan Katzman with Raymond James. Logan Katzman: This is Logan on for Adam. I just had a question. As we exit this year, what are you guys hearing from customers about a potential budget flush exiting 2025? We've heard from a couple of people that it may be there this year, but I just wanted to get your guys' thoughts. Michael Zilis: Yes. This is Mike. I can hit a first pass at that one. I don't think we're necessarily seeing anything abnormal there. I mean, that is part of the reason we typically see a seasonal pop in revenues is budgeting cycles in Q4. And you can see again a pretty healthy sequential increase in our guide going from Q3 to Q4 that would be reflective of that. I think the bigger variable this year is just how strong will SMB be where, again, we're encouraged to see spending grow. And that budgeting cycle exists just as prominently at an SMB customer to different magnitudes as it does in an enterprise customer. So that would be probably the only variable. But I think we feel pretty bullish that it's a fairly normal cycle in that regard when we look to Q4. Operator: Our next question is from Alek Valero with Loop Capital. Alek Valero: This is Alek on for Ananda. Just two quick ones. So I wanted to ask about the biggest catalysts that we can look for over the next 4 to 6 quarters. Paul Bay: This is Paul. As we mentioned in our prepared remarks, the things that are going on, what we're hearing from a market perspective are a couple of things. One, it's around services that the partners are continuing to build out. The other one, the other two that we're talking about, and you saw us make an announcement is around AI. What is AI, how do you monetize the AI, the spend that's going on in AI right now and then security kind of wrapped around everything. We also believe as kind of AI continues to develop, we have the opportunity to continue to take those products that are now proof of concepts. And as they go, and we're seeing some of the workloads go to the cloud and we have some of the large relationships with the hyperscalers, so the ability for partners to take what I would call proof of concept into kind of your everyday kind of downstream into the market, so wrapping services around it AI tied in with security. Alek Valero: Got it. And just a quick follow-up. Have you guys heard anything from the bars regarding any feedback around macro? Paul Bay: This is Paul again. Actually, if anything, it's been more encouraging. As we mentioned, last year we were talking about the challenges in SMB. And the fact that we've had 3 quarters now with SMB growth is encouraging because that market is normally the one that bounces back least. And we've been talking about kind of the enterprise for the last couple of quarters. So the good news is we're seeing sales. And within the SMB sales, we're seeing it across all categories, too. So it's not just centered around one category. So the cloud, networking, cyber and desktop, notebook, they're participating across all categories too. So that's encouraging also. Michael Zilis: Yes. Look, the one thing I would just add on that, we've called this out in previous calls when we were seeing the SMB strength. Our view, which isn't too uncommonly shared view from an economic perspective was that certainly tariffs and inflationary environment were creating probably a little bit more overhang, as Paul just alluded to, especially on that SMB space. So that was definitely the more sensitive part of our customer ecosystem to that environment. And as we see inflation temper back a little bit, more certainty around tariffs, interest rates coming down yet again yesterday with the Fed move, and we'll see what happens after this, those are all pretty encouraging signs that again make us a little bit more bullish about that category of customer for sure. Operator: Thank you. At this time, I would like to turn the floor back over to Paul Bay for any closing comments. Paul Bay: All right. Thank you. So before we wrap up, let me just leave you with a few thoughts from our quarter. First, we delivered strong financial results with all key metrics at or above the high end of guidance, and we are set up for a solid Q4. Second, our AI and platform momentum continues to build. Xvantage is scaling globally and delivering real value while our Enable AI program is gaining traction. Additionally, as you heard, we introduced our enterprise AI agent built on Google's Gemini large language models this week. Third, our profitable growth is broad-based across all geographies, business lines and customer segments. And finally, we're excited to welcome over 2,000 participants next week at our global ONE Innovation Summit in Washington, D.C. It's always great to connect with our team, our partners and our industry leaders to shape what's next in technology. So as always, thank you for joining us today, and a huge thank you to our more than 23,000 team members, our customers and our vendor partners for your continued support. We look forward to catching up with many of you here in the very near future. Thank you, and have a great day. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Christopher David O'Reilly: [Interpreted] Thank you very much for taking time out of your very busy schedule to join Takeda's FY '25 Q2 earnings announcement. I'm the MC today, Head of IR. My name is O'Reilly. Thank you for this opportunity. [Operator Instructions] Before starting, I'd like to remind everyone that we'll be discussing forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. The factors that could cause our actual results to differ materially are discussed in our most recent Form 20-F and in our other SEC filings. Please also refer to the important notice on Page 2 of the presentation regarding forward-looking statements on our non-IFRS financial measures, which will also be discussed during this call. Definitions of our non-IFRS measures and reconciliations with the comparable IFRS financial measures are included in the appendix to the presentation. Now we would like to start with the presentation of the day. We have Christophe Weber, President and CEO; Milano Furuta, Chief Financial Officer; Andy Plump, President, R&D; Teresa Bitetti, President, Global Oncology Business Unit; P.K. Morrow, Head of Oncology Therapeutic Area Unit, will provide you with presentation, which will be followed by a Q&A session. We will get started now. Christophe Weber: Thank you, Chris, and thank you, everyone, for joining us today. Our fiscal year 2025 first half results confirm our expected business dynamic for fiscal year 2025 with business fundamentals tracking as planned. This is the last year of very significant VYVANSE generic impact, which peaked in H1 and which will be much less of a headwind to our growth from now on. Growth on launch product grew 5.3% at constant exchange rate, and we expect this growth to accelerate in H2. ENTYVIO is growing, albeit at a slower pace as the pen is growing 20% quarter-to-quarter in the U.S., but still represent only 9% of ENTYVIO volume in the U.S. Our PDT business is expected to grow at mid-single digit this year with immunoglobulin and albumin growing high single digit. We will continue to maintain very tight OpEx control through efficiency improvement supporting profit. Our decision to update full year management guidance for core operating profit and core EPS was driven by a headwind from transactional foreign exchange, mostly generated by the euro appreciation, which has most notably affected QDENGA. Our updated reported forecast, including our EPS forecast reflect a nontax deductible impairment loss booked in the first half. From fiscal year 2026 onwards, Takeda will be in a new business cycle with VYVANSE generic impact mainly behind us, potentially three new product launch for rusfertide, oveporexton and zasocitinib and an evolving late-stage pipeline now enriched by our strategic partnership with Innovent Biologics. Our leadership in leveraging technology and AI will further transform the company, which will be led by Julie. Milano will discuss our financial results and expected results in more detail in a moment, and then Andy will present our pipeline advancement with exciting data on zasocitinib. Later on this call, Teresa Bitetti and P.K. Morrow will discuss our partnership with Innovent Biologics and we'll focus on two new late-stage molecules. With that, I'll hand it over to Milano to walk us through the financials. Milano? Milano Furuta: Thank you, Christophe, and hello, everyone. This is Milano Furuta speaking. Slide 7 summarizes our first half financial results. Overall, our business performance is tracking as we planned. As anticipated, this period was significantly impacted by LOE, as we lost approximately JPY 100 billion of VYVANSE revenue. Meanwhile, we have been focused on driving OpEx savings, which has partially offset the impact to corporate profit. We expect H1 to be the peak of VYVANSE generic impact, and we expect a better growth outlook for the full year. Revenue in H1 was just over JPY 2.2 trillion, a decrease of 6.9% or minus 3.9% at constant exchange rates or CER. Core operating profit, core OP, was JPY 639.2 billion, a year-on-year decrease of 11.2% at actual FX or 8.8% at CER. Reported operating profit was JPY 253.6 billion, a decline of 27.7% due to larger impairment losses this fiscal year. Core EPS was JPY 279 and reported EPS was JPY 72. The 40% decline in the reported net profit and EPS reflects the impairment of cell therapy, which is nondeductible from taxable income. Cash flow was very strong this period with adjusted free cash flow of JPY 525.4 billion, including improvements in working capital. Slide 8 shows our growth and launch products, which represent over 50% of revenue. In H1, this portfolio grew 5.3% at CER. This modest growth includes the impact of phasing of certain products, and we anticipate a higher growth rate in the second half. In GI, ENTYVIO growth was 5.1% at CER. We are encouraged to see increasing numbers of active ENTYVIO Pen patients in the U.S., and we are also making progress with expanding formulary access. That said, revenue growth has been slightly below our expectation, and we are revising our full year forecast for ENTYVIO to 6% at CER. In rare disease, TAKHZYRO continues to grow steadily as a market leader in HAE prophylaxis with 5.9% growth at CER. Our PDT portfolio growth reflects several factors, which were built into our guidance and fully in line with expectation. IG growth was 3.1%. While Medicare Part D redesign is impacting several products in the U.S. this year, one of the most impacted product is GAMMAGARD LIQUID, and we expect this to normalize in Q4. Our SCIG portfolio is growing at double digits, and we expect this to continue. Albumin declined slightly in H1 due to timing of shipments to China and the foreseen cost containment measures. Meanwhile, we have also secured additional sustainable tender markets outside of China, and we expect albumin performance to accelerate in H2. Therefore, we confirm the growth outlook of high single digit for both IG and albumin. In oncology, FRUZAQLA continues to expand as we roll out global launches. Finally, in vaccines, we have reallocated supply of QDENGA based on market needs, which has pushed some shipments timing into later this fiscal year. However, we expect annual demand to remain in line with our original estimate. Another factor impacting the growth rate of QDENGA is transactional FX, mainly due to the strength of the euro versus the Brazilian real. On Slide 9, you can see how the growth on launch products and the VYVANSE loss of exclusivity contributed to total revenue performance. FX was also a headwind this quarter due to appreciation of the Japanese yen against major currencies. As we expect growth and launch products to deliver higher growth in H2 and VYVANSE year-on-year decline to moderate, we project more favorable year-on-year growth dynamics in H2. Next, an update on efficiency program that we initiated in April 2024. We continue to make progress with initiatives in H1 this year, including additional organizational changes impacting 600 positions, further optimization of real estate and the growth initiatives to capture efficiencies across the R&D value chain. Restructuring costs in H1 were JPY 27.4 billion, and we are focused on further driving additional OpEx savings. As we show on Slide 11, these operational efficiencies are contributing to a reduction in R&D and SG&A expenses. In this bridge for core operating profit, you can see that LOE of high-margin VYVANSE was the main reason for the year-on-year decline of 8.8% at CER. Within this decline at CER, we had a negative impact from transactional FX, which accounts for about 1/3 of the decline. Let me take a moment to explain how this is impacting our P&L. Revenue can be impacted when there is an FX fluctuation between the currency paid for product and the currency of the entity where revenue is booked. This is exactly what is impacting QDENGA sales today, for example, because our European entity books revenue in Europe for its sales to Brazil in Brazilian real. Cost of goods can be impacted, too, when products are imported from other countries. For example, when the euro appreciates, commercial entities outside Europe have to recognize higher COGS when importing products to sell locally. As you know, Takeda has a large manufacturing footprint in Europe, so we are particularly sensitive to euro currency volatility. Next, reported operating profit on Slide 12. This decreased by 27.7% versus prior year, mainly due to the decline in core operating profit and higher impairment of intangible assets. The main item was a JPY 58.2 billion expense related to our recent decision to discontinue cell therapy efforts. Next, our updated full year outlook on Slide 13. Starting with management guidance, although we have reduced our forecast for ENTYVIO and VYVANSE, we expect total revenue to stay in the range of the broadly flat versus prior year. For profit guidance, we expect higher OpEx savings to fully mitigate the impact from unfavorable change in product mix. However, the transactional FX dynamic that I just described is having a larger impact on profits. Therefore, we are slightly lowering our guidance for core operating profit and core EPS from broadly flat to low single-digit percentage decline. The bottom part of the slide shows our reported and core forecast. This reflects our latest FX assumptions, including transactional FX and items booked in H1 that will impact the full year results. We have also revised our adjusted free cash flow forecast to include a USD 1.2 billion payment to Innovent Biologics for our recently announced in-licensing deal. This payment will be funded by cash on hand. Our dividend outlook remains JPY 200 per share for the full year. On Slide 14, we show more details about the updated operating profit forecast. You can see the relative magnitude of transactional FX impact, while OpEx savings compensate for unfavorable product mix. The net impact of all these moving parts, including transactional FX, is a JPY 10 billion reduction in our operating profit forecast to JPY 1.13 trillion. In summary, our business fundamentals are tracking as planned. While H1 growth was largely impacted by LOE, we expect better growth rates for the full year fiscal year. Meanwhile, we remain focused on cost discipline to deliver our guidance, while investing for future growth. Thank you for your attention. I will now hand over to Andy for more details on the pipeline updates. Andrew Plump: Thank you very much, Milano, and hello to everyone on today's call. Next slide, please. Fiscal year 2025, as you just heard from Christophe, is a pivotal year as we advance and accelerate our exciting high-value late-stage pipeline to launch. Today, I am pleased to provide pipeline updates reflecting our growing late-stage portfolio of promising programs powered by our increasingly productive and efficient development engine. We are 2 for 2 with positive Phase III studies for both rusfertide and oveporexton with zasocitinib Phase III data in psoriasis expected by the end of this calendar year. In a few minutes, Teresa Bitetti and P.K. Morrow will walk you through the details of our recently announced partnership with Innovent Biologics, which upon closing, will expand our oncology pipeline. With 2 highly differentiated late-stage oncology assets in development for multiple solid tumors, this deal has the potential to transform our oncology pipeline. But first, I'm going to highlight some recently presented Phase III data for oveporexton and long-term IgA nephropathy data for mezagitamab that we are particularly excited about. The results of these studies truly represent Takeda's high bar for innovation and the breakthrough benefits we seek to provide patients. Let's start with oveporexton on the next slide. Oveporexton is on track to be the first-in-class and potentially best-in-class orexin 2 receptor agonist that treats the underlying orexin deficiency in patients with narcolepsy type 1. We believe that the data presented at the World Sleep Congress last month establishes a new standard of care for NT1. In one of the largest, most comprehensive Phase III development programs for NT1 to date, we demonstrated statistically significant and clinically meaningful improvement across all 14 primary and secondary endpoints with most participants within normative ranges. It is clear that oveporexton has a profound effect on daytime symptoms like excessive daytime sleepiness and cataplexy, nighttime symptoms and cognitive symptoms. In addition, it significantly impacts how patients with NT1 feel and function. We believe we have created a new standard of care to treat NT1 by treating the entire range of symptoms with a safe, well-tolerated pill. Oveporexton sets a high bar with the new standard of care, which will be hard to beat. Feel and function were assessed using multiple objective and subjective measures. Based on these strong Phase III data, we plan to file for U.S. approval in NT1 as quickly as possible later this year with regional filings to occur simultaneously or shortly thereafter. Our orexin franchise is making rapid progress beyond oveporexton. The next-generation orexin 2 receptor agonist, TAK-360, is rapidly enrolling Phase II studies for narcolepsy type 2 and idiopathic hypersomnia. Results for these trials are expected to be read out by early fiscal year 2026. Next slide, please. We previously presented compelling 48-week proof-of-concept data for our anti-CD38 antibody, mezagitamab, in IgA nephropathy. This includes consistent and supportive trends in decreased IgA, IgG and galactose-deficient IgA1 levels, reflecting the selective targeting of CD38 on plasma cells, which produce pathological antibodies. I'll now preview the exceptional 96-week results from the proof-of-concept trial that continue to support this promising approach to modifying this disease. Mezagitamab-treated patients show persistent reductions in proteinuria or UPCR, nearly 18 months after the last dose, suggesting sustained efficacy beyond the treatment period. Importantly, the estimated glomerular filtration rate, or eGFR, that is the regulatory gold standard for measuring renal function remains stable at 96 weeks. Mezagitamab is the first IgA nephropathy therapy to demonstrate stable renal function 18 months after dosing. We look forward to presenting the full data at ASN Kidney Week next month. Our Phase III IgA nephropathy study is open and has been enrolling well. Next slide, please. The Phase III VERIFY study of rusfertide, a potential first-in-class synthetic hepcidin mimetic in development to treat polycythemia vera was presented at the American Society of Clinical Oncology in a plenary session in June. Updated 52-week data will be available at an upcoming medical congress. This quarter, we received breakthrough therapy designation, which speaks to the exceptional practice-changing data presented at ASCO 2025 and increases the probability of priority review for rusfertide, which we intend to file this fiscal year. Looking ahead to our next major pipeline milestone, we expect zasocitinib Phase III psoriasis data later this calendar year. Based on the data seen in Phase II, we believe zasocitinib will provide an important and very attractive oral option for patients. I'm also excited to report that the head-to-head study of zasocitinib versus deucravacitinib in psoriasis is expected to complete enrollment in the next few weeks. As you can see here, psoriasis is the first of many diseases where zasocitinib can benefit patients. With that, I will now turn it over to Teresa and P.K. to provide more details on the Innovent partnership, which has the potential to catapult Takeda into an industry-leading oncology company. Thank you. Teresa Bitetti: Thank you, Andy. Good morning, good afternoon, and good evening. We are pleased to be here today to share more detail about our recently announced partnership with Innovent Biologics and why it's critically important for patients and for Takeda. Next slide. Our collaboration with Innovent involves 3 differentiated assets, each with unique mechanisms. 363 is a potentially first-in-class PD-1/IL-2 alpha bias bispecific. 343 is a next-generation Claudin 18.2 ADC, and we're also receiving the exclusive option to license 3001, which is another ADC targeting EGFR and B7H3. This deal is strategically important because it adds cutting-edge anchor assets to our pipeline. First, a bispecific with the potential to be an IO backbone therapy across a broad range of indications, lung included. Second, a next-generation ADC with potential to address difficult-to-treat cancers, including gastric and pancreatic. And finally, an option to license a potential best-in-class bispecific ADC. These unique programs, each with differentiated mechanisms further demonstrate our commitment to science, our commitment to patients and have the potential to be significant growth drivers for the Takeda enterprise post 2030. So next slide. Let me spend a little time sharing how we've structured this deal and what it brings to the Takeda portfolio. So for 363, which is the PD-1/IL-2 alpha bias bispecific, Takeda will lead the co-development of this asset globally using a 60-40 Takeda-Innovent cost split. Takeda will also lead U.S. co-commercialization of 363 with a 60-40 Takeda-Innovent profit or loss split. And Takeda will have the exclusive right to commercialize and manufacture outside of Greater China. For 343, the Claudin 18.2 ADC, Takeda will have the right to develop, manufacture and commercialize worldwide outside of Greater China. And finally, we will have the option for 3001, which is the EGFR/B7H3 ADC currently in Phase I. If we choose to exercise the option, we will have global rights to develop, manufacture and commercialize outside of Greater China. Next slide. This collaboration further enhances and augments our oncology portfolio and is consistent with our clearly articulated oncology strategy. As a reminder, you can see here on this slide, our strategy is focused on 3 disease areas and 3 modalities. And as we have highlighted here in the red box, the programs included in this partnership fits squarely within our strategy. So now I'm going to turn it over to P.K. to explain more about the science behind these programs. Phuong Morrow: Thank you, Teresa. I'm now going to share more about the 3 programs in this collaboration and why we are so excited to bring them into our pipeline at Takeda. I will start with IBI363. IBI363, as you can see here, is a bispecific with a unique mechanism that has the potential to become an immuno-oncology or IO backbone. Specifically, IBI363 is what I would call an IO-IO molecule, meaning that it is designed to block the PD-1/PD-L1 pathway and selectively activate IL-2 alpha signaling while attenuating IL-2 beta gamma signaling. As you can see on the left-hand side of this slide, this differentiated IL-2 alpha biased approach has been shown to activate tumor-specific T cells that express both PD-1 and IL-2 alpha receptor within the tumor microenvironment, thereby unleashing a more effective antitumor immune response. IBI363, thereby supercharges tumor-specific T cells, resulting in apoptosis of the cancer cell. And by blocking the PD-1 pathway, IBI363 ensures that these T cells continue to stay activated and it reduces the risk of T cell exhaustion. IBI363 has now dosed more than 1,200 patients and has demonstrated very encouraging results. Next slide. We have seen clinically impactful results in trials involving patients with IO refractory squamous and non-squamous non-small cell lung cancer as well as in third-line microsatellite-stable colorectal cancer. And while median overall survival is immature at the higher doses, it already shows a positive trend even at these lower doses. The results you see on the screen were just shared as oral presentations at this year's ASCO. They are encouraging data, especially when indirectly compared to results from standard of care chemotherapy on the right. The safety profile of IBI363 is considered tolerable with the most common adverse events related to IBI363 being rash and arthralgia. Discontinuations due to these events have occurred in a small percentage of patients and a priming dose has been added to the dosing schedule to reduce the risk of immune-related events that may occur with bispecific dosing. The high caliber of these data is reinforced by the FDA's granting of a Fast Track designation in non-small cell lung cancer. Thus, while this is a competitive environment, we are very encouraged by the data we have seen to date and the potential of this differentiated mechanism. Next slide. To maximize the potential of IBI363, we have 3 very clear objectives, which are built on the efficacy that we've seen thus far. First is to establish foundational efficacy in tumors that have progressed as IO therapies. Second is to penetrate into earlier lines as either monotherapy or in combination. And third is to build on our known data to establish efficacy in immune desert tumors such as microsatellite-stable colorectal cancer in which other IO therapies have not worked. So that's why, as shown on this slide, we're initially establishing the 5 Phase III trials, including 2 trials in IO refractory squamous and non-squamous non-small cell lung cancer, 2 in frontline non-small cell lung cancer and 1 in microsatellite-stable colorectal cancer. We also have a series of life cycle management trials that we're discussing with Innovent, which will help to build upon proof-of-concept data as it evolves. Next slide. Now I'll walk you through IBI343. This Claudin 18.2 targeted ADC is seamlessly harmonized with our oncology strategy due to, first, its novel ADC platform; and second, its demonstrated efficacy in GI cancers. When examining the image on the left, I will walk you through the platform from left to right. First, on the very left, IBI343 has a humanized IgG1 with Fc silencing. This Fc silencing is important because it reduces the risk of off-target toxicity and increases the tolerability of this Claudin targeting molecule. This differentiates 343 from other Claudin-targeting agents, which are known to have increased gastrointestinal adverse events. In addition to that, in the middle, the glycan-specific conjugation and sulfamide spacer increases the stability, solubility and potential bystander effect, allowing the ADC to result in a more efficient apoptosis of the cancer cell. And it also supports a homogeneous drug-to-antibody ratio of approximately 4, which many of us believe is a favorable ratio for ADCs. And finally, this potent exatecan payload inhibits topoisomerase 1, so it fits seamlessly into many standard of care regimens. Next slide. 343 has been dosed in more than 340 patients. And as shown during oral presentations at this year's ASCO, IBI343 has demonstrated encouraging activity in pancreatic and gastric cancers. Compared to the standard of care, 343 has more than doubled the response rate and more than doubled the overall survival as compared to standard of care chemotherapy thus far. This, coupled with a favorable and consistent safety profile with manageable GI and hematologic adverse events supports its ability to fit seamlessly into the standard of care. All of this makes us very excited to continue advancing this asset in GI cancers with critical unmet need. And as with 363, these results were also reinforced by a Fast Track designation by the FDA for pancreatic ductal adenocarcinoma. Next slide. We also have an ambitious development plan for 343 in Claudin 18.2 expressing GI cancers as its topoisomerase inhibition enables us to fit seamlessly into the frontline treatment of pancreatic cancer. In the second line of the chart, you can see that Innovent has an ongoing study, which is well underway in China and Japan in the third-line setting in gastric cancer. We will leverage this data from this study and add a single-arm study in the U.S. and the EU to move forward towards global registration in the third-line setting. And in the bottom row, you can see that the plans are underway for a frontline study in gastric cancer to address the needs of more gastric cancer patients across lines of therapy. Next slide. And finally, I will review with you IBI3001, for which we have the exclusive option to license at a potential future date. IBI3001 is truly a novel molecule, which is both a bispecific and an ADC. It targets EGFR and B7H3, 2 targets that are highly expressed in many solid tumors, including lung cancer, colorectal cancer and head and neck cancer, and it is linked to the same potent exatecan payload as 343. Innovent has rapidly progressed this asset into the clinic, already producing data, as you can see on the right-hand side, that shows encouraging efficacy even in highly refractory solid tumors. We look forward to following the progress of this trial, which is moving at speed. And with that, I'm delighted to turn it back to Teresa to talk about the immense promise of this collaboration for patients. Teresa Bitetti: Thank you, P.K. So looking at this from a patient perspective against the backdrop of the top tumor types by overall prevalence worldwide, we have the opportunity to make a difference in areas of extremely high unmet need. So as you can see highlighted in red, the tumors in our initial development plan are not only prevalent but difficult to treat. In our initial plans, we can address 4 of these cancers and make a meaningful difference for patients. Next slide. As I mentioned at the start, this partnership will serve as a significant potential growth driver for Takeda. When we look at the market opportunity for our initial development plans for 363, we're looking at lung and CRC. In lung, we will be focusing on the IO refractory second-line setting, where the majority of patients will have already been treated with a PD-1 or PD-L1 and then move rapidly into the frontline setting as a monotherapy or part of a combination regimen. And in colorectal cancer, we'll focus on the frontline patients with MSS CRC. So in aggregate, the initial plan focuses on a potential combined addressable market of over $40 billion. Next slide. Now let's look at the market potential for 343. Globally, gastric cancer affects around 1 million people with 35% to 55% expressing the Claudin 18 biomarker. In pancreatic, the global incidence is approximately 500,000 with 30% to 60% of patients expressing Claudin 18. The current standard of care in these tumor types centers on chemotherapy and the 5-year survival rates are very low, highlighting the urgent need for innovative treatments. Altogether, 343 offers a potential combined addressable market of approximately $8 billion, although we expect this market to grow as we and other novel agents enter. So as you can see, across both assets, there's an enormous potential to make a significant impact for patients. So next slide. So in closing, we are incredibly energized by this extraordinary strategic partnership that brings great value for both patients and for Takeda. This agreement with Innovent will enable us to address critical treatment gaps in some of the most prevalent and difficult-to-treat cancers. It brings forward unique and truly differentiated programs that will overcome many of the challenges of currently available therapies, and it adds anchor assets to our solid tumor pipeline with the potential to be future growth drivers for Takeda. So in short, this collaboration is incredibly meaningful, both for us and for patients. So thank you for your attention. I'm going to hand back to Chris to open the Q&A. Christopher David O'Reilly: [Interpreted] Now I would like to take questions from participants. We have Christophe, Milano, Andy, Teresa, P.K. and Julie Kim, CEO Elect Interim Head, Global Portfolio Division and Giles Platford President, Plasma-Derived Therapies Business Unit are joining in the Q&A. [Operator Instructions] The first question is from Yamaguchi-san. Hidemaru Yamaguchi: This is Yamaguchi from Citi. The first question regarding to Innovent deal. I understand the potential of this product is pretty big. But at the same time, Takeda sales has not really involved in the solid tumor for a while after [indiscernible]. And investors have a lot of question on this one, how much you need to spend on R&D for the next few years where you have to balance the operating margin. So R&D investment, even though you're going to split, but solid tumor first line seems to be very costly. So can you give me some elaboration on how you're going to run this clinical trial to compete with the global guys on the R&D and trying to, I would say, finance your R&D and the impact -- potential impact to the margins? That's the first question. The second question regarding to the earnings change. Even though there's only a slight change on a CL basis on the ENTYVIO and VYVANSE, seem to have a big change on the currency things. And this year might be a unique year, but is there any way in the future trying to avoid those changes or through some other transactions trying to prevent or this year, it's hard to escape from this currency related to earnings divisions. That's the second question. Christopher David O'Reilly: Thank you, Yamaguchi-san. So the first question was around how we're going to run the trials for the Innovent assets and what that means for R&D expenses. So perhaps P.K. can just comment briefly on -- again, on the development plans we have in place for these programs. And then Milano can add a comment on how that will fit within our R&D budget. And then for the second question on this transactional FX impact, I'd also like to ask Milano to comment on that, please. Phuong Morrow: Yes. Thank you. So we are very committed to investment both within our oncology portfolio as well as overall in order to support our long-term growth, while continuing to support profitability. In terms of the financial implications of this deal, these have actually been reflected in our revised forecast and guidance. It's a little premature for us right now to comment on outlook for R&D spend and margins for fiscal year 2026. But I can assure you, we are very committed to achieving the margins in the mid- to long-term, which are driven by top line growth and optimizing our cost structure. Milano Furuta: Thank you, P.K. Yamaguchi-san, not much things to add to what P.K. said already. But I think you can see that we have been managing quite effectively or in some areas, we are even reducing R&D expenses beyond our initial expectations by the efficiency program, also the continuous -- with continuous cost discipline. That's one. And then the second one is we are very mindful about this -- the incremental R&D investment as well. So that's why you see this cost split of the 60-40 for this 363 compound. At the same time, as you might be aware that we have been arranging some cost sharing program, the partnership with Blackstone for mezagitamab. So that's kind of through those kind of arrangements. We are very consciously managing incremental investment. But in the end, we want to invest for growth, while optimizing OpEx. Eventually, that's going to be top line growth, should be the main driver to the long-term corporate margin improvement. Second question about transactional FX. This is very hard to answer, as it is very difficult to predict the currency fluctuation. But this transactional FX in Takeda's case, as I commented during the presentation, the euro volatility is quite -- have a big impact in this year. This is because of -- relatively, we have a large footprint in the manufacturing operation in Europe. So we have to see how currencies goes. But in the long -- if we want to mitigate, then we have to -- maybe in the long run, somehow we have to rebalance the manufacturing footprint, but that's kind of, of course, a long-term strategic plan. It's not -- we've taken actions depending on a 1-year currency volatility. We have to take a bit to long-term stance on that. Christopher David O'Reilly: [Interpreted] Next question from Mr. Matsubara from Nomura. Matsubara: [Interpreted] Matsubara from Nomura. I have 2 questions. First is about ENTYVIO. As you explained, ENTYVIO Pen penetration is advancing, but the insurance coverage as of now and to enhance penetration of pen furthermore, what actions are you taking now? The second question is Nabla Bio that you have partnership with now, and this is nonclinical as of now, and it's not fully disclosed, but by utilizing this R&D acceleration, how does it go? And for mid- to long-term pipeline enhancement and acceleration, how do you see that? Christopher David O'Reilly: Okay. So thank you for your questions, Matsubara-san. So the first on ENTYVIO, what is the state of insurance coverage? What are we doing to expand access to pen? I'd like to ask Julie to comment on that. And then the second question was on our recently announced collaboration with Nabla Bio. Perhaps Andy can add some comments on what we're doing in terms of utilizing AI in drug discovery. Julie? Julie Kim: Yes. Thank you for the question. And in regards to ENTYVIO Pen access, as you heard from Christophe in his opening comments, we are continuing to improve our overall position along the access continuum, and we're encouraged by the 20% growth that we're seeing quarter-over-quarter in terms of ENTYVIO Pen. Now that being said, we continue to work on access at various different levels. One, in terms of the -- I would say, the highest level of coverage. I think you are all aware that we have 2 out of the 3 big contracts signed for quite some time now, and we continue to work on the CVS piece. For the other levels of access, when you look at the way that the U.S. market is structured, it's actually -- there's a lot of localization even with the way that we have the big 3 PBMs. So while we continue to improve at the local level as well, we are putting in place very specific tactical actions to address the localized challenges in addition to what we're doing at the overall coverage level. So hopefully, that gives you a sense that we're working across multiple different levels on the access continuum in the U.S. Andrew Plump: And thank you, Julie, Matsubara-san, and thanks for the question. We're quite excited by the partnership with Nabla Biosciences. But maybe I can just dial up for a second and give you some sense of the work that we've been managing in our research laboratories for the last couple of years. We see discovery in the biopharmaceutical industry changing quite rapidly, and we're positioning Takeda to be at the leading edge of application of advanced technologies in research. And in fact, we're in the process of completing a new laboratory in Cambridge, Massachusetts in Kendall Square that we call the lab of the future. And the intent of this lab is to enable a workflow in discovery that can both improve our probabilities of success and also greatly accelerate the time that it takes to move molecules through discovery. Today, 1 in 5 -- 1 in 4 of our research programs are enabled by in silico technology. By next year, we expect that over 90% of our programs will be enabled by in silico technology. The partnership with Nabla Biosciences is one example of how we're embracing AI in drug discovery. This is a company that was started by George Church that uses algorithms to optimize sequences of large molecules. We've worked with them for over 2 years now, and we have 3 pilot experiments that each were successful, 2 accelerated programs and a third one actually took us to a novel space that we wouldn't have gotten to with traditional approaches. So we were quite excited about that, and that's what led to then the collaboration that you see at hand. Christopher David O'Reilly: [Interpreted] JPMorgan, Wakao-san. Seiji Wakao: This is Wakao from JPMorgan. I have 2 questions. Firstly, regarding gross margin trend and revised guidance. When comparing the initial guidance with the revised full year guidance, the gross margin has deteriorated 66% to 64.7%. Should we understand this is -- this primarily as an FX impact from the euro? If there are other contributing factors, could you elaborate on this point? And also, if FX is indeed affecting the gross margin, the second quarter gross margin looks relatively solid compared to the FX levels. I'd like to know this point? And why do you expect it to deteriorate in the second half? And second question about IV -- Innovent partnerships. When is the next data update for IBI363 expected, so Page 27. Regarding ongoing first-line and second-line NSCLC studies, we will be able to see data in 2026. In addition, when is the global Phase III trial expected to start? That's it. Christopher David O'Reilly: Thank you, Wakao-san. So the first question on gross margin trend and the revised gross margin outlook for the full fiscal year. I'd like to ask Milano to comment on that. And the second question on the next data point to come for IBI363 and whether we can give an indication of starting Phase III studies. I'd like to ask P.K. to comment on that, please. Milano Furuta: Wakao-san, thank you for the question. You asked about the bridge from initial forecast updated forecast. At the same time, how the H2 second half gross margin will be lower. Actually, the answer would be basically same. If you compare -- if we compare the May forecast and revised the forecast, as you said, gross margin is expected to be lower by about 1.4 percentage points. About half is coming from the transactional FX. And the other half is also coming from kind of product mix change. So we are reducing the VYVANSE, the revenue and the ENTYVIO revenue. And then these 2 revision has a negative impact on the gross margin. So that's the contributing this gross margin update in the forecast. And actually, this explains -- these dynamics explains in the second half because this is more about the second half sales. Also, we are updating the currency forecast for H2. So those 2 impacts were contributing lower gross margin in H2. Phuong Morrow: Thank you, Milano. And perhaps to address the other 2 questions that were asked related to the Innovent collaboration. The first is to say that we, like you, are very enthusiastically monitoring the data with both 363 and 343. We are not yet releasing when we will disclose further data in the coming year, but we will be following this closely, as we determine when the appropriate data inflection will be in order to release more data in a public forum. The second question you had was related to the start of the Phase III studies. And we have noted that the Phase III study in second-line squamous non-small cell lung cancer, we expect to begin in the coming months. And as you saw from the slides, we will also be looking towards moving and initiating additional studies at speed. Christopher David O'Reilly: [Interpreted] Next question is Stephen Barker, Jefferies. Stephen Barker: Steve Barker from Jefferies. The first question is about ENTYVIO and the second question is about your collaboration with Innovent. Starting with ENTYVIO. So you've cut your estimated current growth rate at constant exchange rates from 9% to 6% due to competitive pressures. I was wondering if you could give us more details of those competitive pressures and the implications for growth going forward as in next year and beyond? And secondly, regarding your deal with Innovent, certainly, the China data published to date on 363 is impressive. But there have been several cases where impressive data in China has not been replicated in international studies. So I was wondering if you could share your view on if that apparent trend or phenomenon is real or not? And more specifically, how confident are you that you can replicate the impressive China data in international trials? Christopher David O'Reilly: Thank you, Steve. So I think the first question on ENTYVIO and the reasons for the reduction in the full year forecast. I'd like to call on Julie to answer that. And the second question on data replicability of the China studies in a more global population. I'd like to ask P.K. to comment on that, please. Julie Kim: Thanks for the question, Stephen, on ENTYVIO. So let me start by saying that ENTYVIO has been on the market for 12 years now, and it is still the overall market share leader in IBD when you look at it from a patient demand perspective, and we are holding market share. But as you've noted, there are a few things that are impacting our top line. One is in terms of the intensified competitive activity, and we're seeing that particularly on the CD side, but it is also starting to impact UC. But as I said, overall, because ENTYVIO is still the only gut-selective medicine out there for IBD, we've been able to hold share. The other things that are impacting the top line, there are a few things. One, as Milano mentioned in his talks, it is about the channel mix. We've particularly had an increase in 340B population as well as an increase in Medicare Part D redesign impact. Beyond that, the pen conversion, as we've mentioned, is moving a bit slower than we anticipated. And while we are resolving those access hurdles, it has impacted the top line thus far. But we do expect as those hurdles are resolved, we will see an acceleration of growth, which is why we do expect to end the year higher than where we are year-to-date. Phuong Morrow: Thank you, Julie. And to answer the second question, I'll say 2 points. One is, as you alluded to, initially, Innovent has accrued more patients in China, but over the past few months has now begun to increase the enrollment ex-China, including in U.S. and Australia, and we are continuing to monitor that data as well as its applicability. The second element is the fact that we actually endeavored on very significant due diligence during the evaluation for this collaboration. And that included bringing our own Takeda radiologists in order to evaluate the -- many of the images that we were seeing of the patients as well as determining the correlation with our response criteria, i.e., RECIST. And we saw a very strong correlation there. Christopher David O'Reilly: [Interpreted] Next question, SMBC Nikko Securities, Wada-san. Hiroshi Wada: Wada from SMBC Nikko Securities. About Innovent pipeline, I have a question. 363, regarding mechanism of action, I want to know IL-2 alpha bias, what's the significance of this? Roche has -- well, IL-2 itself is approved for the melanoma and other cancers, but not expanded very much to other cancers. If you activate alpha, Treg may be activated as well. And because of that immune response is suppressed, I think that's what was the rationale. So alpha activated mechanism for 363, what's the meaning of that, including the clinical data you have obtained so far. Can you explain that, please? Christopher David O'Reilly: Yes, P.K., would you like to take that question? Phuong Morrow: Yes, absolutely. So it's a great question. And we also asked the same question and interrogated that data with Innovent and discussed this in depth. And I can tell you that what is actually unique about this particular pathway is the fact that, first, we did learn from the experiences of others within the industry as it relates to IL-2. And that's why our focus has been on this IL-2 alpha bias with attenuation of the beta-gamma pathway. And with that in mind, we have seen that the IL-2 alpha biased approach has been able to target specifically tumor-specific T cells that are addressing both -- or express both PD-1 and IL-2 alpha. So it's been a very precise and effective activation within the tumor microenvironment. The other question that you had was related to whether this would actually cause and trigger activation of Tregs, which we also had that question related to. And we have not actually seen activation of Treg cells, which would have resulted, of course, in a decrease in the immune response. Thirdly, I would say that because of this, we think that the clinical data are very consistent with the mechanism of action with findings of very encouraging data in both IO refractory as well as in earlier lines. Thank you. Hiroshi Wada: [Interpreted] May I continue? Christopher David O'Reilly: [Interpreted] Yes, go ahead. Hiroshi Wada: [Interpreted] And for development policy, so refractory cold tumor is the strategy that you want to take. I understand that additional IL-2 NSCLC first line and head-to-head with PD-1 for Phase III. Is that the plan going forward? Phuong Morrow: Yes. Chris, would you like to be to take this? Christopher David O'Reilly: Yes, please P.K. Phuong Morrow: Yes, of course. So I think your question was around the development plan related to IBI363 and where we see the experience with this and the promise of this and agree with you that we actually want to leverage the strong clinical data. So beyond the 2 second-line studies in IO refractory squamous and non-squamous non-small cell lung cancer, we will plan to go head-to-head against IO therapy, both likely in an all-comers population as well as in a TPS-high population. Christopher David O'Reilly: Next question, I'd like to call upon Tony Ren from Macquarie. Tony Ren: Tony Ren from Macquarie. A couple of questions again on the Innovent transaction. For the IL-2 PD-1 bispecific IBI363, I understand -- I actually cover Innovent myself. I understand they have a global Phase II study. The primary completion -- estimated primary completion of this study is March 2026. So really only 4 months away. Did you guys get a chance to look at the data from that Phase II study, which I believe primarily is conducted in the U.S. and looking to recruit about 178 patients? And if so, were the data better or worse than what you've seen in China? So that's my first question. Christopher David O'Reilly: P.K., would you like to answer that one as well, please? Phuong Morrow: Yes, absolutely. So yes, first, I would like to say that, yes, we have been in constant communication with Innovent related to the evolving data. And as you allude to, that data in the global Phase II is progressing or the trial itself is progressing very nicely and at speed. I can't disclose what obviously, the data shows thus far, but we can see that I would like to just say that the data thus far is fairly encouraging, but I think too early to comment further. Tony Ren: Okay. Thank you for addressing that. Also, Innovent is starting the Phase III global study. I think it's called MarsLight-11 trial in immunotherapy-resistant non-squamous non-small cell lung cancer, right? So that trial according to clinicaltrial.gov is literally starting today. But also -- Dr. Morrow, you said that you're looking to start in the next few months. So are you -- as Takeda is leading the clinical development, right, are you looking to change the trial design and the conduct of this MarsLight-11 study? Phuong Morrow: What I will say is that we -- as I noted, we have had great conversations and discussions with Innovent weekly, if not every few days. And related to the MarsLight study as well as these beginning studies, we've also had discussions about whether we would need -- we would desire to change or tweak any of the elements of the protocol itself. I would say right now, we have not required any or asked for any significant changes as of today, but we are continuing to have those discussions. Tony Ren: If you do decide to change the trial design or protocol or conduct, would that require a new FDA clearance? Phuong Morrow: I don't think so. Christopher David O'Reilly: [Interpreted] Next question is Ms. Ueda, Goldman Sachs. Akinori Ueda: I am Ueda, Goldman Sachs. My first question is regarding [indiscernible] therapy business. I think in the United States, now CSL has been closing some of its plasma centers recently. So it also appears that Takeda is currently focusing on moving -- improving efficiency such as optimizing utilization rates and implementing the digital transformation initiatives rather than expanding the number of centers. So are there any changes in the business environment in the U.S. such as like the demand outlook or the cost structure that are driving the shift? And furthermore, I think some other companies seems to be actively investing in the collection centers outside in the U.S. So could you also let us know whether you are also considering similar types of investments? [Interpreted] I'd like to ask a second question to Milano regarding your dividend increase. Given this -- the downward revision of the guidance, I believe that EPS is going to be also lowered. And you also are able to transfer from the accumulated fund to your hand. However, what is about the potential risk of the impairment loss and how you are confident to continue increasing the dividend payment? I'd like to ask the second question to Milano-san. Christopher David O'Reilly: So the first on the PDT business and specifically on our collection initiatives in the U.S., I think I'd like to ask Giles to comment on that. And then the second question on the sustainability of the dividend. Milano, if you could kindly answer on that one, please. Giles Platford: Yes. Thank you, Chris, and thank you, Ueda-san, for the question. We have been investing extensively to improve efficiency and productivity across our BioLife collections network, and that has positioned us very strongly to be able to meet the growing demand for plasma-derived therapies and to continue to grow our collection volumes without opening to the same extent, new centers. In particular, we have benefited this year from the accelerated rollout of the personalized nomogram for both our FK and Haemonetics devices, and that has enabled us to improve volume collection by approximately 10% to 11% on a per donation basis. And as a result, we won't be opening as many new centers, and we are also benefiting from the ramp-up of the centers that we have opened in the past years. To the second part of your question, we do continuously evaluate opportunities to open up new countries to contribute to global supply of plasma. We don't have anything to communicate at this point in time, but it is a big part of our advocacy work worldwide to ensure that we are having more countries contributing to sustainable supply of plasma. Thank you. Milano Furuta: [Interpreted] Thank you very much for your question. Basically, regarding our dividend policy, as we explained in the past, it is a progressive policy, meaning we will sustain or increase the dividend. And in order for us to make a decision, we will look at core EPS and reported EPS and mid- and long-term reduction of interest-bearing liabilities or borrowings. And looking at these 3 parameters, we make a proposal what to do with the dividend in the next year and going forward. Therefore, at this point in time, I cannot say anything definitely, but these are the 3 points, we will base our decisions. And for the next fiscal year, around May time frame, we would like to announce what is the policy of dividend. Christopher David O'Reilly: [Interpreted] Next question from UBS Sakai-san. Fumiyoshi Sakai: Fumiyoshi Sakai from UBS, two questions. One is the same plasma business. CSL issued profit warning. There are reasons very vague, but one of the factors that you mentioned is weakening demand of China albumin sales or revenues. And your page -- Slide 40, you have slight decline in China. However, you haven't really changed the guidance for FY '25. Do you think -- do you still think that this guidance is achievable? If it's so, can you just give us the -- what's really going on in China market right now? So that's the first question. The second question is U.S. Biosecure Act when you make a deal with Innovent, anything going on in the U.S. these days is a mystery, but this act is still pending? And have you considered what are the political consequences having China Biotech as a partner? Probably not? But if you could update with this Biosecure Act and your business tie-up, I would really appreciate that. That's the second question. Christopher David O'Reilly: Thank you, Sakai-san. So the first question on albumin demand in China and our confidence in the full year outlook, I'd like to ask Giles to comment on that. And then the second question on U.S. US Biosecure vis-a-vis the Innovent deal. I'd like to ask Christophe to answer that question, please. Giles Platford: Sure, Chris, and thank you, Sakai-san, for your question. It's true, our albumin portfolio did decline marginally by 2% for the first half. This was a result of the impact of shipment phasing to China, but also related to the continued government-imposed cost controls in the country, both of which were anticipated as well as some effect of tender timing globally. And I'd like to point out that with a somewhat slower near-term growth outlook for China linked to those government-imposed cost controls, we have been actively working to build sustainable market opportunities for albumin outside of China, and we do see continued growing demand for albumin worldwide. And we have successfully secured a number of tenders in markets ex-China, which will be delivered in the second half, hence, accelerating our growth for the balance of the year. So yes, we remain confident to deliver on our guidance of high single-digit growth for the year for albumin and for our IG portfolio. Thank you. Christophe Weber: Thank you, Sakai-san. This is Christophe here. Obviously, we take into consideration the geopolitical environment when we discuss a deal like our partnership with Innovent Biologics. So I will mention 2 points. One is that we will do -- we'll drive the global development of this asset, guaranteeing that it is meeting all the criteria required by regulatory agencies across the world. So that's very important. And the second point I will mention is that we will manufacture these molecules in the U.S. So we will do a full tech transfer and we manufacture -- we'll organize the manufacturing of this molecule in the U.S. And therefore, we think that this is also a way to mitigate the potential geopolitical risk. Thank you. Fumiyoshi Sakai: [Interpreted] Can you just -- Giles-san, can you give a margin update in PDT business? Giles Platford: Yes, absolutely. I can do that. So we continue to see our margin recovery year after year, and we expect to deliver continued margin improvement in fiscal '25. And that's part of the reason why we gave a slightly more modest guidance in terms of growth for this year. We are seeing more supply on the market. If you remember, Takeda was the first to recover post pandemic. So we benefited from strong growth the past couple of years in meeting unmet demand globally. We see that situation now normalizing. So we're being a little more selective in terms of tender participation ex-U.S., very much expected, anticipated and consistent with the guidance that we gave, and that's partly because we're trying to calibrate both the need to grow, but also the need to grow profitably and to ensure we're getting value recognition in the process. We see continued improvement in product mix. So our innovative subcutaneous IG portfolio has delivered 15% growth for the first half. So that product mix helps in improving margins. The BioLife productivity and efficiency efforts driven by data digital and technology transformation that I referenced earlier are also helping us to improve margin. And we have seen gradual improvement in yield in fractionation and process improvement across our manufacturing network. So all of that is contributing to an improvement in margin over time. Thank you, Sakai-san. Christopher David O'Reilly: For the next question, I'd like to call on Mike Nedelcovych from TD Cowen. Michael Nedelcovych: I have 2. My first is just a broad question on your celiac disease programs. I'm just curious what the breadth of your ambitions are here? How important could those programs become ultimately should they make it to the marketplace? And then my second question is on mezagitamab for IgAN. When we think about the target product profile for that agent, is it sufficient to have efficacy similar to competitor agents across mechanisms, but with potential treatment holidays? Or should we be looking for better efficacy? Christopher David O'Reilly: Thank you, Mike. I think both of those questions on our celiac ambitions and aspirations for mezagitamab, Andy you can answer those. Andrew Plump: Thanks, Chris. Mike, it's Andy. So firstly, on the celiac programs, we had 3 programs that were in proof-of-concept studies, one that we've discontinued, which was TAK-062, which was an orally administered glutinase, which failed to show benefits. And two, TAK-227, which is a transglutaminase 2 inhibitor that's got restricted and then TAK-101, which is a tolerizing vaccine. Both of those are still in Phase II studies right now. Of course, this is a huge unmet medical need with no established standards of care. The bar is quite high for moving forward and the science is quite tough. But we're excited to see data in the coming months and over the next year for both of those programs. So I think we can talk more about what the potential long term could look like after we've seen those data. In terms of mezagitamab, obviously, and you're referencing this, it's an incredibly competitive landscape. With mezagitamab, though, we've got a fairly unique opportunity here. I would say that in terms of efficacy, we wouldn't -- based on the data that we've seen, especially from the APO/BAF agents, I don't think that we expect to see more efficacy. I think the real opportunity with mezagitamab is at least similar efficacy. The 96-week data that I referenced that you'll see in the coming weeks at the upcoming ASN Week meeting is quite extraordinary. I think the real opportunity here is the potential for sustained benefit after relatively short-term dosing. And then secondly, the potential benefits on safety. Christopher David O'Reilly: [Interpreted] In interest of time, I would like to make the next question as final, Sogi-san, Bernstein. Miki Sogi: I have 2 questions. First question is about ENTYVIO. So this is to Julie. So you have mentioned that the evolving competition in the U.S. as well as the increasing -- the change in channel mix. I can imagine that those -- the dynamics are -- it's not really easily reversible. So should we assume that the slowing down the growth rate as you have included in the revision from 9% to 6%. Is this the kind of trend we should expect for the 2026 and beyond? And if that's the case, will you be revisiting the peak year sale of ENTYVIO at some point? That's first question. The second question is about the Innovent deal. I have a question about this IBI3001, very interesting product, the ADC -- bispecific ADC. For this molecule, should we think that this is kind of going to work as 2 ADCs in 1 molecule, meaning that it's just kind of working as EGFR ADC and the B7H3 ADC? Or if there's any synergy by putting these -- the functions in molecule? Those are 2 questions. Christopher David O'Reilly: Okay. Thank you, Miki. So the first question on ENTYVIO to Julie and the second on 3001 to P.K., please. Julie Kim: Thanks for the questions, Miki. In terms of the growth, what I would say is this, as I mentioned earlier, ENTYVIO has been able to hold share -- patient demand share in overall IBD. And what I would expect without giving any predictions about growth and whatnot that we'll provide for FY '26 in May. I would say that our growth is in line with market at this point in terms of patient demand, and we expect to be able to hold our share given the fact that we're still the only gut-selective molecule in IBD and the strong track record that we have, particularly in UC. And as I mentioned, where we see the significant competitive challenges is in CD thus far. In terms of the peak at this point, we are not changing our overall peak revenue guidance. Phuong Morrow: Thank you. And to add on related to IBI3001, happy to bring this forward. So we agreed and when discussing the data and the potential for this molecule with Innovent, it was based upon a few elements. The first is the fact that these targets are very well harmonized with our current disease area strategy in solid tumors, particularly in GI and thoracic cancers. These target specifically. And the second element is that we believe that, as they should target 2 elements and then use the same novel exatecan payload as well as platform that they would be able to very specifically harness a payload and result in more encouraging efficacy. We've seen some elements of that thus far in the earlier doses, as I noted, and we will continue to monitor as we progress up the dose levels. Christopher David O'Reilly: [Interpreted] Thank you very much. With this, we'd like to conclude today's webinar. Thank you very much for your participation today. We'd like to ask for your kind continued support. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Preben Ørbeck: Good morning, and welcome to Aker Solutions presentation of our third quarter results. My name is Preben Ørbeck, and I'm the Head of Investor Relations. As usual, I'm joined by our CEO, Kjetel Digre; and our CFO, Idar Eikrem, who will take you through the main developments of the quarter. After the presentation, we have time for questions. Those of you who are following the webcast can submit your questions via the online platform. And with that, I leave the floor to Kjetel Digre. Kjetel Digre: Thank you, Preben, and welcome to everyone tuning in. As always, let me start the presentation with the main messages for today. First and foremost, I'm pleased to report that we continue to deliver solid financial results in a period of high activity. Our third quarter revenues were NOK 17 billion, which is an increase of almost 30% from the same period last year. And we delivered an EBITDA margin of 8.8% in the quarter or 7.2% if we exclude net income from SLB OneSubsea. In Aker Solutions, our core focus is to deliver predictable project execution. And during the quarter, I'm pleased to report that we met all key milestones on the Aker BP portfolio and celebrated the official opening of the record-breaking Ormen Lange Phase 3 project at Nyhamna. And speaking of high activity. Based on our secured backlog, we now expect revenues for the full year of 2025 to exceed NOK 60 billion. To put this into perspective, this represents more than 3x our revenues in 2020 and 2021 when excluding the Subsea division. However, as we mentioned in our second quarter presentation, we expect activity levels to come down in 2026. Market conditions are changing, and we need to adapt. But fortunately, that is how we have always operated. First of all, we have a scalable business model that is designed to respond to cycles. We are also improving efficiency throughout our organization and in our projects, implementing new digital solutions and robotics to reduce cost and time to first energy. I'll talk more about this later. But first, I will take you through some of the operational highlights of the quarter. Let me start again with the Aker BP portfolio. I'm encouraged to report that the projects are progressing according to plan. As you saw from the introduction video, several important milestones were met during the third quarter. Let's start with 3 highlights from the Hugin A project. In July, we celebrated the sail away of the massive 22,000-tonne jacket substructure from our yard in Verdal. The jacket was later successfully installed at the Yggdrasil area in the North Sea. And at Egersund, the utility model was successfully loaded out and transported to Stord for final assembly. And in late September, another critical milestone was met when this wellbay module arrived at Stord from our partner yard in Dubai. Progress was also good on the Valhall PWP and the smaller Hugin B and Fenris projects in the period. In addition, our Life Cycle segment is actively engaged in modifying existing infrastructure on the Valhall central complex and on the Skarv FPSO. Across the Aker BP portfolio, I continue to be impressed by how teams across Aker Solutions and the alliance partners are working together to deliver these complex projects. Some projects are also leaving our yards to start the offshore installation and commissioning phases. One example is the Jackdaw project, where the topside was successfully loaded out from Verdal and installed offshore in the U.K. This is a so-called not permanently attended installation, enabling lower manning and cost-efficient production from the gas reservoir. Moving over to Ormen Lange. In August, we celebrated the official opening of the Ormen Lange Phase 3 project together with SLB OneSubsea, Subsea 7 and Shell. Aker Solutions has been responsible for the integration of the subsea compression system with the Nyhamna onshore gas plant. This includes the delivery of a 500-tonne module providing power, cooling, heating and ventilation for the offshore project. SLB OneSubsea has been responsible for the subsea compression system, which enables increased recovery from the Shell-operated Ormen Lange field. I think it's worth mentioning that the project has set a few records when it comes to subsea work. One is for the deepest installation of a subsea compression system in water depths of more than 900 meters. It also set a new record for the longest subsea step-out, delivering gas to the Nyhamna plant more than 120 kilometers away. We are also working together with SLB OneSubsea and Subsea 7 on the Jansz subsea compression project for Chevron in the Western Australia. Aker Solutions is responsible for the delivery of about 30 modules to what will become part of the world's largest subsea compression system, weighing approximately 6,500 tonnes. Deliveries of modules from our Egersund started in early October this year with the final transport to the field planned in the fall of 2026. Next, I wanted to highlight our progress on what we have called the second-generation renewables projects. These are projects we have taken on with balanced risk reward profiles and joint focus on standardization to drive down project costs. On Norfolk, we are progressing as planned on the 2 HVDC platforms executed in our joint venture with our partner, Drydocks World, seeing significant benefits in copying effects from the first to the second topside. We have also started work on the jackets for these platforms, taking advantage of our state-of-the-art robotic production line at Verdal. Lastly, I wanted to touch upon our hydropower business. Personally, I'm very happy to see that hydropower, which is a growing market, is back as a key offering to our energy clients. I don't know of many companies that can brag about having 150 years experience in this market, but we do. From our state-of-the-art facilities at Tranby, featuring Europe's largest mill-turn machine, we are supporting hydropower's new role in the energy mix, providing flexible and reliable power when society needs it. One example is the Svean project for Statkraft, where Aker Solutions is delivering all electromechanical equipment. This delivery is key to modernizing the Svean plant with a target of providing 10% more electricity through higher efficiency using the same resources. All in all, I'm pleased to see that we continue to deliver predictable project execution across our portfolio, and I would like to recognize the contribution of our 12,000 employees as well as the thousands of subcontractors and hirings who make this possible through their expertise, dedication and teamwork. Next, I will talk about our tender pipeline and market outlook. At the end of the third quarter, our active tender pipeline stood at about NOK 75 billion. This was a slight reduction from the second quarter, mainly driven by the announced cancellation of Equinor's electrification projects in Norway. In the current environment, the market conditions are getting tougher, especially for new investments within renewables and transitional energy solutions. A key part of our response is to work closely with both developers and our delivery partners to mature commercially viable projects. This relates both to the adoption of new tools and technologies such as AI and robotics, but also how we work together to come up with innovative concepts and designs that enhance efficiency, reduce costs and reduce delivery times. This joint improvement agenda is also highly relevant within oil and gas, where we are currently in the process of renegotiating several important long-term frame agreements for maintenance and modification services. And we're also working with clients to mature several greenfield oil and gas opportunities with the aim of turning them into future projects. So to summarize, the last 5 years have been a remarkable growth and transition journey for Aker Solutions. And I'm very proud of the fact that we continue to deliver solid financial results with such a high workload across our locations. This is a true testament to the capabilities of our 12,000 employees and the culture that we have developed together. At the same time, we recognize that the market is changing around us and that our activity levels will go down in 2026. That said, adapting to change is not something new in Aker Solutions' 180-year history. As mentioned, we have a scalable business model, enabling us to ramp up and down activity. Furthermore, we are working closely with our clients to mature new opportunities, both in traditional oil and gas and within renewables and transitional energy solutions. And finally, our financial position remains robust. This gives us a strong foundation to continue developing the company and generate solid returns for our shareholders over time. And now I will pass the word to Idar, who will go over the numbers in more detail. Idar Eikrem: Thank you, Kjetel. I will now take you through key financial highlights for the third quarter, our segment performance and run through our financial guidance. As always, all numbers mentioned are in Norwegian kroner, unless otherwise stated. So let me start with the income statement. The third quarter revenue was NOK 17 billion, up 29% from the same period last year. The underlying EBITDA was NOK 1.5 billion with a margin of 8.8%. If we exclude the net income from OneSubsea, our underlying margin was 7.2%, in line with our guidance for the full year. The underlying EBIT was NOK 1.1 billion with a margin of 6.6%. And the underlying net income was NOK 863 million, representing an earnings per share of NOK 1.79 in the quarter. Now let's take a look at the cash flow. Our financial position remains robust with a net cash position that increased to NOK 2.5 billion in the quarter. Operational cash flow in the period was around NOK 400 million. This was mainly driven by EBITDA contribution from our operating segments as well as reversal of working capital of about NOK 550 million. CapEx in the period was NOK 94 million, representing about 0.6% of revenues in the quarter. And lastly, the quarterly dividends received from our 20% stake in SLB OneSubsea was NOK 142 million. Now let's take a closer look at our segments. For Renewables and Field Development, the third quarter revenue increased to NOK 12.5 billion, representing a year-on-year growth of 36%. The underlying EBITDA in the quarter was around NOK 1 billion with a margin of 8%. The legacy lump sum project continued to be a drag on the margins in the period. However, I would also like to mention that margins on the second-generation renewable projects are healthy. The order intake in the period was NOK 7.1 billion, leading to a secured backlog of NOK 41 billion at the end of the quarter. Based on the secured revenues and backlog, we now expect the revenues in this segment to be around NOK 45 billion for the full year of 2025, representing a growth of about 20% from 2024. For the Life Cycle segment, the third quarter revenue came in at NOK 3.8 billion. This is a 10% increase from the same period last year. The underlying EBITDA was NOK 275 million with a margin of 7.2%. Order intake was NOK 2.6 billion or 0.7x book-to-bill. The backlog was NOK 19.1 billion, dominated by long-term frame agreements and reimbursable modification project with long-term customers. Based on the secured backlog and market activity, we expect revenue in Life Cycle to be around NOK 15 billion for the full year of 2025, representing a growth of about 15% from 2024. Moving to our financial performance of the SLB OneSubsea here shown as 100% basis translated into Norwegian kroners. You will also see that we have added some more detailed financial information about SLB OneSubsea in the appendix to this presentation. In the third quarter, OneSubsea reported revenue revenues of NOK 9.9 billion. For the first 3 quarters of 2025, revenues for the company were about NOK 30 billion. The EBITDA in the quarter was about NOK 1.8 billion with a margin of 18.4%. The margin in this quarter was negatively affected by change in revenue mix and one-off cost on our legacy project. Underlying execution, however, remains strong. So far in 2025, the company has delivered an EBITDA margin of 20%. Net income for the entity was around NOK 1.1 billion before PPA adjustments. After this adjustment, Aker Solutions recognized NOK 295 million for our 20% share. I should mention that these figures include a NOK 95 million catch-up effect from our second quarter reporting as actual performance was better than forecasted. In the first 3 quarters of 2025, Aker Solutions has recognized about NOK 670 million in net income from OneSubsea into our financial figures. The backlog for the company was NOK 47.3 billion at the end of the quarter. Order intake in the period was about NOK 11.5 billion or 1.2x book-to-bill. This includes the award of a 12-well all-electric subsea production system for the Fram Sør field for Equinor. The company expects order intake to increase towards the latter part of the year, positioning the company for growth in 2027 and onwards. As you can see, SLB OneSubsea is an important contributor to Aker Solutions' financial performance and value creation. Since the closing of the merger, SLB OneSubsea has built up a solid net cash position of about $440 million. The company has an attractive dividend policy with a target to distribute about $280 million to its shareholders in 2025. For Aker Solutions, this represents a dividend of -- at current exchange rate of between NOK 550 million and NOK 600 million this year. Now to sum up. In the third quarter, we continue to deliver solid financial and operational performance. As we have said before, the legacy lump sum projects have been both operational and commercially challenging. Commercial discussions are still ongoing with both clients and subcontractors to solve these commercial challenges. Based on our secured backlog and market activity, 2025 revenues is now expected to exceed NOK 60 billion with an EBITDA margin in the range of 7% to 7.5%. As mentioned, at this early stage, we expect activity levels to come down in 2026 with revenue forecasted to be around NOK 45 billion. SLB OneSubsea is an important contributor to the financial performance of Aker Solutions. The company has built up a solid net cash position and is on track to distribute about $280 million to its shareholders in 2025. At current exchange rate, this implies a dividend to Aker Solutions of about NOK 550 million to NOK 600 million this year. CapEx for 2025 is estimated to be around 1% of revenue. And lastly, working capital is expected to normalize to between negative NOK 4 billion and negative NOK 6 billion over time. That was the end of our presentation. So thank you for listening. In a few moments, we will open up for questions. Preben Ørbeck: Okay. The first question comes from Erik Fosså in SpareBank 1 Markets. Can you talk about the disappointing AR7 budget and how it affects your business, particularly looking at the Vanguard East and the Vanguard West projects? Kjetel Digre: Yes. First of all, a comment on U.K. If you look at the regions where we are involved and energy transition efforts and renewables, one of the places that are really both predictable and forward-leaning with ambitions is U.K. So that's one comment. I think this will develop and offshore wind is going to be a key to U.K. going forward. And then to this specific question. In Norway, we have our relation with our client RWE. And in those projects that I mentioned, the Norfolk, Vanguard East and West, we have milestones to reach and the projects are progressing very well as seen in the video here. The things are puzzling together in a predictable way. And we will just continue to deliver that in good sort of coordinated fashion together with our clients. So no big issues there, and we are pushing on. On the OneSubsea... Preben Ørbeck: And there is a follow-up from Erik Fosså on if you can give some indication on what to expect in SLB OneSubsea in 2026? Kjetel Digre: Just to start off just with the OneSubsea part of it, we are closely coordinated, obviously, through our ownership there. And what we see in different regions, for instance, in the NCS is that the subsea is a solid and healthy brick in the puzzle for energy projects. And for instance, the Norwegian continental shelf is going into an area where lifetime extensions, subsea tiebacks and also bigger greenfield subsea projects and also more complex technology elements like the compression project that is going to be stable/increase. And so that's what we see in our OneSubsea sphere. Idar Eikrem: Yes. Just to add to this, you will also see in this quarter that we have provided some additional information of the historical performance of OneSubsea since the establishment. So that should help you. And with the combination of market information, you should be able to sort of make some assessment of what the 2026 could bring. Preben Ørbeck: Moving on to a question from Lukas Daul in Arctic. What are the main factors that can impact your preliminary 2026 guidance? Idar Eikrem: Yes, our preliminary guidance for '26, as you can see, we have came out with the top line guidance and that we have put NOK 45 billion in top line, which is a reduction from current level of NOK 60 billion plus and that was expected due to the high activity level that we are currently doing. Preben Ørbeck: Moving on then to a few questions from [indiscernible]. I can start with the first, Aker BP has increased the CapEx guidance on the key development projects. How does this affect Aker Solutions as an alliance partner? Kjetel Digre: Well, first of all, I guess, information about projects and the status is something that we really get from Aker BP. Our part of it is that we are engaged as an alliance partner in big projects, many of them in different parts of the asset setup of Aker BP and the projects are on track, both when it comes to progress, when it comes to quality, safety and also the sort of the main prognosis of reaching the start-ups as planned. CapEx is then always a combination of potential new scope, which we know is part of some of these projects and then also how we, along the way, are taking actions to make sure that we are delivering within Aker BP's sort of frames and budgets. So -- and as an alliance partner, we are in a peak activity and many of us, including myself, are spending a large and a major portion of our time actually to safeguard these projects in a good sort of collaborative way in these alliances. Preben Ørbeck: Next question from [ Neil ] when do you expect the conclusion of the multiyear life cycle frame agreements that are currently on tender? Kjetel Digre: Yes. I would say it's quite a sort of a special timing now because many of them, almost all of them has been up for renewal. And I think without sort of commenting this firstly, what is really a great opportunity is that all our clients on these contracts are inviting for a common improvement push, and that's what we are right in the middle of now. And then these things will then -- it's back to the clients sort of decisions to when they are ready, but it will be in the months to come that these things will be clarified both in Norway, but also in, for instance, Canada. Anything to add, Idar? Idar Eikrem: No. Preben Ørbeck: The third question from [ Neil ] did you make any loss provisions related to the legacy projects in the third quarter? Idar Eikrem: Yes, that also cover another question that we have got on this provision line that you can see in the balance sheet, there is a reduction of NOK 100 million roughly from second quarter to third quarter. In that provision line, you will have 3 elements. One is onerous contracts, loss-making contracts, which is going down in the provision. And then you have a warranty provision on ongoing project, and those have increased during the quarter of natural reason of progress. And the last element that goes into that line is all other provisions that we have in addition to the 2 first ones. Preben Ørbeck: Thank you. Next question from [ Neil Agnus ] whether it's sustainable with a CapEx of only 1% in Aker Solutions? Kjetel Digre: Perhaps I can start just on referring back to the activity package. That's what we are right in the middle of now to deliver on. And when launched, pointing at all these oil and gas opportunities that we are now realizing, it came with an expectation and pointing at opportunities to both sort of modernizing the industry engaged in oil and gas and then also gradually make sure that we are ready to take on tasks and responsibilities in the new energy verticals. So that's what's been happening now for 3 to 4 years. We have been investing billions in our yards to upgrade to be more efficient, to be safer, and we also invested in the competence of our people. And all in all, this was necessary to be able to push through the activity level that we're actually engaged in just now. Historically, Idar, perhaps you can comment. Idar Eikrem: Yes. No, it's correct what you are saying. And now we are in a phase where we actually are capitalizing on the investment that we have done over the last few years. We have enlarged our capacity quite significantly. And revenues for next year is forecasted to be NOK 45 billion and 1% is sort of the CapEx guidance for that year due to the -- we can capitalize on the investment that we have done. Any sort of CapEx over and above that needs to be sort of separate business cases that would be good for us and shareholders to do, and then we will announce that separately as a special case. Preben Ørbeck: Excellent. That seems to be -- there seem to be no further questions from the audience. So with that, thank you all for listening in and from everyone here. Goodbye.
Xia Yangfang: Dear investors, analysts, good morning. China Merchants Bank 2025 3rd quarter result announcement will now begin. I am Xia Yangfang, General Manager of the Office of the Board of Directors of CMB. We have announced our third quarter result in this Wednesday, and this conference will be conducted via audio webcast. And now allow me to introduce the attendee first. And they are Mr. Peng Jiawen, EVP, CFO and Secretary of the Board of Directors; and General Managers from the Asset and Liability Management department, Financial Accounting department, Corporate Finance HQ, Retail Finance HQ and relevant departments. And at the same time, we have also invited independent directors Li Menggang, Liu Qiao, Tian Hongqi, Li Chaoxian and Ms. Li Jian to attend the meeting online. On behalf of China Merchants Bank, I would like to extend a warm welcome to your participation, and thank you for your warm support and investment in CMB. There are 2 sessions in today's meeting. First, we will -- introduction given by Mr. Peng Jiawen on the performance of our third quarter results, takes around 15 minutes. And the second session is the Q&A session, takes around 1 hour and 15 minutes. There will be simultaneously interpretation from Chinese to English for this conference. Now I would like to give the floor to Mr. Peng. Jiawen Peng: Dear investors, analysts, good morning. This Wednesday, we announced our third quarter results, and I am happy that together with the general managers of relevant departments in the head office, I can communicate with you. First of all, I would like to thank you for your attention and support. And I would like to briefly introduce our operational performance for the first 3 quarters. According to standard practice, the below mentioned statistics are under the IFRS calibre also the H-share announcement calibre. Since this year faced with complicated environment, we stick to our strategic target of building a value creation bank and stick to a dynamically balanced development philosophy of quality, profitability and scale. And our general development has extended to be development in a good momentum, and there are 5 features of our operation. Firstly, our core profit indicators remain stable and trending towards good trajectory, ROAA and ROAE and CAR maintained at a high level. The group's net operating income was RMB 251.28 billion, a year-on-year decrease of 0.52%, with the decrease narrowed by 1.21 percentage point compared with the first half. Net profit attributable to the bank's shareholder was RMB 113.7 billion, year-on-year increase of 0.52%, up by 0.27 percentage points compared with the first half, ROAA and ROAE were 1.22% and 13.96%, up by 0.01 and 0.11 percentage points compared with this half. We continue to strengthen cost management. Our cost-to-income ratio was 29.86%, maintained at an appropriate level. We maintained sufficient and high capital level and under the advanced approach, our CET1 CAR was 13.93%, Tier 1 CAR, 16.25%. Capital ratio -- total capital ratio 17.59%, down by 0.93, 1.23 and 1.46 percentage points compared with last year-end. We also strengthened asset liability management and secured both increase in loan and deposit scale. We cope with multiple challenges and promote the growth of our low-cost core deposit. We maintained optimized liability structure. As of the end of September, our total asset was RMB 12.64 trillion, up by RMB 4.05 trillion compared with last year-end. Total loan RMB 7.14 trillion, up by 3.6% compared with last year-end. Retail loan RMB 3.7 trillion, up by 1.43% and accounted for 51.8% of the total. Corporate loan, RMB 3.15 trillion, up by 10.01% compared with last year-end. Financial investment balance totaled RMB 4.03 trillion, up by 10.52%. Our total liability was RMB 11.37 trillion, up by 4.12% compared with last year-end. Total customer deposits RMB 9.52 trillion, up by 4.64%, accounting for 83.73% of the total liability. The average daily balance of demand deposit accounted for 49.45% maintained at a high level. Thirdly, our NII maintained steady growth and our NIMs decrease narrowed. We continue to strengthen our low-cost funding advantages, influenced by LPR cut and other influence along with insufficient effective credit demand, especially in the retail loan, we have pressure in our loan yield of the interest-earning assets. For that, we continue to optimize our structure and strengthen liability cost control to drive the improvement of our liability cost and offset the pressure brought by the narrower spread. For the first 3 quarters, our interest-bearing liability cost ratio was 1.31%, down by 38 bps, among which customer deposits average cost ratio, 1.22%, down by 36 bps year-on-year, driven by the above-mentioned factors. Our NII was RMB 160.04 billion, up by 1.74%. For the first 3 quarters, our NIM was 1.87%, down by 12 bps year-on-year. The decrease was narrowed. The decrease was narrowed year-on-year. Fourth, our Wealth Management business has shown good growth momentum, and our net fee and commission income recorded positive year-on-year growth for the first time in 3 years. Since this year, we see recovery in the capital market and the bank sees opportunity to achieve good growth in the wealth management business. Our retail clients totaled 220 million, up by 4.76% for the Sunflower and above client, 5.78 million, up by 10.42%. Our retail AUM was RMB 16.6 trillion, up by RMB 1.67 trillion compared with the end of last year, a growth rate of 11%. For the first 3 quarters, our wealth management fee and commission income was RMB 20.67 billion, up by 18%, a faster growth than the first half. Agency sales of wealth management products, mutual fund trust scheme grew by 18%, 38% and 46% year-on-year. Our agency sales of insurance policy was decreased by 7.05%, and driving by the above factors. The group's noninterest income has decreased, narrowed. And for the first 3 quarters, the net noninterest income was 91.24% and accounting for 36% of the total net operating income, among which net fee and commission income was RMB 56.2 billion, year-on-year increase of 0.9%. First positive growth since the year 2022. Fifth, we maintained stable asset quality. Our NPL has maintained an increase in its balance and decrease in its ratio and the NPL balance was RMB 67.4 billion and the NPL ratio was 0.94%, down by 0.01 percentage points. Our new formation of NPL was RMB 48 billion. Annualized NPL formation ratio was 0.96%, down by 0.06 percentage points. The company closely monitored the change of the external environment and enhanced our risk management capability to prevent risk in key areas. Under the bank's calibre, the NPL in our property and manufacturing sector were 4.24% and 0.45%, down by 0.5 and 0.05 percentage points. NPL in retail loan ratio was 1.05%. The risk was under control. The group continued to stick to its prudent and stable provision policy. Our annualized credit cost was 0.67%, up by 0.02 percentage points. Our allowance coverage ratio was 405.93%, down by 6.05 percentage point. Loan loss provision ratio, 3.84%, down by 0.08 percentage point and maintained at a leading position in the industry. The above are our characteristics of our operation for the first 3 quarters. Since this year, China's economy maintained stable and our high-quality development has made good results, but there are still risk ahead, and many uncertainties were still lying in the external environment. This month, we see the fourth plan recession of the 20th CPCCC approved the 15th 5-year plan, mapping out the new blueprint of the next 5 years China's development, also providing good opportunities for the Chinese banks. We will continue to promote our transformation into international comprehensive and differentiated and intelligent development and provide better value for our customers, employees, shareholders, partners and the society. Xia Yangfang: For the next part, we will enter into the Q&A session. Please follow the instructions given by the operator. Please state your name and the agency you represent before you raise the question. Operator: [Operator Instructions] Now we'll have the first question. The first question is from CICC , Zhang Shuaishuai. Shuaishuai Zhang: I have a question for Mr. Peng about your short-term demand and long-term development strategy and the current environment is not favorable for CMB. We don't see sufficient demand from the retail loan, and we see some challenges ahead which will influence CMB's business. We see some of your banking peers. They're trying to make up the lowering pricing by increasing quantity or lower their risk appetite to realize a short-term financial target? And what is your view towards this phenomenon? And how do you strike a balance? I know that the external environment and the capital environment has posed a high requirement on CMB. And what do you think that CMB can use in terms of your new model, your business strategies to balance -- strike a balance between short-term demand and long-term strategy development to realize an offset? Jiawen Peng: Thank you for your question. Well, according to current situation, we need to hold an attitude that is objective enough. The macro economy is stable in a steady progress, high-quality development momentum is still there. For the first 3 quarters from the macro statistics, the environment withstand the pressure and make steady progress. But objectively, we still see some challenges ahead. The bank's operation, of course. It requires our attention. For instance, you have mentioned that the demand from the retail loan and the fee card, these are all challenges posed to CMB in terms of our operation. But generally speaking, CMB have withstand those pressure. For the first 3 quarters, our performance has shown that we have met our expectation. And we have realized good growth momentum. I would like to briefly introduce my view. Beyond the 5 characteristics I mentioned above, there are some other highlights within our performance. I think to some extent, that could answer your question as well. Through our hard work in this field, we have realized a good development, and maintain good momentum. And these are the aspects I would like to mention. Besides on the revenue and our profit, even though they are under pressure. I won't mention too much about it, but I would like to emphasize that behind our financial indicators, there are some situation that I would like to seize your attention. One is that our customers grow, our customer base growth should show good momentum, no matter our corporate client or our retail clients, we see the client growth as our base of development. And if you take a look at our detailed figure of customer growth, our mid- to high-level clients has secured a growth of over 11% in terms of customer number. Within it, some high value client number, value client number, these growth type are showing good momentum. The CMB's wealth management business have also picked up and realized a double-digit growth in terms of its income. The wealth management income has realized a year-on-year growth of over 18%. If you take a look at excessive wealth management business, our income has secured a growth rate of over 11%. Our AUM when surpassing RMB 16 trillion level. By the end of September, we have already secured a retail AUM of over RMB 16.6 trillion, an increment for the first 9 months of RMB 1.67 trillion, which is quite impressive. Influenced by the external environment, we see the recovery of the capital market, and this has also bring us opportunity. We see these opportunities relying on our good customer base, relying on our capability, and this is what we will continue to nurture. And I also see some other highlights. I want to especially mention that our subsidiary are also showing good growth momentum this year. By the end of September, the total assets of our subsidiary companies were RMB 900 billion, surpassing RMB 900 billion, a growth rate of 8%, representing compared with the end of last year. And the net profit growth has surpassed 16%. We see the current opportunity and they have emerged into CMB's overall development. Besides the highlights in our subsidiary, I think we are also developing in our international business. The total asset of our overseas institutions has surpassed 10% in terms of its total assets. We seize the opportunities arising from the Hong Kong market. And our Hong Kong subsidiaries grew 10% in terms of its total assets and 27% in terms of its profit and income. And our cross-border business, the international BOP has surpassed 90,000 customers. In terms of FX business, we maintained good momentum of growth, a growth rate of 15% for business on behalf of customers. So to -- from the 2 highlights, our subsidiary and our cross-border business, this is 2 of our 4 major developments. We have also captured some highlights from it. And of course, we maintain a good foundation of our asset quality. This is the base of our development. Without a good asset quality, we cannot secure what is building above the asset quality, that is our performance, our customer base and et cetera. So through this year's effort, I think that can reflect what we have withstand. And to coping these pressures, I think we still have some measures that are going to take in response to the insufficient effective credit demand of retail loan, we still regard the retail loan as the cornerstone of our business. And I think we cannot -- we will not change in maintaining relevant market share and our market position in the retail loan business. So in this year, we have also made some efforts in developing corporate loan under insufficient credit demand from retail side and our asset growth in the corporate loan grew by 10%. And these loan growth are in line with the government's guidance. And later on, I will ask our relevant colleagues to introduce the detailed situation. We will also maintain a good management of asset allocation and maintain a stable momentum of our NIM targeted at current risk situation, we will maintain good risk management capability. You have also mentioned some long-term strategy. No matter on the beginning of the year or the interim report or our daily communication with our investors and analysts, we have also mentioned about what we are considering about the future development. We have got our layout for the future development, combined with the recently announced 15th 5-year plan, CMB has also mapping out our own 15th 5-year plan. So generally, we will stick to our plan of value creation bank, building a value creation bank. And for some certain direction, we will continue to focus on the modern industries to enlarge our efforts in the opening up and et cetera. These opportunities arising from some window opportunities, we will seize these opportunities. We will combine the strategic focus of our own 15th 5-year plan with the national's 15th 5-year plan. Of course, I would like to mention again that developing retail business will still be our focus. And the third is that the transformation of the 4 development will continue to be our focus, the international development, the comprehensive development, the distinguished development and the intelligent development. We will speed up this transformation. This will be implemented thoroughly into our own 15th 5-year plan. Besides our efforts in the business development, we are still paying special attention to our daily management, including NIM management, asset quality management, financial management, expense management, all cost management. These all we will continue to pay attention to and also including risk management, we will guard our bottom line to secure our bottom line of risk management. So generally, for current pressure, we are calm, and we have made early preparation. This will be all reflected in CMB's own 15th 5-year plan. Xia Yangfang: The second question, please. Operator: The second question is from Mr. [indiscernible]. Unknown Analyst: Congratulations for your results for the third quarter. I'm from PICC. And I think that you have a positive profit growth in the third quarter. And also you have maintained sound asset quality. My question is for Mr. Peng for NIM. Just now, you mentioned about the weak demand in the retail side. So my question will be, what kind of impact will the weak demand be on for your asset structure? What will be the impact on your NIM? So how long do you think that the NIM will continue to decline and whether the declining period for CMB will be longer than that for the state-owned banks? Jiawen Peng: Thank you for your question. I think NIM is a concern for all the investors. And during the interim results conference, I shared with you my judgment on NIM, namely, we will continue to maintain a leading NIM level, absolute NIM. But for the marginal change, we are under pressure. But I think the decline will be under control. These 3 judgments are made during the interim results. And NIM is -- will be -- is still affected by structure of our asset and liability and also our active management, which is why we have maintained a sound NIM in the past. Nowadays, we are seeing that our retail loans are still under pressure, which is 51% of our total loan portfolio in the past is kind of the backbone of our loan book. And it's also the main reason why we can maintain a leading NIM. So as for -- currently, retail loan are facing pressure in loan growth, but still it has made quite a big contribution to the NIM. And at the same time, we need to see that if there is a slowdown for retail loan growth, definitely, that will have some marginal negative impact on the NIM. That is why I say the NIM marginal change will be under pressure. I think there are main 2 reasons behind the pressure. But of course, we will continue to maintain a leading absolute NIM level, but for the marginal change will be under pressure which is affected by the following factors. The first one is a slowdown of retail loan growth, especially for credit card loan growth and also for consumption loan growth, micro loan growth, all growth rates are slowing down. This has made some challenge to the asset structure. And as for -- compared to the peers, we have a higher proportion of retail loan. So that is why we are facing higher pressure than peers. Second factor is that from the liability cost, just I mentioned, our liability cost is around 1.02%, down by 36 bps, which means that since we have maintained the lowest level of liability cost among peers, and at the same time, we continue to reduce that by quite a big amount, which means that in the future, the further room for us to further lower down the deposit cost will be smaller because if you look at the demand deposit ratio is around 0.05%. So there's a little room to go. And more room coming from the term deposit but we have an even higher demand deposit ratio, which is why we can benefit less compared to peers in the future from the lower down of the deposit cost. And third judgment is that we think that the future trend will be under control, which means that we have our judgment on how deep that the NIM will go down. We have our own analysis and also we have done strategy considerations about how we can counter with the NIM decline. So firstly, I think we'll continue to focus on retail loans. This year, even though retail loans growth is slowing down, it is around 1.34%. But this number is a strong number, but compared to the overall banking industry, we are still higher than the average level, which means we are increasing our market share. And the thing I would like to -- the point I would like to point is that the slowdown of the retail loan is mainly affected by the macro situation. At the same time, we don't want to lower down our risk criteria. That is why we have a slower growth rate, but our market share has continued to increase, which means that retail loan is still a focus of our business. And we are stepping up our efforts and also putting more resources into our retail business, we have made adjustment to our retail business unit and also credit card unit. We are confident that we can continue to improve our market share. And just now Mr. Zhang Shuaishuai from CICC also mentioned about whether we will choose to lower down the risk criteria. I think lower down the risk criteria will not be our choice. The other words to say that is that to make up the shortfall of the loan growth by compromising risk. This is something we will not choose to do. Some say that we need to -- if the price comes down, we need to grow more loans. This means that to grow more amount to make up the shortfall coming from the pricing coming down. But we will not choose to lower down the risk appetite or sacrifice risk to -- in order to gain amount growth. And I think in the future, that the risk from retail side will be stabilized. And as long as the government is trying to lay out many procedures to stimulate demand. And I think at the end of the day, the retail loan will grow again. And also, we will have active measures such as for corporate loans, we have our own strategy for how we grow our corporate loan, and we have reconsidered great debt, including for big midsized and small sized enterprises and the major areas that we would like to focus on. So we think there's a big room to go. And also from liability side, we will continue to maintain a sound liability structures such as the demand deposit proportion you mentioned. And this year, we are seeing that the demand deposit ratio is changing or is trending good towards a better direction. This will be also beneficial to our cost control. And thirdly, is the asset and liability portfolio management that will also help with the NIM side to improve the structure so as to improve the NIM level. So overall speaking, I think for the future trend of the NIM, we are confident that hopefully, that the NIM can reach the bottom and begin to stabilize. Just now for your question, I would like to share 1 of my 2 personal views. I think very important for banking industry today. The first one is that we need to take a perspective from customer. Just as I said, the customer is the foundation of our business as long as we have the customer in place, no matter how product changes because product changes according to the external environment, such as if there's less demand for assets, such as you will face the slower growth of retail, but at the same time, your AUM in your wealth management products can continue to grow. So this also will help with the income for the bank. So taking the perspective from the customer to -- will be very important for banking operation rather than purely focusing on 1 or 2 products. Secondly, I think very important is balanced and diversified operations. A bank's operation and development cannot focus on one aspect. It should be very balanced and also diversified structure such as if there's a slowdown of retail loan, then if we can do better in corporate loan or if we can do better for the asset allocation for retail customers, if they didn't choose to place the demand deposit or if when the market is not performing well, you can provide more deposit with the customer, or when the customer doesn't have demand for loan, but they still have demand for wealth management, which means that customers demand will be very multifacet. So if you can provide a balanced products, multi-level products for the customer, you will have a very balanced and also diversified business structure, no matter how customers' demand changes or how the products they choose changes. Then this balanced and also more diversified structure will help you to maintain a more stable income. Xia Yangfang: Second question, please. Operator: Next question is coming from May from UBS. Meizhi Yan: Can you hear me? Xia Yangfang: Yes. Meizhi Yan: I'm May from UBS. And congratulations for your results in the third quarter. It's a very stable results and also trending towards the better direction. My question is still about NIM. Just now you mentioned for liability cost is declining. This will be beneficial for your NIM. Q-on-Q it is around 10 bps down. So the level of the decline is smaller than the peers. I think that CMB has always maintained advantage in liability cost, but now China has ensued a low interest rate environment. So the advantage for you and the liability cost, is that still strong -- as strong as before? How do you view that? Or do you think the advantage is also contracting? The second question is that the capital market is performing better. There are some discussions on deposits moving around to other parts outside the banking industry. So whether there will be any marginal improvement on demand deposit ratio. But in the third quarter, you can see that your demand deposit ratio is still declining. But why? Why the trend is still declining? And also for liability costs, we are seeing that the rental cost, rental linked cost and also the debt costs are also rising. What are the reasons behind that? Unknown Executive: As for liability cost I think just now Mr. Peng has made his judgment on NIM, I think, it's also applicable to liability cost. Firstly, I think we still have a leading liability cost advantage. For the first 3 quarters, the liability cost is 1.31%, down by 38 bps. And our customer cost is 1.22% and down by 56 bps. And for interbank cost is 1.06, down by 54 bps. So in absolute amount, you can see that we'll have a very low absolute liability cost and a very low absolute level, you can see we still have reached quite a big level of decline. And secondly, Mr. Peng just mentioned that for the marginal improvement, we are under pressure. So you might concern about if compared to peers, whether the decline level might not be as big as our peers. I think the main reason is that it's mainly decided by the features of our deposit costs. In liability costs, we have a higher proportion of customer deposit, namely around 85% and amounted around 50% are coming from the demand deposit. These are very high. This structure feature or characteristic means that we cannot benefit more from the rate card of deposits because rate card is more on term deposit side rather than on demand deposit side. And just now I mentioned demand -- customer deposits make up around 85% of the total. That is why when interbank or market rate is coming down, which means we also cannot benefit from that because some of the peers, if they cannot have so high proportion of customer deposits, well, they will have a more higher proportion of the interbank liability, which means they can benefit more. And especially this year, it's very obvious. The interbank costs are coming down quite rapidly, but we have a lower proportion, lower -- that is why when you see the marginal improvement, we might not be big as our peers. But if you look at the absolute amount, we're still having the very absolute leading position. And thirdly, I think that the trend for the cost deposits to decline is continuous. For September, our RMB demand deposit is only around 1%, and this trend actually continues into October. And for demand deposits for RMB level, we have a daily average growth of over RMB 200 billion. The demand deposit cost is around 1% and it's mainly coming from the demand deposit. So currently, we can see we still have a leading position in the liability cost. And we are continuing to see the trend that the deposit cost is coming down. The only thing is that if you -- from the marginal improvement, since we have a very low absolute amount, that is why the marginal improvement might not be as big as the peers. So I would like to confirm that we are very confident to have a leading liability cost advantage in the future. Second, to your question about the demand deposit ratio. So for this year's trends, we are seeing for the whole banking industry, it's quite obvious that we have a term deposit trend. And this year, I think this term deposit trend is continuing, but from third quarter with the warming up of the capital market, and also M2 and M1 gap are narrowing, we think that there are more and more deposits becoming demand deposit. In September, for the single month, our demand deposit ratio have increased again. So demand deposit ratio is still our advantage. We will take active liability and asset management measures to promote those settlement-related business so as to gain the source of the lower-cost demand deposit. And when the market -- in the market, people tend to have more demand deposit. If this environment continues, we definitely are confident that the demand deposit ratio will continue to ratio will continue to improve. And also for thirdly, for the cost for bonds. Just now I mentioned that since we have a very high proportion of customer deposit, 85% of the total deposit. So for RMB side, we do not have any demand to raise RMB from RMB bond market. So this year, we have done some funding raise from the bond market in the overseas market. And this year, since our overseas branches, they have demand for overseas assets. That is why they have underwritten some overseas bonds, so as to raise the funding side, that is why have led to an increase on the RMB side on the cost on the payable bonds. So marginally, you are seeing for the cost has risen, this is mainly because foreign currency-denominated fundraising. And for the rental cost, this is more related to the rental agreement. Rental agreement is set on a certain date. And that is why we are seeing that the agreement was signed previously, so that cannot change for the time being. Xia Yangfang: Next question, please. Operator: Next question is from Zhu Chenxi from Guotai Haitong Asset Management. Zhu Chenxi: I am Zhu Chenxi from Guotai Haitong. I have a question regarding the income from agency distribution of mutual funds. I noticed that this income realized in the single third quarter, there is a growth rate of 98%, around double. It is relevant with the recovery of the capital market. I would like to understand your outlook towards this income. The growth rate is quite high. Is it sustainable? And the industry itself, the mutual fund industry, we see the third phase fee cut in the mutual fund industry. And what is your understanding of the future influence of this policy, the introduction of this policy. Jiawen Peng: Thank you for your question. Regarding your first question, my answer is as follows. For the third quarter, the agency distribution of mutual fund is growing fast. It is mainly because of the following reasons. One is that thanks to the recovery of the capital market and the rising risk appetite of our investors. And on the other hand, we have also optimized our structure of mutual fund product, and we enhanced our supply and optimization of the equity-related products. And looking into the future development, the above mentioned 2 factors will continue to give great contribution. But considering the same period of last year, there are some high base effect that we need to take into consideration. I think these 2 factors will marginally become milder in their contribution. And for your second question about the third phase fee reduction in the mutual phone industry, what kind of influence will it bring to the income of this sector? I think there will be influential reasons align behind. And of course, we will be put under the pressure of the influence itself. But we understand that we are still in the phase of advice consultation, and there will be a transitional period for further implementation. So I think that for the income of 2025, the influence is limited. In the year 2026, the influence will be rather negative, and there will be some pressure on our income in mutual fund business. And generally speaking, regardless of the redemption fee and subscription fee and also the self-service fee, the 3 dimensions will be put under pressure internally speaking. But to see from the industry level, it is not the first time that we have overcome this kind of fee cut policy arrangement. We will act aligned with the market trend and the customer demand and to make efforts in the following 2 aspects. Firstly, we will continue to follow our high win rate and diversified allocation strategy and take active measures to enlarge our sustained and retained AUM foundation. And for the second aspect, we will continue to follow the market change and understand more and adjust to customers -- adapt to the customer demand to optimize our structure, enhance our resilience and increase the fee rate and increase the return of our product and realize a high-quality development. These are my answers. Xia Yangfang: Next question, please. Operator: The next question is from China Securities, Mr. Ma Kunpeng to raise his question. Kunpeng Ma: I am Ma Kunpeng from China Securities. I have a question regarding the micro -- small and micro finance business. So in recent years, we see fierce competition in this kind of business, but the demand is quite weak. Especially for the recent period, the asset quality, we see some deterioration and the pricing is also declining. I would like to understand from you about the loan pricing of small and micro size loan. Well, considering the cost, the credit cost, the funding cost, operational cost, when you cover all these costs, will there be further room for making profit? And have you made sufficient provision -- and from a RAROC perspective, will small and micro finance business still become your priority in your retail credit business? These are my questions. Unknown Executive: Thank you for your questions. I would like to briefly answer in the following aspects. So small and micro finance, these are a sector under the retail finance business. And just now Mr. Peng has mentioned that in the whole market, the retail loan is under a thorough -- a very tough growth trajectory. So from the market perspective, I think the market is still growing in retail finance business, but the trend is slowing down and the social financing, resident loan and the corporate loan, the structure -- the loan structure itself have all reflect the pressure in the industry itself in growing retail loans. But CMB, our market share is undoubtedly increasing. And of course, for small and micro finance, we are still faced with challenges such as insufficient credit demand and et cetera. Banks are quite -- are having very difficult situation and trying to find a way out. For some banks, they're trying to expand their volume by using lower loan pricing. But for CMB, ourselves under this difficult situation, we choose a more balanced strategy to cope with current situation. In response to current situation, we will put risk management in priority. And based on good risk management, we will strike a balance between the growth in quantity and pricing. And of course, the first I'd like to especially mention is that we manage a good control in our risk. We maintain a leading position in the industry in terms of our risk control. The second is that we have secured our pricing in retail loan. We have not used a low-price strategy to enlarge our risk loan volume. It's a reasonable growth, as you can see. In safeguarding our pricing, we have realized a reasonable growth, a year-on-year growth of around 4%. The growth rate itself is quite leading in terms of our commercial banking peers. I would like to talk a bit more about the risk that you have mentioned. We have increased a quarter-on-quarter increase -- a mild quarter-quarter increase in our risk itself, the NPL ratio. Well, based on the industry trend of increasing risk, we cannot be alone. We cannot stand alone to be having an opposite trajectory. We have been doing a lot of assets in studying industry, in the industry chain and to try to seize more qualified clients. And the second strategy, we pay special focus on regions with higher quality developments such as Yangtze River Delta, Pearl River Delta. And for the third strategy, we have maintained good control in having good collaterals and nearly 90% of the collaterals are secured by ourselves in terms of our small and micro finance loans. And our asset pricing has continued to evolve and to reevaluate in terms of its collaterals. So we have quite good buffer for our asset quality of retail of small and micro finance loans. And for the provision itself, we are quite confident that we can maintain quite a good leading position in the industry. About quantity and pricing balance that you mentioned, we have always followed a balanced philosophy in quantity and pricing. We will continue to stick to this principle. And for the second aspect, I believe that under the guidance of anti-involution and self-disciplined mechanism in the industry. I think, to some extent, given some time, the industry will be back to its reasonable competition. I believe that it is quite a good trend that is beneficial to the industry itself. So I believe that the retail finance, the retail loan, the small, micro finance loan will still be the milestone of our business. And of course, I believe that for the external environment, we could be positive that the trend is still there. The Chinese economy is stable and developing in a good progress. So there will be future room for the growth of retail loans. So in conclusion for CMB, small and micro finance loan is under our guidance, our principles of balanced development, and we will continue to maintain a quite certain proportion of small and micro finance loan in retail loan and also balanced proportion of retail loans in total loan. We will also making efforts to ensure that we have certain market share in the industry. Xia Yangfang: Next question, please. Operator: Next question is coming from Shen Hu from North Rock. Hu SHEN: My question is for asset quality. After I read our third quarter results, in the bank's asset quality are moving in the same direction. For CMB, we can see that NPL has rose by 1 bps. It's -- can I understand it is a normal volatility among quarters? Or does it mean there will be continuous pressure on your asset quality? If you look at other figures like you are seeing the overdue ratio are declining but a slight increase on NPL and also stable special mention loan ration. Does that mean that asset quality is still under pressure, but at the same time, still under controllable or we might not be seeing very obvious improvement in next phase. So can you share with us about the NPL formation trend per month? And how do you look forward to the future trend such as in the fourth quarter and in next year, what other factors? What major factors will you have? Jiawen Peng: Thank you for the question. Firstly, I think for the volatility, I think it's a normal volatility. It's all under control and under controllable range. Secondly, about the future trend of asset quality or what the challenges ahead. I think for asset quality, I think overall, it's under control. But in different phases for different time point, we might face challenges, such as currently for corporate banking. And I think the major impact will be coming from the real estate sector, even though we are stepping up our efforts in controlling asset quality in this area. But periodically, we might see some volatilities and also see some periodic challenges. And secondly, for retail, like consumption loan and micro loan, NPL formation, we are seeing it's still increasing. So these are the major challenges we are facing, and this is also the cause for the volatility of our asset quality indicators. So overall, I think everything is still under the controllable range and maintaining a stable trend. Xia Yangfang: Next question, please. Operator: Next question is from Gary Lam from HSBC. Jia Wei Lam: I'm Gary from HSBC. My question is about your CET1 ratio and also your RWA. In the second and third quarter, we have seen that the CET1 ratio has declined quite rapidly and also RWA growth rates are also faster than what we have expected. So what are the reasons behind? And also what will the -- will this trend continue in fourth quarter in 2026? And whether it will affect your capability of endogenous capital growth and also the continuity of the sustainability of your dividend payout? Jiawen Peng: Thank you for your question. Indeed, in the second also in the third quarter, as we can see that the RWA growth rate has been quite fast. And as for risk-weighted approach and also for the internal rating approach, we see the RWA growth are speeding up. There are several reasons behind. Firstly, last year in order to -- in line with the new regulatory capital rule, so that is why there was a low base for RWA growth rate last year. And secondly, this is mainly because of the structural change of business this year. And since retail loan is growing lower for the whole banking industry, so all the banks, almost you can see are having a faster growth on corporate side, retail loans slowing down. This is the same with CMB. As we can see its growth rate for corporate loan till now is 10% and also retail only 1.4%. We all know that the risk weight for corporate loan and retail are different. So this structural change has led to RWA growth. And thirdly is that for bill discounting, discounting rate is coming down. So we hold less bill discounting this year. And we invested -- shifted the investment into interbank lending and the risk weight for bill discounting is also smaller, but risk weight for interbank lending are higher. So this also lead to a higher RWA growth. And fourthly, in order to improve our profitability, we also have increased our investment for trading purpose, just even though we have lowered down the holding of bill discounting, but we have done more bill discounting for trading purpose on behalf of our customer. So we have slowed down some of the bills after we bought in according to the regulation before we sell down, it still occupies even for the trading purpose, we still occupies the periodic RWA. This also lead to RWA growth. And fifthly, in order to gain some trading profitability, so we have increased our holding in the PO account and also have done more trading. That is why -- which has led to a higher market risk and also which lead to a higher RWA growth. So all these together, we can see that some are in part due to the business structural change. Some are short period, or volatility lead to a higher growth RWA, especially for the trading parts are lead to RWA growth. And sixthly, definitely -- and also just you mentioned about the CAR ratio, one is due to the RWA growth and the second one is that another factor, except from the RWA growth rate is because from the OCI account. Last year, we have seen a quite a big decline on the bond holding in OCI account, which were quite beneficial for the CAR ratio last year. But this year, we have seen more volatilities in the bond market, which also affected the overall other income in the OCI account, which definitely has affected the net amount of our capital. So these are the main reasons why the RWA growth are faster, but CAR ratio are coming down. And I would like to say that the capital management is very important for our internal management. So in the future, I think from 1 perspective, since we have relevant strong capital base, and that is why we will definitely support the business since the all banking industry's profitability are under pressure. And I think we need to expand our trading parts so as to make profit from the trading gains. So we need to support the trading business. And also secondly, we need to make more precise management of capital. As for different products have a different return on capital, we will analyze that and also to put more resources of capital into the products and business units which have a higher return and also control the resources, which have a lower return. And looking forward in fourth quarter, I think with all measures taken and with more precise management and also we have more -- we need to manage the trend of the CAR ratio. So in the mid and short -- in the mid and long run, no matter the CAR ratio or the Tier 1 ratio, I think we will continue to maintain our leading advantage, but also at the same time, we also need to utilize the capital to support the business, which are effectively will bring us more profitability. So even though there are some marginal volatility. But in the future, in the long run, I think we will still continue to have a sound CAR ratio and also have a leading position and also stable CAR ratio. Xia Yangfang: Next question, please. Operator: Next question is coming from Katherine Lei from JPMorgan. Katherine Lei: My question is for fee income. I thought your fee income has been positive in the third quarter, whether it's a trend that is sustainable. And in the fourth quarter, whether -- since you have a high base, whether it will slow down or become negative. And looking into the detail of fee income, you see that the asset management fee for the third quarter has -- from turning from negative to positive. What's the reason behind that? And also for the banking fee decline, whether the decline level will contracting or slowing down? Jiawen Peng: Thank you for your question. So firstly, for fee income, I think it's moving in line with our expectation and is moving towards a better direction. In the third quarter, we have seen positive growth for income. And also, this is a positive growth first time since 2022. And in the third quarter for a single quarter, an increased by 17%. So it's quite a strong growth. And just now my colleagues also mentioned about the reason behind the fee income. So one is coming from the wealth management business. We have seen strong growth on that front, especially from the retail side, including distribution fee coming from agency from the -- and also trust products and also brokerage securities. And just now you mentioned about the asset fee growth. Even though for the first 3 quarters, I think it's down by 1.9%, but the decline level is narrowing down. The reason behind, firstly, I think it's related to the capital market performance. Secondly, I think, it's related to the growth of the asset management, total assets under management. In the third quarter, it has increased by 2.9% compared to the beginning of the year. And thirdly, I think we have seen growth on the custodian part. So among the fee income, we have seen quite good performance on wealth management and asset management and also custodian business. So if we look at the trend, I think the capital market is still moving in a good direction. So capital market-related fee income, we are quite confident on that. And the confidence actually is coming from the strong base, strong customer base, especially for quality customers, we are seeing more and more customer growth and also secondly coming from the growth of our AUM. And also -- but we also noticed that in the fee income among for payment related, fees are quite weak and also still under pressure. And year-on-year, we are still declining. This is mainly because of the credit card business. For credit card business, there are 2 reasons behind the decline or I think it's also a way that we observe the future trend. Firstly, is the recovery of the consumption market. In the first half and also in third quarter, we are seeing that since we haven't seen the data in the third quarter of the consumption data. But in the first half, we are seeing that the consumption has been down by 11% for the whole market. So the whole market is still under pressure. Our transaction value only declined by 8%. In third quarter, it is down by 7.7% for our credit card transaction value. I think the decline level of our credit part is better than the overall trend, but still is under pressure. So that is why payment-related income, especially from credit card is still under pressure. And another thing to look at that is even though payment from credit card is under pressure, but our market share is still increasing, and now we still have the largest market share. In the first half, the market share -- our transaction value market share is around 14.32%. I think it's still the highest in the market. But look in the future, with governments continue to stimulate consumption, we think that the consumption market will continue to improve, which will lead to an improvement on our credit card-related business. So we think that we are thing that the trend will be in line with the whole market. And fourthly, just now you mentioned about the investment related other noninterest income. If we look at the other noninterest income, even though there is still a decline in the third quarter, but still the decline level is also contracting. Amounted income from investment are moving in a better direction. Firstly, the long-term equity investment is improving, including our subsidiary like the CMB Cigna according to the new accounting policy, this is -- we have some increase on the income coming from CMB Cigna. And also secondly, coming from the dividend of our funds we have invested in. And thirdly is from the bond trading account. And fourthly, from the FX exchange, we also have turning from negative growth to positive growth. So even though we are seeing negative growth on the other noninterest income, mainly affected by the bond market performance, but other factors are also turning into the better direction. Xia Yangfang: Next question, please. Operator: Next question is from Xiao Feifei from Citic Securities. Feifei Xiao: I have a question regarding wealth management business. Along with the recovery of the capital market, I would like to understand that about CMB's wealth management business, what are the new transitional direction for you? And how do you evaluate the new gesture or new plan for future development? And what is your assessment of your future performance and income in this business? Jiawen Peng: Thank you for your question. You have just mentioned about a question that we have been considered to think -- the social wealth total volume and the future room to grow, I believe, there are a large room. Well, for us, I think that we would like to seize this opportunity in the overall strategy. We will stick to our principle to develop customer base, especially high-quality customer base. This will be the foundation of our business development. This is the first dimension. And the second dimension is that for CMB, we are unremittedly pushing forward customer service, a new service mechanism of human plus digitalization. We hope that we can implement this new mechanism to realize a further upgrade and further outreach and deepen our service model that we can deliver to our clients. And the third is that we have -- we see there are a larger room to provide professional wealth management consultation service, and we hope that we can provide a stronger service in this area to provide a better customer experience. And for the fourth dimension in the product itself, we think that we need to satisfy our clients' clients and satisfy our clients and center on their demand to realize a high win rate plus diversified allocation strategy to realize our balance in our product metrics to cope with potential changes happening in market itself. So generally, we hope we can enlarge our -- we can deepen our study over the market change and to seize opportunities to maintain a balanced structure and to also be resilient to the market. As you can also see that in the third quarter, our work management fee income actually reflects that what we have been doing is to seize the market opportunity. And finally, in the future. In the financial indicator of Wealth Management business, we think that even though the market has opportunity, we are still faced with many challenges, and these challenges are mainly from these aspects, for instance, the fluctuation, the potential fluctuation of the market, the potential changes in the regulatory requirements, but we are still confident that with the market becoming larger and larger and the increasing of our professional capability that we can maintain a good proportion of the market share and continue to increase our market position, reflecting the financial indicator itself, we will strive our best to overcome the difficulties posed by the third phase fee cut, a fee reduction in the mutual fund industry. And finally, we can realize a stable development, an increase of the fee income and to seize opportunities arising from different types of assets. Xia Yangfang: We will have the next question. Operator: The next question is from Mr. Wai Sing Chang from CIMB Securities. Poyung Chang: I have a question regarding the property sector. We noticed that the real estate NPL is actually decreasing. What is your idea on the progress of exposure in the risk in this sector? And of course, for the next year, we see the maturity of the 16th measure of the property finance. What is the idea on it? And along with the decreasing housing price what is your idea on the influence on your loans LTV? And apart from the property sector, what do you think that the risk that you should pay more attention to? Jiawen Peng: Thank you for your question. For the property sector's risk exposure progress, I would like to talk about my idea from the following 2 aspects. The first is how do we view the current situation? And the second is how do we cope with it. The first one is that I think from the policy side and from the market side, we are both having some views. From the policy side is that the policy will continue, and our target is to stop the decrease and to maintain a stable development manner. And I think from my perspective, the market is also showing a divergent trend. So in the year -- trillion, for the RMB 1 trillion level and trillion meters -- square meters level, I think these are 2 aspects that reflects the decrease in the property market, which is quite sharp. I would like to use these 2 idea to conclude my view on the industry. And from the bank's perspective, CMB in terms of our property sector's risk, I have 3 ideas. The scale maintained stable and the structure is optimized and then the quality is trending towards a stable position. One figure is that from 2019 to 2020, the real estate sector's proportion in our corporate loan is decreasing from 19% to less than 10%, is the decrease in our scale and our structure is further optimized. First is that in Tier 1 and Tier 2 cities, our projects are mostly centered in these cities accounting for over 82%. And the top 10 corporate clients in the real estate sector accounts for over 40% of our total corporate loan and total corporate real estate loans. So by the end of September, our NPL ratio of real estate loan was 4.24%, down by 0.5%, and we make sufficient provision in this sector, which is 2.5x of the average level of our corporate loans provision, which is very abundant and sufficient. We will continue our policy to back to origin to select qualified region, qualified customer, qualified project and make strict management over our real estate business. The second question is about the 16th measures. And I would like to talk about some of my idea. In fact, I think the 16th measures have casting good impact on the market to ensure the smooth development of the market -- of the real estate market, especially the guaranteed delivery of the housing project. So in terms of the maturity of the project itself, it actually extends and help the project to secure a soft landing. So generally speaking, why do I say so? The policy will be continued to the end of the year 2026. And for some projects, if the project cannot meet the expectation of its expected sales volume, so probably the policy will continue to be extended in terms of its maturity. So from the transitioning of the old project to the white list management, I think these management measures are doing beneficiary influence to resident itself, to companies, to government, to local governments. So generally, I think it is a useful measure that is targeted specifically to its audience. So I believe that if the management -- if the project itself could be put under strict implementation. And for the market, I believe that the land price accounts for 60% of the total project volume, I think -- so based on this current situation, our loan is quite secure in terms of the phenomenon. So the 16th measure itself, probably it will be extended in accordance with the current market situation. I think it is -- it could be considered that the safety itself is under control. And your -- another question about other risk areas that we pay attention to is that besides real estate itself, we are still focusing on other areas such as the debt resolution of the local government and also some industries, for instance, the infrastructure and construction, evolution, relevant industries and et cetera, and also small and micro finance and consumption finance sector. I would like to invite Mr. Lu from the Retail Finance headquarter to introduce more about the risk in the retail finance sector and also the mortgage sector. Unknown Executive: Well, for mortgage itself, the mortgage risk is based on our good structure. I could introduce that most of our mortgage are centered, 90% of our mortgages are located in Tier 1 and Tier 2 cities. The collateral rate is maintained at a relatively low level. The LTV level was less than 40%. The collateral is also under repeat and frequent reassessment. Even though we are faced with pressure of decreasing housing price, we have a good reserve in the asset allocation behind to ensure that the overall risk is under control. Of course, undoubtedly, the trend is showing some upward trajectory. It is aligned with the whole market, not just CMB itself. So the mortgage risk, there will be experiencing some uptick. This is about our judgment on the mortgage risk. Xia Yangfang: Next question, please. Operator: Next question is from [ Claire ] from GS. Unknown Analyst: My question is still for asset quality, we can see that the NPL formation has risen a little bit. And just now you have mentioned about the reason already. And at the same time, we have noticed the provisioning level has been down by 7%. But in between the provision for loans are increasing. So how do you see the future provisioning level and also for future provisioning trend? And another question is about interest rate, your view on interest rate after the Central Bank decided to go into market and buy bonds again. So how do you view the interest rate trend? Jiawen Peng: So the first question, in terms of asset quality, we continue to maintain our stance as a stable -- maintain a stable asset quality. And for retail and also corporate loan, we take a prudential view in provisioning. Provisioning level, I think, is more related to the business structure change, such as for corporate provisioning is mainly because more special mention loan for real estate. That is why we have increased the provisioning on that. But at the same time, we definitely see -- have some underwritten for the disposal of the assets as well. So overall, I think the provisioning level is stable. So even though there are some periodic volatility, but overall, it will be -- so firstly, really reflect the asset quality level. And thirdly, I think the volatility will be under control. I have some -- for the provisioning level structure, we can see that we have the provisioning for loan has increased. But for the other non-loan asset provisioning has been declining, and this is mainly related to the total size of the non-loan assets. Unknown Executive: And for your second question, do you mean that the PBOC has decided to buy or sell bonds in the market? I think after Mr. Peng has made a statement, there is a volatility in the market and the rate has been down by 4 to 5 bps. So the market estimation is that after PBOC resumes the operation since there will be more alliance on monetary policy and fiscal policy that will help the rate to go down again. So in the third quarter, they will be affected by many reasons. There's a rebound of interest rates. So last year, for the 10-year bond was stood at 1.86%. And in the third quarter, I think it's around 1.8%. There are many reasons behind that. Some are because of the capital markets and some of the anti-involution expectation, and they are also for new tax rules on the new issued bonds, which will be not affected by that. But after we have resumed the operation of PBOC in the market, I think that will -- our judgment is that, that will be beneficial for the overall investment income. Just now another analyst have asked about the trend of the fee of the noninterest income. So among the noninterest income, other non interest income are affected by the bond market. Last year, we have a -- since the rate was low and that is why we have a high base of other noninterest income. So in the fourth quarter, we are under pressure in this aspect since -- due to the high base. But after PBOC resumed the operation or if they really have done the operation, I think that the market rate will go down for the bond yield will come down, which will be beneficial for our investment gains. Xia Yangfang: In order to guarantee the interest of the individual investors, we have collected individual investors' questions and some are more similar to the questions which you have just raised. And now there is a particular one that has not been asked before, which is -- in the first 3 quarters, CMB's corporate banking loan growth rate exceeded 10%. So what are the major areas that the loans has gone to? And whether you have enough reserve -- project reserve in place for the next year. Thank you. Unknown Executive: And I think by the end of the third quarter, our loan is 2. corporate loan is RMB 2.8 trillion, up by around $26 million compared to the beginning of the year and the growth rate is 10.27%. If we look at the growth structure in terms of industry, the first largest incremental part are coming from manufacturing. The second coming from the power and also -- and third one is coming from the rental and service industry. The incremental power coming from the 3 major sectors compromise around 49.9% of the total income and which is the first 1 coming from manufacturing and for power and also water litigation is around 11.14% of the total corporate loan. And increased level amounted is around -- and also for leasing and also for that is also quite big and also increased by around 23%. So these are the 3 major sectors that we have seen increased for that. And when we look at other regions, we are seeing the Pearl River Delta and also High Sea area and also the -- and also the Bohai Rim region. These are the major areas coming from that. So these are the major areas that our corporate loan goes to. And currently, I think, affected by the overall economy since real estate is not coming up yet, and we are seeing demographically, we are still seeing negative pro income. That is why demand deposit -- for the demand for corporate loans is still under pressure, and there's also a very fierce competition on that. So in the future, I think we still need to look at the right direction to go. And from the reserve and also strategy for next year, from industry and also region strategy, I think that will be similar to the -- this year from industry, we step our efforts also in transportation. And for customer base, except for large focusing on large corporates and large projects, we are also focusing on the midsized corporates to hope that we have more balanced customer structure. And also from a product perspective, we have increased fixed income projects and also M&A projects, which have a longer duration and hope that we can have a more diversified product structure. So we hope that we can keep our balance among scale and also pricing and also asset quality. And can have a dynamic balance according to the changes in the external environment. Xia Yangfang: Now I think due to the constraint of the time now we have, the last question please. Operator: And the last question goes to Richard Xu from Morgan Stanley. Richard Xu: My question is still on loan yields and also loan growth strategy. Just now Mr. Peng has mentioned that there are many policies like the anti-involution and also guidance on banks to have a reasonable loan yield. So when you look at the newly disbursed loans, whether you are seeing the yield is coming stabilizing? And also, secondly, you mentioned about for corporate loan, you want to compete for more quality loans. Everyone want to compete in that area. So what will be your major strategy. And thirdly, from the loan growth rate and also the shareholder return, if the loan yield is not good, whether you will consider to slow down your loan growth rate and also to improve the shareholder return, whether that will be a consideration? Jiawen Peng: Thank you for your question. I think it's the last question, that will be the conclude of our today's dialogue. So firstly, for the loan strategy, this year's the loan yield is coming down. One is affected by the LPR rate coming down and also affected by the weak demand in the market, which lead to a lower yield. And I think when we analyze whether the loan yield has reached the bottom, I think mainly we need to analyze whether the demand is picking up or not. And secondly, whether the LPR will temporarily stop to going down. So when we look at the LPR cut, our analysis is that with the macro economy, maintain a stable growth momentum. The LPR cut expectation is smaller. But overall, when we look at the GDP Q-o-Q growth rate, the decline of the growth rate is narrowing down like the third quarter is 4.8%. So we expect that for quarterly GDP growth will be lower than that. If there is pressure on GDP growth rate, we cannot rule out the possibility that the PBOC will continue to have the cumulative monetary policy and continue to cut the LPR rate. So this is from the LPR rate and policy rate. And secondly, if we look at the demand side, if the bank's demand is closely related to the vitality in the marketplace and also vitality in our investment market. But according to the data, we have seen that the investment data relating to investment is not still stabilizing yet. So even though the profit growth of industrials have rebounded a little bit, but demand for loans, still, we haven't seen very obvious rebound. And for demand, definitely, we need to seize opportunities to seek for new opportunities. Just now, my colleague from Corporate Banking has shared with you some of the areas that we would like to work on. I think mainly for strategies, these -- some of the industries that we need to be even stronger for and for some industries, we currently might have some shortfall, but we want to make up for that. So we need to continue to optimize our customer structure, such as in the past, for corporate banking, we have a higher proportion of large-scale customer, and we might have the highest proportion of large-scale customer, it's around 50% of the total higher than peers. So it means that for -- there will be further room for optimization of customer structure. And if we can also expand our midsized customers, especially for those quality customer size, I think that will also help with the loan yield. And at the same time, when we think that there might be further room for LPR to further cut down, but the anti-involution, we need to also take into consideration about the anti-involution policy, namely banks are having a more reasonable or on pricing. So that will also help with the stabilization of loan yield. So taking into consideration of all the factors I mentioned above, I think that the loan yield will be trending to stabilized at a level. There will be less room for the rate to continue to go down. But for the newly disbursed loans there and for the existing loan, there's still a gap between the new one and the existing one. So that will drag down the loan yield overall. But if you look at the newly disbursed loan yield quarter-on-quarter basis, I think it's more and more returning to a reasonable level for all the banks. So this is my judgment on that. And just now, I also mentioned that when I analyze the NIM level, that is why I think that the NIM is kind of stabilizing at the bottom range. And under this pricing environment, how can we see the return on shareholders? As I always mentioned that for return on one customer, we cannot only focus on the loan that they have, but we are -- actually, we are providing comprehensive solution service for the customer. Loan is only one part of the complete measure. So we hope that loan is kind of something that we give to the customer and then to simulate the customer can work us with us in all fronts, including investment, including other retail-related business, including wealth management-related business. So the contribution from the customer cannot purely be measured by the loan side, rather, it should be a very complete measure of the contribution from our customer. And also I mentioned for loan growth rate, I mentioned when the macro economy is stable, our loan growth rate will be stable. But when the macro economy is under pressure. Our loan growth will also be stable. I don't want to see much volatility in the loan growth rate. Volatility means risk. So it should be in line with the total macro economy. In line with that and try to be stable and then to increase the overall contribution from the customer. And I think it's almost -- we're almost done for today's conversation. I think our friends, analysts, your questions are really, really very good questions and also invoked our thoughts on that. And also you focus -- you also care about the future trends. So I would like to share with you some of our views on the future trends of our bank's operation. So when we look at the future, I think some are certain and some are not certain. For certainties, I think, firstly, the overall economy will continue to have a stable growth, and make steady progress like the GDP growth rate per year, 5% and also other macro datas are moving towards a better position. This is something that is certain -- under this certainty of the external environment, we are sure that our customer base, our AUM, these are the foundation of our business will make steady progress. This is also certain. So this is the first certainty I would like to say. Second is that for asset quality, this is to control the asset quality is our pursuit, and it's something that we will always emphasize on. We will continue to make sound asset quality and maintain a prudential risk appetite. This is also the certainty of us. Just how you focus on the RWA growth rate. And many investors asked a question about that. I think you don't need to worry too much about that because RWA growth, there are many reasons, some are periodic and some are calibre reason and some are base reason. What I want to say is our risk appetite doesn't change. And also our pursuit to make a contribution to our shareholder return doesn't change. So our philosophy, our banking operation doesn't change. So you don't need to worry too much about RWA. And also, we have maintained a relatively high CAR ratio. So for asset quality and also for capital management, this is also certain. And thirdly, the core financial indicator of CMB to maintain a leading position doesn't change. We -- namely like ROE, like the CAR ratio, like the NIM, like the fee income proportion and also like the retail business proportion in our total business portfolio, these are certain. We will continue to maintain our leading position in all these aspects. And fourthly, I think another certainty is under this low interest rate, low fee rate environment, for banking industries for quite a long term, the banks may maintain a low net profit growth rate for quite a long period. So this is also certain. I think you cannot have unreasonable expectation, too high expectations for our bank's low profit growth rate. So I think for maintaining a relatively low profit growth rate will be stable for a bank. It's like a marathon our bank is running. It's not a short run as you need to have a stable -- as long as you have a stable growth for the -- in the long perspective, that will be a high return. So this is something that is return. And when we look at the uncertainties we have, I think there definitely are some uncertainties we are facing with. So that is why we cannot give you a very precise prediction on some financial data. The first one is side under the certain direction of the macro situation, but the market still are facing volatilities. Like the capital market, like the foreign exchange market, there are many volatilities. And also for the bond market, the 3 markets are facing volatilities and changes like the foreign exchange market is affected by the tariff issue. There are some judgments on that, but we cannot make sure that it will be applicable for all the times. And also capital market, definitely, people think that there will be a bullish market, but definitely, there will be volatility, and we are not sure that is establishing of a bond market. And also for the bond market, we have analyzed on that. There are many factors affecting it, and it's a normal thing for the volatility in the market. So whether -- how it will go, the market will evolve is something that is uncertain and also which definitely will bring some volatility to the profit and income of the banks. So this is uncertainty lying ahead. And the second one is that when the overall risk is under control for some certain area of risk in certain areas or for a particular individual cases, there will be some kind of volatility. Just now you mentioned about property, some of the retail risk, we cannot say that it's time that we can stabilize or we can rebound the asset quality. But what we can say is the overall asset quality is under control, but we cannot rule out the possibility that due to some uncertain events, there may be some volatilities ahead. So these are the uncertainties we also need to face with. And thirdly, volatilities that the monetary policy and also fiscal, we will also are changing. Definitely, these are monetary and proactive policies, but how they implement that, what instruments they will use, these are uncertain like whether they will cut the rate or whether they will cut the interest rate or whether how much fiscal investment that we'll have. So this will definitely affect the bank's NIM, bank's fee income and also bring some short-term uncertainties. So even though with all the uncertainties, I think more are coming from the certain sides with all the factors I mentioned above, I think the most certain thing is that we will continue to focus on quality and also lay priority on profitability and to have a proper growth on scale. We are confident we are making steady progress and moving towards a better direction. So I would like to take the chance to share with you some of our views on the future trend. Thank you. Xia Yangfang: Thank you. Now it's the end of our third results conference call. If you have further questions, you can go online to see our third quarter results or if you want further explanation, you're welcome to contact us. Our IR team are always there for you. Thank you. Bye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Good afternoon, everyone. My name is Stacy, and I will be your conference operator today. Welcome to the Fortune Brands Third Quarter 2025 Earnings Conference Call. [Operator Instructions] At this time, I'll turn the call over to Curt Worthington, VP of Finance and Investor Relations. Curt, please go ahead. Curt Worthington: Good afternoon, everyone, and welcome to the Fortune Brands Innovations Third Quarter Earnings Call. Hopefully, everyone has had a chance to review the earnings release. The earnings release and the audio replay of this call can be found on the Investors section of our fbin.com website. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, except as required by law. Any references to operating profit or margin, earnings per share or free cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified. Please visit our website for our reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. With me on the call today are Nick Fink, our Chief Executive Officer; and Jon Baksht, our Chief Financial Officer. Following our prepared remarks, we have allowed time to address some questions. I will now turn the call over to Nick. Nick? Nicholas Fink: Thanks, Curt, and good afternoon to everyone. Thank you for joining our call. In the third quarter, Fortune Brands Innovations had solid sales performance and outperformed our end market, demonstrating the power of our brands and our people. Our sales in the third quarter were roughly flat versus the same quarter of 2024. And when excluding China, increased 1%. From a point-of-sale perspective, excluding China, we estimate that we outperformed the market by almost 200 basis points, with a low single-digit point-of-sale growth. While consumer sentiment and housing activity are still facing near-term pressures, our team is focused on execution and advanced several key strategic initiatives. Our balance sheet remains very healthy as we continue to generate strong free cash flow and continue investing behind our core growth initiatives. We remain focused on our strategies while leveraging our Fortune Brands advantage capabilities to continue to position the company for sustained above-market growth. We believe we are well positioned to continue outperforming our end market for the remainder of 2025 and into 2026. On today's call, I will start by sharing an update on our transformation and provide some examples of how it is advancing our strategy and delivering results. Next, I will provide a perspective on the macroeconomic environment and why I believe our portfolio balances stability with exceptional growth opportunities. I will then close with an overview of our performance before turning the call over to Jon for a detailed discussion of our financial results, updates to our guidance for the remainder of 2025 and some thoughts on our emerging expectations for 2026. The third quarter marked a major milestone in our company's evolution. We welcomed more than 500 associates into our new campus headquarters in the Chicago land area and achieved our hiring commitments 2 years earlier than planned. The quality of our new hires has been exceptional. They have joined numerous top-performing associates from within the organization who are either local or elected to relocate, creating a powerhouse team. This combination provides an optimal mix of continuity and new perspectives. While our headquarters consolidation is first and foremost about accelerated growth, it has also allowed us to take a very critical look at our capabilities, talent and investments to drive increased efficiency across the organization. Our state-of-the-art campus is perfectly suited for our business unit-led organizational design, which is supported by dedicated centers of excellence. Our footprint now mirrors our strategy, and we're already seeing increased collaboration and elevated execution, which is starting to show in our results. As I've said previously, this was the third of 3 phases of our transformation into a tightly aligned operating company. With most of this transition successfully behind us, I'm excited to see how we continue to accelerate performance in 2026 and beyond. Throughout this transformation, we've maintained a consistent overarching strategy. Our brand strength, focus on innovation and expertise in channel management create a compelling value proposition and drives our performance. Our execution of this strategy leverages Fortune Brands Advantage capabilities, which are category management, business simplification, global supply chain excellence and digital transformation. These strengths enable us to rapidly adapt to shifting markets, increase market share and deliver innovation at scale. Our alignment into an execution-focused operating company is allowing us to better leverage strengths across our organization with tangible results this quarter. Using advanced analytics, data science and deep insights into customers and consumers, we are able to implement precise strategies for pricing, promotions and product assortment. This precision allows us to maintain a careful balance between margin protection, price stability and demand responsiveness and facilitates sustainable share growth over the long term, even amidst a dynamic external environment. We continue to expect to fully offset the anticipated in-year dollar impact of tariffs in 2025 and the anticipated annualized dollar impact in 2026 through a combination of supply chain actions, cost-out opportunities, and strategic pricing actions. Fortune Brands has consistently acted as the price leader in our categories and our high integrity, transparent and collaborative approach to tariff pricing was consistent with that history of leadership. As a result, our tariff-related pricing was relatively modest, and absent any new significant tariffs, is now largely in the market. While some of our competitors are still taking significant additional tariff pricing, our work for 2025 tariff pricing is essentially complete and has been for some time. That positions us well to focus on execution, strengthen channel relationships and preserve pricing integrity while allowing us to capture additional share. We intend to opportunistically look for areas to now promote and drive volume. Now turning to the external environment. The macro environment remains uneven, with consumer sentiment cautious and housing activity showing mixed signals. However, our demand profile is stable, and we see green shoots heading into 2026. As we enter the final quarter of 2025, the U.S. housing market continues to show signs of stabilization following a period of elevated mortgage rates and constrained affordability. While overall home sales remain subdued, recent rate cuts by the Federal Reserve have helped ease borrowing costs with a 30-year fixed mortgage rate dipping to its lowest level in a year and almost a full point below where they were at the start of 2025. This has sparked renewed buyer interest and a surge of refinancing activity, suggesting that pent-up demand may begin to unlock as affordability improves. Home inventory levels are also rising, particularly in the South and West, giving buyers more options and helping shift the market toward a more balanced state. Prior business, which is primarily focused on repair and remodel, the mid- to longer-term outlook remains encouraging. In the near term, R&R is below trend even when normalizing for the post-COVID period. However, we believe R&R is poised to rebound in the not-too-distant future, driven by aging housing stock and deferred maintenance projects as well as a consumer base, which is increasingly interested in renovating their homes. For example, a recent survey indicated that 84% of homeowners plan to renovate a part of their home in the next 12 months. Record levels of tappable homeowner equity, together with lower rates means that homeowners are in a strong position to finance improvements through equity extraction tools like HELOCs and cash out refinancing. Recent data shows that homeowners are utilizing home equity lending methods at the highest rates since 2022 with momentum building. Across our channels and segments, we compete in smaller ticket categories where consumers look to trusted brands and innovation to deliver value. Even in the trade down environment, our brands were made the preferred choice by pros and consumers because they combine quality, style, innovation and reliability at accessible price points. Our single-family new construction, which comprises roughly 1/4 of our total sales has faced headwinds from elevated rates and cautious builder sentiment, it remains a long-term driver of growth, supported by a shortage of existing homes. As interest rates continue to trend downward and consumer confidence stabilizes, we anticipate a recovery in single-family activity, which we expect will provide additional growth across our portfolio. Our products are well positioned to benefit from the torque of new construction growth with manageable downside risk. Our products are not affected by homebuilders reducing square footage for affordability since efficient design changes do not significantly change the number of faucets, valves or entry doors within a home. In fact, many of our products can contribute to improved housing affordability because they are easy to install, durable, and can even help save money through reduced insurance premiums and utility costs. It is also important to note that the vast majority of our products are installed later in the construction process, which results in lower variability since completions serve as a moderating factor compared to the more volatile starts. Finally, our relationships with builders positions us as the incumbent brand preferred by both professionals and homeowners when these homes eventually engage in repair and remodel activity. Overall, we believe our balanced portfolio provides stability while also offering attractive growth potential, which comes with new construction. With our advantaged footprint and brand strength, we are confident in our ability to continue outperforming our end market and are poised for accelerated growth. Turning to our third quarter performance. Sales were roughly flat at $1.1 billion, and excluding the impact of China, we're up 1%. Our margins were 17.9% and earnings per share were $1.09. Turning to our segment highlights. Our Water segment delivered another quarter of market outperformance. Sales were $619 million, down 3% versus third quarter of 2024. Excluding China, net sales were roughly flat. Importantly, our point-of-sale results, excluding China, were up low single digits versus a market, which we estimate was slightly down. In Moen, we executed the strategic and targeted promotional activity that we called out during our second quarter call, driving momentum and strong sell-through with key partners. We increased our share with all 3 of our largest retail partners during the quarter, and Moen continues to be recognized as the most trusted brand of faucets. Our brand strength with both consumers and the pro is increasingly evident. Our innovative products continue to win external accolades including Moen's recent inclusion on Time Magazine's Best Inventions of 2025 list. In wholesale, demand remained resilient. Importantly, our relationships with key builders remain very strong, as we not only resigned a number of our key national builders, but also converted others to the Moen brand, resulting in further share gains. We are well positioned with builders due to Moen's exceptionally strong value proposition and our superior service capabilities and we expect to continue to take additional share in this category. The House of Rohl portfolio saw significant sales growth over the third quarter of 2024, and delivered low double-digit point-of-sale growth, significantly outpacing the broader market. Our luxury consumer remains strong and continues to prioritize Craftsmanship and design. Our brands are strategically positioned to capitalize on sustained demand and the work we have done to build our luxury brands portfolio is yielding positive results. We expect this to continue to serve as a growth platform through the rest of 2025 and beyond. Turning to e-commerce. This channel has rebounded since our reset earlier in the year. We are seeing the benefits of our updated go-to-market approach, coupled with the refreshed talent and expertise in our team. We generated sequential improvement within e-commerce sales in the third quarter. There is still room for further improvement, and we see upside momentum heading into fourth quarter of 2025 and into 2026. In digital water, Flow continues to exhibit very strong growth. We recently launched the initial trial of the leak protection service, our new recurring revenue model subscription service. While it is too early to share any results, interest in a Flow subscription is very strong, and we expect this to be a meaningful unlock in both the consumer and insurance channels. We believe Connected Water will serve as a growth engine for years to come, given its differentiated value proposition and potential to significantly decrease one of the largest drivers around housing affordability, insurance costs. In outdoors, we continue to execute well in the softer market environment. Sales were $345 million, roughly flat versus third quarter of 2024. We estimate that our segment point-of-sale outperformed our end market by over 300 basis points, with market outperformance across our brands. In LARSON, the rollout of our retail aisle reset helped drive double-digit sales growth in the third quarter. Our new approach to innovating and marketing storm doors drove a strong consumer response including point of sale, which was up high single digits versus a roughly flat market. This initiative also received external recognition. Earlier this month, Lowe's named LARSON, its 2025 Vendor Partner of the Year for the Lowe's Millwork division. This is a significant honor and a proof point of the underlying investment thesis in LARSON and the ability of Fortune Brands to drive value through its disciplined and returns-focused capital allocation strategy. Therma-Tru strongly outperformed its category with point-of-sale share gains in both wholesale and retail. Although net sales decreased in the third quarter, this was primarily due to the absence of the usual fall inventory build. However, strong customer orders in early October suggest that this decline has not continued into the fourth quarter. In Q3, a significant milestone was reached in the American fiberglass door coalitions case against Chinese fiberglass door panel imports. The court has put in place preliminary countervailing subsidy duties ranging from 50% to 900% on Chinese fiberglass door panel imports. The U.S. government continues its investigation and a final decision is expected in Q1 of 2026. We expect to see the benefit of this government action in addition to tariffs as Chinese inventory in the market is consumed. Fiberon performed well in the third quarter. In September, we recorded the highest monthly sellout for the year. Fiberon saw sales growth in the third quarter versus last year in both retail and wholesale, with strong point-of-sale outperformance in wholesale. Our outdoor brands benefit from their vertically integrated U.S. manufacturing presence, giving them an advantage over import reliant competitors. We expect to see the benefits of our North American footprint to become more apparent in 2026. Turning now to security. Our security segment also made progress in the third quarter. Sales were $186 million, up 5%, building off of many of the initiatives we have highlighted last quarter with further momentum expected in the coming quarters. The Master Lock and SentrySafe brand campaigns continue to build upon our industry-leading awareness and drive consumer engagement. During the quarter, we secured several new retail placements in a variety of outlets, and across multiple price points as competitive products are proving to be inferior alternatives to our iconic and trusted brands. We expect to see the benefit of these retail wins in the fourth quarter and into 2026. Finally, the recent Prime Day exceeded our expectations, and we have gained share in the growing e-commerce channel throughout 2025. As we look toward the end of the year and 2026, we are confident that we will see growth due to our focus on strategic execution. Digital security solutions are also gaining traction and we see a robust pipeline of opportunities for both residential and commercial applications. Recently, our Yale Assure Lock 2 received accolades, including being named Best Smart Lock by CNET and the Spruce. The launch of the Yale Smart Lock with Matter designed for Google Home is also delivering encouraging early results. Turning now to our full digital portfolio. Our digital portfolio continues to scale, and we're making strong progress. We now have over 5 million registered users across our digital platforms with strong momentum in new device activations. For digital overall, we have full conviction in the strength of our product portfolio and its ability to deliver differentiated, sustained growth over the long term. With respect to Flow, we continue to add and expand partnerships with insurance companies and the data shared regarding the product's effectiveness for both homeowners and insurers continues to affirm its significant impact. For Yale, we won several new retail placements and have a significant number of partnerships, which we are starting to scale more broadly. Across our digital businesses, we are increasingly leveraging our well-established advantaged channel relationships with builders, retailers and wholesalers to drive new opportunities. The fundamentals of our digital strategy are sound, and we remain confident in the potential of this growth platform. We are on track to approach $300 million in annualized sales by the end of 2025 with continued growth into 2026. To recap, the third quarter was another strong demonstration of Fortune Brands ability to execute with discipline, respond with agility and deliver above-market performance. Our teams are advancing our transformation, strengthening our brands and investing in platforms that create new avenues for growth. Looking forward to the fourth quarter of 2025, we expect to deliver year-over-year sales growth and market outperformance and expect to see the continued benefits of the initiatives that we have detailed in the call. Throughout the recent periods of external uncertainty and market disruption, we have remained focused on what we can control, driving our most strategic investments continuing to support our leading brands and strategically reshaping our business to be leaner, stronger and more agile. These moments of challenge have been opportunities for us to optimize our structure sharpen our priorities and position ourselves for accelerated growth when conditions improve. Today, we stand not only resilient but designed for performance and built for the future. I will now turn the call over to Jon. Jonathan Baksht: Thank you, Nick. Before I begin, I want to thank those who participated in our recent investor perception study. Your insights will inform our Investor Relations practices, and we are actively working to implement improvements. As part of this effort, we are reviewing how we consistently present period comparisons, certain performance indicators and growth narrative, particularly in areas like digital innovation and other key portions of our portfolio. We'll look to incorporate these enhancements beginning next quarter. As a reminder, my comments will focus on results before charges and gains to best reflect ongoing business performance. Additionally, comparisons will be made against the same period last year, unless otherwise noted. In the third quarter, we again delivered solid results against a soft market backdrop. We delivered sales of $1.1 billion, roughly flat year-over-year. Our results reflect lower volumes compared to last year which were partially offset by strategic pricing actions implemented earlier this year. Sales were up 1%, excluding the impact of the China business. Consolidated operating income was $206 million, down 5% compared to last year, largely due to lower volumes and higher cost of goods, partially offset by pricing, lower incentive compensation and disciplined cost management. Operating margin declined 80 basis points to 17.9% due to lower volumes and product mix in outdoors and security. EPS was $1.09. Turning to our segments, beginning with Water. Sales were $619 million, down 3%, reflecting lower volume, partially offset by price. Excluding China, our sales were roughly flat on a year-over-year basis, reflecting low single-digit POS growth offset by lower inventory build compared to prior year and modest inventory destocking in Canada. Water's operating income was $151 million, down $5 million compared to last year. Operating margin was 24.4%, down 20 basis points compared to last year, reflecting our efforts to strategically balance price realizations and operating costs. We continue to expect full year water margins to be in the range of 23% to 24%. Turning to outdoors. Sales were $345 million, roughly flat compared to last year, with pricing offsetting lower volumes. Sales benefited from the momentum from the LARSON perfect aisle reset and continued share gains of Fiberon. Point-of-sale increased low single digits versus a market that was down low single digits. This is partially offset by lower seasonal channel inventory builds in Therma-Tru in the third quarter as wholesale customers reduced orders in response to weaker external data points. We are encouraged that orders have increased entering the fourth quarter and are trending higher year-over-year. Outdoor's operating income was $53 million down $8 million compared to last year, with operating margin of 15.5%, a decrease of 250 basis points from the third quarter of 2024. These results reflect the impact of lower volumes higher material costs and product mix, partially offset by price. We expect to maintain margins at similar levels in the fourth quarter. And for the full year, we expect segment margins in the 13% to 14% range. In Security, sales were $186 million, up 5%, with price offsetting lower volumes with strong growth in e-commerce and the commercial business. Our Master It, brand campaign for Master Lock is resonating, driving a double-digit increase in brand engagement and contributing to improved sell-through. Security operating income was $33 million, down $1 million year-over-year. Operating margin was 17.8%, down 150 basis points versus third quarter 2024, largely due to product mix as well as increased investments in product development during the quarter, consistent with our strategy to invest in future growth throughout the cycle. For the full year, we expect margins in the 15.5% to 16.5% range. Turning to the balance sheet. We are managing our capital structure with the objective of balancing our cost of capital, returns and overall flexibility. We ended the quarter with cash of $224 million. Net debt stood at $2.4 billion with net debt-to-EBITDA leverage of 2.7x, consistent with our deleveraging objective. We remain on track to end the year with net debt to EBITDA at the upper end of our previous guidance range of 2.2x to 2.5x. Free cash flow in the quarter was $177 million. We now expect full year free cash flow of $400 million to $420 million, reflecting reduced operating income, higher working capital levels and higher cash restructuring charges compared to last year. Additionally, our headquarters transition continues to progress ahead of our original timetable. As a result, during the quarter, we updated the range for total restructuring costs related to the headquarter transition to $100 million to $120 million. The increase relative to our previous range reflects the faster completion of the transition with higher estimates for severance, accelerated depreciation, lease termination costs and other refinements. We remain opportunistic with our capital allocation, balancing shareholder returns with investments to drive growth and M&A opportunities that align with our strategy. Before turning to our outlook, I'll provide an update on our tariff exposure. As Nick mentioned, we are still on track to fully offset the anticipated impact of tariffs, both in 2025 and on an annualized basis in 2026. Implemented changes in tariff rates and rules since our last call have only had a de minimis impact to our unmitigated tariff exposure, but the overall tariff environment has contributed to a more cautious consumer and margin pressures. As a reminder, we have worked to get our spend from China down significantly and expect to be around 10% of cost of goods sold by the end of the year. Our predominantly North American supply chain remains a differentiated competitive advantage. Turning now to our outlook. We are pleased with our year-to-date performance amidst the dynamic macro environment. As today's press release details, we are narrowing our EPS guidance and anticipate finishing the year near the low end of our prior range reflecting the impact of mix and lower volumes within an uncertain end market. The full details of our updated guidance can be found in our press release. As we look beyond 2025, we are actively planning for a variety of scenarios. While it is impossible to predict the exact timing of a demand inflection, we continue to believe it is a matter of when, not if, and when the demand inflects. We believe we are uniquely positioned for above-market growth. While we will not be providing guidance assumptions for 2026 at this point, we are able to share some initial thoughts. Our base planning assumptions center around a flat market overall. Importantly, we believe we are well positioned for our sales to outperform this market estimate based on the meaningful opportunities for which we have line of sight. Through our transformation, we are continuing to identify efficiencies and continuous improvement opportunities throughout our business and remain confident in our ability to drive value even in a dynamic market environment. In summary, our third quarter results once again demonstrate the resilience of Fortune Brands portfolio, the strength of our brands and the effectiveness of our advantaged capabilities. We are laser-focused on executing our strategy while investing in the innovations and capabilities that will fuel our long-term growth. I'm confident in our ability to continue executing at a high level as we close out 2025 and look ahead to 2026. I will now pass the call back to Curt to open the call for questions. Curt Worthington: Thanks, Jon. That concludes our prepared remarks. We will now begin taking a limited number of questions. Since there may be a number of you who would like to ask a question, I will ask that you limit your initial questions to 2 and then reenter the queue to ask additional questions. I will now turn the call back over to the operator to begin the question-and-answer session. Operator: [Operator Instructions] First question comes from Susan Maklari with Goldman Sachs. Susan Maklari: My first question is on the pricing strategy. Nick, thank you for all the comments on that and the approach that you've taken there this year. I guess given that, can you talk a bit about how the outcomes have come together? Have they been in line with what you have expected as you approach the pricing? And how you're thinking about this going forward? Nicholas Fink: Sure, Sue. I'd be happy to. Look, as we said, I think, on our prior calls and you've tracked us for a long time, as you know, from prior inflationary periods, we maintain a very disciplined approach to pricing. And so as we think about it, our goal is, as category leader, to lead where we have to lead but do it in a clear, transparent and incremental way. And if we feel like if we do it and we do it well and we do it early, then we can do it in small increments. And if you recall, 2021 through that inflationary period, we were also taking kind of single, mid-single-digit pricing because we were doing it early and we were covering our cost. Now I will say before I touch further on pricing, I mean, we do a lot before we get to pricing. We work our supply chain really hard. We've pursued a lot of cost-out initiatives. And then what we're not able to mitigate through that, we turn to pricing. And in the case of 2025 with the tariffs, we did that very early on. And we said consistently since that time that between all of those actions, we will cover off on tax. We've covered off on tariffs. And we do. I've read reports that we're "behind" in our second round. There is no second round. We did it early, as I said, in the beginning of the year, we got it done. It's behind us. And really, what we're doing now is we're focusing our enhanced data capabilities and actually looking at places that we can lean into the market and drive volume. Where are those opportunities to promote, understand the elasticities. If we have further CI, we're going to hunt for more of those opportunities, and we think that's what is driving a lot of the share gain that we're seeing. And so I'd say we've been consistent on it through this tariff period, but we've been insistent -- consistent on it through '21, through the inflationary period in '17. And what we find is sometimes it takes a while for others to follow. And that may mean that, that causes a headwind for us for a quarter or 2, and that's fine. We're playing a long game, and we're playing to gain share over the long run, and we'll do it in the highest integrity way for ourselves and our customers. And I think that's exactly what's playing out now. Susan Maklari: Okay. That's great color. And maybe building on that, one of the things that Fortune has historically done really well is outperforming the market and gaining share in periods of weakness. And it certainly sounds like from your comments that is coming through again. But I think something that differentiates you today is this investment that you do have in data, right, a lot more information and nuances of understanding things. How is that helping you to better target those share gains and perhaps even better sustain and further grow the business even as things normalize and we eventually return to market growth. Nicholas Fink: Yes. Look, it's a great question. It's a very exciting part of our strategy. I'll say, as you know, we've been on this broader digital journey now for a little more than half a decade. And I'd say the greatest thing about that, whether it's product, whether it is digital initiatives that are customer-facing or internally facing, the whole team is digitally fluent at this point. I'm not going to say we're digital natives, but we can get around the table and we can discuss digital innovations and understand them. And that's allowed us to move very quickly, particularly as some of these AI tools have become available. And so I think specific to your question around something like pricing, I mean, I remember several years ago, when we first invested to build our pricing analytics, and I think they were best-in-class at the time. Today, I say that is pretty antiquated compared to what we have today, which is, a, much more precise and, b, much faster moving, where we can really get insights on a SKU-by-SKU level, and some of the new leadership that we have here with our headquarters transformation has brought in just world-class talent. And so we're getting sharper and foster all of the time. That's on the pricing side. We're also able to do things like customer and consumer insights literally in hours, whereas it may have taken us weeks. So once you understand exactly where your customer is, where your consumer is, what their shopping behaviors are, what their switching behaviors are and how to target them, it makes us a much more fierce machine. Now for all of that said, I think we're just at the early innings of doing this. We've got some great people and some great capabilities in place. We're seeing some unbelievable talent as we continue to hire up as part of our transition and transformation to the new headquarters, but I think it's early innings for what you'll see us do with these capabilities. Operator: The next question, Michael Rehaut with JPMorgan. Michael Rehaut: First, I wanted to hit -- and I'm sorry if I missed this in the prepared remarks, but just to get a dial in a little bit more in terms of what was driving the 100 basis point decline in segment margin guidance for Outdoor and Security, particularly as we're kind of sitting here at the end of the third quarter, kind of curious what's changed in the last 90 days to drive that type of decline? And if the third quarter margins in either segments in part reflected maybe some of that change in outlook or performance? Nicholas Fink: Sure, Mike. I'm happy to try to take it at the highest level, and then Jon can round it out if you'd like some more detail. In Outdoors, a very simple story. By the way, we saw great performance out of that segment, particularly at the point-of-sale level. What we did not see was the usual seasonal inventory build that you see at this time of year in preparation for the next building season. I've seen this happen once before where we don't see that build, and that tends to be pretty margin-rich product relative to the rest of the portfolio. So in Outdoors, it was pretty much just a mix inside of that inventory build, not particularly concerned about it because that inventory will have to be built to serve that market at some point. And I mentioned it will be at some point next year. And in Security, I'd say it's a variation on that theme. We saw a strong commercial performance, but we did see some backing off from our B2B business. And yet, we maintained our R&D investment at a higher level than prior, and we maintained marketing investment at a higher level than prior particularly with our new Master campaign, which is doing really, really well, and notwithstanding a bit of a mix shift there, we did not want to pull back on those investments. Jon, if you want to add anything? Jonathan Baksht: Maybe just to -- maybe put some numbers around it for you on the inventory piece for Outdoors, Mike. If you look at last year, the seasonal inventory builds, typically, we do see low double-digit increases in that channel inventory in Q3. This year, it actually went the other way, and we saw low double-digit declines. And so to Nick's point, that's something that we'll have to reverse. And so it is a bit of a Q3 dynamic. As we go into Q4, not sure if that's going to reverse then or into next year. But like we mentioned in the prepared remarks, October has seen some signs of -- early signs of that reversal. And so we're encouraged that, that is on the comm. Michael Rehaut: Okay. I appreciate that. Maybe I'll follow up a little later on that as well. Secondly, I wanted to take a step back or shift the question to digital. Nick, I believe you said that you're on track to hit the $300 million annualized rate -- run rate by the end of this year. I wanted to get a, sense kind of 2 parts here. One, tried to dimensionalize those sales between plumbing and security, number one. And secondly, I know you've thrown out, I think, I want to say by 2030, but I could be wrong there, the $1 billion sales goal. Really would love though to try and understand how to think about the growth in the business. I'm not asking necessarily for guidance, but just directionally or degree of magnitude, how to think about growth in 2026, '27 off of -- I guess, if you did $300 million, maybe that would be growth technically, but how to think about that annualized run rate, let's say, going forward? Nicholas Fink: All right. I'll just start by kind of giving couple of things to wrap your head around and then say some stuff about some of what you're looking for. So on the first part, yes, we're approaching that $300 million annualized, which is what we were hoping to see at this point. And also, I think on the prior call, we said expect it to end this year around $250 million. We're actually tracking a bit ahead of that. So really satisfied with the way that business continues to develop. Very, very strong growth on the Flow side, continue to be extremely excited about the opportunities there. And we just very, very recently launched our subscription service, which is the leak protection service, which we think takes a huge barrier to growth away because even though the value prop of Flow is very clear to us, very clear to insurers, there's still a price barrier for a lot of people. And the researcher that we said though says they're absolutely happy to pay a monthly subscription, particularly if the insurance savings is even greater than that subscription, right? It's just a win-win-win, a win for us, a win for the insurer, a win for the consumer. And so very excited that, that has now launched, and we'll be back to you as we start to see the data of how that's performing. On the security side, it's -- we're seeing some nice things. I referenced some of the Yale progress in my prepared remarks, but I think there's more opportunity to come as we cycle in some of the new products, some of which we've developed with Google and some of the big partnerships that we have signed up, which will roll into 2026. One further thing I'll say, and then Jon may give some more color. I think those of you who participated in our recent feedback survey, and it was very helpful. And we understand that people want more dimension around this. And I think over time, we've tried to share anything that we could that is verifiable, repeatable and auditable, like those are our standards for sharing numbers. I understand there's desire for more. And so we're going to come back at the beginning part of the year with, I think, just a clear set of metrics that we're going to be reporting to regularly for the digital business, just if you bear with us, hopefully. And we're taking feedback as to what people are looking for and to the extent we can share, we will. Jonathan Baksht: Yes. Absolutely, Mike. And just to build on the disclosure for next year, it's -- when you start looking at 2030 metrics, it's always harder to build the road map to those. And as we build out the framework for reporting, we do want to provide something that is more tangible in the near term that you can look at. And what I would say to your question around the split between security and outdoors, we don't disclose that at the moment, just given the relative size in our overall portfolio, they're both rapidly growing. And so that piece -- and I'd also give you just some broad guidance that neither of them is outsized in the portfolio. There's a good balance between both security and water within that connected build. But we'll provide a broader framework going into next quarter that will be a bit easier to follow going forward. Nicholas Fink: So just to sum it up, because that was the last part of your question, trending ahead of the $250 million that we gave last quarter, very happy about that. Approaching the $300 million annualized, very happy about that and absolutely convicted about the $1 billion by 2030. Operator: The next question, Philip Ng with Jefferies. Philip Ng: Yes, great to hear about how you're -- you've done -- you've pushed through your pricing raise for plumbing on the water side, right? It sounds like your peers, Nick, are playing a little catch-up. Does that put you in a position to play offense? Any color on how you're performing by end markets, retail channels? Any early read on like placement by any of these markets that we should think about for 2026? Nicholas Fink: Sure. Let me take the second part first, and then we'll come back to playing offense because it is helpful for just crystal clear. We're very happy with the Water results. I'll just start there. If I look at the opportunities, build there, we're gaining share, very pleased. Retail gained share across all 3 majors, we're very pleased. As we said on the last call, we saw opportunity to improve our performance in e-commerce. We have a new team in place. We're executing with, I'd say, significantly upgraded capabilities, uncovering a lot of opportunities. Happy with the progress, but room to improve. Expect to see that improvement as we come through this year and into next year. As I think about then offense, the answer is, absolutely. As we work hard, very hard, in fact, to continue to mitigate the impact of tariffs. We're still working with supply chain. We're still working on cost efficiencies. We're going to look to redeploy that where we can to meet the consumer where they are and promote as we can. And so it's not signaling anything dramatic. But with a lot of this effort behind us, we see opportunity to then really sharpen the pencil. Jonathan Baksht: And one piece that Nick didn't mention in there, but mentioned in the prepared remarks is House of Rohl. And that continues to see really outsized growth really across the distribution. What we're seeing is a lot of strength with the luxury consumer. And within our -- you name the metric between volume, price, we're seeing some very good indicators in the luxury segment. Nicholas Fink: Yes, absolutely. Philip Ng: Yes. I mean the margin has been stellar. Then Jon, you gave us a little hint that 2026 in terms of the end markets, but you're expecting to outgrow. I want to be great if you could quantify how much, but more importantly, can you flag some of the areas where you think you've had some wins that give you confidence that perhaps you could grow a little faster than the market? And then any directional help how we should think about margins as well? Jonathan Baksht: Yes. It's still premature to start quantifying things, Phil. We're just working through the 2026 plan right now. We do have some visibility into the market environment, which is where I guided that this year, which has been a slightly down environment, we are looking next year to be largely flat. And so while it's that's -- the market backdrop hasn't seen a significant turn. We are seeing a bit of some constructiveness in the market to keep it flat. We do feel comfortable that we're going to outperform the market. And you can just look at this quarter's results. I think through our largest business unit, Nick just went through a lot of the wins that we're seeing in the marketplace in Q3 and what we're seeing in the early parts of Q4, and we expect those to continue into next year. And if you go across each of our business units, there's individual pieces that provide that confidence. Starting with Water, I think Nick just covered off on those. If you go through outdoors, we've talked about LARSON perfect aisle. Really, we've seen some good turnarounds at Fiberon in terms of some of our productivity and efficiency there. Therma-Tru, we talked about some of the lack of seasonal inventory builds, which that will start to rebound. In addition to that, we've also mentioned some of the antidumping tariffs that have been coming into the market in that particular segment, which we also think will be a nice tailwind for us. In Security, we've continued to invest going into next year. So we've got some good momentum around our Master It campaign that we feel will continue. The new rollout of our connected products and the Yale Google Smart locks, I think, are going to be a nice tailwind for us as well. And then you just layer on the connected business and watch the growth we're seeing in Flow and our Connected products. So a lot to be excited about going into next year to drive that outperformance. Operator: The next question, Mike Dahl with RBC Capital Markets. Michael Dahl: I just want to start with kind of a clarifying question around the tariff dynamic. Obviously, still some moving pieces since you last gave your guidance between kind of copper and maybe some refinement around 232's and now the most recent news about reduced China exposure. And Nick, I wasn't sure if your comment referred to the 2025 impacts being de minimis, but maybe can you just clarify that, talk about kind of on an annualized basis as all tariffs as currently announced and maybe inclusive of this reduction in China tariffs, what that gross impact is for you? Nicholas Fink: Yes. I'll just make a quick comment and turn it to Jon. But I'd just say on the de minimis, we're not processing in that the 10% yet. That's very late-breaking, and we want to do some work on that. So we're talking about all the other changes as we work through it. And then there's some sector-specific challenges, too, that we see. You've referenced some of them that we're going to have to be laser-focused on. I think with respect to the late-breaking news on the 10%, firstly, we want to see it actually get inked and then we will do our work around that to see where there's opportunity. Jon, do you want to give some more color. Jonathan Baksht: Yes, happy to give some color. So I think on the last call, I gave some dimensions around the tariff impact, $80 million in 2025 and $260 million on an annualized basis in 2026. So since that -- since the call, we've seen the reciprocal tariffs come down quite a bit and really across many of the jurisdictions. And so currently, and frankly, even with some preliminary views of the 10% reduction on China that was announced this morning, we see that the $80 million for this year is likely baked in. But on an annualized basis for next year, we're more in the low $200 million range, more in the low $200 million area, I would say. So the tariff impact has come down. And as you mentioned copper, copper was introduced since the last earnings call, but inclusive of my comments on the low 200s, that includes copper, which really has been de minimis for us. I think our estimate for the overall copper impact across our business is around $3 million. So not much of an impact at all. And again, we are focused on mitigating these tariffs through a variety of actions. So supply chain actions, which we continue. We are estimating that our -- that around 10% of our COGS will be China-based by year-end. So we've been taking a lot of actions there, cost-out opportunities that both Nick and I have mentioned throughout the call and then the strategic pricing actions, which is the third item. But really, it's a combination of those 3 that have helped us work that down. And we feel we've done a lot of work on these numbers, and we feel very comfortable on where we stand. Michael Dahl: Yes, that's very helpful and good to hear. And if I just shift gears to a little more near term, you talked about a lot of the dynamics already, but I wanted to drill down on Water margins for 4Q, just given the commentary around now looking to pick your points on promotions and where to lean in on volume. Your guide still implies kind of a wide range of outcomes for the fourth quarter. So can you help us kind of ballpark what that fourth quarter margin impact? And also maybe specifically like within that range of kind of the Water guide, how you're leaning on top line as well when you think about 4Q specifically? Jonathan Baksht: Sure. I'm happy to start off. From a margin decline standpoint, we did guide to the full year for Water. Our margins haven't -- our margin guidance from quarter-to-quarter has not changed. So we maintain our 23% to 24% operating margin in that business unit. And so if you play that out, that still implies close to 23% or around 23% margin for that business unit in the fourth quarter, which would still be a nice increase or at least a modest increase from Q4 of last year. And I would tell you that just from a sequential basis, there -- if you think about the margin decline, it's really just a matter of mix and spend. And we've mentioned some of the spend that we've been doing from promotional activity. I think there's -- that's probably one area that might change. And then the mix within our products and our channels -- we're seeing a little bit of movement there as well. Operator: The next question, John Lovallo with UBS. John Lovallo: Maybe just to follow up on Mike's question there. I mean I think you gave -- just gave the Water margin directionally, and I think you gave the Outdoor being similar in the fourth quarter to the third quarter. But I guess the question is, we're about 10 months into the year, and it feels like the overall ranges here are still pretty wide. Curious what could kind of swing things directionally here within the next couple of months in such a wide range? And maybe if you could just give us a little bit more color by segment on where you're kind of leaning as we stand today? Nicholas Fink: Yes. John, this is Nick. I'll start with just a couple of conceptual things, and Jon will fill in some color. Just firstly, I would say the way we think about margins, we play it for the year, not for the quarter, right? We're trying to run the business over the longer term. And so we're not going to move around investments quarter-to-quarter to just try to hit a margin number. We're building this thing for the longer run. And so that's -- [indiscernible] of the variability has come from some of the inventory and channel movements that we've seen this year, where as Jon referenced, like we didn't see a seasonal inventory build in a high mix part of the business that will come down the road. But that does have some impact on margin. And then just the third comment on margins generally is I'd say we'd look to the full year guidance on it. And then with respect to the tariff pricing, I think it's important to note, like we're -- our goal is to cover off tariffs dollar for dollar, and then we will work back any margin that we need to work back over time, leveraging our CI initiatives and our supply chain initiatives. Jonathan Baksht: Yes. And I think just to quantify it a little bit, if you look at our full year guide, which Q4 is always an interesting one because we do a full year guide, and it's really just 1 quarter. So you can back into our Q4 margin guidance. And if you look at what that is for both Outdoors -- we covered Water. So my comment is on Outdoor & Security. You can really -- you can see that our Q4 margin implied in each of those guides is higher than the full year guidance so we are increasing our margin in both Outdoors & Security as we go into the back half of the year. We talked about a lot of the dynamics in Outdoors in terms of the channel inventory. And I would say that if there's another factor kind of weighing on Outdoors, there is a mix element to it as we look at our product mix. It weighed on us a bit in Q3, and that trend is -- it looks like it's going to be something that we face in Q4 as well. And then in security, I would say probably similar commentary. I think there is a mix element to it in terms of the timing of our promotional spend and when we're going to see some of that sales pull through. And one of the other elements on security that maybe we haven't touched on, on the call is there is a bit of -- as we change some of the -- start selling through some of our new technology and some of the new hardware, the mix of some of the old hardware that we're also selling is at a lower price point is probably playing a little bit of a part in Q4 as well. John Lovallo: Okay. Got you. And then, Nick, maybe just from a higher-level strategic angle here. I mean there's obviously been a number of pretty meaningful changes at Fortune recently with leadership, corporate headquarters, et cetera. And it seems like a lot of this is behind you at this point, maybe you can kind of refocus on the core business. So my question is, how comfortable are you with the current categories and brands? Are there any that maybe don't quite fit in quite as well as you thought prior? Or are there any areas that you would look to add to? I mean how are you kind of looking at the portfolio overall? Nicholas Fink: Yes. I'll just start with where you started, which was referencing that transformation. And I would say, as I said earlier, we kind of feel like we're at the end of Phase 3 of 3 of really coming down to a very tightly run operating company. And that first big portfolio move in '22 with cabinets and then moved to an operating company model, business unit led, refined that. I think some lessons learned, frankly, of things we could have done better. So made some structural and management changes at the start of this year, kind of I call that Phase 3 of 3 and went to a footprint that matched our strategy with the headquarters move, which we've now moved over 500 people into, and we're off and running. And so we're actually really excited to have that behind us and really just go into '26 focused on execution and some of the incredible talent that we have here. Just a couple of other things I'll say. In addition to the talent story, this is all about driving growth, right? It's all about being tighter, leaner, leaner together and driving growth. It is also unlocking some efficiencies, right? When you just have less duplication and you're together and you can move faster, you're going to be more efficient, and we're seeing that. And then just a final thought, as I said before, is in what is still a challenging economic backdrop, because we've gone through this, we're still in the rehiring phase, and we have our hand firmly on that throttle, and we will throttle it as appropriate to not overhire in what is still a challenging economy. And so that's given us a lot of flexibility with our SG&A, sort of having to go what we're seeing others do in the marketplace and actually let people go. And so that's a really good backdrop. So good question around the portfolio. I mean we are always looking at both our own portfolio and evaluating what are the most productive and fit to strategy parts. We will continue to do that. That's part of our duty to our shareholders as well as looking outside, but we will remain extremely disciplined, which is to say we look for good businesses, we look for businesses where we can add value, and we will only do it at prices that we believe are compelling where we can drive return. And so there's some interesting things out there that could help us move the strategy along even faster, but it would have to meet that criteria. Operator: The next question, Trevor Allinson with Wolfe Research. Trevor Allinson: I wanted to follow up on your comments about a flat market in 2026. I appreciate it's early, but we're seeing the homebuilders continue to slow starts pretty aggressively here, which will impact you guys on a lag. So considering that's well less than half of your business. Is the assumption that you all see repair and remodel growth next year and that will offset a declining new res market or how do you think about growth or declines in each of those markets getting you to a flat overall market? Nicholas Fink: Yes, I'll just give some high-level comments and Jon can jump in. First, just as a reminder for the builder side of the business, which is about 1/4 of our business. We are much more tied to the midpoint between starts and completions, and they aren't typically one for one. What you'll see it starts to move up and down. The completions are much, much more steady, and that's much closer to the number that we see come through our business because, again, the builders can throttle the starts number up and down. And then we are seeing recovery in the R&R line. I think -- I'd like it to be a whole lot stronger, but I was just looking at some data points across retail and e-commerce. And actually, the market has been flat for us on a dollar basis for 10 straight weeks, which I hate to say that it's exciting, but relative to the last 2, 3 years, that's actually pretty decent. And so you are seeing some firming. And then, of course, we're seeing things like the home equity extraction activity, applications for HELOCs, things like that, like I think up 80%, I read in the last report. So some green shoots there. And then we do have our growth initiatives in things like digital and luxury, which will provide us a tailwind to overdrive versus that market. Jonathan Baksht: Yes. And I think just to add on that, if you look at what we've seen in some of those markets kind of year-to-date and how that might play into next year, in repair and remodel, this is our biggest segment. If you look at the beginning of the year, we were looking at that being a bit -- that was still a bit down and a little bit of a drag, although we have seen that turn in the back half of the year, and we expect some of that to continue to next year. So as I look at a flat overall market, we're looking at probably low single-digit increase in repair and remodel with still some challenges in single-family new construction, that probably down low single digits. So those will offset each other. And then that will play out through our portfolio. Nicholas Fink: So I'd just add, this isn't our '26 guide. We're trying to give our perspective to be helpful. If things improve, we'll invest accordingly. But if things deteriorate, as I said earlier, we've got our hand very firmly on that SG&A throttle, particularly with some roles yet to fill. And so we're going to navigate this very, very tightly. Trevor Allinson: Right. Yes. I appreciate that. And the color is extremely helpful. And then one of your competitors in Water is out with a large announced price increase early next year. I just want to make sure I'm hearing your commentary correctly regarding price. Is it your expectation at this time that offsets to tariffs moving forward are going to be through avenues other than pricing, and it's not currently your expectation to push pricing in early 2026 to cover tariffs specifically? And then if you could, can you just tell us what Water pricing was up on a year-over-year basis in 3Q? Nicholas Fink: Yes. I'll start. I don't know if we've broken that out, but I'll start on just how we're thinking about it. So as we said, our pricing on a dollar-for-dollar and on a margin basis, a dollar-for-dollar basis, we believe we've covered off on the tariffs as we know them today. That said, as I said earlier, like the philosophy of this company as a category leader is to be extremely disciplined in pricing. So we will take pricing. We will take it on a regular basis, and we'll take it in hopefully small increments. So that's our strategy. And that's what we did here, we had mid-single-digit pricing across the portfolio to cover off on tariffs. If you go back to '21, where we saw massive inflation, you had pretty modest pricing. Why? Because we took it early. We did it consistently. And as long as we continue to flex that muscle and we do it highly strategically focused where the market can accept that pricing and less so where the market cannot leveraging some of these digital capabilities we built, then we should be in a very good position. And we really believe in doing that, and we really believe in maintaining pricing integrity across our channels, best for all of our customers. And so that's what I would expect to see from us as we move from here into '26. But what I don't believe you will see at this point, absent any new tariff news to the negative is any type of catch-up pricing. As I said, I want to be crystal clear about that. There is no second round for us. We're done. Operator: Thank you for joining today's conference call. You may now disconnect.
Operator: Good day, and welcome to the Peabody Q3 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Vic Svec of Investor Relations. Please go ahead. Vic Svec: Thanks, operator, and good morning, all. Thank you for joining today to take part in Peabody's third quarter call. Remarks today will be from Peabody's President and CEO, Jim Grech; CFO, Mark Spurbeck; and Chief Commercial Officer, Malcolm Roberts. Following the remarks, of course, we'll open up the call to questions. Now we do have some forward-looking statements today, and you'll find our full statement on forward-looking information in the release. We do encourage you to consider the risk factors referenced there as well as our public filings with the SEC. And I'll now turn the call over to Jim. Jim Grech: Thanks, Vic, and good morning, everyone. I'm pleased to report that Peabody continues to perform quite well with great safety results, good volumes, strong cost containment, a pristine balance sheet and an outlook that points to more of the same. Our third quarter was punctuated by strong thermal coal shipments and historically low met coal costs. Also, I'm delighted to say that the longwall production at our flagship Centurion mine begins next quarter. We expect shipments of Centurion's premium hard coking coal to expand sevenfold in 2026 to 3.5 million tons and even more beyond that time. Development and hiring remains on track and longwall equipment is beginning to be installed underground ahead of the February start. Over the 25-plus year mine life, we expect Centurion to be our lowest cost metallurgical coal mine. And by itself, the mine should boost our average met coal portfolio realizations as a percent of benchmark from the 70% mark this year to roughly 80% in 2026. All of this occurs against market pricing that is toward the lower end of the pricing cycle. To steal a bit of Malcolm's thunder, I'll share our belief that all 3 of our end markets could have upside pricing pressure in 2026. Mark will tell you that we have designed Peabody to produce positive EBITDA even during the toughest times while generating substantial cash flows during mid- to higher parts of the cycle. We're now at an interesting inflection point on how investors should be looking at our company. Our capital investment in Centurion is tapering down even as the longwall mining begins in the next quarter, setting us up to expand free cash flows in both directions. That bodes well for shareholder returns using our established policies. Let's now turn to what we're seeing in U.S. fundamentals. One of the world's largest hedge funds recently commented to us that Peabody was at the intersection of some of the most significant themes going on in America, and I couldn't agree more. Consider a few of these. The AI data center theme continues to play out with new investments being announced weekly. When coupled with plans for increased U.S. manufacturing, this means power generation will struggle to keep up with demand for the foreseeable future. U.S. coal plants reliability and affordability also continues to be emphasized. During the coldest days of last winter, for instance, fossil fuels provided more than 90% of the additional U.S. generation needed versus just 4% for wind and solar. The often quoted national average of 16% of electricity from coal also doesn't do justice to the workload, reliability and economics that coal power generation provides in certain states. For example, our home state of Missouri gets approximately 60% of its electricity from coal, while California has virtually no coal-fuel power. As a result, Missouri's average cost of electricity was just $0.11 per kilowatt hour last year, but California power averaged $0.27, nearly 2.5x that of Missouri. The third quarter continued to see 202 (c) executive orders to keep coal-fueled generating plants open and utilities announcing additional extensions. The count of life extensions for U.S. coal fuel generation now totals 58 units and 46 gigawatts of generation, more than 1/4 of the total installed base. This comes as the Trump administration continues to implement common sense policies. In the third quarter alone, we saw federal funding and emergency orders to extend the lives of coal plants, a 5.5% reduction in the federal coal royalty rate and an upcoming 2.5% production tax credit from the one big beautiful bill. We also saw a growing national focus on securing rare earth elements and critical minerals. We have long said that our leading U.S. thermal coal platform and particularly our Powder River Basin position represents a free option for investors. To extend that analogy, today, that option is nicely in the money. With that brief overview, Malcolm, I'll now turn the call over to you to give more color on the markets. Malcolm Roberts: Thanks, Jim, and good morning, everyone. I'll begin with a look at the seaborne markets, where the notable change in metallurgical coal this past quarter has been how unchanged those markets have been. Consider this, the normally volatile premium hard coking coal benchmark price averaged $184 per metric ton in the third quarter, which is the same as the price it averaged in Q2 and just $1 per ton lower than Q1. The global steel story has continued to center around China's anti-involution policies, which appear to be firming as the country looks to trim unprofitable supply. China's crude steel production is down roughly 3% year-to-date. Unfortunately, domestic steel demand has also been sluggish, so Chinese steel exports are still running at elevated levels. Lower crude steel production in traditional markets outside China has tempered the benefit of new blast furnaces in India and the incremental coal imports they represent. I'll remind listeners that while China imports less than 20% of its metallurgical coal demand, India imports 90% of its steelmaking coal needs. We note that in recent days, China has been aggressively pursuing imports of premium seaborne coking coals as domestic pricing in China has risen to a level that makes imports attractive. Seaborne met coal supply continued to see challenges this past quarter with some producers struggling at these sustained low pricing levels. we estimate that 45 million tons of seaborne met coal production or 15% of seaborne supply is earning an unsustainable level of revenue at current price levels. Benchmark prices today stand at approximately $195 per metric ton. Next year's forward curve is in the $215 range. This coming quarter, we'll be looking at the pace of Chinese policies and the strength of the restocking cycle in both India and China. Seaborne thermal coal saw some support in the third quarter with the average benchmark price up 8%. Positives for demand include developed Asian markets in Korea and Taiwan favoring Australian imports over Russian coals, while Chinese coastal plant stockpiles stand at a 12-month low. Anti-involution policies are touching all of China's coal mines, where the 276-day work limits, safety checks and production quotas invariably have an impact on most. Enforcement has been observed, but has been sporadic. On the supply side, seaborne thermal production is adjusting with large exporting nations such as Indonesia and Colombia curtailing unprofitable production. An improving market balance is reflected in the forward seaborne thermal benchmark price contango with next year's Newcastle pricing up 9% above current levels. During Q4, we anticipate winter restocking post shoulder season, and we'll see if the recent rebound in Chinese imports accelerates. Within U.S. markets, I'll reinforce Jim's initial remarks. The favorable trends we've discussed all year are well intact. Through 9 months, total U.S. electricity demand is up 2% over the prior year. That relates mostly to the early-stage build-out of data centers and increased load growth from AI. Electricity demand growth only looks to expand with ICF International, for instance, forecasting 25% growth within 5 years and 78% growth within 25 years. Peabody has been saying that increasing utilization of existing coal plants represents the best form of incremental power in the U.S., and that's exactly what has occurred year-to-date. Percentage growth in U.S. coal generation has been 5x greater than overall electricity generation growth. The 11% increase in U.S. coal burn this year has been driven by good fundamentals, including natural gas prices that have averaged $3.45 per MMBtu, leading to gas generation being down 3%. And those trends may well be repeated next year with a forward curve for natural gas averaging an even stronger $4. Our view is spare generation capacity could provide substantial growth in coal consumption while filling the electron gap. First, consider the landscape in the U.S. Renewables continue to be built out, but don't solve the massive 24/7 reliability needs when the wind doesn't blow and the sun doesn't shine. Renewable saturation is a real concept. Gas plants are being built. However, new turbines ordered today may be 5 years away from being delivered given backlogs. Additional nuclear generation is fine, but at least a decade or 15 years away from reality. For those keeping score on coal plant longevity, add 3 coal-fueled plants in North Carolina to the list of those being extended. And these plants aren't just being kept in service, they are generating more electrons. The U.S. coal fleet ran at just 42% of capacity in 2024. The fleet can never run at 100%, of course, but optimal levels could look a lot like 2008 when coal plants ran at 72% utilization. Closing that gap could add 10% of generation to the U.S. electrical grid without needing to add any new plants. And that increase could translate to some 250 million tons or more per year of additional thermal coal demand. Now that isn't a projection, of course. It's just simple math. However, it does provide a compelling case for coal rebound in the U.S. and one that has already begun to play out this year. From a supply standpoint, providing those additional tons to meet growing U.S. generation can come somewhat from running mines harder and utilizing latent capacity. You've seen that from Peabody with U.S. shipments up 7% year-to-date. With higher coal burn, we also estimate that U.S. generated inventories are down 14% from this time last year. Market fundamentals continue to tighten. We've begun to see price indices increase while natural gas prices have risen across the curve. Coal continued to present attractive economics. That's a brief review of the coal market dynamics. I'll now pass the call over to Mark. Mark Spurbeck: Thanks, Malcolm, and good morning, all. I'll start with a quick overview. We delivered another strong financial quarter with adjusted EBITDA increasing from Q2, driven by higher Powder River Basin shipments, better-than-expected seaborne thermal coal volume and the lowest metallurgical coal costs we've seen in several years despite burdensome Queensland royalties. At September 30, our cash position was $603 million and total liquidity exceeded $950 million, ensuring we have the financial flexibility to manage short-term market volatility while fully capturing upside from more favorable pricing. Together with the increased operating leverage from Centurion, we expect to be positioned to generate free cash flow and deliver outsized returns to shareholders. Let's take a closer look at our financial performance for the third quarter. We recorded a GAAP net loss attributable to common stockholders of $70.1 million or $0.58 per diluted share, which included $54 million of acquisition termination costs, primarily related to financing arrangements, transition services and legal fees. We reported adjusted EBITDA of just under $100 million, generated $122 million in operating cash flow and continued completing development at Centurion South, now just 3 months away from starting the longwall. Turning to operating segment performance. Seaborne Thermal recorded $41 million of adjusted EBITDA and 17% margins. Sales volumes exceeded company expectations with an increase of 500,000 tons quarter-over-quarter as the company recovered the delayed tons from long Newcastle shipping queues in Q2 and then some. The segment expanded margins by 10% from Q2, demonstrating the continued strength of our low-cost Australian thermal platform. The Seaborne Metallurgical segment reported adjusted EBITDA of $28 million. Revenue per ton rose 6% quarter-over-quarter due to a higher product quality mix, enhanced by 210,000 tons of Centurion premium hard coking coal. Costs were significantly better than company targets with cost improvements achieved at all 5 met coal operations. The U.S. thermal mines generated $59 million of adjusted EBITDA on the improved domestic demand that Jim and Malcolm discussed. On a year-to-date basis, our U.S. thermal platform has delivered nearly $150 million of cash flow and EBITDA has outpaced capital by an almost 5:1 margin. The Powder River Basin delivered $52 million of adjusted EBITDA, a 20% increase from the prior quarter. Margin per ton improved 6%, driven by higher volume and reported costs at the low end of guidance. The new lower federal royalty rate improved costs by $0.70 per ton, but reduced revenue by $0.30 as certain contracts require law changes to be passed on to customers. To get a better sense of the momentum building in the PRB, shipments are up 10% year-over-year, yet margins have improved by 39%, resulting in a 53% increase in reported EBITDA compared to the prior year. The other U.S. Thermal segment contributed a modest $7 million of adjusted EBITDA in the third quarter. Sales volumes met company expectations despite an unplanned 5-week dragline outage at Bear Run, which led to a production loss of 400,000 tons. That was mostly offset by a drawdown of inventory, resulting in a net sales reduction of 100,000 tons. Related repair costs totaled $2.5 million, temporarily increasing costs above expected levels. The dragline resumed operating on September 18, and we don't anticipate any impact on fourth quarter production. Also, the Twentymile team completed the longwall move to the 11 East Panel in October, and we expect to return to normal production rates going forward, though we anticipate less than ratable sales in the fourth quarter as we rebuild inventory. Lastly, we recorded a onetime $5.5 million charge in the Corporate and Other segment for the settlement of claims related to a dispute over the calculation of overtime at our U.S. operations. Looking ahead to the fourth quarter, seaborne thermal volumes are expected to be 3.2 million tons, including 2.1 million tons of export coal, 200,000 tons of which are priced on average at $100 per ton. 800,000 tons of Newcastle product and 1.1 million tons of high ash coal remain unpriced. Seaborne thermal costs are expected to be between $45 per ton and $48 per ton, an improvement over prior implied fourth quarter guidance. As a reminder, Wambo Underground came offline in the third quarter. Going forward, we anticipate a seaborne thermal quality mix of 40% Newcastle and 60% higher ash product. Seaborne met volumes are targeted at 2.4 million tons, up 300,000 tons from the third quarter, while costs are expected to be $112.50 per ton better than prior full year guidance. In the PRB, we expect shipments of 23 million tons at cost of $11.25 per ton, both better than prior implied fourth quarter guidance. Other U.S. thermal coal shipments are expected to be just slightly below third quarter at 3.6 million tons as we rebuild inventory and production ramps up at Twentymile following the longwall move. Costs are anticipated to be approximately $45 per ton, a $5 improvement from prior quarter. With Wambo Underground closing as planned, we anticipate certain non-reclamation costs to be reported in the Corporate and Other segment. These costs are very much front-end loaded and estimated at $9 million in the fourth quarter. After third quarter's results, we are making favorable changes to full year guidance for the second quarter in a row. Seaborne thermal volumes are anticipated to be 350,000 tons higher at 15.1 million to 15.4 million. Seaborne met cost targets have improved by an additional $2.50 per ton to $115 per ton at the midpoint. PRB volumes are anticipated to be 3 million tons higher at 84 million to 86 million, while costs are being lowered another $0.25 per ton to $11.25 per ton to $11.75 per ton. With the recent challenges at Bear Run and Twentymile behind us, we are adjusting other U.S. thermal full year volume to be at or slightly below the previous low end of guidance at 13.2 million to 13.4 million tons and full year cost $2 per ton higher at $45 per ton to $49 per ton. In summary, we delivered another straightforward quarter, underscoring the continued discipline of our operations team. With the Centurion South investment nearly complete, we're well positioned to significantly expand margins. We expect another consistent quarter to end the year. We remain confident in our ability to bring Centurion online early next year and deliver stronger cash flow. Our robust balance sheet provides flexibility to navigate near-term seaborne weakness, capitalize on accelerating cash flows as conditions improve and create significant value for our shareholders. Thank you. I'll now turn the call back over to Jim. Jim Grech: Thanks, Mark. I'd like to briefly review our core priorities, which play into Peabody's compelling investment themes. First, we are highly focused on safe, productive and environmentally sound operations. That's our key to everything else we do. Second, we are on our final approach to Centurion's longwall start-up. Centurion joins our multiproduct met coal platform that will see a volume increase of approximately 25% in 2026. Third, we believe our low-cost thermal coal platform will continue to deliver EBITDA well ahead of its modest CapEx needs. Fourth, our leading U.S. thermal position will continue to benefit from the rising domestic generation trends. And fifth, we will maintain a fortress balance sheet with a focus on maximizing shareholder returns. Our sixth priority is also our newest, which is to leverage our #1 U.S. coal production position to assess our potential to meet growing U.S. needs for rare earth elements and critical minerals. We told you last quarter that we saw rare earth and critical mineral potential in preliminary studies performed in conjunction with the University of Wyoming and that a new sampling and laboratory analysis program was beginning in the third quarter. Preliminary data from our targeted zones indicate that we have similar or better concentration than others have reported in the PRB. We acknowledge that we are in the early stages in our assessment of our potential to produce critical minerals and rare earth elements with sustainable processes that could potentially generate attractive returns for our shareholders. In continuation of this assessment, we have multiple activities currently underway. We have accelerated our drilling program as we continue our assessment of both types and concentrations of rare earth elements in conjunction with several third-party labs. We are in discussion with multiple departments in the Trump administration regarding rare earth and critical mineral priorities and potential for funding. We also have been in early discussions with a number of potential technology partners regarding processing platforms. I would describe our actions as aggressive and pacing yet disciplined in approach. By our year-end reporting early next year, we will look to provide a greater sense of mineral types and concentrations while also discussing next stage plans. With that, operator, we can now open up the line to questions. Operator: [Operator Instructions] First question comes from the line of Nick Giles with B. Riley Securities. Nick Giles: My first question, obviously, some key tailwinds for domestic thermal this year. And Malcolm, you mentioned optimal coal-fired utilizations could be in the 70s. That would imply 250 million tons of demand. In this blue sky scenario, how should we think about Peabody's response? I mean, what's the maximum level of output we could see Peabody producing the PRB? How much capital would be required? And how long would it take to ultimately achieve this level? Malcolm Roberts: Look, Nick, I'll talk about the market and then capital, I'll hand over to Jim or Mark, depending on who wants to take it. Look, when we look at this market, there was quite a bit of latent capacity available over the last couple of years that we're seeing fill up very quickly. And so it's a great question that you asked because the expansion is going to come from really 2 things. One is going to be customer commitments and adding on capacity is not something you do for 1 year. So it's going to need customer commitments. And then we'll be looking for the price signals. And we'll see what the market does in terms of price signals to bring those additional tons on. I think that's the best way to look at it. But I would say we see ourselves approaching absorbing the latent capacity that we've had over the last couple of years. Mark or Jim? Mark Spurbeck: Nick, I think Malcolm's got it exactly right. I mean you look at what we've done, particularly in the PRB, increasing our volumes by 10 million tons from the beginning of the year. So that latent capacity really being taken up in the market. We've seen our peers do something similar. So there's going to be additional demand if any of these projections for load growth continue to bear out like we've seen so far this year. The amount of capital it's going to take remains to be seen. But certainly, we're going to have to see the economics and prices in the coal to justify the additional investment. I think there's 2 things, Nick, when I think about additional production, one is the capital, and that's mainly the equipment fleet, but two, also the labor and getting a workforce assembled to produce those additional tons. So Malcolm had it right, latent capacity being taken up and additional volumes are going to come at higher costs. Nick Giles: This is really helpful. Just as a follow-up here. I mean, you mentioned price signals, customer commitments. What would you need to see from a duration perspective? Would you need to see 2030 type commitments at this point to deploy incremental capital? And then just any volume figure, I mean, could we see 10 million more tons, 20 million more tons? I appreciate any clarity there? Mark Spurbeck: Well, we've -- with that 10 million ton increase this year, that's pretty much running at our full run rate. So there's no additional latent capacity to speak of, particularly at our NARM mine, which is the largest mine. With regard to the type of commitments, we're seeing those types of commitments. We're seeing multiyear commitments from customers already, a lot of inquiries around that. It would be -- it would look the same as any other investment. We'd have to see a return. How much can we do on an as-needed basis on a leasing basis versus outright investment and purchase. So to be determined, Nick, on that. But we fully expect with that latent capacity being taken up this year to see that upward pricing pressure. We're seeing it already. We expect that to continue next year, particularly if that forward curve on gas above $4 is right next year. Nick Giles: Got it. Switching gears. Obviously, you have Centurion coming on here shortly, and that will reweight you more towards the benchmark. But with the termination of the Anglo deal, I just wanted to ask how you're thinking about M&A opportunities in met going forward. I mean do you still have a desire to further reweight your met portfolio to higher quality grades beyond what we'll see at Centurion? Jim Grech: Nick, Jim here. And our focus has been on growing the seaborne metallurgical coal. And with the position we're in right now, our entire focus is on getting that Centurion mine up and running and getting it to the maximum capacity possible. And we're in good shape to do that. One of the things that we are addressing, which is going well, as Mark said, is labor. We've got 260 of the 400 employees hired that we need to get to full capacity, and we anticipate being able to get up to full labor complement as the longwall is coming online. So our focus really is on getting the Centurion mine up and running, maximizing the output from that mine and then really taking advantage of the U.S. tailwinds that we have and following up on your questions of getting as many tons out as economically as we can from our U.S. platform. That's really where our focus is. And if the market unfolds as we think it has the potential next year to do so with the upward pricing pressures domestically, internationally, our focus on our organic assets, we see some very robust cash flow potential. And of course, that can work back to share buybacks and so on for our shareholders. So that's really where the focus of our company is going forward. Operator: The next question comes from Nathan Martin with Benchmark Company. Nathan Martin: Just back to the PRB for 1 second. You said the operation, I think, Mark, is basically running at the max at this point. If we look out to the next 2 years, '26, '27, are you guys seeing enough demand to continue running at that max? And roughly how contracted are you and what price at that level? Malcolm Roberts: Malcolm here. Look, I think there are 2 questions. Are we confident about running at max capacity for the next couple of years? The answer is definitely yes in the PRB. I think your second question was what we think price levels will be. It's I can't comment on that, except we are encouraged by where we've seen index price movements and where we're doing business today. Nathan Martin: And Malcolm, just to clarify… go ahead, sorry. Jim Grech: I'm sorry, Nate. If there's something to take from what Malcolm has been saying and Mark as well is that we're seeing an environment in the market where it's certainty and demand increase and the ability for U.S. producers to quickly add production is going to be the challenge, and that should result in upward pricing pressure. So there's going to be some value to the first movers on the customer side that step out and enter into these multiyear agreements and securing the reliability that they're looking for. And we've been seeing some of that. So -- but this inflection point has a real potential to hit the market of the demand increasing quickly, the coal plant utilization wanting to increase to go along with it and how quickly can the production side respond. And for that production side to respond, we need to see more long-term agreements put in place where we can justify the investment, as Mark was talking about. So it's going to make for, I think, a pretty volatile pricing environment going forward if these demand projections hold as we're seeing many consultants forecasting. Nathan Martin: Got it. I appreciate those comments, guys. And then shifting to the Met segment, clearly, a nice quarter-over-quarter improvement in cost per ton there. If you look ahead to '26 and the start of Centurion longwall, should we expect that to drive another incremental improvement? I think I believe you said that was going to be the lowest cost operation in the segment. How should we think about how met segment costs could compare to 2025 guidance? Would just be helpful to get some puts and takes there? Mark Spurbeck: Yes, Nate, Mark. We're not sharing guidance for 2026 yet. We'll do that, obviously, on our next call. Over that 25-year life Centurion will be the lowest cost producer in the portfolio. We talked about the South having some shorter panels, lower production run rate of 3.5 million tons or so next year versus life of mine of 4.7 million. So there'll be some give or takes there. I wouldn't look for any step change next year. Nathan Martin: Mark, that's fair. And then maybe just one final -- it would be great to get thoughts on potential scenarios for how you guys see the arbitration process with Anglo playing out. And then specifically, are there any further adjustments to your results like the $54 million charge, let's say, that we saw this quarter expected going forward? Jim Grech: Yes. Nate, I'll talk about the process, and then I'll let Mark comment after that about any other adjustments. And our analysis of the MAC, which was a prospective analysis, we feel has been confirmed by events and the passage of time and of course, the enormous loss of value that we see. So we've hired 2 prominent law firms, Jones Day and Quinn Emanuel, and they've done their analysis and they join us in their high level of confidence in our position. An arbitration process probably takes years, all right? And we're on the front end of that arbitration process. I can't predict you how long it's going to take, but it will take a while to get to any resolution. But as each day passes by, we get more and more firm in our conviction of our position. And now as far as any other expenses with that or looking forward, I'll give that to Mark. Mark Spurbeck: Yes, on the $54 million charge for the quarter, that really brings the year-to-date charge to $75 million. That's a lot of costs that would have been capitalized had we been able to complete the transaction, primarily related to the bridge financing arrangements. That was significantly most of it, about $45 million of the charge year-to-date. There's also about $15 million of professional fees and transition services that is really a catch-up to where we're at, and that's obviously stopped now. So Nate, I wouldn't expect anything significant like you've seen. There will obviously be some legal defense costs going forward. We estimate that at about $5 million a year. Operator: The next question comes from the line of George Eadie with UBS. George Eadie: Can I ask more about rare earths and the PRB? So in terms of details, we'll get by year-end, should we expect to see grades volumes, costs and potential time line to get to market all of those by year-end? Jim Grech: So George, what we said is we're in the very early stages of our assessment, which is ongoing, and we're getting some preliminary data in. It's analyzed. We're getting more data in and more analysis is needed. We've accelerated our drilling program with that as well. So what we're planning to give at the end of the first -- at our year-end results, which we'll do in February, is a preliminary analysis of indicative element types and concentrations. So that's what we're looking -- that's what we're saying we'll be giving at that point in time. George Eadie: Okay. And you guys called out earlier similar or better grades than peers. Is it reasonable then for me to assume that it's a similar mix like other peers, so sort of heavy in scandium and gallium where the value is? And just sort of lastly on that, like can you help maybe elaborate on discussions on partnerships with the current administration? I guess you're a leading player in both coal and critical minerals, 2 clear top priorities. Like how can you help us understand a bit better like what could happen and how they're approaching this in your discussions? Jim Grech: George, so there's a few things there. First off, I'm not going to get speculative on the types and concentrations. We'll have that in just a few months here. We just want to make sure that we're very thorough in how we approach this. We take a disciplined systematic approach to how we're going to do this. And we'll get all the sampling done. We'll get all the data in and at the -- and when we give our year-end reports at the end of the -- in February, we'll give the information we have at that time. So we're not going to get too speculative at all right now on the concentrations and types. We have been very active within the -- with the Trump administration, meeting with various departments in Washington and we even have some more upcoming here in the near future. So we're working closely with them. And as you said, we are -- with the volumes that we do in coal and with the rare earth elements, we do have a unique position. And we also have a unique position that we do that both in the U.S. and Australia. And with the Trump administration and the recent agreement with Australia, we are looking at the potential for rare earth elements along with -- at our coal mines in Australia as well. So we're very unique in that position. And one other thing I'd like to point out that we're very unique in when it comes to the potential for rare earth elements is the massive scale, which we have in the PRB, which cannot be duplicated. We have the workforce, we have the equipment. We have the logistics facility, and we're currently mining 80 million tons of coal a year and moving over 400 million cubic yards of earth a year. No one else can duplicate that. And I would just say, while we aren't trying to get shovel ready here if there is an opportunity, we are already shoveling in the PRB. So that is a unique position we have. And as we get data and we can solidify our analysis, we'll certainly bring that out. George Eadie: Okay. Yes. No, that's clear. And just sorry, one last one, maybe for Mark. But on the Anglo termination, I might have missed it slightly earlier, but there was a $29 million deposit return. Is there another $46 million to come still? Is that right, the $75 million total? And can you just maybe remind me what the $54 million that has gone through in Q3? And if there's anything more in terms of costs beyond that legal $5 million a year you flagged before? Mark Spurbeck: You're right, George. On the remaining deposit, we expect that to be returned to us. We've asked for that in short order. Not clear why only a portion of the deposit was returned to us. Secondly, on the $54 million of costs, about $35 million of that was related to the financing, the bridge financing, which has now been terminated as we announced previously. And the additional amount was almost entirely related to kind of professional fees and transition services, which have completely been halted at this point. So they won't be going forward. The only thing we'll have going forward is kind of the arbitration legal fees, and we anticipate that to be about $5 million per year. Operator: The next question comes from Matthew [ Key ] with Texas Capital. Unknown Analyst: I have a macro one on the rare earth side. We saw this morning that the U.S. and China reached a tentative deal to pause some of those export controls on rare earth elements for about a year. What impact, if any, do you think this will impact government support for domestic rare earth projects? Jim Grech: Yes, Matthew, that's -- I'm not really sure I have a specific answer to that. I will comment on is that I know that there is a strong desire to have a domestic supply of rare earth elements here by our government. So there could be an international supply, maybe things with China. I'm not sure how that will play out. But I do know there is a very strong desire for conventional or unconventional supply right here native in the United States. And so I would expect that would continue, but I don't want to speak for the administration on that. That's just my expectation. Unknown Analyst: Got it. That's helpful. And just a follow-up on M&A in the seaborne met side. Given that you are in arbitration with Anglo and that could take some time, would you not really be considering any additional M&A in seaborne met until that arbitration process with Anglo is completed? Jim Grech: Well, first off, I'll just say that, again, our belief that the arbitration process will be successful for us isn't going to be a hindrance in anything we -- is not going to hold us back from doing anything in the future. We have 100% confidence in that process, and we are not going to stop anything strategic with our company because of that process. So I'd just like to put that out there right now and clear that up. But as you're asking about M&A, again, I'll just say our focus right now is on our organic assets, getting Centurion online, getting the full value of that for our shareholders and leaning into this market upside that we see happening both U.S. and internationally next year and making sure our platform is capitalized. We have the maintenance in order, we have the staffing in order to take full advantage of the upside we see coming in the market and to generate some very robust cash flows. That's where our focus is right now. Okay. Thank you, operator, and thanks to everyone for the time today. I'll thank our Peabody team, which amid everything else turned in safety performance that remains near our all-time record performance of 2024. We look forward to keeping all of you up to date on our progress as we finish up in 2025. Thank you. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.
Operator: Good day, everyone, and welcome to the Valaris Third Quarter 2025 Results Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Nick Georgas, Vice President, Treasurer and Investor Relations. Please go ahead. Nick Georgas: Welcome, everyone, to the Valaris Third Quarter 2025 Conference Call. With me today are President and CEO, Anton Dibowitz; Senior Vice President and CFO, Chris Weber; Senior Vice President and CCO, Matt Lyne; and other members of our executive management team. We issued our press release, which is available on our website at valaris.com. Any comments we make today about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially from our expectations. Please refer to our press release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements. During this call, we will refer to GAAP and non-GAAP financial measures. Please see the press release on our website for additional information and required reconciliations. Last week, we issued our most recent fleet status report, which provides details on our rig fleet, including new contract awards. Now I'll turn the call over to Anton Dibowitz, President and CEO. Anton Dibowitz: Thanks, Nick, and good morning and afternoon to everyone. I'll begin today's call with a summary of our third quarter performance and highlight our recent commercial achievements. I'll then provide an update on the offshore drilling market before discussing how our continued focus on operational excellence, commercial execution and disciplined cost and fleet management is driving long-term value for shareholders. I'll then turn the call over to Matt, who will provide additional detail on our contracting activity and the broader floater and jack-up markets. After that, Chris will walk through our financial results and guidance, and I'll finish with a few closing remarks. To begin, I want to highlight a few key points. First, I want to thank the entire Valaris team for continuing to deliver safe and efficient operations. This solid operational performance contributed to another strong quarter of financial results with meaningful EBITDA and free cash flow generation. Second, we continue to execute our commercial strategy, having recently secured an attractive contract for VALARIS DS-12 with BP Offshore Egypt. With this award, all 4 of our drillships with near-term availability are now contracted for work beginning next year. Third, despite near-term commodity price uncertainty, demand for offshore drilling services is developing as we expected. We continue to see a robust pipeline of deepwater opportunities for our high-specification fleet, and we are in advanced customer discussions for our drillships scheduled to complete contracts in the second half of 2026. In summary, we remain focused on delivering outstanding operational performance, executing on our commercial strategy and prudently managing our costs and fleet. By staying disciplined and focused on these priorities, Valaris is well positioned to deliver long-term value for our shareholders. Moving to operations. Delivering safe and efficient operations is always our top priority. It protects our people, strengthens relationships with our customers and serves as the foundation for everything we do. Our teams once again delivered solid operational performance, achieving fleet-wide revenue efficiency of 95% in the third quarter. This execution helped deliver another quarter of strong financial results, including adjusted EBITDA of $163 million and adjusted free cash flow of $237 million. In addition, we repurchased $75 million of shares during the quarter, demonstrating our commitment to returning capital to shareholders. Several rigs reached notable safety milestones during the quarter. VALARIS Stavanger marked an impressive 4 years recordable-free, a remarkable achievement that reflects the crew's commitment to safety and the strength of their leadership. In addition, 7 other rigs, floaters VALARIS DS-12, DS-18 and DPS-1, along with jack-ups VALARIS 92, 123, 247 and 249, each achieved 1-year recordable-free. Congratulations to all involved on these outstanding results. We were also proud to be recognized by the Center for Offshore Safety for the third consecutive year, most recently for our Video After Action Review initiative, reflecting both the strength of our safety culture and our commitment to continuous improvement through innovation. We continue to execute our commercial strategy. This is supported by a solid operational performance since many of our recent contract awards have come from existing customers, reflecting the strength of our relationships and the confidence they place in us to deliver safe and efficient operations. Great example is our recent contract for VALARIS DS-12, which will return to Egypt with BP, building on our previous campaign that included drilling the successful El King 2 and El Fayum 5 exploration wells earlier this year. Egypt continues to make meaningful progress in attracting investment from IOCs with several majors awarded offshore acreage in a licensing round earlier this year. Valaris has a long and successful history operating offshore Egypt, spanning roughly 2 decades of drilling programs, including 7 years for BP. We're excited about this upcoming campaign and the prospect for continued activity offshore Egypt in the years ahead. At the start of the year, we outlined our commercial focus on securing attractive contracts to bookend the white space for our drillships with near-term availability. And we have accomplished this objective as these 4 rigs are now contracted for work beginning next year. This is a fantastic achievement by our commercial team and everyone across the organization who played a role in making it happen. Turning now to the broader macro environments in the offshore drilling market. The long-term outlook for our industry is becoming increasingly constructive. There is a growing consensus that today's near-term oil supply surplus will give way to a structurally tighter market later in the decade as a result of historic underinvestment and slowing non-OPEC production growth. Our customers continue to emphasize the need for sustained investment in oil and gas, particularly in offshore developments that provide secure, reliable and affordable energy supply. The IEA recently highlighted that nearly 90% of global upstream spending is required just to offset natural field declines, underscoring how much investment is needed to simply maintain existing production. Without continued investment, the IEA estimates global oil production would fall by 8% per year on average over the next decade, equivalent to losing more than the annual output of Brazil and Norway each year over the same time frame. Demand for offshore drilling continues to unfold as we expected, with customers increasingly looking to offshore projects, particularly deepwater, which offers large accessible resource potential, compelling project economics and comparatively lower carbon emissions to meet future energy needs. Even with some near-term commodity price uncertainty, customers are moving forward with long-cycle offshore developments, and we anticipate meaningful growth in deepwater project sanctioning over the next few years as customers pursue greenfield and brownfield developments as well as exploration. Importantly, most of these projects are expected to be economically viable well below current oil prices. According to Rystad, approximately 70% of deepwater spending expected to be sanctioned over the next 3 years is tied to programs with breakeven prices below $50 per barrel compared to a 5-year forward price above $65 per barrel. This reinforces our expectation that the floater opportunities we've been tracking will continue converting to contracts. And based on our ongoing conversations with customers, we anticipate additional awards for Valaris and the broader industry in the coming months. We continue to expect that utilization for the global drillship fleet will trough late this year or early next year before improving in the second half of 2026 as rigs begin new contracts. And we anticipate seventh-generation drillships will exit 2026 with utilization levels around 90% Customers continue to prefer the most technically capable and efficient assets, which aligns well with our high-specification drillship fleet with 12 of our 13 ships being seventh- generation units, the highest concentration in the industry. Seventh-generation drillships have historically enjoyed a utilization and day rate advantage, and we expect this trend will continue. We have strategically positioned our assets with customers in basins where we see sustained long-term demand, and we believe that this targeted commercial approach will allow us to maintain more consistent utilization over time. Turning to jack-ups. Shallow water demand remains robust with global utilization around 90%, driven primarily by national oil companies focused on energy security and infrastructure development. Recently, Saudi Aramco has issued notices calling back several suspended rigs to resume operations next year, which we expect will further support the supply and demand balance of the global jack-up fleet. Our versatile jack-up fleet continues to be a significant and reliable driver of earnings with EBITDA from the segment increasing year-over-year, driven by more operating days and higher average day rates. This reflects our strategic focus on markets where we hold strong positions, such as our market-leading position in the North Sea, in Saudi Arabia through our rigs leased to ARO and in niche markets that require high-specification assets like Trinidad and Australia. Turning to our broader fleet management strategy, we remain focused on maintaining our high-quality and efficient asset base while prudently managing our costs and fleet. This includes tightly managing expenses between contracts, selling assets when we can achieve attractive prices and retiring rigs when their expected future economic benefit no longer justifies their associated costs. This focus was recently demonstrated by the highly accretive sale of 27-year-old jack-up VALARIS 247, which we closed during the quarter for $108 million in cash. Consistent with our disciplined approach to cost management, following completion of their current programs, we plan to mobilize VALARIS MS-1 and DPS-1 to Malaysia, where we will quickly reduce costs by warm stacking both rigs while we evaluate future opportunities. Before handing over to Matt, I'd like to briefly recap a few key points about the market and our strategy. Our customers continue to highlight the need for ongoing investment in oil and gas, particularly in offshore developments that offer secure, reliable and affordable energy supply. Demand for offshore drilling is developing as we expected, and customers are increasingly turning to offshore projects to support future energy demand. We're well positioned to continue executing our commercial strategy by securing attractive floater contracts supported by our global scale and high-spec fleet. We're in advanced discussions with customers regarding opportunities for rigs scheduled to complete contracts in the second half of 2026, and we will continue to pursue gap-fill programs in the first half of next year. Against this positive backdrop, we remain focused on 3 strategic priorities: delivering outstanding operational performance, executing our commercial strategy and prudently managing our costs and fleet. By staying disciplined and focused on these priorities, Valaris is well positioned to deliver long-term value for shareholders. With that, I'll now hand the call over to Matt. Matt Lyne: Thanks, Anton, and good morning and afternoon, everyone. I'll begin with a summary of our recent contract awards before providing updates on the major floater and jack-up markets where we operate. Since our second quarter call, we've secured new contracts and extensions, adding nearly $200 million to our contract backlog. And we are in advanced customer discussions on several contract opportunities for both drillships and jack-ups that we expect to conclude before year-end. Starting with drillships, year-to-date, we've added approximately $1.4 billion of backlog for our drillship fleet, representing 9 years of total contract duration. Most recently, we've secured a 5-well contract for VALARIS DS-12 with BP offshore Egypt. The contract is expected to commence in mid-second quarter 2026 with an estimated duration of 350 days and a total contract value of approximately $140 million. The contract also includes 3 option wells, which could extend the program to more than 2 years in total duration. Turning to jack-ups. We have secured more than 500 days of additional work in the North Sea, including contract extensions for the VALARIS Norway, 121 and 122 as well as a 4-month program for the 248, which helps bridge most of the gap between the SPS and the start of the next program in 2026. Fleet-wide, we've added over $2.2 billion in contracted revenue backlog year-to-date, significantly enhancing our contract coverage for 2026 and beyond. And current total backlog stands at $4.5 billion. Turning now to the major floater and jack-up regions where we operate. Consistent with last quarter, we are tracking more than 30 longer-term floater opportunities with planned start dates in 2026 and 2027, each with durations of a year or more. We continue to see programs we are tracking progress through the commercial process with long-term contracts typically awarded at least 9 months before their planned commencement. We expect to see further awards both for Valaris and our peers before year-end. Offshore Africa, including West Africa, East Africa and the Mediterranean, remains the most active region for future floater demand, representing roughly half of the long-term opportunities in our pipeline. Starting with Egypt, the country is experiencing declining output from mature fields and views new offshore exploration and development as key to satisfy growing domestic demand. The government has made meaningful progress attracting IOC investment with several majors awarded offshore blocks in a licensing round earlier this year, and we look forward to continuing our long history of operations offshore Egypt in the years ahead. Elsewhere in the Mediterranean, Cyprus is a potential bright spot with exploration and development programs anticipated in 2026 and 2027. Angola is facing a similar situation to Egypt, with production from mature fields declining, resulting in total production recently dropping below 1 million barrels per day for only the second time this decade. The Angolan government is focused on stabilizing production above this level by incentivizing both new exploration and brownfield development. We currently have the VALARIS DS-7 and DS-9 working offshore Angola with the DS-7 currently drilling an exploration well in Block 47 for Azule. Both rigs have delivered strong operational performance, positioning them well for follow-on work when their current contracts expire in the second half of 2026. Elsewhere in West Africa, we expect to see growth offshore Nigeria with 2 multiyear programs with IOCs presently in the tendering phase, one of which is expected to be awarded soon. Offshore Ivory Coast, Eni has issued a request for information for a long-term development program at the Baleine field that is expected to commence in 2027. Similarly, we anticipate incremental demand from Namibia, where TotalEnergies is expected to tender soon for a long-term development for its Venus project, potentially leading to several years of work for multiple rigs. Other operators are advancing plans for further exploration and potential development programs that could begin within the next couple of years. In Mozambique, Eni recently reached FID on its Coral North project and is tendering for a drillship to start work in the second half of 2026. Additional tenders for programs starting in 2027 with TotalEnergies and Exxon are expected in the coming months. Valaris has a long and successful track record offshore Africa. And we expect development activity around the continent will be the main driver of incremental floater demand over the next few years. With 5 of our high-specification drillships now contracted around the continent, we are well positioned to benefit from this growth. Moving to Brazil, we continue to expect that Petrobras' rig count remains stable. Petrobras also recently received an environmental license to drill an exploration well in the Equatorial Margin, an important step toward potential future development activity in this region, which lies adjacent to the prolific offshore basins of Guyana and Suriname. Beyond Petrobras, we also see opportunities with IOCs in Brazil, including Shell's Orca project, formerly known as Gato do Mato, which is nearing award. In addition, we expect that BP's Bumerangue discovery, which was drilled by VALARIS DS-15 will lead to future appraisal and development activity. Overall, we continue to see solid floater demand offshore Brazil and expect it remains the largest market for deepwater rigs. In the U.S. Gulf, customer demand remains healthy with several term extensions announced by our peers following the long-term Oxy contracts for VALARIS DS-16 and DS-18 that we announced in July. We were pleased to have secured these contracts as they provided 5 years of backlog, solidified our presence in the region and deepened our relationship with Oxy, who is a major leaseholder in the U.S. Gulf. We expect this market to remain fairly balanced with demand largely met by the existing supply of the rigs in the region. Outside of the Golden Triangle, we are tracking requirements for 7 drillships offshore India, Southeast Asia and Australia, representing more than 10 years of firm demand. This activity could draw additional supply away from the Golden Triangle as recently occurred with the drillship mobilizing to Indonesia after completing work offshore West Africa. Valaris MS-1 and DPS-1 are scheduled to complete contracts offshore Australia during the fourth quarter. We currently see no new work for these rigs in 2026 but continue to have discussions about potential opportunities in 2027 and beyond. In line with our disciplined fleet management approach, we plan to mobilize both rigs to Malaysia to be warm stacked while we evaluate these opportunities. Turning to jack-ups, current global marketed utilization remains steady at around 90%. We have strong and focused presence in strategic shallow water markets. This has helped us to achieve industry-leading contract coverage on our jack-up fleet with nearly 80% of available days of our active rigs contracted for 2026 and more than 60% contracted for 2027. In benign environments, we have open availability in 2026 for just 2 rigs, VALARIS 106 in Indonesia and VALARIS 107 in Australia. We are in advanced customer discussions for both rigs and expect to secure additional work soon. In the North Sea, recent awards have enhanced our contract coverage. We now have availability on just 2 of our jack-ups in the region during the first half of next year, and we are tracking a number of short-term opportunities that line up well with our limited availability during this time. Looking further ahead, we anticipate demand improves across the region in the second half of 2026 and into 2027. In the U.K., we see a range of opportunities that include gas drilling, plug and abandonment work, new energy and infrastructure projects, and we anticipate supply will largely meet demand. We expect activity in the Dutch sector will remain steady, keeping 4 rigs busy, and we see opportunities in Denmark for up to 2 rigs during 2026, representing an uptick in activity given no rigs are currently operating there. Our strong operational track record and long-standing customer relationships have supported our best-in-class utilization in the region over the past few years, and we continue to see multiple opportunities well suited for our rigs with availability in 2026. In summary, we are successfully executing our commercial strategy, having secured more than $2.2 billion in new backlog so far this year. We continue to engage constructively with customers on future programs, and our focus remains on building backlog through attractive contracts that will further strengthen our earnings and cash flow. I'll now hand the call over to Chris, who will take you through the financials. Christopher Weber: Thanks, Matt, and good morning and afternoon, everyone. In my prepared remarks today, I'll begin with an overview of our third quarter results, followed by our outlook for the fourth quarter. Starting with our third quarter results, total revenues were $596 million compared to $615 million in the prior quarter, primarily due to fewer operating days for our floater fleet as drillships VALARIS DS-15 and DS-18 completed contracts midway through the third quarter without immediate follow-on work. In addition, jack-up VALARIS 247 completed its contract in late July and was sold in August. These items are partially offset by more operating days for several rigs in the jack-up fleet. Adjusted EBITDA was $163 million compared to $201 million in the prior quarter. The decrease was primarily due to fewer operating days for our floater fleet and the $24 million nonrecurring benefit we recognized in the second quarter from a previously disclosed favorable arbitration outcome. Third quarter adjusted EBITDA exceeded our guidance range of $120 million to $140 million, primarily due to certain contracts running longer than previously anticipated, higher revenues from ARO leased rigs and lower support costs. Third quarter CapEx totaled $70 million, coming in below guidance due to timing as certain project spend has shifted to the fourth quarter. During the quarter, we generated $198 million of cash flow from operations and received just over $100 million in net proceeds from the sale of VALARIS 247. After deducting capital expenditures, this resulted in $237 million of adjusted free cash flow. We repurchased $75 million of shares in the third quarter at an average price of $49 per share. We ended the quarter with $676 million of cash and cash equivalents. Moving now to our fourth quarter outlook, we expect total revenues in the range of $495 million to $515 million, down from $596 million in the third quarter. The anticipated decrease is primarily due to fewer operating days across the fleet. Within our floater fleet, drillships VALARIS DS-15 and DS-18 are currently idle after completing contracts during the third quarter. and semisubmersible VALARIS DPS-1 and MS-1 are both expected to complete contracts offshore Australia before year-end. For our jack-up fleet, VALARIS 247 was sold during the third quarter and VALARIS 120 and 248 are expected to have fewer operating days due to a mobilization between jobs for the 120 and out-of-service time for the 248 SPS. We also expect lower revenues from ARO leased rigs as VALARIS 116 and 250 begin shipyard projects. We expect contract drilling expense of $390 million to $405 million compared to $406 million in the third quarter. The decrease is primarily due to cost reduction on rigs that have completed contracts without immediate follow-on work. Both revenue and contract drilling expense in the fourth quarter are expected to include $25 million to $30 million of reimbursable items. We anticipate G&A expense will be approximately $27 million, in line with the prior quarter as we continue to prudently manage our cost structure. Fourth quarter adjusted EBITDA is expected to be $70 million to $90 million. Finally, we expect CapEx of $145 million to $165 million, which is higher than prior quarters due to certain project spend shifting from earlier in the year. The midpoint of our fourth quarter guidance implies expected full year adjusted EBITDA of approximately $625 million, which is roughly $40 million above the midpoint of guidance we provided on our second quarter call. This increase is primarily due to our outperformance in the third quarter as well as an expected improvement in our fourth quarter outlook, mostly driven by more operating days for the jack-up fleet. The midpoint of our fourth quarter CapEx guidance implies expected full year CapEx of approximately $390 million, roughly in line with the midpoint of our prior guidance. As a reminder, we expect to receive approximately $70 million in upfront payments from customers this year to reimburse certain contract-specific upgrades. This concludes my review of our financial results and guidance. I'll now hand the call back to Anton for some closing remarks. Anton Dibowitz: Thanks, Chris. Before we open the line for questions, I'd like to recap a few key points from today's prepared remarks. First, I want to reiterate my appreciation to the entire Valaris team for continuing to deliver safe and efficient operations, which contributed to another strong quarter of financial results with meaningful EBITDA and free cash flow generation. Second, we continue to execute our commercial strategy, and as a result, all 4 of our drillships with near-term availability are now contracted for work beginning next year. Third, demand for offshore drilling services is developing as we expected. We continue to see a robust pipeline of deepwater opportunities for our high-specification fleet, and we're in advanced customer discussions for our drillships scheduled to complete contracts in the second half of 2026. In summary, we continue to focus on delivering outstanding operational performance, executing our commercial strategy and prudently managing our costs and fleet. By staying disciplined and focused on these priorities, Valaris is well positioned to deliver long-term value for shareholders. We thank our employees for their focus and dedication and our customers and investors for their continued support. That concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question today comes from Scott Gruber from Citigroup. Scott Gruber: So, it was good to see the repurchases this quarter. I'm curious about your appetite moving forward. Looking at consensus, there isn't a forecast for much free cash next year as we transition to better times. But you do have $660 million of cash on the balance sheet. Can you speak to an appetite to use that cash to buy back additional shares now ahead of the potential recovery in late '26 and '27? Christopher Weber: Yes, Scott, this is Chris. One, we remain committed to returning capital to shareholders. We executed the $75 million of repurchases in the quarter. We're excited about that. Reflects our confidence in the market and the outlook. But we've always said that our repurchases aren't necessarily going to be linear, not in a straight line, and we're going to be opportunistic, and that's what you saw this quarter. As we move forward, we'll see how the year progresses, what flexibility that provides for additional share repurchases, but excited what we were able to execute this quarter. Scott Gruber: What's your level of cash that you need to run the business? What's kind of a minimum cash balance for working capital purposes? Christopher Weber: Yes. I mean from a minimum cash perspective, I would say around $200 million to run the business. And where we hold cash in excess of that is just really with regards to kind of what are we seeing in the market, what's the cash flow profile of our business going forward and then those sort of things. Scott Gruber: Great. And then if I could sneak one more in. There's been a discussion around renewed appetite for exploration on various conference calls this quarter. Just wondering your perspective, in your conversations with customers, is there a tangible desire to increase exploration activity here in the years ahead? Are those conversations material? Or is it kind of a side conversation at this point? Anton Dibowitz: This is Anton. I'll take it. Look, there's always some exploration going on. Even in a lot of development programs that we've been drilling historically, customers will slot in an exploration well here or there. But we do see an increase in exploration discussions. And that's based on the necessity. The consensus is that we're going to need additional developments in order to meet the world's energy needs as we head towards the end of the decade. And in order to get those developments, our customers need to explore. So, I think it's a simple cause and effect. I think it's great for the market that there is additional exploration or increase in exploration activity expected from the various prognosticators in the market, also from the discussions we're having with our customers, and I think it portends well for where the market is going. Operator: Our next question comes from Greg Lewis from BTIG. Gregory Lewis: Anton, I was hoping you could elaborate maybe a little bit more on Scott's question about shareholder returns. We saw the sale of the rig. That was obviously a nice profit. Cash flow was pretty good, really good. Is there any kind of way to think about -- you're going to have opportunities to sell rigs, some of the noncore rigs in the future. Balance sheet is obviously strong. Is that kind of a -- should we think about asset sales as a mechanism to drive some of this return of cash to shareholders? Or is it going to be more focused on the operations of the business or maybe a little bit of both? Anton Dibowitz: Look, I'd start -- it's going to be focused on the operations of the business. I mean I want to first take a step back and say, we are committed to returning our free cash flow, sustained free cash flow to shareholders unless there's clearly a better or more accretive use for it. I think we've demonstrated that. Part of cost and discipline and fleet management comes to when there are opportunities like we had with the 247, a 27-year-old rig, and we can get a highly attractive price for it, it makes sense for us to divest that asset, and that obviously increases our financial flexibility. But at its base, our capital return needs to be driven by delivering operational cash flow. We are working through this white space period. So, Chris was asked the question before, when we understand and have these rigs, and we fully expect that our 10 active ships will be all working, exiting '26 under contract that will, again, underwrite our ability and flexibility as far as it comes to capital return. So, in summary -- let me take a step back and just summarize. It needs to be driven by operational delivery of operations and sustained earnings and the ability to sell assets when there are attractive opportunities, it is just opportunistic over and above that. Gregory Lewis: Okay. Great. And then the other question I had was around some of the recent term deals you did that have that MPD additional services. Kind of curious, it seems like the market ebbs and flows between MPD being built into the price versus MPD being kind of like a menu item. In the event that it's a menu item, is there any way to kind of -- knowing that every well is different, every customer is different, is there any kind of rough estimate how we should be thinking about how much of the time maybe -- if there is MPD as an add-on service, how much of the time should we be thinking about that service being used? Anton Dibowitz: It's very -- I'd love to give you an easy answer, but it is very, very customer dependent. It depends what sort of drilling they're doing. So, it is contract specific, well specific, is it a development? So, it's hard to -- Matt, I don't know if you want to. Matt Lyne: Yes. I think Anton hit the nail on the head that each customer is so different, so there's no large rule. But I think you can assume, if you're just running general analysis, somewhere between 40% to 50% utilization. Operator: Our next question comes from Eddie Kim from Barclays. Eddie Kim: Just a bigger picture question here. You reiterated your expectation for seventh-gen drillships exiting 2026 at utilization around 90%. At the same time, we have seen a few day rates below $400,000 a day that DS-12 included in that, though I know that Egypt is a lower OpEx environment for you guys. But some investor concern around maybe some more day rate prints below $400,000. First, do you think those are coming? And second, how is that impacting your view on activity inflection higher in the back part of next year? It seems that it isn't, but just wanted to get your thoughts and your confidence level around that. Anton Dibowitz: Okay. A few questions in there. I think this is how I describe it. We believe the market is playing out as we expected. I think that day rates for high-spec ships have largely troughed in the high 300s, kind of low to mid -400 range. As an industry, we're working through a period of white space and then there are a number of tenders that are in progress right now, and you'll probably see some additional prints contract awards in that range as those contracts work through the tender process. But we continue to expect that utilization will trough towards the end of this year, early next year and then a recovery beyond that, exiting as an industry, high-spec ships above -- at or above 90% at the end of '26, and inevitably, day rates follow utilization. But for now, I think day rates have troughed as we see it for the cycle in the kind of high 300s, low to mid-400 range. Eddie Kim: Great. Great. My follow-up is just on your rigs coming off contract next year. You have absorbed a lot of white space with your recent contract awards. But the DS-9 and the DS-7 are off contract mid- to late next year, both in Angola. And based on your, I mean, constructive outlook in Angola and West Africa in general, it feels like it's likely that those could get extended without any idle time between contracts. Just any thoughts there? And then [indiscernible] DS-15, DS-18 have long-term contracts starting end of next year, but are idle today. What's the likelihood that you'll be able to secure some short-term gap-fill work for those before long-term contracts commence? Anton Dibowitz: Matt, do you want to start on the gap-fill and then I'll come across as how we view them. Matt Lyne: Sure. I mean I think -- well, first off, Angola on the 9 and the 7, as I mentioned in my prepared remarks, you're seeing a decrease in production, so I think the government is working closely with the IOCs to incentivize drilling. So, I think your read is right that we see positive discussions regarding the future contracting opportunities for those rigs. And equally, they have performed extremely well, which just further benefits the likelihood that they'll have strong potential for extensions. From a gap-fill perspective, we've done a great job of bookending the near-term availability on our assets. And while there are some short-term opportunities available in the market, probably not enough to fill all the rigs that have white space right now, but we continue to chase work that fits the longer-term opportunities that we've secured. Anton Dibowitz: I think Matt covered it well. Our expectation is that high-spec rigs will exit '26, 90% plus utilization. Our team has done a fantastic job of delivering our commercial strategy to date, and I expect them to continue to do that. No pressure, Matt. But we expect that all 10 of our active drillships will exit '26 on contract and working. Operator: Our next question comes from Doug Becker from Capital One. Doug Becker: Valaris has a couple of rigs with Petrobras in Brazil. I want to get a sense for the focus of recent discussions with them to help reduce costs. Anton Dibowitz: Matt, do you want to? Matt Lyne: Sure. I mean I think it's been widely reported that Petrobras are looking across their entire value supply chain for potential savings in 2026. So, while it's early days in discussions amongst all of their services, we've seen these discussions materialize before. So, I think what's important is recognizing that they want to maintain their production targets, which means they are likely to maintain a fleet of similar size over the long term, which is positive for us. And so, while constructive discussions continue, it's too soon to kind of discuss the specifics around it. Anton Dibowitz: I think Matt said it really well. We expect Petrobras' rig fleet to remain stable. They have clear goals on what their production, and that's going to mean they need to maintain a significant and the most significant drillship fleet in the world. And the discussions are very early days and very, very constructive. So, we'll just have to see how it plays out across the industry. Doug Becker: Definitely sounds encouraging. Maybe switching to Saudi Arabia. You mentioned Aramco has issued notices calling back several suspended rigs. It sounds like there's also been a recent tender. Do you think Saudi Arabia is a source of incremental demand, incremental work for Valaris next year? Anton Dibowitz: Really positive to see Saudi Aramco reactivating and calling back suspended rigs. So, I think when you look at a global utilization of the jack-up market hovering around 90%, it just adds further benefit to that market. So, we see that as a really positive data point. On incremental demand, there are -- there is potential for that. And with some idle capacity sitting over in the Middle East, we continue to monitor that closely together with our joint venture, which operates in Saudi Arabia. Operator: And our next question comes from [ Josh Jain ] from Daniel Energy Partners. Unknown Analyst: Those in the market generally seem in unison with respect to a recovery in deepwater in the second half of '26. And I think the recent contract announcements largely support that. Maybe you could just talk a bit more about where geographically do you have the most confidence that rig counts will hold or increase and which regions do you see as having potential risk if we're in uncertain crude environment? Anton Dibowitz: Matt, do you want to give Josh [indiscernible]? Matt Lyne: Sure. I mean -- I think we've touched a few of these in some of the answers already given in the prepared remarks. But I think we largely see South America, Brazil holding flat, maintaining their fleet size, which is also the largest floater market. So that's a very positive sign. Incremental demand in Africa. We've mentioned the FID of Eni's project in Mozambique and then there's some strong signs of that force majeure being lifted for 2 other major IOCs with Exxon and Total. So some positive work in East Africa and obviously announcing some work in Egypt with decreasing production there, trying to turn that around is showing some other -- some unique opportunities in the Med and West Africa. So, what we have seen though, is some rigs shifting locations as well with Asia carrying a number of opportunities without sufficient supply sitting over there and customers really continuing the trend of focusing on higher-spec assets, you could see some migration from the Golden Triangle to service some of the opportunities in Asia. Roughly half that -- sorry, let me just go -- roughly half -- take a step back from that, roughly half that incremental demand, a big driver of incremental demand will be Africa and Africa in general. There is about 25% of that were coming from beyond the Golden Triangle and fairly stable in the U.S. Gulf and South America. Unknown Analyst: Great. Thanks. And then I wanted to pry just a little bit on Aramco and Doug hit it with his last question. But with -- I guess what's changed a little bit over the last 18 months is I feel like Saudi has definitely gotten a bit more aggressive with respect to their production goals that they're talking about hitting over the next 6, 12, 24 months. Maybe you could just offer a little bit more insight and maybe not into '26, but just longer term, how many rigs do you feel like they ultimately could be adding back over the next 3 years, just given the volatility that we've seen and to ultimately meet their lofty production goals? Anton Dibowitz: I think what I'd focus on in the recent news out of people talking about rigs going back to Saudi Aramco, Saudi Aramco's desire to bring rigs back into production is the fact that in the global fleet, high-spec jack-up utilization is 90% above, 90% and above. So, the market has held in there. The talk is in the near term, kind of mid- to high single digits plus potential for additional tenders beyond that. And every rig that goes back into their fleet is further supportive of the global market. So overall, the jack-up market, high-spec jack-up market is fairly healthy. And I think just to the extent they choose to bring rigs back in order to meet their production targets, it's just further support for a market that's already attractive. Operator: And ladies and gentlemen, at this time, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Nick Georgas for any closing remarks. Nick Georgas: Thanks, Jamie, and thank you to everyone on today's call for your interest in Valaris. We look forward to speaking with you again when we report our fourth quarter 2025 results. Have a great rest of your day. Operator: And with that, we'll be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
Operator: Good morning, and I would like to welcome everyone to the Jupiter Mines Q1 call. Today, we have Jupiter Managing Director and Chief Executive Officer, Brad Rogers; and Chief Financial Officer, Melissa North, to provide a brief update on the first quarter of the 2026 financial year, and then we will open up to questions from callers. Thanks, Brad. Please go ahead. Brad Rogers: Thank you, and thanks very much for joining the call, everyone. As usual, I will just give some overarching remarks in respect of the key points from the quarterly activities report that was released to the market this morning, and then I'll allow time for any questions at the end of those opening remarks. So the quarterly activities report that was released this morning for the first quarter, the September quarter of our 2026 financial year summarizes a very solid start to the year in line with our expectations, and I'll run through some of the details in a moment. But in summary, the operational outcomes in every respect were in line with what we expected and in line with our full year targets. We had costs that were pleasingly in control, particularly given headwinds from a strengthening rand against the U.S. dollar, a build in cash at Tshipi, notwithstanding Tshipi distributed a ZAR 300 million dividend to Jupiter and to the other shareholders of Tshipi, which we passed on adding our own cash to that dividend to our shareholders during the quarter. So good outcomes operationally in line with our full year targets. And obviously, that's what we're trying to do as we build through the financial year. I'll get into the details also on the manganese market. But through this quarter, we saw a slight strengthening in manganese prices and pretty good downstream demand from a manganese alloy perspective. And that meant that relatively strong supply, including GEMCO reentering the market and good volumes out of South Africa were consumed by the market. And prices reflect that, there was a slight increase and prices today sitting just above 4-year average levels, which given Tshipi's cost levels is quite positive for us. So we're in a stable market right now. Prices have been range trading within a relatively narrow range for the last few months. And that's a good thing for Tshipi and that frames the cash generation that we've been able to see in this quarter. So I'll go into a little bit more detail on those opening comments and starting with Tshipi's operations. There were no lost time injuries during the September quarter. There were two minor medical treatment injuries. From a sales perspective, the sales for the quarter were 837,577 tonnes of manganese ore sold. That was down on last quarter, but everyone should bear in mind that what we're trying to do at Tshipi is hit 3.4 million tonnes of ore sales for the year. Usually, in the makeup of that 3.4 million tonnes, you'll see about 3 million tonnes of high grade and about 400,000 and sometimes a bit more of low grade. And that 837,577 tonnes for the September quarter was bang in line with that 3.4 million tonne target. So notwithstanding it was down on last quarter, as you do for all quarters, you're going to see Tshipi sales up and down quarter-on-quarter, you probably shouldn't focus on that too much. It's more the trend towards the 3.4 million tonnes that we have averaged for the last 7 years since Jupiter listed and that we're targeting again this year. And so that number that we recorded for the September quarter was right in line with that 3.4 million tonne full year target. Production was very close to that as well, 829,798 tonnes for the quarter. That was slightly up on last quarter and slightly up on our plan for the September quarter and certainly supportive of, again, achieving that 3.4 million tonnes of ore for the full year. Logistics of 868,442 tonnes were slightly up on plan and up on last quarter as well. The more interesting thing to note out of the land logistics was we had significantly more rail allocation than we expected and planned for. And what's going on there is smaller producers in South Africa are not taking up their rail allocation, notwithstanding the manganese price that's prevailing is quite positive for Tshipi given our cost curve positioning. It's not so positive for others. And that's the reason why some others are not taking up their rail allocation. But as it has in the past, and it certainly was in this quarter, that goes to the benefit of Tshipi, where we had much more rail allocation than we had anticipated. We did almost no South African road haulage for the quarter. And so naturally, given that rail is cheaper than South African road, we benefited from a cost perspective with respect to that particular situation. From a mining perspective, we saw an increase quarter-on-quarter in grade ore production, about 21%. And costs, as I mentioned earlier on this call, came in at USD 2.27 per dmtu. That was a particularly good outcome given the rand strengthened through the quarter, and that figure would have been $2.19 had the exchange rate in the September quarter been the same as the exchange rate observed in the June quarter. But at $2.27, notwithstanding that unhelpful exchange rate movement in the quarter came in anyway in line with where we would be targeting for costs at the moment and where we've been guiding on previous calls. So that was a very good outcome, again, benefiting from the mix of rail, but also benefiting from good cost control across our cost composition, including at the mine site itself. From Tshipi's financials perspective, EBITDA of $26.6 million for the quarter was down on last quarter, and the major driver of that was sales volumes being down. And again, the last quarter that we're comparing to was the fourth quarter of last financial year that had particularly elevated volumes of more than 1 million tonnes, and we're not trying to achieve 1 million tonnes a quarter or 4 million tonnes for the full year at the moment. If we step up to that, and that is part of our strategy, then that will be a decision to do that on a consistent basis. So where you see that sort of variability quarter-on-quarter from a sales perspective and naturally earnings is going to follow that variability, you will expect to see that average out for the full year at about 3.4 million tonnes unless and until we make the decision to expand sales to 4 million tonnes, but we don't intend to do that until we're in a more robust market environment. That EBITDA of $26.6 million, while it was down because of sales for the most part of the last quarter was actually higher than the prior comparative period, the first quarter of last year by about 27%. And that was a quarter where volumes were higher than they were in this quarter. So that earnings can be contextualized in not just the comparison to the prior comparative period, but also -- rather the last quarter, but also the first quarter of last financial year. Tshipi's cash at quarter end increased by 9% to AUD 140.3 million. And that was a good outcome, particularly because Tshipi also distributed a ZAR 300 million final dividend to shareholders in that period. So if you look at the quarter just ended 30 September cash compared to 30 September last year, the cash we have on hand now, 30 September at Tshipi is 45% higher than at 30 September last year. So again, good outcome and good outcome, particularly given the dividend that was distributed by Tshipi during that quarter. Turning to the manganese market. Manganese prices increased during the quarter. The FOB price for ore grade manganese was $3.36 per dmtu at 30 September, compared to $3.20 at 30 June. So good step up there. Today, end of October, it's $3.39, so slightly higher again than the price at the end of the quarter. That price today is around 2% higher than the full year average. And that reflects, as I said earlier, relatively strong downstream alloy demand. And that relatively strong downstream alloy demand has been sufficient to consume the volumes that have been supplied into that market, principally into China, such that stocks really didn't move. The stock number, this is manganese ore stockpiled at port in China in total, was 4.4 million tonnes at 30 September. At the end of this quarter, we're talking about compared to 4.3 million tonnes at 30 June. And that number has come down slightly as you'll see in the quarterly report, but really to the end of October. But that really reflects steady stockpiles at levels that are considerably lower than the full year average, about 25% lower than the full year average level of 5.8 million to 5.9 million tonnes that you would expect to see looking back at the last few years of stock levels in China. So given stockpiles haven't moved and prices have slightly increased, that's good. And it's remarkable in that the market has consumed GEMCO coming back into the market that's now producing at full volumes as in the market that we've just seen. And also some South African volumes have been relatively robust in a couple of the months in the quarter that we've just seen. So good downstream demand, prices slightly improving to levels that given Tshipi's FOB cost of production, as we talked about, $2.27 are quite healthy for Tshipi. But that's because Tshipi, as we know, is an efficient cost producer. Other mines on the manganese supply side are not making so much money at these prices. And that's also in part why the prices have held up. There's good cost -- supply cost support for prices at these levels. So we're really sitting in a market that has gently increased over the last quarter and gently increased again over the last month, but has actually been relatively stable since about May where you've seen steady solid downstream demand, supply month-to-month moving around and sometimes increasing, but the market being able to consume that supply, including the return of GEMCO to the market. So in summary, just wrapping all of that together, the Q1 outcomes from an operational perspective were in line with our expectations. Sales were down quarter-on-quarter, but was in line with our expectation of 3.4 million tonnes for the full year. Production was 2 million tonnes. Costs were actually quite pleasing given the rand U.S. dollar exchange rate was unfavorable to U.S. dollar reported costs during the quarter. So that $2.27 was in line with our expectation, but had to consume that exchange rate headwind. All of that resulted in a good cash build at Tshipi through the quarter, notwithstanding there was a dividend payment during the quarter as well. And as we look at the manganese market, we're in quite a supportive manganese market at the moment. Prices increased, stocks are steady. Downstream demand has been relatively robust, sufficient to consume without increasing ore at stockpile in China, some reasonably healthy at times supply coming from the market, including the return of GEMCO. So hopefully, that paints you a picture of how we've gone for the September quarter. I'll just pause there and see if there are any questions on the line. Operator: [Operator Instructions] Your first question comes from Adam Baker from Macquarie. Adam Baker: Brad, just wondering one on sales volumes, please. Now that we're approaching the traditional November to February wet season, what are you thinking about sales volumes for the upcoming 2Q and 3Q? Do you think it will remain steady at around 800 kt or could there be some variation to this? Brad Rogers: There could be some variation, Adam. I think if you look at the history going all the way back to the time of Jupiter's listing, we have delivered our target of 3.4 million tonnes a year on average. Some years, we've been a little bit higher than that. We were last year as well. But what we're looking to do is to deal with natural operational variability during the course of the year and still hit that 3.4 million tonnes. So wet weather is something that we have to factor into our plans. And if you look at the second quarter of the last few years, the quarter we're going into now, which does often have some wet weather, some quarters see slightly lower volumes because of that factor, and we have to pick it up at the back end. You will typically see a very strong fourth quarter, for example, and that is part of the plan. I think if you're looking at the way that we deal with wet weather, we have stocks on the ground. We have some stocks at port as well. You do sometimes see wet weather impacts on land logistics, but the main weather impacts you'll see are at the mine itself. And part of the planning so that we don't have too pronounced an impact from any wet weather impact at any time of the year is to have safety stock. So it could be the case. We do plan for wet weather in our plan. But obviously, if we don't see as much wet weather or if we are able to mitigate better than expected, then you won't see much variability. And as I sort of cast my eye over the last few years, we've had some second quarters that have been quite strong, stronger than the one we've just delivered. The quarter we just delivered was about 3% above average for the first quarter and slightly above our plan to give you an idea. So we think we're going to the full year plan, including factoring in risks like weather better than we would expect at this point. But we're also pretty experienced at dealing with the usual wet weather impacts that you'd see in the second quarter in South Africa. So not sure, but we have mitigations in place and the overall plan is to pick it up at the back end of the year if we do see any wet weather impacts in the second quarter. And overall, we are absolutely targeting and online for the 3.4 million tonnes of total ore for the full year. Adam Baker: Okay. That's clear. And just noticed during the quarter that you mined a fair bit more low-grade tonnes. Was this a function of the mine plan? Or were there some other factors at play here for the increase in low-grade tonnes like changing cut-off grade, et cetera? Brad Rogers: No, it wasn't that, Adam. It was more opportunistic. So the mine plan hasn't changed. The figure that you're referring to is actually the processed tonnes. So that's the amount of low-grade ore that we crushed through the circuit and have sitting on the finished ore stockpile ready to sell. So that figure, which from memory was -- just have a look was 175,304 tonnes that we produced through the circuit. We sold less than that into the market. So you wouldn't necessarily expect to see that same level of production of low-grade ore every quarter for the remainder of this year. But we had capacity in the processing circuit to do it in this quarter. We do want to have an amount of that finished and ready to sell, not having to crush in future quarters if we think it's opportunistic to do it. And there were some other operational factors in the quarter that factored into that as well. We thought that processing it through the mill rather than hauling it to a ROM stockpile hauling it back to the processing circuit given the capacity that we had in the fleet and the crushing circuit for the quarter, it made sense to crush that. We didn't sell too much more into the market than we expected to for this quarter. But in terms of low-grade ore sales, we did sell a bit more than we might have expected than you might have expected us to given the prevailing manganese prices during the quarter. But part of the reason we decided to do that was that we're able to get low-grade ore on to rail, which is unusual. Normally, low-grade ore has to be road hauled, and that makes it a bit more expensive. And so it was a bit more opportunistic to sell some low-grade ore in this market given the rail availability than it might have otherwise been. Operator: [Operator Instructions] Your next question comes from Jon Scholtz from Argonaut. Jon Scholtz: Just a question on the attributable cash at Tshipi. Is there any other way to access this outside of the Tshipi distribution and dividends? Brad Rogers: So no is the short answer, Jon. The shareholders' agreement at Tshipi, as we have talked about before, I think, on these calls, is fairly tight. It confers joint control amongst the shareholders. Currently, Ntsimbintle Mining and Jupiter and going forward at the completion of the Exxaro transaction with Ntsimbintle, it will be Exxaro and Jupiter. And that's good for Jupiter, that shareholders' agreement. It means that our rights are well protected and that our agreement must be sought in relation to all important matters, including to cash and the distribution of it. The flip side of that is to the extent that there's to be a greater distribution of that cash that's held there, and there is a fair amount of cash held there, as you can see, AUD 140 million for a mine that has done a very good job of producing positive cash through the cycle. So you could make a case for a greater distribution at some point in time while still being responsible for the requirements of the mine. And I think that's what you might be alluding to, and it's not a unique thought. I get that question from time to time. Anything like that, whether it's a normal upsized dividend or a special dividend would require agreement between the parties. And going forward, that will be agreement between Jupiter and Exxaro. I would say that Exxaro is, as a public company, very focused on returns from all of its investments. And if you have a look at the public announcement of Exxaro's binding agreement to invest in Tshipi and other mines, the first page of that presentation highlights is Tshipi's track record of dividend payments. So I'm expecting out of all of that, Exxaro to be focused as we are on responsibly maximizing returns, including release of cash from the mine over time, but that would require agreement between the parties. Jon Scholtz: And if I can just ask on what's the differential today between a rail ton of ore to port and a truck ton of ore to port? Has that widened or has it come down? Brad Rogers: Yes. So on average, over time, you would expect road haulage in South Africa, which is typically road hauled to Port Elizabeth just as rail mostly goes to Port Elizabeth, so like-for-like distance. On average, you're talking about 35% to 50% higher to road haul a tonne than to rail haul under the MECCA arrangements. And for us, Lüderitz and East London, which is another South African rail port that's outside of the PE MECCA allocation sits about midway between South African rail and South African road. The South African road haul rate does move around based on demand because the nature of that demand and not just from manganese or haulers, but from other bulk commodities as well, waxes and wanes based on prices. So right now, road haulage is a bit cheaper than that, but it's still considerably more expensive than South African rail. So it's possibly about 25% higher than South African rail right now, but the more normal average is somewhere between, say, 35% and 50% higher. Jon Scholtz: That makes sense. And maybe just one more. Could you give an update on anything to do with the high purity manganese? Brad Rogers: Yes. Thanks, Jon. So we continue to do our work in the background in that regard, but we're taking a very purposeful approach to that work. Our view is that any real effort and investment in this part of our strategy needs to be market-led, but that we want to be ready and well positioned as we think we should be for the option to monetize when we see that market moving. So what we're doing with that framing in mind is ongoing discussions under NDA with a set of carmakers and battery makers and PCAM makers from around the world that we've been talking to for several years who are interested in potential future supply of HPMSM from Jupiter. And the purpose of those discussions, obviously, is relationship building, but it's also information exchange, them getting technical information from us, us getting demand profile information from them. And from a Jupiter perspective, what we want to see that build into is a 5-year offtake at some point in time that will underwrite the volume of output from any future HPMSM facility and see Jupiter off risk to that volume because that's the key thing really. This is a market that we believe in, that we believe is going to continue to grow. But we believe manganese has a really important value-adding role to play in, and we think Jupiter is well positioned to be a player in that regard and to get value from that. But that volume is not there today. And we can't predict when that volume will be. And so we want to be off risk in that regard. So that's the major reason why we're approaching that part of the study in that way. But from a practical perspective, what that means is we're having ongoing discussions, monthly meetings, exchanging information, building confidence, building relationships, and that's an ongoing piece of work. On the other side, we are also progressing technical work. And so we have a small pilot plant in Johannesburg that is based on our own flow sheet that has already been tested and creates acceptable HPMSM. But the purpose of continuing work in that regard, again, on a very targeted low-cost efficient basis is to continue to refine the costs and the quality of that process and to continue to be able to share meaningful information and samples with potential customers as well. So that's how we're approaching that. This part of our strategy is really about in a future point in time, monetizing the option that we're well positioned for because we're producing low-grade ore from Tshipi in excess to which we can ever sell into the steel market. But that low-grade ore, given we're producing it anyway, gives us a big OpEx advantage over other participants in the HPMSM market in the future, about a 20% OpEx advantage, and that creates a pool of value that we can take value from ourselves but share some value under those arrangements with future customers as well. So in short, continuing the work, Jon, what we want to see in order to accelerate effort in that part of our strategy is those customers that we're talking to coming forth and saying they're in a position to be able to put in place long-term offtake agreements. And that has been building in the 2 or so years that we've been talking to them. The advantage of manganese is that it's cheaper, more available and more chemically stable than other minerals in the cathode. And so we have always believed in that, and we're seeing that confidence growing, clearly on the customer side. But from a practical and a risk perspective for that business case to be advanced, which will be very valuable once we're able to square away this risk, we want to see the volume committed by customers over a term that will underwrite the payback and financials of the Jupiter business case. Operator: [Operator Instructions] Your next question comes from Andrew [indiscernible], private investor. Unknown Attendee: My question is, given the sort of long-term plan you guys, are you thinking becoming more of a dividend sort of paying out company? Or are you looking at maybe getting taken over? Is that right? Brad Rogers: Yes. Thanks, Andrew. Thank you for your question. So our strategy is to continue to pay dividends, and we've got a very good track record in that regard as you have a look at what we've done to date, we paid $0.22 a share in dividends in the 7 years that Jupiter has been listed, and that's pretty close to our market cap today, notwithstanding the mine that has supported those dividends as we've seen again today, is very steady, produces cash through the cycle, even at relatively low manganese prices and has more than 100 years of mine life remaining. So that's an underpinning of a really highly valuable value proposition that we've demonstrated to date. And we see no reason for that to change. So regardless of whatever else happens, unless we are taken over and we're able to monetize that value for our shareholders, then that's something we intend to continue. We also believe very firmly in the value of consolidation within the Kalahari Manganese Field, and that's a core tenet of our strategy as well. And there are various ways to release that value, but it does start since we have the investment in Tshipi with the consolidation one way or another of the ownership at the Tshipi mine. You would have heard perhaps when the Exxaro announcement was made that they were binding themselves to acquiring our joint venture partner at the mine and also to become Jupiter's 19.99% shareholder by taking Ntsimbintle Holdings out of their Jupiter shareholding at completion of that transaction. Jupiter and Exxaro both comment in the shared value and belief of consolidation in the Kalahari. And so we see that Exxaro transaction as consistent with our strategy. And we intend to work with Exxaro and Exxaro has made similar comments to prosecute the ways to release more value for both of our shareholders. And I'm focused obviously on Jupiter shareholders. So that's not something that I can obviously get into detail about until there is something sufficiently well advanced other than to say our strategy is on foot. We see the Exxaro transaction is consistent with that strategy, and we intend to work with Exxaro in order to prosecute further value through consolidation. In the meantime, we continue to pay dividends. We have, again, in this quarter just passed -- produced positive cash at the mine, notwithstanding we also paid a dividend in that quarter. So that's something which is baked into our strategy and we tend to stay focused on, but we absolutely see the opportunity for value for Jupiter shareholders through consolidation, and we see that Exxaro is focused on the same thing and the intention is to work for them -- work with them rather in order to deliver that value for both shareholders. Operator: There are no further questions at this time. I'll now hand back to Brad for closing remarks. Brad Rogers: Okay. Thank you. Thank you for your questions, and thanks for joining the call. I hope those comments have been helpful in framing a quarter that, again, delivers on Tshipi's really strong track record for stable in line with expectation, operational outcomes and good cash generation. And we're sitting in a manganese market that we're quite happy with. Prices have increased. GEMCO is back in the market and the market has consumed those tonnes. And for the quarter that we've just seen and the market that we're sitting in today, we see pretty robust downstream demand, which has supported stable low stocks of ore in China and prices that have increased through the quarter. So hopefully, that's all clear. Again, thank you for your time, and I look forward to talking to you all next time.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to the Beacon Financial Corporation Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Dario Hernandez, Corporate Counsel. You may begin. Dario Hernandez: Thank you, Jean, and good afternoon, everyone. Yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page of our website, beaconfinancialcorporation.com, and has been filed with the SEC. This afternoon's call will be hosted by Paul Perrault and Carl Carlson. During the question-and-answer session, they will be joined by Mark Meiklejohn, Chief Credit Officer. This call may contain forward-looking statements with respect to the financial condition, results of operations and business of Beacon Financial Corporation. Please refer to Page 2 of our earnings presentation for our forward-looking statement disclaimer. Also, please refer to our other filings with the Securities and Exchange Commission, which contain risk factors that could cause actual results to differ materially from these forward-looking statements. Any references made during this presentation to non-GAAP measures are only made to assist you in understanding Beacon Financial's results and performance trends and should not be relied on as financial measures of actual results or future predictions. For a comparison and reconciliation to GAAP earnings, please see our earnings release. At this time, I'm pleased to introduce Beacon Financial's President and Chief Executive Officer, Paul Perrault. Paul Perrault: Thanks, Dario, and good afternoon, everyone, and thank you for joining us for our first earnings call as Beacon Financial Corp. Let me start by welcoming the Brookline and Berkshire stockholders, employees and customers to the new Beacon Financial Corporation, the holding company for Beacon Bank & Trust. This powerful combination between our 2 great legacy organizations will help position us as a leading Northeast financial institution that provides enhanced service capabilities for our clients, performance for our shareholders and resources for our communities. On September 1, the merger and consolidation of the bank charters was completed. However, until we finalize our core system integration in the first quarter of next year, we will continue to conduct business as Brookline Bank, Berkshire Bank, Bank Rhode Island and PCSB Bank operating as divisions of Beacon. We will formally introduce our Beacon Bank brand to the market over the next few months as we get closer to finalizing our system integrations. The Beacon Bank name represents guidance, strength and the promise of stability, the core principles the legacy institutions have upheld for generations. With the combined strengths of Berkshire and Brookline, Beacon can help customers make financial decisions with clarity and confidence. The integration is moving ahead as expected. Our priority remains ensuring our customers and communities continue to experience the outstanding service and support our banks are known for, which is driven by the attitude and expertise of our employees and supported by our 6 regional presidents. I want to thank all of our Beacon Bank employees for their hard work on this integration, their continued superior service to our customers and a commitment to ensuring a smooth transition. Beacon Financial finished the quarter with $23 billion in assets, $19 billion in deposits and $18 billion in loans, with third quarter operating earnings of approximately $38.5 million or $0.44 per share before merger expenses and special charges. We're already beginning to see the rationale for the merger play out with the addition of Berkshire's lower-cost deposit base, combined with Brookline's higher growth markets, creating opportunities to deepen relationships with clients. I'm particularly pleased with our strong retention of client-facing talent through this and the excitement amongst the team, and I'm optimistic to see this excitement and energy translated to even more robust results. I will now turn you over to Carl, who will review the company's third quarter. Carl Carlson: Thank you, Paul. As Paul mentioned, we closed our merger on September 1 with Berkshire as the legal acquirer and Brookline as the accounting acquirer. As such, historical results reflect Brookline performance and the assets and liabilities of Berkshire were mark-to-market and combined with Brookline as of September 1. On a combined basis, we finished the quarter with total assets of $22.8 billion. And on September 1, the fair value of Berkshire assets was $12.1 billion, of which we sold approximately $426 million, $177 million in securities and $249 million in loans. The proceeds were used to reduce wholesale funding. Excluding the purchase accounting mark, the combined loan portfolio declined $484 million during the quarter, largely driven by the sale of $249 million of purchased residential mortgage loans and the reclass of $83 million in similar loans to held for sale. The sale of those loans closed in October, except for a small pool, which closes next week. On the funding side, combined customer deposits increased $89 million. Payroll deposits declined $186 million, while broker deposits and borrowings declined by $249 million and $74 million, respectively. At the end of the quarter, the loan-to-deposit ratio was 96.5%. The allowance for loan losses finished at $254 million, reflecting a coverage ratio of 139 basis points. The allowance includes $77 million in specific reserves on approximately $380 million of loans, representing a coverage rate of 20%. The general reserve of $177 million represents a 99 basis point coverage on the balance of the portfolio. Given the strong coverage rate in the current environment, we expect that while charge-offs may remain elevated as we continue to work through these substandard assets, we expect the run rate for the provision to be $5 million to $9 million a quarter as the reserve coverage ratio trends lower. Net charge-offs for the quarter were $15.8 million, all but $1.4 million of the charge-offs were previously reserved for. Our quarterly results reflect 2 months of earnings for Brookline and 1 month of earnings on a combined basis. The quarter also included the merger charges and purchase accounting associated with the transaction. We will continue to have merger charges through the first quarter when our core systems integrations are completed and the remaining cost synergies realized. As we anticipated, we reported a GAAP loss for the third quarter of $56 million or $0.64 per share. The third quarter included pretax charges of $130 million, $78 million related to the initial provision expense and $52 million in merger expenses. Excluding these charges, operating earnings were $39 million or $0.44 per share. The net interest margin was 372 basis points for the quarter, which included a 30 basis point benefit from purchase accounting. We provided the performance for the month of September, representing the first month of performance on a combined basis and adjusted for the onetime merger-related charges. This is provided on Page 5 of the presentation. Net interest income for September was $72 million, which included $10.7 million in purchase accounting accretion for the month and resulted in a net interest margin of 412 basis points for September. Of the $10.7 million, $3.8 million was related to the credit mark with the remaining $6.9 million related to the interest rate mark. Of the $6.9 million, $1.8 million is due to loan prepayments. We expect FASB to release the final rule on accounting for acquired loans and the credit mark to be reversed in the fourth quarter, increasing equity and no longer reflected in income going forward. We currently estimate purchase accounting accretion to be in the range of $15 million to $20 million per quarter, depending on loan prepayment activity. Noninterest income was $8.5 million for the month, reflecting a $25 million to $26 million quarterly run rate. Noninterest expense of $40.6 million for the month captured some of the day 1 synergies created by the merger and reflects a quarterly run rate of $122 million. Amortization of intangibles at $2.7 million for the month reflects an $8.1 million quarterly run rate. Provision for credit losses for September was $6.6 million, but as is typical, true-up of reserves and provision requirements take place in the third month of the quarter. As I stated earlier, we anticipate quarterly provisions to be in the range of $5 million to $9 million. The September operating performance of 129 basis points on assets and over 15% return on tangible equity illustrates the strong performance of the combined franchise and the potential opportunity going forward. Yesterday, the Board approved increasing our quarterly dividend to $0.3225 per share to be paid on November 24 to stockholders of record on November 10. This represents a 79% increase in the cash dividends previously received by Berkshire shareholders and maintains the level of cash dividends previously received by Brookline stockholders. The quarterly dividend equates to an annual dividend of $1.29 per share, which was communicated when we announced the merger and currently represents a dividend yield of approximately 5.4%. As Paul mentioned, the team is optimistic and excited as we continue to deliver on the merger benefits. This continues my formal comments, and I'll turn it back to Paul. Paul Perrault: Thanks, Carl. We will now be joined by Mark Meiklejohn, our Chief Credit Officer, and we will open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: Congratulations on the completion of the deal. Paul Perrault: Thanks, Mark. Mark Fitzgibbon: First question I had, I guess, for Carl. Carl, what should we expect for the remaining deal-related charges to be in 4Q and 1Q? Do you have a sense for a rough range on that? Paul Perrault: I think it's going to be between $22 million and $24 million in that range. Mark Fitzgibbon: Okay. Great. And then I wonder if you could share any color on that $12.4 million office loan that you referenced in Boston. Any color on that? And also, I was curious from which institution did this loan come from? Mark Meiklejohn: Mark, this is Mark Meiklejohn. That loan is a downtown Boston office property. It's a retail first floor, office above. At this point, the retail is full. And the -- otherwise, the building is largely vacant. We've got about a 30 -- 25% to 30% reserve on that loan. Currently, it's being marketed for a potential sale. So we feel like we're in a pretty good place on it. Mark Fitzgibbon: Okay. Great. And then lastly, it looks like your capital ratios were stronger than we expected coming out of the deal. And it sounds like with the accounting adjustment potentially in the fourth quarter, capital ratios get even a little bit better. I guess I'm curious what your thoughts are on stock buybacks going forward. Paul Perrault: We love the idea, particularly with the price where it is. But I think our first priority -- well, our first priority was to get the dividend increased as we promised when we announced the transaction. And now it's really to get the concentration on the commercial real estate to where we all want it to be. And so right now, we're targeting 300% by the end of 2027. Now we may have an opportunity to still be able to do increases in dividends and stock buybacks while also maintaining our goal of getting to 300%. So we'll continue to explore that as we move forward. Operator: Your next question comes from the line of Steve Moss with Raymond James. Stephen Moss: Paul, maybe just starting off, following up on credit here with regard to potential for elevated charge-offs. Just kind of curious if you could size that up a little bit. It sounds like it's going to be coming from the equipment finance portfolio, if I heard that correctly. Mark Meiklejohn: Yes. I think just a comment to be a little repetitive to Carl, we've got specific reserves of about almost $80 million on a population of about $380 million in what we consider troubled assets. Of that, I would say that a fair amount of that will come out of the -- those problems, as they resolve themselves, will come out of the Eastern Funding portfolio. There's really not much of that in office at this point. Stephen Moss: Great. Okay. Got it. No, that's helpful. I just dive that up a little bit. And then the other thing here in terms of the commentary, it sounds upbeat with regard to C&I lending. Just kind of curious to get a sense for the type of deals you guys are seeing and where loan pricing is these days. Carl Carlson: Well, to give you a sense, we put in the deck what the originations were. And of course, that's on a combined basis for the quarter. But we had coupons being added just a little south of 7%. And that does include some Eastern Funding originations in there as well. Stephen Moss: Got it. And then maybe just on the loan portfolio yields here in terms of the -- just curious, it's probably a bigger step-up than I was expecting. I realize the purchase account increase rate math there. But just kind of how you're thinking about where the loan portfolio yields shake out and how you guys are thinking about deposit betas as we go through these rate cuts on a combined basis? Carl Carlson: Well, of course, the deposit betas, right now, we're modeling about a 57% beta for all of our interest-bearing deposits. And it seems like the lines have been doing a little bit better job than that, than our modeling. And sometimes that happens initially and then it slows down. But in the model, that's what we're using is 57%. Stephen Moss: Okay. And one more housekeeping item here. Just curious how you guys are thinking about the core deposit intangible amortization expense going forward. Carl Carlson: Yes. I think we provided some guidance on that. I think it was about $8.1 million a quarter. That will come down over time. I think we're doing a 12-year sum of the years' digits method on that. Operator: Your next question comes from the line of David Bishop with Hovde Group. David Bishop: Curious within the legacy Berkshire Hills, they had some resilience and strength recently in the 44 Business Capital back small business line. Any impact this quarter in terms of their ability to get stuff to the finish line in terms of loan sales? I'm curious if there's a significant backlog or pipeline within that segment. Carl Carlson: That's an excellent question. I don't know if it really impacted September. I think September was fine. And as you know, you're only seeing Berkshire's results for the month of September in this. And I think that's important to realize. So -- but the fourth quarter, I would imagine there'll be a little bit of a shortfall in -- as far as timing and maybe even the level of gain on sale on the guaranteed portions of those SBA loans. So I do expect that, but I couldn't give you really guidance on how much that might may or may not be. David Bishop: Got it. Understood. And then I appreciate the deck noting some of the divestitures. Any more repositioning or loan sales or security sales anticipated after this? Carl Carlson: Yes. I put a note in there to keep my options open, but I think I'm pretty much done with that. There may be a few more securities that we would like to sell, but it's nothing material. Paul Perrault: And in terms of the branches, there's 4 or 5 overlaps, which will be dealt with post conversion. But I think that Berkshire had sort of cleaned up the footprint quite handily in the past couple of years, maybe 2 or 3 years. David Bishop: Right. And then, Carl, just curious, if you have available, the CRE concentration ratio at quarter end? Carl Carlson: 355% for ICRE to total risk-based capital. And just I'd like to highlight that our construction portfolio is only 33%. It's quite low. And it's nice to remind people of that. Operator: Your next question comes from the line of Karl Shepard with RBC Capital Markets. Karl Shepard: Congrats on getting all this done. Paul Perrault: Thanks, Karl. Karl Shepard: I guess I wanted to start with Carl. Thanks for all the help with Slide 5. And I'm just thinking high level here, this feels like a pretty good starting point once we kind of rightsize the provision and back out a little bit of the accelerated credit-related accretion this quarter. Is that fair? And then what's the message on the size of the balance sheet? Carl Carlson: You're right on with that. That's why I spent so much time -- almost all of my time on that. I think that gives you a good sense of the direction in the different categories and how that's laying out and September gives us a little snapshot of that. As far as the size of the balance sheet, we basically reduced the balance sheet $500 million when you include the loans held for sale. I don't expect that to go down going forward. We'll see exactly what kind of loan growth we're seeing on a combined basis as we move forward. But over time, I think we're targeting that probably mid-single-digit growth in interest-earning assets. And so I would be taking -- I want to be careful, a lot of ratios that people calculate. And even when you look at the yield tables and things like that, you look at our yield table in our press release, and you'll see interest-earning assets or loans might be $12 billion or something like that. It's a much higher number when you look at just where we ended September, right, because that included Brookline for 2 months and the combined organization for 1 month. So you got to be careful about averages and average balances and calculations like that. But we expect to be able to get on a growth trajectory on interest-earning assets going forward in the low single digits to mid-single digits. Karl Shepard: Okay. Yes, I was trying to do the algebra on NII for September. But I guess then one for everyone, but maybe Paul, in particular. Just can we get a few more thoughts on how the first 2 months have gone as a combined organization? And then what's the focus execution-wise between now and the systems integration for you? Paul Perrault: Well, I think it's gone exceptionally well. I mean everybody has an important role to play, and my management committee works very well together and have been knocking off the kinds of things that are necessary to do in these kinds of mergers, everything from employee benefits to consolidating contracts for services, all the technology stuff is well underway. That was done very early on. The selections were made. And so we're about execution at this point. And we've got the banking centers all set up under Chief Banking Officer, Mike McCurdy. We have 6 regions given the footprint that we have. And so we have decentralized all of the support for those regions. And as I travel around the land, I feel very good about the people that I'm meeting and the enthusiasm that they're bringing to this new adventure for everybody. So this is a lot different for everybody, but the optimism is there, and the talent is there. And so I'm feeling very good about where we are here a couple of months away from the conversion. Operator: Your next question comes from the line of David Konrad with KBW. David Konrad: Since you spent so much time on Slide 5, let's spend a little bit more time on it, I guess, if we could. But I'm just looking at the September expenses of $40.6 million and then the amortization of $2.7 million. And if I kind of quarterize that, if you will, I get to about $130 million of expenses kind of a run rate. I guess 2 questions. One, how much of the $68.9 million cost saves has already been implemented in that number, if any? Carl Carlson: I'd say quite a bit of the $68 million has already been realized. Just to step through that a little bit. Just since we announced the transaction, even before we announced the transaction, both companies were being very thoughtful about expenses going into that. And so when we were looking at -- and just people weren't getting hired, people who are leaving -- positions weren't getting filled. There was a lot of double work going on, things of that -- people -- things getting done by additional folks. And so there's been a lot of control around expenses right up until the merger on September 1. And both companies have done an excellent job of controlling those expenses and not spending a lot of money. Then you had September 1 come, and there are a lot of senior people and even department leaders that were let go on the first day. So they exercised their change of control of their contracts and they're gone. So while the number of people, and there's quite a few people right day 1, those are pretty high salary numbers and bonuses and things of that nature, benefits. And so those came right out of the run rate September 1. So that's a nice pickup. Now there's still some savings and synergies to be had on all the contracts and things of that nature, vendors that we use, professional services that we use. And so those things are still going on. And as we get through to conversion, we'll be able to realize on those. And then there's another staffing reduction at that time. Paul Perrault: Just to put some numbers around it for you, David, we're down almost a couple of hundred people in the combined company since a little bit before the combination actually came to fruition. And scheduled to let go post conversion at some point is almost another 100. And so we're being very methodical about it. And as Carl pointed out, there's a fair number of those people who have already left who are highly paid. David Konrad: Right, right. And then so when we look at the fourth quarter, the $130 million is probably a good run rate. Maybe I don't know if there's going to be more expenses -- core expenses seasonally in the fourth quarter. So I'm just kind of wondering what the core number for the fourth quarter range would be. And then the last question would be on Slide 11, that $119.8 million kind of 2Q expense number, we should probably add in the $8 million of the amortization on top of that to get the all-in expense? Carl Carlson: That's correct. That's correct. What I want to add -- I mean, there's a million moving parts on this thing, as you can imagine. And whether it's aligning the benefits across the organization, it's aligning salaries across the organization, the things of that nature. But there are positions that needed to be filled that have been postponed. And of course, we postponed them even further because we're not hiring anybody in December because we're doing the payroll conversion at that time. So there's a lot of things going on, but there's positions that we're going to have to fill. And so that $119.8 million is something that the management team is committed to delivering on, and we're working very hard to make sure that happens. And... Paul Perrault: And we're close. Carl Carlson: And I think -- I don't see a reason why we're not going to hit that and perhaps do better. David Konrad: And then for the fourth quarter, should we -- is $130 million kind of a decent for that? Or should we up that a little bit before it goes down? Carl Carlson: So I think I would use that number for now. I couldn't really give you -- I don't see a real reason why it would vary too much off of September. I didn't really do a deep dive on that. But I think that should be pretty accurate, including the intangible amortization. Operator: Your next question comes from the line of Laurie Hunsicker with Seaport Research. Laura Havener Hunsicker: I just wanted to clarify this. The $119.8 million on Page 11 there, that does or does not include the amortization expense? Carl Carlson: It does not. That's the operating cost. Laura Havener Hunsicker: Got you. Okay. I just wanted to double check. Okay. And then same thing, when we look at the margin, the 3.90% to 4% that you're guiding, that does include accretion income to the rate of an estimated $15 million to $20 million per quarter? Carl Carlson: Yes, it does. Laura Havener Hunsicker: Okay. Okay. And then just your comments here at the bottom of Page 11, can you expand a little bit on that, Paul and Carl, that management will continue to explore opportunities to optimize the balance sheet and capital structure over the next few quarters? Just help us think about that. Carl Carlson: Expand on that a little bit. I think I said it earlier, I wanted to keep my options open here. And I think for -- and I want to get -- this is something we will discuss with the Board more fully and size it correctly. But as you know, we both -- both organizations had sub debt outstanding, and it's something that we will probably look to refinance sometime during 2026. I don't want every single banker in the world calling me, but that's something that will be -- we will be looking to explore that. And I think we'd like to get a nice clean quarter behind us before we move forward with that. Laura Havener Hunsicker: Okay. And then just to clarify, no spot secondary anywhere in the future. Is that correct? Carl Carlson: We have nothing approved yet. Laura Havener Hunsicker: Okay. All right. And then on diluted income statement share count, I just want to make sure I have this right. It dropped 1.6 million or so in September. It's going down another 3.6 million just the accounting, right? So it takes diluted income statement share count will be about 84 million. Is that correct? Or is my math off on that? Carl Carlson: No, I think that's where folks got a little bit tricked up when it was Berkshire as the legal acquirer and Brookline as the accounting acquirer, and they were using the Berkshire share count and then the combined. It was really 2 months of Brookline's share count and then the combined. So the combined share count is around $84 million -- 84 million shares... Laura Havener Hunsicker: 84 million. Carl Carlson: On a diluted basis. Laura Havener Hunsicker: That's perfect. Okay. Good. And then, by the way, I appreciate so much all of your detail. You kept everything that you had in there that we loved is Brookline and you added more stuff. So just great. But just going to Slide 14, can you help us think a little bit about -- this is a smaller line item, but Firestone that came over with Berkshire Hills. What are you doing with that? Is that discontinued at all? Paul Perrault: Yes, it's just going to run off. Carl Carlson: It's about $23 million. Laura Havener Hunsicker: Okay. Perfect. Just wanted to make sure you weren't growing it. Okay. And then obviously, new here, it looks like -- so you're discontinuing the Fitness and the Macrolease. Paul Perrault: That's right. Laura Havener Hunsicker: So that's great. Okay. And then so your charge-offs this quarter, the $15.1 million in charge-offs, do you have a breakdown as to how much of that was Vehicle and how much of that was the Macrolease? Mark Meiklejohn: Yes. Actually, there was 2 large Eastern Funding deals on that. Neither of them were Vehicle or Macrolease. They were both Eastern Funding, but I would say they were noncore-type businesses. One was a commercial laundry and the other was a grocery operator. So yes, those are both long-term workouts, and those reserves had been put up over the last year or so. So we thought now was the appropriate time given where those deals are to take those charge-offs. Laura Havener Hunsicker: Okay. Great. That's -- yes, we've talked historically about the grocery. Okay. And then the specialty vehicle, what is that nonperforming? And same question with the Macrolease. So of your C&I equipment finance nonperformers of $42 million, how much is in those 2 buckets? Carl Carlson: Specialty vehicle is about $4 million. That $42 million is just made up of a handful of names, largely. Laura Havener Hunsicker: Okay. And then Macrolease, do you have nonperformers for that one? Carl Carlson: I think that number is 11. Paul Perrault: No, 13. Carl Carlson: 13, sorry. Laura Havener Hunsicker: 13. Okay. Okay. That's great. And then the office detail, and I appreciate the detail that you added around that. But can you just talk a little bit more? So you have your nonperformers and you're now at $22 million. And I think Mark asked the question earlier. Was this a Brookline? Or was this a Berkshire Hills credit? And not that it matters, I'm just kind of curious. And then also, can you comment, you had a massive jump to the criticized office. It looks like that's now $134 million. Just any color on that would be great. Carl Carlson: Yes. The deal that we mentioned earlier, the downtown office that moved the nonaccrual number was a legacy Brookline account. Laura Havener Hunsicker: Okay. And so then you had -- it looks like then you had another, what, $10 million or so, so nonperforming from your book. Is that right? Carl Carlson: Yes, that sounds about right. Laura Havener Hunsicker: Okay. Okay. And then the criticized there, the $134 million, is any of that coming due in the next couple of quarters? Or any color on that? Carl Carlson: In terms of office, we have 2 loans that are coming due over the next couple of quarters that are in the criticized bucket. Those loans are on short-term maturities at this point. We're well reserved on both of those loans, and we expect some resolution of them over the coming quarters. Laura Havener Hunsicker: Okay. And what is the amount on those? Carl Carlson: About $30 million in total. Laura Havener Hunsicker: In total. Great. Okay. And then do you happen to have the occupancies there on those? Carl Carlson: I don't. Off the top of my head, no. Sorry. Operator: Your next question comes from the line of David Konrad with KBW. David Konrad: Just had a follow-up on Slide 11 with the purchase account accretion expected to be $15 million to $20 million per quarter. Just wanted to kind of clarify to make sure like if you did adopt the new FASB rule, would we think of that range of being more like $11 million to $16 million? Or is that range contemplating the change of the accounting? Carl Carlson: It does contemplate the change in accounting. But again, this is an estimate. It's the best because just so you know, we -- that's done at the loan level, the individual loan level. And so it can be very volatile based on prepayments and things of that nature. Operator: Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. There are no further questions at this time. I will now turn the call back over to Paul Perrault for closing remarks. Paul Perrault: Thank you, Jean, and thank you all for joining us, and we look forward to talking with you again next quarter. Good day.
Takamaro Naraki: [Audio Gap] [Interpreted] Sales stood at JPY 22.5 billion, and this was an increase year-on-year by 21.5%. Ordinary profit this time was JPY 8.1 billion, and this was up by 43.1%. And as a result, we released an upward revision on our forecast for the first half of October 23. This page shows our progress compared to our whole-year forecast. And as you see, our sales and ordinary profit are almost 50% of our target for the whole year. To talk about the breakdown of sales and so on, I would like to talk about the number of transactions closed and M&A sales per transaction. We closed 488 transactions, up by 7.5% year-on-year. M&A sales transaction was JPY 44.6 million, and this was an increase of 12.6% and part of the factors that led to the increase in M&A sales per transaction is the number of large transactions closed, which was 46 this time, up by 58.6% About the factors that have led to these results, we believe that the fact that we've ensured thorough project management from the start of negotiations through to closure worked well. About the improvement in M&A sales per transaction, we believe that this is a result of providing a company-wide support system through a specialized department, which is the Growth Strategy Development Center. Next page. I would also like to report on the cost of sales and SG&A. As we reported when we released our results for the first quarter, we have done a reclassification of what we record as cost of sales and what we record as SG&A, and this reclassification has been applied since the beginning of the current fiscal year. As a result of the reclassification, the cost of sales declined by 943 million, while the same amount increased in the category of SG&A expenses for the first half of FY 2024. In the first half, our cost of sales was 8.601 billion, and the cost of sales ratio was 38.1%. And at the same time, the previous year was 7.502 billion at 40.4%. And this indicates that, thanks to growth in sales and other factors, our cost-of-sales ratio declined. Of the items included in the cost of sales, our referral fee and outsourcing expenses stood at JPY 3.2 billion this time, and the ratio of that out of sales was 14.2%. Compared to that, the same time last year was JPY 2.562 billion at 13.8%. This indicates a slight increase in the ratio of referral fees out of sales. About our SG&A expenses this time, they were JPY 5.586 billion at this time, at 24.7% out of the sales. And the same for the previous fiscal year was JPY 5.164 billion at 27.8%. So the SG&A expenses amount increased while the ratio of SG&A out of sales declined. Summary of the stand-alone quarter of the second quarter. The summary is as we've written at the top, that the further benefits occurred from the implementation of policies for mid-cap companies, resulting in a significant increase in M&A sales production. To talk about our leading indicators on the next page, about the number of our new sell-side mandates, this was 327, and this is a decrease of 15.9% year-on-year. About the number of new buy-side mandates, that was 388, down by 4%. Below that, the number of new transaction negotiations was 297, down by 4.8%. The reason why we have declined in the number of new mandates, be it sell side or buy side, is a result of our focus we put in Q1 and Q2 on growing sales and the number of transactions we closed. Another factor that I should mention is that to increase the success rate of completing transactions, some sales channels became far structured in screening new mandate opportunities. This means that out of the many more mandates that we could have accommodated, we decided to be more selective and decided to choose the mandates that we believe have a higher ratio, a higher likelihood of getting closed eventually. So we have to have a more thorough or more strict screening process. However, in order to generate solid results in the second half and for the next fiscal year onward, it is necessary that we have a recovery in the new mandate numbers. Therefore, we have launched a campaign that's active this month and the month after, especially targeting young employees or consultants with relatively limited tenure at our company. So they'll acquire more new mandates. Please move on to Page 12. On the balance sheet, total assets stood at 60.520 billion, which was an increase compared to 10x last year. And our net assets this time were 48.341 billion. This was an increase of 752 million compared to the end of the previous fiscal year. The ratio of the net assets this time was 79.9% which was an increase of 2.9% compared to the end of the previous fiscal year. I'll talk about headcount on the page after. In talking about headcount, we first would like to talk about the transition of our headcount in accordance with the new classification we've introduced from the first quarter of the current fiscal year. Then on the right-hand side, we have a table of the different categories of our personnel. The top row says M&A consultants. This is a category that includes our sales representatives at Nihon M&A Center, as well as the sales representatives at our overseas local subsidiaries or local entities. At the end of the second quarter, the number of M&A consultants that came into this category was 640, an increase of only 10 compared to the end of the previous fiscal year. To share with you the breakdown of the net increase in people, during the first half of the fiscal year, 97 people joined our company. However, there was a decrease of 87, which includes 73 people who left our company and 14 people who got classified into other areas because of department shuffling. And as a result, we had a net increase of 10 in M&A consultants. There are people who come into the cost of sales category of M&A support. Who comes to the category of M&A support cost of sales, this includes people at their promotion headquarters, these are people, for example, who are lawyers or CPA, the M&A Deal Dedicated Professionals. Other people who are included in the cost of sales of M&A support are Japan PMI consulting people, people at the TPM division, people at the Corporate Value Laboratory, and the Special People Association. After the reclassification, other people's sites to be classified as SG&A expenses of M&A support. And this page shows our transition of headcount in accordance with the previous classification method. So starting from the current fiscal year, or for the current fiscal year rather, we are releasing the headcount transition and the breakdown in accordance with the previous and the new reclassification or classification method. Before I wrap up my presentation, I will talk about shareholder return and shareholder structure. There is no change to the dividend forecast we have for the current fiscal year. We're still planning to pay JPY 29 per share for the current fiscal year, which is the same as the amount we paid in the previous fiscal year. And this is translated into our dividend payout ratio of 83.6%. Our policy of dividend payout ratio of 60% or more will be continued during the midterm management plan period. And our ROE this time is planned to be 22.9% and our ROE has been progressing over 20%. On the left-hand side of this page shows our share ownership structure. There was a bit of a change to the share ownership structure. The ratio of individuals or individual investors declined slightly, while the ratio of financial institutions and foreign institutions increased. This is the end of the summary of our performance this time. Operator: [Operator Instructions] [Interpreted] To translate the first question from the audience. This is about headcount. The number of consultants decreased in the first quarter. Is this because there are many people who left your company with a tenure of less than 1 year? And what about the transition of the ratio of consultants with tenure of 3 years or longer? And what about the turnover rate this time? Takamaro Naraki: Turnover rate in the second quarter was 18.7% and this 18.7% is a 2.5-point increase compared to the previous turnover rate of 16.2%. About the type of people who have decided to leave our company or who have actually left our company, the main people are the people with limited tenure at our company. As a result, relatively experienced consultants, the kind of consultants who have been with us for more than 3 years, are 45.3% of the total. The same ratio in the second quarter last fiscal year was 40.2%. So the ratio increased by 5.1%. About the fact that we are having more inexperienced people leaving our company, we've been taking action. The action is for our Miyake-san and Takeuchi-san to have periodical communication, bilateral communication with relatively new people at the points of 7 months after or 7 months after and 12 months after joining our company, through holding meetings such as one-on-one meetings and group meetings. When 12 months pass and after a new employee joins our company, we decide to do a review of what to do with the employee, especially for the employees who have not been able to generate good results at that moment. And the options include assigning them to a more appropriate department and assigning more appropriate pauses. Operator: Does anybody have additional question? Since this is a very good opportunity, we welcome and appreciate your questions. But if there are no more questions, then we can close this session early. We've one more question, so we continue. You have explained that the focus of the efforts up to the third quarter is on growing sales and not much on acquiring new mandates. But do you believe that by acquiring more orders from the fourth quarter, you'll be able to convert them into your sales by the end of the next fiscal year? Takamaro Naraki: When we started this fiscal year, we had to lower our budget, and that was the last thing that we could do. So we were desperate when we started out this fiscal year. Accordingly, our focus was on growing sales and on closing as many transactions as possible. As a result, we started to gain bigger confidence from around the middle of the second quarter that we'll be able to close the second quarter or the first half in a very good state. We are not waiting until the fourth quarter to start acquiring more mandates. We've already started to put a bigger focus on new mandates acquisition from August. And this is especially targeting the employees with tenure of no less than 3 years at our company, and targeting these people, we've launched a campaign to acquire at least 3 mandates starting from October, and we are making company-wide movements to acquire more mandates. Therefore, we are hoping to have a new mandate number recovery from the third quarter. Another factor that we should explain is that the way that we've been acquiring new mandates is completely different in nature compared to before, in the sense that, be it buy-side mandates or sell-side mandates, when we acquire new mandates, we decide which mandates to receive and which mandates to rather decline at our sales department and marketing department. And the threshold has become tighter or more careful, and we are being more selective than before in choosing which mandates to receive. At any rate, for the current fiscal year, we're going to strike an even better balance among creating good results for the current fiscal year in terms of sales and closing transactions, but also with creating pipelines, which will be converted into closures in the next fiscal year after. Operator: The next question is, what's the likelihood of achieving the continued double-digit growth going forward, and the likelihood of achieving the forecast you have going forward? Takamaro Naraki: We have an explanation of our midterm plan targets on Page 21 of the presentation material. Of course, we are trying to achieve double-digit growth, but we have minimum must targets that we have to achieve, and they are on this page. Our first focus is on making sure that we will be able to achieve at least 7% to even higher than 10% growth. And also, we will try to exceed these targets. Operator: The next question. Even in the case of recovery in your financial performance, is it safe to assume that the company plans to continue to pay commemorative dividends and other sorts of dividends? Takamaro Naraki: About this, we are going to consider this in our company going forward. It was in the previous fiscal year that we introduced dividends, and that was also at the time when we discontinued the policy of providing shareholder benefits. The reason why we are keeping this dividend guidance for the current fiscal year as well is because we believe that we have not been able to contribute to shareholders in terms of income gain. So, since we believe that we have not been able to sufficiently contribute to shareholders in terms of income gains, we are going to make a decision on whether or not we will continue to pay dividends or not. In making the decision, we're going to take into consideration TSR or total shareholder return. Operator: We welcome additional questions. [Operator Instructions] Since we are receiving no more questions, we're closing this session. And before we close this session, we have a comment from Mr. Naraki, and his comment is going to be on the timing delay that he mentioned at the end of the presentation briefing session yesterday. Takamaro Naraki: This is a topic that the company receives questions about in every presentation briefing, basically. And in the second quarter, the amount of the project that experienced a time lag was worth JPY 150 million. JPY 150 million is far less compared to JPY 560 million experienced in the second quarter last year. Although we have been making our deal progress more complex and complicated than before, including our screening process, we feel that in the second quarter, our sales representatives and consultants have become more mature. And we believe that that's part of the reason why we had limited the amount of the project that we didn't get to close this time. About the changes in the environment that the entire industry is facing, we believe that we have been taking the necessary and appropriate actions. So we would ask investors to count on us to deliver solid results in the second half as well. Thank you very much for being with us through the end today.
Jane Morgan: Right. Good morning. Today, I'm here with archTIS Limited, a leading global provider of data-centric software solutions for the secure collaboration of sensitive information based here in Australia, but with significant operations developing overseas, including the United States. Q1 for FY 2026 has been a significant period for the company with major operational milestones, including the successful acquisition of the assets of Spirion based in the U.S. And today, I am joined by archTIS CEO and Managing Director, Mr. Daniel Lai; as well as archTIS Global COO and U.S. President, Mr. Kurt Mueffelman, both of whom are here today to discuss the company's results for the quarter. Good morning, gentlemen. Kurt, I'm going to hand over to you to kick things off. Kurt Mueffelmann: Great. Thank you. Good morning, Jane, and good morning, everybody. Thank you for attending today's presentation. I just want to give a couple of comments that we're going to focus on the financial performance and key growth drivers in the U.S. around Spirion and our expanding engagement within the U.S. Department of Defense. We'll also outline the go-to-market strategies that are underpinning each initiative and how they align with our broader plan to accelerate growth, strengthen profitability and create longer-term shareholder value as we drive the business forward. So I'd like to start by having Dan take us through the quarterly updates. Dan? Chun Leung Lai: Thanks very much, Kurt, and welcome, everybody, to our quarterly webinar. We've got quite a range of information to go through. So we'll do this as best we can. But there's a lot of information to share with you on where we are in the market. But the highlights have been really the focus and pivot to the U.S. marketplace. And that's, of course, one of the great things that we've announced recently was the additional U.S. DoD contract for services about enhancing our product, NC Protect to be able to be integrated and expanded into that environment. That's complementary to the licenses deal that we announced earlier. That's a really confidence building initiative, particularly for us in the market, and it gets us more strongly engaged on a daily basis with that client. The Spirion asset acquisition, that's complementary as well. It's all about us pivoting the business into that U.S. market, which is 40% of the data-centric security market and is the largest market in the world. The acquisition of Spirion gives us other data-centric experience and capability as well as a new client base to cross-sell in the commercial space, which is fantastic as well. That 150 customers is something that we're looking to leverage and grow off. Of course, this acquisition means that we've jumped from an ARR all the way up to $19 million from a $4.2 million licensing revenue of 78%, gives us a solid cash balance after we've done those capital raises and put that acquisition to bed of $13.8 million available funding. Margins are still high at 75% growth. We have, obviously, with that increase in doubling the size of the organization, increased our operating expenses, but a large chunk of that was also one-off costs associated with the acquisition. So I'll get Kurt to jump into some of those financials in more detail. Kurt Mueffelmann: Yes. Great. And so remember, most of these numbers that we're providing are exclusive of Spirion. We closed the deal September 30. So following the completion of the acquisition, the company's ARR increased to just under $19 million at $18.9 million, represents a 377% increase from the prior corresponding period. On a pro forma basis, including in-quarter Spirion revenue, the combined entity would have recognized around $5 million in total revenue. So you can really see the scale that we're driving. For reporting purposes, archTIS itself as a stand-alone, the revenue was $1.5 million, representing a slight increase from PCP. So you really see the scale of the revenue that we're really trying to take under as part of the business. I think the interesting part was as stand-alone, notably, the licensing revenue for archTIS accounted for 78% of the total revenue, up from 64% from the previous period. The high proportion of licensing revenue contributed to our continued strong margins of 75%, highlighting the company's continued strategic transition away from lower-margin services, equipment and third-party software towards the higher-value proprietary licensing solutions and supporting services. Our operating expenses as stand-alone, excluding one-off transaction costs, were up 20% to $2.3 million. This reflected a rise in the headcount that we're predicting as we go into building out the U.S. DoD expansion and the strategy behind that as well as partnership opportunities. The increase also includes the expansion of our product team over in Germany for the development of the acquisition of Direktiv, which Dan will talk about as part of our strategy going forward a little later on in the presentation. We continue to work through synergies toward clear and concise total operating expense levels as we continue to operate from a cost synergies basis and putting together the overall go-forward plan with Spirion standing [indiscernible] inside of archTIS, $5 million, and they're primarily cyclical. We go very cyclical in our cash receipts over the first quarter. I believe the prior quarter was $3.2 million. We got some cash in a little bit earlier that we expected to roll into this quarter. So we'd rather have the cash in the bank a little bit earlier. And despite this, archTIS still ended with a strong $13.8 million in total available funds. So again, good growth balance sheet going forward, really exceptional revenue that we're able to drive and scale the business going forward and really working on where we can keep that operating expense under our control from a management standpoint like we have in the past. So Dan, I think one of the things that we're driving and the key message, I believe, for this quarter was really about supporting the U.S. scalability and growth. So maybe you can take us through the -- both opportunities ahead of us. Chun Leung Lai: Yes. You're starting to see the traction here. We initially announced the 1,000 licenses for the ongoing deployment across the broader DoD and the new and expanded features that we've been -- got the services contract for are about making sure that, that agency can service other agencies as well within that DoD environment and make sure that it's tightly integrated. But these features are very specific to the U.S. defense environment and particularly the M365 deployments. And we've talked about how that can create a cornerstone for the inflection point for the company in the U.S. And why is that? Well, defense is an amazingly big reference for the rest of the Microsoft ecosystem. You know and we work very hard with the Microsoft ecosystem to do that. And that also leverages that asset acquisition of Spirion. And of course, that Spirion gives us not only the footprint to expand and grow with that cornerstone DoD business, but enter new verticals to make sure that we can, I guess, look at those verticals earlier in terms of health, in terms of finance, in terms of manufacturing that we can get into in the world's largest market. That's what they've specialized in that data discovery and our enforcement products run off the back of that. This really -- so for us, those 2 key elements really set us up as a springboard in the world's largest market and that we -- that's the high-growth market that we're targeting. And I think the timing is right because if we've done that earlier, without an opportunity like the U.S. DoD, this will make it a lot more easier for us to get that traction that we want to and play with some really big people, big organizations in terms of competitors and be able to hit a wedge which we can defend and exploit in the market. Kurt Mueffelmann: Yes. I think, Dan, a couple of other things on that. When we look at the U.S. DoD, the services engagement really extends NC Protect and really drives functionality that's not previously in the world's largest Microsoft DoD environment. So for the DoD to come back to us and say, hey, we need these capabilities in this environment, it makes it very sticky. And so by coming in and doing this development, I think it really drives home the need for DoD to really have that broader license across the entire enterprise. Unfortunately, being a citizen over here in the U.S., we've been shut down for the last 30 days. So the larger licensing rollout has been delayed by the U.S. government shutdown, but engagement remains really high and active through the technical validation. We're continuing to work on the statement of work and the underlying technical development on a daily basis with people that have not been deferred. The military people that are still in uniform are still working, and we're working with them day in and day out as well as the commercial people such as Copper River and GDIT. So things are still moving along. But again, we're at the kind of -- the way the DoD goes right now, we're at the government shutdown's will. Chun Leung Lai: Yes. And I think the other aspect of that is we've got Spirion at a very good price. It's got $15 million ARR, and we paid for it 0.9x of that ARR. It adds a multifaceted, not just the client base, the technology and a really good team there that we can pivot into the space and augment what we have to really compete in the world's largest market. I think that's critical. And as you said, the U.S. DoD deal services keeps us engaged with them on a daily basis. I know there's a lot of speculation in the market about these things, and it has been affected by the shutdown. But we are in contact with them, as I said, regularly, and we know what they're committed to and where their strategy is going and where we fit into that strategy, which gives us confidence. Kurt Mueffelmann: So we talk about a little bit about DoD and NC Protect and what we're doing. Why is this so important to the DoD and to the broader Allied Coalition Forces? Chun Leung Lai: Yes. Really great question. And this is the other part that gives us great confidence. Zero Trust and particularly data-centric security has been mandated. It's not like this is optional for these organizations. Why is that? Well, it's really simple. That old system of network security where we put everything inside a boundary doesn't exist anymore. I said recently on the Ord Minnett conference, a Thales report identified that most organizations now have 29 different domains where their data is spread out. Why? Because we've got moving to SaaS platforms and services. We're moving to cloud brokers and SASE and DLP in the cloud in terms of security. We're moving to collaboration tools. We are doing Work from Home. We've got multi-cloud environments where we've got S3 buckets in AWS and M365 out there. This -- all of these different organizations now, how do we secure data and know where our data is to secure it becomes very problematic for the client. And that is no different for the U.S. Department of Defense when it has allied engagements and it's trying to build alliances at the strategic operational and tactical layer. And that's what we're trying to solve for these government agencies and defense departments. It's been mandated. There's standards out there, and we're pushing into this space very quickly, probably not as quickly as a lot of our shareholders want us to. But this is a big market and it's a revenue-rich market. We get it right and we've built a company that's going to be sustainable for a long time and a high-growth company. So mandated compliance requirements by 2027. That's why the U.S. is doing this particular deal. That's why it's so important. We get this right, there is a network growth effect. Kurt Mueffelmann: Yes. And you look at that, right, the alignment positions archTIS to enable that interoperability across all allied defense networks. So whether it's Five Eyes, the QUAD, AUKUS and what have you, it's -- you can pick them off as the network effect across Coalition Forces, but let's look at what we have in front of us today just from a DoD standpoint. And when you start to look at that, this slide really maps the potential scale for DoD adoption or that network sales effect. So from where we are within the COCOMs on the right-hand side where we're selling into today for the Warfighter Network, that carries across all the other areas, whether it's Office of Secretary of Defense, Office of the President, all of the DoD agencies. So our initial 1,000 user deployment is really that entry point, the validation of the security and operational performance we expect will be rolled out the command, the services and that multiyear expansion potential. And so the network effect really stems from the initial license and services today, projected as we discussed back in, I believe, last quarter, to reach 150,000 users, ultimately 450,000 across the Warfighter Network. And then if you start to do the math, this provides a foundation and selected product awards for defense-wide deployments supporting up to 4.3 million users across not only defense, but then entering into the civilian space. Then on top of it, you can start to add Allied Forces. So you see the excitement. So although it's taking longer than what I'm sure everybody would like, it's building that basic foundation that will give us the ability to really do it right and really provide that network effect as we go further into it. Chun Leung Lai: Scary numbers, right, Kurt? Kurt Mueffelmann: Yes, it is. And scary numbers, my compute there we go. All right. Chun Leung Lai: Okay. So how does that then fit in with the archTIS strategy here. Well, really, as our offerings are adopted by the U.S. DoD and NATO and look, we have already announced where we are in some of these deals. NEC deploying us to be demonstrated to JMOD to be their partner of choice. NEC are also engaged with MHI for the future [indiscernible] stuff, which was recently announced here in Australia. But also, we've talked about our engagements over in the U.K. and obviously, this U.S. deal. But that then also has ramifications for the Defense Industrial Base. We have Kojensi here, which is already being used as the shared platform of choice by defense industry. We're partnered with Microsoft. We're trying to solve this in a global way across multiple supply chains. And that means that the Defense Industrial Base is still an opportunity for us, large clients, large revenues, high levels of compliance required, we still look at how we do that. But that also then opens up not just from the Raytheons and Andurils and Kratos and all of those sorts of things, the opportunities for CMMC, which is a standard there in the U.S. Department of Defense for labeling, but that also then opens up that opportunity for those SMB ecosystem. And you can see the numbers that we're talking about in that. It's not a new slide, but what we're really saying here is we've been consistent in our strategy, and we are executing it. But it's the timing and execution of that strategy, which leads to success and the tactical execution to get to those sort of scary numbers that we're talking about. We need to go at the pace where we can sustain this, and we need to build to be able to scale it. So that sort of leads on to the Spirion acquisition there. Kurt, would you like to talk about that? Kurt Mueffelmann: Yes. So Spirion, what a funny name it is, right? And so Spirion is actually SPI for Sensitive Personal Information and Rion or Rion, which derives for ri for meaning King in the Celtic language. So it symbolizes leadership and authority really around that discovery and classification. So when we hear people talk about, well, how could you have stopped that breach? Previously, we couldn't have. Now with the Spirion, we can go in and look at the various breaches of personal information that has taken place, whether it's in Australia, the U.S. or across the globe and play a part in helping to avert those breaches from taking place. So it adds us into a different -- a little bit different part of the market opportunity that's out there today. Slides, they're just going. So Dan, maybe you can take everyone through the acquisition and the reasons for the acquisition itself. Chun Leung Lai: Well, the key reason for the acquisition is that springboard to leverage our market entry into the U.S. We could have invested a lot in Australia and done it all here. But the high-growth market, as I said, is the U.S. and Europe. Between them, they own 70% of the data-centric security market. That's where we need to be for high growth. So Spirion was in the right place at the right time. Most critically, it expands on several fronts. We've talked about the customer base, the blue-chip cross-sell. We've already commenced that. We also have the opportunity. And what's great about those clients is they're already investing in data-centric security. So you don't have to educate these guys from scratch. Now not all of them will convert, and that's great, but some of them will. And some of them will then go on the journey and do that cross-sell up. The other great thing about it is if I'm looking at data-centric security and my data is everywhere in SaaS platform, legacy on-prem, Work from Home, how do I do discovery across all of that plane to understand where my data is, be able to label it, which is a critical point for us to be able to enforce it with our ABAC products. And so it really hits that sweet spot. Now that to us is a reason to start to exploit and push into that marketplace along with that U.S. DoD deal. So critical for us from all of those synergies and we see that as something that we're going to execute and leverage for as an inflection point for the business. So really transformative. Kurt Mueffelmann: Yes. And I think what's really strong about it, it adds a whole new dimension to what we do in our go-to-market around that end-to-end data protection. So Dan, maybe you can go through our thinking from that from a strategic standpoint. Chun Leung Lai: Yes, absolutely. So this is where all these parts start to come together. The first there is the -- where is my data? Is it sensitive? Intellectual property? Is it classified? Who has access to it? What should we do with it? Now what we should do with that and how it should be protected becomes that classification and that label. Then we need to put in policies for who should have access to that, how it gets protected, when it leaves this environment, how is it encrypted, who carries permissions to do what to it. And of course, that enforcement of those policies becomes critical. You've got an end-to-end life cycle here. Our massive differentiator is we connect to the data. So as it transfers from one environment to the other to the other, it's always consistent in terms of the protection and the controls on it. And none of our competitors can do that. That's really critical. So the purchase here is and the competitive advantage is this product and platform is agnostic. Yes, Purview, you can do some of that. Only if all your information is in the Microsoft 365 environment. And there aren't many organizations that have all of their information in an M365 environment or can afford it. That's where we see the real key to success. Over to you, Kurt. Kurt Mueffelmann: Yes. I think though, there'll be -- when we look at the deeper dive into the technology, Spirion's product is a sensitive data platform. It shares a number of similarities with our archTIS offerings. It's agnostic, as you said, to data-centric products. It's feature-rich, similar to the NC Protect, Kojensi and TDI. And our use cases and even more importantly, kind of the stakeholders that we are targeting mirror one another. So when we start to look at the integration of the products, which I saw a demo of the integration today, and it looks fabulous, they really become a great opportunity for not only upsell, but cross-sell. And I had the pleasure to be up in New York City 2 weeks ago with Kevin Coppins, our new EVP of Commercial Enterprise, who is the CEO of Spirion. We spoke to probably half a dozen different existing Spirion customers to bring to them the message around archTIS and specifically how NC could protect and add those layers of governance and enforcement to the data-centric security policy. And one of the customers I wanted to share is one of the largest media companies in the world, only 2 days earlier, I had a conversation with their internal team around how do you secure documents around ABAC technology. And the timing was just amazing because we walked in. Kevin did a great job in talking about what archTIS brings to the Spirion product side and how the technology is going to be supported going forward and the great job, and I believe it was close to $0.5 million renewal that's counting towards ARR and everything. And then all of a sudden, he drops on us that he needs ABAC technology. I think I had the biggest smile, and I don't think I needed a plane to fly home from Florida -- from New York to Florida. I floated home after hearing that because it validated our underlying strategy. It really validated it. And when it goes to the next phase, I want to take everybody through another one on a call that I was similar, a very similar story that they're looking -- all right, you guys identify and classify the data, but how do you really protect it? So one of these discussions was all around this large university medical center. This is an $8.5 billion medical network required a full scan of 50,000 mailboxes and over 500 terabytes of data to identify and remove PHI, which is Personal Health Information. And Spirion's sensitive data platform executed at a scale with 98% accuracy, which is just off the charts. We were on a Gartner analyst briefing the other day, and they thought that was a typo. They thought it was 89% that we did the inverse the numbers. We talked about the 98%. It's a fabulous industry-leading metric. And there were near false -- 0 false positives, which really prove the ability to manage all this regulated data within the environments. And this type of enterprise just validates the credibility for government, defense, education and other regulated industries that we start to look to branch out to. But I thought what was really neat was I sat down with Ryan Tully, our new Chief Product Officer, and we really got into the guts of this, and we really wanted to share with the analysts really how much of the base scan we can really perform. So as I said, we were analyzing over 50,000 accounts, 500 terabytes of data, and we took 215 days to time to completion of scanning all of that, which seems like a lot, but that's a lot of data. We analyze, Spirion did the SDP product, 45 million total e-mails. And within that, we found PHI or Personal Health Information and 36 million. So any one of those e-mails that was leaked or breached would have been a breach announcement back out to the public. So you start to look at the value that we're providing. These numbers are just off the charts. You start to look at data birth, 46 million instances, medical record notices, 136 million, U.S. social security numbers, 130 million identified by Spirion. It's just crazy the amount of data that's out there that people just don't know exists. And so that's what we're really providing to the market. We're identifying it, but then using the NC Protect, TDI or even Kojensi, we'll have the ability to govern and then lock that stuff down so we can't see the light of day. So it's really fun stuff to actually look at and see how you can protect that. And that brings us over to the portfolio, which when you start to combine it, we really start to build out a platform. So Dan, why don't you go through the products themselves as they stand today? Chun Leung Lai: Yes. And I guess what we're really trying to say here is to give the shareholders and those interested investors a view of what we have done and how we're building this up. We've spoken about now we've got products that range right across the data security life cycle from that discovery to labeling to enforcement and governing. Now really what this is about is making sure that ABAC is at the center of it, Attribute-Based Access Control dynamic policy, which then gives you that complete Zero Trust architecture at the data layer, which is very fundamental to people being able to secure their information and particularly sensitive information. And that's what differentiates us in the market. The first one, obviously, that discovery and labeling with Spirion products, NC Protect is an enforcement point for SharePoint Online and the M365 environment. TDI, which was the Direktiv acquisition back in March. Now this is really special because it enables us to be able to glue together the ecosystems, your Varoniss, your Splunks, so your big datas, how do we bring all of those components together to get a view across all of the hybrid and disparate environments, which organizations are struggling with today. So what that gives archTIS the ability to do, and of course, is become the fabric, the Zero Trust fabric between all of these elements and changes us from a direct competitor to an enabler and a partner of all of those bigger companies, and that's the strategy that we're taking across to the U.S. It's something that we've got a competitive advantage in. We're leading in and the referenceability from our defense clients gives us a real sweeping uplift in terms of what the conversation that we're having with our commercial clients as well as our national security clients. And all of that learning about how to do this has come from building Kojensi and being in those classified spaces and understanding the use cases and the problem space with our customers and bringing that back into the design of this. But what we have now is a suite of products that we can turn into a global leading platform for Zero Trust data-centric security. That's what's critical about this journey. And so what does that look like? Well, this slide really tells you that story. We have our own world-class products in NC Protect and then we have competitors for policy enforcement, Axiomatics, NextLabs, Seclore, but we also have those hyperscalers. How do we work with those hyperscalers for the customer to integrate to their multi-cloud. We have the SIEMs, the Splunks, the SaaS services, which they've got to send information out from their environment and get back in or from one of the hyperscalers back into that SaaS service. CASBs, how do they protect that? How do we use the best of breed there, not compete with them, but leverage them. And collaboration tools, including Kojensi, identity sources that need to be trusted, okay? And DLPs and discovery tools such as Spirion and Microsoft Purview. This is the layer which also integrates to the on-premise data that is becoming critical, and that's the excitement. And you need these type of capabilities to solve those defense alliance problems we've discussed, Defense Industrial Base problems. Most importantly, in terms of manufacturing, health, this is now the digital ecosystem and the problem that they're trying to solve. And we believe we can be the world leader and dominate that space, and that's what we're trying to do, build a company up of substance from $4.2 million to $20 million ARR to having a presence in the right marketplace to exploit and expand and to base that off the opportunities, do it when the opportunities arise, such as the U.S. DoD to exploit that. And that becomes this. And Kurt, talk to about the go-to-market strategy we get this year. Kurt Mueffelmann: Yes, it's kind of funny because those who have followed us over the last 4 years, you'll recognize this slide. I think in one of my first quarterly presentations, I presented a version of this slide. We've always seen the value in serving multi-markets, but really needed the right timing, scale, geographic focus and capital to effectively execute on it. And I think with the addition of Spirion and major U.S. Department of Defense engagements, we're now positioned to expand vertically across defense and other highly regulated industries. Our focus remains on organizations managing sensitive and classified data. The Spirion acquisition really strengthens our U.S. footprint, broadens the portfolio and opens up new market segments, as you can see today. When we start to expand beyond government and defense into DIB, that leads into further manufacturing that's out there and then some of the sensitive regulated information you saw one of the educational institutions that I used as an example, financial services, the number of banks that Spirion has is very strong looking for banking information, pharmaceutical and life sciences. Now they start to really understand how we expand that. And so combined, the leadership in ABAC and data-centric security, we're really well positioned to capture these opportunities. With the additional M&A under evaluation, further accelerating growth, you can really see where we're taking the business as we drive it forward. Combine this with the product slide, combine this with the market -- go-to-market slides that we put up about identify, discover, classify, govern and enforce, you can start to see the business model coming together. Now if the U.S. government opens up, we can put a nice deal behind that and push everything else forward and make everyone else happy going forward. So we really see and understand the need to focus on defense and government where we were. But as we drive into new market opportunities with Spirion, we really can see how we can broaden that opportunity going forward. Chun Leung Lai: And how we have to grow. So that's really important, too. We're not denying we have to grow and we have to grow strongly, and that brings us to the strategy. But most importantly, about the strategy, this strategy shifts the conversation completely about archTIS from a best-of-breed player to a strategic layer in a category-defining way and to be that leader in that space. It signals partnership, not replacement. We're not threatening the existing ecosystem and the existing companies out there that have messaging that's similar to us. We're enhancing them and we're enabling them. It clarifies our total addressable market and gives our sales teams a spearhead in which to go to with a message which is compelling and credible to our customers. That's what this is about. And so finally, then on the growth strategy, what does that mean? We're going to -- how do we tactically do that? That's all fantastic. But how do we tactically do that? It starts with winning defense. The U.S. DoD, we can't do anything about that until they open up for business again, and I apologize for that, but we have been trumped and we will wait for Donald Trump to un-trump us in that opening up the government for us to liaise with. But the signs are very positive there, and we are very confident, and that's the indicator from that services deal. You don't invest in a product unless you intend to go and deploy it into that environment. That's the message. The U.S. government has access to all of their products in the world, they're still investing in us. That's the point. Take that, run with it. Second thing there is cross-sell to the Spirion audience who are already investing in this and grow them in a way that is expanding their capability -- DCS capability as we take these products and merge them into a platform to take that longer-term advantage of being that leader in that defined space. And that creates network growth, network growth. And that's really what we want to do, scale and grow. Of course, we continue to have to invest in products. One thing about Spirion and the Direktiv acquisitions, we now have a global presence for not only product development but product support which again, that gives us a base to leverage into the U.K. market once we've established this U.S. market presence and honed our skills and execution. And of course, that's targeting global markets and we also need to look at how do we accelerate that through inorganic growth similar to the pattern that we've just demonstrated with Spirion. We're not afraid of taking this opportunity on. It is a difficult challenge. It is going to be hard. It's going to have its ups and downs. And of course, what we're hoping by this presentation is you get very clear on the strategy that we're executing and come along for the ride because we think it's going to be worthwhile. Kurt, over to you. Kurt Mueffelmann: Yes. Great, Daniel. I appreciate that. So I guess a couple of questions popped up right away. When you showed the TDI slide, a question popped up about, can you talk a little bit about opportunities outside of the U.S. particularly around Japan and the U.K. So I think if you talk a little bit about our POCs with Japan and what we're doing in the U.K., that would be beneficial. Chun Leung Lai: Absolutely. So let me start with Japan. Japan is really -- it has been really exciting for us. I know we don't give out a lot of information on where we are with that. But essentially, this is it. NEC sought us out. They knew that they were part of -- did a worldwide vetting for what data-centric security products they were going to take into the Japanese Ministry of Defense to enable them to join that alliance framework, which we saw in one of those earlier slides and that is part of the QUAD. They also then doubled down when Mitsubishi Heavy Industries won that shipbuilding award here in Australia. Why? Because NEC are already engaged as the IT provider for those ships. Yes. Okay. So they've now got a license, which they engage with us to build those data-centric security products to demonstrate in the -- for the next 5-year budgetary life cycle for the Ministry of Defense. They're going to take that in and they're going to demonstrate that they're hoping to win business in that form. We will know the outcome of that probably in the last quarter of this year. But that's what we're targeting and we have been heavily investing in that. And now Fujitsu have come knocking on the door for -- we're seeing some fruition in terms of that environment as well. So that's fantastic. We obviously have had a global relationship with Fujitsu for some time. Also, Fujitsu in the U.K., a bit of a different story. We were introduced to the U.K. by the Australian Department of Defense. Most recently, a Talisman Sabre exercise demonstrated collaboration proof of concept. They want to now take that proof of concept and rebuild their networks in a data-centric security way. That will come out to tender probably sometime in the first quarter -- third quarter -- our third quarter financial year, so anywhere between January and March. And we are obviously liaising with our partners over there to position ourselves into that space. But we are also being referenced again, as I said, by the Australian DoD. So you can start to see these connections and particularly with AUKUS and supply chain management. So that's why we're confident about this space. And that's why it's really important to get that referenceability from the U.S. and Australia and you come the default. So that's what the activities that we're doing going on in that space. But they're also bringing us other clients. Our SI partners are saying, well you know, Computershare could use this. O2 could use this. And we are seeing that network growth into those commercial spaces. Kurt Mueffelmann: Great. I'll answer the next one because it's actually a pretty good question pretty much for an Australian audience. But given the U.S. DoD is now the U.S. Department of War, is there any reason why archTIS continues to refer to the DOW as DoD, knowing the sensitivity of those leaders? Well, I was up in Washington, as I said, 2 weeks ago, and I was sitting with a couple of military uniform people, and I asked that exact question because when dealing with the military, you want to make sure that you're respectful of what titles are and what the appropriate department names are. So it came down to this that the politicians and nonmilitary are generally considering themselves Department of War, but the actual military and uniform personnel are considered as part of the Department of Defense. Someone got up in front of people and started talking about the Department of War, and you could see the military uniform kind of snicker at it. So it's an interesting breakdown. The official title according to the U.S. government is still Department of Defense. And so that's where procurement contracts and everything come in. Right now, Department of War is kind of a secondary title. So we'll continue to use what procurement uses as Department of Defense until the U.S. government changes that or stipulates to be used in a different manner. We want to make sure we keep the people that are buying the products happy at all times. Chun Leung Lai: Yes. I guess, Kurt, as a politician, they're not the ones that actually go to war are they. So move on. Kurt Mueffelmann: Yes. Dan, I guess one of the questions, a good question. I'm not sure how far we can get into the specific answer. But when you made the strategic decision to acquire the business, Spirion, what metrics do you look at? I don't think we can get into specific metrics of where is revenue going to go next year or where is operating expenses. But talk about the philosophy around the metrics that we're trying to achieve at a high level. Chun Leung Lai: Okay. We've got this fantastic opportunity with the U.S. DoD, transformational opportunity. How do we grow in the U.S., which is the world's largest market. We know we want to pivot to the world's largest market where the biggest opportunities are for growth. That's good for our shareholders. We can grow organically, start going out and trying to find the right people and employ them and maybe they won't work out in 6 months, you try looking for a new or we can go and acquire a company that already understands what we do and complements us from technology, introduces new verticals and skill sets for commercial selling and customer base and has ARR, which we can also build significance because you need to be of a certain size to take on the U.S. marketplace. So behind all of that then becomes the metrics. What do they do? How well as an organization are they running? What's the renewal rate? We go through all of those sorts of things in the due diligence. But really, it becomes what is the strategic value and how fast can I get to where we want to go with buying this company as opposed to building a company. And I think that was the general philosophy behind it. And this one just, as I said, tick all the boxes. It's a data-centric security company. It augments. It has clients investing in data center, here we can leverage and cross-sell and we add value to it from our product suite and they add value to us. And they're in the right marketplace, which we want to address and growing. So that's the philosophy behind it. Kurt Mueffelmann: That's great. Thank you. Let's see. How about this one? We can kind of tag team this. Where does AI enter into the archTIS story? Chun Leung Lai: Well, this is something Kurt and I have been obviously heavily focused on. Look, one of the stories of -- one of the interesting things about what we did with the acquisition of Direktiv to build TDI is to be able to secure generative and agentic AI. It already is in some companies, but it provides a new way of looking at that and provides new controls around how AI is managed. So for as an example, and we are also looking at how we extend NC Protect to policies to generative and agentic AI. So yes, we are looking at that critically. It is a massive question. We believe that we've got a real answer to that problem and it's about scaling up into that space. And if you become the central policy control plane for hybrid environments, including agentic AI services by restricting what tools and products and data it can call to respond to an answer based upon the individual asking the question, that's a really powerful story. Kurt Mueffelmann: Yes, it's interesting. You see when I was up in Boston meeting with Ryan, our Chief Product Officer, you could see the expression just light up when you start to talk about AI, right? It is what NC Protect can do to things like Copilot. You can look at what it can do that TDI can do with some of the existing customers we have today and look at the scope that it has. And as Dan said, it's really about the policies and controlling it. So I think we'll have something pretty exciting in the very near future around that, which really makes, I think, an even fuller suite of offerings that we have to market. Let's see. Where else do we go? Why do we see a large increase in admin and corporate expenses? Well, let me tell you, I live hour south of Tampa, where Spirion is located. And I can't tell you the number of times I saw accountants, attorneys and third parties that are helping us through due diligence for one-off acquisition and integrations of Spirion. It's not cheap to acquire companies. You want to make sure you do it correctly, make sure you have the right people and more importantly, make sure you have correct information and not just make dismissive assumptions into M&A or listen to the bankers that are trying to sell you the deal. They can be very persuasive, but you really have to dig behind the covers, go deep, deep into the onion and peel it back. And so yes, there's going to be one-off expenses. We'll see that coming into this quarter as well. But really, what we're trying to do is what we've shown and I think demonstrated to the market previously is be very cost conscious from a capital expenditure standpoint to make sure that operating costs are in line with revenue. We want to grow top line revenue, but it has to grow at a pace that keeps up with things such as cash and the way that we're spending cash on a regular basis. We can't go out like some of these organizations that have raised hundreds of millions of dollars, but they're spending hundreds of million dollars a year on maybe $50 million in revenue. That just doesn't work for a company like archTIS that's in the public markets, that's a microcap. We need to be very capital efficient. So yes, you'll see increases in operating expenses. And our CFO, Andrew Burns, is over here working with Kevin and myself right now, working on what those synergies are, and we're really finding some really strong synergies, whether it's consolidating CRM systems that cost hundreds of thousands of dollars a year or looking at ways that we can leverage existing systems and really get rid of some existing contracts that may be in place for third-party internal systems, accounting systems, CRM, what have you, consolidating other systems. We're looking after under every nook and creating every rock to find every single dollar we can to either bring it back as capital savings or to push it into growing the market even stronger. Chun Leung Lai: Yes. And thank God, those legal fees have stopped. If I have to have a second life, it might be as a commercial lawyer in the U.S., but you have to have [ a degree ]. Kurt Mueffelmann: We really did do a good job on that career decision, did we. All right. I think one more question, Dan. It's a valid question. For a number of years, the Australian defense led every year at year-end and we saw deals. What happened to the Australian defense market? Chun Leung Lai: Look, it's a great question, and I'm happy to answer it. I think there was 2 things that really have impacted the Australian market. I think the -- let me explain. The first one was, obviously, we had the defense white paper a few years ago, which stopped some spending and then they were talking about projecting force and restructuring and all of that, that affected spending. And then they started to open up the coffers again and we've got some good work back in. We extended licensing in there from NC Protect as well as Kojensi in those classified environments. And then what happened was AUKUS came along. That's great. It's another opportunity. But all the generic or surplus spending or dollars got sucked straight into AUKUS. Establishing an agency that needs to deal with nuclear submarines and getting everybody available and that caused disruption. So obviously, we naturally targeted that space. And we have had some success in that space, which -- but obviously, it's classified and we can't talk about it. But however, what happened next? Donald Trump turned up and said, let's do a review of AUKUS. What do you think happens then? No one spends any money until they find out what the result of the AUKUS agreement is going to be. So that is the natural thing that happens. When these organizations get -- don't have certainty of the way forward, they stop spending, right? And now that AUKUS has now been given the green light again, we have some certainty about what's going to happen. And I expect some of those opportunities are going to open up again. Now -- but that's what's been affecting that marketplace. And in some ways, that's disappointing, but in some ways, that's good. Why? Because it just means that we're more committed to moving into those high-growth markets, which Australia will never be, and there's a risk of dependency in a concentrated form here in Australia. So let's go to those markets where they're bigger, they're better, the revenue can be stronger and there's more opportunity. But let's do it in a way where we can be of a size which can compete, have a strategy that we can exploit, defend and have a message which we can cut through with the white noise. And that's what I think we have now and that's what's exciting about the future. Kurt Mueffelmann: So Dan, I'm going to roll up a couple of questions. So this will be our last question. I'm going to roll up a couple of them into one and then I'll turn it back to you for some closing comments. So there's been a couple of questions around employees, how do you align the acquisition with shareholder interest and what have you. So having done 20-plus buy-sell M&A deals in my career, the employees that you bring on are the lifeblood of the business. We can talk about the technology. We can talk about the customers. But if the employees that we bring across aren't there or they're not motivated or they're not culturally fitting into where we are, the business or the acquisition will fail. So what we've done is we put together a really strong program. I think in the announcement, we talked about an employee incentive program. That actually does a couple of things. One, it allows employees to feel, hey, I did a great job at Spirion. We're really happy to be with archTIS. So over a period of time, people will get retention bonuses. It shows the appreciation that they're valued. We show that they're good to be here and it helps us keep continuity across the entire employee base. We also put equity options in place as well. And it's important to align particularly people that haven't had equity before, align those interests of shareholders with the employees. We make sure that almost every employee has some type of equity in the business itself. We sit down and next week, we'll go through what this 4C was to our entire employee base. We get questions just as difficult questions from employees about where is the share price going? How come it's doing this? How come it's doing that? Why did it go down this much one day, but up the next day? What does volume mean or where is my strike price? So we need to really make sure the employees are aligned to where we need to take the business from a shareholder standpoint to keep everybody on the same page. If you look at it, management right now, we believe we own 15% of the outstanding shares within the business, that's management directors and founders. So that's tight alignment between the shareholders and where we want to go. We feel the pain just as much as everybody else that every tick the share price goes down and we feel related every tick the share price goes up. So we want to see it go up as well. But we want to make sure that we bring the employees on a good ride to make sure that they're compensated properly at a fair market value, give them the ability to bring across their domain expertise and knowledge into the company and then provide that equity incentive where if they win, everybody wins from the shareholders, the employees, the management and the Board. So that's kind of our underlying philosophy around it. Dan, anything you want to add to that? Chun Leung Lai: Yes. Look, in the end, if we can execute and build a sustainable, high-growth company, with a competitive advantage and a technology platform that can execute and solve critical high-value problems, the rest will take care of itself. That's what we have to do. We're on the -- and that's where we start with where we are today. And now we just tactically exploit, I have to execute what we need to do and it starts with this winning this U.S. DoD deal and getting Spirion integrated and moving forward and cross-selling. Kurt Mueffelmann: So Dan, I'm going to ask you to roll your closing comments into one last question. I think it's fair to say that we've heard in other quarters that the future is bright. Why -- what makes this quarter different specifically? So if you can roll that answer into your closing comments --. Chun Leung Lai: One word, progress. We are progressing. The last quarter, $4.2 million ARR, this quarter, $20 million ARR. Yes, a lot of that's been through an acquisition. Where is that acquisition? I think we've explained that and why it's important and where we see the future. If as a shareholder, you can't see that growth, then either we are explaining it wrong or we are doing something wrong, but -- or you're just not getting it. The issue here is, I think it's progress. We have made an enormous amount of progress to where we want to be in the world's largest market to execute what we think we've got a competitive advantage and we can generate strong network growth revenues. That's -- we are a microcap taking on the biggest organizations in the world with the largest companies in the world. That's not an easy thing to do. So that's my answer. And I hope you can see that there is real genuine progress that we've outlined the strategy, and we're executing against it. Kurt Mueffelmann: Great. Well, thank you, everybody for your comments. And I'll turn it back over to Chloe. Operator: Mike, that's all we have time for today. Daniel and Kurt, thank you for taking the time to walk us through the quarter's results and to everyone who joined us today. If we didn't get to your question today or if you'd like to learn more, please feel free to reach out via the contact details at the bottom of our ASX releases, and we look forward to hosting you again soon. Thank you, gentlemen. Kurt Mueffelmann: Thank you. Chun Leung Lai: Thank you.
Operator: Hello, and welcome to Columbia Banking Systems Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Jacque Bohlen, Investor Relations Director, to begin the call. You may begin. Jacquelynne Bohlen: Thank you, Didi. Good afternoon, everyone. Thank you for joining us as we review our third quarter results. The earnings release and corresponding presentation are available on our website at columbiabankingsystem.com. During today's call, we will make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. First, for a list of factors that may cause actual results to differ materially from expectations, please refer to the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures, and I encourage you to review the non-GAAP reconciliations provided in our earnings materials. I will now hand the call over to Columbia's President and CEO, Clint Stein. Clint Stein: Thank you, Jacque. Good afternoon, everyone. Our eventful third quarter is characterized by meaningful progress and growing momentum. First, we were excited to successfully close our strategic acquisition of Pacific Premier on August 31. This milestone completes our 8-state Western footprint and bolsters our position as the preeminent regional bank in the Northwest with approximately $68 billion in assets. We hold nearly 10% deposit market share in the Northwest and an improved competitive position in other key Western markets. Pac Premier significantly enhances our scale and positions us to capitalize on our low-cost core deposit base across an expanded and highly attractive footprint, most notably in Southern California, one of the nation's most dynamic and densely populated markets. Over the last few years, we have created a cohesive regional powerhouse. Our Western franchise now spans the entire West Coast from Washington throughout California. We are uniquely positioned in our region for organic growth opportunities in dynamic markets such as Arizona, Colorado, Nevada and Utah. We are integrating new capabilities and deepening relationships with both new and existing customers while maintaining our commitment to consistent top quartile performance and sustainable relationship-driven growth focused on generating positive economic impact. We remain focused on optimization, generating new business, supporting the growing needs of existing customers and delivering superior results for all of our shareholders, even as we look to complete the integration of Pac Premier. We have strengthened our company by gaining scale, broadening our product offerings and adding to our best-in-class core deposit franchise, driven by our Business Bank of Choice strategy, all while delivering robust profitability and maintaining a conservative balance sheet. The scale and breadth of the franchise we've built allows us to concentrate our focus on organic growth in our footprint, and our robust profitability will support our plans to deliver meaningful capital returns to all our shareholders. We believe this strategy will drive long-term shareholder value. Within our first week as a combined organization, nearly every former Pac Premier branch made a referral to a product or service that was not offered before the acquisition. Our new team members hit the ground spinning, and we are thrilled by their continued enthusiasm. We see tremendous opportunities with our newly enhanced presence in Southern California and throughout our broader footprint. We have quickly begun to benefit from the capabilities Pac Premier brings to our organization like custodial trust services, expertise in HOA banking and proprietary technology that enhances the banker and customer experience. Turning to the third quarter. Columbia's operating results were once again consistent and repeatable, underscoring our focus on operational enhancement and top quartile and, in some cases, top decile performance. Third quarter operating PPNR is up 12% from the second quarter and 22% from the year ago quarter. The improvement reflects our focus on profitability and balance sheet optimization as well as 1 month with Pac Premier. Our teams continue to cultivate new and existing relationships, driving strong customer deposit growth and meaningfully higher loan origination volume during the third quarter, which Tory will detail in a few minutes. The success of our bankers and the exceptional teams that support them enables us to organically remix both the left and right sides of our balance sheet, enhancing the quality of our earnings and driving strong internal capital generation. We continue to allow transactional portfolios to run down, and we transferred a small portfolio of residential mortgages to held for sale. These activities offset our relationship-driven growth in support of our portfolio remix efforts. We intend to organically manage down roughly $8 billion of inherited transactional loans. As I have stated many times before, absent a significant decline in rates, we will hold the majority of these loans until they mature or pay off. However, we will strategically prune the portfolio with sale opportunities where payback periods are short and align with value preservation and creation. As I've said before, we prioritize profitability over growth for the sake of growth. In keeping with that approach, we utilized excess cash from customer deposit growth and balance sheet optimization actions to repay higher cost wholesale funding sources during the quarter. The result was a meaningful increase in our net interest margin. Our disciplined approach to lending supports our strong credit profile as well as our profitability. Our adherence to prudent credit underwriting and proactive portfolio monitoring is reflected in our stable third quarter portfolio metrics and a lower level of net charge-offs. It remains a busy [Audio Gap ] Columbia, and I want to thank all of our associates for their hard work and contribution to another period of solid performance with our third quarter results. With the addition of Pac Premier, we are sharpening our focus on organic growth initiatives, amplified by the disciplined cost-conscious culture that defines our operating model. This is the franchise we set out to build, one that is scalable, resilient and positioned for continued long-term value creation that rewards shareholders with the return of capital. Now that we've outlined our third quarter results, I want to take a moment to acknowledge our CFO, Ron Farnsworth. This will be Ron's last earnings call with Columbia as he is stepping down following a very successful tenure as our CFO, marked by many notable accomplishments. Ron has been a valuable member of our team and a partner to me over the last several years as we integrated our teams, optimized performance to drive profitability, completed our Western franchise with the acquisition of Pac Premier and meaningfully expanded our opportunities to drive long-term shareholder value. The Board, management team and I want to thank Ron for his many contributions to Columbia and wish him the best in his future endeavors. Ivan Seda, who has served as our Deputy CFO since last August, has been appointed Columbia's next CFO. Ivan is a proven financial leader with extensive financial services experience, having previously served as CFO of Union Bank and other executive roles. Ivan hit the ground running over the last several months, and we know he will be a great asset to Columbia as CFO. He'll be spending a lot of time with him in the quarters ahead. I'll now turn the call over to Ron. Ron Farnsworth: All right. Thank you, Clint. We reported second quarter EPS of $0.40 and operating EPS of $0.85. Operating excludes merger and restructuring expense, along with other fair value and hedging items detailed in our non-GAAP disclosures, which I encourage you to review. Our operating return on average tangible equity was 18.2%, while operating PPNR increased 12% from the second quarter to $270 million. The main drivers of operating PPNR growth this quarter were the contribution of 1 month of Pacific Premier and favorable balance sheet remix trends, given customer deposit growth and transactional loan runoff. Operating earnings further benefited from no provision for credit losses due to the impact of improving economic scenarios on our CECL models and a decline in loan balances outside of the acquisition. Our GAAP provision expense of $70 million was due to purchase accounting stemming from the acquisition. On the balance sheet, we strategically sold acquired investment securities that did not fit within our existing portfolio after deal closing and purchased new securities to maintain our relatively neutral position to interest rate changes as detailed on Slide 21. Cash from net security sales, Pacific Premier and transactional loan portfolio runoff was used to reduce our reliance on wholesale funding sources as we continue to optimize our balance sheet. Strong customer deposit growth also contributed to a collective $1.9 billion reduction in broker deposits and term debt during the third quarter, driving net interest margin expansion. Our tangible book value per share increased slightly in the quarter to $18.57 as internal capital generation and a favorable change in AOCI offset deal-related dilution. Notably, tangible book value has increased by 4% since Q1 when we announced the transaction. Our acquisition of Pacific Premier resulted in tangible book dilution of 1.7%, well below the 7.6% we anticipated at deal announcement due primarily to lower discount fair value marks as market yields are slightly lower than when we announced the deal. Our regulatory capital ratios expanded meaningfully with our Tier 1 common now at 11.6% and total risk-based capital ratio at 13.4%. Our excess capital positioned us to put a share repurchase authorization in place, which Clint will detail in a few minutes. As I mentioned earlier, our NIM expanded during the quarter, increasing 9 basis points to 3.84%. Funding remix I discussed drove the majority of the change with 3 basis points of the quarter's expansion, attributable to purchase accounting on acquired CDs as detailed in our earnings release. The amortization will continue during the fourth quarter, but we do not expect it to extend into 2026. As I noted, our provision for credit loss was $70 million for the quarter, and our overall allowance for credit losses was 1.1% of total loans, down from 1.17% as of prior quarter end due to portfolio composition shifts, model recalibration following the addition of the Pacific Premier portfolio. Inclusive of the credit discount, our allowance was 1.34% of total loans, up 3 basis points from the prior quarter end. Noninterest income was $77 million for the quarter. And on Page 23 of our earnings release, we detailed the nonoperating fair value changes. Excluding those items, our operating noninterest income of $72 million for Q3 was up $6 million, reflecting the addition of Pacific Premier. Also noted on Page 23, total GAAP expense for the quarter was $393 million, while operating expense was $307 million. The increase from Q2 reflects 1 month operating as a combined company and other miscellaneous increases as we reinvest cost savings realized in 2024. We are already realizing savings associated with Pacific Premier with approximately $48 million of the targeted $127 million in expected annualized cost savings achieved as of September 30. Systems conversions are scheduled for Q1, and we expect a clean expense run rate in the third quarter of 2026. And with that, I'll now hand the call over to Tory. Torran Nixon: Thanks, Ron. Our teams had a tremendous quarter of business generation. New loan originations of $1.2 billion is up 36% quarter, while year-to-date volume is up 21% from last year. On an organic basis, Columbia's commercial portfolio, inclusive of owner-occupied real estate increased by 5% on an annualized basis, contributing to our targeted loan portfolio remix as we allow transactional balances to decline. Slide 25 in our earnings presentation provides additional balance and repricing details related to transactions. We expect this portfolio to amortize down until loans reach their repricing date, at which point they will reprice higher or refinance elsewhere, improving our profitability in both scenarios. Turning to customer deposits. Balances increased nearly $800 million organically during the quarter. While balances benefited from the seasonal balance lift, we typically see during the third quarter, approximately 30% of the growth was attributable to new customers. Our bankers continue to target full banking relationships when they bring new customers to Columbia, and our performance reflects their success. We are also seeing the benefit of our de novo branch strategy in our newer markets, which contributed nearly $150 million to the quarter's deposit growth. Core fee income increased from the second quarter's strong base. We continue to target a higher concentration from core fee income to overall revenue, and we are already seeing revenue synergies from Pacific Premier. On an operating basis, noninterest income increased 9% due to 1 month's contribution from Pacific Premier, including a $3 million contribution from Custodial Trust Services. Not only will Pacific Premier's Custodial Trust business complement our existing wealth management platform, but their expertise in HOA banking and escrow and 1031 exchange businesses also offer revenue-generating opportunities. We expect to see deeper customer relationships with legacy Pacific Premier customers, and we are already introducing Pacific Premier branches to the CB Way, which offers needs-based sales solutions to our customers. This has contributed to strong referral activity from legacy Pac Premier branches. Since deal closing, referrals to Columbia business lines, including branches from our new Pac Premier associates has driven over 1,200 opportunities. Our Business Bank of Choice strategy, which is powered by our talented team of associates is a key driver of our ongoing balance sheet optimization efforts, helping to further strengthen our profitability. Our pipelines are healthy, and we remain outwardly focused on generating business in a disciplined manner. I'll now hand the call back over to Clint. Clint Stein: Thanks, Tory. Our third quarter results wrap up 7 consecutive stable quarters of operational performance and capital accumulation. Our ability to generate capital beyond what is required for prudent growth and our regular dividend is significantly enhanced by our acquisition of Pac Premier. And our balance sheet management activity during the quarter contributed to our expanding regulatory capital ratios. Ron mentioned the dilution to tangible book value from the Pac Premier acquisition was 1.7%. Our anticipated 3-year earnback at announcement is now expected to be less than 1 year. Our CET1 and total capital ratios were 11.6% and 13.4% at quarter end, well above our long-term targets of 9% and 12%, respectively, and up notably from 10.8% and 13% as of June 30, despite closing a strategic value-enhancing acquisition. Let me repeat that. Our CET1 and total capital ratios were 11.6% and 13.4% at quarter end, well above our long-term targets of 9% and 12%, respectively. Further, our TCE ratio was 8.5% as of September 30, well above the 8% target exclusive of AOCI marks we have consistently discussed since Q1 of 2024 as an indicator that we were able to evaluate share repurchases. Given our excess capital and strong forward outlook for continued net generation, especially in light of our progress integrating Pac Premier, I'm pleased to announce our Board of Directors authorized a $700 million share repurchase program, reflecting our confidence in the strength of Columbia's balance sheet. To put that in context, we have roughly 110 basis points or approximately $550 million of excess capital above our long-term target today. In addition, we expect to produce exceptional profitability, which will result in meaningful capital generation over the coming quarters. We do not currently plan or have a need to do any securities restructurings. However, we are continuing to drive organic growth and evaluate balance sheet optimization opportunities in line with our commitment to enhancing long-term shareholder value. This concludes our prepared comments. Chris, Tory, Ron, Ivan and Frank are with me, and we're happy to take your questions. Didi, please open the call for Q&A. Operator: [Operator Instructions] And our first question comes from Chris McGratty of KBW. Christopher McGratty: Clint, I mean, you're making a pretty big statement with the buyback. I think I'm interested in kind of the balancing act between capitalizing on a cheap valuation and the balance sheet optimization strategies that you talked about. Maybe could you unpack the pace at which you'd expect the buyback to come out? Clint Stein: Chris, so the program is a 12-month program. It is a bit of a balancing act between where we're at. And there will be some things from time to time, we'll want to maintain flexibility for any uncertainty in the macro environment or volatility. A couple of weeks ago is a great example. A couple of banks reported a credit issue, and our stock went down for no apparent reason. So things like that, we'll be opportunistic and strategically take down the -- some shares in terms of a repurchase. But I'll step back and let Ivan kind of give you a little more details that might be able to help you kind of figure out how to model that. Ivan Seda: Yes. Chris, thanks for the question. Like Clint mentioned, right, we're sitting today about $550 million above the target on the back of the lower tangible book dilution and the strong financial performance in the last few quarters. As we look forward to Q4 2026, as Clint mentioned, strong expectation that we'll continue to show strong profitability as we go throughout the course of the next year. We've got a $700 million authorization, which spans the rest of this year through late 2026. Given where we are today, 1 month through the quarter and thinking about some of the potential restriction dates coming up, I would anticipate that the pace of purchases -- the rest of this year will come in modestly lower than the average quarter before we look to ramp it back up into 2026, obviously, subject to market conditions and how things progress throughout the fourth quarter here. Christopher McGratty: If I could just -- my follow-up would be, it would feel based on the excess capital of $500 million plus today and the ROE generation over the next 12 months, I mean you could presumably do the whole $700 million by the time it expires. That's -- I guess, part of the follow-up. And part 2, how do we think about just net balance sheet growth because that's obviously a piece of that too from here. Ivan Seda: Yes. On the first part, I think the answer is yes. It's presumable that we could go through the entire authorization over the course of the next 12 months when you like you said, start with the $550 million surplus and then think about the profitability profile that we anticipate moving forward with. And I think we'll talk probably a little bit more on that second piece of it in terms of the pro forma outlook shortly. But the answer, I think, to the first one is yes. And I'll hand it over to Clint to talk a bit about kind of the balance sheet outlook from a loan perspective. Clint Stein: Yes. We mentioned in our prepared remarks and actually, I think, included a new slide in the earnings presentation this time around to kind of call out the remixing that we're doing. And we had made some decent progress on that. And we have a couple of billion more of those same type of transactional multifamily loans that we want to remix off the balance sheet that came over from Pac Premier. The good news is those are at current rates, current market rates and also have very short remaining lives. But as you see, that number is now roughly $8 billion that we'll be remixing over the next several years. So I think that, that's going to mute bottom line loan growth. But as we've talked in the past, as we remix those into relationship-based loans that come with deposits, come with fee income opportunities that it actually should -- and generally, loans that are at a higher rate, it should result in revenue growth despite maybe bottom line net assets being flat. Operator: Our next question comes from David Feaster of Raymond James. David Feaster: Maybe first off, I was hoping we could maybe just address the elephant in the room to some degree with just the recent activist investor piece that we had, I'm sure you saw the deck, but I was hoping we could just maybe get your thoughts on that, some reactions to it to the extent that you can even comment on it. Clint Stein: Yes. Yes. Well, I'll start by saying we're obviously aware of the presentation. And as you know, we regularly speak with shareholders, gather their perspectives and share our perspectives as well. With that said, we don't talk about the specific conversations that we have with individual shareholders. But because those are typically private conversations. And so in this situation, David, I really appreciate you asking this question. I want to thank you for that. I wanted somebody to ask this. I was hoping somebody would ask this because anybody who has spoken with us over the past year should know what we have been focused on. And just to remove any doubt and for clarity, our priorities in no particular order are consistent, repeatable top-tier quarterly performance. You've heard us say it, we call it wash, rinse, and repeat, and we just completed our seventh consecutive quarter of doing this. Also, we've been focused on and preparing for additional capital returns. We have stated over the last several years, this is a capital return story. And that's in addition to covering our peer-leading dividend. So meaningful buybacks are certainly a part of that, and we're very excited today that our Board approved the buyback yesterday. And then kind of the last item, I'd say Pac Premier, and I've described it as the missing piece of our franchise. You look at what it's done for us in Southern California and other markets. It's increased our density in our de novo market of Arizona. It's added to what we have in the Northwest, that's given us another physical location in Nevada and then the different lines of businesses, it truly was the missing piece to our franchise. And that's why I've been saying we are laser-focused on the integration. And as a result, I have 0 interest in M&A for the foreseeable future. And some of you, yourself included, David, I believe, have previously documented this in your research reports. I mean even, my wife, who I rarely see, because I'm working on delivering top-tier results and activities to enhance long-term shareholder value, knows the priorities and supports my pursuit of them. So we've been deliberately executing a strategy to build a leading, highly profitable Western U.S. franchise, and we're pleased to have realized that goal with the closing of Pac Premier. So our work over the past 3 years is what has allowed us to announce the share repurchase, deliver the results we're delivering today, and place us as one of the top franchises in the Western U.S. So as I look ahead, I'm confident we have the right team. We definitely have the right strategy in place to continue to deliver a high teens return on tangible equity and drive value for all our shareholders. So again, David, thank you for the question. David Feaster: That's great. That's extremely helpful color. Maybe I wanted to touch on the deposit side. I believe $800 million in organic customer deposit growth in the quarter, I mean, really strong growth. I was hoping you could maybe give us some insights into the drivers behind that. Obviously, there's some seasonality, but how much of that is client acquisition, just given your blocking and tackling go-to-market strategy as well as the recent campaigns versus deepening relationships with existing customers versus kind of that seasonality? Torran Nixon: David, this is Tory. I'll start and then let Chris kind of chime in a bit. It was a great quarter, roughly $800 million in organic growth. It came from all different parts of the bank, a big chunk from our commercial customers and commercial bankers, a big chunk from retail just kind of throughout the company. And we had a significant amount that was new customers to the bank. I think we said roughly 30% was new to the bank. We've had growth in our de novo offices. It's kind of -- it was spread throughout the company and very, very proud of the team and the work that they're doing in interacting with our existing customer base, taking market share, bringing new names into the company, just all the things we've been talking about for a long time is really -- continues to pick up momentum and show some great results. And Chris, you want to talk a little bit about the small [ business deposits ]? Christopher Merrywell: Thanks, and thanks, David. David, Tory mentioned it in his prepared remarks, about 30% of the growth came from new customers. We've talked about deposit campaigns in retail throughout the last year and into this year and the latest campaigns brought in to date, just a little under $180 million in new customer deposits, new customer names. And then as Tory mentioned, the de novo markets during the quarter accounted for about $150 million. So the momentum is tremendous out there, and the bankers continue to build upon that. It's very exciting. David Feaster: That's great. And then, Clint, I wanted to follow up on your response to one of Chris' last questions. There's obviously a lot of balance sheet optimization ongoing, remixing away from transactional assets to core assets, not going to have a ton of balance sheet growth. But one of the biggest pushbacks I hear these days is basically how can you still drive earnings growth exclusive of balance sheet growth? You touched on a couple of things. But could you maybe just elaborate that and help us think through and understand where you're able to drive that earnings growth from even with the stable balance sheet? Clint Stein: Yes. And that's part of why, David, again, we listen to our shareholders and our research analysts and take their feedback and try to improve the quality of our disclosure. And that's why we added that new slide in the deck that shows those transactional portfolios and what the weighted average coupon or yield is on those. And I believe that it's about 4.1%. And so if you just think of it in terms of -- and there's obviously loans that have a higher rate and loans that are lower rate, but the portfolio in general is 4.1%. It's been funded largely by the level of wholesale funding that we have on our balance sheet. And obviously, that's been an earnings headwind since we closed the Umpqua acquisition. But as rates have come down now, I think, 150 basis points over the past 13 months, that earnings headwind has gotten smaller and smaller. And with yesterday's move going forward, we would expect it to no longer be an earnings headwind and just kind of be net neutral. But there's no other relationship. There's no deposits effectively. A few of them have some small deposit accounts. There's not treasury management. There's not foreign exchange fees. There's no purchase card activity, any of the other ancillary products and services, they're not using our wealth management platform where we can drive fee income. So if we remix, just figure out on a loan, one that's got a coupon of 410 into a good C&I loan today that is, call it, 8% comes with fee income opportunities is to a certain degree, self-funding and some of that operating deposits that are noninterest-bearing. And then they're going to use all those services that the other person -- the other scenario isn't that's where you can get the revenue generation. And that's the stuff that we're winning. That's the business that we're out there. Our bankers are winning. And I don't want to preempt Tory because he's got -- he's really excited about what they're doing. But that's that remix. And that's why we can -- we're confident we can continue to grow revenue without necessarily having earning assets grow because it's remixing into a better, more complete, comprehensive product for the bank and for our customers. Operator: Our next question comes from Jeff Rulis of D.A. Davidson. Jeff Rulis: Great Slide 25, I appreciate it, whoever pulled that together, kudos to them. I guess, really good outlook extending out 3 years, if we could narrow that into maybe '26, right? I guess it's kind of mid-$3 billion potentially transactionally repricing or running off. Could you stack that against expectations on loan growth, organic production and hazard a guess for loan portfolio size end of the year? Ivan Seda: Yes. Jeff, it's Ivan here, and thanks for the question. I did want an opportunity to provide some comments on our near-term balance sheet outlook given what's obviously a bit of a noisy quarter with the PPBI close mid-quarter. And so I'm going to put it in the context of kind of near-term NII and NIM perspectives, and then we can kind of maybe talk about how that translates as we go throughout the course of '26. I think we heard Ron mentioned earlier in his comments that we saw net interest margin expand this quarter to a full quarter outlook of 3.84%. For those of you doing the math on the release, we have just under $62 billion in total earning assets as of quarter end. And as we look forward into Q4 and a little bit further into Q1, if you put those 2 numbers together, that provides what we think is a pretty good proxy for what we would project, I'm just saying 2 quarters out at this point with a few caveats. Caveat 1 being, again, as Ron mentioned, we do expect a near-term pop in Q4 net interest income of around $12 million or 8 basis points of NIM, associated with the accretion of the CD premium associated with the close. So that's one transactional item that will pop up in Q4. Caveat 2, we may see some earning asset declines or modest declines in the short term due to the balance sheet optimization actions we've discussed. But with those actions that we've talked about and what you just heard from Clint, we should still expect to see modest increases in net interest margin to offset that and support what we view as stable to growing NII over the next 2 quarters from that jump-off point that I just talked about. And then the third caveat I would get is, historically, our weakest quarter is Q1 just from a seasonality and a flows perspective on the deposit portfolio. So you could see a little bit of weakness in Q1 relative to where we land in Q4, especially with that $12 million NII pop. So just a bit of color commentary less around kind of the long-term loan growth outlook, but in terms of how we might think about earning assets and the NII and NIM projections. And I'm going to hand it over to Tory to talk more about kind of how we think about the net loan growth outlook. Torran Nixon: Jeff, this is Tory. So if we kind of take a look at the quarter itself, we had a couple of hundred million in C&I loan growth for the quarter. We had some -- which is about 5% annualized -- we got a little bit of slippage on some -- some loans from late Q3 into early Q4. We're off to, I think, a really good start in Q4. Pipelines grew quite significantly. C&I pipeline grew about $700 million over the course of the quarter in addition to the $200 million in growth. Production was strong at about $1.2 billion this quarter. And the momentum and growth for the C&I space, the outlook is really getting to be pretty strong and feels really good in the company. I think to Clint's points earlier on the integration of the Pacific Premier folks, the customer base that they have, the enthusiasm, the excitement and the capabilities that we have as a balance sheet is all adding a ton of momentum to our company today and feel really pretty good about the foreseeable future on customer growth, C&I customer growth and with that kind of core deposit growth, fee income growth and then certainly C&I loan growth. Jeff Rulis: Tory, could I simplify it and just say you're capable of generating, call it, 5% annual loan growth and then we could just back against the transactional that's coming out. Is that fair? Torran Nixon: Yes, I think that's very fair. Yes, that's definitely our target. Jeff Rulis: Perfect. And then just checking in on expenses. I think you mentioned you've got about $80 million to go on cost saves. So similar question, I guess, thinking about kind of a core growth rate in '26, either blended or a rate that's core and we could take out $80 million over the course of the year, I think Ron said clean by Q3, but any way to quantify the expense run rate, that would be helpful. Ivan Seda: Yes. I'll take that. This is Ivan again. Yes, so we had 1 month of PPBI in our numbers, and that landed at $307 million. Our pro forma for a full quarter of PPBI, our operating expenses would have been around $375 million this quarter. As we look forward and as you noted, we'll continue to see the cost synergies ramp up through the first half of next year. Some of that will be subsequent to some of the system integration activity, which is happening in the first quarter. So we won't see the full post-synergy run rate until the second half of next year. In the meantime, we'd anticipate expenses, excluding CDI amortization to be approximately in the $330 million to $340 million range per quarter for the next several quarters before we start to drop back to lower levels in the tail end of next year. CDI is going to be operating -- that amortization is going to be operating at around a $40 million clip per quarter for the next few quarters if you're looking to back into kind of a full operational expense outlook there. Operator: Our next question comes from Matthew Clark of Piper Sandler. Matthew Clark: Just back to the margin here in the fourth quarter, the full quarter impact of PPBI, the premium coming through in the fourth quarter, kind of a temporary bump up. But any appetite to maybe provide a range of NIM expectations for the upcoming quarter, just to level set just to make sure we're all on the same page. Ivan Seda: Yes. So like Ron mentioned, in Q3, we put up 3.84% on total. If we were to roll forward that $12 million of that $8 million, that puts you up to 3.90% temporarily adjusted in Q4 or just north of 3.90%, that's a fair proxy for where we think the fourth quarter is likely going to land. So modest upside on net interest margin quarter-over-quarter, but fairly stable relative to the one that we just finalized and then a fairly similar range for Q1 2026. And then I think as we look out beyond there, we'll provide, I think, a more holistic perspective as we get into a 2026 dialogue kind of 90 days from now, but that's probably what I would share at this point. Clint Stein: Yes. And Matt, the only thing I would add is Q4, especially October, we have real estate tax and income tax payments and things like that. So we typically see a little volatility in deposits. And then obviously, first quarter is our seasonally weakest where we typically experience outflows. So any variability in our assumptions could obviously have an impact on the number in the range that Ivan provided you. But I just wanted you to keep that in mind. Matthew Clark: And is that -- I would have thought there's some additional accretion coming from PPBI with only 1 month this quarter and getting an additional 2 months above and beyond that, $12 million you talked about. Is that not the case? Clint Stein: Well, yes, you'd have the full quarter, yes, versus just 1/3 of it or 1 month's worth on the asset side. There is the deposit side that Ivan mentioned that does run out at the end of the fourth quarter, but we'll have it for the full quarter in the fourth quarter anyway. Matthew Clark: And then just on credit, just the uptick in nonperformers on a dollar basis, any of that acquired kind of PCD loans? Christopher Merrywell: A portion of it, another part of it just in a very small commercial real estate facility, which we expect to be gone next quarter. So I mean that's essentially it. It's about $20 million. Matthew Clark: $20 million of it was not PPBI related? Christopher Merrywell: About $16 million of it, I would say, is not PPBI related. Matthew Clark: And then it looks like delinquencies are down at FinPac, which I think is a good proxy for charge-offs going forward. The bank had much lower charge-offs this quarter. I guess, how you -- any line of sight on kind of a range of net charge-offs in the near term? Christopher Merrywell: Well, I've said with regard to FinPac that we're kind of at normalized levels now and bouncing along the bottom. And so I'm pretty pleased with that. But I think that as far as a normalized run rate for charge-offs, I think for the bank, I think I'm very happy with this quarter's numbers. And I think somewhere around there would be a proxy for going forward. Operator: And our next question comes from Jared Shaw of Barclays. Jared David Shaw: Maybe sticking just with credit, as we see that portfolio run down on Slide 25 and then get backfilled with new C&I production, how should we think about the allowance level growing from here, I guess, as you pay down or get paid off on loans that have a specific mark? Should we be thinking that, that gets back to like the 112% level over time, given a stable economic backdrop? Christopher Merrywell: I think that's an accurate assessment, just kind of a slow kind of upward migration. Jared David Shaw: And then just for me on the merger charges this quarter. Is that just a pull forward of some charges? Or should we expect that the total merger costs may be a little bit higher? Ron Farnsworth: We'll have additional merger expense in the next couple of quarters as we get through the system conversions in Q1, probably a little bit of a tail there. So lower amounts, obviously, in Q4 and Q1 and very little amounts thereafter. Jared David Shaw: In terms of -- in terms of from the initial expectations still holding? Ron Farnsworth: Yes. Clint Stein: Yes. And Jared, I know that we just put the release out a short while before the call, but we also included a new slide in there that compares our assumptions at announcement for Pac Premier and our current thinking, and you'll see that our cost synergies and total deal costs are unchanged. Operator: Our next question comes from Timur Braziler of Wells Fargo. Timur Braziler: It looks like the PPBI contribution to the balance sheet was maybe a little bit smaller than their last reported asset size, loan size. I guess, did you use the opportunity at close to maybe accelerate some of the outflows on the lending side? Or maybe just give us a little bit of color as to the size of that balance sheet that was brought over. Clint Stein: Yes. So we did sell a substantial portion of their securities portfolio and repurchased a portion of what we sold in securities that fit neatly with what we have in our existing portfolio and also positioned us for our bias towards continued decline in rates. And also, we had some leverage that we put on early in the year just to take advantage of -- to insulate us to a small degree of rate changes while we were waiting for the approval and close. And so from that perspective, we didn't fully reinvest. We paid down some wholesale funding. The other side of it is the timing. We closed it sooner than what we expected. And so that might be part of what you're looking at. But I'll step back and see if Ron or Ivan want to add any context. Ivan Seda: Yes, just in terms of these transactions work you announced in April, you've got a pro forma expectation. I think if you were to go back to the pack that was issued back in -- when the deal was announced in April, loans HFI at that point was 12.0%, came in a little bit shy of that just in terms of where the balance landed on the day of close. And then obviously, we go through and provide our marks, which are all disclosed within the packet today. So once you kind of overlay the rate and credit marks on top of that acquired loan portfolio, it's a little shy of that $12 billion number, but still in a good spot there. Timur Braziler: And then maybe switching to deposits. You had brought up the typical seasonality that you see in 4Q, 1Q. I'm just thinking as some of that some of those balances flow out, how should we think about either replacing that with wholesale funds using the bond book? Kind of what's the balance sheet reaction to some of this expected seasonality that we're going to see on the deposit base? Christopher Merrywell: So this is Chris. I'll take the first stab at it, and then Ivan and Ron can jump in. Yes, there's seasonality in that piece. But as Tory and I mentioned, we've got strong momentum of new customer acquisition, and I expect that to offset some of that outflow. And as you saw in the earnings commentary, we'll start disclosing a bit more of that, so you can see the components and the levers that go into it and trying to separate seasonality away from what is indeed new customer acquisition. And Ron, Ivan, I don't know if you want to add anything on the wholesale part of it. Ron Farnsworth: I mean there will be some fluctuations in wholesale depending -- it just depends on the amount of flows, right, within the loan and deposit portfolios. We'll also have cash flows coming off the bond portfolio to help support some of that funding. So I think what Ivan mentioned earlier just in terms of the average earning assets with the NIM expectation in the next couple of quarters, still within range of the volatility you could see within -- based on just those wholesale flows. We'll be maintaining spring cash targets of around $1.7 billion to $1.9 billion over that time period. Timur Braziler: Great. And then just last for me, just maybe the contribution of accretion income in the third quarter and more specifically, if any of that was accelerated accretion from maybe some of the elevated payoff activity that we experienced here in 3Q. Ron Farnsworth: Yes. A couple of quarters back, we stopped providing the accretion specific detail, and I'll give you a great case in point. So as Clint mentioned earlier, we put on some leverage back in April and restructured the bond portfolio acquired from Pac Premier here in September, the first month post close. And with that, we bought bonds at $0.85 on the dollar, right, straight up, great bonds yielding upper 4% range. That is discount accretion. I buy at $0.85 on the dollar, but it's yield, it's government yield in most cases. So I think we should just look at the face of the financials and look at those levels over time. Timur Braziler: So in terms of accelerated kind of credit accretion on the loan book, there wasn't abnormal.... Ron Farnsworth: Very minimal credit discount. Operator: And our next question comes from Andrew Terrell of Stephens. Andrew Terrell: If I could just start just on the interest-bearing deposit beta. It looks like in the footnotes on the sensitivity, that moved down from, I think, 55% last quarter to 49% beta assumed this quarter. I'm assuming that's mostly reflected or reflective of lower brokered deposits. Is that the case? Or has anything changed in terms of your kind of customer deposit repricing expectations for Fed cuts? Ivan Seda: Yes. Thanks for the question. This is Ivan. No, nothing's changed in short. We'd expect interest-bearing deposit beta roughly 50%. Obviously, it's a little bit of a unique quarter for us because you have the combination of the PPBI book which when you squint at it, looks remarkably similar to the legacy deposit book that was in existence beforehand. And then you also had the late quarter FOMC. And so not the entirety of that is fit into the end of the quarter. But as we've continued to monitor the portfolio through October, continue to see betas kind of in that 50% range. And I think Tory is going to provide some other comments on deposits here. Torran Nixon: Thanks Ivan. Andrew, I would just say that kind of pre any Fed move, Chris and I have structured the various business lines for reductions to be very quick and responsive, proactive with the customer base, moving rates down as much as possible and as fast as possible. And I think we've done that every single time, and we're ready for this most recent move and are implementing that in the bank today, and we will continue to do that going forward and feel very confident in our ability to lower rates as the Fed moves rates down. Andrew Terrell: Thank you for all the color. And then on the buyback, if I can go back to that. Just you guys have an earn-back tolerance on tangible book when you think about deploying capital into the buyback versus other means, I mean, I understand at the current multiple, it probably makes a lot of sense. But is there any sensitivity from a tangible earn-back standpoint? Ron Farnsworth: Yes, this is Ron. This earn-back plan we've got looking out over the year with some sensitivity around the price is under 3 years. I think the bigger issue is we're pretty discounted against peers. And so this is a great buy. Clint Stein: Yes. And the thing I'd add to that is as we scan the horizon and look at things, our view is the greatest investment we can make is in our own stock, our own company. Operator: And our next question comes from Jon Arfstrom of RBC. Jon Arfstrom: Same sentiment there, Ron. Thanks for everything. Tory or Clint, maybe or Chris, back to you guys on the lending environment. How would you characterize the pipelines right now? Are they better, same, lower? Just what are you hearing from your borrowers? Torran Nixon: So it's interesting. If you kind of look back to the beginning of the year, all the conversations around what rates were going to do, the tariff kind of mess. It just -- it put people in a holding pattern. And for the first -- for Q1 and Q2, there was just a -- there was a lot of just doing nothing in pretty stagnant environment. Interestingly, a lot of that is -- that rates have come down a little bit. The tariff noise is less noise, and you're starting to see some increase in activity on M&A activity of customers buying other businesses, some real interest in investment into their companies in the acquisition of pieces of equipment, et cetera. So you're starting to see some good net loan opportunities for our bankers. Interestingly, we looked at production that the biggest producing parts of the company today, and it's been the Pacific Northwest and Southern California for us this past quarter. And growth in pipelines have been across the entire franchise. So when I look at the different pipelines in the different geographies, they're kind of mixed and they're everywhere in the footprint, which is great to see. And that to me shows that this idea of increased activity is kind of throughout at least the western part of the U.S., not in one particular industry or a couple or in one geography. So I think as I said earlier, the C&I pipeline is up $700 million quarter-over-quarter. The real estate pipeline is flat. It's been declining over the last several quarters, but it's flat quarter-over-quarter this time. So things are looking up, which is great to see. Christopher Merrywell: John, this is Chris. And I'd add to that, part of that number Tory mentioned is our investment in new bankers this year. and that's throughout the markets. A couple of them specifically, our new health care folks have a really good pipeline and started booking business. Native American banking, the same. And there are several other C&I lenders, bankers that have come on that are doing the same thing and starting to hit their stride. So I think that's all positive momentum going forward as well. Jon Arfstrom: That's helpful. Maybe, Clint, just for you. You guys have provided a lot of numbers, which I think are helpful. But curious how you think about a sustainable return on tangible for the company. Obviously, a good number this quarter. But do you feel like you can continue to crank out high teens return on tangible the way the model is today? Clint Stein: Yes, absolutely. Absent something breaking in the macroeconomic environment, we would expect to be where we're at or even a little bit higher and deeper into the high teens. So very optimistic about our level of performance. We track it and in many cases, have been at the top quartile. And we think with the addition of Pac Premier and the momentum that we have that we can move into the top decile. And obviously, at 18-plus ROTCE, we're already well above our peer group, and we feel very bullish about that. Operator: And our next question comes from Anthony Elian of JPMorgan. Anthony Elian: Ivan, just to put a finer point on your near-term NIM comments. For 4Q, do you expect -- for 4Q, you expect just north of 3.90%, but the similar range you said for 1Q, is that relative to 3.90% or to the 3.84% you just printed? Ivan Seda: For 1Q, from an NII perspective, normalized, we'd be in a similar spot. I think that the NIM will be probably 3.90%-ish range, maybe a tad higher, but we project earning assets just a touch lower with a couple of items going on there. So from an NII perspective, fairly stable with the exception of that $12 million deposit premium accretion that we've talked about a couple of times already. Anthony Elian: And then my follow-up, Slide 25 on the optimization. The $8 billion of transactional loans, is that all we should think about for optimization for now? Or could there be other loans, deposits, anything on the funding side from Pac Premier that could run off or exit to further optimize the balance sheet? Clint Stein: No. We wanted to make sure that we captured fully so that as we go forward, there's integrity in that number. And as you see us walk that down, you'll be able to see the remix happen on a quarterly basis. So our intent is that this is the bucket. And as the bucket empties, we will not refill it. We're very, very satisfied with virtually everything else that's on our balance sheet. Operator: And our next question comes from Janet Lee of TD Cowen. Janet Lee: If I were to look at Page 13, if I do the delta between the new originations and payoffs and prepayments combined, it's about like a $500 million delta there. In the coming quarters, should we -- should I expect that to accelerate in terms of more prepays versus new originations? Or should that narrow? Torran Nixon: Yes, this is Tory. That's hard to answer kind of because things happened in the quarter that you're not fully anticipating. But we did have some loans that we transferred into held for sale. So I think that's in that number there, which won't happen again for Q4. But if you look at over the course of a year, you can get a fairly good view of just net paydowns, prepayments and payoffs relative to originations. And the goal here for us is that, as Clint and everybody else has mentioned, we're driving core relationship growth for the company. And the idea is to add -- to take market share, add new names to the company and grow the company with new customers that would be deposits, core fee income and C&I loans. Janet Lee: And just to make sure that I understand your comment correctly on balance sheet optimization, is it fair to assume that like the biggest impact to loan growth total should be in 2026 and maybe in '27 and beyond, like it gets lessen if I were to just look at your schedule? Or is it more of a consistent multiyear plan? Ivan Seda: Yes. I think when you look at the repricing and maturity schedule that we put into the material this quarter, the majority of the portfolio that we're looking at, we would anticipate working through over the next 8 quarters, 2 years. Of course, interest rate movements could change that dynamic if we see a steeper decline in terms of the interest rate environment than what's currently anticipated some of this stuff could come into the money more rapidly. But as of what -- given the facts and circumstances we're looking at today, I'd say it's going to be a story we'll be talking about in a process we'll be working through for the next 2 years for the most part. Operator: And our next question comes from David Chiaverini of Jefferies. David Chiaverini: I was curious about loan pricing. I think you mentioned 8% earlier in the call on C&I. I was curious, is 8% a good number to think about for the $700 million loan pipeline? And could you also talk about the competitive environment for loan pricing? Torran Nixon: Sure. David, this is Tory. New originations on the lending side are roughly between 6.5% and 8%. I think probably a weighted average this past quarter was in the low 7s. So that's a fairly good indicator, I think, of the future for the most part. I think that the competitive environment shifts pretty quickly. There are a lot of banks trying to generate asset growth. And so you see some pretty tight margins on some deals. And we're going to hold steady to what we think the value of our company for a customer, and we're not going to chase price. We will be competitive. But we look at pricing very holistically. We look at the cost of deposits, we look at core fee income generated. And then obviously, we look at loan pricing all collectively to decide how we're going to approach either a current customer or a prospect to bring into the bank. So the environment, it changes overnight, and it's always competitive. The idea is to drive value in something other than we do well every single day with the way we operate our company. Clint Stein: David, this is Clint. I'm glad you asked your question because I was using that as an illustrative just for math purposes of the difference between something that's at a weighted coupon of 410 and rotating into something that's more of a traditional C&I or other relationships. And we'll continue to do CRE. And so those at a lower rate. And so depending on what it remixes into. But glad you asked the question so we could clarify that. Operator: And our next question is a follow-up from Chris McGratty of KBW. Christopher McGratty: And don't kill me for the follow-up. I want to make sure as we get the NII, right. The 3.90%, I hear you on 3.90%, Ivan, and that includes the $12 million of NII. But I guess, can you just give me the moving pieces one more time, the earning assets for the fourth quarter and the expected fully loaded NII and then we can make the adjustments for Q1. I just want to make sure we get it buttoned up perfect. Ivan Seda: Yes. So we are wrapping up this quarter with total earning assets just a hair below $62 billion, so 3.84% margin for the full quarter. As we look forward to next quarter, we'd anticipate a similar level of earning assets, maybe a hair lower and landing at about 3.90%, just a hair above 3.90% from a net interest margin perspective in Q4. Christopher McGratty: And then the only adjustment for Q1 would be to pull out the $12 million that you talked about factor in, I guess, our assumptions on balance sheet. But absent the $12 million, roughly NII should be stable in Q1? I'm just trying to make sure I get the [ calculation ] right. Ivan Seda: Yes, that's right. Operator: I'm showing no further questions at this time. I'd like to turn it back to Jacque Bohlen for closing remarks. Jacquelynne Bohlen: Thank you, Didi. Thank you for joining this afternoon's call. Please contact me if you have any questions or would like to schedule a follow-up discussion with members of management. Have a good rest of the day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Ladies and gentlemen, welcome to the Third Quarter 2025 Conference Call. I am George, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Aritz Larrea, President and CEO. Aritz Uribiarte: Thank you very much. Good morning, everyone, and welcome to the third quarter presentation for Loomis. My name is Aritz Larrea, and I'm the CEO of Loomis. And with me here today, I have our CFO, Johan Wilsby; and Jenny Boström, our Head of Sustainability and Investor Relations. I'll start by providing a quick summary of our third quarter performance before taking questions. Let's start the presentation by turning to Slide #2. We delivered a solid and positive performance in the third quarter with revenues reaching SEK 7.6 billion and currency-adjusted growth of 7.1%. Despite the expected decline in our ATM business, the group achieved a strong organic growth of 3.9%. This was also the first quarter to include the full results of Burroughs, which made a meaningful contribution to our overall growth and further strengthened our position in the U.S. market. Our efficiency initiatives continue to deliver strong results with the operating margin rising to 13.2%, up from 12.9% last year. We've successfully grown the business without increasing our headcount, further driving margin improvement and demonstrating the impact of our ongoing operational discipline. We delivered another quarter of strong operating cash flow with a rolling 12-month cash conversion of 95%. This robust cash generation enables us to continue investing in the business while also delivering attractive return to our shareholders. Our commitment to optimize capital allocation to drive returns is also reflected in the increased return on capital employed, which was above 16% in the quarter. While we have been active in M&A, invested in our business and continued our share repurchase program, our net debt-to-EBITDA ratio has improved compared to the second quarter. During the third quarter, we completed 4 acquisitions and signed an agreement for a fifth one. I will address each later on in the presentation. As announced yesterday, the Board has also approved a new share repurchase program of SEK 200 million for the fourth quarter. Let's now turn to our reporting segments, starting with Europe and Latin America. Our European and Latin America segment delivered a solid performance in the quarter with revenues reaching close to SEK 3.7 billion, and the organic growth was 2.3%. We have seen a different mix of performance across our business lines during the quarter. While we continue to experience strong demand for our cross-border valuables transportation and storage solutions within the international business line and the Automated Solutions business delivered solid results, the ATM business declined due to previously announced losses in Sweden and France. In addition, there was a negative impact due to the ATM consolidation market in the U.K. While these developments have led to short-term volume headwinds, we expect the long-term industry trends to continue to favor specialized providers. In addition, revenue in Europe was also affected by the ongoing restructuring activities in Germany, where we continue to discontinue unprofitable contracts as part of our efforts to strengthen profitability. These developments have temporarily affected growth in the region, but our initiatives are consistent with our strategy to focus on efficiency, scalability and long-term profitability. We can also see that the restructuring initiatives implemented in recent quarters are having a positive effect on profitability, while with the operating margin increasing to 12.9% versus 12.4% in prior year. In September, we completed the acquisition of Kipfer-Logistik announced in July. Kipfer-Logistik is a leading pharmaceutical logistics provider based in Switzerland, and this acquisition significantly accelerates the growth of Loomis Pharma. By integrating a well-established company specialized in high-security, temperature-controlled road freight, we are further strengthening our international business line, where Loomis already provides cross-border, high-security logistics for banknotes, precious metals and jewels, including customs clearance. With our long-standing expertise in Secure Logistics, we continue to explore opportunities to expand and enhance our services in this area. Let's turn to the next page and talk about the performance in the U.S. The U.S. segment delivered another strong quarter. If we adjust for currency impacts, which was negative 9%, the U.S. achieved record high revenues and operating profit. Organic growth was 5.4% and the acquisition of Burroughs contributed to the overall growth. The International and Automated Solutions lines of business had notably strong performance in the quarter. Our implemented staffing planning measures have enabled a more efficient way of working, allowing us to grow the business without adding employees. At the same time, we have secured a high service quality and maintained customer satisfaction. The volume growth, combined with improved efficiency contributed to the improvement of operating margin. The operating margin increased to 16.3%, up from 16.1% in prior year. This is the first full quarter with Burroughs, and we continue working on integrating their business into our U.S. operations and our Loomis culture. We are still early in the integration process, but while the business is adjacent to our existing operations, it represents a new line of work for us, one that is highly technology-driven and involves technical service teams we previously did not manage. We are seeing great progress and are already observing how it complements our current business. Burroughs is a strong strategic fit as it allows us to provide a fully integrated ATM and automated solutions service offering to our customers. In August, we acquired Keys Armored Express, a CIT service provider operating in the Florida Keys area. We've also signed an agreement to acquire Precious Metals Vault and storage facility in Toronto. This acquisition will strengthen our local presence in Canada and increase our depository service and storage capacity within the international business line. Let's turn to the next page and talk about SME Pay. Revenues in the SME Pay segment increased to SEK 65 million in the quarter. Nearly 40% of this revenue now comes from new small- and medium-sized customers, demonstrating that our strategic focus on SMEs is delivering both growth and margin. We're also making strong progress on the digital side. Loomis Pay continues to scale, broadening our payments offering and strengthening customer loyalty. Transaction volumes through our payment gateway surpassed SEK 2.5 billion in the quarter, representing a 23% increase compared to last year. In addition, in July, we took an important step in Spain with the acquisition of 2 POS companies in Catalonia. This significantly strengthens Loomis Pay presence in the region, enhances our POS capabilities and expands our customer base among SMEs. Let's now move to the next slide, where I'll share a few updates on our sustainability progress. This quarter, we adopted 2 new sustainability policies, an environmental policy and a human rights policy, further reinforcing our commitment in these critical areas. Our environmental policy includes our emissions reductions targets to 2030 with the actions being taken to reach these. The key focus here remains on reducing emissions from our vehicle fleet. For the first 9 months, we have reduced our Scope 1 and 2 emissions by approximately 2% compared to prior year. I want to highlight that the increase you can see in emissions in the graph here compared to the second quarter is largely related to the acquisition of Burroughs. Initiatives are ongoing to align Burroughs to our carbon emissions reduction plan. Continuing to decrease emissions while growing the business is, of course, challenging, especially due to difficulties with charging infrastructure for an electrified fleet, but something that we are fully committed to. As a global employer with an important role in society, it is crucial to uphold fundamental human rights across our operations and value chain. Our new human rights policy reinforces our dedication to safeguarding the rights of our workers and how we intend to uphold our efforts in addressing actual and potential human rights. Now let's turn to the income statement slide, where I'll begin by noting that despite a significant negative impact from exchange rate fluctuations, we achieved a strong currency adjusted growth. This quarter includes costs classified as items affecting comparability, primarily related to the ongoing restructuring efforts in Europe and Latin America. Our financial net has declined compared to previous years, following lower financial expenses, driven by declining interest rates. I would also like to highlight that the effective tax rate has gone up to 30% for year-to-date 2025 due to changes in our assumptions for deferred tax assets. This year-to-date adjustment impacts the effective rate in the quarter. Additionally, the tax rate in 2024 was also lower due to the U.S. green tax credits, which have now been removed. For the full year, we expect an effective tax rate of about 30%. Despite the considerable currency headwinds and higher effective taxes, earnings per share rose to SEK 7.83 per share. I would also like to highlight that also our net debt-to-EBITDA ratio is about the same level as prior year, and we also see an improvement compared to the second quarter, even after several M&A and continued share repurchases. Now let's move on to the next slide, where I'll provide a longer-term view of our performance. As we can see, we have a stable and resilient business model that continues to deliver. We delivered a strong third quarter, and I'm confident in our journey ahead. Our restructuring initiatives in Europe and Latin America are showing results, and we've seen clear margin improvements over recent quarters. On a rolling 12-month basis, we generated over SEK 30 billion in revenue and reached an operating margin of 12.6%. Currency adjusted growth was 6.1%, fully in line with our financial targets for the strategic period. The major focus in this strategy is accelerating growth within the SME customer segment. This is already contributing to our performance. We have seen healthy revenue momentum and solid margin contribution from SMEs across all our key markets. As we look ahead, it's important to recognize that we are up against a very strong fourth quarter last year, which benefited from favorable movements with U.S. tariff uncertainties. We're also managing the impact from ATM business losses in Sweden and the consolidation of ATM networks in France, both impacting our European operations. In addition, there's a negative impact due to ATM market consolidation in the U.K. compared to Q4 last year. That said, we still see solid opportunities for organic growth, both with our actual customers as well as with SMEs. And as we outlined at our Capital Markets Day, value-creating M&A will continue to be a key lever in our strategy going forward. This concludes my summary of the quarter. Operator, we are now ready for questions. Operator: [Operator Instructions] Our first question comes from Simon Jönsson with ABG. Simon Jönsson: I want to start off with the M&A track. I think it's nice to see that you are more active again as you have been talking about, of course. And I wonder specifically about Burroughs, you mentioned it a bit, and you have had some time now to digest it. So my question is what you're seeing in terms of the turnaround on margins in Burroughs, if that is something that you have already started to see a positive impact on? I mean, the margins in the U.S. were quite good despite the full integration of Burroughs. So I guess I wonder if you have seen any margin impact already in Burroughs. Aritz Uribiarte: Thanks for the question, Simon. I would say that it's still early stages with Burroughs, but our immediate focus is just on resolving some existing quality issues to ensure service excellence. Once this is achieved, we will shift our efforts to improving operational efficiency and margins, with the objective of making the business margin accretive over time as we promised when we announced the acquisition. Simon Jönsson: All right. So I'm guessing that it's fair to assume that it remains quite margin dilutive here as of right now, at least. Aritz Uribiarte: You're right, yes. Simon Jönsson: Then I wonder about the SME Pay segment, just specifically on the organic growth acceleration we saw here in Q3. If there are like any specifics you could point to here, like bigger customers or something that drove the organic growth acceleration Q3? Aritz Uribiarte: So as we explained at the Capital Market Day, we've been always focused on big retailers and big banks. SME was never our focus. And we shifted that, and that has been a shift that our sales teams have made. And we've seen an important progress there. And consider that Q3 also has the seasonality, the normal seasonality that we have in Europe, but it was a great quarter from that perspective, and we expect the following quarters to continue the same way. Simon Jönsson: All right. Great. Then lastly, maybe a bit more general reflections, but on Latin America and maybe specifically on Argentina, I mean, it continues to look like the business environment is improving, more politically stable and so forth. So do you have any general reflections right now, what's going on? And if that's positive or negative for you? Aritz Uribiarte: I think, I mean, when you look at Argentina, it's really small when you look at our group. But I think that progress has been made there from the country side. We keep investing there, and we're looking into growing in that market as well inorganically. So it keeps being an interest market for us. Operator: Our next question comes from Dan Johansson from SEB. Dan Johansson: A couple from my side. Maybe firstly, I was curious to hear how we should think about the revenue mix right now. I noticed you continue to have very good momentum in both Automated Solutions and also international, which is, of course, good for margins and CIT is down like 5% or so versus last year. And I mean, long term, your mix shift will, of course, continue, but it would be interesting to hear how you think about business mix more near term for coming quarters. Do you see sort of a near-term recovery in CIT? Or should we expect these trends to continue and revenue mix to continue to be supportive ahead here? Aritz Uribiarte: Yes. Thanks for the question. And my first comment there would be, I was surprised on your comment around CIT because we should look at the business lines currency adjusted, and I don't see that decrease happening in CIT. Looking forward, as I said in the call, I mean, we're facing -- we're up against a very strong fourth quarter that we had last year. We had the favorability of the U.S. tariffs uncertainty there. And we are having a negative impact on the ATM business due to the losses in Sweden, France and the U.K., and that will impact our European operations. But we keep working on finding alternatives. And as you've seen, for example, our international business, despite the slowdown due to tariff uncertainty, the business has also keep growing. So we keep looking at other revenue streams as well. Dan Johansson: Yes. Fair point on the currency effect there. But also interesting on international. I mean, as you say, is the performance and the momentum in international sort of even throughout the quarter? Was there any notable difference in growth rate July versus September and beginning of October? I mean, before it was tariffs, but now it seems to be other factors driving the performance. So a little bit of momentum throughout the quarter. And also, is there anything in particular driving the very strong performance you have in international still now? Aritz Uribiarte: I mean the front of thing we have with international, Dan, is that it's not a recurring business. So we can't see it as we see our domestic business there. We do expect the international business line to slow down a little bit versus what we've had in Q3. But again, as I told you, we're looking into how can we keep growing this business and keep expanding as we did with pharma, keep expanding to other verticals and other areas of interest as well. Dan Johansson: Yes. Makes sense. Interesting to follow. And maybe a final one, just a small comment there on the ATM market consolidation in the U.K., just so I get it right there. Did you experience an impact already this quarter? Is that more gradually ahead as we move into Q4 and further on here? Aritz Uribiarte: Sorry, I didn't catch that question. Can you repeat again, please, Dan? Dan Johansson: No, it was just -- did you see the ATM slowdown in U.K. already this quarter? Did it impact the numbers in Q3? Or is that more for Q4 and going forward here? Aritz Uribiarte: Yes. You should expect more or less the same trend, rather trend in Q4 and first half of next year. Operator: The next question comes from Viktor Lindeberg with DNB. Viktor Lindeberg: Maybe following up on Dan's question on U.K. as a start. And can you quantify the amount of the contract or contracts that you've lost so we can pin down the magnitude of this? Aritz Uribiarte: We don't disclose those numbers, Viktor. Viktor Lindeberg: Okay. But it's fair to say that it was already in the full quarter of Q3? Aritz Uribiarte: It has been -- yes, it's been in the whole Q3 quarter. That's correct. Viktor Lindeberg: Okay. You mentioned the tax rate, and it's come up to about 30%, and you guide for that for the full year as well. Is that a good ballpark proxy going into next year as well? Aritz Uribiarte: Yes, I would say so for now. Viktor Lindeberg: And on the tax rate from a cash tax perspective, the cash tax has come up quite a lot this year. Are there any one-off items, if you will, in that amount? Or should we pencil in similar, call it, cash tax rates going into next year as well, do you think? Aritz Uribiarte: No, that's going to come down because we had a delay of U.S. tax payments from '24 that came into '25. So they are artificially large this year. And that piece will wash out when you get into '26. Viktor Lindeberg: Super. That's very helpful. Two final points. One very small on your Loomis Pay and SME. I noted you have about SEK 9 million of revenue now in automated solutions in this segment, and that's quite an astonishing number for the small size of that segment. But curious to understand, is this Automated Solutions revenue a product sale similar to CIMA? Or is it actually more installed base type of revenue, more recurring in that sense? Aritz Uribiarte: No, it's exactly the same. The only thing is that when you look at CIMA, you have a huge portfolio of solutions, and we're talking about a smaller range of solutions. Viktor Lindeberg: Yes, that was my question. So if it is more the actual product installed generating SEK 9 million in the quarter and then in that sense that we maybe can expect SEK 9 million also in the coming quarters or if it's more product sales? Aritz Uribiarte: Additional product sales and recurring revenues. Viktor Lindeberg: Okay. Super. Final question on the U.S. and automated solutions growth accelerated quite dramatically. And my numbers tell me 31% in organic terms. But that begs the question, if you have added revenues from Burroughs or something else into that segment? Aritz Uribiarte: Yes, you have revenue coming from Burroughs as well. Viktor Lindeberg: All right. So can you give us an indication on the underlying SafePoint or Automated Solutions organic trend? Is it similar to what we have seen in the mid-teens or so? Or has it started to deviate? Aritz Uribiarte: I think you're right that it's more or less same. Operator: [Operator Instructions] There are no more questions at this time. I would now like to turn the conference back over to Mr. Larrea for any closing remarks. Aritz Uribiarte: Thank you very much all for listening in. Please reach out if you have any follow-up questions. Thank you. 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.
Operator: Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ranpak Holdings Q3 Earnings Call. [Operator Instructions] I will now turn the call over to Sara Horvath, General Counsel. Please go ahead. Sara Horvath: Thank you, and good morning, everyone. Before we begin, I'd like to remind you that we will discuss forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K and our other filings filed with the SEC. Some of the statements and responses to your questions in this conference call may include forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. Ranpak assumes no obligation and does not intend to update any such forward-looking statements. You should not place undue reliance on these forward-looking statements, all of which speak to the company only as of today. The earnings release we issued this morning and the presentation for today's call are posted on the Investor Relations section of our website. A copy of the release has been included in the Form 8-K that we submitted to the SEC before this call. We will also make a replay of this conference call available via webcast on the company website. For financial information that is presented on a non-GAAP basis, we have included reconciliations to the comparable GAAP information. Please refer to the table and slide presentation accompanying today's earnings release. Lastly, we'll be filing our 10-Q with the SEC for the period ending September 30, 2025. The 10-Q will be available through the SEC or on the Investor Relations section of our website. With me today, I have Omar Asali, our Chairman and CEO; and Bill Drew, our CFO. Omar will summarize our third quarter results and discuss our outlook, and Bill will provide additional detail on the financial results before we open up the call for questions. With that, I'll turn the call over to Omar. Omar Asali: Thank you, Sara, and good morning, everyone. Thank you for joining us today. I wanted to start today by discussing our third quarter announcement that we entered into a strategic and economic partnership with Walmart. This agreement has been years in the making and required the hard work and execution of many of our Ranpak team members. The Walmart agreement is a transformational deal for Ranpak and Ranpak Automation in particular. I'm extremely proud of the team and the solutions we have built in automation as those really drove the origination of this partnership. Our warrant agreement with Walmart can be summarized as a potential for up to $300 million in spend, excluding the cost of paper over 10 years, in exchange for warrants to purchase up to 22.5 million shares in Ranpak with a strike price of $6.83 per share. We expect that over $100 million of such potential spend would be allocated towards automation equipment and services with $200 million of such potential spend focused on PPS products. Given the requirements for vesting exclude the cost of paper, this implies roughly $600 million in potential reported spend in PPS products over the 10-year period for a total potential spend of roughly $700 million across all of our products. This is an extremely exciting transaction for us at Ranpak, and I believe cements our place as a true leader in warehouse automation. Adding to the momentum in automation, we are pleased to share that we have entered into a multiyear enterprise sales agreement with Medline, the largest provider of medical surgical products and supply chain solutions serving all points of care to provide them with our Decision Tower and right-sizing solutions for up to 14 of their distribution centers over the next several years. As the world's largest user of AutoStore robotic technology, Medline is on the cutting-edge of implementing warehouse automation solutions. We are thrilled to collaborate with them to unlock further value in their supply chain by pairing our end-of-line packaging automation solutions with their storage and retrieval investments so they can maximize throughput in their facilities by picking goods quickly and optimizing shipping volume and customer experience for outbound shipments. The amount of rigor required to satisfy customers of this caliber is tremendous, and our team is executing. We've made substantial investments in the team and solutions over the past years, and it is now paying off. We have marquee automation deals in North America with our 2 key workhorse products in the Cut'it! as it relates to Medline and Autofill for Walmart. The Walmart deal, in particular, highlights how powerful having the best-in-class automation solutions can be in driving growth opportunities in protective. When I first got to Ranpak, the assumption from most was that automation would detract from protective and that it was a hedge for that business. What we are actually seeing is that they work extremely well together and forge deeper relationships than either business could ever achieve on its own. In 2025, we have now partnered and economically aligned ourselves with 2 of the most demanding and sophisticated customers in the world, in Amazon and Walmart, and have the potential to generate well over $1 billion in revenue from these 2 customers alone over the next 8 to 10 years. I can't think of many companies that can say that, and I believe it is a testament to the solutions and talent we have assembled at Ranpak. Five years ago, this would not have been a possibility at our company. Now, onto the quarter. Consolidated net revenue increased 4.4% and would have increased 5.3%, excluding the non-cash impact of warrants on a constant currency basis for the quarter. Enterprise accounts in North America as well as global automation continue to be the main top line growth engines in 2025. Our volume momentum in North America continued in the quarter with large accounts driving 3.7% volume growth against a solid third quarter in the prior year. In Europe and in Asia Pacific, volumes were down 2.5 points versus last year as a more challenging operating environment weighed on top line results. Overall, consolidated volumes were down 30 basis points versus prior year. Automation increased 56% on a constant currency basis in the quarter versus last year, keeping us on track to achieve our expected full year automation revenue of $40 million to $45 million. Automation continues to gain traction globally as we believe we are winning more than our fair share in box customization and are beginning to ramp up with Walmart in North America with our Autofill solution. We believe our solution set of box customization, automated dunnage insertion, robotic pad insertion, data and analytics and partnerships with cutting-edge AI players such as Pickle and R2 are a clear differentiator in the market and driving adoption of our solutions. North America was a key driver of top line performance with sales up 10.9%, driven by an increase in volume and an increase in automation revenue of 140% over Q3 of last year. Enterprise accounts drove solid growth, while the distribution channel improved somewhat relative to the softer Q2 that was impacted by trade and tariff uncertainty. The team continues to drive closes and focus on solution selling, highlighting our breadth as a key differentiator. Underlying demand has been really strong in void-fill throughout the year in North America with each quarter up double digits. Wrapping had solid contribution in the quarter, up mid-single digits after a softer Q2. Cushioning was the only area in North America that was down year-over-year, driven by softer July. August and September cushioning revenue increased nicely, and we are expecting cushioning to get a boost from our new launches within our Guardian product line that provides us with smaller footprint and lower cost alternatives to foam in place. Although the launch is very new, the momentum we are seeing is one of the best I've seen from our new product introductions. I think there's a large opportunity in the next number of years to meaningfully grow our cushioning business in North America and Europe with these new products. This will not only boost growth, but provide favorable mix as cushioning has a better margin profile relative to void-fill, given it's a robust solution that requires more engineering and know-how to effectively make cushioning pads capable of shipping heavier industrial-grade items. Innovation in PPS will remain a key area of focus for us as we look to expand globally and take further share from plastic and foam. We feel very good about the outlook for North America PPS, where we expect our growth will be anchored by Amazon and Walmart in the upcoming years and supplemented by continued innovation. While its origins are in automation, we expect the Walmart agreement to drive growth in PPS over the upcoming years as each Autofill unit placed is expected to consume over $100,000 of paper per year, which we believe should lead to a solid recurring revenue stream. We also expect to expand our PPS relationships beyond the void-fill associated with the Autofill in order to help Walmart maximize the vesting of their warrants. In Europe, industrial activity continues to weigh on cushioning, which was the driver of volume challenges in the quarter as void-fill and wrapping combined were close to flat year-over-year. The environment seems to be stable at this point and offering some glimpses of improvement as trade tensions settle, but it's choppy, nonetheless. In Europe, we are very focused on what is within our control and driving outcomes through better execution. Europe is our most profitable region, so we are taking a number of steps to drive volume growth. We've put in new sales leadership and are hiring key talent to target larger accounts and focus on total solution selling. This will better position us to drive growth through cross-selling opportunities amongst PPS and automation solutions and develop sticky relationships with some of the largest end users in Europe. Asia Pacific production continues to ramp up, and the team is doing a good job of driving growth in the region, which has been offset somewhat this year due to destocking activity as we ramp up local production of product lines. We continue to view Asia Pacific as a really important part of our growth story in the upcoming years as having locally-sourced paper and production will enable us to be a lot more competitive in the region. We have just qualified our first local paper vendor, which is really exciting. We are looking forward to ramping up production there and produce more for the region locally than in Europe. Given it's an entirely new team there, we have gone slowly and methodically to ramp up production. As expected, we saw some sequential improvement in profitability as our margin enhancement initiatives began to have an impact throughout the quarter, driving an increase in gross margins to 34.5% compared to 31.3% in Q2. On a constant currency basis, adjusted EBITDA increased 3.5% for the quarter or 7.6%, excluding $0.8 million non-cash foreign impact. The input cost environment remains similar to our update last quarter. In the U.S., pricing has been flat since increasing earlier in the year, and we expect it to remain that way through the remainder of the year. In Europe, the energy markets remains favorable with Dutch nat-gas in the low 30s. We expect paper pricing for the fourth quarter to be in line with Q3 and helping to maintain our attractive margin profile in the region. To summarize, our priorities remain what we shared last quarter, improve margin in North America, drive volumes in Europe, scale automation and generate cash. We believe all of these things will contribute to a far improved financial profile and enable us to delever to 2.5x target that we have. We want our capital structure to not be a topic of discussion and are committed to delevering. We're executing on a plan to do all these with some early successes in key areas. With that, here is Bill with more info on the quarter. William Drew: Thank you, Omar. In the deck, you'll see a summary of some of our key performance indicators. We'll also be filing our 10-Q, which provides further information on Ranpak's operating results. Overall, net revenue for the company in the third quarter increased 4.4% year-over-year on a constant currency basis, driven by solid volume growth in North America and an increase in automation revenue, offset by a somewhat sluggish environment in Europe and destocking in APAC. For the quarter, in the Europe and APAC reporting segment, combined revenue decreased 0.6% on a constant currency basis, driven by 2.5% PPS volume headwinds, offset somewhat by price/mix and 34.5% growth in automation revenue. Our reported results benefited from 6.4 points of currency as the euro has meaningfully appreciated since the start of the year. In North America, both PPS and automation increased year-over-year, driven by large e-commerce accounts. Automation increased $2.1 million or 140% and void-fill and wrapping each contributed positively to growth, resulting in regional revenue growth of 10.9%, net of $0.8 million warrant expense, which detracted 1.7 points from reported NOAM results. Gross profit declined 3.8% in the quarter on a constant currency basis and would have declined 1.5%, excluding the $0.8 million non-cash impact of warrants. Excluding depreciation within COGS, gross profit increased 3.2% on a constant currency basis due to higher sales and improved margins in both NOAM and EMEA. Higher gross profit ex depreciation from both geographies drove an increase in adjusted EBITDA of 3.5% in the quarter on a constant currency basis or 7.5% excluding the $0.8 million noncash impact of warrants. We continue to keep a tight lid on our spending and are laser-focused on our margin enhancement initiatives to drive growth in adjusted EBITDA and enhance our cash position with the ultimate goal of deleveraging to 2.5x. Moving to the balance sheet and liquidity. We completed the third quarter with a strong liquidity position. We had a cash balance of $49.9 million and no drawings on our revolving credit facility, bringing our reported net leverage to 4.4x on an LTM basis and 3.8x according to our bank leverage ratio. As expected, we reduced our inventory somewhat in the quarter, although it remains elevated due to our entering into peak season, given last year, we wanted to ensure we had adequate supply to satisfy customer demand and insulate ourselves from any potential disruptions. We expect to reduce inventory further in Q4 and turn that working capital into cash. We expect to build cash for the remainder of the year given the seasonality of the business and improvements we will make on our cash conversion cycle. Overall, we are expecting to end the year with approximately $65 million to $70 million in cash on the balance sheet. This is down somewhat compared to last quarter due to a lower sales environment in Europe in Q3 and expectations for Q4 compared to where we expected to be at the end of July. Our CapEx for the quarter was $7.8 million, in line with our expectations, of which $6.4 million related to PPS converter spend. Capital expenditures are the area most directly impacted by the evolving tariff landscape. Our strategic sourcing work related to options for converters globally continues. We are encouraged by the progress there and are vetting options for alternatives to sourcing in China. We continue to focus our efforts on minimizing impact on CapEx through a greater focus on refabrication and refurbishment of older converters in the field. To reiterate from last quarter, while the environment around us is obviously uncertain from a paper sourcing perspective, we expect minimal impact as we source locally in our production areas. One final area to mention is that you continue to see warrant expense impacting our P&L. In the short term, these will have a meaningful impact on our P&L. But as we hopefully ramp our business with Amazon and Walmart, the impact will be far less pronounced on the comparisons. Again, these are all non-cash impacts, but they will be added back in statement of cash flows. But for reporting purposes, we must treat the warrants as a reduction in revenue, which flows throughout the P&L, dollar-for-dollar. This results in a 0.5 point impact on gross margin and a 0.6 point impact on EBITDA margin. With that, I'll turn it to Omar. Omar Asali: Thank you, Bill. While it has been a challenging start to the year, I'm pleased we demonstrated meaningful progress on our margin enhancement initiatives this quarter, and I'm looking forward to further improvements going forward. As we think about the finish of the year, we feel very good about continued growth in automation and achieving $40 million to $45 million in revenue for 2025, net of warrant expense. The momentum in automation is building, and I believe we have something special in that business. In North America, the PPS business continues to perform well, driven by our larger customers, and I believe we will have a strong holiday season based on the feedback I'm hearing from the team and our customers. Our margin enhancement initiatives are well underway and having an impact. I believe a lot of the noise and disruption from the beginning of the year is well behind us. Europe and Asia Pacific have been a bit more volatile as volumes have been up and down from 1 month to another. Asia Pacific has some air pockets of destocking as lead times for products that we are producing there go from 5 months to 1 to 2. That being said, our distribution channel in both reporting regions is getting invigorated by our new products in cushioning, void-fill and wrapping. Our innovation is broad-based and that is energizing our partners as well as attracting talented personnel to join the Ranpak team. I have been out meeting with our distribution partners in North America and Europe, and the message is consistent. They all want to grow with Ranpak. I feel very strongly that we're on the right path and building momentum with customers and the market. Based on the environment in Europe and Asia Pacific, we are expecting to come in at the low end of the second half revenue guide of $216 million to $230 million and expect profitability to be robust to achieve the lower end of the second half adjusted EBITDA guide of $44.5 million to $54.5 million. Our milestones achieved in 2025 and everything that has led to it has laid a strong foundation of growth and expansion in the years to come. We believe we have the right personnel and structure in place to meaningfully scale this business and that the investments we have made in systems and people are starting to show up across the board. I see tremendous opportunity to enhance our margin profile and gain efficiencies through our internal processes and by working with our vendors who want to grow alongside us. Externally, I see substantial growth opportunities in protective, automation and cold-chain. The strategic and warrant agreements we signed are having the desired effect of deepening our relationships and providing the opportunity to get into additional products and geographies with these key players. We have an excellent platform for growth and the opportunity to build the leader in industrial automation technology. Physical AI and Machine Vision is driving the next phase of industrial automation, and I believe we have the solutions and access to data that others dream of. The target I'm setting for the team is to get -- to grow to $800 million in revenue organically within the next 5 years and to have automation be at least 15% of that total revenue. I believe we can achieve that with our current offerings and what we have currently in development and our new products. At this point, we'd like to open it up for questions. Operator? Operator: [Operator Instructions] Your first question comes from Greg Palm with Craig-Hallum. Greg Palm: Omar, going back to the guide, just wanted to make sure I understand all the kind of the puts and takes. So, it sounds like relative to the last update, really no change in automation, no change in North America, a little bit of a slowdown or weaker results in kind of Europe and APAC. Is that right? Anything else that you want to point out? I just wanted to make sure I understood all that. Omar Asali: No, you got it right. I think we continue to feel excellent about automation globally, by the way. In North America, we continue to see very robust volumes, including up to now. Europe and Asia Pacific are a little bit inconsistent. So, just to be clear, we will be within the guide. It's just given the inconsistency in those businesses, we expect to be on the lower end of the range. And that's the thing that we're monitoring. And honestly, Europe continues to start and showed some pattern of improvement. The hesitation we have around that, Greg, is things are changing fast in Europe, and we would like to see a trend continue over a longer period of time before we build our confidence on the business there. But that's basically the summary. You got it right in terms of the building blocks. Greg Palm: Yes. Okay. And gross margin actually bounced back a lot more, I guess, more quickly as well relative to what I would have thought. How much of sort of the full impact of both pricing and some of the cost reductions did you see in Q3? And I guess maybe a different way to ask it is, how much is still left to go in Q4? Omar Asali: In pricing, obviously, given what we've done in North America, we saw a good positive impact in Q3. On the cost initiatives, margin improvement, continuous improvement, honestly, I see a lot more room there. We continue to execute. We're improving in our buying. We're improving in our logistics and freight. We've made some tangible moves. We have a plan over the next few months to continue doing that. We are also looking at our physical footprint and optimizing that. You may recall, we've hired a new Chief Operating Officer who joined us, who is working hard on some of these initiatives. So, I think on the cost initiatives, I'm expecting a lot more progress and to continue to drive gross margin on that front. Greg Palm: Okay. Perfect. And then, just shifting gears to Walmart, obviously, a very important announcement. So, congrats there again. But can you give us just a sense on like how the ramp will progress over the time frame, $700 million spend, 10 years. I mean that implies a pretty significant annual contribution. I'm guessing it will be a lot less than that initially and then ramp more meaningfully over time, but maybe you can help us understand what that might look like based on what you know today? Omar Asali: Sure. So, we are already in the ramp-up phase. There was some modest help in Q3. You will see more help in automation in Q4. And then we're expecting in '26 and beyond in the next few years to really ramp up quite a bit on the equipment side. I personally think that spend will occur in a period that's meaningfully shorter than 10 years given the dialogue I'm having with Walmart. I think you will see Walmart relatively quickly become probably the second largest customer we have, and there's quite a bit of room to grow in terms of their annual spend with us. So, I think we will see how '26 goes, Greg. And then, obviously, that will help us guide the upcoming sort of ramp-up. The key thing is, some of our projects are in their next-generation facilities. So, it's related to their build-out there. And you can see in public comments, Walmart is investing heavily in e-commerce, in DCs and in FC fulfillment, and we are the beneficiaries of that as they continue to invest in that area. So, I think you will see some impact in -- starting in Q4 and hopefully, much bigger impact in '26 and thereafter. Greg Palm: Okay. Perfect. And then just lastly, your sort of longer-term targets that you put out, I want to make sure I heard it right. You said $800 million in revenue in 5 years, automation to contribute 15%, 1-5, of that. Is that right? And then do you have sort of an EBITDA margin target in mind if you're able to execute upon that? Omar Asali: You have that right. So, these are the right numbers sort of in the next 5 years, and that is sort of our organic plan, if you will, where we think the businesses we have today, the new product introductions that we're working on, we think they can lead effectively to doubling the top line in the next 5 years to $800 million. You have it right on automation, where I believe, we can get to 15%, 1-5, out of that $800 million coming from automation. And honestly, the guidance I have for the team that we're working towards and you're seeing us making progress towards that, is we want to be in a business that has north of 25% EBITDA margin. So that's the longer-term goal. Operator: [Operator Instructions] Your next question comes from Ghansham Panjabi with Baird. Ghansham Panjabi: Just sort of building on the last question as it relates to 2025, I mean, obviously, a lot going on with the macroeconomic environment in Europe, U.S. and of course, your internal initiatives, et cetera. What is a reasonable baseline for volumes for 4Q? And how would that disaggregate between your 2 major regions? William Drew: Ghansham, this is Bill. So, for 4Q, I think we're expecting fairly consistent with what you saw this quarter just based on what we're seeing out of Europe and then continued strength in North America. So, we continue to see the enterprise accounts drive solid volumes in North America. We do think we'll get more of a contribution from the distribution channel as well in North America, which should help to improve things and also contribute favorably to the margin. EMEA and APAC, given that the environment there remains a little bit more challenging and harder to call. So, we are expecting to be a little bit down there year-over-year and also taking into account some of the destocking in APAC. But overall, as we exit the year, we're looking to get back to growth in that area as well. Ghansham Panjabi: Okay. And then, in terms of automation, clearly, this is -- or at least I think it's going to be more lumpy than perhaps your protective packaging business in terms of volumes. How do you think about -- how should we think about the comparison going into next year and how you're going to build off that pretty significant momentum that you're showing this year for different reasons, including your strategic partnerships? Omar Asali: Ghansham, I think as you highlight, obviously, automation is about -- it's driven by the sale and then the deployment and installation of equipment. So, it's a little bit different than the consumable business we have in PPS. As I said, we feel very confident that we will hit the $40 million to $45 million this year, which will represent meaningful 40%, call it, 50% growth year-over-year. In the near term, honestly, Ghansham, we continue to see the trend of 50% plus growth in automation. And our confidence in that growth trajectory is increasing because, frankly, a bunch of it is with customers that we've signed, that we're deploying, that we're building the equipment and installing and it's agreeing with them on the deployment and installation schedule. And as I announced in the call, we have a large enterprise agreement now with Medline, it's very sophisticated in automation. We're very excited about helping them in a number of their DCs, and we're working on other deployments like that. So, this is a business where you can start building a backlog over time, Ghansham, and the confidence in the numbers is higher, but it's probably more a business where you should think about it in terms of annual deployments that you can do rather than quarter-by-quarter, which is how we're thinking about it. But the growth trajectory in the near term, I'm expecting it to be 50% plus in the top line. Ghansham Panjabi: Got it. And just one final one as it relates to the momentum that you're seeing with these -- again, these partnerships, et cetera, including Medline. How is the weighting going to change between North America and the overseas market, especially Europe as we -- over the next 3 years, just given the asymmetric growth that you're seeing? Or is the growth yet to come in Europe and the weighting is going to be pretty much comparable as it is now? Omar Asali: That's a great question, Ghansham, because obviously, recently and with enterprise accounts, we've seen bigger growth in North America, and we've seen some challenges in Europe. What I'm expecting, as Europe stabilizes, is that we will get back to growth in Europe, in particular, around new product introductions that are really important globally, but in particular, very important in Europe as we try to come up with converters that are faster and have a more compact sort of footprint. And that's really important in the European market where DCs and warehouses are smaller than what you see in the U.S. So, we have a road map to regain market share to drive our growth. Having said that, in the next few years, I continue to expect higher and more further growth in North America than in Europe. And to your question, I think the geographic exposure of our company over time will lean heavier towards the U.S., but for the right reasons. In other words, not because I think Europe is going to decline, I actually think we're going to reverse the trends. And as Europe stabilizes, we will grow, but it will be at a lower pace than what we're seeing in North America. And look, we've been a small public company that's a bit unusual in the quantum of exposure to Europe. So, over time, I expect that you will see Europe still being a very large and important contributor, but North America play a bigger role. And obviously, given sheer size today, we think Asia Pacific has tremendous room for growth to drive top line. Ghansham Panjabi: Okay. And if I could just squeeze one more question, maybe for Bill as it relates to cash flow, anything we should keep in mind versus the initial guidance? And obviously, you're pointing towards the lower end of your EBITDA range for the back half of the year? And then also lastly, on CapEx for '26, can you give us a frame of reference as to how to think about that component? William Drew: Yes, sure. I think it's pretty consistent, right, with what we went through last quarter. We did lower our year-end cash balance forecast to $65 million to $70 million, which is a little bit lower than what we talked about in Q3 -- sorry, at the end of Q2. And that's really driven by just the performance in Europe and APAC, right, the lower sales environment there. So, I think we are looking to finish in that $65 million to $70 million area in cash on hand, and that's just driven by the lower volume outlook. And as we think about next year, right, we do look to get back to free cash flow generation. So, I think for us, we're looking to generate probably $15 million to $20 million in free cash at least next year based on what we're seeing. And I think the CapEx piece of that would be about $35 million or so based on what we're looking at now. Operator: There are no further questions at this time. I'll now turn the call back over to Bill Drew for closing remarks. William Drew: Thanks a lot, Carly, and thank you all for joining us today. We look forward to speaking again after Q4. Operator: Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Wood Group Half Year Results Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Iain Torrens, Group CFO. Please go ahead. Iain Torrens: Thank you, and good morning, everybody, and welcome to the Wood Group Half year '25 announcement. So just to begin, this past year has been 1 of significant challenge and transition for the group. That said, we are pleased to have published our full year '24 annual report and accounts and H1 '25 interim results, together with the supplementary circular to the Sidara acquisition. I would like to thank our shareholders, employees and clients for their continued support and patience during what has been an extremely difficult period. I also believe yesterday represented an important milestone for Wood in moving forward, providing stability for the business and delivering some value for shareholders through the proposed Sidara acquisition. The preparation of the financial statements and the subsequent completion of the order process has taken longer than anticipated, reflecting the complexity of the issues identified and the extensive work required to ensure the integrity of the financial statements and appropriate safeguarding their preparation. Due to the passage of time, the departure of key personnel and the inherent limitations in applying retrospective knowledge to historic events. It was not possible to determine with precision the appropriate financial periods for certain adjustments. Accordingly, our focus in the first instance has been to ensure that the 31 December 2024 balance sheet reflects an accurate and reliable position with allocations to financial periods undertaken on an estimated basis. This approach provides a clear and definitive starting point of the group as it moves forward. It also satisfies certain of exceptional conditions related to the Sidara offer, enabling us to move forward with the shareholder vote for the Sidara acquisition. In response to these challenges, we have taken and are continuing to take decisive action to reinforce governance and financial discipline. This has included leadership changes within the finance function, the engagement of external technical accounting experts and the implementation of enhanced controls. Whilst the restatement of prior year results and the adjustments identified through our auditors challenge and the independent review have been significant, they represent an important step in restoring confidence ensuring compliance with accounting standards and maintaining the integrity of the group's financial records on financial statements. Against this backdrop, I will today provide some high-level context in the financial statements and take any questions at the end, you may have, recognizing that the full detail, including the impact of restatements as set out in the published documents. Looking ahead, now that the financial statements have been published, our focus is on bedding these improvements, strengthening our operating model and delivering sustainable value for the business. We are also seeking the readmission of shares as soon as possible to the resumption of trailing. If we look first at 2024, revenue of $5.5 billion in '24 was down 1% compared to '23, with growth in operations offset by a significant decline in consulting and a small decline in projects. Adjusted EBIT of $81 million in '24 was 52% lower than '23, despite benefiting from the cancellation of the year's employee annual bonus originally planned to be $36 million. Included within adjusted EBIT of $55 million of independent review charges that will not repeat in future periods. To help explain our results, we have shown this as a separate line item. Even excluding this, we saw an underlying decline in profitability across all business units. Consulting saw a 68% reduction in adjusted EBIT to $20 million. This was -- this mostly relates to $22 million of losses on 1 contract in our system integration business within Digital Consulting, where we recognized a $16 million loss provision and derecognized $6 million of revenue. In Projects, where we saw an adjusted EBIT of $38 million, though this includes $46 million of charges related to the independent review. Excluding this, so adjusted EBIT for Projects at $84 million and up 19% compared to last year, an improvement driven by the completion of a number of contracts and cost savings we have made. Operations saw revenue growth but a reduction in adjusted EBIT to $94 million as revenue growth and some improved pricing was offset by $24 million of charges recognized across 3 contracts. The largest loss here relates to 1 contract where our client trades under Chapter 11 and is currently going through a complex sale process. We expect to recover some of these losses in the future as we establish a relationship with the new owner. Group performance was lower than previously reported in our trading update on the 14th of February '25, with actual 2024 adjusted EBIT of $81 million versus previously reported $205 million to $215 million. And this difference was driven by $55 million of nonexceptional independent review charges, $46 million of losses related to the consulting and operations fee used, in part due to the extended time line of the results process, which led to further assessment of contracts in '25, and a revised assessment of the classification of some charges between exceptional and adjusted results. Whilst operating cash flow improved, we saw a free cash outflow of $153 million in the year despite the benefit of actively managing working capital at the year-end. Net debt excluding leases remain broadly flat after business disposals and at 31 December '24 was $683 million. The prior year was $694 million, after combined disposal proceeds in 2024 of $170 million. However, average net debt, excluding leases, was arrived at $8 billion throughout the year and the prior year was about $800 million. Our statute results show a loss of $2.8 billion with the largest impact being at $267 million reflecting revised revenue recognition on a legacy AFW Project, reflecting the stringent requirements of IFRS 15, $158 million of other exceptional items included in continuing operations related to further charges related to LSTK and large-scale EPC contracts, asbestos-related charges, the cost of our simplification program costs related to implementing the SaaS ERP system and charges related to the independent review. And finally, a $2.2 billion impairment of goodwill and intangible assets, reflecting the impact of higher discount rates and an increase in the risk factors, particularly around the Projects business unit, leading to significant downward revisions to forecast used. Turning to the H1 '25 results. Our results for the first half of '25 reflected the challenges we have faced. Whilst our order book grew overall, helped by some large EPCM opportunities and projects and big renewals in operations, revenue was down 13% compared to last year at $2.4 billion. Adjusted EBIT of $63 million was 38% lower than the last year when we exclude independent review charges. We faced some delays in key client programs in Projects and a slower-than-expected ramp-up in operations. Our trading was also impacted by the difficult situation we faced with a backdrop of uncertainty related to the independent review. The delays of publication of our 2024 audited accounts and the tightening of liquidity as the period progressed, given that we had to postpone our planned refinancing. In particular, access to our uncommitted financing facilities was restricted, including bonding and receivable facilities making it more difficult for us to win new business and begin work on new projects we had previously won, as well as creating a significant working capital unwind. Our trading in this period was reflective of these pressures. However, despite these challenges, our clients have continued to award us significant work during this period, and this is a testament to the excellent work our people do every day of our deep technical expertise. Given the continued uncertainty at this point, we are not providing financial guidance, having previously removed our profit forecast in the Sidara scheme document published in September '25. Wood remains well placed to benefit from significant long-term growth drivers across the energy and material markets, supported by our technical expertise and long-term client relationships. The company has continued over the last 18 months to receive strong support, including new awards from our client base with business wins during the year, including from BP, Shell, Total Energies, Woodside's Trion project, OMV, Petron and [indiscernible]. Our order book at the 30th of June '25 was around $6.5 billion, significantly improved in the $5.8 billion position at 31 December '24. The publication of our financial statements yesterday satisfies certain of the conditions relating to Sidara's offer. And a supplementary circular to the scheme document has been sent to shareholders. The Sidara offer represents the best through this difficult period and provides a clear pathway to secure the long-term future of the company to ensure -- to enable us to continue serving our clients around the world. The Board of Wood continues to recommend the shareholders book in favor of the transaction. To ensure shareholders have sufficient time with the supplementary circular prior to the vote, we have delayed the shareholder vote to 17 November 2025 at 3:00. Shareholder approval of the transaction will enable the extension of our debt facilities to 2028 to become effective and facilitate the receipt of the initial $250 million capital injection from Sidara, which will significantly reduce uncertainty and improve our liquidity position, creating a path to stability for the business our clients and our employees. Subject to the approval of our shareholders, the transaction is expected to complete in the first half of 2026. I would like to thank the employees of Wood for working tirelessly through 2025, continuing to deliver for our clients and for helping us to deliver on the audit of times. As previously announced, Ken Gilmartin will step down the shareholder vote on the Sidara acquisition, and I will take over as Group CEO. Since joining Wood, I have developed a strong belief in the underlying strength of the business, our client relationships and the quality of our people. We are now focused on improving the execution of the company's strategy for our clients and employees while delivering an outcome that delivers some value for our shareholders. I appreciate that there is a huge amount to digest across yesterday's announcements. I will be happy to take any questions. Thank you very much. Operator: [Operator Instructions] We will now take our first question. This is from Alex Paterson, Peel Hunt. Alexander Paterson: Well, congratulations on getting the results out anyway, but it's an enormous relief. I've got lots of questions, which apologies, very basic because, obviously, so many things have changed, and there's been so much going on, I'm slightly lost track of where we are on some of them. If I give you sort of maybe 3 or 4 at the start, and then we'll see if anybody else wants to ask any questions. But I was just going to say from the point of view of the listing, have you actually applied for to restart trading now? And how long do you expect it to take before you do? On the Sidara transaction -- sorry. Sorry, do you want to answer them in between? Or what's the easiest way do you think? Iain Torrens: There was a slightly technical glitch at our end there were suddenly disappear. So in the first -- I heard the first question, Alex. And then it may be that's helpful if you repeat the others. But in terms of readmission for trading, we've made the application. My expectation is that we will hear back from the FCA early next week. Alexander Paterson: That's great. And then can you just remind me of the outstanding conditions from Sidara and the process to deal completion? It sounds like you've got the 2024 balance sheet to meet those exceptional conditions. Shareholder votes is on the 17th of November. What are the other phases are the hurdles that you need to clear, please? Iain Torrens: Yes. So I mean, in essence, we are into normal regulatory approvals. So as you say from today, the next big event, shareholder vote on the 17th of November. Following that, we then receive the capital injection, the first $250 million from Sidara and our amend and extend with the bank facilities and the noteholders will go live without simultaneous. And you'll see in the annual report that gives us access to $200 million of bonding lines, which is incredibly important when we're looking at the commercial side of this business. We're then into normal regulatory approvals, all the regulatory filings to be made. So a normal cycle through to completion some time H1 2026. But there are no other specific Sidara conditions that were back into the normal regulatory type cycle. Alexander Paterson: So yes, so all the Sidara exceptional conditions have been met? Iain Torrens: That's correct. The exceptional conditions related to delivery of accounts by the 31st of October, and a clean balance sheet opinion have been met. Alexander Paterson: You removed your profit forecast from the Sidara scheme document and you've not given any financial guidance. What has changed to mean that you've done that, please? Iain Torrens: Well, I think if you look at both -- if you look at the interim results that were published yesterday, I think we illustrate a very complex world we're working in. It's both complex from an external perspective with our clients going through, in many cases, substantial internal change. But clearly, from a Wood perspective, we've had our own unique issues, and that's made it incredibly difficult to forecast outturn for the current year, when do clients, for example, starts -- when does work ramp up versus when we might expect the work to have ramped up. So we withdrew the forecast on the basis of really the ability to predict what would happen for the balance of the year. Quite normal in a public company takeover as you're aware, not to provide profit guidance. Alexander Paterson: Absolutely. And the -- just in terms of the legacy contracts, what remains to be completed? And the -- what's outstanding? If I remember correctly that you were basically had done everything other than Aegis. Is that the case? Or are there other things that are likely to need further work? Iain Torrens: Well, I don't think there's -- all of the legacy, when we look back to the legacy contracts, they have all now been completed, or from our perspective, complete. We have a deal of contractual disputes is probably 1 word you might use, which we're working through. We settled 1 of those. It was a very large one, just at the -- and it's reflected in the end of last year's results. So we're working through, I would say, the tail of contractual disputes, but there's no physical work taking place on the ground. What we have seen, and I'm sure Simon will be happy to take you through the bridge of it, as we work through independent review findings, the accounting treatment for some of these smelters is very complex. And it's fair to say, it doesn't always follow where you expect the commercial outturn to land their apartments around IFRS 15, in particular, and recognizing revenue need 85% certainty when you talk about highly probable that revenue won't reverse. So I think that's probably something. It's worth maybe a session with Simon just to walk through, how that all trues up into the balance sheet. But it's in the annual report in some detail. Alexander Paterson: Understood. Yes, forgive me, I've not been able to read all of that. Iain Torrens: It's not really a bed time reading. Alexander Paterson: I've never done so many searches for specific things, I think, in the document in such a short period of time. And then just finally, the -- just on the Aegis contract that obviously you've made a substantial increase to the provision there. And am I right in understanding that this is -- it's going to proceed to a trial? And if so, what are the sort of dates around that, please? Iain Torrens: I think a couple of things going on. I think, firstly, it falls squarely into that camp of accounting and looking at what information do you currently have and how do you get over that highly probable threshold. Now there's a significant amount of disclosure on it in a number of different places down to report. I think it's probably worth reading. Sitting here today, there is 1 of the path through is to ultimately, trial. On trial is a probably 3- to 5-year time horizon. The alternative, of course, is that we are able to reach a commercial settlement with the customer, which is the U.S. government. At this point, it's too early to determine which route becomes more likely. And there's -- I'd say, I'll have a look at the description and then having a follow-on session because it's fairly complicated. Alexander Paterson: Understood. Well, that's great from my side. I've got obviously a lot of reading to do. Operator: [Operator Instructions] There are no further questions coming through at the moment. So I will hand back to the speakers. Thank you. Iain Torrens: Thank you, everybody. And again, maybe going back to the start. I think having joined Wood earlier this year, it's at the heart, a fantastic business here. And I'd like to thank you all for your support. I know it hasn't been easy, and I appreciate the fact that we have delivered both the FY '24, but the interim statement later than would normally be expected. By all means, if you've got any further questions, please reach out to Simon, and we'll be very happy to help you going forward. Thank you. Operator: Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect. Speakers, please stand by.
Claus Jensen: Good morning, everyone. Welcome to the conference call for Danske Bank's financial results for the first 9 months of 2025. My name is Claus Ingar Jensen, and I'm Head of Danske Bank's Investor Relations. With me today, I have our CEO, Carsten Egeriis; and our CFO, Cecile Hillary. We aim to keep this presentation to around 20 minutes. After the presentation, we will open up for a Q&A session as usual. Afterwards, feel free to contact the Investor Relations department if you have any more questions. I will now hand over to Carsten. Slide 1, please. Carsten Egeriis: Thanks, Claus. And I would also like to welcome you to our conference call where I'm pleased to share the highlights of Danske Bank's financial results for the first 9 months of 2025. This period saw a solid financial performance rooted in our strategic priorities as outlined in our 428 strategy. Net profit for the first 9 months came in at DKK 16.7 billion, equivalent to a return on equity of 12.9% for the first 9 months and 12.6% for the third quarter. On the macroeconomic front, the Nordic region shows promising growth, aligning closely with structural rates. And despite some downward revisions of GDP growth for Denmark, the economy remains strong. The supportive low interest rates set by central banks in Europe are contributing positively to the business environment we are operating in. And our achievements can be attributed to a good performance across core income lines, prudent cost management and while maintaining strong credit quality. We are pleased with the increased commercial momentum that we saw during the first 9 months. This is in particular evident from an uplift in lending and deposit volumes of 4% and 3%, respectively. The positive traction for lending is mainly due to higher customer activity in the corporate segment, whereas the increase in deposits is driven by the retail segment where our customers favor savings over spending. Our asset management business continues to grow, reaching an all-time high of more than DKK 950 billion in assets under management, bolstered by strong net sales in both the private banking and institutional segments. Credit quality continued to be strong and was supported by favorable macroeconomic conditions. For the first 9 months, the loan loss ratio amounted to 2 basis points, unchanged from the preceding quarter, and the PMA buffer is kept largely unchanged. And then just a few comments when comparing to the preceding quarter. Core income came in slightly better. NII was unchanged as a combination of lending growth and the contribution from our structural hedge had a positive effect that offset the impact of lower market rates. Fee income was higher due to a positive development in asset prices and continually strong momentum for net sales across all channels within asset management, which resulted in a solid increase of 6% in assets under management. We, therefore, maintain our guidance range from net profit of between DKK 21 billion and DKK 23 billion. However, we now expect net profit to be at the upper end of that range. The expectation is driven by better NII and an improved outlook for loan impairment charges, which we now expect to be no more than DKK 0.6 billion. And then Slide 2, please. At Personal Customers, we saw a stable financial performance supported by deposit growth and healthy customer activity while managing the impact of policy rate cuts on deposit margins in the first 9 months of the year. In Q3, total income was supported by an 8% increase in fee income that reflected a positive uplift across all fee categories. Net interest income also benefited from an updated hedge -- our updated hedge allocation framework, and Cecile is going to talk about that a little bit later. We continue to see strong credit quality and prudent cost management, which support our 2026 financial objectives and the trajectory on cost income and return on allocated capital is in line with our 2026 targets. In terms of lending, the development in home loans generally remained stable, reflecting a somewhat subdued housing market when looking across the Nordic countries as a result of cautious consumer sentiment. In Denmark, housing market activity has gradually risen and total home loans in PC Denmark grew modestly as the lending volume of our bank home loan product, Danske Bolig Fri, increased by another 11% in Q3 and is now up more than 35% year-on-year. This is also a reflection of changed customer preferences with customers substituting the more conventional Realkredit Danmark mortgage product by bank home loans, which highlights our ability to offer flexible loan products through a rate cycle. And then simultaneously, we've adapted our pricing and our holistic advice to serve our customer needs and enhance Realkredit Danmark's competitiveness. And then finally, while deposit volumes are typically affected by increased summer spending, we continue to see elevated cash savings and an overall 2% deposit growth year-on-year. And then additionally, our commercial traction within Private Banking was underpinned by another quarter of higher net sales and inflow to investment products. And this, in turn, drove assets under management to record high levels and again shows our ability to expand offerings and support customers' financial planning regardless of the market environment. Slide 3, please. At Business Customers, we see the momentum building and our financial performance reflected continued progress on our commercial priorities. Core banking income was up 3% in the third quarter relative to the same quarter last year, supported by solid fee income driven by higher everyday banking fees, including FX activity as well as finance-related fee income growth. Total income quarter-on-quarter was supported by stable fee income despite typical seasonality and NII benefited from the updated treasury allocation framework. Our growth agenda was supported by improved credit demand and our efforts to expand our customer base, resulting in increased market shares across all 4 Nordic countries. And this was underpinned by the growth in lending volumes of 1% quarter-on-quarter and then 4% year-on-year, which again was largely broad-based across industries. With a sustained focus on diligent cost management, the cost-income ratio continues to be in line with our 2026 target and the robust credit quality and benign level of impairments further supported profitability with profit before tax increasing 3% quarter-on-quarter and in line with our 2026 targets. Our strategy execution has been encouraging and clearly highlights the business potential, and we continue to focus on improvements to our digital offerings, coupled with targeted advisory services to support customers efficiently across the region, where complex solutions are in demand from our customers across the Nordics. And then Slide 4, please. In our Corporate and Institutional franchise, we saw a strong financial result for the first 9 months of the year. Total income was up 8% year-on-year as we continue to leverage our strong balance sheet to the benefit of our corporate and institutional customers and saw strong customer demand for our investment solutions. In addition, we focus on executing our strategy to be the leading Nordic wholesale bank. Importantly, our leading solutions in product areas such as loan capital markets, debt capital markets and cash management see solid customer demand and help us continue to attract new corporate customers outside Denmark, in turn, delivering on our strategy. Total income was up 1% relative to the second quarter, driven by solid customer activity in our markets area alongside continually strong credit quality. And this helped us generate a return on allocated capital of 25%, well ahead of our 2026 target. And then we continue to grow our corporate lending book. We saw lending growth of 12% year-on-year and 4% quarter-on-quarter. We were also very proud that as the only Nordic bank, Danske Bank was mandated as joint global coordinator in the largest ever capital raising transaction in the Nordic countries. Operating expenses, they grew 2% relative to the second quarter as we continue to invest in the business and selectively add competencies as needed to drive our advisory offering and execute the strategy. And then assets under management grew 6% in the third quarter relative to the preceding quarter to a record high level of DKK 954 billion, primarily driven by strong net sales across channels and also a robust investment performance. And then with that, let me hand over to Cecile for a walk-through of our financial results for the group, and that's on Page 5, please. Cecile Hillary: Thank you, Carsten. As Carsten just mentioned, our financial performance was solid in the first 9 months of the year. Net profit for the group came in at DKK 16.7 billion and was down 5% year-on-year, firstly, due to the loan impairments line and secondly, from lower insurance income. NII remained stable as the impact of rate cuts was mitigated by the growth we saw in volumes and the contribution of our structural hedge. Fee income benefited from higher customer activity and the growth of assets under management. The result for the third quarter came in at DKK 5.5 billion, up 1% from the level in the second quarter, mainly due to lower loan impairment charges. Total income was slightly down as income from both trading and insurance activities decreased from strong levels in the second quarter. This decline was partly mitigated by stronger fee income, thanks to the rebound in customer activity in the third quarter. Trading income saw a decline in Q3, mainly due to valuation adjustments in group treasury and a one-off in Q2. Trading income from customer activity at LC&I was on par with the level in Q2. Income from insurance activities came in lower in the first 9 months of 2025 compared to the year before, partly due to an increase in provisions in the first quarter. In the third quarter, the result was lower due to return on investments and the results of the health and accident business. We continue to focus on repricing, preventive care and reactivation initiatives to improve the financial outcome of insurance contracts and respond to current market trends related to long-term illnesses. Operating expenses were almost unchanged relative to the same period last year as well as the preceding quarter. And finally, as Carsten mentioned, credit quality remained strong with a net reversal in the third quarter. Slide 6, please. Let us take a closer look at the key income lines, starting with net interest income. Overall, NII remained stable both year-on-year and quarter-on-quarter despite the impact of lower rates on deposit margins. When comparing net interest income, not only with the same period last year, but also with the preceding quarter, NII has benefited from a continually positive development in lending volumes, particularly evident on the corporate side. The growth in deposit volumes contributed to NII year-on-year with a stable quarter-on-quarter level. In addition, our deposit hedge has helped to mitigate the impact of rate cuts on deposit margins and the lower return on shareholders' equity. In this context, please be aware that as part of our ongoing focus on asset and liability management, we have increased our bond portfolio hedge slightly to approximately DKK 170 billion. With respect to deposit margins, the increase that can be observed relates to changes to our fund transfer pricing framework implemented in the second quarter with the objective of allocating NII from the structural hedge to the business units according to their contribution. It is important to note that these are not driven by changes to customer pricing and do not impact group NII. Our NII sensitivity, which was updated in the second quarter, remains unchanged. With respect to expectations for the full year, I would like to highlight that they are based on the current rent environment with forward rates as of the end of September and subject to balance sheet developments. We consider the current market view and consensus on NII to be a good indication for the full year of 2025. Now let us turn to fee income. Slide 7, please. Our fee income grew by 2% relative to last year. Adjusted for a nonrecurring item from last year and the divestment of PC Norway, fee income was up 3%. The increase mainly came from everyday banking transactions due to higher activity among existing as well as new customers. Relative to the second quarter, fee income was up 3% in the third quarter, driven by higher investment activity among our customers and the recovery from the sentiment we saw in the second quarter. Investment fees benefited from increasing asset prices and continued growth in assets under management with positive net sales for all types of clients. Income from financing had a positive effect in the third quarter, driven by higher corporate activity, whereas fee income from everyday banking and capital markets transactions declined slightly from the second quarter due to summer seasonality. However, the somewhat muted transaction activity in ECM and M&A was offset by continually good primary activity in DCM and LCM. Next, let us look at net trading income, Slide 8, please. Net trading income increased 12% from the level in the same period last year. The increase was mainly due to positive market value adjustments in group treasury, partly offset by xVA adjustments. Trading income at LC&I improved from the level in the same period last year due to higher customer activity. In Q3, customer activity at LC&I held up well despite the third quarter being a seasonally slower quarter. Net trading income was down 27%, mainly due to the positive one-off item booked in the second quarter as well as valuation adjustments made in group treasury. This concludes my comments on the income lines. Let's turn to expenses. Slide 9, please. Looking at the cost development for the first 9 months, our focus on cost management and improved efficiency continues to yield the expected results. Operating expenses are in line with our full year guidance of up to DKK 26 billion. And at 45.6%, the cost-to-income ratio is progressing towards our 2026 targets. Relative to the level last year, costs were in line as structural cost takeouts and the planned reduction in costs for the financial crime plan mitigated the impact of wage inflation and performance-based compensation. The relatively modest increase in digital investments should be seen in the light of the significant ramp-up we made last year. Relative to the preceding quarter, costs were down by 1%, mainly due to lower costs related to financial crime prevention, which continued the trajectory towards a lower run rate by year-end according to plan. While the cost discipline and trajectory during the year have been encouraging, we continue to expect full year expenses to end close to the guided level given higher quarterly costs in Q4 due to seasonality. Slide 10, please. Let us take a look at our credit portfolio and the trend in impairments. Credit quality continued to be strong, underpinned by a well-diversified and low-risk credit portfolio. The macroeconomic environment remained benign with increasing employment and steadily improving household finances. Consequently, impairments continue to be below the normalized level. In the third quarter, credit deterioration related to a few single name exposures was offset by workout cases. In combination with the update of our macroeconomic models, we saw a small net reversal for the quarter. The update of the macroeconomic models included a small revision to the weighting of our scenarios towards a slightly more balanced approach with the upside scenario now weighted at 25%, the base case scenario at 50% and the downside and severe downside scenarios combined at 25%. In addition, we have kept our PMA buffer unchanged at DKK 5.7 billion. The decreases in PMAs for CRE and agriculture have been reallocated to global tension. We continuously keep our macroeconomic scenarios under review in conjunction with the PMA buffer. Given the strong asset quality we saw in the first 9 months, we have lowered our full year guidance for loan impairment charges from around DKK 1 billion to no more than DKK 0.6 billion. Slide 11, please. Our capital position remained strong in the third quarter and was further supported by another quarter of solid capital generation post dividend accrual and lower REA as a result of lower market risk. At the end of Q3, the reported CET1 capital ratio was unchanged compared to the preceding quarter at 18.7% despite a temporary impact from Danica of around 0.4 percentage points due to the call of a Tier 2 instruments. We continue to operate with a healthy CET1 buffer versus the regulatory requirements now at 390 basis points, and we intend to progress steadily in the coming years towards our stated capital target of a CET1 capital ratio above 16%. The ongoing share buyback program we announced in February is being executed and will continue to provide support throughout the year. Now let us turn to the final slide and our financial outlook for 2025. Slide 12, please. As previously mentioned by Carsten, we reiterate our outlook for net profit to be in the range of DKK 21 billion to DKK 23 billion. However, we now expect net profit to be in the upper end of that range. For total income, we continue to expect slightly lower income this year than in 2024. Income will be driven by lower albeit resilient net interest income and will be supported by our focus on fee income. We will continue to drive the commercial momentum and growth in line with our financial targets for 2026. Income from trading and insurance activities remain subject to financial market conditions. We continue to expect operating expenses of up to DKK 26 billion, reflecting our focus on cost management and cost-to-income targets for 2026. We have revised our full year guidance for loan impairment charges of around DKK 1 billion due to continually strong credit quality. We now expect loan impairment charges of no more than DKK 0.6 billion. And finally, our financial targets for 2026 also remain unchanged, subject to our current economic and market expectations. Slide 13, please, and back to Claus. Claus Jensen: Thank you, Cecile. Those were our initial comments and messages. We are now ready for your questions. Please limit yourself to 2 questions. If you are listening to the conference call from our website, you are welcome to ask questions by e-mail. A transcript of this conference call will be added to our website within the next few days. Operator, we are ready for the Q&A session. Operator: [Operator Instructions] And our first question today comes from the line of Shrey Srivastava from Citi. Shrey Srivastava: Two for me, please, one bigger picture and one sort of more technical. I want to ask about recent M&A activity that you've seen in the Danish market and how it affects your view on the competitive landscape across your various business areas and how you're changing your strategy in response to that, if at all? That's the first. And the second one is you -- it's going back to your comment on the deposit hedge. You've been increasingly using derivatives to manage the interest rate risk in the banking book. And it says in your report that you begin to -- you expect to begin use of derivatives in a hedge accounting format in the first half of next year. Can we get some more color around this decision and what sort of impacts we can expect to see, if at all, and the rationale? Carsten Egeriis: Thanks for that. I'll take the first one, and then I'll hand the second one over to Cecile. M&A landscape in Denmark, we've obviously seen the news this week of the Sydbank and Arbejdernes Landsbank merger. I think this is very much in line with -- not speaking to the specific merger, but the consolidation and acceleration of consolidation is very much in line with what we have been expecting. And I've said before that particularly the changes around the competition landscape on Realkredit related to the Totalkredit decision some time ago would make it more interesting, beneficial to consolidate. And so this is very much in line with that. We don't see any change to our strategy. We're focused on continuing to deliver our strategy, growing with our customers, taking market share. We're investing in technology. We're investing in advisory services, and we believe that we have a very good focus strategy and position in the Danish market. And yes, so no changes in strategy. Cecile, do you want to take the deposit hedge question? Cecile Hillary: Yes, absolutely. So in terms of the deposit hedge, Shrey, currently, it includes the bond hedge, the loan hedge, but we don't use yet derivatives. That's in plan indeed for next year. So let me unpack these different components. The deposit hedge or structural hedge, obviously, as we call it, includes a bond hedge, which, as I've just mentioned, has increased this quarter from DKK 160 billion to DKK 170 billion, really reflecting the continued stability and strength of our deposit base. That bond hedge is -- has got an average life of about 3, 3.5 year average life and obviously provides the NII support that we're aiming for. In addition, there is a loan hedge, which is about DKK 200 billion. That loan hedge is not a perfect hedge from the point of view of deposit hedge in the sense that there are several durations. There is also a little bit of optionality with respect to certain loans, but we still see that as obviously a good hedge when it comes to providing NII support. Going forward, our intention is indeed, and we're very progressed in our capabilities now to use derivatives in order to affect our structural hedge. And those derivatives would be, as we would expect, hedge accounted, meaning that effectively, they will not create sort of mark-to-market volatility precisely because they will be effectively hedging our deposit book. Having -- so what will it do? It provides additional liquidity and additional ease effectively of reinvesting the deposit hedge. However, what it doesn't do is it does -- it's not necessarily in itself going to increase the hedge. Effectively, the way it would be managed is that derivatives would slowly replace part of the bond portfolio that we currently have in place. So that's to give you a little bit more detail on this hedge. Operator: Your next question today comes from the line of Namita Samtani from Barclays. Namita Samtani: My first one, do you expect net interest income to grow into 2026 now? And could you explain me how you think about the structural hedge going into 2026? Do you still expect it to be accretive? And my second question, in Danica, there was a health and accident provision in Q4 of last year. Will the same happen again in the fourth quarter? Carsten Egeriis: Thanks, Namita. In terms of NII, we'll come with an updated guidance as part of year-end. So I think I'll keep my focus today on the quarterly results. But as you've seen, NII has stayed pretty stable and rates have now stabilized. And at the same time, we continue, of course, to have a strategy where we're focused on growing our balance sheet, including our lending. And I think, again, you could probably think about the hedge accretion as being close to neutralizing as rates now are stabilizing at 2%. But again, we'll update on '26 NII outlook as part of year-end. And then on Danica, we do do model updates every year on the health and accident, and we continue to do that. And there is no question, as you've seen that the health and accident continues to be under some level of pressure, but it's too early to say what the quarterly updates will show, but we continue to be focused on one, improving the operational management, which includes particularly being much more proactive towards our customers in terms of how we can help them. And then at the same time, of course, it is also correlated with health trends and that includes mental health illness trends, which still are quite high in Denmark. Namita Samtani: Could I just have a follow-up? The fourth quarter '25 NII, do you still expect that to be flattish versus the third quarter? Carsten Egeriis: I would say at this stage, of course, again, we don't want to give an outlook on Q4. But again, there is still some remnants of impact of the reducing interest rates that we've seen earlier and that offset by the volume growth that we're seeing. So we continue to feel good about the level of NII that we're seeing in Q3 into Q4. That's probably the way I would formulate it. Cecile Hillary: I would guide you to for -- if you want to think about the NII for the full year, actually, we find that consensus and market expectations are actually pretty accurate. Operator: Your next question comes from the line of Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: Yes. It's Sofie from Goldman Sachs. So the first question would be the risk-weighted asset decline that we saw. Should we expect any further risk-weighted asset declines to come? And how should we think about any further kind of capital headwinds or tailwinds in the coming quarters? And related to that, kind of given that you have the U.S. corporate probation coming to an end this year, is there anything that you think would restrict Danske from distributing over 100% of profits in 2026? What is the FSA's general thoughts around over 100% distribution? So if you could kind of comment around that. Carsten Egeriis: On the first one, REA decline, there's a particular sort of larger movement, if you will, on market risk. This tends to move a little bit up and down depending on market. So I wouldn't say that we should see any particular movements on REA and more think about REA as a function of growth. So no particular sort of movements expected either way. And then on U.S. probation, I think I've earlier said that we have before distributed over 100% of capital also in line with the sale of, for example, the Norwegian retail business. So that is not a constraint in itself. But we will update on the capital strategy and distribution strategy as part of our Q1 results where we're also planning to give an update on, obviously, both '26, but also financial metrics targets for '28. Sofie Caroline Peterzens: Okay. That's clear. And just going back to the risk-weighted asset growth. In the fourth quarter, should we expect any increases from the operational risk? Carsten Egeriis: Not major. I mean, you're right, we do update it every year. And as you know, we're on standardized and it's a little bit of a function of income. And as you know, income has been pretty stable year-on-year. So I wouldn't see it as anything material. There will always be some movements, but nothing material. Operator: Your next question comes from the line of Tarik El Mejjad from Bank of America. Tarik El Mejjad: Two questions, please. First, on the corporate growth. Can you maybe shed some light on what sectors or what area is growing because you're posting quite a healthy growth here and came a bit of a positive surprise. And the second one is on the cost of risk. I mean you had releases without PMA releases. And I want to understand if there is a particular specific area where you had some releases on some files? Or is it just a structurally lower cost of risk? Carsten Egeriis: Yes. Tarik, thanks for that. On corporate growth, it's broad-based. We've been looking at exactly that question. And there are no particular sectors driving that. One would have thought, okay, maybe the defense side, the energy side. In fact, I think that those growth opportunities are yet to come at larger scale. And in fact, the growth we're seeing at this stage is, yes, pretty broad-based. And again, broad-based, but also driven by the fact that we see that we're taking market share in corporate lending across the Nordics in line with our strategy. Cost of risk, nothing particular. Look, we've kept the PMA stable, as you've seen. And PMAs, I would say, are still at the higher end of what you would sort of expect through the cycle. A large part of it, as you can see in the breakdown also sort of linked with general macro uncertainty. If you look at sort of the actual flows in -- through stage 1, 2, 3, I think nothing particular that we would call out. We continue to see strong asset quality and sort of stable flows. Cecile Hillary: And if I can maybe add to that. The release and the impairment line that you see, indeed, obviously without any changes to the PMAs other than some redistribution from the CRE and agriculture line into global pensions is really linked to 2 different things as well. So one, actually, if you look at the various divisions, we actually saw net reversals both in LC&I and BC. So obviously, some strong workout cases there and some recoveries. Net-net, positive in PC, but frankly, very minimal. So all in all, clearly, a very strong asset quality all around. And then some moderate impact from the IFRS 9 models, where we have made a few changes just to obviously reflect economic assumptions, number one. And also the weighting of the scenarios has slightly changed to be more balanced with a sort of 50% base case instead of 55%, 25% upper case and 25% combined severe downside and downside cases. Tarik El Mejjad: Okay. Can I squeeze in a very quick follow-up on the other and treasury line, this is more for our models, to be fair. I want to understand what's the big negative there just for the future period? Cecile Hillary: Is that on the trading income line that you mentioned? Tarik El Mejjad: Yes. Cecile Hillary: Yes, yes. So on the trading income line, there are 2 reasons why this came down quarter-on-quarter. And again, just to be clear, this is not linked to LC&I. So the first one is the one-off in Q2, which was the sale of the export finance shares, which I think we mentioned in Q2. The second thing is, as you mentioned, indeed, is treasury effectively market valuation adjustments. What it is there is as part of our hedging. So obviously, these are not open positions, but purely hedging of both interest rates and currency and FX risk. We obviously use derivatives. These derivatives are held at fair value in the center. So in this case, obviously, in treasury. And clearly, they will fluctuate according to rates and FX considerations in the market. And sometimes they go up, sometimes they go down, and this is effectively what it comes to. So I will reiterate, this is not due to any economic loss, and there is always some fluctuations up and down throughout quarters. Operator: Your next question today comes from the line of Mathias Nielsen from Nordea. Mathias Nielsen: Congrats on the strong underlying results this quarter. So the first question goes like if we take a step back and look a bit into the next year, like if you were to highlight the top 3 priorities like both strategically and financially into '26, which 3 things would you then highlight as the most important? And secondly, maybe related to this, when I look at the lending growth in LC&I, it clearly looks like you're getting to a strong business momentum there. It also looks like the business customer segment is starting to look stronger and stronger and pretty strong as well. And then lastly, like when do we see the personal customers? I know it's always easier to get business momentum with the big clients because you're closer to them than the small clients. But when should we expect the personal client segment to get even more on fire compared to where we see today? Carsten Egeriis: Thanks, Mathias. Look, as we look into '26, it's really about continuing on our Forward '28 strategy. we said that we wanted to be the leading wholesale bank in the Nordics, a leading bank for SMEs across the Nordics with sort of more complex needs and then a leading private bank and personal bank in Denmark and Finland. And we continue to invest in both advisory capabilities and in technology and to ensure that we can really deliver a leading bank across those priority segments and focused customer groups. So that's what '26 and out to '28 is all about. There's no question that since the presentation of our strategy in June '23, technology has moved quite significantly in terms of what we're seeing in artificial intelligence more broadly. So no question that is a huge focus is how can we accelerate and augment our existing strategy by investing further in artificial intelligence and using technology to position us even stronger. To be more specific, we're also investing in capital markets and advisory capabilities in Norway and Sweden across our Private Banking segments. And as you've seen here in Denmark, Mathias very heavily in our technology digital solutions where we're investing heavily in both our district platform for corporates and in our mobile bank for Personal Customers. Your question on Personal Customers and when do we see as much clear green shoots and clear blue water in terms of acceleration and business growth. Look, I would say on the one hand side, on Personal Customers, where I would call out strong traction is private banking and investments. You see us taking market share on the investment side in Denmark. That's closely linked with also good traction in Private Banking, where, in fact, we're also increasing customer inflow. We're investing in our family office in that area as well and see good traction. And then it does take longer to move the needle on the broader retail segment. Our focus is really on the customers that require more advisory-heavy solutions. And we do see customer inflows in those segments. And we continue to, again, invest in, for example, the housing, the mortgage area, where we believe that we need to do more. So hopefully, that's helpful and gives you a few examples of what we're doing. Cecile Hillary: If I may, let me add, you asked for obviously financial objectives. And obviously, Carsten gave you the sort of strategic and financial combined. I would add that one of certainly my key objectives and the group's key objectives is also to ensure that the group is efficient, right? So our focus on cost will remain and our focus on cost-to-income ratio. And that focus on ensuring that we balance obviously the need to be efficient and the need to continue to invest, both of which obviously can enhance each other. So that's on the priorities. On the PC side, the other thing I would add to what Carsten mentioned is that I am pleased to see that on the housing front, on the financing on the housing front, we have stabilized volumes. That's particularly the case in Denmark. And we have done that whilst protecting profitability, right, and returns. And given the competitive situation that we operate in, the fact that we managed as we obviously endeavor to do to continue to balance, obviously, the competitive pressure we're seeing on the RD side with our progress that has been extremely significant on the bank lending side and protect, as I mentioned, profitability has been pleasing to see. Mathias Nielsen: So just to wrap all your things you set up, like the way I understand it is like there's still some way to go to -- to get to the peak performance of how much you can actually deliver after what -- in turnaround after all this AML cases. Is that fairly understood that you're not at a fully up running state yet? Carsten Egeriis: We absolutely see plenty of unrealized potential, not least in the PC segment, but certainly also in the corporate segments where we're still punching below our weight across the Nordic countries. We still have a challenger position in many areas in those countries and have much more opportunity to again grow market share. Operator: [Operator Instructions] We will now take the next question -- and the next question comes from the line of Martin Gregers Birk from SEB. Martin Birk: Just continuing along the lines of Personal Customers, I guess your Q3 numbers is perhaps implicitly also another testament to your successful Danske Bolig Fri. Do you guys see a limit to that story? And when does that dilute RD too much? That would be my first question. Then the second question goes back to the M&A story that is unfolding in the Danish space. You have a [ Sydbank ] that is increasingly talking to large customers being attractive, you have a Nykredit which has beefed up their own bank balance sheet after acquiring Spar Nord. [ Sydbank ] now that is also getting a balance sheet that allows them to tap into this segment. Do you feel increased competition from this? And when is -- when sort of does your role as a big brother in the Danish banking market? Or let me rephrase this, when are sort of the little brothers in the Danish banking market becoming too big and that forces you to act? Carsten Egeriis: Thanks, Martin. I think on DBF, Danske Bolig Fri, so the bank lending side and then the Realkredit side. Look, I see this very much as being able to offer our customers a broad range of products based on both market situation. So where rates have been, it's been interesting to take out a bank loan given the increased flexibility around that. So I think we're very much focused on being able to offer the broad palette of products and services and then letting customers decide. So I see that we can both continue to grow in Danske Bolig Fri, but certainly also have a lot of focus on growing the Realkredit side of things. And as you all know from Denmark, we're investing really heavily again in improving our Realkredit offering, both digitally with the housing universe with giving customers faster turnaround on decisions with giving them more clarity on how much they can borrow as well as making targeted price adjustments where we think it's interesting. So again, much more opportunity there. M&A story, competition, is there competition? Yes. Is that -- is it a very competitive market environment out there? For sure. I think we've been able to show that we can grow and take market share in that. I'm not concerned about the consolidation in the Danish market. I welcome that consolidation. We have a strong strategy, which we think is very competitive, very compelling. And with the pace of change that we're moving and the investments we're moving with, we think that we can continue to grow in the market. Claus Jensen: Can we have the last question, please? Operator: Your last question today comes from the line of Jacob Kruse from Autonomous. Jacob Kruse: So just 2. So firstly, you talked about being a challenger in some of the other markets. How do you view your sort of nonorganic growth opportunities there? I think there's been clearly a lot of activity going on. And with respect to, I guess, it's the 13th of December where you come off the probation period. Does that immediately change something? Or what's the time line there? And then secondly, just on the -- you mentioned on the structural hedge, this replacement going into derivatives and an increase in liquidity. Will that have any effect on your NII or P&L? Carsten Egeriis: Thanks, Jacob. I think, as I've also mentioned before, that the Nordic markets, particularly Sweden, would be an interesting market to look at nonorganic and we'll continue to do so. There is nothing sort of relevant at this stage. We continue to be focused on our organic strategy, but we certainly are continuing to scan the market and looking at opportunities on the nonorganic side as well. But again, very important to underline within the focus segments that I also mentioned before in terms of where our strategy focus is. No, I don't think that the post probation changes -- I mean, it changes that we will update our capital situation and distributions situation because we've always said that we would be carefully looking at legacy excess capital during this period. And so we'll have that discussion. And again, our preference is that we grow and use our capital to grow at interesting return levels, but we'll also look at other opportunities. And then, Cecile, do you want to just talk about the hedge piece? Cecile Hillary: Yes, I'll take the hedge piece, and thank you for your question, Jacob. Just to confirm, the inclusion of derivatives is effectively going to help us manage more effectively the reinvestment of the hedge. In itself, it doesn't add additional NII or it could, but I would say, marginally just because of the additional liquidity, the additional ease of effectively targeting a certain point, I guess, in the curve. So I would say any additional uplift due to derivatives specifically is more marginal. But just to take a step back, right, with the deposit hedge, the bond hedge and the loan hedge combined, we expect to continue to get a very good lift in the coming years, particularly next year before, as Carsten mentioned, in horizon, a few more years tailing off, right? But I mean, the lift will continue to be there to NII. Carsten Egeriis: Okay. Thank you very much, everybody, for your interest in Danske Bank. Very much appreciate the questions. And as always, please do reach out to Investor Relations and Claus, if you have any questions.
Operator: Good day, and thank you for standing by. Welcome to the Wood Group Half Year Results Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Iain Torrens, Group CFO. Please go ahead. Iain Torrens: Thank you, and good morning, everybody, and welcome to the Wood Group Half year '25 announcement. So just to begin, this past year has been 1 of significant challenge and transition for the group. That said, we are pleased to have published our full year '24 annual report and accounts and H1 '25 interim results, together with the supplementary circular to the Sidara acquisition. I would like to thank our shareholders, employees and clients for their continued support and patience during what has been an extremely difficult period. I also believe yesterday represented an important milestone for Wood in moving forward, providing stability for the business and delivering some value for shareholders through the proposed Sidara acquisition. The preparation of the financial statements and the subsequent completion of the order process has taken longer than anticipated, reflecting the complexity of the issues identified and the extensive work required to ensure the integrity of the financial statements and appropriate safeguarding their preparation. Due to the passage of time, the departure of key personnel and the inherent limitations in applying retrospective knowledge to historic events. It was not possible to determine with precision the appropriate financial periods for certain adjustments. Accordingly, our focus in the first instance has been to ensure that the 31 December 2024 balance sheet reflects an accurate and reliable position with allocations to financial periods undertaken on an estimated basis. This approach provides a clear and definitive starting point of the group as it moves forward. It also satisfies certain of exceptional conditions related to the Sidara offer, enabling us to move forward with the shareholder vote for the Sidara acquisition. In response to these challenges, we have taken and are continuing to take decisive action to reinforce governance and financial discipline. This has included leadership changes within the finance function, the engagement of external technical accounting experts and the implementation of enhanced controls. Whilst the restatement of prior year results and the adjustments identified through our auditors challenge and the independent review have been significant, they represent an important step in restoring confidence ensuring compliance with accounting standards and maintaining the integrity of the group's financial records on financial statements. Against this backdrop, I will today provide some high-level context in the financial statements and take any questions at the end, you may have, recognizing that the full detail, including the impact of restatements as set out in the published documents. Looking ahead, now that the financial statements have been published, our focus is on bedding these improvements, strengthening our operating model and delivering sustainable value for the business. We are also seeking the readmission of shares as soon as possible to the resumption of trailing. If we look first at 2024, revenue of $5.5 billion in '24 was down 1% compared to '23, with growth in operations offset by a significant decline in consulting and a small decline in projects. Adjusted EBIT of $81 million in '24 was 52% lower than '23, despite benefiting from the cancellation of the year's employee annual bonus originally planned to be $36 million. Included within adjusted EBIT of $55 million of independent review charges that will not repeat in future periods. To help explain our results, we have shown this as a separate line item. Even excluding this, we saw an underlying decline in profitability across all business units. Consulting saw a 68% reduction in adjusted EBIT to $20 million. This was -- this mostly relates to $22 million of losses on 1 contract in our system integration business within Digital Consulting, where we recognized a $16 million loss provision and derecognized $6 million of revenue. In Projects, where we saw an adjusted EBIT of $38 million, though this includes $46 million of charges related to the independent review. Excluding this, so adjusted EBIT for Projects at $84 million and up 19% compared to last year, an improvement driven by the completion of a number of contracts and cost savings we have made. Operations saw revenue growth but a reduction in adjusted EBIT to $94 million as revenue growth and some improved pricing was offset by $24 million of charges recognized across 3 contracts. The largest loss here relates to 1 contract where our client trades under Chapter 11 and is currently going through a complex sale process. We expect to recover some of these losses in the future as we establish a relationship with the new owner. Group performance was lower than previously reported in our trading update on the 14th of February '25, with actual 2024 adjusted EBIT of $81 million versus previously reported $205 million to $215 million. And this difference was driven by $55 million of nonexceptional independent review charges, $46 million of losses related to the consulting and operations fee used, in part due to the extended time line of the results process, which led to further assessment of contracts in '25, and a revised assessment of the classification of some charges between exceptional and adjusted results. Whilst operating cash flow improved, we saw a free cash outflow of $153 million in the year despite the benefit of actively managing working capital at the year-end. Net debt excluding leases remain broadly flat after business disposals and at 31 December '24 was $683 million. The prior year was $694 million, after combined disposal proceeds in 2024 of $170 million. However, average net debt, excluding leases, was arrived at $8 billion throughout the year and the prior year was about $800 million. Our statute results show a loss of $2.8 billion with the largest impact being at $267 million reflecting revised revenue recognition on a legacy AFW Project, reflecting the stringent requirements of IFRS 15, $158 million of other exceptional items included in continuing operations related to further charges related to LSTK and large-scale EPC contracts, asbestos-related charges, the cost of our simplification program costs related to implementing the SaaS ERP system and charges related to the independent review. And finally, a $2.2 billion impairment of goodwill and intangible assets, reflecting the impact of higher discount rates and an increase in the risk factors, particularly around the Projects business unit, leading to significant downward revisions to forecast used. Turning to the H1 '25 results. Our results for the first half of '25 reflected the challenges we have faced. Whilst our order book grew overall, helped by some large EPCM opportunities and projects and big renewals in operations, revenue was down 13% compared to last year at $2.4 billion. Adjusted EBIT of $63 million was 38% lower than the last year when we exclude independent review charges. We faced some delays in key client programs in Projects and a slower-than-expected ramp-up in operations. Our trading was also impacted by the difficult situation we faced with a backdrop of uncertainty related to the independent review. The delays of publication of our 2024 audited accounts and the tightening of liquidity as the period progressed, given that we had to postpone our planned refinancing. In particular, access to our uncommitted financing facilities was restricted, including bonding and receivable facilities making it more difficult for us to win new business and begin work on new projects we had previously won, as well as creating a significant working capital unwind. Our trading in this period was reflective of these pressures. However, despite these challenges, our clients have continued to award us significant work during this period, and this is a testament to the excellent work our people do every day of our deep technical expertise. Given the continued uncertainty at this point, we are not providing financial guidance, having previously removed our profit forecast in the Sidara scheme document published in September '25. Wood remains well placed to benefit from significant long-term growth drivers across the energy and material markets, supported by our technical expertise and long-term client relationships. The company has continued over the last 18 months to receive strong support, including new awards from our client base with business wins during the year, including from BP, Shell, Total Energies, Woodside's Trion project, OMV, Petron and [indiscernible]. Our order book at the 30th of June '25 was around $6.5 billion, significantly improved in the $5.8 billion position at 31 December '24. The publication of our financial statements yesterday satisfies certain of the conditions relating to Sidara's offer. And a supplementary circular to the scheme document has been sent to shareholders. The Sidara offer represents the best through this difficult period and provides a clear pathway to secure the long-term future of the company to ensure -- to enable us to continue serving our clients around the world. The Board of Wood continues to recommend the shareholders book in favor of the transaction. To ensure shareholders have sufficient time with the supplementary circular prior to the vote, we have delayed the shareholder vote to 17 November 2025 at 3:00. Shareholder approval of the transaction will enable the extension of our debt facilities to 2028 to become effective and facilitate the receipt of the initial $250 million capital injection from Sidara, which will significantly reduce uncertainty and improve our liquidity position, creating a path to stability for the business our clients and our employees. Subject to the approval of our shareholders, the transaction is expected to complete in the first half of 2026. I would like to thank the employees of Wood for working tirelessly through 2025, continuing to deliver for our clients and for helping us to deliver on the audit of times. As previously announced, Ken Gilmartin will step down the shareholder vote on the Sidara acquisition, and I will take over as Group CEO. Since joining Wood, I have developed a strong belief in the underlying strength of the business, our client relationships and the quality of our people. We are now focused on improving the execution of the company's strategy for our clients and employees while delivering an outcome that delivers some value for our shareholders. I appreciate that there is a huge amount to digest across yesterday's announcements. I will be happy to take any questions. Thank you very much. Operator: [Operator Instructions] We will now take our first question. This is from Alex Paterson, Peel Hunt. Alexander Paterson: Well, congratulations on getting the results out anyway, but it's an enormous relief. I've got lots of questions, which apologies, very basic because, obviously, so many things have changed, and there's been so much going on, I'm slightly lost track of where we are on some of them. If I give you sort of maybe 3 or 4 at the start, and then we'll see if anybody else wants to ask any questions. But I was just going to say from the point of view of the listing, have you actually applied for to restart trading now? And how long do you expect it to take before you do? On the Sidara transaction -- sorry. Sorry, do you want to answer them in between? Or what's the easiest way do you think? Iain Torrens: There was a slightly technical glitch at our end there were suddenly disappear. So in the first -- I heard the first question, Alex. And then it may be that's helpful if you repeat the others. But in terms of readmission for trading, we've made the application. My expectation is that we will hear back from the FCA early next week. Alexander Paterson: That's great. And then can you just remind me of the outstanding conditions from Sidara and the process to deal completion? It sounds like you've got the 2024 balance sheet to meet those exceptional conditions. Shareholder votes is on the 17th of November. What are the other phases are the hurdles that you need to clear, please? Iain Torrens: Yes. So I mean, in essence, we are into normal regulatory approvals. So as you say from today, the next big event, shareholder vote on the 17th of November. Following that, we then receive the capital injection, the first $250 million from Sidara and our amend and extend with the bank facilities and the noteholders will go live without simultaneous. And you'll see in the annual report that gives us access to $200 million of bonding lines, which is incredibly important when we're looking at the commercial side of this business. We're then into normal regulatory approvals, all the regulatory filings to be made. So a normal cycle through to completion some time H1 2026. But there are no other specific Sidara conditions that were back into the normal regulatory type cycle. Alexander Paterson: So yes, so all the Sidara exceptional conditions have been met? Iain Torrens: That's correct. The exceptional conditions related to delivery of accounts by the 31st of October, and a clean balance sheet opinion have been met. Alexander Paterson: You removed your profit forecast from the Sidara scheme document and you've not given any financial guidance. What has changed to mean that you've done that, please? Iain Torrens: Well, I think if you look at both -- if you look at the interim results that were published yesterday, I think we illustrate a very complex world we're working in. It's both complex from an external perspective with our clients going through, in many cases, substantial internal change. But clearly, from a Wood perspective, we've had our own unique issues, and that's made it incredibly difficult to forecast outturn for the current year, when do clients, for example, starts -- when does work ramp up versus when we might expect the work to have ramped up. So we withdrew the forecast on the basis of really the ability to predict what would happen for the balance of the year. Quite normal in a public company takeover as you're aware, not to provide profit guidance. Alexander Paterson: Absolutely. And the -- just in terms of the legacy contracts, what remains to be completed? And the -- what's outstanding? If I remember correctly that you were basically had done everything other than Aegis. Is that the case? Or are there other things that are likely to need further work? Iain Torrens: Well, I don't think there's -- all of the legacy, when we look back to the legacy contracts, they have all now been completed, or from our perspective, complete. We have a deal of contractual disputes is probably 1 word you might use, which we're working through. We settled 1 of those. It was a very large one, just at the -- and it's reflected in the end of last year's results. So we're working through, I would say, the tail of contractual disputes, but there's no physical work taking place on the ground. What we have seen, and I'm sure Simon will be happy to take you through the bridge of it, as we work through independent review findings, the accounting treatment for some of these smelters is very complex. And it's fair to say, it doesn't always follow where you expect the commercial outturn to land their apartments around IFRS 15, in particular, and recognizing revenue need 85% certainty when you talk about highly probable that revenue won't reverse. So I think that's probably something. It's worth maybe a session with Simon just to walk through, how that all trues up into the balance sheet. But it's in the annual report in some detail. Alexander Paterson: Understood. Yes, forgive me, I've not been able to read all of that. Iain Torrens: It's not really a bed time reading. Alexander Paterson: I've never done so many searches for specific things, I think, in the document in such a short period of time. And then just finally, the -- just on the Aegis contract that obviously you've made a substantial increase to the provision there. And am I right in understanding that this is -- it's going to proceed to a trial? And if so, what are the sort of dates around that, please? Iain Torrens: I think a couple of things going on. I think, firstly, it falls squarely into that camp of accounting and looking at what information do you currently have and how do you get over that highly probable threshold. Now there's a significant amount of disclosure on it in a number of different places down to report. I think it's probably worth reading. Sitting here today, there is 1 of the path through is to ultimately, trial. On trial is a probably 3- to 5-year time horizon. The alternative, of course, is that we are able to reach a commercial settlement with the customer, which is the U.S. government. At this point, it's too early to determine which route becomes more likely. And there's -- I'd say, I'll have a look at the description and then having a follow-on session because it's fairly complicated. Alexander Paterson: Understood. Well, that's great from my side. I've got obviously a lot of reading to do. Operator: [Operator Instructions] There are no further questions coming through at the moment. So I will hand back to the speakers. Thank you. Iain Torrens: Thank you, everybody. And again, maybe going back to the start. I think having joined Wood earlier this year, it's at the heart, a fantastic business here. And I'd like to thank you all for your support. I know it hasn't been easy, and I appreciate the fact that we have delivered both the FY '24, but the interim statement later than would normally be expected. By all means, if you've got any further questions, please reach out to Simon, and we'll be very happy to help you going forward. Thank you. Operator: Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect. Speakers, please stand by.
Nuno Vieira: Good morning, and welcome to CTT's 9 Months '25 Results Conference Call. This event is hosted by Mr. João Bento, CEO of CTT; by Mr. Guy Pacheco, CFO of CTT; and by Mr. João Sousa, CCO of CTT. Please note that this conference call is being recorded. [Operator Instructions] I'll now turn the call over to Mr. João Bento, CEO. João Bento: Good morning, everyone. Welcome to our third quarter results presentation. I would invite you to follow us through the presentation that has been distributed yesterday evening. So if we move to the first slide, Slide #4. We have a plot of the -- a bridge of the revenue and EBIT in the quarter, with our, we'd call resilient organic growth; revenues growing 6%; recurring EBIT doubling that, 12%, with positive contributions from all the business lines in terms of revenues. This 6.1% are, in fact, 17.2%, taking into account the contribution of Cacesa. And on EBIT, the pro forma growth of 12.3% is in fact -- corresponds in fact, to 38.1%, which illustrates how competitive the addition of Cacesa represented to our e-commerce solutions portfolio. Moving to Slide #2 and with additional -- with additional detail on the growth of parcels volumes. We see a comparison between second quarter and third quarter, with a slight sequential improvement in e-commerce volumes. But we have to take into account that there were a couple of events, very significant in the end of September, that somehow impacted volumes in the quarter. Indeed, we have this typhoon Ragasa in South Asia that kept significant amount of volumes, e-commerce volumes sourced in China in the ground, so they could not fly. Some of them were sent by land, but there were also impacts in the border between Poland and Belarus, and some of the volumes that came through roads were also halted there. There was also, well, I would say, meaningful delay in main volumes that we can discuss later on. The good news is that all these volumes were merely delayed and they showed up already in October. But on the right-hand side of the slide, we can see that we have, well, double-digit growth in July, in August and then in September, a flattish improvement basically for the reasons that we have mentioned. So because of that, we are -- we keep quite confident also because October is looking extremely positive, and we anticipate a strong growth outlook for volumes, around 15% year-on-year for the fourth quarter of this year. Moving to Slide #6 and moving from volumes to revenues and margin. What we see is an improvement of 36% in revenues, that without Cacesa would even still represent a double digit, around 11% growth, which is significantly amplified when we move to the EBIT margin in the sense that with the pro forma of Cacesa, the growth would be very slight, 4.5%, but indeed a 50% growth on EBIT. The good news that we'd like to highlight here is that although -- well, despite of these volumes delayed given the typhoon and the closing of the Polish border, we still see an improvement in margin from 8.7% to 9.5% that, as you know, is, well, the best EBIT margin for any parcel business in the market. So given the contribution of Cacesa, that differentiates our E&P offering. We -- with this integrated model, we continue to drive profitability in parcels. And in that sense, we think that we should signal that. Moving to Mail. I will pass the floor to my colleague, João Sousa. Joao Carlos Sousa: Thank you, João. Good morning, everyone. On Mail & Other services, as you can see, in the third quarter of 2025, we are already seeing a recovery in address mail, with volumes down only 4.3% compared to a decline of 8.5% over the first 9 months of the year. In fact, this improvement reflects a gradual stabilization of the activity after several quarters of more pronounced declines in traditional mail volumes. This recovery is mainly explained by the normalization of volumes and clearance of backlog from major clients, which had a negative impact in the previous quarters. And we are seeing also these positive trends already -- or continued in October that reinforce this recover momentum. I would like also to highlight the business solutions that is driving good performance. Business solutions continue to play a key role in supporting both revenues and margin in the Mail & Others business area, with recording growth of 10.9% year-on-year. As with this mix of revenues and services, as a result of this, we have total revenues reaching EUR 341.9 million, representing a limited decrease of 1.9% comparing with the previous year. On EBIT for the Mail & Other segments took on EUR 2.28 million for the first 9 months, maintaining a flat margin of 8.9%. This stable performance demonstrates that our operational discipline on cost control and continuous on to managing these ongoing structural change in the mail market. On Slide 8, now we are going to financial services and retail. We continue to see a sustainable performance across public debt and insurance offering. Financial sales continue to show a solid and consistent growth, supported by stronger results in public debt products and insurance. Public debt placements, up to 167% in Q3 compares with versus period in last year. Savings certificates maintain like a preference savings vehicle for the Portuguese citizens. And I would like also to highlight that the digital sale channels for these products continue to be performing strongly, and September was the record month for these channels. This has also allowed us to bring new citizens to this product. Also, we are -- with a robust growth in insurance and health plans, we are in this strategic to build recurring revenue streams continue to deliver. Health plans -- the stock of health plans, growth, 69% versus the end of last year and almost 33 -- sorry, 12.8% on quarter-on-quarter. Insurance products also, with a very good outlook, performing pretty well. And I would like also to highlight that in -- already in October, we launched a new health insurance that also allow us to have a new product in this area. And the first numbers give us also a very good highlight -- a very good outlook for the coming months. Seeing this on this business area, the revenue is up to 57%, reaching EUR 9.8 million, and EBIT up to 44.8% to EUR 5.2 million. This reflects the success of our diversification strategy for this business area. And now pass to Guy. Guy Patrick Guimarães de Pacheco: Thank you, João, and good morning to all. On Slide 9, we can see Banco CTT's numbers, where we witnessed a strong growth in business volumes, growing 11.4% year-on-year in the third quarter, with a strong performance on the loan book that grew 16.4%. And on the off-balance savings, that grew 25.7%, where we see Generali partnership already at cruise speed and gaining -- continuing to gaining traction on the market. That translated to banking revenues growing 3.7% in the period, although with some compression in net interest margins as interest rates seem to reach a bottom, which gives us positive trends going forward. We see net interest income going up EUR 0.9 million, and commissions led by insurance and card commissions growing EUR 0.6 million in the period. We -- in terms of profitability, a flattish performance as we continue to invest in our future growth, deploying additional commercial capabilities, be it digital or physical, and we invest in technology to support that growth. Our return on tangible equity stood at 13%, a slight increase vis-a-vis the 12.4% of last year. Moving on to the financial review. In Slide 11, we have our key financial indicators where we see resilient growth throughout most of the metrics. On revenues, 17.2% growth. And if we consider Cacesa last year with the 6.1% growth in the third quarter, recurring EBIT growing 38.1% or if we account for Cacesa, 12.3%. Specific items reached EUR 7.6 million as we concluded the restructuring project that we have ongoing on the Mail division for this year. We invested EUR 4.2 million in exits of people. M&A expenses and strategic projects account for the rest of the value. Net profit in the quarter reaching EUR 10.7 million, growing 35%, or reaching, in the 9 months, EUR 32.8 million, growing 18.4%. Our free cash flow stood at negative EUR 6.4 million, and this is due to strong working capital investment that I will detail towards the end. On Slide 12, we see our revenue reach, where we continue to see Express & Parcels as our main contributor to growth. Revenue is growing 6.1%, accounting with Cacesa, with Express & Parcels growing EUR 15.7 million or 10%, with softer parcel volumes due to a weak September, putting some pressure on growth. And this was caused by the extraordinary effects that João shared, the typhoon and the military movements on the Polish border. Cacesa continues to perform very well. In Mail, we witnessed a EUR 2.4 million decline or 2.3%. This is -- this shows 2 different performance, Mail declining EUR 3 million in the quarter or 3.4%, that were partially offset by the good performance of Business Solutions as we continue to diversify along the value chain of our customers in order to further increase the resilience of the revenues of these business units. In the bank, EUR 1.3 million increase or 3.7%, fully driven by net interest income and commissions growth as we continue to grow our business volumes. In Financial Services, an increase of EUR 3.5 million in the quarter, and fully due to the strong performance in public debt placements, that grew more than EUR 1.1 billion as debt certificates continue to be a very attractive product in the market vis-a-vis other low-risk alternatives and already with some positive contribution of the recurring revenues that we continue to bet on in order to find additional diversification on these business units. All in all, other key metric is the Express & Parcels in the quarter already are above 50% of our revenue, reaching 52% of our total revenues this quarter. On Slide 13, we see our costs. Our OpEx grew 5.6% in the quarter, driven by parcel, in line with activity, but softer volumes putting pressure on our unit costs. As you know, we start to scale for the peak season, where we keep prioritizing quality as we see that as paramount to further growth in the future. Mail & Others with a decline of EUR 3.3 million on OpEx or 3%. We continue to optimize our routes with a strong reduction on the number of routes and account reduction that mainly account for that OpEx savings. In Financial Services, we see a EUR 1.9 million increase, fully in line with higher activity. And in the Bank at 5.8% increase or EUR 1.5 million, and this is fully to the commercial and technology investments that I already shared. Cost of risk this quarter with a good performance, reaching 0.7% of cost of risk. So good dynamics there as well. In Slide 14, we see our recurring EBIT, where we posted a 12.3% growth with bank, flat and all the other business units with a positive contribution. In Express & Parcels, we see very resilient margins despite these lower-than-expected volumes in the quarter, with 9.5% margin and increasing EUR 0.7 million. In Mail, positive contribution of business solutions and cost reductions, leading to a EUR 0.9 million increase in the quarter. Financial Services, with good -- very good performance in placements, also contributing positively with EUR 1.6 million. And the Bank, with this flattish performance, with the investments in capabilities offsetting the growth in banking products. Going forward, we expect a very strong peak season that will underpin the EBIT growth in Express & Parcels. Mail seasonality will lead to a sequential margin improvement as fourth quarter continues to be, seasonality-wise, the strongest quarter of the year. Financial service will continue to grow, although with a tougher comparable in the fourth quarter. And the Bank will post a flat to single-digit growth due to the continuous investments in commercial activity. Slide 15, we see our consolidated cash flow. Operating cash flow reached EUR 42.9 million in the 9 months, with a strong growth year-on-year. Free cash flow also stood in 20 -- 12 -- sorry, 18.8%, also with a EUR 10 million growth. And our net debt now stands at EUR 61 million at consolidated level. In Slide 16, we see pretty much the same figures, but excluding the bank or having the bank under equity accounting, where we see, in the 9 months as the operating cash flow reached EUR 20 million and due to this high investment in working capital. In the third quarter, our working capital increase EUR 13 million. And this is due to seasonality or third quarter is normally very strong in working capital investments, and that is due EUR 5 million to the travel subsidy to the Portuguese Island, a service that we provide to the Portuguese government, and because of summer normally has this high growth and payment terms with Portuguese that are always pressured. And we have EUR 8 million increase in accounts receivables, both by increase in activity and some delays in payments of some key customers that we expect to fully offset in the fourth quarter as normally we do. Our net debt now stands at EUR 2.4 million due to this working capital investment, but we expect to -- that to be deleveraging towards the 2x in the end of the year. And with all that, I'll hand you over to João Bento for his final remarks. João Bento: Thank you. So moving to Slide #18. We have a plot of the evolution of EBIT and the corresponding contribution of E&P that we see that, well, after the drop between '19 and '20 associated with the COVID crisis, it's been very, very steady. And looking at the trailing last 12 months up to the third quarter of this year, we see that we are already at EUR 105 million of EBIT, which means that we would require fourth quarter, that would be roughly EUR 10 million or more above that number. The right-hand side chart, it illustrates the gap between where we are and what we need actually to do. So we see the fourth quarter EBIT of last year at EUR 30.5 million. If we would consider the contribution of Cacesa, that would take us to EUR 37.2 million, meaning that because we need EUR 41 million to achieve the guidance, we are at a 10.3% increase or 34.4% versus the actual number of last year. This 10.3% of growth quarter-on-quarter -- fourth quarter-on-fourth quarter is, I would say, significantly less than what we have exhibited throughout the year. So at the top hand side of the slide, you can see that in the first quarter, we grew 19.5%, 28% on the second, 12% on this quarter, with all the delays associated with the typhoons. And so I'm not saying it's easy, but it's quite feasible, and that's why we are strongly committed to keep our ambition of recurring EBIT equal or higher than EUR 115 million. And by completing a quarter along those lines, this will, in fact, represent the conclusion of, I would say, notable transformation cycle that we have been taking this company. I would still ask you to follow me on the last slide, just to remind you that we have our Capital Markets Day taking place next Monday and Tuesday. We have quite promising news for you. We're going to do the similar exercise that we did 3 years ago, discussing and illustrating the strategy for our business areas and committing with financial targets for 2028. So we are looking forward to meet you all there. And I believe that you'll be very pleased with the news that we have to bring. With that, we remain available for your questions. Nuno Vieira: [Operator Instructions] Our first question will come from João Safara. Joao Safara Silva: I'll start just with 2 questions. The first on -- to try to understand a little bit what is implicit in the fourth quarter margin for Express & Parcels. Obviously, and you've mentioned that you've been focusing a lot on quality ahead of the season. Nuno Vieira: João, sorry, we are having significant difficulties in listening to you. If you can speak louder, please. Joao Safara Silva: Yes. Is it better now? Nuno Vieira: It's better now. Joao Safara Silva: Okay. Sorry. Okay. Yes. So what I -- yes, so going back to my question, what I was wondering and trying to look implicitly to the fourth quarter. To meet your guidance, you obviously have to have some kind of improvement in Express & Parcel margins. So I think basically, I just wanted to have a confirmation there since we've been having in the last quarters, in first quarter, margins were flat, obviously, trying to exclude the impact of Cacesa, which I know it's difficult. And then in the second quarter, you've recovered. And now in the third quarter, it seems that margins, again, they've more or less been flat versus year-on-year. And for the fourth quarter, according to my numbers, it would still imply an improvement in margins. So if you could -- well, just give me some color there on what are you seeing for the fourth quarter in terms of margins? And then the other question is just on the extraordinary costs you had this quarter for the employment contract suspension. The question here is, I mean, basically, if this is something related to the plan you're going to present on Tuesday? Or is this something that was already contemplated and part of your ongoing cost savings? Guy Patrick Guimarães de Pacheco: Thank you, João. So on your first question, so we are expecting a strong peak season in Express & Parcels, that will once again be the main driver of our growth in the fourth quarter. Obviously, as you know, scale here plays a role and because we have this unforeseen lack of volumes on the third quarter, especially in September, that put some pressure on unit costs. And as such, our margin was stable-ish. And I would like to underline that, nevertheless, we were able to post a 9.5% EBIT margin that shows a lot of resilience of that business unit. But nevertheless, as you said, we expect both a volume increase and a slight margin increase during the fourth quarter. That was again Express & Parcel as a main driver. We also expect growth coming from Mail -- sorry, positive impacts for Mail and the growth coming from Financial Services as we continue to see resilience on the placements, although the comparable will be tougher as last quarter was already very strong in placements last year. On the specific items. So 2 main things. First, it's the restructuring project that we ended, and that we continue to explore opportunities to optimize Mail & Others as we continue to see that paramount to sustain margin going forward. And that project comes to an end in the third quarter. And now we also had some strategic projects that are, as you mentioned, linked with the next strategic cycle that we'll announce next week and some M&A expenses as we continue to have projects ongoing and what's ongoing, be it with the transactions already announced and other internal projects. Joao Safara Silva: Just a follow-up, would there be, on the fourth quarter, additional nonrecurring cost? Guy Patrick Guimarães de Pacheco: On people, no. We should expect some costs around M&A, but nothing as meaningful as this quarter. Nuno Vieira: Our next question comes from Filipe Leite. Filipe Leite: Yes. I have 3 questions, if I may. The first one is on Cacesa and the integration of Cacesa. Basically from the EUR 5 million synergy that you announced at the time of the acquisition. If you have an idea of how much do you have already achieved in terms of synergies, and when should you expect or should we expect the full achievement of this EUR 5 million synergies with the incorporation of Cacesa? Second question on Mail and CPI used this as reference for the upcoming year. Mail price increase, I believe, is up to June or July. And the question is if you have already an idea of the potential magnitude of the price increase for mail next year? And last one is a clarification on specific [indiscernible] because looking at the breakdown, you mentioned in 9 months, EUR 1.4 million positive impact from regulatory compensation. But in second quarter alone, this positive impact was EUR 3.5 million. If you can clarify what are those regulatory compensations and why the reversal in third quarter? João Bento: I'm afraid we didn't get exactly what you mean in the third question, but I will start with the previous 2 ones. So on Cacesa, things are going pretty well. What we can say is that we are more or less around midterm achieving the full synergies that have been announced, and they will be fully embedded across next year because there are several -- the nature of the synergies is diversified, but so we are probably halfway to be there. On CPI, actually, the formula is public. We know the volume decline, we know the inflation. The issue here is that the proposal has been put, but it's not been approved. In any case, you should expect something around 6.5% plus or -- more or less around that, just not to give you the exact figure because it's not been approved. But it's very easy to compute the numbers and it should be something around -- well, between 6.5%, 7%, some like that. Guy Patrick Guimarães de Pacheco: On the third question, because we didn't fully get it, I suggest that Nuno Vieira will follow up with you in the end of the call. Nuno Vieira: [Operator Instructions] As there are no further questions at this point, I would like to hand the call back over to Mr. João Bento, CEO, for any additional or closing remarks. João Bento: Thank you, Nuno. Well, as we've seen, it's been a mild quarter, fortunately, positioning us strongly in line to achieve the guidance this year. And I believe that the most promising news are to be shared with you on the forthcoming Capital Markets Day next week. So thank you again for coming. We remain available to your questions through the IRO team, and hope to meet you all next week. Thank you. Nuno Vieira: Thank you very much for your participation. This earnings call is now concluded.
Operator: Ladies and gentlemen, welcome to the Third Quarter 2025 Conference Call. I am George, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Aritz Larrea, President and CEO. Aritz Uribiarte: Thank you very much. Good morning, everyone, and welcome to the third quarter presentation for Loomis. My name is Aritz Larrea, and I'm the CEO of Loomis. And with me here today, I have our CFO, Johan Wilsby; and Jenny Boström, our Head of Sustainability and Investor Relations. I'll start by providing a quick summary of our third quarter performance before taking questions. Let's start the presentation by turning to Slide #2. We delivered a solid and positive performance in the third quarter with revenues reaching SEK 7.6 billion and currency-adjusted growth of 7.1%. Despite the expected decline in our ATM business, the group achieved a strong organic growth of 3.9%. This was also the first quarter to include the full results of Burroughs, which made a meaningful contribution to our overall growth and further strengthened our position in the U.S. market. Our efficiency initiatives continue to deliver strong results with the operating margin rising to 13.2%, up from 12.9% last year. We've successfully grown the business without increasing our headcount, further driving margin improvement and demonstrating the impact of our ongoing operational discipline. We delivered another quarter of strong operating cash flow with a rolling 12-month cash conversion of 95%. This robust cash generation enables us to continue investing in the business while also delivering attractive return to our shareholders. Our commitment to optimize capital allocation to drive returns is also reflected in the increased return on capital employed, which was above 16% in the quarter. While we have been active in M&A, invested in our business and continued our share repurchase program, our net debt-to-EBITDA ratio has improved compared to the second quarter. During the third quarter, we completed 4 acquisitions and signed an agreement for a fifth one. I will address each later on in the presentation. As announced yesterday, the Board has also approved a new share repurchase program of SEK 200 million for the fourth quarter. Let's now turn to our reporting segments, starting with Europe and Latin America. Our European and Latin America segment delivered a solid performance in the quarter with revenues reaching close to SEK 3.7 billion, and the organic growth was 2.3%. We have seen a different mix of performance across our business lines during the quarter. While we continue to experience strong demand for our cross-border valuables transportation and storage solutions within the international business line and the Automated Solutions business delivered solid results, the ATM business declined due to previously announced losses in Sweden and France. In addition, there was a negative impact due to the ATM consolidation market in the U.K. While these developments have led to short-term volume headwinds, we expect the long-term industry trends to continue to favor specialized providers. In addition, revenue in Europe was also affected by the ongoing restructuring activities in Germany, where we continue to discontinue unprofitable contracts as part of our efforts to strengthen profitability. These developments have temporarily affected growth in the region, but our initiatives are consistent with our strategy to focus on efficiency, scalability and long-term profitability. We can also see that the restructuring initiatives implemented in recent quarters are having a positive effect on profitability, while with the operating margin increasing to 12.9% versus 12.4% in prior year. In September, we completed the acquisition of Kipfer-Logistik announced in July. Kipfer-Logistik is a leading pharmaceutical logistics provider based in Switzerland, and this acquisition significantly accelerates the growth of Loomis Pharma. By integrating a well-established company specialized in high-security, temperature-controlled road freight, we are further strengthening our international business line, where Loomis already provides cross-border, high-security logistics for banknotes, precious metals and jewels, including customs clearance. With our long-standing expertise in Secure Logistics, we continue to explore opportunities to expand and enhance our services in this area. Let's turn to the next page and talk about the performance in the U.S. The U.S. segment delivered another strong quarter. If we adjust for currency impacts, which was negative 9%, the U.S. achieved record high revenues and operating profit. Organic growth was 5.4% and the acquisition of Burroughs contributed to the overall growth. The International and Automated Solutions lines of business had notably strong performance in the quarter. Our implemented staffing planning measures have enabled a more efficient way of working, allowing us to grow the business without adding employees. At the same time, we have secured a high service quality and maintained customer satisfaction. The volume growth, combined with improved efficiency contributed to the improvement of operating margin. The operating margin increased to 16.3%, up from 16.1% in prior year. This is the first full quarter with Burroughs, and we continue working on integrating their business into our U.S. operations and our Loomis culture. We are still early in the integration process, but while the business is adjacent to our existing operations, it represents a new line of work for us, one that is highly technology-driven and involves technical service teams we previously did not manage. We are seeing great progress and are already observing how it complements our current business. Burroughs is a strong strategic fit as it allows us to provide a fully integrated ATM and automated solutions service offering to our customers. In August, we acquired Keys Armored Express, a CIT service provider operating in the Florida Keys area. We've also signed an agreement to acquire Precious Metals Vault and storage facility in Toronto. This acquisition will strengthen our local presence in Canada and increase our depository service and storage capacity within the international business line. Let's turn to the next page and talk about SME Pay. Revenues in the SME Pay segment increased to SEK 65 million in the quarter. Nearly 40% of this revenue now comes from new small- and medium-sized customers, demonstrating that our strategic focus on SMEs is delivering both growth and margin. We're also making strong progress on the digital side. Loomis Pay continues to scale, broadening our payments offering and strengthening customer loyalty. Transaction volumes through our payment gateway surpassed SEK 2.5 billion in the quarter, representing a 23% increase compared to last year. In addition, in July, we took an important step in Spain with the acquisition of 2 POS companies in Catalonia. This significantly strengthens Loomis Pay presence in the region, enhances our POS capabilities and expands our customer base among SMEs. Let's now move to the next slide, where I'll share a few updates on our sustainability progress. This quarter, we adopted 2 new sustainability policies, an environmental policy and a human rights policy, further reinforcing our commitment in these critical areas. Our environmental policy includes our emissions reductions targets to 2030 with the actions being taken to reach these. The key focus here remains on reducing emissions from our vehicle fleet. For the first 9 months, we have reduced our Scope 1 and 2 emissions by approximately 2% compared to prior year. I want to highlight that the increase you can see in emissions in the graph here compared to the second quarter is largely related to the acquisition of Burroughs. Initiatives are ongoing to align Burroughs to our carbon emissions reduction plan. Continuing to decrease emissions while growing the business is, of course, challenging, especially due to difficulties with charging infrastructure for an electrified fleet, but something that we are fully committed to. As a global employer with an important role in society, it is crucial to uphold fundamental human rights across our operations and value chain. Our new human rights policy reinforces our dedication to safeguarding the rights of our workers and how we intend to uphold our efforts in addressing actual and potential human rights. Now let's turn to the income statement slide, where I'll begin by noting that despite a significant negative impact from exchange rate fluctuations, we achieved a strong currency adjusted growth. This quarter includes costs classified as items affecting comparability, primarily related to the ongoing restructuring efforts in Europe and Latin America. Our financial net has declined compared to previous years, following lower financial expenses, driven by declining interest rates. I would also like to highlight that the effective tax rate has gone up to 30% for year-to-date 2025 due to changes in our assumptions for deferred tax assets. This year-to-date adjustment impacts the effective rate in the quarter. Additionally, the tax rate in 2024 was also lower due to the U.S. green tax credits, which have now been removed. For the full year, we expect an effective tax rate of about 30%. Despite the considerable currency headwinds and higher effective taxes, earnings per share rose to SEK 7.83 per share. I would also like to highlight that also our net debt-to-EBITDA ratio is about the same level as prior year, and we also see an improvement compared to the second quarter, even after several M&A and continued share repurchases. Now let's move on to the next slide, where I'll provide a longer-term view of our performance. As we can see, we have a stable and resilient business model that continues to deliver. We delivered a strong third quarter, and I'm confident in our journey ahead. Our restructuring initiatives in Europe and Latin America are showing results, and we've seen clear margin improvements over recent quarters. On a rolling 12-month basis, we generated over SEK 30 billion in revenue and reached an operating margin of 12.6%. Currency adjusted growth was 6.1%, fully in line with our financial targets for the strategic period. The major focus in this strategy is accelerating growth within the SME customer segment. This is already contributing to our performance. We have seen healthy revenue momentum and solid margin contribution from SMEs across all our key markets. As we look ahead, it's important to recognize that we are up against a very strong fourth quarter last year, which benefited from favorable movements with U.S. tariff uncertainties. We're also managing the impact from ATM business losses in Sweden and the consolidation of ATM networks in France, both impacting our European operations. In addition, there's a negative impact due to ATM market consolidation in the U.K. compared to Q4 last year. That said, we still see solid opportunities for organic growth, both with our actual customers as well as with SMEs. And as we outlined at our Capital Markets Day, value-creating M&A will continue to be a key lever in our strategy going forward. This concludes my summary of the quarter. Operator, we are now ready for questions. Operator: [Operator Instructions] Our first question comes from Simon Jönsson with ABG. Simon Jönsson: I want to start off with the M&A track. I think it's nice to see that you are more active again as you have been talking about, of course. And I wonder specifically about Burroughs, you mentioned it a bit, and you have had some time now to digest it. So my question is what you're seeing in terms of the turnaround on margins in Burroughs, if that is something that you have already started to see a positive impact on? I mean, the margins in the U.S. were quite good despite the full integration of Burroughs. So I guess I wonder if you have seen any margin impact already in Burroughs. Aritz Uribiarte: Thanks for the question, Simon. I would say that it's still early stages with Burroughs, but our immediate focus is just on resolving some existing quality issues to ensure service excellence. Once this is achieved, we will shift our efforts to improving operational efficiency and margins, with the objective of making the business margin accretive over time as we promised when we announced the acquisition. Simon Jönsson: All right. So I'm guessing that it's fair to assume that it remains quite margin dilutive here as of right now, at least. Aritz Uribiarte: You're right, yes. Simon Jönsson: Then I wonder about the SME Pay segment, just specifically on the organic growth acceleration we saw here in Q3. If there are like any specifics you could point to here, like bigger customers or something that drove the organic growth acceleration Q3? Aritz Uribiarte: So as we explained at the Capital Market Day, we've been always focused on big retailers and big banks. SME was never our focus. And we shifted that, and that has been a shift that our sales teams have made. And we've seen an important progress there. And consider that Q3 also has the seasonality, the normal seasonality that we have in Europe, but it was a great quarter from that perspective, and we expect the following quarters to continue the same way. Simon Jönsson: All right. Great. Then lastly, maybe a bit more general reflections, but on Latin America and maybe specifically on Argentina, I mean, it continues to look like the business environment is improving, more politically stable and so forth. So do you have any general reflections right now, what's going on? And if that's positive or negative for you? Aritz Uribiarte: I think, I mean, when you look at Argentina, it's really small when you look at our group. But I think that progress has been made there from the country side. We keep investing there, and we're looking into growing in that market as well inorganically. So it keeps being an interest market for us. Operator: Our next question comes from Dan Johansson from SEB. Dan Johansson: A couple from my side. Maybe firstly, I was curious to hear how we should think about the revenue mix right now. I noticed you continue to have very good momentum in both Automated Solutions and also international, which is, of course, good for margins and CIT is down like 5% or so versus last year. And I mean, long term, your mix shift will, of course, continue, but it would be interesting to hear how you think about business mix more near term for coming quarters. Do you see sort of a near-term recovery in CIT? Or should we expect these trends to continue and revenue mix to continue to be supportive ahead here? Aritz Uribiarte: Yes. Thanks for the question. And my first comment there would be, I was surprised on your comment around CIT because we should look at the business lines currency adjusted, and I don't see that decrease happening in CIT. Looking forward, as I said in the call, I mean, we're facing -- we're up against a very strong fourth quarter that we had last year. We had the favorability of the U.S. tariffs uncertainty there. And we are having a negative impact on the ATM business due to the losses in Sweden, France and the U.K., and that will impact our European operations. But we keep working on finding alternatives. And as you've seen, for example, our international business, despite the slowdown due to tariff uncertainty, the business has also keep growing. So we keep looking at other revenue streams as well. Dan Johansson: Yes. Fair point on the currency effect there. But also interesting on international. I mean, as you say, is the performance and the momentum in international sort of even throughout the quarter? Was there any notable difference in growth rate July versus September and beginning of October? I mean, before it was tariffs, but now it seems to be other factors driving the performance. So a little bit of momentum throughout the quarter. And also, is there anything in particular driving the very strong performance you have in international still now? Aritz Uribiarte: I mean the front of thing we have with international, Dan, is that it's not a recurring business. So we can't see it as we see our domestic business there. We do expect the international business line to slow down a little bit versus what we've had in Q3. But again, as I told you, we're looking into how can we keep growing this business and keep expanding as we did with pharma, keep expanding to other verticals and other areas of interest as well. Dan Johansson: Yes. Makes sense. Interesting to follow. And maybe a final one, just a small comment there on the ATM market consolidation in the U.K., just so I get it right there. Did you experience an impact already this quarter? Is that more gradually ahead as we move into Q4 and further on here? Aritz Uribiarte: Sorry, I didn't catch that question. Can you repeat again, please, Dan? Dan Johansson: No, it was just -- did you see the ATM slowdown in U.K. already this quarter? Did it impact the numbers in Q3? Or is that more for Q4 and going forward here? Aritz Uribiarte: Yes. You should expect more or less the same trend, rather trend in Q4 and first half of next year. Operator: The next question comes from Viktor Lindeberg with DNB. Viktor Lindeberg: Maybe following up on Dan's question on U.K. as a start. And can you quantify the amount of the contract or contracts that you've lost so we can pin down the magnitude of this? Aritz Uribiarte: We don't disclose those numbers, Viktor. Viktor Lindeberg: Okay. But it's fair to say that it was already in the full quarter of Q3? Aritz Uribiarte: It has been -- yes, it's been in the whole Q3 quarter. That's correct. Viktor Lindeberg: Okay. You mentioned the tax rate, and it's come up to about 30%, and you guide for that for the full year as well. Is that a good ballpark proxy going into next year as well? Aritz Uribiarte: Yes, I would say so for now. Viktor Lindeberg: And on the tax rate from a cash tax perspective, the cash tax has come up quite a lot this year. Are there any one-off items, if you will, in that amount? Or should we pencil in similar, call it, cash tax rates going into next year as well, do you think? Aritz Uribiarte: No, that's going to come down because we had a delay of U.S. tax payments from '24 that came into '25. So they are artificially large this year. And that piece will wash out when you get into '26. Viktor Lindeberg: Super. That's very helpful. Two final points. One very small on your Loomis Pay and SME. I noted you have about SEK 9 million of revenue now in automated solutions in this segment, and that's quite an astonishing number for the small size of that segment. But curious to understand, is this Automated Solutions revenue a product sale similar to CIMA? Or is it actually more installed base type of revenue, more recurring in that sense? Aritz Uribiarte: No, it's exactly the same. The only thing is that when you look at CIMA, you have a huge portfolio of solutions, and we're talking about a smaller range of solutions. Viktor Lindeberg: Yes, that was my question. So if it is more the actual product installed generating SEK 9 million in the quarter and then in that sense that we maybe can expect SEK 9 million also in the coming quarters or if it's more product sales? Aritz Uribiarte: Additional product sales and recurring revenues. Viktor Lindeberg: Okay. Super. Final question on the U.S. and automated solutions growth accelerated quite dramatically. And my numbers tell me 31% in organic terms. But that begs the question, if you have added revenues from Burroughs or something else into that segment? Aritz Uribiarte: Yes, you have revenue coming from Burroughs as well. Viktor Lindeberg: All right. So can you give us an indication on the underlying SafePoint or Automated Solutions organic trend? Is it similar to what we have seen in the mid-teens or so? Or has it started to deviate? Aritz Uribiarte: I think you're right that it's more or less same. Operator: [Operator Instructions] There are no more questions at this time. I would now like to turn the conference back over to Mr. Larrea for any closing remarks. Aritz Uribiarte: Thank you very much all for listening in. Please reach out if you have any follow-up questions. Thank you. 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.