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Operator: Good morning, ladies and gentlemen, and welcome to The Bancorp, Inc. Q3 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Friday, October 31, 2025. I would now like to turn the conference over to Andres Viroslav. Please go ahead. Andres Viroslav: Thank you, operator. Good morning, and thank you for joining us today for The Bancorp's Third Quarter 2025 Financial Results Conference Call. On the call with me today are Damian Kozlowski, Chief Executive Officer; and Marty Egan, our Interim Chief Financial Officer. This morning's call is being webcast on our website at www.thebancorp.com. There will be a replay of the call available via webcast on our website beginning at approximately 12:00 p.m. Eastern Time today. The dial-in for the replay is 1 (888) 660-6264 with the passcode of 37073. Before I turn the call over to Damian, I would like to remind everyone that our comments and responses to your questions reflect management's view as of today, October 31, 2025. Yesterday, we issued our third quarter earnings release and updated investor presentation. Both are available on our Investor Relations website. We will make certain forward-looking statements on this call. These statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission. In addition, we will be referring to certain non-GAAP financial measures during this call. Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures are in the earnings release and the investor presentation. Please note that The Bancorp undertakes no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Now I'd like to turn the call over to The Bancorp's Chief Executive Officer, Damian Kozlowski. Damian? Damian Kozlowski: Thank you, Andres. Good morning, everyone. In the third quarter, The Bancorp earned $1.18 earnings per share on revenue growth of 7%, excluding consumer fintech loan credit enhancement income and expense growth of 6%. EPS growth was 13% year-over-year. Fintech GDV continues to grow above trend at 16%. Revenue growth in the quarter, which includes both fee and related interest income revenue was 23%. Our 3 main fintech initiatives continue to make substantial progress. First, our credit sponsorship balances ended at [ 785 ], up 15% from second quarter and 180% year-over-year. We are expecting increasing volumes with new product enhancements and increased utilization. Second, our embedded finance platform development has continued to progress with an expected launch next year. And third, new program implementation time lines, Cash App being the largest are on track with expected revenue in the first quarter of 2026. All 3 initiatives should have an increasingly positive effect on our financials as we move forward through '26 and into 2027. We also made progress in reducing our criticized REBL assets, which include both substandard and special mention assets. These assets declined from $216 million to $185 million or 14% quarter-over-quarter. We expect more progress in the fourth quarter. Under our Project 7 initiative, which looks to achieve $7 earnings per share run rate by the fourth quarter of '26, we will be conducting a restructuring of our institutional banking business in the fourth quarter of '25. Headcount is being reduced by 30 as we deemphasize growth to reallocate space on our balance sheet for credit sponsorship balances. This will reduce run rate expenses by approximately $8 million while incurring approximately $1.3 million restructuring charge in the fourth quarter. We also are implementing our first AI-powered use case. We have developed a new tool to reduce the writing of narratives in financial crimes risk management. For a $300,000 investment, we anticipate that we'll be able to avoid approximately $1.5 million in run rate expenses over time based on increasing volumes. This tool will be operational in the first quarter of '26. This is the first of many AI tools to come in the future. We expect to develop and implement these tools as quickly and as prudently as possible in areas that will lead to increasing efficiency and productivity of our people and platform. These tools should have an increasing positive impact on our already best-in-class profitability. Lastly, we are lowering guidance to $5.10-ish a share for '25, primarily due to lower projected balances on our traditional lending businesses and an increased credit provision for leasing due to losses on the disposition of previously identified credits in trucking. In addition, we are not giving specific guidance in '26 other than we are targeting a minimum $7 earnings per share run rate by the end of '26. We are, however, initiating preliminary guidance for '27 of $8.25 earnings per share. As discussed, we believe that our 3 main fintech initiatives, platform efficiency and productivity gains from platform restructuring and AI tools, plus a high level of capital return through continued share buybacks will contribute to EPS accretion. EPS gains are subject to uncertainty, particularly as it relates to the development implementation time lines in fintech and our stock price for buybacks. I will now turn the call over to our Interim CFO, Marty Egan. Marty? Martin Egan: Thank you, Damian. Excluding consumer fintech loan credit enhancement income, noninterest income for the third quarter of 2025 was $40.6 million, which was 27% higher than the third quarter of 2024. Total fintech fees accounted for most of that increase. Prepaid, debit card, ACH and other payment fees increased 10% to $30.6 million over that period, and consumer credit fintech fees increased $2.9 million to $4.5 million. Additionally, in the third quarter, we reached an agreement on the earnest money deposit on the terminated sale of a property in other real estate. The $2.3 million settlement amount is included in other income. The provision for credit losses on nonconsumer fintech loans was $5.8 million for the quarter, of which $4.8 million was related to the leasing portfolio. The leasing provision was driven by the third quarter net charge-offs of $2.8 million, primarily related to the trucking and transportation industry. Average fintech solutions deposits for the quarter increased 10% to $7.3 billion from $6.6 billion in the third quarter of 2024. Noninterest expense for the third quarter of 2025 was $56.4 million, which was 6% higher than third quarter of 2024. The increase included a 10% increase in salaries and benefits. As Damian mentioned earlier, we made progress on reducing our substandard and special mention on REBL -- assets. We expect that trend to continue in the fourth quarter as $102 million of those loans are under contract and expected to close during the quarter, of which $12 million is already closed and $74 million is expected to close in the next 5 days. Additional details regarding our loan portfolios are included in the related tables in our press release as are the earnings contributions of our Payments business. I will now turn the call back to Damian. Damian Kozlowski: Thank you, Marty. Operator, could you please open the lines for questions? Operator: [Operator Instructions] Our first question comes from the line of Tim Switzer with KBW. Timothy Switzer: You guys doing well. First question I have is, can you guys provide an update on Square and the Cash App program, some of the other new programs you guys have going on. Is there a time line for when all the volume has transitioned over to you? And when should we start to see this ramp in GDV and the associated fees. Damian Kozlowski: Yes. So it's on track and revenue is expected in Q1. We're not sure exactly the ramp-up schedule because it's really dependent on time lines at Block at Cash App. We do have confidence that as we work through the year, though, we will have substantial fee revenue generated by the third and fourth quarter of next year. Timothy Switzer: Okay. Okay. That's very helpful. And then can you provide an update on the $27 million REBL loan that was scheduled to sell, I think, in Q3 according to the 10-Q, and it just looks like it hasn't closed yet. I would just love an update on that. Damian Kozlowski: Yes. So that $27 million is expected to close in the next 5 days. So it's either today or at the beginning of next week, and that's that substandard loan. Timothy Switzer: Okay. And it seems like there's just a lot of either momentum or activity in terms of closing new loan sales with some of the criticized assets. I guess, could you just provide an update on how discussions with borrowers and new sponsors are going? Do you expect more sales in the future. And any kind of color you can provide. Damian Kozlowski: Yes, these things usually take longer. But if you're going to get all the value out of -- the last thing you need to do is panic when you have a little dislocation, which we didn't. And so we've just been working with the borrowers, some in deferrals, right? And so those deferrals are coming to an end, so we're getting resolutions. And the market has improved generally for these assets. And we've gotten much more clarity. So I think we're going to make really good progress in the fourth quarter and in the first quarter of this year. The fourth -- this fourth quarter has already been ring-fenced. It could be a little bit better or worse depending on what happens, but we're fairly confident of the 102 reduction. Timothy Switzer: Great. Good to hear. And the last question I have is deposits moved a little bit lower. I know you guys are trying to manage the balance sheet quite a bit. I would just love some color on that. Damian Kozlowski: You mean the end-of-period deposits? Timothy Switzer: Correct. Correct. Damian Kozlowski: So it's -- we get ups and downs in deposits depending on the program. There's a big seasonality part of it. We're looking at it now. There might be some portion of an impact on drawdowns because of the government shutdown. We're not sure. There's usually a lot of volatility, but we have a lot of primary liquidity. So we have -- we've taken deposits off the balance sheet. So we don't have any concerns. We expect the deposits to start to grow in the fourth quarter and then the first quarter is obviously tax season is where we as you -- if you look back at last year, you could see the dramatic difference as it ramped up in the fourth quarter. And what's happened generally is that you get a ramp up in that fourth quarter. And over the last -- and traditionally, you go back 5, 6, 7 years ago, you'd get that big ramp down. What's happened now is that because we have our reg ii limit, it's more about managing deposits off the balance sheet. We have plenty of deposits. The question is how do we manage it through the cycle so that we don't have these big ups and downs. And so we've gotten much better at taking deposits off the balance sheet when we don't need them. Operator: And your next question comes from the line of Joe Yanchunis with Raymond James. Joseph Yanchunis: So I was hoping I could just ask one more on credit. Can you provide an update on what's going on with the [ ARIA ], and potentially share any occupancy rates that are there and any conversations that you might be having? Damian Kozlowski: Yes. So it's -- we're continuing to lease up the property. There's units available. We're finishing up on -- I think it's about 10% of the units that still need to be refurbished. We'll continue to lease it up. We have people looking at the property to do a transaction. I can't give you any assurances today when that will happen. But we think we'll, over the next 30 to 60 days, get more clarity on the property. There is definitely a market out there for the property. The appraisal, if you recall, came in higher last time we reported in the second quarter earnings. So we feel comfortable. I mean it's in a very different state than it was when we had to take the property over, all the major construction, the roofs and the foundations have been done. So it's just a lease-up situation, and we do have available over 20 units available for rental. So I think we're in a fairly good position in the property. Joseph Yanchunis: Okay. I'm happy to hear that. Kind of moving over to your outlook. I was hoping you could talk about how much share repurchases are implied in your -- both your 2025 and 2027 guide. I know when you initially laid out your 2025 outlook, it includes some share repurchases. And I understand your 4Q '26 and '27 do include share repurchases. So if you could just kind of unpack that, I'd appreciate it. Damian Kozlowski: Yes. So it's -- we've got a lot going on. So we have 3 big initiatives that we're not sure exactly of the timing, right? So we have the new programs, including Cash App. We have embedded finance, which we're launching, and we also have the leveraging up of the credit sponsorship business, right? And there's ambiguity around new partners, exactly when the revenue will be realized. And then we have the big share buybacks and what the stock price is. So what we've done is kind of looked at both and modeled them out and saying, okay, what happens if we get the aggressive versus most likely versus downside case and then looked at the potential stock price with the multiple and said, okay, let's look at all these cases and run a bunch of scenarios and what do we feel comfortable with on both the -- both on the revenue side, but also on the buyback side and then also the expense side because we're implementing -- we have a whole game plan around AI now, which will have an impact on our ongoing cost structure. So this is -- it's probably -- we don't want to put something out that because of the volatility of where we are right now. As we get better visibility as to -- as things play out in the beginning of next year, we could give you more guidance on it. But we didn't want to give guidance for the first couple of quarters. We feel very confident at this point that we expect that we'll get to the $7 run rate. And then if you play it out, that $8 in '25 is very doable and '27 because you have everything hitting at once. You have got all the revenue initiatives. You've got all the buybacks because we would continue to do the significant amount of our net income. And then you have the cost reduction at the same time. So that -- we feel fairly confident regardless of the stock price of the buyback that we'd be able to hit it. But we can't give you the exact -- we kind of run it at a bunch of different prices. And then we look at the revenue expense side and try to triangulate on what best number to go out with. Joseph Yanchunis: Totally understand that you're juggling a lot of things right now. But just in relation to the share repurchases aspect of the guide, should 2027, should we think about the same amount of repurchases, $50 million a quarter, what you have in 2026. And then would that '25 new guide includes share repurchases. Just trying to think of where the jumping off point is as we enter next year. Damian Kozlowski: Yes, yes, right? So it includes the buyback. And if -- obviously, a lower share price or we get better clarity exactly on the implementation time lines. We'll give that guidance to the market once we get clarity. We just know that under all the things that are going on, that $7 is very attainable to get to the run rate. And if we get to that run rate, then you have a whole bunch of things hitting in '27 because you've already ramped everything up. As for the tradition, which has not been approved by the Board, our tradition is that we're going to return depending on the multiple of the company, 100% of our net income in buybacks. At that point, it will be $300-plus million of net income. So that would be similar to the buyback that we did this year. Joseph Yanchunis: Okay. I appreciate that color. And then just kind of shifting focus here. In the quarter, we did see total fintech fees drop sequentially kind of driven by a decline in ACH fees. Can you discuss what occurred here and how we should think about the trend for this line item moving forward? Damian Kozlowski: Yes, there's a lot of volatility. There's incentive fees. There's a whole bunch of things in there, and there's seasonality in there, too. So you're coming off the income period. But they're volatile. So I think you look year-over-year as the best metric to understand that and over a couple of quarters. So you look at the trend and you look year-over-year. So sometimes we do have a slight depression quarter-to-quarter, especially coming off the first to the second, but sometimes the second to the third, but then it starts ramping up again. So I would encourage looking at it longer term and looking at it year-over-year. So we're definitely above -- remember, we have not implemented some of these things like embedded finance. We have not implemented Cash App yet. There's no volume there. Even on the volume that we currently have, we're above trend right now in GDV growth. So that's without the large addition of the next program. So I think you're going to still see the above trend, if not higher going into next year, and that will obviously drive fee growth as well as the adoption of more credit sponsor partners and also the launch of embedded finance. Joseph Yanchunis: You talked about these several initiatives which are going to drive growth, which aren't really hitting the numbers now. Is there any way to kind of rank order these opportunities in terms of potential magnitude? Damian Kozlowski: Well, embedded finance is where the market... Joseph Yanchunis: Not just in '27, but over the next few years. Damian Kozlowski: Yes. So the embedded finance opportunity is very large, right? So we haven't traditionally done any program management for our partners. And what embedded finance really does is package all the capabilities that we have today. We've talked about this whole layer cake of fee opportunities, and it delivers the entire menu to somebody who wants to embed it in their app, such as a gig economy company. And so that makes that -- we not only -- and because we have such scale and the other things, and obviously, we're profitable doing it, if you're able to deliver the program management element, and that's a big growing market, it's going to be in the future, it's a big opportunity. If you recall, the program manager, you'd have to rebate this, obviously, to your partner, but that is the biggest part of where you get the fees, right? So that typically can be up to 80% of the interchange structure in the program management. That's where they get all their revenue from, right? So today, we're a few percent, maybe 4% at the max of those fees. So if you're able to layer on the program management element, you still obviously have to pay things like Visa, Mastercard and networks. But then there's a much richer fee environment, of which, of course, you'll share that with your partner, but that makes our platform much more profitable than it would have been if we just sold it piecemeal. Or for some partners like Chime, we sell all layers of the cake. But in certain cases, we only sell parts of that offer. But that's kind of packaging that entire offer and then it increases the fee environment for us to monetize the platform. Joseph Yanchunis: That was a very thorough answer. I appreciate that. And then last one for me here. Can you talk about the health of the consumer, particularly on the lower end. Obviously, you've discussed how GDV growth remains above trend. But I was just wondering if you're seeing any underlying trends within the data. Damian Kozlowski: Not in spend, and it's hard to tell. We are -- we're seeing momentum in things like the short-term MyPay and InstaLoan world, right? So you're seeing some momentum, but we can't tell if that's just adoption or an economic reason. So we haven't seen the stress on the economy yet. So people are still spending. Remember, the vast majority of our program partners are -- we have corporate payments, that's not going to be -- insurance payments aren't going to really be affected. And then we're generally paycheck to paycheck in a lot of our universe. So people are still employed. They're still spending, and we haven't seen the stress yet. Joseph Yanchunis: Just kind of to piggyback off that, have you seen any increased demand or demand for -- in the early wage access from furloughed government workers? I know that's not the bread and butter of the programs that you offer, but just wondering if you've seen a pickup there. Damian Kozlowski: Yes, we still have momentum in the balances in the -- but we can't tell generally if it's driven -- you would think that it was, but we can't be sure that it's -- you would think that it has to have some impact, right, just logically. But we can't tell if it's just more adoption of the product set through our partners' marketing. It hasn't -- let's say, it hasn't doubled, right? So it's not -- it's maybe a little elevated in the adoption level, but not enough to say that it's from a specific group other than just the normal business marketing. . Operator: And your next question comes from the line of Arif Gangat with Cygnus Capital. Arif Gangat: I have 2 questions. My first question is on the loan delinquency data in your press release. It looks like sequentially, the REBL loans past due doubled from June to September, ballpark $37 million to $74 million. So my first question is, what's driving that? And should we expect continued migration as we step through this quarter of more past due loans in the REBL portfolio. . Martin Egan: No. Some of that will be resolved in that $102 million that's under contract. So that's expected to improve in the quarter. Arif Gangat: So we should expect when we see the same data for Q4, a lower past due line item for REBL loans. Martin Egan: Yes. Arif Gangat: Okay. Great. And then the second question I had is on the consumer fintech loans. Could you help me understand, given the charge-offs in that portfolio, understanding that your partners indemnify you for losses. Help me understand kind of the high charge-off rates in those loans. What's the nature of those loans? Why are they charging off at such a high rate. And for your partners who are indemnifying you on those losses, what's in it for them? Like why are they continuing to suffer those types of losses in these consumer fintech loans? Damian Kozlowski: Yes. So that's -- this is only -- all our consumer fintech loans are now Chime. We haven't added another partner as of yet. And it has been disclosed before, we have $1.8 billion that we have a limit on their use of our balance sheet. There's 5 different products. And they have their own for -- I won't speak for Chime, but they have their own. Obviously, they have plenty of -- you can look at their financials, they have plenty of wherewithal to sustain the losses. So they do it for various reasons. I don't want to speak for them. But I believe it's a profitable activity even with the charge-offs, but there's other marketing reasons that they do the loans in order to make relationships more sticky and to add relationships. But I can't really speak to their strategy. And they -- all I could say is that if you look at their own -- what they say about their -- they're definitely in that business, and they have the ability to change the dynamics around how they lend, and that's up to them. We're just providing the infrastructure and the balance sheet at this time to the limit of 1.8, and they make the decisions ultimately about what losses they like to bear at what rate and then what -- is there a benefit to do that either financially or for marketing? Arif Gangat: Got it. Just to follow up on that then in your conversations with Chime, are they concerned about consumer weakness, slowdown, particularly at the lower-end consumer, the same subprime-related problems we're seeing in other pockets of the market that would then potentially give them pause around lending to the same extent or tightening their underwriting criteria. And I'm really where I'm going with it is, if they do that, how does that impact your fee income and growth prospects in fintech. Damian Kozlowski: Well, once again, that's their decision, and that's a question for Chime. I can't just -- I obviously can't disclose any conversations we've had. That's really a Chime question. We're here to support our partner. We have obviously an incredibly close strategic relationship. We've provided them with enablement for them to help their business plan, and then we've given them a limit of $1.8 billion. So they can change their view of how they want to build their business tomorrow. As -- and I'd ask you to look to their own announcements and stuff of what their intentions are. Operator: And we do have a follow-up question coming from Tim Switzer with KBW. Timothy Switzer: Embedded finance is a pretty broad term that captures a lot of different products and activities. And I'm not looking for a specific partner or anything like that, but can you just provide some color on what you'll be doing next year as you launch that platform? And are you referring to launching a single program or just the platform broadly? Damian Kozlowski: So we already have a workable mockup platform that's actually live, right? So we're in the development process. So we started on the track several years ago of -- Because it wasn't like we discovered -- a bunch of our partners had asked us if we had the capability to do this aspect. So -- and if we could help them build out a capability within their own user experience, right? So that's where the journey started. It became clear to us that the market wants a bank solution, right? They want the entire infrastructure. You're going to have third parties, but they want it to be a bank solution. And that's where there is a lot of demand, especially if you think about the types of companies that need this and where it's not their primary business model. It's mostly the gig economy, but it's not only that, right? So that's where we're focused at first. But it's clear that embedded finance, if you look at any industry study, it's something that's sometimes mentioned as much as AI is. But it's something that's going to be broadly -- people want that financial services capability. So our journey is focused on the use cases that will kind of deliver our entire capability set. Most of that in the early days will be gig economy types of companies, but then there are many other use cases as those companies adopt this type of capability that we'll build on those capabilities and have a large potential market. Now the market is obviously a very large market. And the revenue streams from this type of activity can be very large. I think we have the -- and they could be costly, right, for the provider. But because of the investments we've made in the key core capabilities that are needed such as financial crimes risk management, compliance risk management, we have -- we believe we have an economic advantage in delivering embedded finance to the marketplace over many of the competitors. And that will result in significant profitability enhancements for the Bancorp. And that's part of the reason why as we build these new capabilities, we don't want to give -- and these are all kind of being done at the same time. There's obviously huge potential. And as we get clarity to the market and as we launch these things, we will tell the market. And the potential is large. However, it hasn't been proved out yet. We think these are all going to be within the next 12 months, very important part of our profitability story. Timothy Switzer: Got it. Very helpful. And then can you maybe help us think about -- I know the NIM is a really moving target here, but maybe the trend or trajectory of NII given the impact of Fed rate cuts going forward? Damian Kozlowski: Yes. So we're very different than 4 years ago when we opened the balance sheet. We're very flat. So we're not very asset sensitive. If it goes -- if rates go down 400 basis points, it's only 3% of net interest income because of the way we've structured the balance sheet. So the question for us is when appropriate. And we've got such balance sheet flexibility. For example, obviously, we could have made up room on our net interest income deficit by just buying bonds, but we haven't because the flexibility in this kind of environment is at a premium. So we'll look at those opportunities. And we haven't gone down the credit curve because of price. So as you know, the spreads are very tight in the marketplace. . So we don't feel -- with all the things that we're working on, we don't feel a need to go down the credit cycle, go down the price, go down in price or put on bonds just to make up for the lack of origination on the traditional credit. So that's our position. So we obviously had a little deficit in our net interest income versus what the expectations were, but we don't want to chase in this market or be forced into a position that many people have been enforced in the place of buy bonds just to supplement some of the net interest income. Timothy Switzer: Okay. Got it. That's really helpful. And then can you provide an update on how regulator expectations for BaaS partnerships are changing. And with the -- the administration has been here for 9 months now. Have you kind of seen an easing due to that? Like what areas have you found it easier to operate in. And has this allowed some of your peers, many who were forced to kind of pull back the last several years. Has that kind of allowed them to start to reenter and become more of a competitor again? Damian Kozlowski: I don't think you're going to get any reentering. I think there's -- there was a -- obviously, a lot of people got into Banking as a Service. It's more than just the regulatory part of it. It's all the infrastructure and there's still -- what the regulators have basically said, there was -- I don't want to say overreach, but there was clearly some standards that were starting to be suggested that were not necessarily consistent with guidance. And what the regulators have said is, listen, we're going to use the guidance. We're not going to try to create things that are out of guidance. And I think that's helpful to the entire industry, including us, because we're -- if you remember, we're kind of the highest volume, largest provider. So if they're going to set a standard, they're probably going to start with us. So if they're not going to set a new standard and they're going to managed to previous guidance, we're at previous guidance. So that helps us a lot in that we won't have to meet a new standard, but we'll have to hit the regulatory standard that we've met in the past. So we haven't seen it. We're focused on the largest programs in the implementation. We haven't seen any -- we're still saying -- seeing a lot of the business, we don't do it all, right? So we don't see a pipeline difference at all. And I think over time, it's good for everybody if they manage to -- it's the ambiguity around it. I think that's good for everybody that if the regulators focus on what they -- what the regulations are, that you can have a clean understanding of what their perspective is, right? And then you can meet that perspective. People join us, it's not only because of the regulatory expertise which we have. It's all the other infrastructure. It's the look through the programs through our ability through financial crimes and our data management capability and all that -- and our fraud list and all that stuff. So it's -- that's the only one aspect of it. Timothy Switzer: Okay. And then it hasn't been asked yet. So I'll go ahead, but the commercial fleet leasing, there's a lot going on in that space with the freight recession. I know you typically lease the smaller fleets, you're probably struggling with that. There is also the government shutdown. You have, I think, some exposure to government agencies. What were the issues kind of facing these credits here? And is there continued pressure at all going forward? And I guess, could you just clarify, was this several borrowers, it sounds like? Damian Kozlowski: Yes. So there are 3 borrowers. We don't have a large exposure. So you probably -- the transportation segment got hit hard because there was a bubble during the pandemic because everybody was delivering things. Nobody was going to stores, as you know. They closed all the small stores down. You could only go to Walmart, if you recall. But that ballooned the trucking industry. And so we never had a very large portfolio, and we only have 12 million left. So -- and we haven't done a credit in a couple of years. So this is a legacy disposition of assets where some people are -- it's gotten so bad that there's reports of people abandoning these trailers, not the truck, but the trailer part, people have actually abandoned them at truck stops. But we get the trucks back and then you go through a process of disposition and just aren't realizing these are depression of market -- even in our discounted view because we've usually taken gains on all of our transportation assets, vehicles and trucks. So it's just -- it's a whittle down portfolio. We only have a small exposure left, and it's all centered on losses on disposition of assets. Timothy Switzer: Got it. And the last question I have -- just an update on CFO search. Damian Kozlowski: I can't give you anything today, but I think we'll be able to announce something soon. Operator: And that concludes our question-and-answer session. I would like to turn it back to Damian Kozlowski for closing remarks. Damian Kozlowski: Thank you, everyone, for joining us today. Operator, you can disconnect the call. . Operator: Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.
Unknown Executive: Good morning, everyone. Welcome to CLCT's 3Q Update Briefing. I'm [indiscernible], IR for CLCT. And with me today, we have our CEO, Gerry; CFO, Joanne; CFO, [indiscernible]; Head of IPM, You Hong; and Nicole from the IR team. For this briefing, we will start with a brief presentation followed by a Q&A session.[Operator Instructions]. With that, Gerry, please go ahead. Kin Leong Chan: Good morning. Welcome, everybody, to CapitaLand's China Trust Business Update for Q3 2025. I'm quite sure everyone earlier been watching this U.S.-China President Trump and China's Xi coming together in South Korea. So that's actually a good way to get us started on this business update for CLCT. First, let me go to a snapshot of where we stand today in terms of our asset. Allocation by percentage of GRI, our retail allocation is now at 69.9%, about 70%. That dropped from first half where it was 70.8%, about 1% drop was because we divested this CapitaMall Yuhuating through the C-REIT securitization exercise. And as a result, of course, the other components that we went up 26.5% of GRI is in business parks, 3.6% in logistics parks. In terms of our distribution yield is now 6.2%. Our stock price have came up a bit, that caused a compression in yields. That is also reflecting some of the overall S-REIT yield compression across the board. In terms of third Q key highlights, very happy to again share that CLCT together with our sponsor, we have listed the C-REIT CLCR on Shanghai Stock Exchange on the 29th September 2025. That is China's first international sponsored retail C-REIT. It opened well. It was open trading at 19.6% above its IPO price of CNY 5.718 per unit. That is CLCR. For CLCT, of course, we seeded this C-REIT with our CapitaMall Yuhuating. And we also became a strategic investor through our 5% holding of units in CLCR. Overall, I would say that I think I mentioned before the demand for C-REIT has been, I would say, very, very encouraging. The IPO oversubscription is 254x for institutional, retail 535x. We can see that allocation-wise, we have 20% with the originating or the strategic sponsor group, of which CLCT is one of them. We hold 5%. In terms of the current -- at IPO, the DPU yield for CLCR is 4.4%. Currently, it's already traded. Currently, the IPO -- currently, the trading yield for CLCR is between 3.8% to 3.9%. During the Q, we also refinanced and issued SGD 150 million of perpetuals, right? That was also very well subscribed, at 3.4x subscription coverage. And interestingly, we also had quite a big fund manager and insurance companies allocation, about 1.5 more than of it was to institutional investors. So we successfully completed our perpetuals refinancing through this exercise. In third quarter, we also attained and maintained our 5-star rating for GRESB, while this is the third year where we have obtained our 5-star rating. So very well done to our sustainability team there. In terms of results for third Q, you can see in terms of overall portfolio, our gross revenue came down by 8%. Our NPI also came down by 8%. In terms of -- if you consider on a same-store basis, excluding our Yuhuating, that number would be basically the gross revenue drop of 3.4% and NPI, a same-store basis, drop of 4.4%. Now if you compare that to first half for our overall revenue, the drop would have -- excluding Yuhuating, the drop would have been minus 4.7% in first half. So we are talking for the -- sorry, let me take that back. Let me rephrase that. For our retail revenue -- for our retail revenue, it dropped for this third quarter, minus 1.8% without Yuhuating for retail revenue. If you compare to first half, on the same basis, it would have dropped 4.7% without Yuhuating. So you can see that actually our retail revenue, the drop have narrowed. For Business Parks, the revenue this quarter dropped by 9.1%, right, again, due to Shanghai to Singapore-Hangzhou Phase 2. The -- if you compare to first half, the drop was about minus 10%. Again, a slight narrowing of drop. In terms of logistics revenue, this quarter, we went up by about 13% compared to first half where it was increased by 2%. That was mainly due to the improved occupancy at Shanghai Fengxian. Let me add more color in terms of -- just now I talk about the retail revenue in terms and the overall revenue drop from [DPU] as well. If you look at our overall revenue this quarter, it dropped by about CNY 36 million, of which CNY 21 million came from the loss revenue from the divested Yuhuating. So that's about 58%. About CNY 10 million was from business parks due to the conditions that I have mentioned. So that's about 28% of that drop. And the rest came from what we have put here in terms of lower rents and occupancy at CapitaMall Xinnan and mini anchor tenant repositioning at Rock Square. For the Rock Square mini anchor repositioning, right, we have basically had a tenant open on 1st October. So we would -- that would go away in 4Q. It was -- that space will start contributing and that tenant is at the CapitaLand at Rock Square and the new tenant at the CapitaLand has saw good traffic and started contributing to Rock Square's numbers from October onwards. In terms of NPI, I mentioned minus 8.5% overall year-on-year. Again, very much due to the divested Yuhuating NPI loss, right? So on the same-store basis, we see minus 4.4%. And of course, there are some other factors due to the overall drop in gross revenue from other asset class, other assets like the Business Parks and some of the assets like CapitaMall Xinnan. On the other hand, it's partially offset by our cost reduction efforts of about 1.3% year-on-year on a same-store basis. The next slide, we take a look at some of the retail metrics. If you look at shopper traffic and tenant sales, third Q compared to first half or 9 months for the year, you would see that third Q actually, both on shopper traffic and tenant sales have done quite well comparatively speaking. Third Q year-on-year increase in shopper traffic is 4.5%. Tenant sales third Q increase is 3.2%, right? One of the factors is, I would say, is that some of the key sectors continue to do well. We also had the effect of better Golden Week holidays in 2025 than 2024. So for the key sectors, if you look at F&B, we are plus 5.1% year-on-year for a 9-month basis. Infotech, plus 12.8%. Toys and hobbies, again, very strong momentum, plus 56% and jewelry and watches, 16.6%. So these key sectors continue to do well, whereas maybe some of -- I mentioned before, some of the bigger ones -- bigger categories like fashion and beauty and health continue to have single digit drop in sales year-on-year. In terms of AEI, we have completed -- we have seen the contribution from CapitaMall Xuefu and some contribution from -- one thing, which I'll talk about later. But here in this slide, we just wanted to highlight one of the key growth driver for third Q, which is CapitaMall Xuefu AEI. That added 20.8% to our shopper traffic for that mall and a 24% increase for -- in terms of tenant sales in that quarter. Occupancy costs continue to maintain at about 17.7%. That's quite stable below pre-COVID levels. In terms of China's Golden Week, we saw, as I mentioned earlier, a better Golden Week than last year. So we had 4.6% year-on-year increase in traffic and about 4% increase in total sales versus the last comparative period for Golden Week last year. So if you look at retail occupancy, we have a slight bump in this quarter, right? Some of our strong malls, Xizhimen, Rock Square, Xuefu, Nuohemule basically are fully leased, and that has helped to bring up the retail portfolio occupancy. There is continually positioning for CapitaMall Xinnan, which you can see the occupancy dropped slightly. We are trying to work hard to pivot that mall to a new concept where we focus more on the IP and the anime and young to cater to the younger generation. So what we call [indiscernible], and we are seeing some progress there. But in the interim, there will be some bumps in occupancy. In terms of retail reversion, we see that we now have a retail reversion for 9 months of minus 1.5%. And these have narrowed from first half where we reported about minus 3%. And some of the reversions -- stronger reversions we see from, again, the strong categories that I spoke about, F&B, IT, toys and gifts, right? Again, the weaker reversions from fashion and beauty and health. So that's basically for retail. For Business Parks, our overall occupancy dropped by 86.9% to 85.2%. I'll explain shortly why that's happened. The Xinsu portfolio and our -- Xinsu portfolio has been relatively stable. There was a small drop due to one of the -- one tenant basically giving up the space, but we are looking to fill them. The AIT asset within Xi'an, that asset has started to basically fill the Ping An's -- fill the space that was vacated by one of our big tenants that left 1 year ago. And currently now, we have brought it from 74.6% to 75.4%. We are making quite good progress. And by the end of December, we are looking for occupancy of mid-80s, right? So we have some tenants already lined up. So we were coming progressively, and we hope that by end of December, we will be able to push it up to the mid-80s. I continue to be at the mid-80s level, 80s levels, there was some drop, but we'll try to fill in those tenants as well. For Hangzhou, Phase 1 had a small increase. And Phase 2, where we had previously shared that we have basically taken over some service office tenant space that was at about 25,000 square meters. In third quarter, we had another service office space, which, when we review our tenant portfolio for Phase 2, we found that we wanted to proactively take over that service office tenant -- to basically start to convert them into spaces that we can control directly. There was, of course, learning from the earlier exercise where we took over the space on the service office operator. We thought that it may be better that we take it over earlier, right, so that the transition if the service office operator dropped off would be easier. So that was what we did in third Q. You could see that, that caused a temporary reduction in the occupancy from 79.7% to 70.7% because the service office was about 29,000 square meters, and when we take it back, we directly signed leases with the subtenants of which about 60% of that space was leased. So that caused basically a change from a master lease of 100% to about 60% of the space being in our books being leased. We are working hard on this, and we hope to repeat the success that we have with the other service office operator that we took in. In all, we took back -- from the last round we took plus this round, we took back about, I would say, about more than 50,000 square meters of space. We now have already leased up about 67% of that space, right? So for -- in the 4Q, I think we should be able to push that Phase 2 occupancy closer to what we saw in June 2025 of the high 70s mark. For the Business Park reversion, for first half, it was minus 8%. So for 9 months, including the Q, it's minus 8.9%. So for Business Park, we continue to deploy rental incentive as a key tactic to maintain our occupancy as well as preserve our asset value in quite a challenging market in some of the business park assets. Overall, you can see that our Business Parks continue to -- in terms of occupancy, continue to outperform the submarket, Xinsu in Suzhou, of course, outperformed quite significantly about 30 bps -- 30%, but for the Xi'an portfolio, AIT and AIH, currently, it's slightly below submarket, but with the committed tenants that have signed on in October, our AIT and AIH as a cluster would have 83.9% occupancy that would have outperformed the submarket. As I was mentioning, in 4Q, we should see even more, and that should push up the whole Xi'an cluster above 83.9% in terms of occupancy. Hangzhou at 73%, it's also outperforming the Hangzhou submarket. And we should, as I mentioned, in 4Q, continue to see improvements in our Hangzhou overall business park occupancy. In terms of logistics, we're quite stable, same occupancy as June '25, 96.6%. The revisions that -- negative reversions that you see there basically is due to one of our renewal of a strategic anchor tenant at Wuhan, which was already previously reported. I will let Joanne take the capital management part before I close off. Okay. Siew Bee Tan: On our financial position for this quarter, as you can see, the total debt has actually reduced from SGD 1.8 billion to SGD 1.6 billion. This is also actually because of the temporary use of the proceeds from the perpetual that we issued in September. That also actually brings down our gearing to 28.8%, as you can see. But we have actually redeemed the perpetual out there I think, 2 days ago. If we actually include that additional perks that we have used our loans to redeem, that gearing would have been 41.3%. On the average cost of debt in this quarter, it has actually improved from 3.42% to 3.36%. I think this is actually the fruits -- the labor of the fruits that we have actually earlier on issued CNH bonds and also all the initiatives that we have actually rolled out that at a point in time, CNH interest was actually lower and we actually benefited and that can be seen from the cost of debt this quarter. Our ICR is at 2.9x and average debt to maturity is 3.4 years. In terms of the ICR sensitivity, as you can see on the right table, on 100 basis point interest rate movement, our ICR is still at 2.3 level, which is a healthy level. Same goes for the sensitivity on the EBITDA. 10% decrease on the EBITDA, my ICR is still at 2.6x. That is way above the requirement by MAS of the 1.8x where we need to actually explain and put up some explanation to that. We also have a sensitivity in terms of the gearing on a 1% movement of the Sing dollar to renminbi, our gearing will move about 0.27%. I think this is something that we actually put out on the debt maturity profile. As you can see for 2025, we are actually pretty done. There's nothing that is due for refinancing for 2025. In fact, I think the team has actually proactively look out to actually extend our loans, and we actually work on the 2026 tower. SGD 120 million, which was actually dollar debt has actually been -- will be refied to a renminbi debt. I think we are working towards what we have actually communicated to the investors that by end of this year, we are actually targeting our renminbi debt as a total percentage of our total debt to be at least 50%. As of 30th September, we are actually reporting 45%. I think by end of the year, we will definitely be more than 50% is what we have actually started to achieve. As a percentage of total fixed to floating, we are at 80% fixed this quarter. This level is at this level because, again, for the temporal perpetual and we use the proceeds to actually pay down floating debt. I think this percentage, we will -- you will see that this fixed percentage will come up a little bit to actually benefit from the lower [indiscernible] that we are seeing right now in the current interest rate environment. And I think, in terms of the debt maturity -- debt funding mix, we are pretty well mixed. We've introduced our renminbi bond. We also have done FTZ bond and also increased our onshore renminbi loan percentage. I think that's a little bit color of the debt maturity profile and capital management. I'll hand back to Gerry to actually... Kin Leong Chan: Okay. So thanks, Joanne. Yes. So looking forward to the fourth Q to the end of the year, some of the things that our stakeholders can look forward to. In terms of our AEIs, right, for CapitaMall Yuhuating where we transform a large supermarket area into a higher-yielding retail space overall, we have successfully leased 100% of the AEI area, right, achieving an ROI of 12.6%, very well done AEI and achieving a very good return of our investment and CapEx in this area. Currently now on 1st October, in fact, we are ahead of schedule. We were actually initially thinking that we will be only able to open the space in November, but now we have managed to basically open it in 1st October. About 14 of 27 tenants have opened, including 7 Fresh, which also when they opened, did very well, right? The remaining shops will open progressively throughout October and November, right? Our AEI area was opened right before the Golden Week period. So that has really helped to increase the shopper traffic and tenant sales at CapitaMall Yuhuating. In terms of the Golden Week performance, you can see there our shopper traffic went up by 13%. Tenant sales went up by 21%. The supermarket itself really outperformed in terms of per square foot sales versus the previous supermarket at 177x. So very efficient use of space, very good sales, right? So I would say that we are looking very good in terms of this AEI. In terms of CapitaMall Xuefu, I think last first half, we shared already about it. For our Animation, Comics and Game Street, now besides the supermarket that has opened, now the Game Street, ACG Street has now opened. This 2,105 square meter NLA where we transform it previously, again, it was part of the original supermarket. We took it back and then now transforming the Game Street. It's 100% occupied next to our B.U.T supermarket, which opened in June. This street now has 13 brands, 9 of which are introduced to the whole CapitaMalls for the first time. So these are some of the popular ACG brands where we are trying to basically build an area, which leverage and which would basically be able to attract more IP merchandising such tenants into the space, and which would attract also a different demographic, a younger consumer demographic, Gen Z demographic who are really into IP merchandising and the offerings that we are putting into this street. So if you look at the first month since the street has opened, the shopper traffic has increased by 18% year-on-year. Total rental increase that we achieved here for this share of AEI is 13.1%. In terms of how we are creating value through our strategy, we have already achieved entering the C-REIT market this year by becoming -- by listing CLCR and becoming a key stakeholder. That gives our unitholders access to the China domestic capital market. In fact, we are proud to say that we have only S-REIT or perhaps only REIT in Asia Pac that would be able to allow our unitholders access to the C-REIT market. In terms of unlocking value, we have recycled CapitaMall Yuhuating. We divested Yuhuating through C-REIT securitization at a premium. Basically, it was 8.8% premium to our announced floor price. And it was also a 4% premium above Yuhuating's 2024 valuation, right? So this, I would say, is a very good outcome. In terms of exit NPI -- exit NPI, it was a very competitive, very attractive 6.2% NPIU that we have exited at for basically Tier 2 city asset, right? This really shows how we can effectively take an asset like Yuhuating, even though it's a Tier 2 city asset, add value to it over time. We bought it maybe about 5 years ago and then be able to recycle that asset into a C-REIT exiting at a premium, right, at a good yield and then bringing back money and then being able to then find new ways to redeploy that capital. And this S-REIT connection, I think in the months ahead and the next year, we will try to continue to exploit our unique advantage and continue to see whether we have more opportunities to do such activities. In terms of extracting value, we continue to look at our AEI as an important way to drive some organic growth. So we have already announced Wangjing and Xuefu's successful completion. The next one up is Xizhimen, which we are looking forward to completion in 4Q. Currently, the AEI work is going well. The tenant is doing AEI work, which is basically 89% completed. We are now looking forward to them getting approvals to open. Hopefully, we -- by the time we get to 4Q, we'll be able to give you some good news and also some snapshot of how it's looking. In terms of capital management, we have been very proactive at that. We told our stakeholders and unitholders that we want to aim for 50% of debt being renminbi-denominated debt so that we basically have a better currency mix and asset liability matching in terms of our renminbi exposure. And we have -- basically have achieved that. We have achieved that. And by the end of December, I think you would have seen that we have made very big efforts and have successfully outperformed this 50% mark. With that, maybe I'll pass back over to [indiscernible] to take in questions. Yu Qing Chen: Okay. Thank you, Gerry, for the presentation. Now let's proceed to the Q&A segment. We have the first question from Derek. I'll pass the time to you. Please go ahead. Derek Tan: Can you hear me? Yu Qing Chen: Yes. Derek Tan: I just wanted to ask a few questions. So firstly, if I -- I'll start with retail, right? I mean your numbers, sales and traffic looks pretty okay, but your reversions are still negative. I was just wondering whether -- when should we see that turn coming in? And could you have a guidance for that? Maybe that's the first one. Kin Leong Chan: Yes. I think I previously shared in terms of reversion, quarter-to-quarter, we are seeing plus 3%, minus 3% sort of range. This quarter was a better quarter where we had some reversions from the good reversions from some of the stronger trade cats. So we sort of basically improve on the first half. But first half, I think we -- I mentioned before, we had a mini-anchor repositioning the CapitaLand at Rock Square that basically brought down reversion a bit. And also, we were transiting from some of the higher rental EV tenants in some of our malls, some of them have basically consolidated, right? So we have to replace them with different trade cat? So that affected the reversion in the first half. So going forward, now that we have basically worked that out, our reversions will probably look at in that tight range of, I think, flat to maybe slightly negative but what we are seeing currently. Derek Tan: Sorry, you're still looking at flat to negative. That's the guidance still at this point? Kin Leong Chan: Yes. I think at this moment, the balance is such that there are some trade cats that are doing well. So that's contributing positive reversions. But there are also other trade cats that are doing not as well, which I've mentioned before, fashion and beauty and health. And overall, the -- while sales are -- as you can see, sales and traffic are doing well, but we are still in an environment where in terms of expanding space are being cautious, right? So it's also quite difficult for some of the trade cats to ask them for rental increase. Hong You: Yes. Maybe just to add another perspective. I think our stronger malls are actually doing okay, do register generally flat to slight positive that we wanted. But there are also malls that have been going through repositioning, for example, [indiscernible] and I think we still continue to see a bit of adjustment there. So that's why you see as a whole, we remain cautious. The other perspective is that I think you probably are also aware that the -- for example, when people got to spend the per capita spending tend to bit more on the downside. So I think the tenants are also aware of that because they actually do give a lot of sales promotions and all that. So while sales is actually on a healthy trend, I think their profit margins are also still having a bit of pressure. So I think in negotiating with the landlord on the rental, we continue to be cautious in terms of how they actually expand. I mean we hope things will be better next year. But I think at this moment, we still would want to be guiding a bit cautious. Derek Tan: Sure. No problem. Maybe I just want to -- it's an observation. I'm not sure whether it's the right kind of comparison. But if you compare to your peers, right, for example, people like Mix is doing pretty okay. I'm just wondering whether it's a function of the tenants or the trade cat or just maybe the positioning in the retail sector. Just wondering your thoughts on that. Hong You: Maybe -- I mean, we can't speak as a whole, but when we actually visited some of the mixed-use properties and based on the conversation that we had, they had, I would say, some of the malls were opened in the more recent times, and their strategy would have been starting from a low base, get the mall filled up. And then as the business continues, then ramp up. I think there are certainly some effect from there. In fact, when we compare some of the malls that we are in our portfolio and similar locations, our rents are actually not lower. So from that point of view, there's a bit of a catch-up in the rent I feel from those newly opened malls. Derek Tan: Got it. So I mean last one for retail. Your op cost, do you have an exact sense for me? Kin Leong Chan: Yes. I think we have an op cost is still about high 17s to about 18%. Derek Tan: Okay. Got it. Got it. Sorry, last one for me from your business park and logistics, right? I noticed that we saw dip in reversions, but also occupancy is a bit soft selected assets. So I mean, I know, Gerry, you mentioned you took back some space and you managed to work on it yourself, right? So you look at, say, going forward, right, reversions, negative, which is the one that will move into a positive territory first. So occupancy first or reversions? Kin Leong Chan: Occupancy. Derek Tan: So you'll be focused on occupancy going to a certain level before you start to be a bit more stricter on rents? Kin Leong Chan: Yes. I think clearly, for the business park sector, I think everyone is almost in the same direction, us as well as other competitors. Everyone is focusing on occupancy. Just now I mentioned for our Xi'an cluster, AIT and AIH, right, we -- with some of the committed occupancy that we have already in October, as a group, we -- as Xi'an Group, it's now about 84%, right? We have brought it up in terms of committed occupancy, but we'll continue to bring it up, hopefully, to the high 80s by end of December. For Hong Kong, it's the same thing, right? Currently, maybe as a group is about low 70s. But by end of December, as we work through that those service office converted return space that we are working on directly, we should be able to bring it up -- hopefully, we'll be able to bring up to the high 70s. Yu Qing Chen: We have the next question from [indiscernible]. Unknown Analyst: A couple of questions from me, a bit more in terms of the divestment proceeds from CapitalMall Yuhuating. So I'm just wondering what are your thoughts on conducting a unit buyback at this juncture versus carrying down debt? Kin Leong Chan: Okay. So currently, whatever proceeds that we bring back, the likelihood that immediately, we'll probably use it to temporarily pay down debt first because that's the fastest way to use the proceeds. This, Tan can share a little bit more about timing and all that later. But in terms of the medium-term plan in terms of how to make use of -- obviously, after you pay down debt, we have a slightly better gearing headroom. I'm still looking at it together with the team. One of the options, of course, like you mentioned, is a unit buyback plan. Today, as you can see in earlier in our slide, the -- our trading is about 6-plus percent, right? Maybe give it -- it was in first Q or first Q to second Q, it was 8%, right? So if you ask me when it was first Q and second Q, 8%, there was a very strong, of course, rationale to do the unit buyback. Now it's about 6%. It's still, I would say, maybe an opportunity, but I think now we have to weigh against maybe other opportunities that may come up. And I've mentioned before the fact that I want to look at ways to continue to exploit this the C-REIT -- the Ex-rate and C-REIT connection that we have now. I believe that we are in a position where we can now actually go and look in the market, specifically at retail assets right? As you can tell, as we -- because we have sold the Yuhuating asset, we lost some income. If we can find a solid asset that basically has long-term value and at yields that are higher than our trading yield and also higher than the asset that we have divested, right, that becomes maybe another option for us to basically use our gearing, right? We could deploy into those to such a retail asset. And then, of course, continuing in the long term to have a pipeline of good retail assets, which when their value have peaked, we can then rotate them and securitize them. So that's what we are thinking through now, right, what we are looking at the market right now to see whether there are such opportunities, right? I give myself -- we give ourselves about maybe 6 to 9 months to go through the exercise, right? And we'll come back to unitholders when we have made that decision. But certainly, unit buyback is still on the table if we cannot find better use of the money. Unknown Analyst: Got it. That's very clear. I guess it's a tangential note, given that we have potentially some lower gearing and still that $107 million worth of offshore CNY debt that is coming due next year, where do you see your cost of debt trending in FY '26? Kin Leong Chan: Joanne, can you take that? Siew Bee Tan: Yes. Okay. For us, I think like I mentioned earlier on, we already actually have seen our cost of debt improving for this year vis-a-vis last year. I think it's also because of the effort that we actually have achieved more renminbi loans on our book. So going forward, I think if this continues, as we mentioned, where we are actually also embarking at least 50% of books on renminbi debt. We see that the average cost of debt will actually hovers around this level. So what I want to say is that actually, we have really benefited from the lower cost of debt beginning of this year already. Unknown Analyst: Okay. Got it. Just one last question for me, a bit more of a stupid question. But back in first half '25, we actually retained about [ CNY 1.8 million ] that was contributed by CapitaMall Yuhuating in terms of distributions. So I'm assuming that all of this will kind of be sort of returned to the REIT to form the second half DPU. And also given the cutover date of 29th September for CLCR, should we still expect any contributions from the asset for the second half sort of DPU? Siew Bee Tan: Yes. Yes, you're correct. In 1 half, we actually retained 2Q Yuhuating's contribution. At that point in time, we're actually not very clear in terms of the regulation on what is the cutoff date of the transaction. But following on the IPO of this asset in CLCR, the initial date or rather the cutoff date has actually been confirmed that it will be on 31st March. So having said that, it means that we will not be able to actually have Yuhuating's contribution starting from 1st April onwards. So in other words, for the 2Q retention of Yuhuating will not be released back to the unitholders. And at the same time, as what we have also shared in terms of operation numbers, 3Q Yuhuating is also not inside the NPI where we actually presented. Yu Qing Chen: We have the next question from Hong Wei. Wong Hong Wei: This is from Hong Wei from OCBC. I just have 3 questions. So my first question is on the tenant retention. So I see that for retail, for example, the renewed leases is actually less than half of those. So just wondering how sticky are the tenants? And are these tenants churning in and out quite rapidly. So that's my first question. And the second one is that there are certain big categories that really boom a lot in tenant sales. So I think that also contributed to some of these tenant sales figures being supportive. So is this something that's sustainable? Or do you think this will come off? And closely related to this tenant sales question is, I mean, just now talk about occupancy cost. So it's come down to a level where you mentioned it's healthy. But I think Derek also mentioned and asked about the negative rental reversion. So just wondering, is 17.7% something that is going to be where you will stabilize at? Or do you think it will go up or down from here? So that's my second question. And my third question is that Yuhuating has been divested. So I think now GRA, about 70% is coming from retail. A couple of years ago, there was a road map to reduce retail down to 30%. So I mean, obviously, a lot of things have changed since then. So is there a kind of a refreshed target or road map? So that's my third question. Kin Leong Chan: Okay. I think the first 2 questions, You Hong can take and I can take the third question in terms of strategy, I think. Hong You: Okay. On the trade cat sales, I think, of course, different trade behave slightly differently. In terms of F&B, we actually continue to see good traction. And I think there are interesting brands that's coming up. And so on the retention side, in fact, that's also from our experience, I think for retail malls, refreshing 50% to 60% of the area brands is quite common. And if not, I think we also would run a risk of at times our shoppers getting a bit tired of the same color. So I think that churn, we are not too worried about. Indeed, it is what kind of tenant that bring in, what kind of tenant that goes out is more of a question to us. So I mentioned about the F&B. In terms of toys and hobbies, this traditionally is not a big trade category, but benefited from the likes of Pop Mart and a few other names. It did actually give us a very good sales momentum. So far, we see that trend is still continuing. IT side, I think the first half indeed benefited quite a bit from the so-called government's incentive trading program. So I think there is that benefit. And Q3, we are seeing slightly tapering down a bit. What we believe on the ground is that the training program and then the incentives are still ongoing. But I think perhaps the quotas, the timing of the voucher that's given as well as the fact that the [indiscernible], some of people would have already done their big shoppings in the first half. Q3, the effect will not be as big, but still on a year-on-year basis, it's still increment. Jewelry and sales, we still see increase. Yes. So I think if you ask me whether the sales momentum will continue to grow, I think it's still a healthy recovery and some of the rotational trade cat shift will still continue. Yes. That's the trade cat sales retention question. On the cost, from what we see, I think this is generally -- I mean, our cost is a function of rent and sales. So from that point of view, our cost will probably stabilize at this stage and then may turn out a bit if our sales continue to grow. But I think that probably will set a good momentum when I think the tenants are actually really feeling the confidence coming back and for us to actually engage them in a positive rental cycle negotiation. But like I mentioned, that hopefully would happen sooner than later in next year. Kin Leong Chan: Okay. On the question of strategy and asset allocation, currently, we are about 70-plus percent retail. As you have noted, many things have changed versus a couple of years ago. The new economy sector, of course, have been quite in a turbulent time relatively speaking, compared to our retail, which are very defensive asset class. On top of that, we have successfully listed a new recycling vehicle, right, securitization vehicle through the C-REIT. So in our view, we want to revolve our strategy now towards this competitive and strategic advantage that we have in terms of the retail value chain, right? So I see ourselves focusing more on the retail side of the business rather than, say, growing the new economy side of the business in terms of asset allocation. Yu Qing Chen: We have the next question from [indiscernible]. Unknown Analyst: Just a very quick one. You mentioned you want to look at China maybe potentially for acquisitions again. Can you give us some color on what's happening on the ground? Are there distressed deals? And what's the kind of cap rates for retail in the market right now? Kin Leong Chan: Okay. I will maybe introduce this shortly, but I'll let You Hong take that question because he looks at it from an investment point of view. But indeed, I would say that we are just starting to scan the market more actively, right? I mean we haven't bought a retail mall for some time, right? But from our perspective, this asset has been a very defensive asset on our portfolio. And particularly retail malls that are more mid-market, have good traffic connections in dense residential catchment, those are the ones that in our portfolio have done well, and we want to add such assets into our portfolio if we can find them. I will let You Hong take maybe the current market conditions. Hong You: Yes. I think the market has been, I would say, still investment market relatively soft between institutions. right? The transaction volumes, I think, has not really cut that much, especially in the retail scheme since traditionally, it was not a very big market and then it requires a lot of operation capabilities. I mean the C-REIT market has been actually active and then giving very attractive, I would say, valuations in the assets that we have sort of traded, it's giving us that about 6% exit cap that we hope to achieve. And then for first year, I think it will be one notch lower, right, close to the 5%. Whereas in the capital market side, I think things are a bit different. I would say, when I say capital market, it's more the physical institute the unblock sales market. I think generally, people -- the offer spread are still large, right? I think any buyer are still asking higher than what I've spoken about in terms of at least 1 to 2 percentage or 100 to 200 basis points, right? I think this is where things are. And I mean, we are still at early days. So we hope to come back to you. Kin Leong Chan: So like what You Hong said, I think I'll summarize that liquidity is keen in the unblocked market, right? That's across asset class, not only retail, but retail because needs expertise tend to be blocky, chunky in terms of size, right? So that increased the level of market dislocation that we are seeing. And because now with our, I would say, superior conditions for investing in such asset, I mean, we are backed by our sponsor and our operator who have retail expertise for 30 years in China. We have proven track record of value adding to retail assets. And we now have the ability to recycle older assets into a C-REIT, helping us to achieve liquidity when we need them. We feel pretty good about trying to find opportunities under this environment of market dislocation and particularly want to focus on retail. Yu Qing Chen: We have another question from Derek. Derek Tan: Gerry, I just wanted to have a follow-up on the questions, right? So I mean, you have done the C-REIT, which was a great recycling avenue for the trust. But going forward, right, is that the only one that you think is most viable at this point in time? And thinking about SA you also looking at acquisitions, right? I mean my own thoughts are that your gearing at 38%, debt capacity is not, say, a lot or so. So I'm just wondering whether how should we think about your capital and the size of the deals that you potentially could look at, just these 2. Kin Leong Chan: I think you are referring to whether Yuhuating is the only one that could potentially be injected with C-REIT. Is that correct? Derek Tan: I think 1 year's time, they can buy, right, can buy more from you. But I'm just wondering whether at this point in time, is this the only avenue that you think is open for you for now? I'm just curious. Kin Leong Chan: In terms of -- I think this would be a key way that we want to utilize, though it's not the only way. I mean, You Hong can share there will be -- there are third-party avenues. But generally speaking, I think valuations for the right assets, probably you can achieve better valuations through the C-REIT securitization. And of course, not everyone can basically securitize through -- as you know, it's not easy to lease a C-REIT, and we are only basically foreign sponsor who have leased a retail C-REIT on the A share, right? So we have the advantage. So of course, we want to make use of that advantage, right? So that's one. Two, I think your question of the balance sheet, right? Of course, we divested Yuhuating. Clearly, that sort of bite size of about CNY 1 billion of asset is clearly something that would be interesting that would replace sort of the Yuhuating asset size. And if we require -- if we find really fine asset, for example, that is bigger, I don't know, say, CNY 2 billion, right? We may have other ways to raise money. As I said, we are continually looking at targets where we can recycle some capital. Of course, the C-REIT is one avenue. I did mention that I want to continue to utilize that channel to basically get capital when I need it, right? So there are, in fact, something that is actively looking at. You, do you want to add anything else? Hong You: Yes. In terms of divestment channels, I think we have, in the past, been able to divest assets to the various local institutions, right? So I would say that some look for income, right? Some look for alternative use. So in this market, like what Gerry alluded to, I think the liquidity is relatively thin. So on the alternative use, I think we are seeing buyers being generally more cautious where if they are looking for income, I think, again, in this market where the bid offer spread is still a bit wide, I still think probably C-REIT is the better option for us. Derek Tan: Okay. Got it. Got it. Sorry. Last one for me. If you think about, let's say, your capital sources, right, that you want to tap. So I would presume that you will look at divestments first, followed by the capacity per [indiscernible] equity. So is equity something that you think you want to tap at the right opportunity? Kin Leong Chan: I mean it's not something that we can speculate, right, by [indiscernible]. So I think end of the day, it's finding -- it's the quality of the asset that we are looking at, whether on a stabilized basis, that asset that we eventually find can justify the use of capital, right? I think that's the starting point, right? We don't find a good asset that meet all these criteria, then obviously, we won't force it. Yu Qing Chen: [indiscernible] if you have another question. Unknown Analyst: No, sorry. Yu Qing Chen: Okay. Are there other questions from the floor? Okay. Since there are no questions, this concludes our session for today. Thank you, everyone, for joining, and please feel free to reach out to me or my team if you have any further questions. Thank you all, and have a great day.
Operator: Good day, and welcome to the nVent Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tony Riter, Vice President of Investor Relations. Please go ahead. Tony Riter: Thank you, and welcome to nVent's Third Quarter 2025 Earnings Call. On the call with me are Beth Wozniak, our Chair and Chief Executive Officer; and Gary Corona, our Chief Financial Officer. Today, we'll provide details on our third quarter performance and outlook for the fourth quarter and an update to our full year outlook. As a reminder, all results referenced throughout this presentation are on a continuing operation basis unless otherwise stated. Before we begin, let me remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in today's press release and nVent's filings with the Securities and Exchange Commission. Forward-looking statements are made as of today, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results. Today's webcast is accompanied by a presentation, which you can find in the Investors section of nVent's website. References to non-GAAP financials are reconciled in the appendix of the presentation. We have time for questions after our prepared remarks. With that, please turn to Slide 3, and I will now turn the call over to Beth. Beth Wozniak: Thank you, Tony, and good morning, everyone. It's great to be with you today to share our outstanding third quarter results. Our portfolio transformation to become a more focused, higher-growth electrical connection and protection company is delivering results and accelerating our growth. We had record sales and adjusted EPS in the third quarter. For the first time, quarterly sales were more than $1 billion. Adjusted EPS was $0.91. Both sales and EPS exceeded our guidance. We also had record orders and backlog in the quarter. Organic orders were up approximately 65% primarily driven by large orders for the AI data center buildout. Excluding data centers, organic orders grew high single digits. With the record orders growth, our backlog grew strong double digits sequentially. We had very strong cash flow in the quarter, and our balance sheet is healthy. Our first priority for capital allocation remains the same, invest in growth. We are investing in new products, commercial capabilities and expanding 4 of our facilities to add capacity for data center and power utility growth. Now on to Slide 4 for a summary of our third quarter performance. Sales were up 35% and 16% organically, led by the infrastructure vertical. New products contributed over 5 points to sales growth year-to-date, and we have launched 66 new products so far this year. Adjusted operating income grew 27% year-over-year with return on sales of 20.2%, adjusted EPS grew 44%. Looking at our key verticals. Infrastructure led the way with organic sales up over 40% with strength in both data centers and power utilities, Industrial and Commercial/Resi sales were each up low single digits. Turning to organic sales by geography, both Americas and Europe were strong. Americas grew high teens, while Europe was up approximately 10% and Asia Pacific was down low single digits. Looking ahead, we continue to expect infrastructure to have strong sales growth across both data centers and power utilities. We expect Industrial sales to grow low single digits and Commercial/Resi to be flattish for the year. For guidance, we are again raising our full year sales and adjusted EPS guidance to reflect our outstanding third quarter results and stronger performance in data centers. Our organic growth and recent acquisitions are expected to more than offset the EPS impact from the thermal management business we divested in the first quarter. Importantly, we cannot accomplish these results without the dedication of our nVent team. Transforming our portfolio and accelerating to become a higher growth company takes a lot of effort and teamwork. I am very proud and appreciative of all the hard work by our nVent team to support our customers and deliver this outstanding performance. I will now turn the call over to Gary for further details on our third quarter results and our updated outlook for 2025. Gary, please go ahead. Gary Corona: Thank you, Beth. We had another excellent quarter, exceeding our guidance with record sales and adjusted EPS, along with very strong cash flow. Let's turn to Slide 5 to review our results. Sales of $1,054 million were up 35% relative to last year. Organically, sales grew 16% driven largely by volume and an increased contribution from price. Acquisitions added $139 million to sales or 18 points to growth ahead of our guidance. Foreign exchange was roughly a 1 point tailwind. Third quarter segment income was $213 million, up 27%. Return on sales came in at 20.2%. Inflation was more than $45 million, including nearly $30 million in tariff impact. Price plus productivity offset inflation, and we also continued to make investments for growth, particularly for data centers and our recent acquisitions. Q3 adjusted EPS was $0.91, up 44% and above the high end of our guidance range. We generated robust free cash flow of $253 million, up 77% year-over-year. Now please turn to Slide 6 for a discussion on third quarter segment performance. Starting with Systems Protection, sales of $716 million increased 50%. Acquisitions contributed 26 points to sales and have performed ahead of expectations. Organically, sales grew 23%, with all verticals growing. Infrastructure grew over 50% with continued strength in data centers. Commercial/Resi grew low double digits, Industrial was up low single digits. Geographically, Americas and Europe were both strong, driven by data centers. Americas grew over 25%, while Europe was up low teens. Asia Pacific was down low single digits. Third quarter segment income was $146 million, up 40%. Return on sales of 20.4% decreased 150 basis points year-over-year, impacted by inflation, acquisitions and growth investments. Moving to Electrical Connections, sales of $338 million, increased 11%. Organic sales were up 5%, and the EPG acquisition contributed 6 points to sales. From a vertical perspective, infrastructure led, growing high teens. Industrial grew high single digits and Commercial/Resi was flat. Geographically, sales were led by the Americas, up mid-single digits, Europe was flat and Asia Pacific was down low single digits. Segment income was $102 million, up 10% versus last year. Return on sales improved sequentially coming in at 30%. Compared to last year, return on sales was down 40 basis points, mainly due to inflation and acquisitions. That wraps up the segments for the quarter. Turning to the balance sheet and cash flow on Slide 7. We ended the quarter with $127 million of cash on hand and $570 million available on our revolver. We had very strong quarterly cash flow generating $253 million in free cash flow, up 77% year-over-year. We believe our healthy balance sheet and strong liquidity position support our disciplined capital allocation strategy. Turning to Slide 8, where we outline our capital allocation priorities. We continue to prioritize growth and execute a balanced and disciplined approach to capital allocation to deliver great returns. We are investing in the business via R&D and CapEx for growth and supply chain resiliency. We returned $351 million to shareholders year-to-date in the form of share repurchases and dividends. We exited the quarter just below our targeted leverage range. We believe we are well positioned and have additional capacity for future capital deployment with our first priority being to invest in growth. Moving to Slide 9. As Beth shared earlier, we are raising our full year sales and adjusted EPS guidance to reflect our strong Q3 results and our improved outlook. We now forecast reported sales growth of 27% to 28%. That includes expected higher organic growth and approximately 16 points from acquisitions, with foreign exchange approximately a 1 point tailwind. For organic sales growth, we now expect to grow between 10% and 11% versus our prior guidance of 8% to 10%, reflecting our Q3 beat, along with stronger growth in data centers and power utilities. We are raising our full year adjusted EPS range to $3.31 to $3.33, up 33% to 34% versus last year. This new guidance continues to reflect tariff impacts of approximately $90 million. We expect to offset the impact of inflation, including tariffs through pricing, supply chain productivity and operational mitigating actions. For free cash flow, we expect conversion of 90% to 95%. One additional modeling assumption to note, we now expect corporate costs to be approximately $120 million versus $110 million previously. Looking at our fourth quarter outlook on Slide 10. We forecast reported sales growth of 31% to 33%, with acquisitions contributing approximately 15% to sales and foreign exchange, approximately a 1 point tailwind. Organic sales growth is expected to be up 15% to 17%. Price increases, coupled with productivity are expected to offset inflation, including the tariff impacts in Q4. We expect adjusted EPS to be between $0.87 and $0.89, which at the midpoint reflects a nearly 50% increase relative to last year. Wrapping up, we are pleased with our excellent third quarter performance. We delivered record sales and adjusted EPS, and we are well positioned for a strong fourth quarter. I will now turn the call back over to Beth. Beth Wozniak: Thank you, Gary. Please turn to Slide 11. Our portfolio transformation to become a more focused, higher-growth electrical connection and protection company is showing in our results. We have increased our exposure to the high-growth infrastructure vertical. In addition, we have been investing in our data center business, which is growing and accelerating with the AI build-out. We believe the infrastructure vertical has the highest growth opportunity with the trends of electrification, sustainability and digitalization. Turning to Slide 12. I want to share our latest highlights on liquid cooling for data centers. We are a leader in liquid cooling with over a decade of experience and more than 1 gigawatt of cooling deployed. Our strength lies in our ability to design modular, service-friendly, high-performance systems that simplify deployment and provide resiliency across large-scale environments. We differentiate with deep application expertise, complete system designs, lab capability, rigorous testing and a proven ability to manufacture at scale. In September, we announced a new manufacturing facility in Minnesota, our second liquid cooling expansion in the last 2 years. This new facility is expected to begin production early next year and effectively double our overall footprint to support our record orders and backlog. Recently, we were named to NVIDIA's partner network as a solution adviser with our cooling solution and design architecture. This brings both credibility and awareness with global customers designing next-generation AI facilities. At the upcoming Supercomputing Conference, we will debut over 10 new products, including our newest generation of high-performance, high-reliability, modular liquid cooling solutions, purpose-built to meet the growing power and thermal demands of next-generation AI data centers. And we now have a new tagline for our liquid cooling solutions. We do cool stuff. Wrapping up on Slide 13, we had record performance in the third quarter, including strong double-digit growth in orders, sales, adjusted EPS and free cash flow. Our backlog has never been larger. Our portfolio transformation and our focus on data centers is delivering accelerated growth, which we expect to continue in Q4 and beyond. I'm very proud of our nVent team that is working tirelessly on growth, delivering for our customers and our shareholders. We believe we are well positioned with the electrification, sustainability and digitalization trends. Our future is bright. With that, I will now turn the call over to the operator to start Q&A. Operator: [Operator Instructions] Our first question comes from Joe Ritchie with Goldman Sachs. Joseph Ritchie: Yes. So look, let's start with the incredible quarter acceleration this quarter. Beth, I'm wondering if you could maybe just parse it out a little further for me. So it seems if my math is right, your data center orders were up, I don't know, almost 3x this quarter. I'm just wondering, are you starting to like see a little further out in your pipeline for data centers. Is the lead time still pretty comparable. I always think of your backlog as being kind of like 9 to 12 months? And is the type of data center order changing? So are you doing more modular type data centers? Just any color on that would be helpful. Beth Wozniak: Okay. Thanks for the question. Well, yes, you are correct, our data center orders are accelerating. And as we look at that, some of those orders are through 2026, but we do have some view into '27. And of course, we have visibility into '27 and beyond with some of our key customers. One of our key focus areas this year was to continue to expand our customer base and expand our portfolio. So I would say we're seeing some new customers there as well. But as you know, a lot of these orders are particularly for liquid cooling and are large orders, and so they can be lumpy. And I think we're just seeing the overall data center growth accelerating. Joseph Ritchie: Okay. Great. And then maybe just as part of that question, just the type of data centers that you're actually booking orders for? I know that you have some more modular offerings as well that typically carries higher content. Just trying to get an understanding for the orders that were booked this quarter, whether you're seeing any shift in the type of orders that you're booking for the data center business? Beth Wozniak: Thanks for the question. As I mentioned, we are expanding the customer base, and we are seeing a broader range of orders. So it's not just liquid cooling. There's other things in there in cable management and our power distribution units. But I would say our expectations for seeing smaller customer orders through distribution, for example, goes hand-in-hand with this portfolio of new products that we are going to showcase at Supercompute and launching through the end of this year and into next year. And I think that will take some time, but we really do expect that modular platform and suite of products to really drive a further diversification of our customer base. And of course, I want to make the point that it's -- the level of orders that we're seeing that gave us confidence for our capacity expansion to be able to meet that overall demand. Joseph Ritchie: Yes. Great. Great to see. I'll see you at Supercompute. Operator: Our next question comes from Deane Dray with RBC Capital. Deane Dray: I want to stick with this -- the new modular liquid cooling launch. So congratulations. Can you talk a bit about the implications for the industry data cooling specifically? Is it moving more towards standardization. Will there be -- what are the implications that there's less customization? What does that do to your mix? Beth Wozniak: Yes. Thank you for the question, Deane. I think one of the things that we've stated is it's a modular platform. And as we start to see expansion of liquid cooling from hyperscalers to colos to enterprise to more different types of customers that we wanted to have complete flexibility in our offering. And so the modular approach allows us to meet higher flow rates, higher power rates and/or smaller applications. And so if anything, we're seeing more standardization on the interoperability, which is really key for all these data center customers. But the modularization gives us the flexibility and allows us to scale through our manufacturing processes, our capabilities to be able to deliver with speed. So if anything, what we're -- what this whole launch of new products is allowing us to expand liquid cooling beyond hyperscalers into more diverse customers and applications. Deane Dray: Great. That's exactly what I was looking for. So I appreciate that. And then second question, and thank you for sizing the capacity expansion. You said it was 2x. Can you help unpack the margin impact on Systems Protection? You said part of it, the decline which we had modeled for was the impact of investments. Is that all M&A, but is there any capacity expansion there on that new facility? Gary Corona: Deane, this is Gary. I'll take the margin question. And as you noted, Systems Protection in the quarter was actually a bit better than we expected on the margin line. Some of that is driven by growth. But certainly, also, we did experience a bit of a headwind from the M&A in Systems Protection but a bit less than we expected, and the investments are certainly in there to support the really nice growth, both of the business this year as well as we move into next year and expand capacity. So good quarter for Systems Protection on the top line and on the bottom line. Deane Dray: And is the capacity expansion in that as well? Or is that part of the CapEx spend? Gary Corona: Yes, it's both CapEx and OpEx investment to support the expansion. Beth Wozniak: Including investments in our engineering capability as we continue to launch and expand our new product offerings. Operator: Our next question comes from Jeffrey Sprague with Vertical Research. Jeffrey Sprague: Just back to all these orders dialed right on this. First, I'm just wondering, are you including in the organic orders at Avail EPG because you now own it, and therefore, you consider those organic? And I'm also just wondering sort of the base we're coming off of. Obviously, things are very, very strong, right? But I don't want to run with 300% order growth, if that's somehow misleading, so to speak. So can you just kind of give us a sense of the base and this question about the acquisitions, if any? Beth Wozniak: Yes. When we talk about the 65% order growth, that is all organic. And so that does not include inorganic. So for example, the Avail EPG acquisition. So this is all the organic orders. And as we mentioned, the core business is up high single digits on orders and ex Avail EPG, but data centers overall is driving significant order growth for overall nVent. Jeffrey Sprague: Yes. And then can we just think about we're going to exit the year with data center being roughly 20% of revenues. What percent of orders might it be as we think about 2025? Gary Corona: Jeff, as you think about -- I mean, you got to go back to Beth's point, right, is think about it from the standpoint of all in orders, we're roughly 65% organically, taking data solutions out, so you can say, 20-ish-percent of the business, orders were up high single digits. So certainly, data centers are growing very, very healthy in the quarter. We saw some very large orders come in. Jeffrey Sprague: Great. No, understood. And then can you just give a little bit of more color on what you're seeing on the utility side of the equation, primarily, I would guess some closure related and the like, but any other detail there would be quite interesting. Beth Wozniak: Yes. I think on the utility side, we've continued to see nice orders in our Electrical & Fastening Solutions business. Recall, they have some utility exposure. And that what we're also seeing is continued orders and continued growth for the large enclosures that we acquired through the last 2 acquisitions. So overall, we talked about our growth being driven by both data centers and power utilities and that we've been expanding our capacity to support our power utilities as well. Operator: Our next question comes from Julian Mitchell with Barclays. Julian Mitchell: Maybe just wanted to start off with the operating margin outlook. So I think in the fourth quarter, it seems that maybe the operating margin that's dialed in is maybe up slightly sequentially and down a bit year-on-year, maybe in that 20%, 21% range. Just wanted to understand if that's the right sort of placeholder? And should we expect the company to return to operating margin expansion sort of fairly soon next year? Just when you're thinking about the margins in the backlog and the margins in the current orders being booked today? Gary Corona: Julian, it's Gary. Thanks for the question. And you're pretty close there. Margin performance for the quarter came in essentially in line with our expectations. Coming into the quarter for the second half, excluding EPG, we expected margins to be slightly down in the third quarter and up in the fourth quarter. And that's what we've assumed in our updated guidance. Q3 is impacted by recent acquisitions, being margin dilutive, the investments for growth that we talked about. And it's worth mentioning, we had higher incentive compensation in the quarter as our 2025 performance continues to exceed expectations. As you mentioned, Q4 margins will be up sequentially and an improvement to Q3 as our actions continue to build, and we'll build -- be up excluding EPG in the fourth quarter. We're not going to give guidance here on '26 on this call. But all in, we do expect margins to improve and to see better incrementals next year. Julian Mitchell: That's very helpful. And then just circling back, I'm sure not for the last time to the whole orders and so forth discussion. Maybe one other way I would ask about it perhaps is that, I know you don't disclose the backlog quarterly, but you typically in the 10-Q disclosed the RPO. And I think that was about $800 million at the end of June, up from about $150 million in March. I know we'll get the Q fairly in the next few days, but any help you could give us on how that RPO ended September, just as some kind of crude backlog movement proxy? Gary Corona: Julian, as we mentioned in the script, our backlog was up double digits sequentially. And we're feeling very good about where we're at, and we will disclose the backlog as we get to the end of the year. Julian Mitchell: Got it. And the RPO is sort of moving sort of commensurate with that? Gary Corona: Directionally makes sense. Operator: Our next question comes from Nigel Coe with Wolfe Research. Nigel Coe: Gary, I'm going to really annoy you here. We're calculating something in the range of about a 1.3x book-to-bill. Would that be in the right zone? Again, not looking for points here, but in that kind of ballpark. And then just thinking about the gross margins. Obviously, you're sort of absorbing a lot of headwinds here with tariffs, inflation, acquisition dilution. How do we think about the contribution margin from liquid cooling sort of ramp up? Is the gross margin comparable to fleet average here? Or is there any kind of variance that we should be aware of? Gary Corona: Yes. I'll just start with -- we're not going to disclose the book-to-bill, but we had healthy book-to-bill in both segments in the quarter. On a gross margin perspective, as I mentioned in the script, price and productivity is offsetting inflation. What it's not offsetting is the investments that we're making and then the incremental compensation expense, as I mentioned. But we do feel really good about our margins on liquid cooling. And as we've mentioned before, they're healthy and in line with the averages in Systems Protection. So we'll -- it's also worth mentioning from a gross margin perspective, we bought a couple of businesses that structurally had lower gross margin. We've got good plans in place as we deliver against our playbook, but it's in line with our expectations, and we expect it to continue to improve. Nigel Coe: Okay. You can't be for trying to get that number, but thanks for the detail there. And then just a quick one on 4Q modeling. Your revenue range, obviously, very healthy growth, but it does imply revenue step down quite a bit and, I think, maybe 5% in 4Q, Q-over-Q. As the mix of data center increases, I expect that the quarterly revenue profile to be a lot more stable. In fact, in many cases, 4Q can be stronger than 3Q in the data centers. Just curious why sales would be below -- so much further below 3Q levels? Beth Wozniak: Well, one thing I just want to point out, yes, certainly, there's strength in data centers. But typically, as a business, we always see Q4 as a lower revenue quarter. And recall, in Q4, it depends what our distribution channel wants to do with their inventory position. So we tend to see some seasonality in the core business in Q4. Gary Corona: And our organic guidance, 15% to 17% is very much in line with the growth that we're seeing, which is significantly accelerated from the first half and where we've been -- we guided 15 points from acquisitions in the fourth quarter. That is down a bit from a much higher than expected performance in Q3. But remember, we also had a little bit of tracky in the inorganic growth in Q3. Operator: Our next question comes from Brian Drab with William Blair. Brian Drab: I was wondering if you could just remind us of the margin impact as you're developing this modular solution and you're rolling out new products, a lot of which are going to be in the standard -- more standardized category. How does that impact margins and maybe like the timing of when we could start to see that impact margins? Beth Wozniak: Yes, Brian, as we create this more modular suite of products, over time, we expect that to scale through distribution, and we typically see stronger margins through our distribution business. But that is going to take some time because certainly, there's a lot of growth through our hyperscaler customers. So that -- we won't see that any impact on margin there. The margins will continue to be good and in line. But it will be a while before we really see that grow to the scale that we see, but that is our strategy as we go forward that liquid cooling will play a role in many different applications and even beyond data centers. Brian Drab: Okay. And then there is -- it seems like every couple of months or 6 weeks, there's just a panic among investors around these companies like [ SOX ] like nVent and others exposed to data center because there's some new technology that's going to change entirely the way that we're cooling data centers. So the microfluidics announcement for Microsoft and earlier announcements of Amazon and people are talking about 2-phase direct-to-chip potentially changing the world. What -- can you just talk for a second about what you're seeing across all the different types of customers that you're serving? And what direction do you see the market going over the next 2 to 3 years in terms of technology? Beth Wozniak: Well, sure. I mean recall, we always start with by saying that less than 10% of data centers are liquid cooled. And as you think about the new GPU chips and the need for liquid cooling, it is only going to expand. And on top of that, liquid cooling also provides up to 50% energy efficiency. So when you think about it from that perspective, there's going to be a continued increase in liquid cooling. And there's many different types of architectures. However, right, our view is you need to have a cooling distribution unit and typically some manifolds no matter what configuration you have, whether it's immersion, whether it's cold plate, there still needs to be that controlling CDU type of capability. And in fact, at Supercompute, while we're showing a whole launch of new products, we're also showing how we partner with immersion players and how we partner with those who are looking at 2-phase. We think some of those cooling technologies will have applications but not as broad. And so our strategy has been to have a wide range of products and portfolio, and we're flexible that we can integrate with any of these different types of cooling technologies and fluids that are being used. Operator: Our next question comes from Nicole DeBlase with Deutsche Bank. Nicole DeBlase: Can we just start with EPG Avail? I think in the slides, you mentioned that the business was performing ahead of your expectations. Is there any way to give some stats on what you're seeing with respect to apples-to-apples growth in that business or if it's margins ahead of expectations? Just some more color there would be helpful. Beth Wozniak: Yes. I think when we think about as we said, when we acquired both Trachte and Avail, we really were building a more core utility platform base. And I think what we have -- while we've said it's exceeded expectations is some of our growth synergies that we're seeing this growth in both the gray space. Certainly, the need for power because of data centers continues to grow and there's nice steady growth there, but we're seeing some more data center applications. Some of that is because of the customers that we've had, that we brought with these acquisitions and some of it is just the overall demand to more modular or ensuring that we -- there's data center pods and things like that. So that's when we talk about exceeding our expectations. We're finding more applications and we're winning some new type of business. And I'll let Gary speak on the margin side. Gary Corona: Yes. Just to build, we're seeing double digits apples-to-apples growth. It will contribute 15 points to the fourth quarter, and it's nicely accretive for us in the first year. And based on the really strong and ahead of expectations, revenue and profit in Q2 and Q3, Nicole, it will be approximately a $0.10 impact to EPS, higher than the $0.05 that we originally quoted when we had just acquired the business. Of course, that's net of the lost interest benefit that we initially guided on. So really nice performance from EPG, both on the top line and on the bottom line. Nicole DeBlase: That's great. And then just on the non-data center order growth in the high single-digit range, Beth, can you just parse that out a little bit between Comm/Resi and Industrial? Like did you see growth across all of your markets in the quarter? Beth Wozniak: Yes, we did. So we certainly saw strength of orders in Industrial, in Commercial/Resi and certainly saw some strength there for our Electrical Connections business as well. So we are very pleased with just the breadth of the order growth. Operator: Our next question comes from Jeff Hammond with KeyBanc Capital Markets. Jeffrey Hammond: Just wanted -- I think with all this demand, it's awesome and you guys are adding capacity. And I think what we're hearing from some of our other companies is just how hard it is, and you guys seem to be confident that the margin trajectory starts to improve as you get through kind of the acquisition noise. So I'm just wondering what you think are the big challenges or pitfalls as you kind of ramp all this capacity and you're getting all this business in? Beth Wozniak: Well, growth is hard, and that's why I said, our employees are working really hard because as you scale, we've got to ensure that we're expanding our facilities that we're bringing them online that we're developing our supply chain. I do think that's a strength for us because as I started, we've been over working it in liquid cooling for over a decade. So we're partnering well with suppliers to help them scale. We're having to ramp up in terms of people and finding innovative ways to train and bring people into our facilities. So there's a lot that we're doing. But I will say this, the fact that our expansions have been close to where our core capabilities are and our lab expansion, it's given us a lot of flexibility. So it's a lot of work, but I think we've got a very disciplined approach to how we're driving this increase in growth. Jeffrey Hammond: Okay. That's great. And then just a quick one, a follow-up on EPG Avail. I think with Trachte, you found some really good business optimization and flow in the plan. I'm wondering if you're seeing similar opportunity with Avail and if you're considering any capacity expansions, I think you're doing some on Trachte already with Avail? Beth Wozniak: I'd say it's a similar story. Certainly, part of our integration playbook is to look at some of the areas for optimization, which includes looking at lean and flow through the plants, which does provide capacity. It's looking at our supply chain capabilities in combination and where we can drive -- where we can look to strengthen the supply base. And yes, we are expanding our capacity in many of these facilities, both with people and extensions to those plants to be able to support the demand that we see. Operator: Our next question comes from Vlad Bystricky with Citi. Vladimir Bystricky: So I just wanted to follow up on the comments about the stronger M&A contribution in 3Q and a slight raise to the outlook for 2025. Can you talk about -- is that driven by better demand patterns that you're seeing? Or is that more reflective of better productivity and your ability to ship product out versus sort of your initial expectations? Gary Corona: Thanks, Vlad. Yes, as I had mentioned, our acquisition of Avail EPG is performing well. And to answer your question directly, it's both. We are driving more top line growth than initially expected. And the margins are looking a bit better than we initially forecasted as well as we drive scale and efficiency through the plant network. So very pleased with the acquisition and look for continued growth there. Vladimir Bystricky: Great. I appreciate that color, Gary. And then just circling back to data centers and the liquid cooling growth that you're seeing. I know, Beth, you mentioned and highlighted some large orders that came through in the quarter. Can you just talk about what you see in the large order pipeline going forward and whether you see in your pipeline, incremental large orders like you saw in 3Q that could repeat over the coming quarters, understanding that they can be lumpy. Beth Wozniak: Well, certainly, large orders are typically tied to larger programs from hyperscalers. They do tend to be lumpy. So it may not -- it's not smooth the way those orders get booked. But I think that's just how we see the overall data center business accelerating. And again, it was those orders and that backlog build, which is -- which we tied to why we're investing in expanded capacity, which will be online here in 2026. Operator: Our next question comes from Scott Graham with Seaport Research Partners. Scott Graham: Congratulations on the quarter. I was hoping you guys would tell us maybe on the 5% contribution from new products. If we took out infrastructure, what would that number look like? Beth Wozniak: Well, it would be lower. Just like a lot of our growth is being driven by infrastructure. We intentionally are focusing on new products across both data centers and power utilities and that infrastructure vertical. So strategically, as we position the nVent portfolio, to be more aligned with those macro trends, those investments in new products in R&D are also targeting infrastructure. So that's intentional. Scott Graham: Okay. So it's possible that the 5% is all infrastructure, would you say? Beth Wozniak: It's not all infrastructure. Oh, no. It's not all infrastructure. But it certainly has a significant portion from infrastructure. Scott Graham: One easy one. Will fourth quarter tariff impacts both in dollars and sort of with the price cost calculation we do here, even including your productivity, will tariffs be about the same in the fourth quarter as they were in the third? And what does that overall net number kind of look like that net productivity number? Gary Corona: Yes. So as I mentioned, the tariff dollars will continue to build. But I had mentioned as well earlier, is that we expect price to be sequentially stronger in Q4 as well. And that's what's driving from a margin perspective, excluding EPG, we expect to be up in the fourth quarter. Scott Graham: If I could just sneak in this last one, the net leverage, I know you said it's like a little bit below your target. What does that look like pro forma right now? Is that like a [ 18 ] type of number or that territory? Gary Corona: Yes, you're right in the zone there. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Beth Wozniak, Chair and CEO, for any closing remarks. Beth Wozniak: Thank you for joining us today. I'm extremely proud of our performance in the third quarter. We will continue to focus on delivering for our customers, employees and shareholders by executing on our growth strategy. We believe nVent is a top-tier high-performance electrical company well positioned for the electrification, sustainability and digitalization trends. Thanks again for joining us. This concludes the call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the OneMain Financial Third Quarter 2025 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Peter Poillon, Head of Investor Relations. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Peter Poillon. You may begin. Peter Poillon: Thank you, operator. Good morning, everyone, and thank you for joining us. Let me begin by directing you to Page 2 of the third quarter 2025 investor presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of the OneMain website. Our discussion today will contain certain forward-looking statements reflecting management's current beliefs about the company's future financial performance and business prospects. And these forward-looking statements are subject to inherent risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release. We caution you not to place undue reliance on forward-looking statements. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, October 31, and have not been updated subsequent to this call. Our call this morning will include formal remarks from Doug Shulman, our Chairman and Chief Executive Officer; and Jenny Osterhout, our Chief Financial Officer. After the conclusion of our formal remarks, we will conduct a question-and-answer session. I'd like to now turn the call over to Doug. Douglas Shulman: Thanks, Pete. Good morning, everyone. Thank you for joining us today. Let me start by saying we're really pleased with our results this quarter. We had very good revenue growth and continue to see very positive credit trends. This led to excellent growth in capital generation, the primary metric against which we manage our business. We also made meaningful progress in our new products and strategic initiatives, all of which sets us up for significant value creation in the near and long term. Let me talk about a few of the highlights for the quarter. Capital generation was $272 million, up 29% year-over-year. C&I adjusted earnings were $1.90 per share, up 51%. Our total revenue grew 9% and receivables grew 6% year-over-year. Originations increased 5%, driven by our expanded use of granular data and analytics, combined with continued innovation in our products and customer experience. We continue to see positive trends across our credit metrics. Our 30-plus delinquency was 5.41%, which is down 16 basis points year-over-year as compared to up 2 basis points in the third quarter of 2024. C&I net charge-offs were 7% in the quarter, down 51 basis points compared to the third quarter of 2024. Consumer loan net charge-offs were 6.7%, down 66 basis points compared to last year. We're really pleased with the improvement in net charge-offs year-over-year, which reflects ongoing careful management of our portfolio and the strong performance of recent vintages. Despite some continued economic uncertainty, our customers are holding up well. Delinquencies are in line with expectations, losses continue to come down and we really like the credit profile of the customers we are booking today. Last quarter, I provided an update on some recent initiatives that are helping to drive originations in our core personal loan business, even as we maintain our conservative underwriting posture. They include a simplified debt consolidation product, new data sources that automate customer information to reduce friction in the application process, streamlined loan renewal for certain customers and creating a loan origination channel through our credit card business. We are continually innovating across our company to expand reach, enhance offers and improve customer experience. For example, we've been expanding a strategy to increase customer eligibility by offering smaller initial loan amounts to some customers, then letting them grow with us as they exhibit positive credit behaviors. This has allowed us to expand our customer base without taking on more risk and provide more customers responsible access to credit. We are constantly optimizing and using data and analytics to find additional pockets of growth by fine-tuning pricing, loan amounts and product offerings at a very granular level. Let me turn to the progress we are making in our Brightway credit cards and OneMain auto finance businesses. Across our multiproduct platform, we now provide access to credit to about 3.7 million customers. That's up 10% from a year ago. Much of the growth in our customer base is attributable to credit card and auto finance. In our credit card business, we ended the quarter with $834 million of receivables. And earlier this month, we passed the 1 million mark in credit card customers, a notable milestone for the business. Since 2021, when we launched our card business, I have said it is strategically valuable and complementary to our traditional personal loan franchise. It adds a daily transactional product to our more episodic personal loan product. And credit cards create meaningful, long-term deep relationships with customers. The average card customer has a credit card for about 10 years. Our customers often start with a $500 or $700 line of credit, which can grow over time. A card customer is more engaged than a typical borrower, checking their balance, making payments and selecting rewards. Our average customer logs into our app every week. And we have the ability to offer customers alone or other products over time with 0 cost of acquisition since they are already on our platform. So with 1 million customers and growing, this business is very valuable to our franchise. Additionally, I'm really pleased with what we're seeing in some important financial metrics of our card business. Revenue yield continues to increase, now over 32% and our credit card net charge-offs were down nearly 300 basis points from last quarter. While some of the improvement is due to typical seasonal patterns, the strong performance was also a result of continual efforts to refine underwriting, enhance servicing and the overall maturing of the business. In our auto finance business, we ended the quarter with over $2.7 billion of receivables, up about $100 million from the last quarter. Similar to our personal loan and credit card businesses, we have maintained a conservative underwriting posture and feel great about our auto portfolio, which continues to perform in line with expectations. We believe that our experienced team, underwriting rigor backed by decades of serving the nonprime consumer and our ability to offer loans through both independent and franchise dealerships are all competitive advantages. As we grow our credit card and auto finance businesses, we are focused on carefully managing credit, enhancing our product offerings and driving efficiencies to reduce unit costs as we scale. This quarter once again demonstrated the strength of our balance sheet. We issued 2 unsecured bonds totaling $1.6 billion with tight spreads. We've now raised $4.9 billion in 2025 across 4 unsecured bonds and 2 ABS securities at attractive pricing, and we've also expanded our forward flow program. Our strong balance sheet and sustained access to diversified capital sources gives us a distinct competitive advantage. I want to highlight 2 things that exemplify who and what we are as a company. First, I've spoken before about Credit Worthy by OneMain, our free financial education program. Since its inception, Credit Worthy has reached almost 5,000 high schools or about 18% of all high schools nationwide. As we deepen our impact across the U.S., recently, we surpassed the mark of teaching 500,000 students, the importance of building and maintaining good credit and how to do just that. With hundreds of employees volunteering as teachers and mentors in the program, we are dedicated to helping teams across America, build a strong financial foundation. Second, I'm also pleased that OneMain has been named as one of America's Top 100 Most Loved Workplaces for 2025 by the Best Practice Institute. This recognition is based on direct feedback from our team members who create tremendous value for our customers and our shareholders. It gets to the heart of our culture of teamwork, respect, growth, innovation and accountability. I truly believe that if you have team members working together and going the extra mile every day, it will drive outstanding results for the company. The expanded reach of Credit Worthy and our recognition for the fourth year running as the most loved workplace speak to our differentiated business model with deep ties in the community and a culture that rewards delivering results while providing outstanding service to our customers, both of which are critical to the long-term success and shareholder value of OneMain. Let me end with capital allocation. As I've said before, our first use of capital is extending credit to customers who meet our risk-return thresholds. We then make strategic investments in the business that drive long-term shareholder value, like product innovation, our people, data science, technology and digital capabilities to name a few. We are committed to our regular dividend and are increasing it by $0.01 quarterly or $0.04 on an annual basis. The annual dividend is now $4.20 per share, which translates to a 7% yield at our current share price. Excess capital beyond that will largely be used for either share repurchases or strategic purposes. This month, our Board approved a $1 billion share repurchase program from now through 2028. All things being equal, we expect share repurchases to be a bigger part of our capital return strategy going forward as we drive more excess capital generation in future years. This quarter, we repurchased 540,000 shares for $32 million. Year-to-date, we've repurchased over 1.3 million shares already meaningfully exceeding our repurchases in 2024. Our dividend increase and new share repurchase authorization reflect our continued confidence in the strength of our business. In summary, we feel great about the quarter and the first 9 months of the year. The strong performance is the result of our continued disciplined actions to optimize our credit box, deliver innovation to drive originations and expand our product offerings and distribution channels. With that, let me turn the call over to Jenny. Jenny Osterhout: Thanks, Doug, and good morning, everyone. Let me begin by saying we had a great third quarter. The results reflect broad-based continued improvement across our key financial metrics, highlighted by continued strong revenue growth, good credit performance and capital generation that grew 29% year-over-year. We also further demonstrated the strength of our funding program by raising $1.6 billion across 2 bonds in the quarter. Third quarter GAAP net income of $199 million or $1.67 per diluted share was up 27% from $1.31 per diluted share in the third quarter of 2024. C&I adjusted net income of $1.90 per diluted share was up 51% from $1.26 in the third quarter of 2024. Capital generation, the metric against which we manage and measure our business, totaled $272 million, up $61 million from $211 million in the third quarter of 2024, reflecting strong receivables growth across our products, higher portfolio yields and continued improvement in our credit performance. Capital generation per share of $2.28 was up 30% from $1.75 in the third quarter of last year. Managed receivables ended the quarter at $25.9 billion, up $1.6 billion or 6% from a year ago. Third quarter originations of $3.9 billion were up 5% year-over-year, consistent with our expectations. As discussed last quarter, we are now more than a year into the successful personal loan growth initiatives that we implemented in June of last year. We identified pockets of growth in high credit quality segments that met our capital return framework, while maintaining a tight credit posture, and we've been able to achieve strong growth without relaxing our underwriting standards. We continue to execute new initiatives utilizing deep analytics to optimize pricing in low-risk segments of the business that will drive profitable growth in the quarters ahead. In fact, we expect originations growth to increase to high single digits in the fourth quarter. Third quarter consumer loan yield was 22.6%, flat from the second quarter, but up 49 basis points year-over-year. The improvement was driven by the sustained impact of our pricing actions taken since the second quarter of 2023. This tailwind was partially offset by an increasing mix of lower yield, lower loss auto finance receivables. We expect we can maintain yield at approximately this level for the near term. Also, as Doug mentioned, we saw a nice increase in our credit card revenue yield compared to the third quarter of 2024. It was up 151 basis points to 32.4%. The combination of these yield improvements across our businesses is a notable driver of our year-over-year revenue growth. Total revenue this quarter was $1.6 billion, up 9% compared to the third quarter of 2024. Interest income of $1.4 billion grew 9% from the prior year, driven by receivables growth and the yield improvements I just mentioned. Other revenue of $200 million grew 11% compared to the third quarter of 2024, primarily driven by higher gain on sale associated with our larger whole loan sale program and increased credit card revenue associated with the growing card portfolio. Interest expense for the quarter was $320 million, up 7% compared to the third quarter of 2024, driven by the increase in average debt to support our receivables growth. Interest expense as a percentage of average net receivables in the quarter was 5.2%, flat to the prior year, but down from 5.4% last quarter, reflecting the actions we took to proactively manage our debt stack, most notably the refinancing of our 9% bond due in 2029. The strong execution of the funding we've done so far this year, combined with our liability management, enabled us to reduce our funding costs below our initial 2025 expectations. Third quarter provision expense was $488 million, comprising net charge-offs of $428 million and a $60 million increase to our reserves, driven by the increase in receivables during the third quarter. Our loan loss ratio remained flat quarter-over-quarter at 11.5%. I'll discuss credit in more detail momentarily. Policyholder benefits and claims expense for the quarter was $48 million, up from $43 million in the third quarter last year. As I've previously mentioned, we expect quarterly PB&C expense in the low $50 million range in the quarters ahead. Let's turn to credit, where our performance continues to be very good. I'll begin by looking at consumer loan delinquency trends on Slide 8. 30-plus delinquency on September 30, excluding Foursight, was 5.41%, down 16 basis points compared to a year ago as the back book continues to run off and the better performing front book grows. 30-plus delinquency increased by 34 basis points sequentially, which is consistent with pre-pandemic seasonal trends. On Slide 9, you see our front book vintages comprised of consumer loans originated after our August 2022 credit tightening, now make up 92% of total receivables. The performance of the front book remains in line with our expectations and is driving the delinquency and loss improvements we are seeing. While the back book continues to diminish, now making up 8% of the total portfolio, it still represents 19% of our 30-plus delinquency. Though relatively small, the back book continues to disproportionately weigh on credit results. We expect it will contribute less each quarter ahead with our newer vintages increasing in share. And I should note that the pace of performance contribution will depend on the rate of growth of new originations as well as the back book's performance. Let's now turn to charge-offs and reserves as shown on Slide 10. C&I net charge-offs, which include credit cards, were 7.0% of average net receivables in the third quarter, down 51 basis points from a year ago. Consumer loan net charge-offs, which exclude credit cards, were 6.7% in the quarter, down 66 basis points year-over-year. This follows the trends we have seen in improving delinquencies along with better back-end roll rates and recoveries, and we are really pleased with the trajectory of losses. We continue to see strong performance from our newer vintages. While there will be typical seasonality, we expect to see continuing year-over-year loss improvement over the remainder of 2025 and into 2026. Let me update you on the credit trends of our $834 million credit card portfolio. Net charge-offs in our card portfolio improved sequentially by 288 basis points to 16.7%. We anticipated a significant improvement in card losses based on prior quarter's delinquency trends, which were better than typical card portfolio seasonality. The strong performance was further aided by enhancements in our servicing and recovery capabilities in our card business. We remain pleased with the overall quality of the credit card portfolio and feel confident that we are building an enduring profitable business for the long term. Recoveries remained strong this quarter, amounting to $88 million, up 12% year-over-year and 1.5% of receivables as we continue to optimize our recovery strategy. Loan loss reserves ended the quarter at $2.8 billion. Our loan loss reserve ratio, which remained flat to prior quarter and prior year at 11.5% at quarter end, includes a 40 basis point impact from our higher yield, higher loss credit card portfolio. Now let's turn to Slide 11. Operating expenses were $427 million, up 8% compared to a year ago. The 6.6% OpEx ratio this quarter is modestly better than last quarter and in line with our full year expectations as we continue to invest in technology, data analytics and new products. We feel great about the inherent operating leverage of our business, which has been consistently demonstrated over the past several years as our OpEx ratio has declined from 7.5% in 2019 to its current level. We remain disciplined in our spending, balancing responsible investments with our focus on driving long-term growth and efficiency to deliver operating leverage for the future. Now let's turn to funding and our balance sheet on Slide 12. During the quarter, we continued to optimize our balance sheet. We believe our focus on balance sheet strength is a clear competitive advantage and enhances the stability of our business. As a leading issuer over the years, we've consistently invested in our capital markets program. We focused on maintaining best-in-class execution and controls and as a result, have built a loyal and diversified investor base. In August, we issued a $750 million unsecured bond at 6.13%, maturing in May 2030. The proceeds of that issuance were used to redeem the remaining balance of our most expensive security. The 9% coupon bond scheduled to mature in January 2029. In September, we issued an $800 million bond at 6.5%, maturing in March 2033. Both bonds had strong demand from new and returning investors and were issued at near record tight credit spreads. Including these 2 bond issuances, we now have issued 7x the last 6 quarters in the unsecured market, lowering our issuance costs, derisking our balance sheet and reducing our secured funding mix to 54%. This creates a lot of flexibility for us going forward. We also recently signed a $2.4 billion whole loan sale forward flow agreement with a long-term partner. The agreement substantially increases and extends a current loan sale commitment that provides further capital and funding optionality for the future. The current agreement that calls for $75 million of loan sale commitments per month will continue through the end of this year and then increase to $100 million per month starting in January. We're very pleased with the terms and the economics of the agreement and believe this further demonstrates the attractiveness of our loans and great confidence in the performance of our portfolio. Overall, from a balance sheet perspective, given the strong issuance year-to-date and the larger forward flow whole loan sale program, we feel great about our ability to continue to opportunistically issue when markets are most attractive in the quarters ahead. Additionally, our overall liquidity profile is as strong as ever with bank facilities totaling $7.5 billion, unchanged from last quarter end and unencumbered receivables of $10.9 billion. Our net leverage at the end of the third quarter was 5.5x, flat to last quarter. Turning to Slide 14, our full year 2025 guidance. First, we're narrowing our full year managed receivables growth guidance to the higher end of the range. We now expect managed receivables to grow in the range of 6% to 8% compared to our prior 5% to 8% guidance held previously. And given our growth in receivables, along with our improving asset yields, we now expect full year total revenue growth of approximately 9%. This is above our guidance range of 6% to 8%. We continue to expect C&I net charge-offs to come in between 7.5% and 7.8%, at the lower end of the range we gave at the beginning of the year. And our expected operating expense ratio remains unchanged at approximately 6.6% for the year. As all our key financial metrics move in the right direction, we expect capital generation in 2025 will significantly exceed 2024, reflecting strong momentum in our business. We have another excellent quarter in the books, as we approach the end of the year and look ahead to 2026. We see opportunity to continue to deliver outstanding shareholder value in the quarters and years ahead. And with that, let me turn the call over to Doug. Douglas Shulman: Thanks, Jenny. Let me close by saying we really like our competitive positioning. We built our business for the long run with best-in-class credit management and a fortress balance sheet. We are driving growth by innovating across products, digital experience and data science. We are deeply committed to the communities where our customers live and work and have a great team delivering for our customers every day. The strong results of this quarter are a reflection of all of this, and we look forward to continuing to drive value for our customers and our shareholders going forward. With that, let me open it up for questions. Operator: [Operator Instructions] Our first question comes from Terry Ma with Barclays. Terry Ma: So there's been a lot of chatter about the health of the nonprime consumer. Maybe some cracks showing up in auto, both of which you have exposure to. So maybe just talk about what you guys are seeing more recently. Maybe help us tie that to your commentary about higher origination growth in the fourth quarter. Douglas Shulman: Sure. I guess regarding auto, we're not seeing anything negative in our auto credit. All of our auto continues to perform in line with expectations. I think zooming out on the consumer, I think you got to keep in mind that we see plenty of opportunity, and we lend to individual consumers. And the customers we have on our books and the customers we're seeing come through our channels are holding up very well, and we underwrite net disposable income. So after somebody is paid, pays their taxes, covers all of their other credit, pays all their expenses, how much is left over. We're seeing net disposable income for the consumers who come in, continue to be strong. And as you know, we have a lot of different cuts that we use for our underwriting, whether it be risk, the collateral, the type of product, the geography. And so we're seeing lots of opportunity, and we're not seeing issues with the customers that we have on our books. I think the consumer generally and the nonprime consumer generally has been stable for the last 18 months. I mean if you look at the macro data, while unemployment has ticked up some, it's still at a -- in a good place. Wages cumulatively have increased. They don't seem to be increasing as much anymore. Inflation is much more in check than it was, and savings remained pretty stable for the last 18 months. We also do a qualitative survey of our branch managers on a regular basis who are out talking to our customers, seeing new customers. And we look at how's the customer doing, are you seeing signs of stress, et cetera. That is stable. We just did one. The results are very similar this year now as they were a year ago. We also have unemployment insurance for a subset of our customers, and we've not seen increase in unemployment insurance claims. And so we are always on the lookout, and I do think there still remains very broadly for the U.S. economy, some macro uncertainty, whether it's around tariffs or what's going to happen with interest rates, et cetera. But we feel good about the health of the consumer. Terry Ma: Great. That's super helpful. Maybe just a follow-up question on credit for Jenny. Like net charge-offs continue to improve year-over-year, delinquencies are also improving year-over-year just ex Foursight. But as I look at the magnitude of delinquency improvement ex Foursight, it's kind of moderated. So maybe like just any color on kind of what's going on there and help us think about maybe just the direction of travel kind of going forward for delinquencies. Jenny Osterhout: I think most importantly, to your point about the direction of travel, we feel like the direction of travel is good. These delinquencies are in line with our expectations. And we expect the delinquency improvement year-on-year to vary some. So we're really focused on where the book is going and our expected losses. And we mentioned earlier, but we consistently have seen better roll rates and recoveries. And we expect continued year-on-year improvement in our consumer loan net charge-offs, which you saw dropping this quarter by 66 basis points. And so I think as we look at the consumer loan net charge-offs, we expect for them to get back within our historical range of below 7% over time. Operator: We'll go next to Mark DeVries with Deutsche Bank. Mark DeVries: Doug, given some of your comments about the macro uncertainty and the kind of the stable consumer, where do you think you sit right now in kind of the spectrum of underwriting between tightening and loosening? And given that some of the factors, what's your kind of bias going forward in terms of which direction you'd be moving? Douglas Shulman: We really, for the last several years, have had quite a conservative underwriting posture. Specifically, what we've done is our models will tell us and all of our data science will tell us, depending on the customer, what do we think the losses will be over their lifetime. And we put a 30% stress overlay on top of that for our credit box, which basically translates into -- even if that customer's peak losses during their lifetime were 30% more than we think they're going to be, we would still meet our 20% return on equity threshold. And so across our personal loans, our credit card and our auto, we've chosen not to loosen that up. I think there just remains macro uncertainty. We're not seeing it on our book, and we're getting plenty of customers to book that meet our return threshold. I think to open that up some, we do weather vane testing. So we're always booking a set of loans across product, customer type, geography that are in the 15% to 20% ROE, and we need to see those pop above. Our current vintages are performing in line with our expectations, but they're not outperforming. And so we need to see outperformance. And I think we need to see a little more clarity in the macro. Our basic bent is always to err on the side of having really good customers who can pay us back, who meet our risk-adjusted return thresholds. We don't see a lot of advantage in taking extra risk. Our originations year-on-year for the first 3 quarters of the year are up 10%. So we're finding plenty of pockets of growth. And we'd rather innovate around the kinds of things I talked about earlier: product, customer experience, channel because this is how we built a really strong, stable company that through the cycle is going to have good returns. So our bent is not to reach for growth, but instead to stick with our discipline and keep finding growth by innovating and serving our customers well. Mark DeVries: Okay. Makes sense. And just a follow-up for Jenny on funding. I think you mentioned in your prepared comments that funding costs came in lower than you expected for the year. Is this more of a product of term or spreads coming in better than you expected? And you also alluded to enhanced mature -- I mean, the flexibility, right? I think you have very low maturities anytime soon and a lot of liquidity. How are you thinking about taking advantage of that added flexibility in the funding markets? Jenny Osterhout: Yes. Thanks. Obviously, funding is critical to any lending business. And I think for us, we really see it as a differentiating strength and a competitive advantage. So we're always looking at the opportunities as they come. And I think what we saw this quarter was we were able to go out for that first $750 million unsecured bond at 6.13% due in 2030. And what we were able to do with that was use the proceeds to redeem the remainder of our 9% 2029 unsecured bonds. So that really allowed us to take in sort of that higher pricing that we had and bring that in. So our interest expense went from an expectation of closer to 5.4% to come in to closer to 5.2%, like you saw this quarter. So that was really what drove that. I mean I'd say then we were also able to go out and do another issuance at 6.5% and go all the way out to 2033. So I think we were very happy with the spreads and with the performance of what we were able to do this quarter. I mean I would also say, I mean, we've gone out now 7x in the past 6 quarters. So I think we've really been able to go out there, and I think that's a testament to the team and to what they've built over time. And the flexibility that I mentioned is really about -- if I look forward, our next unsecured maturity is about $425 million in March of '26. And then we don't have anything maturing until January of 2027 when we have about $750 million maturing. So we can continue to look for opportunities of where we can, pay down some of our price bonds that are callable in later needs and we can also look at our needs for growth. We also obviously are looking at our unsecured and secured mix, and this has allowed us a little bit more flexibility there to determine which market we want to go into. So we really like that flexibility because it just allows us to continue to focus on maintaining a really conservative balance sheet. Operator: Our next question comes from Mihir Bhatia with Bank of America. Mihir Bhatia: Maybe to start just staying on the topic of buybacks or capital, I guess, you obviously upsized the buyback this quarter. Should we be -- any markers you can give us on like what kind of sizing we should be thinking about every quarter? Like what are you trying to solve for? Is there a capital -- like what can we look at? Is it just distributing net income? Is it capital? What payout ratio? What is the target internally that we should be thinking about? Douglas Shulman: Yes. Look, we've had a pretty consistent capital allocation strategy, which includes -- I'll go through it again, that is, first, we're going to make every loan that meets our risk-return thresholds, and we put about 15% of any loan is equity we put into it. So some of it will depend what kind of opportunities and what kind of growth we have. Then we're going to invest in the business for long-term franchise value. Then we're going to have the dividend. And after that, we're either going to allocate it to other strategic purposes or buybacks. As I mentioned, we anticipate more buybacks now that we're going to have more excess capital at the bottom of that waterfall. I think you've seen us ticking up our buyback. I think you can anticipate it ticking up into next year. I think the best I can give you is we've looked at it and we've allocated $1 billion through 2028. I don't think it's necessarily going to be linear. And we don't have specific guidance about what's going to happen quarterly. Mihir Bhatia: Fair enough. Maybe switching a little bit just on gain on sale. You've had a nice step-up this year. I think you in your prepared remarks, you talked about further increasing the forward flow. Should we expect another step-up in '26 as that forward flow comes in? And maybe also just take the opportunity to talk about private credit. How does that compare with your traditional channels today? Any desire to expand forward flows further and leverage the demand from private capital? Like give us a peek under the hood in terms of the hold versus distribute equation. Jenny Osterhout: I'm going to start with your second question first, and then I'll come back again on sale. Just in terms of private credit, I mean, I think what I'd just say there is we're always looking to evaluate opportunities. We've got -- I just talked about, we've got great access to capital in the public markets. And so we're really looking at opportunities really to provide either funding flexibility. And then we're also quite focused on the economics and the terms of those deals. So I did mention we increased that and extended that whole loan sale program. It's forward flow with attractive pricing. And I think we're happy with the diversification that gives us and we'll evaluate those opportunities as they come. And I wouldn't -- I think of this as additive to our current strategy. So I just think of this as one more way that we go access funding. If I go back to gain on sale, gain on sale was about $17 million this quarter. That increased from last year, about $10 million from that whole loan sale program. If I think going forward, I'd say I'd look more at total revenue because this will both benefit, I'd say, a little bit gain on sale, but also think of servicing fee revenue. So I'd focus on the total revenue line, and it should help some. Operator: Our next question comes from Moshe Orenbuch with TD Cowen. Moshe Orenbuch: Great. And it's very encouraging to see the increase in your guidance for originations and loan growth. And can you just talk a little bit about the competitive environment, the pricing environment? And if it's not too much to also say that if -- how would those -- how would your efforts be enhanced if your ILC charter is approved? Douglas Shulman: Sure. Look, it's -- there's plenty of competition out there, but we think it's quite constructive for us. I think our results show that year-to-date originations, as I mentioned, are up 10% from last year, even with our tight credit box. We expect fourth quarter, we'll see some uptick in originations from this quarter. We're really focused on originating to good customers that meet our risk-adjusted returns and meet all of -- have the right credit profile for us. Over 60% of the customers that we're booking today remain in our top 2 risk grades, which is where it's more competitive and there's more people playing. And so -- and that's remained steady. So we're still getting plenty of pickup in really competitive spaces. Our pricing has held. We've not needed to bring down pricing as you see with our yield, and that's been -- has ticked up. And as Jenny said, we expect it to be pretty steady going forward. I think there's always opportunity to drop price and pick up more. We're always fine-tuning pricing, loan size, the type of product, the collateral, the data sources that we use to book loans. So I think the key for us is to continue to innovate. But we like the competitive environment. We like our positioning, and I think we're really comfortable. I've said it before, we just don't chase growth. We book really good loans that are going to have good returns that are going to be accretive to the franchise and to our shareholders, and we're seeing plenty of opportunity there. Look, I think the ILC, I've said before, is if we get it is accretive to our strategy. It's going to allow us to serve more customers. It's going to allow us to have some deposit funding. It'll allow us through the deposit funding potentially to do some more lower end of prime kind of customers. It'll allow us to book our credit card through our own ILC rather than through a partner. And so I think it is good for long-term franchise value. We'll start to compete in the market, but I think it would be a net positive. Operator: And we'll go next to Don Fandetti with Wells Fargo. Donald Fandetti: Doug, I was curious to get your perspective. I mean there's been a lot of volatility in ABS markets. And I just want to get your thoughts on how you think those markets are going to hold up in terms of access and if you think there'll be tiering for kind of seasoned issuers such as OneMain? Douglas Shulman: Yes. I mean, look, I'll let Jenny say. What I'd say is through lots of volatility for many years, we've always been able to access the ABS market because people trust us as steady hands who know how to underwrite and the collateral we put into our trust are ones that we understand well. So I think for us, there's going to be plenty of access. I'll let Jenny talk more broadly. Jenny Osterhout: Yes, I'd just say the team is obviously constantly talking to folks in the market, and I feel like we've built a pretty strong reputation and have a pretty developed program that's been out there for a long time. And so I think we're quite confident in our ability to go out into the ABS market. And obviously, we'll see what unfolds there. But I think we're pretty disciplined operators and our partners feel pretty good about the way we run our program. So I think we're feeling pretty good about being able to go back into ABS. Operator: We'll go next to Kyle Joseph with Stephens. Kyle Joseph: Just wondering if you're seeing any impacts from the government shutdown and if this had any impact on the outlook for this year? Douglas Shulman: We're not. We've been through a number of government shutdowns. It's a very small part of our book, folks who work for the government. So we don't see any material impact and definitely no impact on our outlook. Kyle Joseph: Got it. And then just one follow-up for me. Yes, given all the volatility in auto, I know you guys highlighted that you're seeing stability in your portfolio. So is that something -- are you seeing kind of a competitive advantage in that? Is that an opportunity? Are you getting more aggressive in terms of deploying capital there? Or is it one of those things where there is a lot of volatility and you're shying away or just kind of unchanged overall? Douglas Shulman: I'd say unchanged. We're still a very small player in auto. We have a lot of room to grow, but we're very disciplined operators. So we're pacing it. We're developing more dealer relationships. We're continuing to mature the business. We're continuing to mature the models. And so we like what we're booking. We like the pace we're doing it at. There's obviously been a lot of noise, not necessarily around our customer base in auto, but there's been lots of different divergent noise about things with the title auto, but it really hasn't affected. We're going at pace carefully, but we're going to continue to grow the business. Operator: We'll go next to John Pancari with Evercore ISI. John Pancari: On the -- back to the origination front on your high single-digit expectation for the fourth quarter, I know you indicated that you're not necessarily unwinding or loosening standards here and your -- it sounds like you're not yet taking a more active pricing posture or anything. So can you maybe give us a little bit more of a detail around what changed here in terms of your expectation for originations to leg up a bit in terms of the pace of growth for the fourth quarter as you look at it? Douglas Shulman: Look, I think the biggest thing is we are always fine-tuning where we're seeing some credit outperformance in a very small pocket, opportunities to increase the loan size a little bit, do things on pricing. We're also always adding channels. And then I've given you the list before. We've been really leaning into product origination -- or I'm sorry, product innovation and investing in it for the last 18 months, and I think you're just seeing the results of that. We have an enhanced debt consolidation product. We've reduced friction for certain really good credit customers in the renewal process, which increases book rates. We have added new data sources, whether it's bank data, DMV data, other kind of data like that. We've allowed people to split their paychecks and pay us directly from their paycheck, which is better credit performance, which has allowed us to book people who choose to do that. And so a lot of it is just grinding away every day, finding pockets, pushing on it, making sure we offer a great product to customers and we're refining the business all along. So I think that's mostly what you're seeing. Jenny Osterhout: I can just add one piece of context for that. Just on originations, we were at about 5% year-on-year growth, and I mentioned this earlier, but we expect to be in the high single digits for the fourth quarter. So I just want to put some context around it. I mean, I think Doug mentioned, it's through a lot of constant sort of looking and refining, but I just want to give that context. John Pancari: Yes. Got it. And then separately, just given the very favorable capital generation that you cited and your expectation for buybacks to leg up a bit, how do you -- any change in how you're looking at M&A opportunities, specifically as you look at still growing the card business? And then on the auto side, is there -- or even outside of that, are there opportunities you see out there that could present from an inorganic point of view? Douglas Shulman: Anything that is in the market or we might want to be in the market that we think could accelerate our strategy around personal loans, card or auto or underlying things that we continue to develop, whether it'd be data science, digital capabilities, et cetera, we look at. And so we look at lots of opportunities every year. We've looked at well over 100 opportunities in the last 5 years. And we've acted on 2 of them, which were 2 small tuck-in acquisitions. And so what I'd say is, if there's an opportunity that strategically makes sense, accelerates our strategy, financially makes sense, we think we can execute on it. It is in our kind of risk and profile of the kind of company we want to be in the reputation. We want to be as the responsible lender who actually helps customers move to a better financial future. we'll look at it. It would have to be accretive to shareholders, and it has to be something that we wanted. So we're very selective, as you've seen over time, but we're always looking at opportunities. Operator: We'll go next to Vincent Caintic with BTIG. Vincent Caintic: First question, just kind of a follow-up on the 2025 net charge-off guidance. You've had really good credit results this year, both delinquencies and losses. The 2025 guide being unchanged, it kind of does imply a very wide fourth quarter range. So I'm just wondering if you're seeing anything that maybe gives you uncertainty for fourth quarter? And if you could describe that would get you to the low end and the high end of the range? Jenny Osterhout: Vincent, it's Jenny. Last quarter, we updated our guide from 7.5% to 8% to 7.5% to 7.8%. So I think we really thought that we already brought that in a bit. I think as we look -- we'll be looking at those roles to loss and -- we've mentioned a little bit about the drivers of those, but I mean, we've been very happy with what we've been able to do in terms of using digital tools to both be in contact with more customers who go delinquent and then also our recoveries and being able to do more with recovery. So I think we just -- I think we're happy with having brought down the guide last quarter, and we'll be looking at those at those roles each month as we go forward. Vincent Caintic: Okay. Great. That makes sense. And then if you could update us on your kind of long-term thoughts on capital generation. It was nice to see the share repurchases, which, to your point, indicates your confidence in OneMain's capital generation. So just wanted to update, is $12.50 a share of capital generation is still a good bogey for 2028? And what are the factors that get you there? And does that $12.50, if that's still the right bogey, does that rely on the bank charter? Douglas Shulman: So we feel really good about capital generation. I said before, our goal is to generate more capital each year going forward. our North Star remains $12.50. We haven't put a date on it. We definitely don't need the bank charter to get to $12.50. It would be accretive. I've said before, a bank charter would be something we think we're well qualified for, meet the requirements, would be additive to the business, but not necessary. But as you said, this is a business that really generates a lot of capital for our shareholders. We're really happy that we have now moving into a place where we have more excess capital, and we can use it for strategic purposes. I think we're at the top of the hour. So I want to thank everyone for joining. As always, feel free to reach out to us with follow-up and we'll look forward to seeing you during the quarter and on the next call. Operator: Thank you. This does conclude today's OneMain Financial Third Quarter 2025 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.
Operator: Good morning, ladies and gentlemen, and welcome to the BayFirst Financial Corp. Q3 2025 Conference Call and webcast. [Operator Instructions] This call is being recorded on Friday, October 31, 2025. I would now like to turn the conference over to CEO, Tom Zernick. Please go ahead. Thomas Zernick: Thank you, Joanna. Good morning, and thank you for joining our call today. Once again with me is Robin Oliver, our President and Chief Operating Officer; and Scott McKim, our Chief Financial Officer. Today's call will include forward-looking statements and non-GAAP financial measures. Please refer to our cautionary clause on forward-looking statements contained on Page 2 of the investor presentation. At the start of the year, management and the Board initiated a comprehensive strategic review of the bank's business model to chart a new path forward that holds true to our mission as a community bank. Today, we are reporting on the culmination of our work to derisk the balance sheet and position our community bank for long-term sustainable growth and enhanced shareholder value. For over a decade, the bank's SBA 7(a) business has provided revenue to help build our 12 branch network, which drives tremendous franchise value. At the same time, this line of business outgrew our community bank model and as reflected in this year's results, brought material risk that led to operating losses. In September, we reported BayFirst would exit SBA 7(a) lending and that we had signed a definitive agreement to sell a large portion of our SBA 7(a) portfolio to Banesco USA. Furthermore, the majority of our SBA 7(a) staff would be offered positions with Banesco USA's SBA lending team. I should note that we expect to close this transaction later in the quarter. However, the current federal government shutdown has generated some delays. While managing this transition, the BayFirst team continues to prioritize our community banking mission by delivering excellent service to our customers across the Tampa Bay and Sarasota markets. Our focus remains firmly on what matters most, being the premier community bank in Tampa Bay. That means building real relationships with local individuals, families and small businesses through reliable checking and savings accounts. These connections give us a solid, stable funding foundation while strengthening our footprint throughout Tampa Bay's dynamic market. And today, more than 84% of our deposits are insured. This relationship-driven strategy helps us to deliver sustainable growth while maintaining the disciplined risk management and operational efficiency central to our long-term value creation. Scott will elaborate on the restructuring charge and the accounting impacts related to the portfolio sale to Banesco USA, and Robin will discuss changes to our senior leadership, which align with the focus I have previously shared. But first, I want to emphasize that though profitability has not met expectations, we are building a stronger, more resilient organization. Once restructuring is complete, we expect to return to profitability with the goal of positive return on assets of 40 to 70 basis points in 2026 with continued improvement in later years. Additionally, we will continue resolving nonperforming loans and improving credit quality. With strong market opportunities and operational capabilities, we remain focused on executing our strategy and delivering long-term shareholder value. To that end, we have made some important but difficult decisions regarding staff levels, span of control and legacy costs related to our SBA 7(a) lending business and technology platform. I am confident our actions will allow us to create a stronger, more stable BayFirst. I also want to share some encouraging metrics, all of which will be sustainable as we move away from relying on gain on sale revenue, which has historically contributed to most of our earnings. We expect lower net charge-offs following the reduction of unguaranteed SBA 7(a) loans on the balance sheet. While our net interest margin dipped this quarter, the decrease was related to onetime items. We will be closer to the 4% target, which we mentioned previously, which is achieved through lower deposit costs and appropriately priced consumer and commercial loans originated across the Tampa Bay market. Now I will pass the microphone to Scott McKim, our CFO, to provide an overview of our financial performance. Scott McKim: Thank you, Tom. Good morning, everyone. We are reporting a net loss of $18.9 million in the third quarter. This compares to the net loss of $1.2 million reported in the second quarter. During the third quarter, we recorded a restructuring charge of $7.3 million plus the lower of cost or market adjustment on the loan portfolio being sold to the Banesco USA, an increase to our allowance for credit losses and a handful of other extraordinary items. The restructuring charge includes $2.9 million to write off assets and prepaid expenses related to the SBA 7(a) lending business. Also $3.9 million in personnel-specific costs, including the termination of the company's ESOP plan and about $0.5 million of conversion in deal costs. We previously reported that the portfolio sale was priced at 97%. The discount on the final portfolio is $5.1 million, including fair value adjustments, recognition of deferred costs and premium discounts and, of course, the 3% stated discount. This impact is seen in noninterest income for this quarter. I will also note that our allowance for credit losses was reduced by $800,000 in recognizing that these loans are being moved to held for sale. While it is not part of the restructuring charge, we also recorded and accrued $1.9 million of disallowed interest overpayments from the SBA during the quarter. Loans held for investment, therefore, did decrease by $127.1 million or 11.3% during the third quarter of 2025 to end at $998.7 million and decreased $43.8 million or 4.2% over the past year. During the quarter, $97 million of loans were transferred to held for sale and subsequently marked to the lower cost of market, as I noted a moment ago. Total deposit balances increased $7.7 million or 0.7% during the third quarter of 2025 and increased by $59.3 million or 5.3% over the past year to $1.17 billion. The increase in deposits during the quarter was primarily due to an increase in time deposits of $53 million and is partially offset by decreases in noninterest-bearing accounts of $3.8 million, interest-bearing transaction account balances of $27.9 million and savings and money market account balances of $13.7 million. Furthermore, as Tom mentioned, more than 84% of the bank's deposits were insured by FDIC on September 30, 2025. Shareholders' equity at quarter end was $89.7 million and is $12.6 million lower than the end of the second quarter -- or the third quarter of 2024. Net accumulated other comprehensive loss decreased by $300,000 during the quarter, ending at $2.1 million. Tangible book value decreased this quarter to $17.90 per share from $22.30 per share at the end of the second quarter. As Tom mentioned, our net interest margin was down 45 basis points to 3.61% in the third quarter. Net interest income was $11.3 million in the third quarter, down $1 million compared to the second quarter and up $9.4 million from the year ago quarter. During this quarter, the bank wrote off $400,000 of unamortized premiums related to 1 USDA guaranteed loan, which was liquidated during the quarter. Furthermore, $600,000 of interest was reversed for loans moved to nonaccrual status during the quarter. Outside of these onetime adjustments, net interest income would have been flat to the second quarter number. Noninterest income was a negative $1 million for the third quarter of 2025, which is a decrease from $10.8 million in the second quarter and a decrease from $11.7 million in the third quarter of 2024. The third quarter decrease is primarily from the decrease of gains on the sale of SBA 7(a) government-guaranteed loans. Notably, with the exit of the SBA 7(a) lending business, revenue from the gains on sale of government-guaranteed loans will no longer impact noninterest income as it has in prior periods. Tom alluded to this earlier. Noninterest expense was $25.2 million, an increase of $7.7 million compared to the second quarter. Nearly all of this increase is related to the $7.3 million, which is the restructuring charge that I spoke about a moment ago. Loan origination and collection expense was also $700,000 higher in the third quarter, and that was offset by lower salaries and benefits, including commissions and incentives. Provision for credit losses was $10.9 million in the third quarter compared to $7.3 million in the second quarter and $3.1 million in the year ago quarter. Net charge-offs, primarily from unguaranteed SBA 7(a) balances were $3.3 million, which was down $3.5 million compared to the second quarter. Excluding the $800,000 reduction in the ACL for the loans that was transferred to held for sale, the remaining increase in provision is primarily for retained unguaranteed SBA 7 balances. Annualized net charge-offs as a percentage of average loans held for investment at amortized costs were 1.24% in the third quarter. That was down from 2.6% in the second quarter and up just slightly from 1.16% in the third quarter of 2024. Nonperforming assets were 1.97% of total assets on September 30 compared to 1.79% at June 30, 2025, and 1.38% at September 30 last year. Nonperforming assets, excluding government-guaranteed loan balances were 1.21% of total assets as of September 30, 2025, compared to 1.12% as of June 30, 2025, and 0.88% on September 30, 2024. The ratio of allowance to credit losses to total loans held for investment at amortized cost was 2.61% at September 30, 2025. That compares to 1.65% as of June 30, 2025, and 1.7% on September 30 of last year. The ratio of ACL to total loans held for investment at amortized cost, excluding government-guaranteed loan balances was 2.78% September 30 of this year, 1.85% in June of this year and 1.70% in September 30 of last year. At this time, I will turn the call over to Robin to make some additional comments about staffing changes. Robin Oliver: Thank you, Scott. First, I'd like to comment a bit more on our efforts around asset quality. Throughout this year, we have worked to strengthen credit administration practices to ensure the timely identification of problem credits as well as ensuring those same problem credits are resolved as quickly as possible. Management has worked to tighten credit underwriting in all areas of the loan portfolio and in an effort to ensure all loans are properly risk rated and accounted for, management hired consultants and other third parties in the third quarter to assist in reviewing the portfolio to take an aggressive stance on recognizing all potential problem loans. This effort did increase our nonperforming and classified loans as well as our allowance for credit losses, as Scott reported. As we move forward into 2026, the goal will be the continual reduction of nonperforming and classified credits to bring these balances closer in line to peers. The overall wind down of the SBA loan portfolio, the potential sales of additional SBA unguaranteed balances and the continued aggressive workout of problem loans is expected to improve asset quality in the coming quarters without significant additional provision for credit losses being necessary. As Tom mentioned, I also want to touch on some leadership changes. First, Tom Qualley has served as the bank's Sarasota market leader for the past several years. Tom is a veteran banker with over 40 years of experience, and he will be retiring in December. Succeeding Tom is Samantha Hill. Sam, as she likes to be called, joined BayFirst over a year ago and brings a wealth of knowledge in the commercial and community banking space. Tom and Sam have been working together and will complete their transition plan over the coming weeks. I also want to announce that Adam Curtis, who has been serving as our Pinellas County market leader, has assumed the leadership role in Tampa as well. Adam has added the 2 Tampa branches to his team and will also take over as Chief Lending Officer upon Tom Qualley's retirement. Adam is well known throughout both markets and has a great team of branch managers and business bankers. Finally, I want to note that Brandi Jaber's title is now Chief Administrative Officer. Previously, Brandy was focused on loan production operations. And with our restructuring efforts, she will now manage a few operational areas and importantly, the Banesco USA transition project. Brandi's historical knowledge of our SBA 7(a) lending business makes her the perfect leader for this important project. And that concludes the comments I have, and I will turn it back to Tom for his final thoughts. Thomas Zernick: Thank you, Robin. Our Board of Directors and leadership team are committed to driving resilience and innovation as we position the company for long-term success and enhance shareholder value. We are confident that these efforts will better align the company and our bank with the demands of a dynamic banking landscape. We remain optimistic about the road ahead. Thank you. Robin Oliver: At this time, we'd like to turn it over for questions. Operator: [Operator Instructions] The first question comes from Ross Haberman at RLH Investments. Ross Haberman: I have 2 quick questions. You said you did not sell all of the SBA. How much did you hold back? How are you servicing them? And why don't you sell the whole thing? Thomas Zernick: Ross, I can answer that quickly for you. Our anticipation is, and I stress this is a forecast, is that on the end of December, so this would be post closing the transaction, the bank would still have about $167 million of unguaranteed SBA 7(a) loan balances. So we are still working on selling the remainder of that portfolio. The transaction that we announced previously, that was the amount of balances that Banesco USA wish to buy. And we continue to look for other parties to continue to try to market and sell that portfolio down. As far as servicing it, ultimately, Banesco will be operating as the servicer for all of the loans that are in our SBA portfolio for us. And at that point, really, it's -- the best part of that is that a good chunk of our people who have been servicing that portfolio on our behalf will move over. And so there really should be a good level of continuity between the 2. Ross Haberman: What -- refresh my memory, what kind of reserve or allowance did you sell the bulk of -- or cents on the dollar, did you sell the bulk of the SBAs for? And will you have to take a bigger reserve or allowance for this last $167 million? Thomas Zernick: The portfolio sale that we previously announced was at a 3% discount, so 97%. The increase in our allowance for credit loss that we are talking about today reflects an increase of really primarily related to the unguaranteed balances going forward. We're not anticipating adding additional ACL to the ACL for those remaining balances at the end of this year or in the future. Operator: [Operator Instructions] The next question comes from Julienne Cassarino at Sycamore Analytics. Julienne Cassarino: Yes, eventful quarter. You do what has to be done. So I applaud you on the definitive actions in the quarter. I was just wondering, are you still -- Tom, your background is in SBA loans. Are you still originating SBA loans, even though they're not this kind of 7(a) or there still -- is SBA still going to be a big part of the business model moving forward? Thomas Zernick: Yes. We are -- first of all, I'm certainly a commercial banker. I do have a lot of expertise in SBA, but we are actually exiting SBA. We will continue to originate up until our close with Banesco USA. Beyond the closing date, we will be a true community bank. And we will make Tampa Bay-based commercial C&I loans. We will continue to focus on some consumer lending, residential mortgage lending, all in Tampa Bay. And we will continue to offer a great deposit suite. We've enhanced our treasury management services significantly, and we'll continue to do all the right things as a real community bank now. Julienne Cassarino: Okay. So SBA really is a complete exit. And can you talk about the treasury management product? You mentioned it started in February, I believe, of this year. So it really seems to have gained traction. Can you just describe the products or products and if you have any off-balance sheet deposits? Robin Oliver: This is Robin, Julienne. We have always had treasury in our portfolio. But what we've tried to really do is beef up the software and the services that we have to make sure we are competitive in the marketplace. So for example, towards the end of last year, we added lockbox services, which we did not have before, which if we're going to serve health care industry or the homeowners associations that we've talked about, that was something that they demand. In addition, earlier, I think what you're speaking about in February, we did roll out a new software product from Jack Henry -- Jack Henry Treasury. And it is -- we've always had Banno business for our business customers, but the new Jack Henry Treasury is really designed for more mid-market type businesses that want more complex permissions and functionality in order to serve that market. So it's not something that all of our customers would be on, but we've worked to transition some of our larger business clients to that platform, and now we can offer that as we work to enhance and improve our business services. So a little over 2 years ago, we had one treasury officer to give you an idea. And we have now beefed our team up to really 4 folks serving treasury, and we will likely continue to increase that in 2026 because we have onboarded a lot of new treasury customers this year and are seeing a lot of success in that space. So hopefully, that gives you a little flavor of what we're doing there. Julienne Cassarino: Yes, sounds great. And there's no -- you don't do sweep deposits. Robin Oliver: No, we do not have any off-balance sheet activity. Sorry, I forgot to answer that part of your question. Julienne Cassarino: Okay. I just wanted to make sure. And yes, it sounds really good. And I was just wondering about the loan portfolio review that was done in the third quarter that you were describing. What percent of total loans were reviewed in that? Robin Oliver: We reviewed around $70 million of the portfolio, but it was from a third party. And then we also had another individual that we hired as a consultant that was reviewing a large number of units but smaller dollars because that has been where some of our credit concerns have been. So we were really -- it was a targeted review focused on specific criteria that might indicate that there was a credit weakness in that particular credit. So we've looked at different components of our data tape, our watch list loans, things of that nature to try to pinpoint those that could be problems that weren't recognized yet as needing a downgrade and to just make sure that we had our arms around the entire portfolio and that any problem loan possible was identified clearly here by the end of Q3. So a bit of a targeted review there. Julienne Cassarino: So is it fair to say $70 million loans were reviewed by a third party, external third party and the rest of all the loans were internally reviewed by a new hire, it sounds like. Is that? Robin Oliver: Well, yes, a contractor not all other loans, right? But we focus on our SBA watch list loans, our conventional commercial watch list loans, our smaller bolt and flat cap loans that have had prior express modifications and might still be having some struggle, things of that nature. So we probably hit about 8% to 10% of the total portfolio, but focused in a targeted way. Julienne Cassarino: Okay. So 8% to 10% Okay. Okay. And then is the Board getting paid now? I remember last quarter, you said the Board was -- had halted their compensation. Has that changed? Robin Oliver: No, that has not changed. Julienne Cassarino: Okay. So the Board is still not being paid and the repurchases have been halted and now all of this news is out, I'm guessing nobody insiders are not restricted, right, from buying if they want. Thomas Zernick: Yes, I'll take that one, Julienne. It is -- I'll answer it this way. These are some pretty substantial changes, and this is something that really has kept insiders out of the market. As far as when that window is back up for us, that's to be determined. I wouldn't expect to see anybody jumping in today by any measure, but we'll take that one day at a time going forward. Julienne Cassarino: So currently, insiders are under -- currently, insiders continue to be under a lockup, but... Thomas Zernick: Well, we typically wait until 2 full trading days after we release earnings before we open that window. Julienne Cassarino: Right. But now there's no reason to not be under lockup, right? Because there's -- it's all out, right? There's nothing else really pending, right? Thomas Zernick: Yes. It's -- I appreciate the question, Julienne. I'm not going to go into additional details. Operator: The next question comes from [ Fred Earl at GTF Capital Management. ] Unknown Analyst: My question is why is the best decision anything other than to go to the Home Depot and get one of those signs that goes in the windshield for sale [ till now]. Thomas Zernick: I'm not exactly following your question. Okay. Looks like he hung up Joanna. Is there anyone else in the queue? Operator: Thank you. There are no further questions in the queue. So that does indeed conclude today's conference call. We do thank everyone for participating. And at this time, you may disconnect your lines. Thank you.
Operator: Good morning, and welcome to the Silvercrest Asset Management Group Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that the event is being recorded. Before we begin, let me remind you that during today's call, certain statements made regarding our future performance are forward-looking statements. They are based on current expectations and projections, which are subject to a number of risks and uncertainties, and many factors could cause actual results to differ materially from the statements that are made. Those factors are disclosed in our filings with the SEC under the caption Risk Factors. For all such forward-looking statements, we claim the protections provided by the Litigation Reform Act of 1995. All forward-looking statements made on this call are made as of the date hereof, and Silvercrest assumes no obligation to update them. I would now like to turn the conference over to Rick Hough, Chairman and CEO of Silvercrest. Please go ahead. Richard Hough: Good morning, and welcome joining us for the third quarter 2025 earnings call. Our discretionary assets under management, AUM, which primarily drives the firm's top line revenue, increased $687 million during the third quarter, primarily due to the beneficial equity markets. Silvercrest added $46.4 million in organic new client accounts during the third quarter and has added $564 million in new client accounts through the third quarter of 2025. Despite overall negative flows during the quarter, closed accounts were immaterial and new client account flows remain on pace to register one of the stronger levels of organic new client flows over the past several years. Silvercrest has added approximately $2 billion in organic new client accounts year-over-year. and we are primarily focused on organic new client acquisition and discretionary AUM as a result of our previously announced and ongoing heavy investments in growing the business. Discretionary AUM now stands at $24.3 billion, which is a 3% sequential quarterly increase and an increase of 8% year-over-year. Assuming supportive markets and continued business development, we hope discretionary AUM will exceed all-time highs in the coming quarters. Total AUM at the end of the third quarter did hit a new high for the firm at $37.6 billion. Of that total, reported nondiscretionary AUM at quarter end comprised $13.3 billion. These nondiscretionary AUM are associated with only 4% of total revenue, mostly comprising fixed fee reporting and family office services. These assets have more than doubled over the past few years, which artificially lowers the apparent average basis points we receive for advising on AUM. To better relay the average basis points of our asset management and advisory businesses, we expect in 2026 to adjust how the firm reports nondiscretionary AUM. This will substantially lower that nondiscretionary AUM on a onetime basis without any revenue effect, providing a clear picture of the business. Barring short-term market volatility, the increase in AUM bodes well for future revenue as Silvercrest primarily bills quarterly in advance. As previously announced and emphasized, Silvercrest has embarked on significant strategic investments to promote growth opportunities. As it takes time for those investments, primarily in intellectual capital and headcount, -- to bear fruit, our earnings and adjusted EBITDA are substantially lower than the steady-state business and reflect our concerted effort to invest capital to support our long-term strategic priorities. Our strategic initiatives highlight Silvercrest in both the institutional and wealth market. The firm continues to invest in talent across the firm to drive new growth and successfully transition the business toward the next generation. Our new business pipeline remains robust, in particular with regards to our new global value equity strategy. Also, as previously discussed, Silvercrest will continue to adjust our interim compensation ratio to match important investments in the business as long as we have compelling opportunities to organically grow the firm and build our return on invested capital. With important initiatives for marketing in Europe, Oceania and Asia as well as in U.S.-based personnel, our compensation ratio will remain elevated for the foreseeable future. We previously announced a new buyback program of $25 million in May 2025. As of the end of the third quarter of 2025, we have repurchased approximately $16 million worth of shares. Our strong balance sheet supports ongoing capital returns, our substantial dividend as well as our growth initiatives. Silvercrest also previously received shareholder approval to increase the number of shares issuable under our equity incentive plan. We expect to begin rewarding shares to further motivate our professionals in the near future. We announced a dividend of $0.21 per share of Class A common stock, and that dividend will be paid around December 19 to stockholders of record. With that, I will turn things over to Scott Gerard to discuss our financials, and then we will take questions. Thank you. Scott Gerard: Thank you, Rick. As disclosed in our earnings release, for the third quarter, discretionary AUM as of September 30 of this year was $24.3 billion, and total AUM as of the same date was $37.6 billion. Revenue for the quarter was $31.3 million and reported consolidated net income for the quarter was $1.1 million. Looking at the third quarter, revenue for the quarter increased $0.9 million or 2.9% year-over-year. Expenses for the quarter increased year-over-year by $4 million or 15.4%, primarily driven by increased compensation and benefits expense and general and administrative expenses. Compensation and benefits expense for the quarter increased year-over-year by $3.1 million or 16.8%, primarily due to increases in salaries and benefits expense, primarily as a result of both merit-based increases and new hires and an increase in the accrual for bonuses, partially offset by a decrease in equity-based compensation. General and administrative expenses increased by $0.9 million or approximately 11.9%, primarily due to increases in professional fees, occupancy and related expenses and recruiting costs, partially offset by decreases in shareholder expenses and trade error expense. Reported net income attributable to Silvercrest or to Class A shareholders for the third quarter was approximately $0.6 million or $0.07 per basic and diluted Class A share. Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and noncore and nonrecurring items, was approximately $4.5 million or 14.5% of revenue for the quarter. Adjusted net income, which we define as net income without giving effect to noncore and nonrecurring items and income tax expense, assuming a corporate rate of 26%, was approximately $2.4 million for the quarter or $0.19 per adjusted basic and diluted earnings per share. Adjusted EPS is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as of the end of the reporting period for basic adjusted EPS. And to the extent dilutive, we add unvested restricted stock units and nonqualified stock options to the total shares outstanding to compute diluted adjusted EPS. Looking at year-to-date September 30 of this year, revenue increased year-over-year by $1.7 million or 1.8%, primarily driven by market appreciation and partially offset by net client outflows. Expenses for the 9 months ended September 30 of this year increased year-over-year by $7.1 million or 9.4%, primarily driven by increased compensation expense and general and administrative expenses. Compensation expense for the 9 months ended September 30 this year increased year-over-year by $4.6 million or 8.5%, primarily due to increases in salaries as a result of both new hires and merit-based increases in addition to an increase in the accrual for bonuses, partially offset by a decrease in equity-based compensation expense. General and administrative expenses increased by $2.5 million through the 9 months ended September 30 this year or approximately 11.7%, primarily due to increase in professional fees, occupancy and related expenses, portfolio and systems expense and travel and entertainment expenses, partially offset by a decrease in trade error expense. Reported net income attributable to Silvercrest or again, the Class A shareholders for the 9 months ended this year was approximately $5 million or $0.56 per basic Class A share and $0.55 per diluted Class A share. Adjusted EBITDA was approximately $16.8 million or 18% through the end of September of this year. Adjusted net income was approximately $9.6 million or $0.77 and $0.74 per adjusted basic and diluted EPS for the 9 months ended September 30 this year. Looking at the balance sheet, total assets were approximately $157.6 million as of September 30 of this year compared to $194.4 million as of the end of last year. Cash and cash equivalents were approximately $36.1 million as of September 30. This compared to $68.6 million at December 31 of last year. There were no borrowings as of September 30. Total Class A stockholders' equity was approximately $58.9 million at September 30. And during the third quarter, we repurchased approximately $4.6 million worth of Class A shares. That concludes my remarks. I'll now turn the call over for Q&A. Richard Hough: Thank you, Scott. We'll take questions at this time. Operator: [Operator Instructions] And our first question will come from Christopher Marinac of Janney Montgomery Scott. Christopher Marinac: Just want to talk a little bit about calibrating the timing of when the AUM and revenue kind of hit various points to get back to leveraging the expenses that you're having now. I understand the comment on the compensation that you mentioned in the remarks. And I just want to understand, do we think about this as maybe an 18-, 24-month time frame? Or is it any way to kind of give visibility on that? Richard Hough: Yes. So that's a great question. And obviously, we have multiple investments going on. So it depends on the time horizon for each one. Just very briefly, we have domestic expansion efforts. We are active in Asia/Australia. We are opening an Australian investment trust there. In order to get flows, we are working on our MiFID II with the Central Bank of Ireland in order to face Europe and actively market there, both to existing clients as well as to new institutional and family clients. And all of that also includes new marketing professionals, investment team here, et cetera. That is all on a short-term basis, kind of occurred, let's just call it over the past 1.5 years in its bulk. Our headcount has gone up by about 15 to 20 people, I think it's exactly 15 people, say, over the past year-over-year. So that's a lot of hires and quite recent, even though we've started hitting EBITDA and earnings for these investments prior to that. The bulk of it has been quite recent. So when you put it all together, yes, you're looking at a longer time horizon of 18 to 24 months. However, we are done primarily with the investments we made in institutional marketing as well as in our global value equity team. And I expect flows for that in a much shorter term than that. The pipeline is very large. And so I would look to that more like 6 months to 12 months, and we could see even some reasonable allocations in the fourth quarter or first quarter coming up here, which is -- which would obviously cover about 6 months. So all things being equal, that would start to creep into the profit side and start increasing the EBITDA and earnings on that basis alone. But there's still other investments to go. So the longer time horizon is probably more realistic. What I look forward to is really being able to report substantial progress that those investments will be making. The potential is very large. And I'm quite confident that it is going to pay off and that we will be able to report meaningful progress soon. Christopher Marinac: Great. And the progress clearly was also this quarter. So there was progress for sure in this last quarter. One related -- just goes back to kind of professional fees that you called out in the press release. Are any of those temporary? Or will you have new professional fees to kind of cover in future periods? Scott Gerard: Yes, Chris, in our -- some of them are temporary, especially related to some of our global initiatives. And in our earnings release and 10-Q, there is a reconciliation from GAAP numbers to non-GAAP, where we isolate those nonrecurring items and add it back. So you can get some sense from that disclosure what is temporary. Christopher Marinac: Okay. Great. And then, Rick, to the extent you can comment on this, as you look out a couple of years, do we get back to where the EBITDA margin was? Does the EBITDA margin get recast because it's now going to be a different company with a different broader focus? Richard Hough: Yes, you look out further and it gets back to where it was barring any other new investments. Of course, where it was before included ongoing investments that were just on a much smaller scale. And we have a lot of wood to chop. So I expect we'll be getting back to that over that time frame. It's really just more about organically building completely new things here. If I were to strip everything away that we have done over the past 1.5 years, 2 years, we would be at a really historic EBITDA and earnings level. Operator: Next question comes from Sandy Mehta of Evaluate Research. Sandy Mehta: The global strategy has a very strong performance over the last 5 years -- in 1, 3, 5 years. And you mentioned that you have a very large pipeline. There's interesting dynamics there. So the U.S. weighting is 73% of MSCI World. So that doesn't bode well for global strategies. But on the other hand, EAFE in emerging markets, international markets have outperformed the U.S. this year by 2x. So I think that bodes very well for Global. So can you just give us a little bit more color on what you're seeing from a marketing perspective, the pipeline and what clients are saying or consultants are saying, what do you see out there on Global? Richard Hough: Yes. Right. So 2 points. Number one is, while I have focused on the significant opportunities for the global value portfolio because of the size of the allocations it can receive and because it's new at the firm, that has colored my remarks. And that is also the strategy that received the large Australian superannuation fund seeding, not quite a year ago, about 9 months ago or so. And that is the performance you are referring to. And in fact, on a shorter time horizon since that investment, it has performed very, very well, which is really nice to be able to demonstrate to an investor and to other potential investors that this is a good strategy that they should be looking at given the trends that you noted. That strategy has freedom to change those balances and to move around against the benchmark as they seek relative value and outperformance in the portfolio. That said, we have other international equity strategies at the firm that focus entirely on investing outside the United States, whether that's in developed international markets or in emerging markets. Those markets have been hot. And I'm very pleased to report that those capabilities led by a different investment team here at the firm have done extremely well and also have interest from investors in a growing pipeline. The mandates don't tend to be quite as large there, and they're a little different, but that has potential as well. So you add that -- those 2 together in covering both the global international and emerging market space, and it looks quite favorable for the firm. In terms of what we are hearing or seeing our new centralized institutional marketing team and process has been highly engaged both with very significant sovereign pools of capital, and it includes other Australian superannuation trust. It includes pool capital for retail and other retirement assets. It includes interest in Europe, and it includes the globe's largest consulting firms. We rate extremely well, both on a performance basis for those strategies that I just went through as well as with regards to the compliance and high quality of the firm here and the institution that we've built. Silvercrest, despite being a fairly small asset management firm, also gets a lot of attention for its intellectual capital among those consultants I just shared with the firm yesterday that one of our update pieces from our investment policy team was one of the most read articles within the internal distribution of one of those large consultant firms, one of the globe's largest. The pipeline itself is not measurable the way we used to measure it. I think we've talked about this in prior earnings calls. We used to have very rigorous standards around what we would announce on a call for the pipeline. And that was we were in finals or semifinals presentations. It was -- we were invited to put in an RFP or -- and we expected some form of decision within a 6-month period. The consultant industry and the way that marketing works now has changed very substantially since 2020, which is to say COVID. It gradually changed during that period of time. It became harder and harder for us to measure. And so we just are not confident with giving very strong numbers the way we used to be. Instead, I have chosen to provide color. I will say that from my thinking, it is a very large pipeline. It is quite significant, especially in those international and global areas. for the firm, and I'm quite optimistic, as you heard in my answer to Christopher. If I can give harder numbers as we go along here and learn more about how it's working, I will do so. But unfortunately, I just don't have the same apples-to-apples or confidence in giving you the kind of numbers that I did before. As part of that effort, I should mention that we hired a professional who was one of the top institutional client representatives at a competitor firm, one of the larger asset managers in the United States. And globally, he has spent his career in Australia and in London, and his contacts have been extremely helpful to us as well. I hope that helps. I'm happy to follow up with anything else, Sandy. Sandy Mehta: Yes. Yes, yes. Sure. And you already talked about expenses, and you said that you hired 15 key hires. The new hires, is most of the hiring done at this point of the senior people that you were hiring? Is that pace of incremental hires? Is that going to slow down? Richard Hough: We've done most of it that for building out the new equity strategy as well as the institutional team and all of the support work that goes along with that, including trading, et cetera, marketing support analysis. However, as I mentioned earlier, to Christopher, we have multiple initiatives going on. So there will be new hires for Europe. There will be new hires in Asia. There will be some new hires in -- domestically on the wealth side. So we are not done. However, as this initiative grows and those -- the investments we have been made to date produce revenue, it won't be as noticeable in terms of hitting our earnings and EBITDA because we'll have cash flow to fund those things. Just as before we hit this very strong investment phase, we were hiring people and investing in the business all along and not hurting earnings or EBITDA when we did that previously. So -- you may -- depending how soon some of these big hits come along, it may not be as noticeable as it was as we continue to make those investments in the business. Just going back, say, several years pre-COVID and during that, we were investing in the next generation. I was hiring new portfolio managers here. We were investing across the business, and it was not affecting our EBITDA because we had such strong growth and cash flow. I expect that to accelerate and to happen as we move forward over time as the revenue starts coming in for these initiatives. Sandy Mehta: And where are you in terms of OCIO assets, currently? Richard Hough: OCIO is almost $2.2 billion and has a very strong pipeline. I usually don't talk about wins on the next quarter. I usually wait, but we just -- we just got a, I think, about a $70 million or so new foundation just joined us, I think, October 1 or 2. So it didn't quite make it in the numbers for this quarter. And I expect more from that team. The performance for the OCIO portfolio itself that gets uploaded and compared to our peers is very, very strong as well. I don't know if you see that, but they have outperformed quite nicely, which really helps us along with our differentiated service model. Sandy Mehta: And one last question from my side. Your share count has declined 11% year-over-year. You had the $16 million buyback. Do you disclose what price you bought the stock? Or can I ask you whether it's more at the $16.5 level or more at the $14.5 level? Richard Hough: Yes, we don't disclose it. I will say that it has been, from our thinking, a very, very favorable price. And I would -- also, I think in our last call, we pointed out that we did some pretty substantial block trades in the period just after we announced it. So if you looked at the price in June, you've got a good idea for a couple of those block trades. But we've been active in the market all along here. So you can assume that since the end of June through August and September that we were actively buying back stock. But no, we don't disclose the price. And I think we've got about -- on that point, about another $9 million, $8 million or $9 million to go, something in that range. Is that right, Scott? Scott Gerard: Yes, that's correct. Yes. Operator: [Operator Instructions] There are no further questions at this time. So that will conclude our question-and-answer session. I would like to turn the conference back over to Rick Hough for any closing remarks. Richard Hough: Right. Thank you very much for joining us for this third quarter of 2025 review. As you saw from my business update and the questions, thank you, Sandy and Christopher. This is a critical juncture for the company in terms of our investments. But hopefully, I convey that I expect those investments to pay off for this firm with some progress in the short term in getting back to more elevated levels of earnings and EBITDA as we move further along into 2027 and 2028. The efforts that we have taken to find really talented professionals to enhance our offerings and to grow the visibility of the firm, not just here in the United States, but in other markets with large pools of capital has been very important to us, and I think will have benefits into the future. Thank you again, and we look forward to discussing the fourth quarter and year-end. Operator: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
Andreas Klauser: Good morning, and welcome to our Q3 earnings call. Just let us start on the first slide with our equity story, what sets us apart. I think it's the clear market leadership, so the added value we can provide to our customers as well as dealers. The strong resilience, this is driven by the broad product portfolio we have. The solid growth opportunity, I think here, despite the Service segment, still North America, APAC and Marine offers great opportunities and the huge earnings potential by increased profitability. I think that's an important part and all the other ingredients will follow what was presented now. Yes, we are a true global player with EUR 2.36 billion revenue in 2024 with a strong global presence, which is driven by the engineering and technology competence, sales and service network worldwide, the 30 production sites worldwide and even more important, highly motivated employees all around the globe. In addition, we are very proud that we have a strong resilience throughout the industry diversity. So we are in many different areas of doing business. And that's the reason as well when one of the activities, one of the businesses might slow down, others can compensate. And here as well, you can see the spread throughout the globe. On the next slide, and it is also something we also would like to remind yourself is stick to our product portfolio, including a very successful marine business, which we'll see later on in the presentation of Felix is strongly contributing to our results. But we are never standing still. We reach higher. So we worked for more than 9 months quite intensely on our reach higher strategy 2030+. We had a strong solid process behind, which is really bottom up and as well fully kicked off by the Board and challenged by an outside consultant. I think this is something which we will hear later on more about it and as well in the next months to come. Where are we coming from? We have a strong focus on 5 must-win action fields. One is related to lifting customer value, so the customer focus. The second area is the balanced profitable growth of the service and spare parts business expansion and as well the working platform as an additional core pillar, which is heavily requested and required in the marketplace. And the third part is execution excellence, supply chain optimization and process system and data optimization as well here to make sure that we are more efficient, we are faster in better dealing with our customers and dealers. So all in all, we are talking here about 18 programs to drive future growth and profitability. And on the next slide, this will lead, first of all, to keep our #1 position for Crane and Lifting solutions. This is very clear commitment we have. On the other hand, as well our financial targets by 2030 is EUR 3 billion revenue, a 12% EBIT margin, 15% ROCE and as well EUR 150 million bigger, the free cash flow side. And I think these are the elements where we are working towards and which are heavily supported by all the actions which are in place and the strategy which is defined. The growth target just that you can better understand where we are coming from and where we are going to. So where is the biggest portion of growth coming from? No doubt it's on the service side, followed by recovery in EMEA, which is expected, which is more related to the marketplace. Even more important, the area working platform as well a clear strategy to roll out new solutions, new successful solutions for our customers and for our dealers. Before then coming to the outlook for 2025, I ask Felix, hope you can hear for his presentation on the results to better understand where we are coming from. Please, Felix go ahead. Felix Strohbichler: Thank you, Andreas. Good morning, ladies and gentlemen. As you are aware of, we have 3 segments in which we are steering the company and how we also report our numbers, starting with the segment Sales and Service, which comprises all sales activities of Products and Solutions as well as the service activities of Palfinger, but not the external revenue in production for third parties, which is another segment. So looking at the key developments of the first 3 quarters. First of all, in EMEA, we have seen a substantial improvement of the order intake in Q4 of last year. This order intake has remained stable for the last 4 quarters. However, on the other hand, we have to say that the infrastructure package, for example, in Germany has not yet showed any impact, which on the one hand, is bad news, but it's also good news because it means that all the potentials out of those infrastructure packages in Europe are still ahead of us. If we then go to North America, we had quite some developments in summer, the increase of tariffs from 10% to 15%. Then more importantly, the Section 232 has been introduced, which has, on the one hand, a negative impact on demand, which is not surprising if you consider that some products have become more expensive by 10% to 20% for customers. So this leads to a slump in demand and also the reduction in profitability because that all the impacts of those tariffs can be fully passed on and compensated. So this also leads to a certain reduction in profitability of around EUR 10 million to EUR 12 million in 2025, which was not expected only a few months ago. Coming then to Latin America, we have here a very positive development, especially in Brazil. Due to the latest developments in Argentina, we also hope that here we will see a positive outlook. APAC is clearly dominated by India, which is driving the growth in the region. Marine, Andreas has already mentioned that Marine is a very important contributor to our bottom line, also to our top line, but even more important to our bottom line. The market environment is still very positive and the profitability is on a very good level. And last but not least, typically, we don't talk about Russia. Here, we have to mention it because in the last quarters, we have experienced a massive slump in the economy and therefore, also a sharp decline in sales and earnings, which leads to the fact that at the moment, Russia is more or less at breakeven and there is no bottom line contribution out of Russia anymore for the time being. So what does this mean for the numbers in the segment Sales and Service? So first of all, the external revenue has declined slightly by 2.5% with a profit EBIT of EUR 150 million, which represents an EBIT margin of close to 10%. So a slight decline compared to last year. However, we will recover to a large extent in the fourth quarter, but Andreas will talk about the outlook later. What I would like to highlight here is clearly the order book development. So as you all remember, we had a very large order book in the years 2022 and 2023 due to the inflated demand in the post-COVID phase. In the meantime, we have come down to EUR 1 billion of order book, which is a very healthy level. And this order book level has been stabilized over the last 12 months and even increased slightly. So we are now quite exactly at EUR 1 billion of order book in the segment Sales and Service. And what is also important, especially having in mind that one of our key strategic pillars is growth in service. Our Service business share has increased to almost 19% compared to 17.4% in the same period of the last year. Coming now to the second segment, the Segment Operations, which includes all the manufacturing and assembly activities of PALFINGER and also the production for third parties, starting with production for third parties, of course, this activity has been impacted by the challenging economic environment overall. So here, we are producing components for other machinery producers and of course, we can feel here the still calm overall environment. If we then go further, we see capacity adjustments in both directions. On the one hand, we increased our capacity at the moment and have been increasing our capacity in Europe and also in Brazil due to the fact that the order intake developments have been positive. On the other hand, due to the tariff policies, we have underutilization in the U.S., and I also mentioned already the fact that in Russia, the market is quite down. So we see underutilization in the U.S. CIS whereas we increased capacity in Europe and Brazil. What does this mean in terms of numbers? The external revenue has come down by another 5%. So every year after 2023 or 2022, we have now seen a certain decline, again, mirroring the overall economic development. The EBIT line is at EUR 10.7 million compared to EUR 22.3 million the year before and driven on the one hand, of course, by the lower utilization in production for third parties, but also by North America and CIS. Coming then to the segment other nonreportable segments. So this sounds a little bit complicated in the end. It's just a combination of 2 small units on the one hand, it's the holding unit, which comprises projects and activities for the whole group. On the other hand, it's the Tail Lifts business, which has been carved out of the Global PALFINGER Organization because it's a different industry with specific requirements. As you can see in the external revenue, the market environment for Tail Lifts, especially in our core markets, Germany and U.S. is difficult. This has led to a decline in sales for Tail Lifts by almost 20%. In the EBIT line, you see an improvement of EUR 7 million. However, this is not coming from Tail Lifts. This is mainly because we have increased our intercompany invoicing of projects to other entities. So this is the main effect of this improvement here in this segment. So coming now to the numbers for the complete group, starting with the revenue. So the revenue is still 3.5% below the previous year. But as you know from our guidance, we expect now ramp-up and an effect of our ramp-up in capacities in Europe. The EBIT line is by minus 17.6% down to EUR 130.7 million. And this means an EBIT margin of 7.8% and a consolidated net result of EUR 72.4 million. So important is to understand that we have now the opposite development compared to the previous year when we started with 2 record quarters based on the record order book we had and then we had a reduction of capacity and now it's the opposite. We are ramping up capacities in 2025. So we expect here a positive development in Q4. And if you then look at the chart on the right hand, you can see that EMEA has become, again, even a little bit more important due to the positive order intake in the last quarter. So 59% coming from EMEA in the first 3 quarters, 25% from North America, LatAm and APAC at around 6%. And CIS has declined in importance due to the market development, as mentioned, with around 4%. So coming now to our balance sheet, and this is really a great development. Our equity has improved by EUR 140 million to EUR 884.7 million, which represents an equity ratio of 41.3%. The net debt has come down from almost EUR 760 million to EUR 577 million. The gearing ratio, net debt to EBITDA is now -- are now at extremely healthy levels. So what you can see here is an extremely solid and stable balance sheet of PALFINGER. So our financial strength is absolutely positive. And this is also coming from the sale of treasury shares, not completed, but also one of the impacts was the sale of treasury shares in summer. So we had proceeds of EUR 100 million by selling 7.5% of the issued shares at the placement price of EUR 35.40. So this strengthened the balance sheet with an improvement in equity ratio of more than 3% and reduced the gearing ratio by more than 15%. But what is perhaps at least as important, especially for our investors is that this has dramatically increased the attractiveness for our investors. Now the free float is 43.5%. So this is a substantially higher level than before. So the liquidity of the share is much better. And now we also have not only a chance, but I would even say a high probability of inclusion in the ATX. At the moment, we are the #20 on the list, and there is quite a big gap to the #21. At the bottom of the slide, you can see to whom we sold the shares. So it's long only mainly 3/4 to long-only investors. And then if we look at the regions, we are happy to report that we could also internationalize and diversify our investor bases, especially the U.K., France and the U.S. with the sale of the treasury shares. What will we do with the EUR 100 million proceeds we could generate from the sale of treasury shares. Here, you can see several projects we have ahead of us. Of course, these proceeds will help us and enable us to fund these strategic investments to pull some of those forward. So we will especially expand our service business by investing in service locations in mobile services, especially in North America, but also in service locations in EMEA. We are driving a defense project to generate a product portfolio of highly developed solutions for the armed forces to improve our market position here. We have already invested in the spare parts hub in North America, which has been opened in September, which cost around EUR 10 million, and we have the investment in a new assembly plant in India ahead of us, which will cost EUR 30 million. Just some examples of what we are going to do. But as you can see, we can make very good use of the proceeds. Last but not least, let me come to our cash flow statement. Let me start with Q1 to Q3 2024. You see at the bottom line, the free cash flow was minus EUR 2 million. In the end, we reached even EUR 120 million of positive free cash flow at the year-end, driven by inventory reduction mainly. This year, we are already EUR 56 million ahead of last year. So we are fully on track to achieve more than EUR 100 million of free cash flow for the full year. And the main difference compared to the last year is that on the one hand, we will have less potential from change in working capital. However, the level of investing activities is substantially lower compared to the previous year. So we are happy to report that our target is absolutely realistic, and we are full on track. With this, I would like to hand back to Andreas Klauser for the outlook. Andreas Klauser: Yes. Thank you, Felix. Now let's see what does this mean in nutshell for full year 2025. As Felix already mentioned, unfortunately, U.S. tariffs were costing us profitability and as well caused a slowdown in our output. Nevertheless, on the other hand, we expect an output increase in Europe. The good news is here, we are having the orders on hand. So this will be mostly compensated our first 9 months and should result in a quite successful closure of 2025, which also means still good results. And what does this mean in terms of programs that we are counting on, which is not, let's say, in for 2025. There is a strong fiscal package in Germany, ReArm Europe, I think the amounts are quite well known in Western Europe, RePower Europe. So all these are the ingredients not to forget about the U.S.A. Stargate project and potentially as well at a certain point in time, the Reconstruction of Ukraine. It is just a small reminder which kind of areas, which kind of programs are already somehow announced and where we can count on in the future to fully participate. Saying this, yes, we reach higher with our 2030 plus strategy. This also means, as I mentioned earlier already, strong solid financial targets for 2030. This means on one hand side, EUR 3 billion revenue. On the other hand, a 12% EBIT margin, 15% ROCE and as a commitment to the market as a commitment to our customers, #1 for Crane and Lifting solutions. At this point in time, let me say thank you for your attention, and we will take your questions now. Operator: [Operator Instructions] The first question comes from the line of Daniel Lion from Erste Group. Daniel Lion: First question regarding your '27 outlook. As I haven't read it, just to make sure that the guidance for '27 is still valid? Felix Strohbichler: Yes, the 2027 targets were actually in the presentation of Andreas. So this was Slide #7. Daniel Lion: Okay. Okay. Sorry, then I didn't read that. Andreas Klauser: Slide #8. Financial targets 2027, EUR 2.7 billion, 10% EBIT margin, 12% ROCE and the free cash flow. Daniel Lion: Okay. I'm seeing it already, sorry. And then on your order backlog, currently at EUR 1 billion, we should expect now a stronger fourth quarter, catching up with some of the declines we've seen throughout the year. But what does this mean now for first half year? How does your visibility look like? And maybe also sneaking preview to next year? If possible, to what extent will you need some of these packages to materialize that you show as potentials in order to show further grow towards your '27 targets? Andreas Klauser: And the good thing is that we are not materializing all the shipments, all the orders we have just in 2025. I think it's already good coverage for Q1 2026. And this is partially driven already by some of the projects like the fiscal package in Germany. Our dealers are preparing themselves, our customers are preparing themselves now already placing orders to have the equipment available to work on the infrastructure projects. The same is for ReArm Europe. So most of the European armies, we were already ordering some logistic equipment. Unfortunately, we can't disclose this further as you understand for sure, the reason. So for us, the starting point looks already good. And then we will see how it will evolve. But in general, all these projects which are announced are somehow considered but only partially. So this is not something that all these ingredients need to happen next year that PALFINGER can do its results. We are quite confident that what we see now and what we have in the pipeline will lead us already to a good result in 2026. Daniel Lion: Okay. And reflecting on the services share, it's up more than 1 percentage point. How do you think this will develop going forward, especially also with the potential you have on the equipment business? Do you expect the share to grow materially in the next 2 years? Or do you think that it will more or less keep the share and increase together with the overall growth that you expect to show? Andreas Klauser: No, our expectation here is really that the service business will outperform maybe other growth areas, which we have on the equipment. This is clearly defined in the strategy and as well what we see now that our customers might even be willing to extend the life cycle of our products. So they're investing in service, they're investing in parts and we are doing this as well in North America, we had already established our new spare parts hub Huntley. We are doing certain things, which you have seen earlier in Felix presentation in Europe. So this will be quite -- should be a quite quick win, which we can see over the next couple of months. And on the other hand, yes, we will kicking in with new equipment on the AWP, Aerial Work Platform. Aerial Work Platform for example, which will still take a bit of time. But all the ingredients together are making us quite confident that we can get there. Felix Strohbichler: So perhaps to refer to the Slide #9, where you can see that service accounts for around 1/3 of our growth potential. So this means that the 1/3 of growth potential is more than the 19% of service share we have today. So service is growing over proportionately. Daniel Lion: But this will be a gradual improvement. So it's not like back-end loaded. This is actually a steady trend that we should be seeing in the figures, right? Felix Strohbichler: This is what you can already see in the last years as well. Operator: The next question comes from the line of Patrick Steiner from ODDO BHF. Patrick Steiner: Patrick Steiner speaking. Two from my side. First one, how should we interpret the new 2025 guidance? Do you expect to come close to the 2024 results in terms of EBIT? And the second one is, could you give us a bit more information on the fundamental development of the North American business? Did you expect -- or do you expect any market share losses as a result of the tariffs? Felix Strohbichler: So let me start with the 2025 guidance, how to read this. As you might recall, our target has been even when we communicated the half year results that we aimed for even exceeding the second best year 2024 in terms of EBIT, which would be EUR 186 million. At that time, we were not, of course, considering that there may be the impact, especially of Section 232, as I said, it's an impact of around EUR 10 million to EUR 12 million for this year's profitability. So this means that you have to assume that we won't get to this level, but we won't be that far away. So we are talking here about an impact of around EUR 10 million to EUR 12 million, which is now a deviation from our previous guidance. But apart from this, everything remains unchanged. Andreas Klauser: And about the North American market, here, we can already see that further orders are coming in especially as well now on the service side, which was a little bit slow earlier this year, but now it's coming back. The market is coming back. So I don't expect here any negative impact for 2026 coming from North America. Patrick Steiner: So also no market share losses? Andreas Klauser: Yes, the market share loss, clearly no market share losses, even if you consider the truck mounted forklift, here, we gained market share, but still the U.S. American market, the customers are a little bit hesitant, we are a little bit hesitant to provide orders first to see what's happening, especially on the logistics part, but clearly no market share in the game. Operator: We now have a question from the line of Elias New from Kepler Cheuvreux. Elias New: Two questions from my side on tariffs. So firstly, I mean, you mentioned the EUR 10 million to EUR 12 million hit to EBIT in 2025 due to the 232 tariffs. Given these tariffs were only introduced in the summer and assuming nothing changes with regard to this tariff policy, if I were to annualize that run rate, would it be correct to assume a sort of similar hit of, say, EUR 20 million to EUR 24 million in 2026? Or is there any reason to expect this impact to fade in 2026? Felix Strohbichler: Well, of course, you're right that the Section 232 has to be considered to remain in place. And it would be more or less even 3x the amount if there wouldn't be any counteraction. But of course, we are constantly improving here our value chain and taking measures to limit the impact of the tariffs. So we do not expect now EUR 36 million. But yes, there will be a certain impact out of the tariffs also in 2025 because we cannot fully compensate in terms of change of supply chain within a few months or even a few quarters. But we also have to say that we have implemented price increases of up to 18% depending on the product group, which sometimes has already taken effect in some cases, will take effect. So yes, there will be an impact in 2026, but it won't be 3x the impact of 2025, but it will be also probably a double-digit million number, which still remains as an impact for 2026 from today's perspective at least. Elias New: Okay. Great. That's very clear. And just on that tariff again. I mean, how much of this tariff surcharge are you currently passing through to customers, both the reciprocal and tariffs Section 232? And how you sort of try to balance increasing your price and passing that through versus accepting lower volumes? How do you kind of think about balancing that equation? And perhaps whether you are following the same approach here as your competitors or how you see sort of other players in the market kind of choosing to increase prices? Felix Strohbichler: So first of all, everybody tries to pass on the cost increases to the customers. This is also what we do. As I mentioned, price increases of up to 18%. But the reality is also that it's a lose-lose situation. So everybody has different strengths and weaknesses. And whenever somebody, for example, with one competitor for Tail Lifts in the U.S. They have just opened up a new assembly plant in Mexico. So they've doubled the capacity, market is extremely down. So they decided not to pass on any price increases, and they are the #1 player in the North American market. So there are always some competitive effects you also have to take into consideration. For example, for Cranes, we are the clear market leader. We can here also dictate more or less what is acceptable and everybody else also has imports from Europe. But for some other product groups, it's not the case that we can always fully pass on all the cost increases. And this is also true for competition. So in the end, the tariff situation creates a lose-lose situation for every competitor, but also for the customers. Elias New: That's very clear. Just as a reminder, if I understand correctly, you are just as well positioned in the U.S. in terms of manufacturing, et cetera, than your competitors. I know it differs by product, but it's not like you're structurally worse positioned than competitors? Felix Strohbichler: It depends on the product group. So for example, for loader cranes, we are better positioned than everybody else because we have an assembly plant in Canada, and there is a USMCA agreement in place between Canada and the U.S. We have assembly plants and manufacturing plants in the U.S. for products, which are also coming from the U.S. from other manufacturers. So here, we have more or less a local footprint against local competitors. But it's only in a few cases like for loader cranes where we have a substantial advantage. In some cases, we had advantages in the past like bringing components from Brazil or Europe from low-cost production sites to the U.S. Now this advantage has disappeared because we are impacted by tariffs to bring these components to the U.S. would also not help because then the cost advantage goes away even if you save some tariffs, it doesn't help a lot. So in the end, it's not only that it has been an advantage to be in the U.S. It's also that in some cases, we have competitors with a similar setup so that in total, I would say it's a picture where we have still to do some homework to compensate fully the impact of the tariffs, but we'll get there to compensate fully will probably take another year or even 1.5 years. Operator: [Operator Instructions] The next question comes from the line of Lars Vom-Cleff from Deutsche Bank. Lars Vom Cleff: You already alluded on the U.S. headwind, EUR 10 million to EUR 12 million you expect for this year's EBIT. But if I would bluntly subtract that from the EUR 186 million you generated last year, I'll end up with EUR 175 million, but that wouldn't imply any improvement of the operating performance this year or year-on-year, although your capacity is higher and Brazil Marine seems to be developed well. Is fair to assume a flat underlying -- organic underlying development, leaving U.S. impacts aside for the moment? Felix Strohbichler: I think you have to consider again the development last year and this year, I tried to highlight this in the overall group profit development. So we had a record first half year last year. And now we have the opposite development. So we had a rather weak start into the year with a lower order book and are ramping up capacity. So it's just the mirroring of what we have seen last year. And if you now say it's the same, it's not true because if we look at the individual regions, for example, Russia has had still a significant EBIT impact in 2024, which has completely done away and which has been fully compensated by other regions like Marine, for example. Lars Vom Cleff: Okay. Perfect. And then you also already shared some thoughts about the U.S. tariff impact you're expecting for next year. Is it too early to ask how you're looking at next year from an operating business performance? Are you expecting a significant recovery, investment packages finally starting to materialize? I mean the U.S. is the U.S., pretty sure we can't make any forecast regarding that region. So would you be okay with me assuming a significant better performance next year? Or would you still say rather be cautious in this regard? Felix Strohbichler: So let me answer this with Slide #8. I think it was showing the 2027 targets. So our assumption is, of course, that next year, we will see some impact of all those programs. If we would not see any tailwind, of course, we could also not keep our 2027 target. So the underlying assumption is still that we will see already in the first half year of 2026, some momentum in Europe. If this does not kick in, of course, it would become very difficult to show the year or the results we target for 2026, which has to be somewhere in between of this year results and the 2027 target. So yes, the underlying assumption is we have to see some positive impact in 2026, which shall also lead then to a substantially better year 2026 in terms of financial results. Lars Vom Cleff: Understood. And then last one for you, Felix. I mean, order backlog up 2% year-on-year. And you're commenting on the order intake by saying order intake stable at a solid level. If I do a back of the envelope calculation, given your revenue development, order backlog development, I would calculate a Q3 order intake that rose around about 20% year-on-year. Am I doing something wrong in my calculation? Felix Strohbichler: Well, it's a matter of fact that in the last 12 months, every single month with 1 or 2 exceptions has been substantially higher than the comparable month 1 year before. So if this was the question, yes, this is absolutely correct that we have seen this on a constant basis now more or less almost every month. Lars Vom Cleff: Okay. Perfect. No, I was only wondering because you stating order intake stable at a solid level for me, sounds more conservative than what I'm calculating. Felix Strohbichler: Means stable over the last 12 months, but not stable compared to 14, 15 months ago. So we have seen in 2023 and until end of Q3 2024, much lower order intake than output. So we have been eating up order book more or less every single month for 18 or even more than 18 months. And this has stopped in Q4. Since then, the order book -- the order intake is more or less on a similar level than the output, which means that the order book has stabilized on a reasonable level of EUR 1 billion. So the order book has changed dramatically anymore for the last 12 months. Operator: [Operator Instructions] We have a follow-up question from the line of Elias New from Kepler Cheuvreux. Elias New: Yes. Just one follow-up question from me. Just on sort of growth drivers for 2026 and beyond. I mean you clearly mentioned that EMEA is the growth driver for Q4 now, but order intake is stable since Q4. So just wondering when you expect this to start improving materially? Are you sort of starting to see trends already that expect a meaningful pickup into 2026? Or is the growth in 2026 to be driven more by North America. So despite tariff headwinds, et cetera, I mean, the CapEx cannot be deferred forever, right? So I'm still guessing that despite these headwinds, the U.S. will be a huge growth opportunity going forward. So do you expect that also to meaningfully drive growth in 2026? Felix Strohbichler: Well, in the end, it's very difficult to predict when all those packages will kick in. What is important to understand is that PALFINGER is early in the cycle. So for example, in 2020, after COVID, our order intake picked up already in July, whereas for many industries, it took until the fourth quarter when the improvement happened. So we assume, and this is more or less what banks sometimes think, and I think there are some bankers also in this call now that there might be an impact in the second half. If we are early in the cycle, we should see already the order intake development, hopefully, at the end of the first half year, and this is also needed upside, we will not see it in the output in half year 2. So our expectation, and of course, this is not the guidance because at the moment, it has not happened, and it's an expectation, a hope an assumption that we should see an order intake improvement already in Q2, which should then lead to an improvement of output and profitability, especially in the second half year 2026. Andreas Klauser: And here, just to add, as I mentioned earlier, that the German package is already somehow kicking in so that we see already an increase in orders because potentially our customers are expecting the infrastructure deals, which need to anyway happen. The same is that we got provided some orders from some major army as well in Europe. So this is something which is already slightly kicking in, but not yet to the full amount. And for the others, we are ready to deal with it. It's just to show you the potential and to show you that it's on our radar that we are not caught [indiscernible]. Elias New: Okay. Great. And so it's both ideally the U.S. and Europe that will be driving growth in 2026. So there's no reason to assume that the U.S. will remain kind of sluggish in '26? Felix Strohbichler: So we expect a certain growth from the U.S., but this is not the big driver. The big driver for 2026 from the base point of view is a recovery in Europe. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Andreas Klauser for any closing remarks. Andreas Klauser: Yes. Thank you very much for your attention as well, I think for all the questions which you provided. I think this has shown how interesting PALFINGER is and as well how clearly we can explain our performance. Stay well and see you soon. Thank you.
Unknown Attendee: Hi. Good afternoon, and good morning to everyone, depending where you are located. We are very proud here to be today to present our strategic plan to 2031. I'm joined today by our Chairman, Mr. Paolo Ciocca; Mr. Paolo Gallo, our CEO; Pier Lorenzo Dell’Orco, CEO of Italgas Reti and Gianfranco Amoroso that you all know, our CFO. I leave now the floor to the Chairman. Paolo Ciocca: So good morning and good afternoon, ladies and gentlemen, and thank you for attending today's presentation of Italgas 2025-2031 strategic plan. There are moments in our company's history when progress isn't just represented by financial or industrial results, but rather by recognition of its deepest identity. And by the way, Italgas' history is not at all a short one. This said by, as you well know, a young newcomer to the company. Italgas identity is the cornerstone around which the group has developed in recent years, the cornerstone of an exciting journey that has seen the group establish itself as a global benchmark for innovation, model transformation, anticipation of the future. Today, 1 year after the previous strategic plan, we can say that our future mapping worked out well and ahead of schedule. The group is further strengthened by its international leadership and has established itself also in terms of size as the leader in gas distribution in Europe. But it is not just a question of numbers. It is a question of vision and responsibility and the ability to drive energy transformation as enablers of decarbonization. Our commitment is clear. We want industrial innovation with energy transition. We create networks that don't just distribute energy, but also enable molecules to change their nature from fossil fuel to renewables, from natural gas to biomethane, hydrogen and synthetic methane. We believe in technological neutrality as a guiding principle. This means evaluating all available solutions, building a resilient, competitive energy system that is ready to meet the needs of family, businesses and institutions. In these recent years, we have demonstrated that the energy transition can be substantive, a substantive project. We have done so by extending and digitizing our networks, developing a market around the various areas, let's say, uses of hydrogen in the network and focusing on research and development. Our aim is to make things happen. The plan we are about to present to you today is at the heart of this new phase and outlines how we intend to remain true to our nature, continuously evolving, faithful that our vision of the future of energy and our values because Italgas is changing, growing and expanding, at the same time, it keeps its 188 years old distinction in Italy, a force that builds a real progress and generates value at the service of communities and territories. Now let's go to the [indiscernible] and let me welcome Paolo and its leadership team. Thank you. [Presentation] Paolo Gallo: Good afternoon, everyone, and good morning for the person that are connected from abroad. It is for me a great pleasure to be here to present this strategic plan that represent the first strategic plan after the acquisition of 2i Rete Gas. In this plan, we are setting a commitment that has never taken in the whole history of Italgas, a clear sign of confidence that we have for the future and the vision that we have for the future about our infrastructure. And we feel that today, we are going to share the vision with you, the investment, the technology and the people that will make this plan happen, shaping the energy of the future. But let me start with the where we stand today. One year ago, we announced the acquisition of 2i Rete Gas, the largest -- the second largest gas DSO in Italy. And we have created with such acquisition, the largest European DSO. As you can see, those are the numbers. We serve nearly 13 million customers in the gas distribution. We serve directly and indirectly 6.3 million customers in Italy and Greece. We manage nearly 160,000 kilometers of network. But moreover than that, we do all this activity, thanks to an incredible 6,400 employees that is the result of the combining of the 2 company. 7 months ago, we closed the deal, and now we wanted to show you the progress that we have made in such a short period of time. At the same time, we want to show you and share with you our vision for the next 7 years. Let's take -- show you about our strategic vision. We want to maintain our leadership in innovation, in technology, in digital transformation, maximizing the value for all our stakeholders. The vision is built around, as I said, innovation, AI transformation, energy transition and with a focus, a never-ending focus on operational efficiency. Three business area, you know very well that they are gas distribution in Italy and Greece, which remain in our core business. Water service, a sector where our digital capability that we can apply from our experience in gas distribution can make a difference. Energy efficiency that we feel it has been a little bit forgotten, but it's a key element for the energy transition, and we strongly believe on that. And on top of that, we think we can take a great advantage from unlocking all the possibilities and opportunities coming from the massive application of [ AI ] to our processes, our assets and our way in which we manage the company. But before going on, let me take for a few moments, a look at the past. I think the past 9 years at Italgas has been extremely exciting and successful. And I think it is worth spending a few words about what we have achieved, where we stand today and which is our ambition. We have invested up to the end of 2024, nearly EUR 7.5 billion growing the RAB up to EUR 10 billion before the acquisition of 2i Rete Gas. We delivered an impressive OpEx reduction, minus 40% since 2018. We distributed more than EUR 2 billion dividends to our shareholders. At the same time, we were able to maintain a solid financial structure. And we have done all of that reducing our carbon footprint, reducing our energy consumption. Then 2025 make the difference. We acquired the second largest DSO in Italy, and we become the first DSO in Europe. We were already the first DSO in terms of innovation and technology, not in terms of size. Now we cover also the size parts. And we achieved in Italy a market share of 55% -- now we are planning that is the ambition to invest in the next 7 years, EUR 16.5 billion, including the acquisition. That includes, of course, the acquisition of 2i Rete Gas. And we expect that our EBITDA and our EPS will grow at double-digit numbers, starting from 2024 based. And the financial structure, as Gianfranco will show you later, is very strong, very robust, and we start deleveraging already in 2028. But let me move more on the -- what we see the scenario of the gas for the future. I remember that in the industry, I was probably one of the first person to talk about the energy trilemma. And I remember that I was talking about that in London a few years ago during an interview that I had with Bloomberg. At the time, nobody were talking about the energy trilemma. Since then, as you can see from the trilemma today, something has changed, has shifted. After the Ukraine invasion, the focus was to guarantee the energy supply, security of supply was at the top. And since then, since 2022, I think the situation in Europe has significantly changed. Most of the country have been able to get rid of the Russian gas and be able to build a different supplier, different supply flow. Today, the focus has shifted to the cost of energy. And the cost of energy has become get the major attention of all the European countries, not only for industry because industry means competition, being able to compete at the world level, but also for the end customers, for the residential. And I think one of the solution is the use of the gas infrastructure. DSO is part, is the heart of the solution. And there is a growing recognition that the trilemma cannot be solved just using ideological position, but a more pragmatic, a more neutral approach from a technological point of view will bring the solution. It's not going to be easy. It's not going to be linear, but that's the only way in which we can solve a complex problem like the energy. And I think -- and we feel that the gas network bringing in the future, today in the future, renewable gases will help to solve the trilemma from a cost point of view and security point of view. Let me show you some numbers, very interesting one. The evolution of the energy price and the gas price in Italy before the Ukraine invasion and today. As you can see, the cost of energy, the gas in terms of euro per megawatt hour has gone back more or less, not yet, but it's not very far from the price that we had before the Ukrainian invasion. We cannot say the same for the electricity. Electricity price is 3x the gas price. And that makes even more difficult to think about electrification in certain sector. And if you couple that with the fact that we are going to see in the coming months and years, an increased demand of electricity, think about AI data-driven consumption, then will pose even more problem. The gap may even become bigger, not only, but if you think about what happened in Spain just before summer, more renewable you put in the system and you need to recover the rigidity that the renewable put in the energy system because renewable, it's production is not capacity. And in this context, gas will continue to be in different form, crucial to maintain an energy system stable, efficient, secure with a cost that is affordable by everybody. And we -- I brought you an example of the day-by-day life of the life of ourselves when we need to face certain decision to change, for example, a very traditional gas boiler for the heating system. And we made this comparison based on the number that you saw with no subsidies. That means that we are comparing apple with apple. 3 options: one that I consider probably the best effective one, very simple, high-efficiency boiler gas. The second one is heat pumps with limited modification of the heating system. The third one is probably the one that the ideological people will say that is the best solution. Heat pumps change all your heating system, put what is the underfloor coils, you will be happy. For 25 years, you will be happy because it will take 25 years to pay back the investments. What does it mean that by -- in 25 years, you will probably change everything. So you will never get there. And that is when you compare apple with apple with no subsidies. But there is the solution. And the solution part of the solution is let's go back to what the European Commission made it years ago after Ukraine's invasion that probably has been forgotten for a long time. That is the REPowerEU. They clearly identify 3 path in order to reduce the dependence on Russia and at the same time, to reduce also the cost. That is the development of biomethane, the development of hydrogen production and importation and the last one, increase the energy efficiency in our real estate activities in everything in our industry, everywhere. Why it has been forgotten? Because it's too difficult, again, -- that's the problem. But that is the solution because biomethane is something that is today available is competitive. Hydrogen, we will talk in a moment. And energy efficiency is the other area where there is a lack of interest, but it's -- again, it's one of the most effective tools that we have in order to reduce energy consumption and reduce our cost. If I look -- if I take a look at the same situation in Italy, what we can say is that biomethane is a very high potential area. Many studies and our evidence about connection request to show that we will have an increase of biomethane production as an average by 50% every single year through 2030. That will let us reaching the goal of 5 billion cubic meters of production that represent about 7% to 8% of the total demand of gas in Italy. And there are positive signal. One is the latest auction that was made about awarding the grants from our resilience recovery plant to upgrade the existing biogas into biomethane. Hydrogen. Hydrogen is let me say, a longer-term opportunity because of the cost. But I think we should continue to invest in research and development to research in the use of hydrogen. Our plant in Sardinia, Pier Lorenzo will talk to you about that. I around, it's a clear demonstration that we can build an ecosystem that is based on hydrogen. Is it competitive? Not yet, but still, there are very nice signal about that competition. Think about that the energy conversion into hydrogen is 55% in a small plant. So if you scale up the plant, you can even reach higher efficiency. And finally, the e-Methane that is for us and for Europe is probably the new frontier. For Japan, it's not. Japan is testing significantly e-Methane. See, e-Methane as the solution for gas supply in Japan. It's the combination of CO2 capture with hydrogen. So what I'm telling you with this example is that with a pragmatic approach, you find many solutions that can bring you security of supply, energy transition and cost of the energy altogether as a solution. And the fact that the gas will continue to be there today, fossil, tomorrow, renewable is also shown by this graph. After the shock in 2022, we have already seen some recovery in '24. And if I look at the first semester of '25 in respect of '24, we saw an increase in 6% -- and we have just closed the numbers at the end of September, and we look at what we injected in our network in respect of the previous year and the growth is still close to 6% also at the end of September '25. And as I said before, more electrification expands, more renewable in the picture and the more we need the molecule to compensate the rigidity of the electrification. But let me now move and give a quick outlook about the progress that we made on the 2i Rete Gas integration. You remember, I don't want to go through all the story about the different steps, but I wanted just to stay on the fact that 1st of July, we merged Italgas Reti with 2i Rete Gas. And I think that has been an incredible achievement, 90 days to complete that process. And then to complete the all 2i Rete Gas acquisition, we need to satisfy also the mandatory request by the antitrust. As you know, that has been recently closed, let me say, the agreement with the 4 buyers, the 600,000 redelivery point that were requested to be put on sale, we received 12 acceptable from a price floor point of view offers for a total of less than 250 redelivery point, which were considered also acceptable from the antitrust point of view in terms of requirement that the buyers should have. The process will involve the disposal of the delivery point together with the personnel, the systems and all the assets that are needed to operate this redelivery point, this network. The RAB value associated is EUR 218 million. The overall price that is paid will be paid is set at EUR 253 million, significant premium paid over the RAB. We expect the closing to be happened before the end of the first quarter of 2026. But of course, it will depend about also the buyer. Regarding what has not been sold, so the remaining 350,000 redelivery point, we don't have to do any second round of disposal on this redelivery point in this network will be applied the so-called soft remedies that will be applied when the tender process of the award of this asset will take place. So -- but let me say, I wanted to share with you another point that is we always said and I have already said at the beginning that we are -- that we are the best in our industry. But I wanted to bring you data facts to show you that our statement is true. So we made a comparison with our international peers. And we have looked at the different topics that for us makes the difference. So smart meters, we are close to 100%. If you look around Europe and worldwide, there is no one that is passing 50% of the installation. And the majority are below that number significantly. Network digitization, this is where the gap is huge. there is no one, no one that has made such an upgrade of the network. And when I say network digitized means that I can control remotely everything that I can manage the network remotely everything. Pier Lorenzo will tell you more in detail what does it mean that. And on top of that, we are going to implement the AI transformation in which we see some other example. But to me, to be extremely effective and to be able to adopt on a massive -- at a massive level AI, you need to have a network fully digitized and you need to have a collection of billions of data in order to be able to really leverage the application of AI. On the biomethane, that buys from country to country. We know that there are other countries that are better positioned than us. But I think Italy will recover this gap very soon. On the network ready for hydrogen. If I look at our plant in Sardinia, we can say that our network is 100% ready to accept 2% or 20% of hydrogen. In fact, we have a protocol with the Ministry of Industry and Energy to scale up the 2% that is the minimum up to 20%. If I look at the average of the network in Italy, then we can say that 80% is ready for 20% blending. But I also can say that by the end of the plan, we will have 100% of our network ready for a blending of hydrogen up to 20%. Let me go through some more significant progress we have made in the months since the acquisition of 2i Rete Gas very quickly, but I think extremely representative of our ability to make things happen. On the operational point of view, we have fully reorganized our territorial footprint, redesigning our territorial model, reducing the area of overlapping. At the same time, we have closed 19 office. We have reduced our fleet car by 13%, thanks to the to the synergy that we are starting to extract. The core of the activity has been the IT. We moved 1 petabyte of data, 1 petabyte of data. I don't know how many 0 they have it. So forgive me for that, in 90 days with no problem at all. And I think that makes -- that show our -- let me say, the strength of our IT infrastructure in dealing with such a large number. We have started in-sourcing activity, and I start mentioning Picarro. We have the largest fleet in the world of Picarro machines. We know how to manage, we know how to drive them, we know how to use them. We immediately stopped the third-party contract that 2i Rete Gas had, and we immediately start in sourcing that as well as we started to in-source activity like the integrated supervision center and other ones with a termination of a number of contracts with third party. And finally, we started to implement the digitization plan that we have for 2i Rete Gas. But let me start now to look at the numbers because I think you are here also not only to listen my and our vision, but also to see the numbers. And I'm starting from the ones that you like most, synergies in cost and revenues. So I'm starting from the synergies from revenues. From April, when we closed the acquisition, we had several working groups working together between Italgas and 2i Rete Gas, Ex-Ri-Rete Gas people in order to find out the area of synergies and to find out the area where we have to invest in order to upgrade the network to the level that we have in Italgas. And we find out that there are more investment that we expected that we presented to you last year, EUR 800 million. And we find out that there are more up to EUR 900 million. At the same time, the revenue contribution from this additional investment moved from EUR 80 million to EUR 100 million at the end of the plan. Just to mention some of the initiatives that are included in this EUR 900 million investment replacement, we find out that there are still some traditional meters in 2i Rete Gas network that are not be replaced. So that is the first thing that we started. We will finish by early 2026. But then we find out all the area where we need to upgrade, not only upgrade the single equipment, but also changing, for example, the authorization system to our standard. And based on that, we have a clear and detailed digitization plan that has already started and will deliver the EUR 900 million additional investment and the EUR 100 million additional revenue. But probably the most interesting one for you are the cost of synergy that you have already seen in our plan. And I want to remind you that last year, some of you, I don't know if many of you or a few of you were very skeptical about our ability to reach the EUR 200 million. We raised the bar. Now we are at EUR 250 million. And I think our history and our track record makes this number credible. And how we find out this EUR 250 million over time, because, as I said, the working groups have been working for months, identifying which are the areas that we can improve, where we can extract value, when we can have synergies and we have a detailed plan for each of the activities. So we know also in terms of time frame when this synergy will happen. And you can see in this graph, the previous plan in terms of time, in terms of value and the new plan in terms of time, in terms of value. So the upgrade was driven by a shift from an outside in to an inside in perspective. And it clearly reflects an optimized. There are a lot of activity that will be in-sourced -- with our ambition to avoid any redundancy, there will be no redundancy in our plan. There is no redundancy in our plan, but we will maximize in-sourcing, bringing inside the company what we feel are the core activity of the company and with the ambition to retain our top talent. We -- if you remember, last year, we were talking about 3 pillars of synergies, traditional digital and AI. Well, during the activity of the working group, we realized that the first 2 pillars sometimes are crossing one to each other. So now you will see only 2 pillars, traditional and digital and AI. And I promise to you that I will show you the time frame of the 2 categories, and I will show you and give you an example of what we are doing and what we will do. So the first one represent traditional and digital. If you remember, the sum of the 2 last year were in the range of EUR 120 million, EUR 140 million. We gave you the range. Now we are EUR 180 million. So the delta in the EUR 50 million that we are talking about are concentrated in this area. The cost saving benefits related to such initiative will be fully visible already in 2025, some of them, a few of them, still they will be visible. And you have already noticed in the 9 months result that there are some cost savings that are coming from the synergies from the acquisition of 2i Rete Gas. In '26 and '29, we will continue in-sourcing core activity. That is the main driver, including some example, authorization measurement, metrology inspection, emergency response service, those are core activity that we cannot leave to a third party. And we will use digitization and AI to work on an approach that is applying the predictive maintenance. Supplier will be part of this effort. Supplier base will be rationalized. We want our supplier to grow because we are a different company in terms of size with respect to the past, and we want to improve from a quality and economic point of view, the procurement condition. This initiative combined together will let us achieving the majority of the EUR 180 million by 2028. And then in the last 3 years, we will see a massive rollout of our Nimbus smart meter, and we will complete the digitization of 2i Rete Gas network. Regarding the AI, AI is a little bit more difficult in a sense that is from one side, the most exciting journey. From the other side is less predictable because we don't have any example, especially in our industry. The numbers today is set at EUR 70 million and does not include any additional initiatives that may arise in the future, but have not been yet identified. We have tried to list for you some of the initiatives, some of the use case that we have already been working, we have been identified use case that we have identified for which we have started working on that. These initiatives are expected to deliver most of the anticipated benefit over the next few years. Some examples, you can read it, AI-driven automatic scheduling algorithm, which allows to improve planning optimization, increase intervention sussection rate, taking into account external factor. We have already developed, I have already mentioned to you a couple of times, a predictive algorithm for faulty smart meters that is capable to anticipate by a few days. The occurrence of faults, optimizing our intervention and reducing the penalty risk. We have also identified AI opportunities also in the same IT. For example, we are implementing the first level end user support agentic automation for the IT system and application, very difficult to explain. So don't ask me what is exactly meaning. But what I can tell you that these initiatives application has been recently awarded by Databricks that is a leading platform for data engineering. We will use agentic AI also in the commercial activities in order to manage requests and claims reducing external cost and increasing our productivity. To do all that, we have set up AI rooms. So you know that we have a digital factory. Well, now the digital factory is split into 50% is always devoted to develop digital application. The remaining 50% is devoted to develop AI application, AI algorithms. So we are going to have not only digital rooms, but also AI rooms. That is what we have already planned and that is covering the portion of the synergy that is evidenced that are underlying in this chart. For the remaining, so we are talking on a medium, long term, there are a number of use cases that we have already identified that will be approach later in the plan that regard virtual coach for productivity enhancement, basic drafting, so we'll touch the engineering activities, autonomous network management, smart meter activation, remote smart meter activation. And finally, to use the autonomous driving for leak detection. In that case, we need to have a policy approval, but I can tell you that we have already started working with the Politecnico the University, Politecnico di Milano and di Torino in order to have the first prototype of autonomous driving for gas leakage research next year. It is important to highlight that this transformation will be also an opportunity for our personnel to change their skills to reskill and upskill and move from low added value activity to, let me call it, AI governance that is much more interesting than not doing the low value-added activity. Now I will move in the numbers. I have already anticipated the total investment for the plan period, including the acquisition already done of 2i Rete Gas is EUR 16.5 billion, plus 5.7%. If we take out -- if we exclude the acquisition of 2i Rete Gas and the tenders, the increase is 10%, more than 10%. In order to facilitate the comparison, we have reclassified -- last year plan, you remember that to avoid to share publicly what was our expectation about antitrust disposal, we merged the 2 numbers together, tenders and disposal. So now we took out the disposal. So now the tenders that you see are the gross tender or gross tender are the tenders in order to facilitate the comparison. And you can see that the 2 numbers of 2i are different, are higher in this plan, not because we pay more, but in fact, the reality is that we pay less than expected, but we retain more assets than not the one requested by the antitrust. So the EUR 4.8 billion, EUR 4.9 billion that is the explanation. Regarding the other area, the driver and Pier Lorenzo will tell you in a moment, is the gas distribution in Italy, an increase of EUR 1 billion. Greece remains stable in terms of EUR 1 billion investment as well as the other 2 activities, water and energy efficiency. Finally, the tenders, 1 year has passed and 1 year has been, let me say, another year of delay. That's normal. I mean that is common to the last 10 plans that we presented to you. So nothing new. And that is the reason why we reduced the number from EUR 1.7 billion to EUR 1.5 billion. That number accounts for less than 10% of the overall investment. If we look at different perspective, that is also interesting, I would like to ask your attention on the right part of the slide, it's interesting to look about the different areas. Largest amount of investment is allocated roughly for 40% of the total on network development and upgrade of the network in Italy and Greece, nearly 20%, 19% of digitization and AI. I would like to ask you if you know any other gas DSO that is investing such significant amount of money in digital and AI. And finally, Water and ESCo accounts for 5%, while tenders account for 9%. Trying again to give you a full picture of our investment plan. Our effort is focused on 3 main pillars. As we said before, network development upgrade and maintenance. We are leveraging our scale. We are leveraging our skill in order to move to a predictive maintenance that is driving and will drive our CapEx plan to improve reliability and performance of the network. The second pillar is asset digitization. We need to bring the 2i Rete Gas at the same level of our network as well as AI transformation. That is where we have the bigger difference from our competitors. There is where we have the big expertise in terms of network automation, in terms of digital transformation and in the coming years in terms of the AI application. The third pillar referred to the other initiative, water and energy efficiency. Here, we think that extending all the innovation that we have brought to the gas distribution into water and energy efficiency will make the difference. We'll make the difference because on the water sector, we will see significant reduction of leaks as well as gas, but gas is already very low. And then we will enhance infrastructure resilience in gas and water. We will improve operational efficiency. You have already seen some results, reducing energy consumption and dispatching green gases. These are the things that are taking together all these activities. But now I will go into more details, and I will leave the floor to Pier Lorenzo, who will talk to you about gas distribution in Italy and Greece, please. Pier Lorenzo: Thank you, Paolo. I'm really excited to be today on this stage to present the investment plan on gas distribution in Italy and Greece of Italgas, which is the largest in our long history. And let's start with the biggest chunk of the plan, which is dedicated to our core network investments in Italy and in Greece. It accounts for EUR 7.7 billion, and we will develop the plan along 3 lines. starting from repurposing of the grids, basically by replacement of older assets driven by predictive maintenance and active leak search through our cutting-edge technology, Picarro, which you already know. But on top of that, we will invest on grid development and extension basically to execute the commitments that we have undertaken as a result of the already awarded tenders and in Greece for the extension of the existing grid, driven by the requests for new connections. Furthermore, we plan to invest more on top of that as a result of the awarding of new tenders. And last but not least, we will invest on the infrastructure enhancement with several initiatives ranging from the installation of small-scale LNG plants in Sardinia and again in Greece, development with -- of reverse flow plants, innovative reverse flow plants, which will help us debottlenecking the existing grid to promote biomethane connections and power-to-gas pilot project plant, which has been already put in operation just a few weeks ago. Let's deep dive into the investments that we are planning in Italy, the organic investments dedicated to network. So these investments accounts for EUR 5.4 billion, and they include network development and centralized investment. They do not include new tenders. Amongst others, we will invest to execute the commitments that we have undertaken as a result of the 8 items that we have already been awarded all across Italy, plus 2 additional items tenders that we expect to be awarded in a very short period of time. This piece of plan accounts for about EUR 1 billion, and it underpins about 2,000 kilometers of networks in terms of both extensions, new networks and repurposing of existing networks. Along with that, we will invest -- continue to invest in Sardinia, where we have completed 100% of the network, more than 1,000 kilometers. We will invest basically to convert the large cities of the region, namely Oristano, Sassari, Cagliari and Nuoro by 2026. We will do that by deploying against small-scale LNG plants where the cities cannot be connected directly to a methane pipeline. Moving to the tenders. As of today, in Italy, all in all, we can record 11 officially awarded tenders -- and there is still a long road to do to the end of this process. We have still 166 tenders to go. So this year, as always, we have reviewed the schedule of the tender based on the actual progress status of the process. We believe strongly that the tenders represent a great opportunity for Italgas to further consolidate the markets. We can leverage on our current features to be best positioned to win the tenders. We have a strong track record. We have recorded 8 wins out of 11 tenders, but I should say out of 9 tenders because we took part to 9 tenders out of the 11. So the track record is really very successful. And all in all, with this plan, we are devoting EUR 1.5 billion to the new tenders, which will result in an increase in delivery points that we project to step up to EUR 2 million by the end of the plan horizon. Moving to Greece. As Paolo anticipated, we're basically confirming EUR 1 billion of investments. In this area, the investment will be dedicated primarily to the extension of the network driven by the request for new connections. This will result in the realization of 2,500 kilometers of new networks with an increase in terms of RAB up to EUR 1.3 billion by the end of the plan horizon. And in parallel, a sharp increase in terms of number of users, stepping up from more than 600,000 to nearly 1 million redelivery points by the end of the plan with a CAGR of plus 6.5%. Let's talk about green gases. We confirm our full commitment in promoting green gases and in particularly biomethane and hydrogen. Concerning biomethane, we can record as of today, 11 connections of biomethane plants to our networks. We had only just 3 years ago. So this is a sharp increase. But what's more, we have more than 38 new projects of connections under development. What's more, we have installed 3 reverse flow plants. This is a very innovative type of plants, which is vital to debottleneck the local distribution grids in order to promote the full injection of biomethane into the grids. So all in all, we are projecting by the end of 2030 to increase the production capacity of biomethane injected into Italgas grids up to 1.2 billion cubic meters per year. Talking about hydrogen. We have inaugurated just a few weeks ago, the hydrogen hyround project. This is a very innovative project, basically a power-to-gas hydrogen plant. It is in Sardinia, near Calgary, and it stands out as of today due to its very high efficiency, 55%. But what's more, it is really a showcase of the entire supply chain of hydrogen, starting from the production of real green hydrogen from a photovoltaic plant nearby, which produces the electricity needed to generate the hydrogen. Then we have storage. And then we have the demonstration of various end users of the hydrogen. We have a refueling station for vehicles over there. We have a pipeline for direct connection to a nearby industrial site. And the most distinctive feature, we are blending the hydrogen together with natural gas to feed the local gas distribution network of the city of H2. And we plan in the next 12 months to increase the percentage of blending starting from the current 2% of hydrogen up to 20% of hydrogen. This will make hyround project a unique site all over Europe. Let's move to digitization. We have dedicated in this plan EUR 3.1 billion of investment in Italy and in Greece. We will develop the investment addressing basically 3 clusters of initiatives. First of all, we are going to digitize all the assets that we have acquired from 2i Rete Gas, so that these assets will be completely controlled and monitored remotely by DANA from our control rooms in Turin and Florence. Second cluster, we are going to deploy our brand-new smart meter, Nimbus in Italy. We have validated the project. We have patented that meter. It is patented in Italy, in Eurasia, and we have a patent pending in Europe. The meters has confirmed to have superior performances compared to all the smart meters presently available on the market. So we have decided to massively roll out the meters in Italy and in Greece. And the third cluster will concern AI transformation and IT infrastructure upgrade in order to develop AI-driven new algorithms. Talking about digitization in Italy. This has become basically a trademark for Italgas. We are dedicating this plan EUR 2.9 billion in order to complete the digitization of all the assets that we have acquired from 2i Rete Gas. It's quite a large portfolio of assets. I recall that 2i Rete Gas has brought to us more than 1,200 City Gates, 12,000 district governors, more than 70,000 kilometers of networks, and we have to digitize all the bunch of pieces of equipment in a very short period of time. So we have envisaged a step-by-step approach. The first step will come to completion by the end of 2027. We will fully digitize the 1,200 City Gates so that the entire network will be remotely controlled by DANA from our control rooms in Turin and Florence in Italy. In parallel, we will digitize the 12,000 district governors, which are basically smaller plants. so that by the end of the plan horizon 2013, we will have completely digitized the entire asset portfolio of former 2i Rete Gas. AI. Let me first recall what we have done so far. We started in 2017 with a visionary approach to digitize our operation and our assets. We set up a digital factory at our headquarters in Milano. And I think that we have been very successful. Over the period of time, 2017, 2024, we have deployed more than 50 innovative digital solutions. We have reviewed more than 300 processes. But what's more, we have involved a huge amount of our employees -- and this makes the digital factory and the digital approach a change management project, more than 750 people involved in the last 18 months only. So now we have to face the second stage, the second phase starting from this year to the end of this plan, which will be focused on AI transformation. And Paolo has mentioned some of the first projects that we are already executing. So for sure, we will address data quality. We will develop algorithms in order to achieve operational excellence, and we will improve in general, our operational skills. We will evolve the digital factory from digital rooms to AI rooms in order to design all the AI stuff that is needed for this transformation. DANA will evolve, will change, will transform from a basic software for remote control and command of the network to a real platform for AI-enabled automation. And as I've mentioned before, we have already 100% of our network legacy 2i Gas Rete fully controlled by DANA. By the end of 2027, we will extend this control capability to the new grids, the new assets acquired from the former 2i Rete Gas. And meantime, we will deploy DANA by the end of 2026 also in Greece, so that DANA will cover the entire portfolio of assets of the group. The other important cluster of investment concerns metering. As I said, in this plan, we are planning a massive deployment of our Nimbus meter in Italy, primarily in order to address the replacement of the first generation of smart meters, which are based on GPRS technology or 2.5G. This technology will soon come to obsolescence. So we have decided to massive replace these meters with the Nimbus. In parallel, we will do the same thing in Greece, where the installation is driven by the need of replacing traditional meters, not even smart meters. And on top of that, the new connection, the new users, which will be driven by the extension of the grid that I already mentioned. Let me conclude my presentation by confirming here our full commitment to reach the challenging targets in terms of reduction in net energy consumption and green gas emissions -- greenhouse gas emissions, sorry. We have reviewed these targets on the basis of the successful performances that we have recorded so far. We are ahead of our original schedule, together with the extension of perimeter resulting from the recent acquisition of 2i Rete Gas. So in this plan, we're setting these new targets. In terms of reduction of net energy consumption, we aim at reaching a target of minus 35% by the end of 2030 compared to the baseline of 2020 and minus 11% compared to the baseline of 2024. We will do that progressing with the project initiatives that we have already undertaken on our legacy networks and will extend to the former 2i Rete Gas networks. So energy efficiency projects for industrial consumption and for civil consumptions, optimized fleet -- car fleet management and also a reduction of the uses of cars driven by AI. Concerning emissions, we are setting new targets on Scope 1 and 2. The new targets are a reduction of minus 55% by the end of 2030 compared to the baseline of 2020 and minus 26% compared to the baseline of 2024. We will do that with our innovative technology of Picarro for gas leak detection with smart maintenance and also with the energy efficiency initiatives that reduces energy consumption, but as a byproduct reduces also emissions to the atmosphere. These targets are in full alignment with the 1.5-degree Celsius scenario of the Paris Agreement, and we will target net zero by 2050. Scope 3 emission, again, -- we are confirming our commitment towards achieving the target in terms of reduction of minus 24% by 2030 compared to the baseline of 2024. This, of course, we will achieve by tight collaboration with our partners, vendors and suppliers. So thank you very much, and I give the floor back to Paolo for Water and ESCo. Paolo Gallo: Before getting into the numbers before giving the floor to Gianfranco, I would like just to spend a few words regarding the other 2 activities that we have in the group that are water distribution and energy efficiency. As I said before, our approach is whatever we have developed in the gas distribution, we are going to apply, especially in the water side, but also we are using in a mutual support, the energy efficiency as energy efficiency company is testing the solution to us. We are providing them ideas about innovation and then the tested solution will be put on the market. So that is the -- what is behind the link between gas distribution, water distribution and energy efficiency. On top of that, on the water, Pier Lorenzo described DANA. We will have very soon a DANA for water exactly the same as long as we will have digitized the network, we will be able to manage the network, the water distribution network remotely similar to what we are doing on the gas distribution. On the water, we will carry out large-scale replacement of all pipelines in order to reduce together with the digitization, also the water leakages. In the energy efficiency, there has been a change in respect to the previous plan. We have less M&A. We find that was not the best way to grow the business. We are moving to let me say, traditional between brackets because it's not really traditional EPC business development. So it's going to be organic development. We will have -- we will see in the numbers, less revenues, higher profitability. We are going to apply in that case, I'm saying it traditional, but it's not really traditional. We are going to apply advanced technical solution, innovative solution in order to manage and to keep the customer loyal to us. And always remember that energy efficiency is also helping us in order to reduce and to achieve the targets that Lorenzo has described before. Give you a few examples about the water, what we are doing. Since the acquisition, we have managed the company independently of the consolidation perimeter. So we manage the company being the industrial partner. And we are committed over the plan period to invest EUR 450 million. [indiscernible] EUR 450 million is what we consolidate in our numbers. If you look at the overall numbers, independently of the consolidation, the number looks bigger, it's EUR 800 million. That includes network replacement, extension, completing the development of infrastructure to increase water availability. We show you in the picture the desalinization plant that we have already built in Sicily to improve the availability of water. And on the other side, Ventotene Water Treatment Plant that has been also done. You probably know the Ventotene Island was a way to increase the quality of the water. Of course, we use a lot of funds, local and the national resilience recovery fund in order to accelerate what we feel it is essential to transform the water distribution in a better service for the customers. The plan is very -- the plan is written in this presentation. You see that our goal is to digitize the water distribution. There are a difference between the first 2 company and the second one because the first 2 are distributing up to the final customer. The other 2 are just transportation. But apart from that, the approach is exactly the same. We want to fully control the network remotely, and we want in that way to reduce significantly the water losses. The numbers of the sector, investing EUR 450 million will bring the RAB at the end of the plan over EUR 300 million. Revenue will be EUR 220 million higher than the previous plan as well as the EBITDA that will pass the EUR 100 million. That is the numbers. But to me, more -- even more important are the other objective that is the leak reduction. We want to bring down significantly the leakages of water to a number that is well below the average -- the Italian average, either in distribution and transportation. We can do that only if we digitize the network, only if we replace the older pipelines. And this objective can be reached only if we are going to invest the numbers that I mentioned before. In the meantime, energy efficiency, our company, ESCo, will work to support this company to reduce the energy consumption. 33% is our goal by 2030, even though we have experienced in 2024, a significant increase in the energy consumption due to the drought that we had not only in Sicily, but also in other parts of Italy. As well, we want to reduce by 33% Scope 1 and 2 with always the same target to get to 2050 with a net zero carbon footprint. Finally, on energy efficiency. as I told you at the beginning, was one of the 3 pillars designed by the European Commission in the REPowerEU to reduce the energy consumption, to get rid of the Russian supply energy to diversify the energy supply. That was a pillar that has been forgotten very soon. Why? As I told you, it's difficult, but it's fundamental to reach the energy transition goal. And our strategy is to offer to the 3 segments that you see, residential, industrial and public administration, innovative solution, digitized solution because that's the only way in which we can reach the targets set by the REPowerEU or in any case, set by the energy transition. We are going to invest nearly EUR 400 million, EUR 340 million throughout the plan period, mainly on the EPC contract development with limited amount of M&A contribution to growth. That means slower revenue growth, but higher profitability. As I said, our focus is on residential and industrial segment as well as public administration. With that effort, we will reach a total revenue by the end of the plan and EUR 260 million with a margin that will be 20% of EBITDA with an EBITDA margin of 20% -- if you have look at the numbers in the first 9 months, we are already there, I mean, very close, 19%. And we will continue to be there. We don't want to have -- we don't want to offer low-value solution. Our solution will be high value, innovative from a technology point of view and digitized. Now I leave the floor to Gianfranco for the conclusion of the presentation with the numbers. Gianfranco Amoroso: Good afternoon, everybody. I will -- thank you, Paolo. I will give you a quick overview over the 9-month results of this year. And immediately after, we will have another deep dive into the financial performance of the strategic plan. So let's start with this picture. I like it very much because it's very clear. is a clear demonstration of growth. Basically all the KPI of the profit and loss accounts are in the same direction. The direction is a clear growth. Italian gas distribution is the main contributor to these results made of different elements. There is the recovery of previous gap, of course, as you know very well since the first half. So the recovery of the deflator, the recovery of the OpEx recognizing the tariff by the new provision issued by the regulator. And all this, of course, together with the contribution of 2i Rete Gas consolidated starting from the 1st of April, more than offset the impact -- the negative impact of the WACC, the 60 bps this year compared to last year. In the meanwhile, in parallel Water, Greece and ESCo are continuing their trajectory positively contributing to the performance. And most importantly, as we will comment a few later after, there is a gaining momentum on the efficiencies. So benefiting of the first contribution of the initial synergies that we are implementing in this first 6 months. So basically, the EBIT marks a growth of more than 50%, 53.8%, notwithstanding the negative impact of the PPA, we made the preliminary allocation of the PPA starting from 1st of April, and this accounts for around EUR 10 million in this 6-month period. Cash flow generation is massive. We exceeded EUR 1 billion, of course, a record high for this period of time in the year and will cover -- is able to cover all the technical CapEx and part of the dividend, of course. CapEx, we will comment briefly after accounted for EUR 773 million, growing 40%, 40.7% compared to last year. And net debt, of course, increased reaching EUR 10.9 billion, of course, impacted by the acquisition. So the price paid, the debt assumed through the consolidation of the company, net of the proceed of the capital increase successfully executed in June. So all these elements will support an improving of the guidance for 2025 that I will comment later on talking about the strategic plan. I will -- sorry, I will go directly to the performance. So revenues and operating costs. So the most important thing that I want to remark here is the new element that you see on the right side of the slide, that is the minus 3.5% on a like-for-like basis in the efficiencies. This is the result of the first activities, the starting of the activities that we started last April. And this made of all the action that Paolo and Lorenzo explained before. The number attached to this potential is EUR 14.6 million that is already, let's say, an indicator of the progression of the total number that we had commented before. Going back for a while to the total revenues. I mean, the -- as you can see, the main contributor is 2i Rete Gas, of course, due to the consolidation. There is also the positive contribution in terms of RAB growth made by both the Italian gas distribution and the Greek distribution and also the impact of the resolution of ARERA that I commented before. The negative is, of course, the negative impact of the WACC accounting for about EUR 38.7 million, while on the -- over the EUR 42.7 million water and ESCo, ESCo contributed approximately EUR 426 million. So if you go to the following slide, we can see the performance in terms of adjusted EBITDA, a robust profitability, benefiting from the updated perimeters of the consolidation and also the action for the reduction of the cost. EBITDA growth compared to the last year of about 35.6%. Distribution was usually the main contributor to this performance with a positive of EUR 347 million, while Water and ESCo contributed also with EUR 12.6 million. In terms of EBIT, very short comment apart from the, let's say, contribution of the EBITDA, there is, of course, the change in the D&A that is negative. This, of course, is the impact of the consolidation of 2i Rete Gas, the CapEx executed in the last quarter and let's say, that more than offset the positive contribution due to the, let's say, termination of the Rome concession last year. In terms of net profit in the following page, of course, the growth, as we have seen is double digit in terms of net profit adjusted, up to 36.8% versus last year. Of course, there is the impact of 2i Rete Gas acquisition in terms of positive contribution of EUR 274 million, while on the negative expected impact of the financial charges due to the increase in the debt linked to the acquisition, the bridge financing, the bond that we issued in February, the interest on the debt consolidated through the acquisition of 2i Rete Gas. And the total impact of all of that is around EUR 77 million, as you can see. On the taxable income and tax rate, you see that there is a negative of EUR 58 million. This is due to the increase in the EBIT -- total that has driven the tax rate to 28.1%, a slight increase from the 27.6% of last year. So if we move to the technical investments briefly, as I commented, the total amount of CapEx in the period has been of EUR 773 million, up to 40.7% compared to last year. I would underline a couple of things. The first is more than 600 kilometers of new network pipes execute deployed during the period, of which 360 in Greece. And the starting of the activity, the preparation works for the upgrade and the digitization plan of the perimeter of 2i Rete Gas. Now on the cash flow. As I said, the remarkable number is the EUR 1 billion of operational cash flow. There is -- these results very positive as, let's say, more than offset the slightly negative impact of the net working capital, about EUR 22 million that is, let's say, typical for this period of the year due to the billing seasonality. And then, of course, this more than EUR 1 billion of operating cash flow has fully covered the CapEx executed in the period of EUR 827 million and has also covered part of the dividend paid in May of EUR 350 million. So all of that results, of course, in a variation of net debt that is impacted by the acquisition for, let's say, the debt and the price paid for the acquisition of 2i Rete Gas. So I think now we can move forward to the plan, back to the plan in order to comment the financial of the strategic plan. First, let me comment on that, let's say, broad picture. Our plan has the target to deliver a 10% EPS growth that has been, let's say, made possible by a disciplined capital allocation between the different components of our CapEx plan, an improvement in the level of efficiencies. And all this, of course, make the shareholders benefiting through the dividend policy that we will comment later on. So the 3 pillars are investment plan, of course, upgraded and increased by more than 5%, 5.7% compared to previous year, out of which the technical component reached EUR 10 billion compared to the EUR 9.1 billion of the previous plan. Second, very important, already commented and discussed the operational efficiency and extra revenues coming from the investments. that have been improved by more or less 25% compared to last year. Finally, but very important, the strength of our balance sheet. This is, let's say, supported by an increase in the level of operational cash flow aggregated for the whole life of the plan of more than 7%. Of course, this has made possible the full coverage of the technical investment done during the period, the payment of all the dividend. And of course, as usual, there is headroom for tenders and potential M&A activities. So this is not to be commented because we discussed at length, but help me to explain this one, so the development of the RAB. The development of RAB as usual, let's say, clarified with tender and without tender. If you look at the figure overall, including the tender, we are moving from EUR 10.2 billion reported '24 to a level of EUR 20.3 billion, of which 90% is gas -- Italgas distribution in Italy. If we exclude from the tenders from the numbers, the overall RAB is expected to reach EUR 18.9 billion with an average CAGR of 9.2%. Of course, tenders will contribute to EUR 1.4 billion additional RAB to the figures that I just commented of EUR 18.9 billion. The increase of RAB compared to last year plan is upgraded. If you look at the RAB, if you remember the level of the RAB in 2030 or last year plan, there is a difference with the lending number of 2031 of around EUR 1 billion. This is, of course, due to the increased level of CapEx of this plan and also there is also the impact of the deflator that we have already explained. Talking on the right side of the redelivery point, also in this situation, we can consider the number including the tenders, and we have a CAGR on the plan of 10.1%. If you exclude the tender, the number is 7.8%. Talking about profitability, we have seen increased level of investment, capital allocation, increase of RAB revenues drive to an increase of EBITDA. The rate of a CAGR of EBITDA is more than 12% higher than the RAB CAGR, meaning that we have also the possibility to have an extra growth due to the extra activities and investments that we are planning into the plan and also the efficiencies. We have done, let's say, a segmentation in order to give you the starting point of EUR 1.35 billion, the intermidpoint that will be the guidance for '25 of EUR 1.87 billion. And then the landing point at the end of EUR 3 billion of the EBITDA. Of course, most of this -- the large part of this increase is linked to the inclusion of 2i Rete Gas as expected. Another important portion is linked to synergies, efficiencies and AI. And then we have the contribution of the tender, of course. Let me say that out of the EUR 3 billion at the end of the plan, the gas distribution of the -- Italian gas distribution will have 80% of, let's say, contribution to that number, 6% will be the contribution of Greece, while ESCo, Water and other will account for 6%, same number, 8% the tenders. On the right side, you have the evolution and the trajectory of the OpEx cost basis in, let's say, as a starting point, we have here the 2024 on the '23 that we have commented before. Of course, you see the increase due to the consolidation of 2i Rete Gas, cost linked to the tenders and the synergy and efficiencies that, let's say, contributed to the reduction arriving to the level of 2031. All that allow us to make a projection of the EPS jointly with the financial charges that we will comment soon. So the EBITDA expansion, financial discipline, driving a double-digit growth of 10% throughout the plan. We start from a level of EPS adjusted for IAS 33 of EUR 0.59 in 2024. And approaching the end of the plan, there is also a very important year, the 2029 year in which the net income will exceed EUR 1 billion. So it is considered a very important achievement, of course. All that is, say, possible also due to the financial strength of the balance sheet, the third pillar. And this is the clear evidence of that. If you look on the left side, you have the maturity profile of our debt, very well spread all over the years of the business plan. Our financial strategy is focused on, of course, maintaining a solid liquidity buffer, have a mix of fixed and floating rate around 70% and 30% and increase the duration through the issuance of the new bonds in the plan. The strong, let's say, the improved cash generation profile allowed us to achieve in the plan the level set and agreed with the rating agencies 1 year earlier than projected last year in the plan. So we are now able to meet the 65% threshold not in '28 in '27. This is a clear situation of deleverage that allow us to have financial flexibility in our plan. You see on the right, the evolution of the credit ratios, net debt over RAB will end at the end of 2031 more or less at 60%, but clear deleverage starting from now. And also the funds from operation over net debt has a very positive and incremental trajectory. The result of this strategy is a cost of debt that, of course, will evolve during the year due to the refinancing of the maturities of older bonds, but we remain well below 3% throughout the plan. So finally, let me recap and give you the guidance. For the current year '25, supported by the result of the third quarter, we are improving our guidance with adjusted revenues of EUR 2.5 billion versus previous EUR 2.45 billion, adjusted EBITDA of EUR 1.87 billion versus a range that we gave of EUR 1.85 billion, adjusted EBIT of EUR 1.19 billion versus previous range of EUR 1.12 billion, EUR 1.16, while we are confirming our expectation in terms of technical CapEx around EUR 1.2 billion and net debt, excluding IFRS 16, around EUR 10.8 billion. Jumping to the final year of the plan 2031, including tenders, we are projecting revenues of approximately EUR 3.8 billion above the previous plan of EUR 3.6 at the year before 2030. EBITDA of EUR 3 billion above the previous 2030 level of EUR 2.8 billion, EBIT of EUR 2 billion above the last year plan of EUR 1.8 billion in 2030. The intermediate year 2029 will have revenues for EUR 3.4 billion, EBITDA of EUR 2.7 billion and EBIT of EUR 1.8 billion. RAB will surpass EUR 20 billion, EUR 20.3 billion versus EUR 19.2 billion of the previous plan ending in 2030. The leverage, as discussed, is improving and will end, as I said, at 60% at the end of 2031. Now I give back the floor to Paolo for the dividend policy. Paolo Gallo: Thank you. I'm going to the end. The last but not least, the dividend policy. And I'm closing that. I will leave just final remarks on slide, and then I will open the floor for questions. Let me say that has been approved yesterday by our Board of Directors, and we decided based on the results of the 9 months based on the plan that we have approved to extend the dividend policy up to 2028, maintaining the same payout ratio, 65% on adjusted EPS. And we have just changed the floor -- so instead of starting from 2023, we started from -- we use 2024 DPS as a reference point and with an increase of 5% per annum. It's not insignificant. Anna Maria will tell me that the number is not 5%, but I disagree with her, but that I will mention also Anna Maria point of view. I think it's not insignificant because not only we extend the dividend policy by 2 years, but we significantly increased the reference point. But I also would like to remind you that in the past year, we have never, never used the floor. So our result has been always above the floor and the increase provided by the floor. According to Anna Maria and probably IAS33 for which don't ask me what it is, adjustment, the increase is not -- the increase expected -- the minimum increase expected in 2025 is not 5%, but is 11.7%. You know that you know better than me IAS 33, but still, I'm very basic person. So I'm saying I want to guarantee an increase of 5% over the last dividend that we paid this year over 2024 result. That's the end of the presentation. Thank you for your patience. It has been quite long, but we are here for -- to answer to any question you may have. Maybe not all of them, but some of them, yes. Thank you. Unknown Attendee: So thank you to everyone. [Operator Instructions] James for a long time. So we start from the back there, James Brand. James, if you can stand up and... James Brand: It's James Brown from Deutsche Bank. I wanted to just, obviously, a very impressive plan and a lot of synergies and cost efficiencies that you're delivering. I just wanted to ask what you're assuming in terms of any potential regulatory clawback at some point? Because as I understand it, there's a cost review that will be coming in 2027 for 2028. And there's also this whole debate about do we switch to like a TOTEX system, but nobody seems to know exactly what that will mean at the moment. So I was just wondering, I guess, what you've assumed in your plan? And perhaps it's impossible to know, but maybe you could just talk us through a little bit how you think about the risk of getting some of the cost efficiencies claw back from you and how you think about TOTEX. And that was kind of going to be one question, but I think it's probably about 3 already. So I'll leave it at that, and I'd be very grateful to you. Paolo Gallo: Let me say that we are more than happy to give our efficiency for a time horizon back to the system. It's the way to repay institution to repay our customers, to repay the market. Just to give you a number, and then I will go back to your answer. Just to give you a number. In between '18 and '24, we gave back EUR 300 million to the system. So I think that is the game. I think we have demonstrated in the last 9 years that no matter we give the money back to the system, we are able to achieve better performance. And we have never changed that approach. So let me say, the focus on cost efficiency is one and then the regulatory is another one. But I -- the whole management is focused on cost efficiency, forgetting that the regulatory period will somehow later asking something back. To your point, what we have assumed in the plan, we have assumed an X-factor consistent with what we have experienced up to now. So we have already embedded in the plan less revenues as a way to give this money back, this efficiency back to the system. And regarding '28, '28 is difficult to shape because, as you know, there will be a new system, the TOTEX, we call ROS, but it's the same. I think that will change the rules of the game. For us, we see an opportunity because we can become even more -- we can even more implement an industrial approach because you mix altogether OpEx and CapEx and you make -- and you decide based on which is the best solution for you as an industry to allocate, let me say, money on the OpEx or on the CapEx. But because we don't have -- because there is no consultation yet on the market, we don't know how the regulatory body will shape the ROS. We know the general terms of the ROS. So what we have thought about is it's another opportunity for us to be even more efficient. But in the plan is embedded and X-factor similar to what we have experienced up to now. Unknown Attendee: We have Julius there. Julius Nickelsen: Julius Nickelsen from Bank of America. Two questions on the synergies and then just one clarification. The first one, I mean, I understand that the last time you put out the EUR 200 million, this was before you actually run the assets and now you upgraded it. Is that number now here to stay? Or are there any surprises left where you think some areas in the business that could still bring some more synergies? I don't want to be greedy. And then in terms of what have you already achieved in 2025 and what is left in 2026? I see you saw the EUR 14.6 million of cost synergies in this quarter, but could you maybe give a little bit more precise split? And then lastly, just to have ask, I assume these numbers assume that the allowed return will stay at 5.9% for the plan. Paolo Gallo: Okay. Starting from the last question, we have assumed that 5.9% will remain. So we assume flat WACC. Regarding the first question, we have already presented -- we just presented a new plan. Now you are asking me, there is something more. We need to wait 1 year and maybe we will find something more, not now. I think -- but apart the joke, I think that what we have done, thanks to -- mainly to Pier Lorenzo because he has run all the -- and the other team has run all the detailed analysis. We were able to build on a bottom-up basis really the -- all the activities that are needed to be put in place in order to achieve the synergies. So while 1 year ago, we were -- we made more an approach top-down saying, okay, what we can achieve, what with a similarity of the results that we have achieved in the past in Italgas Today, we are here and we say EUR 250 million that again, it's a round number, but it's EUR 252 million. So if you want, you can get another EUR 2 million on top of that. It's a true number based on all the detailed activities and results that we expect to achieve. What has been already achieved in '25 is the number that you have seen. It's a combination of synergies and ongoing focus on cost cutting. We cannot -- from now on, we will not be able to separate what it was if we were alone and what it is now because now 2i Rete Gas is not an entity anymore since July 1. So you should look at the numbers as the total -- so our ability to continue to reduce the cost, our ability to produce synergies, I would say, mainly in the traditional and digital part. AI will come later. It will not come. We'll probably see some numbers in '26. But as you have seen in the curve of the graph, it will come later. But I cannot tell you, if you are asking me in '26, what are the synergies, what you have -- it's impossible because now the company is one company, the organization is one organization. So I will be focused on what we will be able to achieve as a cost cutting and synergies in comparison to what was the baseline in 2023. Unknown Attendee: We have Francesco, Francesco Sala: Francesco Sala, Banca Akros. Congratulations for your results and the presentation. The first one is on the -- your inflation assumption, especially for the RAB until 2031. The second is what makes you think there's going to be a pickup in tender activity in the next few years? And if there is any evidence you have to back this assumption or if something has changed in the last few months? And thirdly, you wish that there were more opportunities in the water segment, but there have been very few in the last few years. I wonder whether you think something is going to change in this regard in the next future? Paolo Gallo: The first one, I mean, we have assumed on the long run an inflation rate of 2%, very simple. So we were not so creative. So we just flat the inflation to 2%. On the tender side, we have seen a 2025 that probably has been the best year ever since the launch of the tender in terms of number of the tenders that has been awarded and tendered, '26 look similar. My point is, and probably you have read on the newspaper, my point is that as the Ministry [indiscernible] said, tenders process need to be reviewed. And I think the point is need to be reviewed in terms of size of the tender, so increase the size of each single item, reducing the number of items. And on the other side, having let me say, an institution on an authority that authority is not the right term. A body that is running the tender that is more effective, can be local, can be regional, can be central, but should run the tender. The problem is as of today is that there are so many that have not taken this as a clear commitment to run the tender and to complete the tender. What you said on the water distribution is true. You said few, I would said 0 opportunity. I will make it few to 0, not only, but each opportunity, we need to look very carefully because we don't want to have an opportunity that is not an opportunity that is a problem. So we will look only if there are serious opportunity in the market. As of today, there is none. But on the other side, the plan will continue to deliver better quality of the service, less leaks, operational efficiency in the perimeter that we have acquired from Veolia. Unknown Attendee: So we have... Paolo Gallo: We will answer to all your questions. So don't worry. Unknown Attendee: Okay. So Aleksandra there and then we go in the line. Aleksandra Arsova: Aleksandra Arsova from Equita. So 3 questions on my end. The first one, so again, not to be too greedy, but maybe on dividend since you provided an improved growth profile, faster deleverage. So I'm thinking maybe is there any room maybe next year to further improve either the payout or the growth in EPS? This is the first one. The second one is maybe more a curiosity. You are mentioning the potential changes to the concession regulatory framework. But if this -- the timing of these changes, I mean, are quite uncertain. And so I was thinking maybe on the other hand, is there any possibility or is it viable from an antitrust point of view to do further M&A in Italy, maybe many bolt-on M&As? And the third one is a follow-up, a clarification on the unitary OpEx tariff. So you said previously, if I understood it correctly, that you assumed the X factor, which is similar to the one you have at the moment. But if I remember correctly, the consultation paper under review currently assumes a lower X factor at least for '26, '27. So you are more conservative at the moment vis-a-vis the proposal by ARERA? Paolo Gallo: On the first question, you know the answer, so I don't answer to you exactly. I said that I don't know how many times. I think -- and I'm -- on that point, you can be flexible. But the point is that with that dividend policy that we applied over 9 years, we were able to acquire 2i Rete Gas. So the answer is there. On the second one, there are many discussions around tender and concession. I don't think it is viable to extend the validity of the concession because the concession has been expired in '12. So it's strange to because somebody is proposing to extend the concession. But the problem is different. The problem is tenders have been set 13 years ago. The process didn't work. I think we need to face this situation and try to solve it. Further M&A, while the tenders are going on, you will be scrutiny again by the antitrust. And as of today, there is nothing again on the market. for the OpEx. We have used the -- for '26 and '27, we have used the numbers in the consultation, but then from '28, we use a flat number higher than the ones for '26 and '27. Unknown Attendee: And then Fernando. Okay. Unknown Analyst: First question is regarding the slide in Page 19. This is related to the time line of cost savings. I mean I was doing a visual calculation there. It looks like you are getting around 50% of the cost savings already in 2026. My question here is this is something that you expect in 2026 or maybe more end of the year. I'm saying this is because this could have significant implications of next year earnings. So that is my first question. Then second question, I think that you say that you assume a flat WACC for the period until 2031. So there, I would like to know what is your expectation in terms of the activation of the trigger mechanism for next year. I assume that you don't expect it, but you can clarify. And a follow-up question on that is France lost the AA rating in October. I would like to know your opinion on what has to be done in this scenario? And what could be the implications for the sector? Paolo Gallo: Always remember, you referred to Page 19 that this number is as a reference of 2023 cost. So part of that has been already achieved in '24. Part of that will be achieved in '25. So the '26 is already a cumulative number that takes into consideration what was already achieved. It will be, as you see, mainly traditional in '26, some digital, and they represent about, let's say, 40% of the total. On the second one, we have -- on the WACC, we have assumed, as you said, flat period, so trigger will not apply according to us also because France should be out of the reference country because they lost the AA rating. They are now in A+. So according to the regulatory framework that set the characteristic of the countries to be compared with, they said they should be AA countries. France is not anymore AA countries. So I think that is my -- I mean, reading the paper of the regulatory and applying just in a very simple way. Last year, France was probably still considered because if you remember last year, France was AA-. So they still have the AA somehow. Today, 1A is lost completely. So they have A+ only. Next... Unknown Attendee: We have Sarah there. Yes, Alberto, [indiscernible] to you. Sarah Lester: Sarah Lester from Morgan Stanley. And I really do apologize one more on synergies, and then I think we'll stop on the synergies. '27, '28. So tying a bow on, I think it's Slide 15, 19 and 20, it feels like you're in the ballpark of EUR 180 million in '27, 2028. Just doing a sense, check if they're kind of sensible numbers. And then I also have a high-level question on future mapping. You're obviously incredibly strong at extracting value from acquisitions. Would you consider expanding outside of Europe? Paolo Gallo: If you go back to page -- page, I'm coming to Page 20, you will see that by 2028, the majority of the synergies that are EUR 180 million are reached, not all, but a significant portion of that. So you're right. The second question is relevant to potential acquisition. I'm not saying nothing about that because it's -- we don't have anything in our end. I always say which are the principles that drive us. First of all, Europe is our area of interest, of course. But the second point for which we look at the outside Italy are, first of all, macroeconomic scenario of the country and then even more important, the regulatory framework. That is what we did in Greece. At the time, macroeconomic scenario was not looking very good, but we saw at the time, significant signal of improvement. So we strongly believe at the time that Greece, and we were right, would come out of the situation that they were and now they are in a very good macroeconomic condition. And the second element, even more important, regulatory framework was very stable, was clear, was similar to our. So those are the 2 elements that we normally look before considering anything outside Italy. Europe, of course, is the best area where we would like eventually to invest if the 2 conditions that I mentioned to you are met. And there is somebody that is willing to sell, of course. There is no one that there is no interest. Unknown Attendee: Yes, so Christabel. There? Christabel Kelly: Chris from UBS here. Just one question on the financing strategy. I noticed that this time, you're aiming for a fixed floating ratio of 70% to 30% and an increased duration. Can I assume that that's reflective of your view on where interest rates are going, cost of financing for Italy and for Italgas going forward? Paolo Gallo: Yes. I think if I well understood your point, the strategy is based on the expected structure of the rates in the future, of course. In this plan, we are assuming a level of the fixed rate more or less stabilized on the current levels, while we are expecting a decrease -- a sharp decrease in the short-term rates. For this reason, the ratio changed a bit from the previous 20% to 80% to 30% to 70%, meaning that we will go more for, let's say, short-term or variable rates that could be also a long-term fixed rate swap into a variable in order to take benefit of this situation of the rates. And the combination of the 2 situation, coupled with also the increased duration will result in the level of cost of debt that I have commented in the slide. Next. Alberto de Antonio Gardeta: Alberto de Antonio from BNP Paribas. My first question will be on Greece. You have given the targets for 2021 in terms of revenues, EBITDA and RAB. Maybe could you disclose what your assumptions behind in terms of WACC inflation, X-factor or any additional potential revenues? And my second question will be regarding the biomethane opportunity. And let me understand if -- are you investing directly in any plans or how this business works and how this is going to impact your company in terms of maybe CapEx, potential additional revenues or just decarbonation of the molecules? Paolo Gallo: Okay. Regarding Greece assumption, if I well understood, we have assumed similar to the overall plan, flat rate, flat interest rate, flat allowed return similar to what we have today. There may be some correction over time, but we don't think this is going to be significant. That was the assumption that we used. and inflation as well. So we use the same numbers that we are using for Italy, we use also for Greece because, as I said before, the 2 countries are very similar today as well as the other. Regarding biomethane, what we have assumed in the biomethane, maybe Pier Lorenzo can elaborate a little bit more is not that we are investing in biomethane production plant, but we are making the connection easier for them to accelerate the development of biomethane new plant and the connection. Maybe Pier Lorenzo can say a little bit more about our approach in how we can help biomethane production plant to be connected. Pier Lorenzo: Yes. As Paolo anticipated, we see biomethane not really as an opportunity to invest in directly, but as a gigantic opportunity for our country to address the decarbonization of the end user and consumptions together with the security and supply because biomethane, we have to remember here in U.K., you have a lot of production as well, is made locally. So looking at Europe as a whole continent, which is strongly dependent on importation of gas, biomethane production can mitigate this issue concerning security of supply. So all in all, our approach here is to promote the development of the industry in Italy, facilitating, making easier to connect these plants to the local grids. And we do that, we have done in the past, and we will do more and more by streamlining the design of the connections so that they cost less and less and by investing in reverse flow projects. The main issue that can arise in a project of connection of biomethane to a local grid is the fact that the local grid at the exact site where the developer of the plant wants to install the biomethane plant is not fully capable of receiving the entire amount of production of gases in every hour of the year, especially when the demand is very low. So thanks to reverse plants, we can debottleneck the local network so that virtually we can -- or really not virtually, we can connect any kind of biomethane plants wherever the developer wants to develop the plant. And connecting a biomethane plant to a local distribution network is definitely less expensive than connecting the same biomethane plant to a transportation network, which is run operated at definitely higher pressure, so they need compression and blah, blah, blah. So we have to promote and we want to do that, the connection of biomethane plants to local low-pressure distribution network. That is our aim. Of course, we reflect all these in our CapEx investment plan in terms of CapEx strictly related to the connection of the plants. So pipes and pieces of equipment that we need to connect. Unknown Attendee: Ella from Citi. Ella Walker-Hunt: I have 3 questions, if that's okay. First question is to do with the WACC trigger. The WACC trigger. -- if it is triggered, can you just give us a sensitivity of us know how the earnings would be impacted if there was a downside trigger. My second question relates to AI synergies. So I remember in the last plan when you were discussing your EUR 200 million synergies, you said that EUR 80 million were going to come from AI synergies. And then in this plan, it's more like EUR 70 million. So can you just talk about the difference there in terms of the EUR 80 million and EUR 70 million? And then my last question refers to the tenders. So you -- in terms of the 247,000 connection points that you're selling, you sold them at a great price, 16% premium to RAB. But if you do -- if we do a quick back of the envelope calculation in terms of your plan, then you have EUR 1.5 billion CapEx for the tenders to bring on EUR 1.4 billion RAB. So it's like 7% premium to RAB. So I was just wondering about the difference there. So why do you think -- I guess, yes, just the acquisition price at a much lower premium versus what you sold at? Paolo Gallo: The last question we need to interact because it was not very clear to me. Let's start from the first one. The impact of a potential trigger for which we don't believe is going to happen is EUR 45 million. EUR 15 billion of RAB multiplied by 30 bps, that's the impact in terms of less revenues. AI synergy, which -- what is the difference? Let me say what we said is, of course, pretax revenue, the EUR 45 million is pretax. In terms of AI synergies, let me say that last year, we have estimated between -- I remember, I said EUR 70 million to EUR 80 million, but it's true. We mentioned EUR 80 million because we thought the number came out from the fact that the impact that was generated the digital transformation in the 7 years previous plan that generated a certain number would have been similar or better. The synergy impact would have been similar to what was generated by the digital transformation previous plan, and that the number came out from. So it was not a bottom-up. It was a clear top-down numbers. Now we were more -- much more detailed in building see -- AI cases and say what is going to happen with the application of the AI. There will be more productivity, less personnel involved, less use of cars and other stuff like that. So we were able to detail and the number came up to be EUR 70 million. So I strongly believe the EUR 70 million is more reliable than 80 million of last year. EUR 80 million was, and I always said was taking as a similarity. But I have also to say that between now and the next couple of years, other AI uses will come up. So I would take this as a floor, the EUR 70 million, and I will not take it as a final number. Based on the knowledge that we have today, that is the best reliable number we can give it to you with the time frame that we have envisaged. But it's going to be changed. Yes, because AI is something that is evolving. I don't think anyone -- anyone in our industry, but in general, anyone in industry like ours has been able to predict with such detailed way the AI impact on the cost of the company. The last one I have -- let me just recap, okay? We bought what we bought at a limited premium. And then we sold RAB EUR 218 million with a certain premium higher than what we bought, okay? That's the end of the deal. Tender is another matter. You know the tender we buy at RAB by definition because there is no competition on the value of their assets. So that is the fact that has been reduced the amount of the tender is only due by the delay. Remember that the number is made of acquisition of existing network plus CapEx that is requested to upgrade this new network acquired through a tender. So the delay in the tender means that there may be some items that are not in the plan period anymore. But if you delay the tender also the CapEx, technical CapEx connected to the tender may be delayed, too. But there is nothing to do with premium. I don't know if I'm clear. Okay. Unknown Attendee: If there are no more questions from the room, we can take the question from the conference call. Operator: The first question is from Javier Suarez of Mediobanca. Javier Suarez Hernandez: I'm really sorry to jump with questions after a long presentation. So the first question is on the EBITDA margin that is embedded into your plan. That means -- that means an expansion versus 79%... Paolo Gallo: Can you start again because now your voice is back. Javier Suarez Hernandez: Okay. Can you hear me now? So the first question is related to the expansion on the EBITDA margin to 79%, which is the number that is embedded into your guidance for 2029 and '31. So the question for you is that if you can help us to understand that expansion in the EBITDA margin that is going to be by the end of the plan, significantly different between the old Italgas 2i Rete Gas, Depa and the water business. So further detail on EBITDA marginality between your different activities would be very helpful. The second question is on the tendering process and what may be done to incentivize and to stimulate the process. So you can share with us any proposal to the new -- to the administration in Italy to make the system more virtuous and probably quick. And if you think that what it is happening or is the discussion for the electricity distribution concession is something that could be replicated to the gas distribution concessions as well? And the very final question is on Slide 60, when you are showing the credit metrics. So there is a vertical a significant decrease on net debt to RAB and a significant increase in the FFO versus net debt. So the question is, philosophically, where do you think that a company like Italgas should be seated if it is a correct interpretation to say that beyond, say, 2028, the company is maintaining some financial flexibility to capture additional opportunities related to M&A or the tendering process, if that is a correct interpretation? Pier Lorenzo: Okay. Let me start -- maybe start Frank, on the first EBITDA... EBITDA trajectory in the plan. clear, you are right, meaning that it is true that there is a clear direction in terms of improving the EBITDA margin, both for Italian gas distribution. We are approaching at the end of the plan a level of 88% basically. And so starting from a level now that is around 80%. In terms of the same trajectory is also followed by -- in parallel by Enon, by Greece, but on the lower scale, of course, you remember that in the past, we considered Enon as, let's say, like [indiscernible] in Italy, so a smaller perimeter with headroom for improving efficiency. So also Enon will improve the EBITDA margin at the end of the plan, approaching 76%, 78% more or less. The driver behind that, of course, are the operational efficiency synergies, revenue synergies that we commented, mainly I would say. Paolo Gallo: Yes. I'm just adding 2 points. EBITDA is growing because the costs are going down. There is a clear difference between -- you remember that we put the ambition of Greece and the ambition Greece, we are on the trajectory of that ambition. But we have always said that because of the size of the Greece they will never be able to achieve the same EBITDA margin that we are able to achieve, thanks to the size that we are having in Italy. But also in Greece, we are using -- we have applied digital transformation. We will fully digitize the network. We are doing that. We are very close. By the end of this year, we will complete that. AI application will be moved to Greece too, but the scale will determine, of course, a different -- slightly different EBITDA with a margin that is probably lower than the one in Italy. On the tender side, my only comment probably Javier didn't hear what I said before. The proposal on the electricity distribution is to extend the concession, but concessions are in full force today. So the comparison between gas distribution and electricity distribution is not comparing apple with apple because gas distribution concessions have expired by law back in 2012. We have talked for many, many years about what we can do in order to accelerate the tenders. Our opinion, our position that is shared among the association is that we need to reduce the number of items. So we need to reduce the number of tenders. And we need to have a clear commitment by whoever take the responsibility to run this tender to run this tender because otherwise, you can even reduce the number of tenders increasing the size of the item, but that if no one is taking the responsibility to run the process in in a time manner, then we will be sticking the same situation. So 2 elements should be addressed. Number of items reduced and a clear and committed responsibility to run the tenders. I think regarding the last question, what we have presented always is deleveraging over time. And as in the past, we have always find a way to use and to invest properly eventually any additional fund we may have in order to increase the profitability of the company. So I would not -- we need to stay below 65%. That's no doubt about that. That is our target because we want to maintain the same rating that we have with the rating agency. Apart from that, everything else, if there is a room, we will try to use in the best way like we did in the past, available funds. Unknown Attendee: Next question from the call, please. Operator: The next question is from Davide Candela of Intesa Sanpaolo. Davide Candela: I have just 2. The first one is with regards to the nanometers rollout. It looks like to me that by 2030 and the year after, there could be a little bit of deceleration in the rollout in Italy. I wonder if you can share why is that if it is because you are reaching a certain point that no more should be installed or you're waiting for something and maybe some assumption behind the cost you are assuming in the plan for the rollout of those meter -- and second... Paolo Gallo: Excuse me, you are talking about rollout, but rollout of what? Davide Candela: Of the smart meter. Sorry for that. And second question, really high level with regards to the data centers. And we have recently seen a potential role of hydrogen with the fuel cell technology in the data centers. I was wondering if you could just share your view very high level and maybe if there is a role in future for gas distributor in there? Paolo Gallo: Regarding the first one, just to make it clear, the meters that we are going to replace are the first generation, I think Pier Lorenzo said very clearly. So the GPRS, not narrowband IoT, not the latest that we are going to install. That's the reason why we still have EUR 6 million, the combination of 2i Rete Gas and Italgas Reti of GPRS. You know the GPRS is a technology that the telco will probably soon discontinue. So we are planning to replace them. The structure should be very similar, let me say, the impact on our profit and loss and depreciation is exactly the same that we had when we replaced the traditional one with the smart one. So we expect that the regulator in order to face a situation where at a certain moment in time, this smart meter will not transmit anymore because GPRS will disappear. They will issue a regulation for which to encourage the operator to replace the GPRS with new ones. That's the reason why there is EUR 6 million on that. Regarding use of hydrogen for data center, if that is the request, honestly, I don't have an answer. So I don't know how to use hydrogen in the data center, if that is the question that I understood. Unknown Attendee: Next question please. Operator: The next question is from Bartek Kubicki of Bernstein. Bartlomiej Kubicki: Congratulations. I hope you can hear me well. A few things from my side. First of all, on the regulation as such. As we remember, there is quite some volatility with regards to gas distribution regulatory framework in the last couple of years, unexpected WACC cut, OpEx cut back in 2019. My question is, what are the key -- in your opinion, what are the key upsides and downsides from the regulatory point of view to your business plan not included in the business plan? And I'm not talking about the trigger mechanism, something which is out of the common discussion, including here the potential remuneration of the smart meters of the existing smart meters and the faster depreciation of those existing smart meters. Second thing, I would like to -- just a clarification on your leverage. Of course, you will degear very quickly from, I suppose, more than 70% net debt to RAB to 60% net debt to RAB into 2031. Just a quick question. What do you assume with regards to the famous Rome concession? Because I remember there was always some kind of EUR 0.5 billion potential payment to keep the Rome concession for longer. What do you assume here? I mean, is it still assumed in the business plan or not anymore? And the last point on your synergies and efficiencies, will it cost anything? Meaning I know that you said there will be no redundancies, but will you be incurring any additional restructuring costs to get to those synergies? Paolo Gallo: First question is, honestly, what I can say is that for me, '26 and '27 is very clear the regulation. So we don't expect no upside, no downside. Then from 2028, there will be the ROS taking place. In the ROS, we may see maybe some remuneration of the fully amortized asset, for example, similar to what currently Enon is enjoying if they keep in proper operation, fully amortized, fully depreciated assets. That's one element, but it's not so -- it comes to my mind. But generally speaking, the ROS application or the TOTEX application starting from 2028 for me, from the vision that we have, it could be an upside from an industrial point of view for Italgas in a sense that to be constrained OpEx and CapEx will be one single box in which you really leverage your capability in managing network and deciding which is better to spend in OpEx or to spend in CapEx, depending which is the best result from an industrial point of view. So if I look at the framework, I welcome the ROS, the TOTEX framework coming because it will give us more opportunity to use our industrial competence in order to increase our results. I'm just closing on the third point, and then I will leave the floor to Gianfranco for the Rome concession. I said no redundancy. We didn't any redundancy in the past. There's no cost associated. We don't have any redundancy. Our goal is today, and we have already started is to start reskilling our personnel in order to handle different kind of process and different kind of activity. We don't have to wait AI to be massively used. We need to do it now, and we will do it now in order to be ready when the AI will be used in a more extensive way to be able for our personnel, for our colleague to take other jobs consistent with the new organization from one side, the new process from the other side. So there is no cost associated. There will be no redundancy at all. Gianfranco Amoroso: On the Rome concession, the assumption in the plan is very straightforward because we have a receivable for around EUR 300 million in our balance sheet. Simply the business plan assumes that this receivable is paid during the plan. Consider that the other important assumption is that we are assuming in 2028 the taking of control after the tender of Rome of the concession. So this payment can happen before this date or I would say at the latest at this date. So you will have the cash in the cash position during the plan. Paolo Gallo: The impact of deleverage, EUR 300 million over EUR 11 billion of that is.. Gianfranco Amoroso: Not meaningful. Paolo Gallo: Exactly. But the assumption is that by -- in 2028, the concession, there will be a tender completed. Our assumption is that the Comune di Roma will continue to keep the ownership of the existing infrastructure by them and that is what is inside the plan. Bartlomiej Kubicki: May I just ask one more clarification on point number one, please? Paolo Gallo: Please. Bartlomiej Kubicki: Yes. Regarding the smart meters and the remuneration of the quicker depreciation of the currently existing smart meters. How confident are you that the regulator will be happy to allow you for another smart meters rollout while you have basically just a few years ago completed the smart meters rollout, which costed you probably EUR 1 billion plus. So there's additional kind of investments going into the network, additional, let's say, impact on the customers' bill. So how are you -- how confident you are that the regulator would be happy to approve a similar scheme to what we had back in 2019, '22? Paolo Gallo: It is not a matter to be happy or not happy. It's a matter that if GPRS will be discontinued. We will have 6 million smart meter not working anymore. So it's not a matter to be happy or not happy. It's a matter to understand the reality and say, okay, the previous smart meter that was developed and installed back 12 years ago, now has to be replaced with new ones because technology has changed. So the happiness should be -- there is a new technology that is much better than the old one. And of course, they have to consider the loss of depreciation. But consider, as I said, the first smart meter were installed back in '13, '14. There will be not a significant amount of depreciation to be paid. Unknown Attendee: Thank you, Bart. There are no more questions from the conference call. I reckon everyone here has been asking a question. IR team is available. So thank you, everyone. Paolo Gallo: Thank you. Thank you for coming.
Operator: Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the third quarter 2025 results hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Nadia, and I will be your coordinator for today's conference. [Operator Instructions] I remind you that today's conference call is being recorded. At this time, I would like to hand the call over to Mr. Carlo Messina, CEO. Sir, you may begin. Carlo Messina: Thank you. Welcome to our 9-months 2025 results conference call. This is Carlo Messina, Chief Executive Officer; and I'm here with Luca Bocca, our CFO; Marco Delfrate and Andrea Tamagnini, Investor Relations Officers. We just delivered our best ever 9-month net income at EUR 7.6 billion, of which EUR 20.4 billion (sic) [ EUR 2.4 billion ] in Q3. Common equity Tier 1 ratio increased more than 100 basis points. Annualized return on equity is 20% and earnings per share grew 9%. These are excellent results, confirming we are well on track to deliver our full year net income target of well above EUR 9 billion. including Q4 managerial actions to strengthen future profitability. The 9 months and the third quarter both recorded all-time highs for commissions and insurance income. Costs are down, asset quality remains top notch and customer financial assets grew to more than EUR 1.4 trillion. We keep investing strongly in technology, enabling the acceleration of our workforce generational change. This year, we are returning EUR 8.3 billion to our shareholders, including the EUR 3.2 billion interim dividend to be paid in November. On top of this, an additional capital distribution will be quantified at year-end. Our results once again confirm the resilience of our well-diversified business model, further validated by the EBA stress test where Intesa Sanpaolo was a clear winner. This outstanding outcome reinforces our leading position in Europe. This is also reflected in the 2-notch upgrade by Fitch moving ISP above Italy and the 1 notch upgrade by DBRS. Our strong profitability allow us to confirm a world-class position in social impact to fight poverty and reduce inequalities. I'm proud of these results and thank our people for their excellent contribution. Now let's turn to Slide 1 for the key achievement of the first 9 months. In the first 9 months, we delivered record high profitability and efficiency, NPL stock and ratios at historical lows, strong capital growth and high increasing and sustainable value creation. Slide #2. In this slide, you can see the impressive continuous growth in net income. Slide #3. In the first 9 months, we delivered a significant increase in return on equity, earnings per share, dividend per share and tangible book value per share. In a few weeks, we will pay an interim dividend almost 10% higher than last year. Slide #4. In Q3, we confirmed our excellent organic capital generation capability with a 40 basis point increase in common equity Tier 1 ratio. Slide #6 (sic) [ Slide # 5 ]. Net interest income has increased over EUR 400 million compared with 2 years ago despite a 90 basis points drop in Euribor. Euribor is now stabilizing at a level consistent with the normalized interest rate scenario, and our hedging strategy will continue to sustain net interest income in the coming quarters. Slide #6. In the first 9 months, commissions and insurance income grew 5%. Q3 performance was excellent with 7% yearly growth and stable Q-on-Q despite the usual summer business slowdown. Slide #7. We also managed to reduce costs despite tech investments reaching EUR 5 billion. Slide #8. As said, we are in a comfortable position to confirm our 2025 net income guidance of well above EUR 9 billion. Moreover, we clearly have significant excess capital, giving us a lot of flexibility for growth and additional distributions. Slide #9. Our performance allow us to benefit all our stakeholders. The new medium, long-term lending to families and businesses grew 40% on a yearly basis. And let me just focus on the contribution to the public sector because in taxes in the first 9 months, we gave contribution for EUR 4.6 billion that is equivalent to the amount of the new taxation that the government is looking from the banking sector. In 9 months, we paid the same amount. So contributing hopefully to social inequalities in the public sector. Slide #9 -- Slide #11, sorry. In a nutshell, in the first 9 months, net income was up 6%. We accrued EUR 5.3 billion in cash dividends, and we delivered a best-in-class common equity Tier 1 ratio growth. Please turn to the next slide for a closer look at our P&L. Slide 12. This slide shows the building block of our 9-month P&L with improved results across nearly all items. Please turn to the next slide for the third quarter results. Very briefly, in the third quarter, revenues were supported by the highest ever Q3 commissions and insurance income. We decided not to push on trading, keeping flexibility for the coming quarters. Costs were down on a yearly basis, and we increased NPL coverage. Please turn to Slide 14 for a look at net interest income. We are firmly on track to deliver net interest income well above the 2023 level. Further growth is expected in 2026. Slide #15. This slide provides more details on the net interest income evolution. The Q3 decline was mainly due to the further reduction in Euribor and the impact from the 6-month and 1-year repricing of loans. Slide #16. Customer financial assets were up strongly on a yearly and quarterly basis. In Q3, we had EUR 3 billion growth in retail current accounts and EUR 10 billion growth in assets under management. Let's now move to Slide 17. Slide 17. commission growth was driven by wealth management fees. We can count on our unmatched advisory [indiscernible] and our fully owned product factories are a clear competitive advantage. Slide 18. The contribution from Wealth Management and protection activities is 43% of gross income and assets under management inflows are growing. Please turn to the next slide for a closer look at insurance income. Non-motor P&C contribution was the main driver for insurance income growth, and we still have significant upside potential. Slide 20. The contribution from commissions and insurance income to revenues is by far the highest in Europe after UBS. Please turn to Slide 21 for a look at costs. Operating costs are down with personnel costs decreasing 1% and administrative cost 1.5%. Slide 22. We have high flexibility to further reduce costs, thanks to our tech transformation. By 2027, we will have 9,000 exits with savings of EUR 500 million. Slide 23. We have a best-in-class cost-income ratio in Europe. Let's move to Slide 24 for a look at our asset quality. Asset quality remained excellent, and we registered the lowest ever NPL inflows. Slide 25. Our NPL stock [ is ] clearly among the best in Europe. Slide 26. As you can see, we remain very well positioned in terms of Stage 2. Slide 27. Our annualized cost of risk is stable at 25 basis points with NPL coverage up to more than 51% and stable overlays. We see no signs of asset quality deterioration. Slide 28. Our NPL coverage is clearly among the best in Europe. Slide 29, our Russia exposure is now less than 0.1% of the group's total loan with local loans close to 0. Slide 30. We have a rock solid and increasing capital position. Common equity Tier 1 ratio increased to 13.9%. Let's move to Slide 31. ISP [indiscernible] of the EBA stress test, we had a very low adverse scenario impact on our common equity Tier 1 ratio. The next best performing peer showed an impact 3x higher. In the next 3 slides, you have the usual update on our sound liquidity position and ESG actions. But let's move to Slide 36 to see how ISP is fully equipped to succeed in any scenario. Slide 36. Our profitability and capital position remains strong even in adverse conditions. We have a very resilient business model. Our asset quality is top notch, and we have already deployed EUR 5 billion in tech investments, including artificial intelligence, we are key enablers for future efficient gains. Slide 37. Intesa Sanpaolo stands out in Europe across key metrics and is better positioned than peers to face any future challenge. Slide 38. In this slide, you can appreciate our unique positioning, thanks to our commissions-driven and efficient business model. Let's move to Slide 39 for a few words on the strength of the Italian economy. The Italian economy remains resilient and the recent upgrade of Italy's rating confirms the country's strength. We expect Italian GDP to grow this year and next. Slide 40. The Italian companies are in a stronger position today compared to the past. Their debt-to-equity ratio has decreased over time and their liquidity buffers are at all-time highs. Slide 32 -- 42, sorry. This slide offers a recap of our best ever 9 months and the reason why we are fully equipped to succeed in the future. To finish, please turn to Slide 43. Slide 43. We are in a comfortable position to confirm our full year net income guidance. 9-month performance once again demonstrates the quality of our business model. We are a sustainable 20% return on equity bank, one of the few in Europe able to combine high profitability with long-term strength. In Q3, we started putting away in the and continue in the fourth quarter to reinforce future profitability. We are delivering one of the highest capital returns and dividend yields in European banking while maintaining a rock solid capital position and continue to lead on social impact. At the same time, we are accelerating the generational change of our workforce, investing in skills and new talent to ensure the group continues to grow and innovate in the coming years. Thank you for your attention, and we are now happy to take your questions. Operator: [Operator Instructions] And now we're going to take the first question. And it comes from the line of Antonio Reale from Bank of America. Antonio Reale: It's Antonio from Bank of America. Just a couple of questions for me, please. One on growth and the other one on capital distribution. So my first question is, well, what do you think it will take for a bank like yours to be able to show some loan growth going forward and at the same time, not dilute your 20% ROTE. So basically supporting growth while keeping the same level of profitability sustainable through time. The second question is to do with your capital. I think this quarter was a positive surprise. And I think yet it's not being rewarded by the market today. I think part of the issue might be that this excess capital has been trapped there in the bank as you've been basically remunerating shareholders only from your earnings, almost 100% total payout, but you've not paid out the excess capital. So the question is, could you consider paying shareholders also out of your excess capital? And related to that, I mean, you're no longer the highest paying cash dividend bank in terms of payout for what it's worth really. Do you think it will make sense to pay more than 70% dividend payout, so tilting the mix even further towards cash dividends? Carlo Messina: So thank you, Antonio. The point on growth is something that we analyzed in comparison the real potential of value creation. We are shifting a significant portion of our [indiscernible] into very low default rate loans. So we reduced in a significant way the default rate of our portfolio, so moving to close to 1% in the range of 0.7%, 0.8%. So the reduction was massive in the last year, and this will continue because we think that for a bank like us in mainly concentrated in wealth management and protection business model with a significant sustainability in the earning power, what is important is to concentrate on the ability to not generate nonperforming loans in the future. So that means that the growth in loan book will be, for sure, accelerating mainly in the sector export related in the sector that are linked with the new generation and new funds. But in our perception, this will bring the growth in the range of 2%, 3% in 2026, but not more than this. So the main driver could be for sure, for the recovery and growth in terms of net interest income 2026 will be the loan growth, but the acceleration will be part of a story that will balance also the cost of risk for the future. So that for us is fundamental having -- you know that Italian banks in the past had significant negative surprise from the loan book. We want to avoid to be in case of future crisis to be again in the same position. That's the reason why we are so concentrated in maintaining a net nonperforming loans ratio very low and [indiscernible] not diluting the coverage of the nonperforming loans that for us is fundamental also to proceeds in further reduction of the stock because 0 nonperforming loans is the ideal way of working for a bank that is really focused on wealth management and protection like Intesa Sanpaolo. In terms of capital distribution, obviously, capital distribution and the excess capital is related with the business model because from one side, we have a very limited need of capital. So our capital related to unexpected losses today is very low because as you had the occasion to see in the EBA stress test, our resilience is really strong. So our real excess capital is really significant in comparison to the past and in comparison to all the other peers. At the same time, the capital distribution is something that we will reassess in the new business plan. We have a clear evidence of other players that are working on a payout ratio that is much higher cash dividend payout ratio that is much higher than the one that we have in Intesa Sanpaolo. So this is something that we are evaluating. And at the same time, also what we can do with the excess capital, not only the current excess capital, but also the excess capital that we will generate in the next years because the run rate of 20% ROE bank will, by definition, create significant excess capital for the future. And this is part of what we are starting for the new business plan, but we have to discuss with the Board of Directors and then to propose and submit also to the supervisor. And then as soon as we have completed this process at the beginning of February, we will announce a new dividend policy. But obviously, the capital -- the excess capital, the real substantial excess capital significant and we do not see any kind of M&A opportunities. So by definition, the capital is -- the excess capital is of our shareholders. Operator: And now we take our next question. And the question comes from the line of Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. My first question would be around net interest income. How should we think about the net interest income trough? Do you think it's fair to assume that net interest income will trough in the next 1 or 2 quarters? Or when do you expect net interest income to trough on a quarter-on-quarter basis? And also, if you could just remind us of your rate sensitivity and how do you think about the replicating portfolio tailwinds that we should expect for net interest income? And then my second question would be around the banking tax in Italy. How should we think about the potential banking tax or levy for Intesa? Carlo Messina: So on net interest income evolution, I want just to make a clear point on net interest income because I read some point on net interest income that I think in this quarter, I need to have some clarification. So when we gave the outlook on our net interest income, we gave a clear indication that the third quarter could have been a third quarter in which we can have a reduction in terms of net interest income in comparison to the second quarter. And the reason is mainly related to the fact that we have, in the third quarter, a concentration and we had a concentration of repricing on the loan book. So we had the majority of our loan book that had made repricing during this quarter. We still remain only with EUR 8 billion of loans that we repriced in the fourth quarter. So this is the real bottom that we reached in this quarter because we had an impact of roughly between the repricing on a 6 months and 12 months Euribor of 100 basis points on an amount of 50 billion in this quarter. So this means that we had the peak of the negative contribution in this quarter, but was expected by us. So that was not a surprise. That the reason why we confirm our guidance and also because refinancing on the loan book will be only EUR 8 billion, concentrated in a volume of loans of EUR 8 billion. So very limited amount in comparison to our portfolio. So we think that in this quarter, we can have a rebound in terms of net interest income and then maintain the speed that will allow us to have in 2026 net interest income that can increase. So that's our expectation on net interest income. On the other side, banking tax. On the banking tax, we -- obviously, for the real figure, we will have to wait until the final process in parliament, so in which we will have the law approved. What I can tell you is that the impact that we can have both on net interest -- net income and on net equity from our side is totally manageable. And our commitment today are also including a potential impact coming from taxation. So absolutely not worried about this kind of impact. Operator: And the question comes from the line of Marco Nicolai from Jefferies. Marco Nicolai: So the first question is on insurance income. I see that it's picking up. So if I look at the year-on-year growth in the third quarter, it's actually improving quite a bit compared to the previous quarters. So can you tell us what's happening here? And if we should expect for the future, the same level of year-on-year growth in this line in insurance income? And then another question on isytech. Just wanted to know where you stand in terms of the group transition to this new tech platform beyond the isybank customers? And so what do you expect in terms of efficiencies from this platform, both in terms of cost efficiencies and also in terms of revenues upside, let's say, from this platform? Carlo Messina: So thank you. On insurance, we are working in order to have further [ acceleration ] business. The momentum is very positive and the penetration is in such a position that can allow us also to have significant further increase because we increased penetration, but we remain with a penetration between 13% and 14%. And we think that there is room to have significant further penetration in the next years. So insurance is and will remain and especially property and casualty insurance is and will remain an engine for growth that for the group is really strategic. Also, if you look the growth in terms of market share in the areas in which we are investing is really impressive. So we are increasing the value of this company and the value of the acceleration of the product between the different networks of the group and especially in the Banca de Territori network. Isytech is, for sure, important for Isbank, and this will allow to have further potential increase in terms of clients, in terms of revenue. But let me focus on what is in reality for us, isytech because isytech will be the pillar of the new business plan. isytech will be the key driver of the new plan, especially for the cost reduction. We think that the massive investments of the cloud and the possibility to write off the mainframe could be -- the investments in mainframe could be the most important part of the story of a plan that will be a plan based on cost reduction and efficiency. So this will be the clear lever that we will use in order to gain competitive advantage, not only in terms of client revenues, but in terms of efficiency. So this will remain a strategic lever, and we will elaborate more in the presentation of the business plan. Marco Nicolai: When do you plan the presentation of the business plan again? Carlo Messina: Should be in occasion of the results of the year-end, so the beginning of February. Operator: And now we take our next question. And the question comes from the line of Ignacio Ulargui from BNP Paribas Exane. Ignacio Ulargui: I have 2 questions, if I may. The first one is on fees. Looking to wealth management fees and looking to the asset inflows in the quarter, seen a very strong performance despite the summer seasonality. Just wanted to get a bit of a sense of how you think fees will go through in coming quarters and the progression of shift from AUC to AUM, how you see your clients on that step? The second one is on the capital movement in the quarter. If you could elaborate a bit more on the RWA improvement, the 10 basis points. Was there anything related to moves? Linked to that, should we expect any hit from operational RWAs in the fourth quarter? Carlo Messina: Okay. So starting from fees, we expect to have a very good performance also in the next quarter by definition. So fourth quarter will be a quarter in which our expectation is to have a growth -- significant growth in terms of fee and commissions, but also an acceleration during the year of the business plan. In the plan, we are planning to reinforce the ability to make conversion in terms of asset under administration and also the portion of time deposits that will expire during the period of the plan. We are increasing and we will elaborate on the presentation of the business plan, but I can anticipate that the amount that is workable is really massive and increased in comparison with the EUR 100 billion that originally we gave as the workable -- real workable part that we gave to our network, we are increasing this amount and they will start in 2026 to work with target that will be selective client by client. But this is and will remain an area in which we can deliver organically a significant growth in terms of fee and commissions. In terms of capital movements, we had in this quarter benefits in terms of risk-weighted assets is also related to this reinforcement of the quality of our loan book. So the reduction in terms of default rate has allowed us to improve the condition of the risk-weighted assets. And this is part of the story that I was mentioned before. This will continue to be part of our story. And we think that this can give satisfaction also during 2026. In terms of the trend for the last quarter, we will have a further positive evolution in terms of capital ratio that our expectation. And we will compensate an increase in operational risk that can come from the revenues average of the last 5 years because you know that 3 years because you know that the rule in which you can calculate the risk on a standard basis is based on 3 years revenues. And so we had like all the other banks in Europe, an increase in revenues. So this will bring an increase but will be more than compensated by the other reduction in risk-weighted assets. Operator: And the question comes from the line of Britta Schmidt from Autonomous Research. Britta Schmidt: Just coming back on net interest income. You mentioned that hedging means that you can sustain this net interest income for the coming quarters. So should we read into this that this is the level we should expect unless we see loan growth pick up? And then just a clarification, what is in the other net interest income that declined in 3Q in the quarter? Is that related to NPLs? Or is there anything else in there? And then on capital, just 2 clarifications, please. I think there was a pillar increase of around 15 basis points. Maybe you can give us some color as to why that increased? And whether you could just confirm that any insurance dividends are yet to be recorded in your capital? And maybe if you have an impact on that, that will be helpful as well. Carlo Messina: Luca bocca will answer to your questions. Luca Bocca: Okay. I can start with NII. NII, we will have some decrease in the quarter in the financial component, but it is related to the classical situation in that line that are NPLs and the difference between loan and deposit. So the capital that is noninterest bearing asset liabilities. So it is something that is normal that decrease during a negative trend in the Euribor, but it will remain stable in the next quarters. And according to the question to insurance income, you are right, we are in Danish compromise. So RWA of insurance income is included in the credit risk. And during the quarter, we can have the payment of a dividend to decrease the level of RWA related to that kind of line. And this is one of the measure of optimization that we can have during the fourth quarter to compensate the increase in operational risk. Operator: And the question comes from the line of Andrea Filtri from Mediobanca. Andrea Filtri: The first question is if you could give us a sort of sensitivity of your fees to the market performance? And the second is an unbiased view on Italian M&A. There are articles every day on the combinations, potential combinations in Italy. How do you see the end game looking like in terms of market structure for the Italian market? Carlo Messina: So looking at the sensitivity to the market performance, our expectation is that in case of a reduction of interest rate, we can increase our fee commission income in a significant way because this calculation is made moving through the capital gain embedded in our assets under administration that we can switch -- that we can ask our clients to switch into asset under management. So we think that in case of a reduction of 50 basis points of Euribor, the increase could be in the range of some EUR 100 million of commissions. This will depend on the kind of portfolio. A significant portion of our -- of the portfolio of our clients with a reduction of 50 basis points could become significantly capital gain positive. So in case of potential switch, we can accelerate the growth of our fee and commissions income. In terms -- that's very important for the gross income -- the gross inflows, not only for the net inflows. So in case of a reduction, we are really positive. In case of an increase in interest rate until a level of 50 basis points, our expectation we will remain more or less at the same level. This will depend also on the market performance of the equity markets. Then we will see what can happen. Our base case is that our fee and commissions can increase in a significant way during 2026 and 2027. Looking at the M&A environment in Italy, I have to tell you that I don't think that there will be some significant move in the next months during 2026, we will see what can happen for the other competitors that didn't close deal during 2026. In any case, Intesa Sanpaolo will be not part of any kind of consolidation in the banking and insurance framework. Operator: Now we'll go and take our next question. And it comes from the line of Andrea Lisi from Equita. Andrea Lisi: The first question is if you can already provide us an indication on the managerial action you are aiming to put in place in the fourth quarter, especially given your indication regarding the new business plan that will be a plan of further efficiencies. And so if you can provide some color on them. The second is if you can provide an update of your direct digital platform from 2026, how is evolving the collaboration with BlackRock to create the new digital wealth management platform for European private and affluent clients, what should we expect and what should we have updates? And how should we make in your international growth in this segment? Carlo Messina: So looking at the managerial actions, we will obviously wait for the final figures of 2025 in order to define the managerial action and the focus will be on the sustainability of future results. The first part of the job [indiscernible] the cost base. So this will mean that we will work on some areas in which we can anticipate some cost reduction that we can have for the future. So making some write-off in some areas in which we can improve profitability, mainly related to the IT system cost base. This will be the majority of the efforts that we are doing in terms of studying the potentiality. Then we still have a significant number of people that asked to leave the organization at the timing of our agreement, and we didn't -- we were not in a position to allow them to leave the organization. At the same time, we remain also with some areas of potential reinforcement also on the credit side, if this will bring to a potential reduction in terms of risk for the future. And so we will also work in this part of the story considering that we are in a very good position in terms of run rate of the cost of risk. So these are the most important areas in which we will concentrate in order to evaluate the managerial actions. On the BlackRock, I will ask Luca to answer to your question. Luca Bocca: Yes. The partnership is continuing to develop. In Italy, Aladin solution is fully operative on all the different clients that we have, especially in the Private Banking division. So you see the very good performance in commission are also driven to the excellent level of service that we offer to the Italian client. On the European platform, we are planning, as you can see at Page 60 to launch the platform not only in Belgium but in the fourth quarter of this year and some hundred million of new financial asset can arrive in the next quarter. But again, in the business plan, we will provide also a number on this kind of lever. Anyway, we are starting to have also new inflow of money in Belgium and Luxembourg. Operator: Now we're going to take our next question. And it comes from the line of Andrew Coombs from Citi. Andrew Coombs: Just follow up with a couple of numbers questions. Firstly, just on the trading income, the client contribution was fairly stable, but the capital markets are fair bit weaker. Could you just elaborate on what drove that swing in the capital markets trading results? And then the second question, just coming back to the deposit hedge on Slide 15. You talked about EUR 2.5 billion maturing a month, so close to EUR 30 billion a year. If I take that implies the entire book would turnover in about 5.5 years. So your average duration would be just shy of 3 and you said it's 4. So can you just help me square the circle on that one, please? Carlo Messina: So on the trading income, we had some negative mark-to-market, especially in some participation, mainly we can mention the Euronext participation that was really strong positive in the last quarters and this has reduced the positive contribution. So this is the most important part of these items in the trading income. Then in any case, we decided to be very conservative in order not to force profitability in this quarter because we have already reached the level of our profitability that we want to deliver this year. And so we are already to prepare for the new business plan. In the second question, I will ask Luca. Luca Bocca: The duration is 4 years because it's the average duration based on the different buckets that we cover with a different level of our stable deposit. So it's 4 years with repricing of more or less EUR 3 billion every month in the region of EUR 9 billion every quarter. So it's something that you need to wait for the different bucket of our deposit. In any case, you can assume a repricing at the level of today of 10 basis points more or less every quarter, and this is the reason why we are have another increase in the yield of our hedging portfolio in the 2026 of around EUR 400 million of positive contribution. Operator: And now we're going to take our last question for today. Just give us a moment, and it comes from the line of Delphine Lee from JPMorgan. Delphine Lee: Just 2 on my side. So I just wanted to ask on fees because you've had a very strong year, fees growing mid-single digit, but that includes wealth management fees growing double digit. Going forward, do you think you can continue to achieve the same kind of levels -- or just if you can give us any color of how you're thinking about the moving parts within fees? And then my second question is just a follow-up. I can't remember if you responded to the question, but another question around the cash dividend payout. Considering other banks, other Italian banks are looking at increasing meaningfully their dividend payout ratio. Is this something you're considering as well as part of your new business plan? Carlo Messina: So on fees, I can confirm you that we are working in order to have a double-digit growth in terms of wealth management and commissions. This will be part of the strategic story of the group and the increase in terms of amount of assets under administration and deposits that can be transformed into asset under management and the increase in people that we will have during the business plan, global advisers and the 360-degree services, this will bring us to have trend in terms of fee and commissions income that is and will remain the most important part of the story of our business model. In terms of cash dividend payout, as I told in the first question, I think that this will be evaluated with all the new dividend policy of the group. It is clear that until some months ago, we were the best-in-class in terms of cash dividend. Today, there are other players that can be considered as part of benchmarking that we can analyze in terms of evaluating the new dividend policies. But do not forget that we will have to deal also with a significant excess capital. So the mix between dividend payout and share buyback, we will be part of the new dividend policy. But 70% would be a minimum for sure. Operator: Thank you. Dear speakers, there are no further questions for today. I would now like to hand the conference over to the management team for any closing remarks. Carlo Messina: No, only thank you very much, and we will have the occasion to have also the analysis of the business plan in the next presentation, and you will have all the drivers that will allow us to be a sustainable 20% ROE bank. So thank you very much. Operator: This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.
Allison Chen: I hope you can hear us. If you guys -- if you cannot hear us, please let us know. So before we get into it, let me share the agenda for today. So we will have Tan Choon-Siang, who will get us through the third quarter key highlights. After that, we'll delve into the Q&A. And then please also note that this meeting will be recorded. A quick round of introductions of the management. We have today here Choon Siang, our CEO; Mei Lian, our CFO; Mei Peng, our Head of Investment; Yi Zhuan, our Head of Portfolio Management; and I'm Allison, Investor Relations at CICT. Okay. Now let's bring on Choon-Sian to share his highlights. Choon-Siang, please. Choon-Siang Tan: Good morning, everyone. Thanks for joining us today. I know you guys are excited to ask us questions. So we'll try to spend just a couple of 3 minutes. You probably have gone through the slide deck. I think safe to say this is quite a good quarter in terms of operating performance as well as financial performance. You can see that we are pretty much firing on all engines. Office is doing well. Retail is doing well. AEI is getting complete contributing and acquisitions are helping to help with the growth of the operating numbers as well as the financial numbers as well. So NPI up about -- for the year-to-date, we are up 0.2%, but that's, of course, due to the fact that we sold 21 Collyer Quay. Like-for-like up about 1.4%. On a quarter basis, it's quite similar numbers. Gearing is up 39.2%. I think some of you might be surprised why the number went up compared to last quarter, but it is because of the distribution that we did as well as the advanced distribution that we did as a result of the EFR. So there's a reason why the gearing creeped up slightly. Cost of debt, as expected, came down slightly, 3.3%. Bear in mind that this is a year-to-date calculation of cost of debt. So you don't expect it to move by quantum leaps because you are averaging over 9 months, whereas the previous quarter, we are averaging 6 months. We did a good financing, $300 million for the quarter. You guys have seen the news, 2.25%, probably the lowest financing done by the REIT this year. Operating metrics, maybe I'll just quickly skip to the next slide. I think operating metrics, we can talk about it a bit later. So AEI, we have -- I think we have announced some of this earlier, but we have now started works on these 3 projects already, at least from this quarter onwards. Lot One, we have gotten commitment from FairPrice to expand into Basement 2. This will be a conversion of the existing carpark. So that will be a good uplift in terms of NLA and should help contribute meaningfully from next year -- towards the end of next year onwards. Tampines Mall, we have already started work. If you have visited, you would have seen some of the works at the entrance area. We will also be moving the works further in once that exits. We have already got a commitment from some of these key tenants that you see here. So a very exciting list of new tenants that we hope will uplift the overall mall. And then we are also starting work on Raffles City. But this is not really a significant asset enhancement. It's more an upgrade of existing facilities given some of the facilities and some of the amenities that are lacking compared to some of the newer buildings. For example, end-of-trip facilities, which is common for new buildings now, which is not present for R City. We're trying to add that as an amenity for our tenant in Raffles City Tower. Next slide, please. I think financial performance, we've talked about that. We are up 1.5% year-on-year in terms of gross revenue, NPI as well, about 1.6%. So fairly happy with the numbers. So contributions from all areas from rental reversions, from improvements in occupancies as well as the acquisitions are contributing to the numbers. Next slide, please. Next slide, I think year-to-date, we talked about it. Leverage ratios and capital management numbers, we've touched on the key numbers in terms of gearing and average cost of debt. So I don't think we need to dwell too much. Next slide, please. I think we don't have to focus on this. Maybe just go through the rental reversions and occupancy. Next slide. Yes, maybe just a quick one on occupancy. I think all of our assets are doing well, all in Singapore, Germany as well as Australia. Office occupancy has improved due to improvements in Australia as well as Germany. We have leased out some additional space in 100 Arthur as well as MAC. So that's a very positive news for us, given the lack of momentum over the last few quarters for leasing some of this. And now we are seeing some green shoots. So we are very happy with the outcome. Integrated development occupancy came down slightly due to mainly Raffles City. It's a accumulation of a few different buildings. So it adds up to about 0.5% due to Raffles City Tower as well as Funan. There are some exits, but we have already backfilled some of the spaces and we are continuing to see some momentum in terms of backfilling. So I don't think we see that as a major concern. Next, Rental reversions, very pleased to say that improvements against the last quarter, you guys probably have seen the numbers already. If you look at it compared to second quarter, these numbers are up compared to last quarter. Last quarter, overall, retail, we are probably up 7.7%. Now we're up 7.8%. I think the more meaningful number actually is office. Office is up 6%. Rental reversion is 6-plus percent compared to 4.8% last quarter. Retail sales, very positive quarter. So I think as we highlighted in previous briefings, I think second quarter was a bit muted, partly due to liberation day, right, it was purely based on effects of that, in April and May. So we had a slight -- I mean, excluding ION, we had a slight downtick in terms of tenant sales, but now it's back up about 1% per annum year-on-year growth if we exclude ION. If you ION, of course, there's a more significant growth rate. So I think overall, it does look like the momentum is swinging back to positive. So very pleased with the outcome as well in terms of operating numbers. Next, some of the new brands, I don't think we want to spend too much time, but I think if you have visited some of our malls, I think we have quite a lot of exciting brands. Hai Kah Lang, if you have gone to Funan, you'll see that every day, there's a long queue there. Legendary Hong Kong in Tampines Mall is doing very well, some new brands in some of the others. I think it's probably not your focus. Maybe just one last bit, one last slide. This is the improvements in occupancy across the 3 countries, as you can see, we are indeed improving the occupancy as what we promised. I think we wanted to improve the asset performance for some of our overseas assets, and we have delivered on that. Germany is now up to -- we leased out a major space in bank, which has been quite stubborn. So now occupancy there is about 86%. And bear in mind, this is you excludes Gallileo. So if you include Gallileo, that number will probably move a little bit higher. Australia, we also managed to lease up -- actually, the only challenging asset in Australia was 100 Arthur, so that we have leased up quite a big space over there. So now that moves the average of the 3 buildings up from 88% to 91.2%. Okay. Sorry, I think that's probably more than 3 minutes, but maybe we can move to Q&A. Allison Chen: [Operator Instructions] I see quite a few raised hands, but perhaps then we will go to Mervin. Mervin Song: Congrats, Choon-Siang and team. Very good business update. I can't see many negatives per se. Can you touch on the tenant sales? FCC also reported improvement. I'm just wondering what's happening for third quarter? And do you think this will continue into fourth quarter considering the last 2 Decembers has been down year-on-year? And the second question I have is in terms of cost of debt guidance noted it did fall Q-on-Q. Do you have updated guidance for year-end as well as FY '26? Choon-Siang Tan: So I think -- I think that -- I would say that Q2 is more an anomaly. So we are back to normalized pattern, I mean going up. Normally, you wouldn't have been so excited if we tell you tenant sales are up 1%. I think you will see that as business as usual. I think it was because second quarter, we were down and now it looks like an uptick. But I feel that second quarter was more an anomaly because of Liberation Day, there was a lot of caution thrown into consumer spend. So I think some of that savings that people locked up in second quarter might have contributed to the uptick in third quarter. And of course, if you look at year-on-year, 1% growth means that the third quarter sales was higher than 1%. So it's quite strong momentum. I think part of it was also contributed by CDC vouchers, right, because those went up in July, but probably did not account for that full delta. But in fact, we probably saw an increase overall across most of the trade categories and not just supermarkets. Okay, so I think our second part of the question is whether we can see that continuing in Q4? I think that's a bit hard to -- I mean, hard to extrapolate. It always depends on how much time people spend traveling outside of Singapore. I think that's always a big determinant of whether a lot of them spend days in Singapore. Sorry does answer your question on December numbers? Mervin Song: Not a problem, yes just wondering your thoughts. A lot of negativity in the retail space, but I think this is a positive data point. We will just to need to keep writing on LinkedIn about how great retail in Singapore is. Choon-Siang Tan: I mean negative news always gets more eyeballs. That's all I can say. So don't always believe everything you need in the newspapers. Mervin Song: And cost of debt... Choon-Siang Tan: At the macro numbers from [indiscernible] right? I think the retail sales numbers are actually up in third quarter quite a bit as well. So it's not just limited to sales in malls. I think overall macro across the country, retail sales are up quite a bit. I think if I'm not wrong, it was about August or July up about 4% to 5%. Yes, I think August 4.6% retail sales. Mei Lian Wong: Then there was a question on cost of debt. So the averaging down of Q-on-Q is that we're actually seeing lower cost per Q, it is close to about 3.17%, so guiding towards the end, we continue to see the cost of debt slightly down. But to the nearest decimal point, it is probably close to 3.3% -- but when we round it up to the nearest, it is still around 3.3%. Mervin Song: Sorry, you're a bit softer. So can I say that -- so the third quarter itself was 3.17%? Mei Lian Wong: Yes, yes. Mervin Song: Yes. Okay. So next year, it will be at least 3.1%, if not 3%. Mei Lian Wong: Yes, yes, closer to 3.1% to 3.2%. Mervin Song: Next year. Allison Chen: All right. Next, shall we move on to Geraldine? Geraldine Wong: Choon-Siang team, maybe just following on to Mervin's question. If your full loan book resets at today's rate, what could your average cost of borrowing look like? Choon-Siang Tan: Well, theoretically, it should be the same as what we just borrowed, I mean it is 2.25%, right? Geraldine Wong: Okay. Choon-Siang Tan: Yes. I mean I'm just giving a very simplistic -- I mean, we have the capability of borrowing at 2.25% today. So if we reset the whole loan book, it should be that or even lower because there was a 7-year bond, right? Technically, our average term to maturity is 4 years typically because you have some nearer data ones and some floating. Floating are usually even lower. So if you -- I think 2.25% is probably conservative if you reset today, but yes. Geraldine Wong: Okay. Yes, it's the lowest rate we've seen in a while. Maybe just on office, if I just look at 3Q reversions, it looks to be closer to 10%. So just wondering what's driving the numbers? Is it more Australia? And how much of it is due to the CapitaSpring consolidation? Unknown Executive: Our reversion numbers does not include the overseas properties, just the Singapore reversion numbers. We saw some of the leases in some of the properties, but currently however the reversion number is pretty strong. Geraldine Wong: Okay. So it's [indiscernible] plus CapitaSpring console. Unknown Executive: Yes, there's a bit of a blend across the board. Geraldine Wong: Okay. Okay. Maybe just last quick one on acquisitions. Now with CapitaSpring already under your belt, what could be next for us to excite the market? Choon-Siang Tan: You're not excited enough? Geraldine Wong: Very exciting, but... Choon-Siang Tan: Well, we are looking at a few things that I'm quite excited about, but I don't think I'm ready to share with you. Okay. I think in terms of things that are visible, the only thing we can share, I guess, is sponsor pipeline, right? I mean those are at least clearly visible. Sponsor pipeline, I think what is left in the books is Jewel and Jewel is quite an exciting project, but we don't know whether -- yes, I guess that's a matter of timing as well. So that's one potential. I'm not sure whether it's something for '26 or '27 or '28. So we'll see what happens. Also looking at some other stuff, but yes I think the other thing that is getting us also excited is also I think we do -- we are trying to do a few AEIs. And I think those have quite meaningful contributions. I mean they are a bit smaller in terms of capital deployment, but they do add vibrancy, add some new tenants and also contribute meaningfully to our numbers on a consolidated basis. We're also exploring new potential AEI for some of the other malls. So as and when they are ready, we'll be sharing that next year if they come to fruition. Allison Chen: Next, [indiscernible]. Unknown Analyst: Three questions. The first one is on ION. Tenant sales have been very strong. How long can this sustain? Choon-Siang Tan: So far, I think so good. I will say that ION sales, if you look at it compared to -- I mean, the numbers are because it's absent last year, right? I think on a year-on-year basis, I will not say that it's -- I will not say that it's stronger than our other malls. I think they are probably more in line. So actually, they do trend quite similarly to some of our downtown malls. So I wouldn't treat ION sales as separate in terms of trending. They still remain quite correlated with, for example, Raffles City or even some of the suburban malls. Even though we see it as slightly higher end and maybe slightly higher tourist content, but I think at the end of the day, it's still about 70% domestic. So it's still highly correlated with our domestic traffic. But we are hopeful that the numbers will continue because bear in mind, ION is not operating at 100% capacity. If you go to ION today, you will see that some of the shops are still not fully operational because we have been doing a bit of a rejigging, moving some of the tenants and trying to elevate the experience on the ground floor and moving some -- shifting some of the tenant. So if you ask me on that basis, actually, there is some room to grow because if all the tenants are operating, actually, you should expect tenant sales to improve. And I think if you look at tourist numbers in Singapore, I think ION does have some reliance on tourism in terms of spend, right? If you look at tourist numbers, while we do not have big concerts like Taylor Swift, which contributed quite meaningfully to last year, but the government and tourism board still does -- makes a very good effort. If you look at tourist numbers, actually, it is still -- it is higher -- we are tracking higher than last year. So there is still strong momentum. There are a lot of -- my calendar is very strong. And bear in mind, this year, F1 was actually in October, not in September. So F1 numbers on a like-for-like basis actually have not contributed to September numbers. So that you might see some skew and some positive momentum in the October numbers. Unknown Analyst: Okay. Then my second question is on your comment on Jewel, right? What's the passing rent for Jewel? Can you share? Choon-Siang Tan: Oh, it's not our asset. I don't even know the numbers. Unknown Analyst: Then is there anything on the market right now that is exciting -- that is making you excited other than your sponsor pipeline? Choon-Siang Tan: I mean, you know in Singapore, there aren't that many opportunities... Unknown Analyst: Others on the market are not so exciting in terms of pricing? Choon-Siang Tan: No, I think if it's a third party, unfortunately, I think in terms -- it could be exciting, but the pricing usually is not as exciting. If you have to run through a competitive process, it's usually a bit harder. We also want to stay disciplined in terms of acquisitions. We want it to be exciting, but we also want to price to be exciting also. It doesn't really answer your question. But we are looking at a few things also. Unknown Analyst: Yes. I was just thinking about next year, what's the plan? Is it going to be a quiet year? Because this year has been relatively busy for you from the beginning of the year to date. Choon-Siang Tan: Yes, we hope it won't be quiet. Unfortunately, it's hard to articulate very clearly. If you ask -- if you look back 9 months ago, you probably thought this year might be a quiet year too. Unknown Analyst: Yes. Because I look at AEI. AEIs doesn't really leave much to your -- it doesn't bring much to your portfolio because your portfolio is so huge, right? You add another $10 million, it's like it doesn't move the needle, yes. Choon-Siang Tan: Unfortunately, it's very hard for us to share things that we are working on unless it's quite finalized anyway. So usually, this question is very hard to answer. But, we are excited a lot. In any case, next year, actually, we do still will benefit from the existing organic. I mean we have only -- even for this year, CapitaSpring has only contributed 1 month starting from September onwards. So it will still continue to contribute next year. There are things that are announced already. I mean, while it's not a new acquisition, like, for example, it has not contributed for the last 18 months, but we are quite excited that it will contribute -- start contributing early next year. And this one is substantial because it's an entire building, right? Allison Chen: We shall move on to Rachel. Unknown Analyst: Can you hear me? Choon-Siang Tan: Yes. Unknown Analyst: Yes, I don't know why my video is not working anyways. Yes. Maybe just following on, on this exciting transactions or assets that you're looking at. Is it still Singapore office or retail? Choon-Siang Tan: If we were to look at -- if you were looking at staff, it will probably be Singapore for now. Unknown Analyst: Okay. Office or retail or both? Choon-Siang Tan: I think we are open to both depending on -- we are quite pragmatic people. I mean, at the end of the day, it depends on pricing, right? So we are value hunters. We like -- as long as we think it's -- it adds value to our portfolio, and we think that we are able to acquire something at a reasonable valuation, yes. So it's a matter relative to market. Although if you look at -- I mean, most people -- if you look at it simplistically, you know that retail trades at a higher yield, right? Technically, it's more feasible and easier to do retail. Of course, the risk is different. So people cannot just look at you solely as well. Unknown Analyst: Okay. Is the Paragon's portfolio still in your this exciting assets or not really? Choon-Siang Tan: I think Paragon, I'm not... Unknown Analyst: Paragon REIT. Choon-Siang Tan: So I suspect that might take a while. I don't think it's in -- I mean, I don't know, but it doesn't feel like it will be in the market in the near term given that they have to do AEI. Unknown Analyst: Okay. Okay. But there are other assets in Paragon as well, right, Paragon REIT, ex-Paragon. Choon-Siang Tan: I think that's Clementi Mall, they're running a process now, right? I think that's public knowledge. And the other one -- they only have Marion after that, which is in Australia. I think these are the 3 assets that you have. Unknown Analyst: Okay. All right. Then my next question is on Gallileo. Now that you have leased up, is looking good. Are you keen to sell? And is the market ready to sell? Choon-Siang Tan: I think we focus on handing over to the tenant first. Actually, it's not completely done. While we have started -- actually, it's a multiphase handover. So we will only be completing the handover to the tenant, probably coming close to the end of Q1, which is another 5 months from -- 4, 5 months. So I think we want to focus on -- and when you do handover, there could be issues at the beginning. So we'd rather try to be a good landlord and sort of all these issues with the tenant to ensure a very smooth handover first. Unknown Analyst: Okay. But the income from this Gallileo will be full contribution starting from end first quarter, is it when you are fully handing over? Is it full? Choon-Siang Tan: Yes. No. So it will be staggered. So it will also -- contribution will also be based on phases. We only get rent for the area that we have handed over. Unknown Analyst: Okay. So when should we expect like the full... Choon-Siang Tan: Full contribution was -- partial maybe Q1 and full probably Q2 onwards. Unknown Analyst: Okay. Got it. Choon-Siang Tan: We already own 94.9% of the asset. So when we say full, we mean the full contribution from our share. Unknown Analyst: Yes. Okay. And just one last one, quick one. In terms of ION, I know there's some rejigging. When can we expect all this rejigging to complete and then we will see some flows in income? Choon-Siang Tan: It will probably take a while because we are actually -- because actually, we are doing a few movements, and you cannot do all at one time. So that's sort of as a bit of a musical chairs. Tenant A move to tenant B, tenant B moves to tenant C. So it will be ongoing for a while, I think, at least it will continue until next year. But at least those that are not operating now when they open and contribute, then you will it will be incremental. Yes, we don't expect everything to open up to get the... Allison Chen: Next, we hear from Brandon. Brandon Lee: I just want to touch a bit on your asset sales, right? Can you share what's your guidance here? I mean we have been seeing cap rates compressing quite a bit domestically. So are you still looking to sell if we do see that, is it more office or retail? Choon-Siang Tan: I think we have done some divestments in the last 12 months already. In fact, yes, it's really still within the last 12 months. We've done 2 asset disposals [indiscernible] and the service residence at CapitaSpring. So I don't think we are in a hurry. But as you rightly pointed out, it does seem like the market yields are compressing quite fast, partly due to probably no good assets available for sale in the market and also coupled with the sharp decline in interest rate in the last couple of quarters, right? So there's been -- I mean, we are looking forward to what currently the mall transacts at eventually. But we do think that, yes, the cap rate compression is quite significant. So -- it could make us reevaluate our portfolio a little. But I think safe to say we are generally quite happy with our portfolio construct now. We do think that most of our portfolio are very strategic and quite core to our business. I would say that if we were to divest, we may want to look at -- I mean, I think some of you alluded to some of our overseas assets that will be more meaningful for us to look at in terms of divestment. In Singapore, I don't see us divesting significantly. We could potentially look at 1 or 2 assets, but not urgently because they are all yielding quite well. So we will also have to evaluate. So when they are yielding well, unless we get a very significant uplift to our valuation of book value, it's likely to be dilutive. So we have to evaluate that quite carefully. So it depends on what kind of yield I can get. Brandon Lee: So basically, at the current 39.3% gearing, you're quite comfortable. Choon-Siang Tan: Okay. So 39% is not -- actually because we did advanced distribution, right? So in a normal quarter, if we didn't do advanced distribution, this gearing would have been lower. So when we were comparing it to like, say, a few quarters ago, it does look a bit higher. But we must bear in mind that we have advanced distribution. Other quarters, we normally don't have advanced distribution, right? So without -- if you remove that effect of the advanced distribution, the gearing would probably have been 38% plus. But I guess the underlying message in your question is that should we be comfortable with 39-plus percent gearing? I think we would like it to be a bit lower. Brandon Lee: Okay. And just one last one, right, for the potential inorganic, right, would you be keen to look at some of these GOS mixed use with a retail component like something like -- along Central Mall -- because in the past, we did see like CSE going for Bedok site, right? Choon-Siang Tan: I think we will evaluate all opportunities. So it all depends on how it affects our numbers in terms of whether we have the capacity to do it and whether it's overall accretive or makes sense for us from a portfolio perspective. Yes. So I think to answer your question is, yes, we will look at all opportunities as long as the -- it's relevant to our portfolio. Brandon Lee: Okay. Sorry, just one quick one. Is [indiscernible] considered your sponsor? Choon-Siang Tan: No. Brandon Lee: No, okay. Choon-Siang Tan: What do you mean by sponsor? I guess when we say sponsor, we mean we have a ROFR to their pipeline, right? Then, the answer is no. Allison Chen: Derek, please go ahead. Derek Tan: Just a few questions, right? Firstly, on acquisitions, right, I'm just looking at some of your peers, I'm not sure whether they're peer, but gone into suburban Australia. I'm just wondering whether is that part of the world interesting for you? Or you still want to focus on Singapore for now? Choon-Siang Tan: I think we want to focus on Singapore for now. We still see opportunities in Singapore, so until such time where we think that we run out -- I think -- but for now, I think we still see some pipeline in Singapore. So we -- I think our investors would rather want us focus on Singapore for now as well, I think. Derek Tan: Certainly. Okay. Got it. Got it. And just to also reconfirm, I think previously -- I mean, we hear from a great buyer that this Bukit Panjang Plaza was on the market, right? So that is off the market already. Just any thoughts on that? Choon-Siang Tan: I mean, was it in the market? Derek Tan: Don't know. So not in the market? Choon-Siang Tan: I just want to make sure because maybe it was there in the market before I joined, so I need to clarify. So, I cannot answer for those. Well, I think I'm just checking with my colleague whether it was in the market, right? No, right. We never said that was in the market. Mei Lian Wong: Normally, it wasn't. Choon-Siang Tan: Yes, I saw the newspaper article, so I wasn't sure whether it was from us. Derek Tan: Okay. No problem, no problem. Sorry, my last question, I mean, just a quick one. I mean results are really good and straightforward. Could you give us the guidance for your reversions and maybe going to next year? I think my thinking behind it is that this year, you had the consumption vouchers, right, and boosted spending a little. I'm just wondering whether at this moment, are you still okay to push reversions to the same level? Do you think you can maintain? Choon-Siang Tan: No, I think we have always said that high single, probably not so sustainable. We're probably going to target between mid to -- yes, about 2% per annum sounds more reasonable, right? I mean, Inflation is also not that high. Derek Tan: Got it. Got it. Got it. Sorry, just last one. If you think about the ION, the LLP potential, right, is that still something you're working on? Is there a time line that you can look forward to, to convert -- sorry, convert to LLP? Choon-Siang Tan: Yes. So I think we have -- I think at the last briefing, we have also said, you already are in the long time, not to be -- probably not something that you want to work into your numbers in the short term. But of course, rest assured, at the back end, we are running at 100%, but doesn't -- even when you run 100% to try to get it, it will still take a very long time because yes -- so yes, I will not assume it in the short term, but you have to get it done. Derek Tan: I'll leave that as a surprise. Allison Chen: Next, can we hear from [indiscernible], please? Unknown Analyst: Can I follow up on the reversion, I guess you were guiding for reversion to moderate for some time, but it seems that things are actually improving. So what's actually driving this positive surprise here? Choon-Siang Tan: I think -- I guess, overall, Singapore economy is doing quite well. If you look at GDP growth, it's always -- it's been surprising on the upside every single quarter as well. So I guess -- yes, I think generally, equity market is doing well, CDC vouchers does seem like people are prepared to -- I mean, when people are prepared to spend -- continue to spend when the market moved, it's general market is doing well. What is driving it? I guess, while we have always said CDC vouchers is driving part of it. Some of it was probably due to -- like I mentioned, I think Q2 was a slightly lower base, right? So improving from Q2. Q2 was probably muted because of Liberation Day. I think we probably felt it most in April and May in terms of tenant sales. And some of the bounce back is not as surprising actually. And then you probably have some savings, right, because people spend less in the last quarter. But I think overall, market and economy is doing well. So we do expect sales momentum to improve. Unknown Analyst: Second question on tax transparency, right? So our forecast is usually 3 years forward. So by saying that we should not factor this in, does it mean we shouldn't expect it to happen within the next 3 years? Choon-Siang Tan: No, I wasn't thinking from your point of view. I was thinking from my point of view. My point of view is 12 months. Allison Chen: Jonathan, you're up next. Unknown Analyst: First question, for those of us who missed the first 3 minutes, don't mind, could you run through what's driving the higher occupancy for the office portfolio? And then second question, as we come towards end of the year, do you expect sizable revaluation gain when you do your revaluation for December? Do you expect cap rate compression for retail and office portfolio? Which segment would contribute more divestment gain? Would it be office or retail? Choon-Siang Tan: Okay. So office occupancy went up largely because we managed to lease out our 2 assets in Germany and Australia quite well. So we -- in Germany, occupancy went up 5%, right, close to 5% because of MAC, which is only a single property. So that was a single tenant, large lease. So we're quite happy with the outcome. Australia, actually, 2 of our office buildings are pretty much fully leased already. It's just 100 Arthur Street. We managed to lease out 100 Arthur Street and also a fairly large long-term lease as well to Flight Centre, which took quite a big space. So that improved our -- and this is a 3 percentage point increase in Australia over 3 buildings, right? But actually, the stand-alone building was more significant. So these 2 contributed to the uptick in office occupancy. So that was your first question. Second question is on valuation, right? We do hope for our Singapore assets to be -- to show improvements in valuation. As to how much, I think it's hard to say. If you look at some of the other REITs that have year-ends in September or June, they have reported a healthy valuation uplift for the Singapore portfolio at least, yes. Unknown Analyst: Yes. I mean would it come more from retail given like maybe transaction in the market? Choon-Siang Tan: I think it will be both office and retail. You might look at retail, I guess, because I think office cap rate is already quite tight, right? So the room to move is probably slightly less than retail. And of course, if you look at our performance reversions and in terms of occupancy, it's also slightly higher for retail. So all of those get factored into future cash flows, right? I mean I'm just giving like some of the drivers and what could potentially move. So at the end of day, it depends on how the valuers do their numbers as well. But if you look at broad numbers, of course, retail number seems to be -- have a higher -- better momentum in terms of rents. Allison Chen: Vijay, you have a question to share? Vijay Natarajan: Just adding on to this Jonathan's question. In terms of overseas markets, do you think -- see that things have bottomed out over there? Do you expect this occupancy gain to sustain? And probably can give some color in terms of incentives for some of these leases you have signed? Choon-Siang Tan: Okay. Maybe Yi Zhuan do you want to take some questions. The other questions, I have to defer to my colleagues. Lee Yi Zhuan: Yes. So I'd say generally, the overseas markets, and I will go into Australia first, right? So for Australia, at this point, we do see a bit of signs of bottoming out in terms of some of the occupancy vacancy that we are seeing, but we are also, at the same time, right, incentive levels are stabilizing, but it's nearing the peak. As for the leases that we signed, I won't go too much into the details, but for the 100 Arthur one it's pretty much in line with what we are seeing some of the newer buildings in the area doing -- so unfortunately, for North Sydney at this point, is on the elevated side of things compared to the main Sydney core CBD area. But the good thing is generally, while we are seeing North Sydney compared to a couple of quarters ago, the Flight to Centre would be right where a lot -- which has been benefiting the core CBD for a while. We are seeing a lot more inquiries now also coming for North Sydney coming from some of the Macquarie Park or Chatswood and some of these other tracings that is further out. So hopefully, some of these translates eventually into more deals in the area. For MBC side, I think it's pretty much in line with what the market is doing. The rent free is a little bit long for the submarket in airport district at this point. But at this, we do not really see something that is odd in that. The good thing about some of these leases is that the commitments are coming quite early like Flight Centre, we are already seeing the tenant taking the space early next year. Vijay Natarajan: Okay. Would you say the occupancy has bottomed? Lee Yi Zhuan: Sorry? Vijay Natarajan: Would you say the occupancy has bottomed out? Lee Yi Zhuan: We will still see a little bit of volatility in the next few quarters in terms of the occupancy for our assets because there will be some exits. But I think right now, the momentum in getting them back still is essentially quite the key. Vijay Natarajan: Okay. Got it. My second question is in terms of portfolio, broadly looking at next 3 years, do you have any redevelopment opportunities in your portfolio like CapitaSpring or CapitaGreen, which you see in your portfolio, specifically in your portfolio or even with the sponsor assets combined together like Class assets or CLIs assets, which you can redevelop together in the next 3 to 5 years? Lee Yi Zhuan: Redevelopment. So for redevelopment is, of course, we do study some of the possibilities in view of some of the things we see in the master plan. But a lot of all these things, we have to actually engage the authorities as well as look at what eventual schemes we are getting because it only makes sense for us. Most of our -- if I say we get a very good GFA uplift. But if you look across most of our properties, right, they are trading pretty well, the kind of occupancy and it is actually also quite strong. So there must be meaningful upside for us to undertake redevelopment. Vijay Natarajan: Okay. But at this point of time, you don't see any? Lee Yi Zhuan: We will have to study and see what the market can bring us. Allison Chen: Can we hear from Terrance, please. Unknown Analyst: Congrats on the strong results. Can I ask on the office -- what drove the stronger office reversions this quarter? I mean you report on a 9-month basis versus first half basis. So it's actually quite strong, specifically for this quarter. And how is tenant demand trending, especially I understand AST2 had a bit of lower occupancy in the first half of the year. So how is that doing? Lee Yi Zhuan: I would say that generally, if I look at Singapore office market, right, the key trends -- trends are still pretty much the same, right? The flight to quality, people are paying for quality at this point, limited supply. And of course, we see some of the upgrading demand, even though generally relocation is still something that a lot of companies are a bit careful because of the CapEx commitment. And we also start to see like some of the landlords in the market are starting to look at, especially for the smaller spaces, right, looking at fitted out suites and fitted out options. For this quarter, in particular, we do see pretty strong reversions for 2 properties, mainly Capital Tower as well as Six Battery Road. It's very hard to say why suddenly because actually, like, for example, if I go a quarter before, these are the assets that probably the reversion is on the lower end. And then -- but this quarter is on the slightly higher end of things. So it's really deal specific rather than anything that is jumping out for -- as a key driver. Unknown Analyst: And for AST2, how is that doing occupancy-wise? And is that something that we have to worry about? Lee Yi Zhuan: Yes. AST 2, I think generally, that area has a little bit of activities in the past few quarters because we have Marina 1, we also have IOI filling up. So definitely, when it comes to filling spaces, it's a bit more competitive. But we are in talks with some of them to backfill. I think we are in some advanced discussions with some of the tenants. Hopefully, you can convert them soon. But with some of the supply and tightening around the area, those will -- I would say that this will probably give us a bit of opportunity to see a bit of improvement in the occupancy in the coming quarters. Unknown Analyst: Can you share the occupancy this quarter for AST2? Lee Yi Zhuan: Just give a second. Unknown Analyst: Yes. And then I'll just ask a final question. For retail side, any concerns on cinema or tenants? And maybe could you give us a sense of which segments are doing better, which segments are a bit more challenged? Lee Yi Zhuan: Okay. Maybe AST2 this quarter, our occupancy is actually slightly higher at around 95%. Yes. As for the retail, you were talking about retail, right? Yes. So for retail side, our good thing for cinema trade is that we are not overly exposed within our portfolio. It's less than 5% from NOA perspective. And generally, the rent contribution is even lower. So I think sub-2% from GRI contribution perspective. And -- but so far, at least we don't have a real issue with our cinema. And hopefully, I think we will promise that next year, there's a better lineup of shows. So hopefully, it converts with less cinemas around better shows, hopefully translates to better performance from the cinema side. As for the rest of the trades, I would say, generally, we do still see for F&B, right, the operators generally are still -- quite strong interest coming from there. So dining out has been still quite resilient demand across the board. So actually, a lot of the well-capitalized overseas operators are showing quite a lot of interest coming to Singapore. Having said that, I think generally, manpower limitations, wages, cost of supply also means that a lot of all these operators tend to get a bit more strategic in the way they choose and also in terms of the size. So we also see a little bit of shift from what used to be a lot of traditional fine dining now moving more into experiential kind and affordable food. So -- and I think this trend will probably persist in the coming quarters. You will see a lot more new concepts in terms of food. For fashion side, generally, the fashion retailers are a little bit careful for expansion now. And a lot of them are trying out like the new-to-market brands tend to look for pop-up space. So actually, there's a lot more inquiries for pop-up where they want to come in, take a space, either have these or take up even some of these space for pop-ups, right? And then they will try to do like a short campaign, and they will seek to test the market whether there's acceptance for it and before they look at a more permanent space. But this quarter, one of the standout performance is actually the hobbies. Generally, hobbies are doing quite well this quarter. The hobbies trade. So your [indiscernible], ActionCity, some of those are doing quite well. Last year, for -- if I talk about entertainment, partly because maybe we will have to see how the F1 weekend goes. But generally, if you look at it, last year, there are a lot of recovery for the nightlife, the entertainment. So -- but year-on-year, we see the entertainment coming off a bit this year, yes, for the clubs and the bar. Allison Chen: Derek. Derek Tan: Just a quick follow-up on that cinema percentage of GRI, that's for retail, right? So overall, it will be even lower, right, sub 1%... Allison Chen: You're breaking up. Can you repeat your question? Derek Tan: No. Just following up on Yi Zhuan's answer on cinema operators accounting for less than 2% of GRI, that's retail GRI, right? So overall be even lower? Lee Yi Zhuan: This is actually your GRI retail. Derek Tan: Okay, this is retail? Lee Yi Zhuan: Correct. Derek Tan: Okay. Okay. Got it. And just can I also ask on the occupancy costs for retail, given that I see a disconnect between the reversions and the tenant sales, what's the occupancy cost right now? And how does that compare... Lee Yi Zhuan: Our occupancy cost, if I compared to first half of 2025, actually, it came up a little bit, very marginally. But I would say quite stable around [indiscernible]. Derek Tan: Okay. Okay. Is there a breakdown between downtown and suburban? Lee Yi Zhuan: Just if we are talking about cost, if you're talking about downtown, suburban generally is around 16.5%, plus/minus. So it will fluctuate around the area. Downtown is about 18%. Derek Tan: Okay. And just moving to office. I'm not sure if I caught -- was there a reversion outlook for office in Singapore next year? Lee Yi Zhuan: Probably around the same low to mid-singles, I would say, for those at this point. Derek Tan: Low to mid-single digit. Okay. Got it. All right. Got it. And just lastly on potential acquisitions right now. I think Choon-Siang did mention a more of a preference for malls for retail. Within that, would suburban or downtown make more sense to you right now? Choon-Siang Tan: Derek, I think we didn't say that -- we said that retail yields are higher, but I don't think we have a preference for that. It all depends on the relative value. We are open to both -- as evident in our last 2 acquisitions, right? One was office and one was retail. So it depends on what's the pricing for each of them. But of course, to make the numbers work, retail yields are higher. So it's always a bit easier in terms of that, but we have to look at it from a portfolio construct point of view as well. I think your question is whether it's retail -- the thing about Singapore acquisitions and pipeline is -- it always depends on what's the opportunity. So it's hard to -- I don't think we are necessarily try to ring-fence around a specific area. I think it always depends on the specific opportunity. I think we are more concerned about the location advantages and whether there is a great catchment and whether there's a great transport node attached to the asset. So these are more important considerations rather than whether it's retail or whether it's suburban or office or downtown. Derek Tan: And I guess following on that, what we sensed also is the dominant nature of the mall, right, let's say, if it's 200,000 square feet, that's imminent -- that's far more attractive to you? Unknown Executive: Yes. Yes. So I think definitely for us, it has to add meaningful scale. I think not so interesting for us if it's a very small asset, it doesn't move the needle for us. Derek Tan: You spoke about pricing as well. I guess would it -- could we benchmark against on a per square foot basis, maybe the current assets that you have, some of the more better mall -- suburban malls, for example, at 3,003, 2,006 per square foot. So that will be a number that's more comfortable for you, right? Choon-Siang Tan: Yes. So I think we have to look at a few metrics. One is cost per square foot, as you rightly pointed out, that's relevant. I think the other thing, of course, because also cost per square foot can vary depending on whether it's a more horizontal mall or more vertical mall, whether there's basement or no basement, that kind of stuff. So I think the other more important metric, of course, is yield. I mean, because at the end of the day, that's the income that we'll be getting. And also the third number that we always focus on is accretion and whether how it contributes to our overall portfolio. So these are the few things that we typically focus on and try to be disciplined around it. Allison Chen: Next, we have Terence from UBS. Terence Lee: My first question is on tenant sales. Do you mind sharing a bit on the third quarter year-on-year trend for retail because it seems to be flat for 9 months and it appears to lag that of peers. And it's kind of counterintuitive because I would expect that you should have gotten the lift from the SG60 vouchers coming in from July onwards. Choon-Siang Tan: Yes. So I think these numbers are year-to-date, right? So if you look at it from that perspective, this quarter actually is higher than 1%. As to what it should have been, you sound like you are expecting a much larger number. Terence Lee: No, your peers are reporting somewhere around, say, 3% to 4% year-on-year increase. Choon-Siang Tan: Is that for 3 months or is that for 9 months, though? Terence Lee: It is probably in the third quarter. Choon-Siang Tan: Yes. So that's a difference. That's why I highlighted that this is the year-to-date numbers. But maybe we can share a bit more color. Yi Zhuan can share a bit more color. Lee Yi Zhuan: Okay. So for third quarter, if I -- year-on-year, if we exclude just like-for-like properties, excluding ION are also around 3-plus percent for the retail portfolio. Terence Lee: Okay. And perhaps do you mind sharing perhaps your thoughts next year when SG360 vouchers roll off, like should we then expect sales to flatten out, potentially even decline? Lee Yi Zhuan: Actually, I wouldn't think so, to be honest, because they were offset with at least some of the growth that we see and the broader economy, how it is doing. So I wouldn't particularly say that, that on its own will actually really -- because actually, right now, we see the SG60 vouchers, probably there's a little bit of transfer effect between people having a bit more disposable income to spend given that some of the other day-to-day things they already use the voucher to offset. But we also see some of them take the money and travel overseas and spend it overseas. So I wouldn't say that actually next year, we would expect this number to really come off. Terence Lee: Okay. Got it. And on -- I think in Tampines Mall is done to close down in November 2025. Should we expect that there will be some vacancies? Or how is the backfilling progress? Lee Yi Zhuan: Yes. Definitely, that one on its own space is about, if I'm not mistaken, around 38,000 square feet, right? So as it closes down, there will be a transitional vacancies that we will see. But actually, at this point, we have already been in advanced discussion with a lot of the tenants to -- some names are already very, very close to some of these names to just a choice. It's already kind of like well backfill. Because actually there's -- sorry, maybe I'll just elaborate a bit on this because it's actually sitting on 2 floors, the ground floor and the upper floor. So the ground floor as the first space of some of the works that we are carrying out, right? Those we have actually largely kind of gotten the name kind of filled it up. The second floor is the one that's some of the details we still have to work through to finalize with the different brands because it involves a bit of reconfiguration. Terence Lee: Is it fair to say that this might involve some degree of cutting up large plate into small plate and there is that effect of like positive reversions coming out thereafter? Lee Yi Zhuan: Yes, there will be a bit of reconfiguration. Some of the floors will definitely become the smaller ones, especially the ground floor, you probably see a bit more of that. Net-net, we will expect it will generate higher income. So basically, the per square foot rent for some of the spaces will be much higher than what it is getting today. Allison Chen: Next, Rachel. Unknown Analyst: Just some follow-up question. In that Isetan, if I look at your numbers, your Tampines Mall ROI is only roughly about 7%. But now you are cutting up space in Isetan, should we expect more ROI? Lee Yi Zhuan: But we have to offset with a slight loss in NLA also. Unknown Analyst: Oh, okay. Unknown Executive: I mean, 7% is taken into account... Choon-Siang Tan: [indiscernible] contribution. Yes, we have taken into account the effect of reconfiguration. Lee Yi Zhuan: Sorry, yes, if there's a question, yes, the whole project's ROI includes everything. Unknown Analyst: Okay. Okay. All right. And then for the retail leases that was signed during COVID, has that all already been mark-to-market already? Or do we still have a few more left? Lee Yi Zhuan: It is mostly mark-to-market right now, yes. Unknown Analyst: Okay. And on the office side, you said that the key trends are still there. So I'm just wondering because of the limited supply, are you still able to push rents up or generally, the rents are actually quite stable now as you discuss with tenants? Lee Yi Zhuan: I would say that at this point, generally as a market, while there's limited supply, we also see that there's actually -- I wouldn't say the new demand coming in is very strong. Even though some of the leases we have seen recently, especially done at IOI and Central -- sorry, Marina One, right? Actually, you see big companies who actually book marginally bigger space than what they had previously. So that kind of reflects also within our portfolio, if we see this year-to-date, right, we actually see a net expansion of space among our existing tenants. So -- but a lot of the movements in the market is actually a bit of musical chairs, right? So I would not say that at least at this point, there will be a lot of -- I would say it's actually flattish and very moderate growth rather than to expect a very -- landlords are really stretching rents a lot. But of course, in some instances where we actually have tenants that moved out and some of these tenants probably have been with us for quite a while, right? And then some of the new tenants that we bring in like what we see in City and what we see in Six Bounty Road, there are those where opportunistically, we are able to get pretty strong reversions. Unknown Analyst: Okay. Got it. Yes. And the new tenants -- new to Singapore tenants are very, very small now, right, for office. Lee Yi Zhuan: Yes, I would say new to Singapore tenants demand not really that much. In fact actually, if we see startups, there's actually -- what we hear is that there are a bit of more start-ups coming from Chinese and Indian companies, right? Some of them also coming through for the tech space of things. And usually -- some of these smaller setups, they usually either go for fitted offices or they go for those kind of co-working spaces that we see. Allison Chen: We'll circle back to Mervin again. Mervin Song: Yes. I just had a question in terms of the office NPI margins. It fell Q-on-Q and year-on-year. Just wondering what's happening there? Is it the incentives you're having to pay for Germany or Australia? In terms of second question I have is electricity costs. How much you're paying today? And do you still expect further savings ahead? And for 101 Miller in North Sydney, are we getting closer to doing a more substantial AEIs, especially the retail space, which is connected to the train station or at least the forecourt to activate the space, perhaps have a more comfortable clock. Lee Yi Zhuan: I'll probably take the last 2 questions first. And so for Greenwood Plaza, we are having plans to actually do some of the repositioning works for the Greenwood Plaza sometime next year. Some of the plans we are working through, and we are also talking to some of the brands working with our JV partners definitely. So we do expect to see a little bit -- because earlier this year, we did a bit of work around the lobby for the office side. So I think the whole repositioning exercise for the office was quite well as we can see the uptick in the occupancy. Right now, then the next one to focus on is with Greenwood Plaza. With station completing later part of this year, we also see that there's a bit of a shift in the gravity of where the traffic flows in the center of gravity, right? So definitely, we need those a little bit of things to kind of anchor where and what GWP can bring in terms of footfall, in terms of the sales and stuff. In terms of electricity rate, I will only say that in '26, we probably expect tariff rates to come off what we have currently in '25. And for the occupants -- sorry, the NPI margin for the office side, I think partly came off maybe includes CapitaSpring. We have that little bit -- CapitaSpring's margin on average kind of have a little bit of impact on the overall office portfolio and what is the... Mervin Song: And this -- the NPI margin hasn't been this low for a while. Should it normalize higher over time or this is the new level? Or the first half was normally higher, and it is only 6.4%? Lee Yi Zhuan: I would say that normalized should be around [indiscernible] . Mervin Song: Okay. Sorry, just on electricity costs, would it be in the mid-20s at this point in time, going to low 20s? Lee Yi Zhuan: Do you mean as in? Mervin Song: The tariff rate? Lee Yi Zhuan: It's probably around, it is slightly [indiscernible]. Mervin Song: But it will be going to low 20s next year, I presume? Lee Yi Zhuan: Oh you are saying 2025 of 2026? Mervin Song: So, on 2025 going into 2026. Lee Yi Zhuan: So, it is slightly above, right now we are going slowly below. Mervin Song: Okay. And your contracts, 1-year contracts or you do more longer term? Lee Yi Zhuan: The contract is always long... Mervin Song: Look forward to exciting pipeline in the future. Allison Chen: Any more questions? No. Okay. So it looks like we've got everything covered for now. If anything else comes to mind, you know how to get to us. And thank you for the time today. Have a good week ahead. Choon-Siang Tan: Thank you, everyone.
Operator: Welcome to the Invesco Mortgage Capital Third Quarter 2025 Earnings Call. [Operator Instructions]. As a reminder, this call is being recorded. Now I would like to turn the call over to Greg Seals in Investor Relations, Mr. Seals, you may begin the call. Greg Seals: Thanks, operator, and to all of you joining us on Invesco Mortgage Capital's quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website, invescomortgagecapital.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding the statements and measures as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Again, welcome, and thank you for joining us today. I'll now turn the call over to Invesco Mortgage Capital's CEO, John Anzalone. John M. Anzalone: Good morning, and welcome to Invesco Mortgage Capital's Third Quarter Earnings Call. I'll provide some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning for Q&A is our President, Kevin Collins, our COO, Dave Lyle; and our CFO, Mark Gregson. The strong momentum that began in mid-April continued throughout the third quarter as expectations for easing monetary policy, strong corporate earnings and improved economic growth fueled rallies across the financial markets. Financial conditions remained accommodative as volatility measures declined sharply and equity market has performed well with the S&P 500 Index in NASDAQ both posting strong gains. Inflation measures continue to run hotter than the Federal Reserve's 2% target over the quarter. With a headline consumer price index rising to 3% in September, up from 2.7 in June. While the core CPI increased from 2.9% to 3%. Investor expectations for future inflation seen through [ TIPS ] breakeven rates increased modestly, reflecting concerns about the potential impact of fiscal and trade policies on consumer prices. Meanwhile, prior to the pause in data caused by the government shutdown on October 1, labor market data pointed to continued sluggish growth. The economy added an average of 51,000 jobs in July and August, down slightly from 55,000 per month in the second quarter, while the headline unemployment rate increased to 4.3% in August. Despite persistent inflation above the Fed's target, the FOMC lowered its benchmark Federal funds target rate by 25 basis points in mid-September, exciting signs of a weaker labor market. On Wednesday, the FOMC cut its target rate an additional 25 basis points to a range of 3.75% to 4% and announced the end of quantitative tightening. Futures pricing now indicates that investors expect three more cuts before the end of next year. Interest rates declined across the treasury yield curve during the quarter with shorter maturities leading the way. This also reflected market expectations for a more accommodative policy stance from the Federal Reserve and continued weakness in the labor market. Industry volatility declined notably throughout the quarter on growing consensus for easing monetary policy. As a result, agency mortgages performed well during the third quarter, benefiting from the persistent decline in interest rate volatility as well as the overall supportive environment for risk assets. While demand from commercial banks and overseas investors remained relatively subdued, the steepening of the yield curve in the front end improved investor sentiment for agency mortgages. The outperformance was broadly distributed across the 30-year conventional mortgage coupon stack with discount coupons recording the largest gains. Performance in higher coupons was dampened by elevated prepayment risk as 30-year mortgage rate declined approximately 50 basis points during the quarter. Positively, premiums on specified pool collateral improved in higher coupons as investors saw prepayment protection. Agency CMBS risk premiums declined quarter-over-quarter as investor demand increased with broader financial markets. These factors led to a 4.5% increase in book value per common share to $8.41 at quarter end. And when combined with our $0.34 dividend, resulted in a positive economic return of 8.7% for the quarter. Leverage ticked up slightly as our debt-to-equity ratio increased to 6.7% at the end of the quarter, up from 6.5x as we continue to reduce the percentage of our capital structure comprised of preferred stock and position the company to further benefit from positive Agency RMBS performance. During the quarter, we raised $36 million by issuing common stock through our ATM program, maintaining a disciplined approach to ensure that this activity benefits existing shareholders. At quarter end, our $5.7 billion investment portfolio consisted of $4.8 billion agency mortgages and $0.9 billion agency CMBS and we retained a sizable balance of unrestricted cash and unencumbered investments totaling $423 million. As of last night's close, we estimate book value was up approximately 1.5% since quarter end. Given the notable decline in interest rate volatility, we remain constructive on agency mortgages, and we view near-term risks as balanced following its recent strong performance. Our longer-term outlook for this sector remains favorable as we expect investment demands to broaden given the lower interest rate volatility, a steeper yield curve, attractive valuations and the end of quantitative tightening. In addition, Agency CMBS continues to offer attractive risk-adjusted yields and diversification benefits relative to our Agency mortgage holdings supported by its stable cash flow profile and lower sensitivity to interest rate fluctuations. Lastly, we believe anticipated changes to bank regulatory capital rules would increase investor demand for agency mortgages and agency CMBS, providing further tailwinds for both sectors. Now I'll turn the call over to Brian to provide for more details. Brian Norris: Thanks, John, and good morning to everyone listening to the call. I'll begin on Slide 4, which provides an overview of the interest rate markets over the past year. As depicted in the chart on the upper left, despite further easing of monetary policy in September, treasury yields declined only modestly during the quarter as the deterioration in employment data was offset by robust economic growth, fueled in part by the boom in AI investment. Positively, the yield curve continue to steepen with 2-year treasury yields falling 11 basis points, while 30-year yields were down just 4 basis points. The difference between 2-year and 30-year treasury yields ended the quarter at 112 basis points, roughly 65 basis points steeper than a year ago, and remain supportive of longer-term investments, such as our Agency RMBS and Agency CMBS. The chart in the upper right reflects changes in short-term funding rates over the past year, with the third quarter highlighted in gray. While financing capacity for our assets remained ample and haircuts unchanged, 1-month repo spread began to indicate funding pressures in late September and continued into October, widening approximately 5 basis points. Steady issuance of [ T-bills ] caused dealers to become very long collateral, squeezing balance sheet and putting upward pressure on repo rates. We believe that FOMC announcement on Wednesday to end quantitative tightening at the end of November was largely in response to this pressure, but further adjustments may be necessary before repo spreads can unwind the recent widening. Lastly, the bottom right chart highlights the significant decline in implied interest rate volatility since the middle of April. This improvement has provided a tailwind for risk assets in recent months, particularly Agency RMBS and is largely driven by diminishing tail risks across fiscal, monetary and trade policies as well as potential deregulation measures that should encourage greater investment in fixed income securities. Slide 5 provides more detail on the Agency mortgage market. In the upper left chart, we show 30-year current coupon performance versus U.S. treasuries over the past year, highlighting the third quarter in gray. Agency mortgage performance was impressive during the quarter as the decline in interest rate volatility supported persistent demand for money managers and mortgage REITs, while net supply continued to undershoot expectations. Although bank and overseas demand remains subdued, steady inflows into money managers and robust capital raising by mortgage REITs helped to offset the weakness resulting in strong returns for the sector. Third-year mortgage rates declined during the quarter as tighter mortgage spreads, lower interest rates and compression in the primary secondary spread led to a decline of nearly 50 basis points. This decline in mortgage rates dampened the performance of higher coupons relative to those lower in the stack as investors were reluctant to increase prepayment risk in their portfolios. While generic, collateral and discount coupons outperformed treasury hedges by 90 to 130 basis points, similarly generic collateral in 6% and 6.5% coupons outperformed by a more modest 30 to 70 basis points. In the upper right-hand chart, we show higher coupon specified pool pay-ups which are the premium investors pay for specified pools over generic collateral and are representative of the bonds that IVR owns. Positively, payoffs improved during the quarter, offsetting a portion of their underperformance relative to lower coupons given increased investor demand for additional prepayment protection and premium coupons. Although IVR's prepayment fees were relatively unchanged during the quarter at just over 10 CPR, higher coupons did indicate a faster refi response to the decline in mortgage rates in September, and we expect a similar response in speeds this month. This recent increase in refinancing activity is expected to be somewhat short-lived, however, as increased refi efficiencies result in swifter responses and reduced flag comps with November speeds expected to decline. We continue to believe that owning prepayment protection via specified pools, particularly in premium price holdings remains a beneficial way to hold attractively priced mortgage exposure. Slide 6 details our Agency RMBS investments and summarizes the investment portfolio changes during the quarter. Our Agency RMBS portfolio increased 13% quarter-over-quarter as we invested proceeds from ATM issuance and maintain leverage at book value improved. The majority of our net purchases occurred in 4.5% versus 5.5% coupons with a decline in our 6% and 6.5% allocations, a result of paydowns and the growth in the overall portfolio. Although we continue to focus our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discount environments. Price appreciation in our holdings has resulted in a higher percentage of our pools valued at premium dollar prices. Therefore, while we remain most comfortable with lower loan balance specified pool stories, we increased our exposure to borrowers with higher loan-to-value ratios, given our expectations for slowing on price appreciation resulting in a reduced refi response for these borrowers. Overall, we remain constructive on Agency RMBS as supply and demand technicals are favorable and lower levels of interest rate volatility should continue to encourage strong demand for the sector. We believe near-term risks have become more balanced following recent outperformance with nominal spreads tightening approximately 20 basis points during the quarter. However, valuations remain attractive with the current coupon spreads on a 5- and 10-year SOFR blend ending the quarter near 170 basis points, equating to leverage gross returns in the upper teens. Slide 7 provides detail on our Agency CMBS portfolio, risk premiums tightened during the quarter consistent with broader financial markets. Given the more attractive relative value in Agency RMBS, we did not add to our agency CMBS position during the quarter and maintained current holdings with our allocation declining modestly due to the growth in the portfolio. Despite the lack of new purchases, we continue to believe that Agency CMBS offers many benefits mainly through its prepayment protection and fixed maturities which reduced our sensitivity to interest rate volatility. Levered gross ROEs are in the low double digits and consistent with ROEs and lower coupon Agency RMBS, and we have been disciplined on adding exposure only when the relative value between Agency CMBS and Agency RMBS accurately reflects their unique risk profiles. Financing capacity has been robust as we continue to fund our positions with multiple counterparties at attractive levels. We will continue to monitor the sector for opportunities to increase our allocation as the relative value becomes attractive, recognizing the overall benefits to the portfolio as the sector diversifies risk associated with an agency RMBS portfolio. Slide 8 details our funding and hedging book at quarter end. Repurchase agreements collateralized by our Agency RMBS and Agency CMBS investments increased from $4.6 billion to $5.2 billion, consistent with the increase in our total assets while the total notional of our hedges increased from $4.3 billion to $4.4 billion as our hedge ratio declined from 94% to 85%. The table on the right provides further detail on our hedges at year-end. The composition of our hedges shifted modestly towards treasury futures quarter-over-quarter with 77% of our hedges consisting of interest rate swaps on a notional basis. While on a dollar duration basis, the allocation declined to 63% given the higher allocation of interest rate swaps closer to the front end of the curve. Swap spreads widened during the quarter, unwinding a portion of the tightening experienced in the second quarter, serving as a tailwind for our performance. Despite the recent widening, we continue to believe swap spreads are still historically tight and should continue to normalize, benefiting the company, and we maintain our preference for interest rate swaps over treasury futures. Slide 9 provides detail on our capital structure and highlights the improvement made in recent quarters to reduce our cost of capital. Further improvement in the capital structure remains a focus of our management team as we seek to prudently maximize shareholder returns. To conclude our prepared remarks, financial market volatility has declined notably since the beginning of the second quarter, resulting in strong performance from most risk assets in the last 5 months. IVR's economic return of 8.7% during the third quarter is a result of that positive momentum, but also reflects our disciplined approach to capital activity and our focus on shareholder returns. In recent years, we have taken significant yet prudent steps towards improving our capital structure and reducing the cost of capital to our common stock shareholders. We remain committed to that approach as we seek to further reduce expenses while enhancing returns and improving scale. We believe our liquidity position provides substantial cushion for further potential market stress while also providing sufficient capital to deploy into our target assets as the investment environment evolves. While we view near-term risks as somewhat balanced we believe further easing of monetary policy will lead to a steeper yield curve and lower interest rate volatility, both of which will provide a supportive backdrop for Agency mortgages over the long term. Thank you for your continued support for Invesco Mortgage Capital, and now we will open the line for Q&A. Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Trevor Cranston with Citizens JMP. Trevor Cranston: You're just talking about the changes in the hedge portfolio moving a little bit towards treasuries this quarter. Can you talk in general about kind of where your net duration exposure is at? And kind of if you have any general position on with respect to the shape of the yield curve? And then a second question on the hedge portfolios, how you guys are thinking about potentially using options given the decline in the cost of volatility. Brian Norris: Sure, Trevor. Thanks for the question. Yes, I'll tackle yield curve first. We kind of had a bit of a steepener on a while now. And we started to reduce that a little bit, preferring to move more of our hedges into the front end of the curve. Obviously, the Fed did cut rates on Wednesday. Chair Powell did express that future cuts are a little less certain than the market was expecting. And so I think that would result in a bit of a flatter curve than what we've been seeing. So as potentially those cuts start to get priced out of the market. So we like being -- we're still positioned for a bit of a steepener, but we did reduce that just a little bit. As far as the overall net duration of the portfolio, we like -- we have historically preferred to have empirical duration as close to 0 as we can get it. But given the fact that most of our tools are, a larger percentage of our tools are now in premium prices. We do think that we have a little bit more risk towards a rally in interest rates. And so at least from a model duration perspective, we are running model duration is slightly long versus kind of being more historically flat. So we still do prefer interest rate swaps. We do think that, like we said, we do expect swap spreads to continue to normalize. And as that occurs, we'll kind of continue to move more into treasury futures, just given some of the benefits that we see there from a liquidity and margining perspective. But right now, we still think that there's, we still have a bit of widening to do in there. So we'd like to lean more heavily into swaps. Trevor Cranston: Got it. Okay. That's helpful. And then with the tightening that we saw in agency spreads in the last quarter, can you talk about where you're seeing returns on kind of marginal capital deployment relative to the existing dividend level? . John M. Anzalone: Yes. So at the end of the quarter, levered gross returns were in the upper teens. So net returns were kind of mid-teen area. So that's pretty consistent with where our dividend to book yield is. So we feel like is supportive of that level. And we've seen a little bit of compression so far in October, just given further outperformance in mortgages that. Recently, we have seen those levels kind of back up a little bit since the Fed meeting. So I think mostly in line with what the earnings power of the portfolio currently is. Operator: [Operator Instructions] Our next question comes from Doug Harter with UBS. Douglas Harter: Can you talk about your appetite for continuing to kind of change the capital structure with the buyback of the preferred issuance common. And I guess, as you look at those transactions, the combined effect of that transaction, does that have any impact on book value in the quarter? John M. Anzalone: Yes. Doug, it's John. Yes, on the preferred buybacks, I mean, those are relatively small. Obviously, I think there is -- so the impact was pretty minimal on that. I think around $2 million we bought back. So I mean those -- it's just harder sliding on those because the volume of trading is relatively low. So we'll continue to, to buy those back as long as that makes sense and they're trading below 25%, which -- so that didn't have a big impact on, on the capital structure, although in the right direction. Yes. And then just comment. Obviously, in terms of common stock, I mean, we're trading at -- we've been trading at a discount. So we have not issued any recently, which would go in the right direction for improving the capital structure. In terms of going the other way, in terms of buybacks, we have been active in the past buying back shares. Typically, we look for times when the price-to-book ratio is persistently low over an extended period of time. I mean it kind of bounces around quite a bit. And so if we look for persistent discount and also when investment opportunities are not accretive. So right now, we're still seeing relatively accretive investment opportunities. So we're not buying back shares now. Certainly, if those conditions occur, we will certainly look at doing that. Douglas Harter: Great. And then moving back to the investment opportunities, just how you're seeing the relative value between Agency CMBS and Agency RMBS today? Brian Norris: Yes, Doug, it's Brian. Yes, I mean, Agency RMBS continues to provide a more attractive ROE. I think Agency CMBS, like I said in my comments, the return potential there is a bit more in line with what we would call lower coupon Agency RMBS and continues to have a lot of benefits. So I think -- to the extent that Agency RMBS is still mid to upper teens, we would probably look to see a bit more compression between the 2 before we would look to significantly moved more towards Agency CMBS, but we do like continuing to hold those securities as they do provide a lot of convexity benefits for the portfolio. Operator: At this time, I'm showing no further questions. I'll turn the call back over to the speakers. John M. Anzalone: Thank you, everybody, again for joining and look forward to speaking to you next quarter. . Operator: Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.
Operator: Good day, and welcome to the OFS Capital Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Steve Altebrando. Please go ahead. Stephen Altebrando: Good morning, everyone, and thank you for joining us. Also on the call today are Bilal Rashid, our Chairman and Chief Executive Officer; and Kyle Spina, the company's Chief Financial Officer and Treasurer. Before we begin, please note that the statements made on this call and webcast may constitute forward-looking statements as defined under applicable securities laws. Such statements reflect various assumptions, expectations and opinions by OFS Capital management concerning anticipated results are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from such statements. The uncertainties and other factors are in some way beyond management's control, including the risk factors described from time to time in our filings with the SEC. Although we believe these assumptions are reasonable, any of those assumptions could prove incorrect, and as a result, the forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward-looking statements. OFS Capital undertakes no duty to update any forward-looking statements made herein, and all forward-looking statements speak only as of the date of this call. With that, I'll turn the call over to Chairman and Chief Executive Officer, Bilal Rashid. Bilal Rashid: Thank you, Steve. Yesterday, we announced our third quarter earnings. Net investment income was $0.22 per share compared to $0.25 per share in the prior quarter. This decline was primarily due to higher interest costs, which were expected as part of our ongoing initiative to refinance our existing bonds and extend the maturities of our debt. Net asset value at September 30 was $10.17 per share compared to $10.91 per share in the prior quarter. The decrease was largely driven by a markdown on our equity investments, most notably our position in Pfanstiehl Holdings and unrealized depreciation on our CLO equity investments attributable to underlying loan spread tightening. Overall, we believe our credit portfolio is stable. During the quarter, we had one loan placed on nonaccrual status and one loan was taken off of nonaccrual and moved to performing status. While we remain steadfast on preserving capital, we are strategically focused on efforts to improve our net investment income over the long term. This includes ongoing efforts to monetize our minority equity position in Pfanstiehl, our largest position in the portfolio with a fair value of approximately $78.5 million at quarter end. The fundamental performance of the company continued to improve and the long-term outlook remains strong in our view. The reduced valuation mark reflects the challenging market conditions to monetize this asset despite the improved performance. While we remain confident in the portfolio company's long-term potential, a near-term exit could improve our net investment income and reduce concentration risk. However, we recognize this may come at the cost of realizing the investment's full fundamental value. As a reminder, our initial $200,000 investment in Pfanstiehl in 2014 has generated approximately $4.2 million in distributions to date, an approximately 20x return on our cost. Looking forward, the broader economic outlook remains uncertain. On the monetary front, so far this year, the Fed has lowered interest rates by 50 basis points, and there is potential for further reductions in the near term. Given that the vast majority of our loan portfolio is floating rate, continued rate cuts could reduce our net investment income. Despite this backdrop, we remain comfortable with the overall health of our portfolio. We have deliberately constructed our loan portfolio to be resilient by avoiding highly cyclical industries and maintaining our strong diversification. Our loan portfolio is entirely composed of first and second lien senior secured loans, reflecting our commitment to positioning higher in the capital structure. As for new originations, middle market M&A activity this year has remained below expectations. However, we remain actively engaged with our existing portfolio companies and are prepared to deploy additional capital if needed. As we mentioned on our last call, early in the third quarter, we began the process of refinancing our $125 million unsecured notes that were due to mature in February 2026. In July, we completed a $69 million unsecured public bond offering. These new public notes mature in July 2028. In August, we continued the refinancing process by completing a private placement of a $25 million unsecured note. This new private note matures in August 2029. Following the completion of these offerings, we repaid $94 million of the February 2026 notes in August, resulting in a leverage-neutral refinancing. We believe these actions have further strengthened our capital position and enhanced our operational flexibility. In addition, the public bonds have a non-call period of only 1 year, while the private unsecured note is prepayable at any time, providing us additional flexibility in an evolving rate environment. We expect to repay the remaining $31 million on the February 2026 notes ahead of the maturity. Additionally, during the quarter, we elected to reduce the size of our floating rate facility with BNP Paribas from $150 million to $80 million. We took this action as we embark on delevering the balance sheet. We believe our liquidity position remains sufficient, supported by our $25 million Banc of California floating rate corporate line of credit, which was undrawn at the end of the quarter. As we continue to navigate this uncertain environment, we remain confident in the experience and capabilities of our adviser with approximately $4.1 billion in assets under management across the known and structured credit markets, deep expertise across industries and a track record spanning more than 25 years and multiple credit cycles, we believe we are well positioned to manage through this ongoing uncertainty. With that, I'll turn the call over to Kyle Spina, our Chief Financial Officer, to give you more details and color for the quarter. Kyle Spina: Thanks, Bilal, and good morning, everyone. As Bilal mentioned, we posted net investment income of $2.9 million or $0.22 per share for the third quarter, which was down $0.03 per share from the second quarter. Top line income increased $75,000 quarter-over-quarter. However, expenses increased by $418,000, leading to the decline in net investment income. As we alluded to on our last call, we announced yesterday that we are reducing the quarterly distribution to $0.17 per share for the fourth quarter of 2025. This adjusted distribution rate represented an implied 8.8% annualized yield based on the market price of our common stock as of September 30. In light of ongoing interest rate cuts, coupled with our increased cost of financing, we determined it an appropriate time to better align our distribution rate with our net investment income. We believe this step will allow us to preserve capital as we focus on deleveraging and strengthening our balance sheet in this uncertain economic environment. Despite this reduction, we remain focused on improving our long-term returns as we continue exploring avenues to monetize our equity investment in Pfanstiehl. Our net asset value per share decreased by approximately 7% or $0.74 this quarter. As Bilal described, the decline in our investment portfolio at fair value was most pronounced in our equity holdings, including $4.5 million of unrealized depreciation on our equity investment in Pfanstiehl. We also observed more meaningful net unrealized depreciation in our CLO equity holdings totaling $4.0 million attributable to spread tightening in the underlying loan collateral. We placed one loan on nonaccrual status during the quarter, representing 1.8% of the total portfolio at fair value. We also placed one loan back on accrual status during the quarter following the completion of a restructuring transaction. Overall, our loan portfolio was relatively stable quarter-over-quarter based on our internal credit ratings. At quarter end, our regulatory asset coverage ratio was 157%, a decrease of 3 percentage points from the prior quarter. As we discussed last quarter, we closed on $94 million of new bond issuances during the quarter between a public and private offering, the proceeds of which were utilized to partially refinance our 4.75% unsecured notes scheduled to mature in February 2026 in leverage-neutral transactions. We are pleased with the execution on these deals, which extended our debt maturities, though obviously, they are priced wider than where our existing notes were issued in early 2021 in a near 0 rate environment. Following the completion of these transactions, we have a more manageable $31 million remaining outstanding on our February 2026 unsecured notes, which we intend to repay in advance of the maturity date. Turning to the income statement. Total investment income increased approximately 1% to $10.6 million this quarter. This was primarily driven by nonrecurring dividend and fee income recognized during the quarter, totaling approximately $0.6 million. Total expenses increased by approximately 6% during the period to $7.6 million. This was primarily due to an approximately $700,000 increase in total interest expense, largely driven by the higher coupon on our new unsecured note issuances. Looking ahead, we anticipate further net interest margin compression attributable to lower reference rates following the Fed's aggregate 50 basis point rate cuts so far this year and the impact of any potential future reductions. We expect this will impact yields on our predominantly floating rate loan portfolio. In addition, we anticipate higher interest costs related to the refinancing of our February 2026 unsecured notes. Turning to our investments. We believe the majority of our loan portfolio remains solid, while we continue to closely monitor certain borrowers performing below our expectations. As mentioned, overall, we were neutral relative to the number of issuers with loans on nonaccrual status quarter-over-quarter with one new loan placed on nonaccrual status and one loan placed back on accrual status during the third quarter. With respect to our loan portfolio, we are committed to being senior in the capital structure and selective in our underwriting, with 88% of our loan holdings being in first lien positions based on fair value. During the quarter, we committed $8.3 million to a new middle-market debt investment. In addition, we continue to focus on add-on opportunities for growth with our existing issuers and as of quarter end, had $18.3 million in unfunded commitments to our portfolio companies. The majority of our investments are in loans and 100% of our loan portfolio was senior secured at quarter end. Based on amortized costs as of quarter end, our investment portfolio was comprised of approximately 69% senior secured loans, 23% structured finance securities and 8% equity securities. At the end of the quarter, we had investments in 57 unique issuers totaling $370.2 million at fair value. On the interest-bearing portion of the portfolio, the weighted average performing investment income yield decreased modestly to 13.3%, which is down about 0.3% quarter-over-quarter. The decrease in yield was primarily due to the impact of net change in nonaccrual positions. This metric includes all interest, prepayment fee and amortization of deferred loan fee income, but excludes syndication fee income if applicable. With that, I'll turn the call back over to Bilal for concluding remarks. Bilal Rashid: Thank you, Kyle. In today's continued uncertain economic environment, we remain focused on preserving capital and strengthening our balance sheet. In that regard, we have taken meaningful steps to extend the maturities of our debt and secure financing that gives us operational flexibility over the coming years. As we look ahead, we are focused on defensively positioning our balance sheet, which includes our decision to reduce the distribution rate as well as our ongoing plans to reduce our debt. We believe our loan portfolio remains generally stable and well positioned to withstand this market. Its diversification across multiple industries continues to serve us well, and we maintain our focus on investing higher in the capital structure. As with prior quarters, we remain focused on increasing our net investment income over the long term, specifically through our efforts to monetize certain noninterest-earning equity positions, including our investment in Pfanstiehl. Our team's long-standing experience and investment discipline has driven consistent results. Since 2011, the BDC has invested more than $2 billion with an annualized net realized loss of just 0.25%, while continuing to generate attractive risk-adjusted returns on our portfolio. As always, we will continue to rely on the size, experience and reputation of our adviser. With a $4.1 billion corporate credit platform and affiliation with a $30 billion asset management group, our adviser brings deep credit experience and long-standing banking and capital markets relationships. Our corporate credit platform has gone through multiple credit cycles over the last 25-plus years. Our adviser and affiliates are also strongly aligned with shareholders as they maintain an approximately 23% ownership in the company. With that, operator, please open the call for questions. Operator: [Operator Instructions] This concludes our question-and-answer session and concludes the conference call today. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Eldorado Gold Third Quarter 2025 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Lynette Gould, vice President, Investor Relations, Communications and External Affairs. Please go ahead, Ms. Gould. Lynette Gould: Thank you, operator, and good morning, everyone. I'd like to welcome you to our third quarter 2025 results conference call. Before we begin, I would like to remind you that we will be making forward-looking statements and referring to non-IFRS measures during the call. Please refer to the cautionary statements included in the presentation and the disclosure on non-IFRS measures and risk factors in our management's discussion and analysis. Joining me on the call today, we have George Burns, Chief Executive Officer; Christian Milau, President; Paul Ferneyhough, Executive Vice President and Chief Financial Officer; Louw Smith, Executive Vice President, Development, Greece; and Simon Hille, Executive Vice President, Operations and Technical Services. Our release yesterday details our third quarter 2025 financial and operating results. This should be read in conjunction with our third quarter 2025 financial statements and management's discussion and analysis, both of which are available on our website. They have also both been filed on SEDAR+ and EDGAR. All dollar figures discussed today are U.S. dollars, unless otherwise stated. We will be speaking to the slides that accompany this webcast, which can be downloaded from our website. After the prepared remarks, we will open the call for Q&A. At this time, we will invite analysts to queue for questions. I will now turn the call over to George. George Burns: Thanks, Lynette, and good morning, everyone. We are pleased to welcome Christian Milau as President joining as part of my succession planning. Christian has already been actively engaged with our leadership team through recent budget and strategy discussions and has met with a number of our shareholders and analysts since joining last month. He brings a fresh perspective and a strong focus on our key priorities. His appointment further strengthens our leadership team as we continue to advance our growth strategy and position Eldorado for long-term success. Turning to the outline for today's call. I'll begin with an overview of our third quarter 2025 results and highlights. I'll then hand the call over to Christian for his remarks, followed by Paul on our financials and then Louw and Simon with an update on projects and operations. Turning to Slide 4, our third quarter highlights. We achieved safe production of 115,190 gold ounces and generated approximately $77 million of free cash flow, excluding securities investment. Operational performance remained strong at Lamaque, benefiting from early processing of the remaining portion of the second Ormaque bulk sample. Kisladag had fewer tonnes placed on the pad and lower grade stack as a result of reduced equipment availability and short-term mine plan resequencing as well as placement of ore on a test pad for the whole ore agglomeration project. Efemçukuru maintained stable production, while Olympias had challenges from stockpiled ore containing the viscosity modifier used in the tailings paste backfill that negatively impacted the process water chemistry in the flotation circuit. During the third quarter, we improved management of the stockpile of ore but modest negative impacts on metal recovery may persist as we continue processing material from affected backfill stopes and stockpiles. Given our strong performance through the end of the third quarter, we are tightening our 2025 guidance range on gold production and now expect to be between 470,000 and 490,000 ounces. Turning to cost. We have revised our 2025 guidance upwards. Total cash costs are now expected to be between $1,175 and $1,250 per ounce sold and all-in sustaining costs are expected to be between $1,600 and $1,675 per ounce sold. These increases were primarily driven by: one, record high gold prices and recently enacted higher royalty rates in Turkiye driving higher royalty expense; and second, lower-than-expected performance at Olympias has resulted in lower byproduct sales, higher processing costs with production expected to be at the lower end of the guidance range. Additionally, for 2025, we also expect sustaining capital cost to be at the higher end of our $145 million to $170 million guidance range. In line with previous 2025 guidance, operations growth capital is expected to be between $245 million and $270 million. Lastly, at Skouries, project capital investment for 2025 has been revised upward to between $440 million and $470 million as a result of the acceleration of work originally planned for 2026 across several noncritical path areas and proactive derisking efforts. The estimated overall project capital remains unchanged at $1.06 billion. We are on track with accelerated operational capital and are maintaining our guidance of $80 million to $100 million for 2025. Turning to Slide 5 in the third quarter. Our lost time injury frequency rate was 1.21, an increase from the LTIFR of 1.10 in the third quarter of 2024. We recognize there is always room for improvement and remain committed to continually strengthen our safety performance. Throughout 2025, we're advancing health and safety initiatives. These efforts are reinforced by the multiyear rollout of our Courageous Safety Leadership program launched earlier this year. On sustainability, our team in Quebec recently welcomed a delegation of external and internal verifiers to complete the verification against the standards of: one, our sustainability integrated management system; two, the Mining Association of Canada's Towards Sustainable Mining initiative; and three, the World Gold Council's Responsible Gold Mining Principles. The objective of the integrated verification was to demonstrate our commitment to health and safety, social and environment performance. While the reports are in the process of being finalized, we are encouraged with the preliminary results and look forward to sharing our performance when they become available. During the quarter, we continued to execute on our share repurchase program, buying back and canceling approximately 3 million shares for a total of $79 million. For the 9 months ended September 30, 2025, repurchases have been approximately 5 million shares for a total of $123 million. The program reflects our continued commitment to disciplined capital allocation and returning value to our shareholders. With that, I'll turn the call over to Christian to say a few words. Christian Milau: Thanks, George, and good morning, everyone. I'm very excited to be joining you today in my new role at Eldorado. While I've only recently joined the company in September, pleased with the company's strong culture, talented people and high-quality asset base, including operations and projects in attractive mining jurisdictions with long average mine lives and significant prospectivity throughout the portfolio. I have already spent considerable time with our leadership teams through initial budget strategy meetings. These sessions have given me a strong sense of the ambition, opportunities and discipline that will guide the company during the next phase of the strategy as well as the strong alignment around delivering sustainable value to all stakeholders. What stood out most to me is the depth of talent, the capacity across the organization and the clear commitment to safety, operational and ESG excellence as well as disciplined capital allocation. My focus in the months ahead will be on supporting our teams as we advance our near-term priorities and ensuring that we positioned -- we're positioned to deliver our long-term strategy as we go through the Skouries' cash flow inflection point in 2026. Having just returned from our sites in Turkiye and with visits planned to Greece and Quebec in the coming months, I'll have the opportunity to see all the mines firsthand. The visit so far stood out to me with the excellent commitment and pride on display. It's been impressive to witness the energy and collaboration of our teams on the ground, and I look forward to continuing to engage with more of our sites, communities and investors in the months ahead. With that, I'll now hand over to Paul to walk through the financial results. Paul Ferneyhough: Thank you, Christian. Moving to Slide 6. Our third quarter results reflect consistent operational performance and are aligned with our tightened full year production guidance. Robust gold prices have contributed positively to cash flow from our operations, further supporting our capacity to execute our strategic and operational investments in the coming months. In Q3, Eldorado reported net earnings from continuing operations of $57 million, equivalent to $0.28 per share. Excluding onetime nonrecurring items, adjusted net earnings were $82 million or $0.41 per share for the quarter. The principal adjusting item was a $22 million unrealized loss on derivative instruments, primarily due to gold commodity swaps. Free cash flow for the quarter registered a negative $87 million. However, underlying free cash flow, excluding capital investments in the Skouries project amounted to positive $77 million. Turning to our producing assets. Cash flow from operating activities before changes in working capital totaled $184 million during the quarter. Our corporate gold price collars will continue to settle monthly through the year-end with approximately 50,000 ounces outstanding for the fourth quarter and an upper limit of $2,667 per ounce. Following the expiration of these collars, we will be fully exposed to market gold prices with only minimal hedging derivatives remaining tied to the Skouries project financing facility. Production costs for the quarter reached $164 million, representing a $23 million increase over Q3 2024. 1/3 of this increase is attributable to higher royalties while the remainder stems from the rising labor costs in Turkiye, where inflation continues to surpass local currency devaluation, and at Lamaque where additional labor and contractor expenses were incurred due to the planned deepening of the Triangle Mine. In Q3, total cash costs were $1,195 per ounce sold and all-in sustaining costs or $1,679 per ounce sold. Gross capital investments at our operating mines totaled $58 million for the quarter. At Kisladag, these expenditures included planned waste stripping and equipment costs related to construction of the North Heap Leach pad second phase. At the Lamaque Complex, investments focused on the Ormaque development as well as construction of the North Basin water management facility and initial procurement for the recently approved paste plant. Progress continued at Skouries, including facility and process construction as well as early mining activities in both the open pit and underground areas. Throughout the quarter, approximately $138 million was invested in the project, supplemented by an additional $18 million in accelerated operational capital for self-performance of open pit mining operations. Current tax expense for quarter 3 was $52 million, reflecting a $13 million increase from the prior year period, attributing to improved profitability in Canada and Turkiye. Deferred tax expense stood at $2 million compared with a recovery of $11 million in Q3 2024. This included a $4 million expense related to net movements against the U.S. dollar, mainly driven by the lira and euro partially offset by the reversal of temporary differences. Advancing to Slide 7. Our balance sheet remains robust, providing the flexibility needed to support growth initiatives and return capital to shareholders. With liquidity totaling approximately $1.1 billion, we continue to be well positioned to invest in our cash-generating assets, advanced Skouries towards completion and create additional value through disciplined capital allocation and the NCIB program. Earlier this month, and with Skouries production coming ever closer, several staff members attended LME Week in London, the foremost annual event for the global metals community. Productive discussions were held with traders and smelters regarding the sale of our high-quality, clean copper-gold concentrate from Skouries. As a result, we anticipate finalizing initial multiyear offtake contracts by year-end. With this overview concluded, I will now hand the call over to Louw, who will present the highlights of our Greek assets. Louw Smith: Thanks, Paul, and good morning, everyone. Let's begin with Slide 8, which highlights the progress at our Skouries Copper Gold project. As of the end of Q3, overall progress on Phase 2 construction reached 73% and 86% when including Phase 1. We remain on track to achieve first copper gold concentrate production towards the end of the first quarter of 2026. With commercial production expected in mid-2026. We now have approximately 2,000 personnel on site, including 236 members of the Skouries operational team. This strong workforce has enabled us to derisk several areas early. Our skilled labor ramp-up began with concrete, structural and mechanical trades and is now transitioning to electrical, piping and control systems. While we've exceeded our labor targets, our focus remains on aligning skilled resources with active work fronts to support our execution plan. From a productivity standpoint, construction performance continues to track at or slightly above plan across the site. On the bottom of Slide 8, you'll see a photo of the open pit. This week, our fourth crew started operating, enabling the transition to a 24/7 rotation. As of the end of October, we had stockpiled approximately 531,000 tonnes of ore from the open pit and an additional approximately 93,000 tonnes from the underground, containing an estimated 21,000 ounces of gold and 5.5 million tonnes of copper, positioning us well as we prepare for commissioning and initial concentrate production. Turning to Slide 9. The photos here and on the following slides illustrate the steady advancement of work underway. Infrastructure around the process plant continues to progress. Final foundations for support buildings were completed in early October and structural mechanical piping and electrical work are ongoing across the key areas, including the substation, line plant, flotation blowers, compressors at guar area. The control building structure is complete with electrical installations underway on the first 2 levels. We have completed pre-commissioning of the concentrate filter presses and water testing of the flotation cells and tanks, preparation for pre-commissioning the pebble crusher are in progress. Moving to Slide 10. Progress continue on the thickeners, water testing of the first two thickeners is complete and piping installations have commenced following completion of the pipe rack installations. Slide 11 focuses on the filter tailings plant, which remain on the critical path. As of the end of October, structural steel installation at the filter tailings building was approximately 92% complete. The time lapse video showcasing this progress is linked for reference. Mechanical work progressed with the assembly of the filter presses with 4 complete at the end of the third quarter and the remaining tool on plan for completion in November with each press equipped with 98 plates. The compressor building steel structure is 98% complete and all 6 compressors and all -- and air receivers have been installed. As seen on Slide 12, construction of the crusher building structure is progressing. Concrete workers reached the final elevation above the foundation with the final wall lifts advancing. The primary crusher is assembled in position and work is underway on cable tray and internal structural steel stairways and platforms. Conveyor foundations between the primary crusher and the process plant, including the coarse ore stockpile are now complete. Conveyor preassembly and support steel installation are well underway. At the coarse ore stockpile on Slide 13, the stockpile dome foundation is nearing completion and assembly of the dome has commenced. The first of the 3 reclaim feeders and associated chute work has been installed with preassembly continuing on the remaining 2 feeders. Moving to Olympias on Slide 14. Third quarter gold production was 13,597 ounces and total cash costs were $1,869 per ounce sold. Production was impacted by flotation circuit stability issues earlier in the year, which led to a modification of the paste backfill blend to eliminate viscosity modifiers in the backfilled stopes. While plant operations recovered substantially in Q2, affected stockpile ore continued to be processed in the third quarter despite efforts to minimize negative impacts in the processing circuit, ongoing process water chemistry challenges further reduce the metal recovery during the quarter. While mitigation measures are underway, modest negative impacts on the metal recovery may persist as we continue processing material from affected backfill stopes and stockpiles. Progress continued on the planned mill expansion to 650,000 tonnes per annum during the quarter, with the early works advancing and demolition activities underway within the concentrator. All of the major equipment, including the verti-mill, flotation cells, thickeners, cyclones and E-room have been delivered. We expect progressive commissioning and ramp-up in the second half of 2026. We remain committed to driving transformation at Olympias. A comprehensive program is now underway to modernize and optimize the process plant and surrounding infrastructure alongside leadership and skills development program aimed at strengthening capabilities across all levels of the organization. I'll stop there and hand it over to Simon to discuss the Turkish and Canadian operations. Simon Hille: Thanks, Louw. Starting in Turkiye on Slide 15. Kisladag production totaled 37,184 ounces with total cash costs of $1,309 per ounce sold. The decrease in production during the quarter compared to Q2 2025 was primarily due to lower tonnes mined as a result of lower-than-planned equipment availability and the resulting short-term resequencing of the mine plan. Fewer tonnes placed on the pad and lower grades from prior periods along with the placement of ore on the test pad to support the whole ore agglomeration study. The decision has been made to proceed with a whole ore agglomeration at the capital cost of approximately $35 million, reinforcing our commitment to enhancing permeability, improving leach kinetics and shortening the leach cycle. Over the life of mine, we expect operating and capital cost savings driven by a shortened leach cycle specifically the shortened leach cycle is anticipated to reduce sustaining capital expenditures through lower consumable requirements such as liners and associated pipeline. Installation of the agglomeration drum is expected in 2027, with long lead items expected to be ordered in Q4 of 2025. We made a strategic decision to decouple the whole ore agglomeration from the HPGR screening reflecting our continued focus on capital discipline. To support future optimization, geometallurgical studies, continue in order to characterize future mining phases and will evaluate the benefit of additional screening for the HPGR. These studies are expected in the first half of 2026. On Slide 16, at Efemçukuru. Third quarter gold production was 17,586 ounces at total cash costs of $1,522 per ounce sold. Gold production throughput and average gold grades were in line with the plan for the quarter. And now moving to the Lamaque Complex on Slide 17. Lamaque delivered production of 46,823 ounces at total cash costs of $767 per ounce sold. Third quarter production was positively impacted from higher throughput driven by processing the remaining portion of the second Ormaque ore sample. The high-grade ore was treated in a blend with Triangle ore and performed very well. I would also like to congratulate our team at Lamaque hosting during the quarter nearly 30 Quebec members of Parliament of Canada. The visit was a proud moment for our team as they showcased our commitment to innovation, operational excellence and sustainability leadership. And with that, I'll turn back to George for his closing remarks. George Burns: Thanks, team. Before concluding today's call, I'm pleased to announce that yesterday, we finalized the sale of the remaining gold project, Certej. This transaction marks the end of a lengthy process aimed at divesting noncore assets within the portfolio. I look forward to monitoring the progress of the project given our retained equity and royalty. Gold prices have remained strong, but we've seen some sharp swings lately. Through this environment, we remain strongly committed to disciplined cost management, to protect and expand our margins. Capital allocation continues to be a key priority. We're returning capital to shareholders through our enhanced share buyback program while at the same time advancing our high-return growth initiatives across our global portfolio. This positions us for sustained growth, margin expansion and driving enhanced shareholder value as we enter the next phase of Eldorado's transformation. Thank you for your time. I will now turn it over to the operator for questions from our analysts. Operator: [Operator Instructions] The first question comes from Cosmos Chiu with CIBC. Cosmos Chiu: Welcome, Christian. Maybe my first question is on the transaction that happened earlier today. Fresnillo buying Probe gold with the support of Eldorado Gold. I guess my question is, George, has this always been the desired outcome for that investment? And then I guess broader scale, M&A is heating up in the sector. How do you see Eldorado positioned? George Burns: Sure. On Probe, I mean, we took a toehold in Probe a number of years back with the view that there was a property package that could have potential supplemental ore to feed our really permitted mill capacity that exceeds our current run rate. And so our hope was that they would discover some high-grade, high-value underground opportunities that subsequently could be part of the Lamaque complex. Really how that has evolved as they've discovered a large, low-grade open pit opportunity. And as we assessed that opportunity, it really didn't stack up with our other capital allocation opportunities. And so when we heard this week that Fresnillo made an offer, it didn't fit our strategic initiatives going forward. And so we didn't agree to sign on to support that acquisition. On the bigger, broader M&A opportunities ahead, I mean, at Eldorado, our focus is head down, deliver the high-value project Skouries, Olympias expansion and other investments across the portfolio. That's our priority. As we come out of delivering Skouries in the first half of next year, and we're going to be positioned to continue to invest within the portfolio, but look for other opportunities externally. So I think we're in a great position in a great market. But for now it's head down focused on what we're doing. Cosmos Chiu: Perfect. Maybe switching gears a little bit to Skouries. Certainly, sounds good to hear that it is on time for first concentrate in Q1 2026. As you have mentioned, the filter tailings plant is on a critical path. Louw did a good job in terms of summarizing it. But is there anything else that's on the critical path? That's number one. And number two, it is a fairly tight schedule, delivering first concentrate by Q1 2026 and it kind of straddles your holiday season. I know there has been some changes in the schedule in terms of work schedule. But how have you factored in potential workers taking time off during the holiday season. Does it really go kind of dead in Greece during those months or during those weeks? And how should we look at it in terms of kind of like looking at the risk on the time line for delivery by Q1 2026? George Burns: Thanks for the question, Cosmos. Yes, so for a critical path, the dry stack filter plant given the short or the small footprint that we're dealing with there is the key focus for us. Obviously, everything in front of that has to be done and constructed on time to be able to put ore through that filter facility. But I did tell there's nothing at this point that we're worried about. Now looking forward, you hit the nail on the head. It's the transition to get the additional trades on piping the electrical and control system that are critical to delivering everything ahead of the dry stack filter plant. I'd tell you we have good visibility on that. The transition is evolving week-over-week, month-over-month and will continue right up to the first quarter, and then there'll be a dramatic drop off in construction workers and a huge focus on preparing for commissioning. So we're feeling good about that transition. We've got visibility on the required workers over the next 5 months, say. And as we say, we're on track to deliver first concentrate at the end of the first quarter. Cosmos Chiu: Great. And maybe just one last question on Kisladag quickly, the whole ore agglomeration project. Could you maybe remind us what's the potential impact here on recovery, on throughput? And is it really just overall kind of potentially having less wear and tear on the HPGR longer term? Is that what we're trying to do here? Simon Hille: Thanks, Cosmos. It's Simon. The whole ore agglomeration, the purpose of that is primarily to enhance permeability in the leach pad, so that we get a good contact with the lixiviant and the ore particles. And so where we see the best benefit there is, as we've reported previously, we've got a very long leach cycle. Our leach cycle currently is sort of around 300 days on average with enhanced permeability that comes with the whole ore agglomeration. We expect to see that reduced to 200 days. That provides us with the primary benefit of obviously getting our returns faster in terms of metal recovery, but also less infrastructure requirements in the longer term because we need less footprint in order to leach the tonnes in the plan. So at the moment, we're not planning any enhanced recovery in the model but faster kinetics generally are a positive sign for that in the long term. Cosmos Chiu: Yes. Thanks, Simon. I forgot that the leach cycle is that long at 300 days. So 200 days certainly gives it much needed benefit. Operator: The next question comes from Tanya Jakusconek with Scotiabank. Tanya Jakusconek: Welcome, Christian, on board. So maybe, George, can I start with you? Just on Skouries, can I just review with you, we've got that end of Q1 for the concentrate first gold pour. We are then going commercial by mid-2026. Can you remind me again what your definition for commercial production is so that we can monitor the correct 60% of the mill or whatever, however you're going to define it, so we can model that? And then can you remind me from commercial, when do we actually get to steady state? And what do we need to get there? So that's my first question. George Burns: Yes. Thanks for the question, Tanya. On the commercial production, we're expecting to be at 80% of design nameplate throughput at that point and then expect to get the rest to 100% by the end of the year. So that's the key criteria. We're feeling comfortable with that given that it's a single floatation circuit. Olympias is much more complex with 3 concentrates. And we've got already some of our operators from Olympias at Skouries going through training on that particular facility. And I think we're in good shape to deliver that ramp up. Tanya Jakusconek: Okay. 80% of designed nameplate capacity to go commercial, is that 80% over 30 days? George Burns: I believe that's correct. Tanya Jakusconek: Okay. And then from midyear, you expect 6 months really of ramp-up to get to nameplate by the end of 2026 is what I heard. Is that correct? George Burns: That's correct. That's what we're assuming. Tanya Jakusconek: Okay. And then -- sorry. And with that, the old technical report and I say old because it is quite outdated, when are we going to have a better understanding? Obviously, as soon as you operate, you have a better understanding on operating costs, but when is the market going to be given an update on costing for this operation, both on the operating and sort of the capital sustaining costs? George Burns: Yes. So we'll be updating the market on our 2026 guidance in Q1. And with that, will include the remaining capital spend and the operating cost post commercial production. So that will be the first window. Just to reference back to the technical study. So I mean we completed that technical study just prior to getting the financing in place and then initiating construction. So it's only as stated as the construction has been. But again, we'll be updating that as we work our way through next year and getting the actual results that can then be built into an updated technical study. Tanya Jakusconek: Okay. So we would -- so you are expecting to give us an updated technical study in 2026? George Burns: No, I'd say we're going to collect the data from 2026, and that will inform the timing and results in an updated study. So we haven't had a date on that. We're waiting for the results. Tanya Jakusconek: Okay. All right. And then just secondly, as we come towards year-end, I know in December, you'll be releasing your -- and we're literally a month away or thereabouts for your reserves and resources. Can you talk to me about how you were thinking about cutoff grades? What are you thinking about inflation on your costs, gold price inputs. And how do these reserves look and resources? George Burns: Yes. So I mean, the first thing on metal prices. So we're in the process of determining where to land on update on our reserve price assumptions. We use a look back on metal prices as well as staying consistent with our peer group. So we're expecting a modest increase in metal prices. Our focus is to keep our reserve price conservative, ensuring we have very strong margins to drive profitability in the company. So I'd just tell you, it won't be consistent with the peers, a modest increase in metal price assumptions, and we do all this in the fourth quarter at Eldorado so that we have the latest and greatest information to support our budget for next year and our guidance that we'll set in the first quarter. So -- and then in terms of inflation, cutoff grades, I mean, we're working through all those as we speak, and we use actual data and project through our life of mine studies that are done during the summer to set those assumptions. So it's work in progress. I would tell you we're not expecting any radical change in any of those inputs, a modest increase in metal price assumption. Tanya Jakusconek: Okay. And do you expect to replace, do you think your reserves this year? George Burns: Yes. I mean, we haven't finished the work. We're feeling good about it. Stay tuned. We're not far away from releasing that information. Tanya Jakusconek: Okay. And then I guess my final question would be to Christian. Welcome on board, Christian, and you've mentioned in your opening remarks that you're looking forward to the next phase of the strategy and you visited all of the operations. So maybe you can share with us as you look at the company, what are your top 5 priorities for the next 12 months? Christian Milau: Yes. Thanks, Tanya. And actually, just to clarify, I haven't visited them all yet. I said in the next month, I'll visit Quebec and Greece. I'm sort of following along with the preplan visits in our budget strategy cycle here. But I've been really impressed with what I've seen so far. Obviously, I've seen a lot of mines around the world and the ones at Tüurquie I got to visit last week and the week before, very impressive in terms of an ESG approach, in terms of how they operate, the longevity of the team and just the skill and experience and reputation in the industry. In terms of priorities, really for me right now, it's really getting an opportunity to settle in for me when I came in, looking at the culture and how I can slot into a team and really the transition with George, I think it is a wonderful period of time for me to just get caught up without the pressure of having a quick change. And you see in our industry, it happens quite often overnight and get up to speed with the budgets. We're going through that next phase of strategy for the 5 years coming once Skouries is up and running. And I think critical to us will be that post-Skouries cash flow inflection point and how to allocate the capital. So in our sort of 2030 strategy planning, that will be something we're going to be looking at very closely. And I don't have any answers for you today specifically because I think we're going through that process, but it's a wonderful time to be joining a group like this where, for me, the culture fit was really good. I think the team is diverse and deep. And I think the spread of assets is wonderful and the exploration upside and the long lives already in the portfolio are really exciting. And there's growth projects here are very valuable from our own cash flow. So it's kind of building all those into that next phase of the strategy as it sort of inflects and turns to cash flow generation from pure spending and building Skouries over the last couple of years. Tanya Jakusconek: Okay. So I guess what I'm hearing from you, and maybe I don't want to have my own assumptions, but maybe you can tell me if this is correct. So you've taken a look at the team, the culture, you're happy with that. You're looking to get Skouries behind and producing so that we can then, number two, look at capital allocation, whether that's continued share buyback, dividends, et cetera, et cetera, for return to shareholders. Maybe you can talk about the portfolio itself, like what does Perama stand in here? Any of the other assets, Probe is noncore, anything else that you see noncore, other assets that you want to push through further in the Eldorado strategy? Christian Milau: That's a fulsome question, Tanya. I think at this stage, when I looked at it, exploration and just continuing to extend and advance mine life is critical. And now there's an opportunity with these kind of gold prices in this environment. And again, my superficial early look is there's real opportunity to spend some money and focus on that. There's a great team here, I think, that has some plans and excitement around our current assets and in the countries we currently operate. So I think that will be one of the key elements. And Perama Hill, I mean, literally going through that phase of, I think, getting GIA updated and submitted. So assuming there's a permit over the next year or so, it would be nice to put that into the plans. I don't think we're quite ready to actually build the timing in yet. But I think there's been a good job done in Greece to build the sort of social license and the acceptance of the relationships. And when you look at Skouries and Olympias, there's a really nice platform. So I think Perama could come in afterwards, but I can't commit to timing at this stage, obviously. And as George alluded to, I think there are these opportunities, which Simon was saying in Turkiye to continue to improve, enhance and some of the operations are already underway and are performing well. In Quebec as well, there's exploration opportunities. There's already good results coming out of Ormaque underground, and there's an ability to expand that plant if there's enough ore there. So all those things could be part of the plan, but timing and specific commitments, I think it's a little bit early on that, but that's a good place to park some of the capital over time, I think. Tanya Jakusconek: Okay. Well, good. Look forward to working with you. Christian Milau: Thanks, Tanya. Operator: The next question comes from Don DeMarco with National Bank Financial. Don DeMarco: Maybe I'll just start off with Olympias. So obviously, the challenges in the flotation circuit were evident in Q3. And I heard on the call that they may persist for some time. And then concurrently, you've got this expansion underway. Does that expansion perhaps complicate things with regard to resolving the challenges in the flotation circuit? And maybe if you could just give a little bit more detail on when you think you might see a rebound in recoveries? George Burns: Well, maybe starting with recoveries. I mean, we've seen a rebound just in the last 2 months. So when we're successful at managing the ore fed into the plant and not getting a slug of this viscosity modifier in the plant, we're seeing good recovery. So it's been good in the last 2 months. But if we get a slug of this material in, it messes up the process water, and it takes time to clean it up. So we end up lowering throughput. We end up getting lower recovery. And that's the reality looking backwards. As Louw mentioned, this is a cut and fill mining method underground. And so these -- we put this viscosity modifier in the cemented backfill in stopes between Q3 of last year and Q1 of this year when we realized we have this problem. So as we mine next to all those stopes during that period, we have the risk of getting the viscosity modifier into that fresh ore. And that residual risk will remain until the second quarter of next year. Obviously, our mine operators and our plant operators are day to day, shift by shift, managing the blends. We do have a design to take the higher risk stockpile ore and -- ore will be coming out of the underground and process it before it goes into the plant. So there were crushing and screening and taking the coarse material. It won't have a significant amount of that modifier in it, and that goes into the mill. The fine material, we're looking at permitting and the ability to wash it and remove that most of that viscosity modifier. So later on, that could be put in the plant. So these are the things that we're doing. And it's fair to say there's some risk remaining into Q2, but I'd say we're getting better at managing it. We're trying to be as proactive as we can to not have another significant upset. But as Louw said, the risk will remain. In terms of the expansion, really, there's no connection between this problem and the expansion. We're basically having to move some of the infrastructure like piping and cable trays to make room for the equipment that we're installing. So that work is in progress. We'll get that construction completed next year. It will be a staged approach. Some of the equipment will get stalled earlier in the year that will help improve the performance of the mill. The throughput won't happen until we get the grinding mill in and that happens in the second half. So we're expecting some really exciting results that come out of Olympias once we get this expansion completed. That's no longer the bottleneck. It will be back on the underground mine ramp up. And as we've talked over the last 2 years, we've done a really good job of debottlenecking the underground. So we get this mill expanded. Production goes up, margins expand, and we get this viscosity modifier behind us, Olympias will be a key contributor to cash flow. Don DeMarco: Okay. And then on to something else then. With the guidance adjustment that we saw with Q3, costs are higher. But of course, some of the drivers of those costs are outside of your control, such as the Turkiye royalty rates and so on. Could you just give us maybe a rough percentage of looking at the delta in that cost increase, how much was within your control and how much was not? Paul Ferneyhough: It's Paul here. So I think I heard you, you were breaking up a little bit, but the question is around our increase in our guidance for all-in sustaining costs. There's 2 things basically that have driven that. One that is in our control and that we've been dealing with and one that isn't. And they split about 50-50 in terms of how it's impacted our guidance for the rest of the year. So the first one is around gold price. If you remember, our original budget was set with a gold price of around $2,300. We're now assuming an average price to the end of the year of $4,000 an ounce. And at that level, we continue to see increased royalties, both from the absolute cost, but also the increase in the slate of royalties that we saw in Turkiye early in the year, and that's responsible for around 50% of the increase. And then the second 50% is really just a reflection of Olympias performance with those recovery issues and lower volume, and that has pushed up our per ounce costs. So it's 50-50 between them. We're not actually seeing any real inflation in costs in terms of -- versus our guidance for the year outside of that. Don DeMarco: Okay. And then just as a final question. Also in Q3, we saw a big increase in your share buybacks quarter-over-quarter. So I just was wondering, going forward, do you expect to maintain the level of buybacks in Q3 or maybe ease a bit, increase a bit? Just kind of -- just to get your sense at this point? And then also while on the top of capital allocation, maybe even any additional color on the dividend or the timing of the dividend as I know Christian brought that up in his response to Tanya. Paul Ferneyhough: Yes, sure. So as far as the share buybacks are concerned, we signaled at quarter end Q2 that we had extended our NCIB program for another 12 months with a maximum repurchase of 5% of our outstanding share capital. We do intend to be opportunistic around that. We think our shares are incredibly good value at the current level. But really, it's when there's opportunities in the market or if we're underperforming, then we will actually use the NCIB program to purchase those shares. As a good sort of working average, I would assume over the next 3 quarters that we continue to buy at approximately the same rate, okay? As far as dividends are concerned, I think we haven't changed our messaging around this. Next year is an inflection point for us in terms of cash flow generation as Skouries comes into operation. And that feels like a great time for us to then be considering if it's the right moment to put in place a sustainable dividend that we can stand behind going forward. And so I think that will be back on the agenda for us in terms of capital allocation as we move into next year. Operator: The next question comes from Lawson Winder with Bank of America. Lawson Winder: Thank you for today's update. If I could maybe push you a bit more on 2026 and the CapEx outlook. So for 2025 sustaining CapEx, we're running at the high end of the $145 million to $170 million. When you look to next year, I mean, is that higher end of the 2025 a pretty reasonable baseline for 2026? And actually, you know what I had asked a similar question for the growth capital at the operations. I mean, is that is the current $245 million to $270 million range, a decent level heading into next year? George Burns: Well, again, we'll be updating you in the first quarter on next year's guidance, maybe a couple of comments that might help. So the Olympias expansion, that's obviously underway in Quebec. We're completing the second bulk sample, but we're in the middle of permitting for a paste backfill plant, an operating permit. So the timing on that is uncertain, but there'll be capital to spend on Olympias when we get those permits. So stay tuned for that. As well, Simon's walked through the whole ore agglomeration, and we've committed that $35 million. So we got to build all that into next year's plan depending on permitting. I'd say those are the moving parts. The rest of the portfolio is pretty consistent. And then on the growth capital, well, beyond that is Skouries, obviously, we've kind of walked through that Q1 is the bulk of the spend next year in Skouries and we're commissioning in Q2. So there'll just be some residual growth capital happening there. As you look forward on Skouries though, remember that the pit is up and running, we're in good shape there. The plant will be running next year. We've got the first blast on the test, but over the next 3 years, we'll be investing in that underground to get the infrastructure in place for it to ramp up to be the sole feed to the plant at the end of the next decade. So there's incremental growth capital that will be happening over the 5-year plan. Next year, some of that capital on the underground will begin to be spent, but the ramp-up really starts happening at '27. So it's hard to give you specific numbers on next year. Hopefully, I gave you a little bit of color there, and it's not too far away from given the specific updated guidance on '26. Lawson Winder: Yes. Actually, that summary was very helpful. And I just would want to say, it's impressive that, that Skouries remains on track. And if I may, and just to cover off potentiality, should there be any delay, what would be a rough weekly or monthly holding cost of just keeping that going for a slightly extended period of time? George Burns: Yes, the way I would describe it, we're comfortable. We have all the equipment and materials there. So there's no risk on that side. We have the workforce. We're over 2,000 people at site right now, construction and operations ramp up. So the impact next year if for some reason, it took a little bit longer to get the first concentrate, those fixed cost that we were going to spend on a monthly basis is about $15 million. So that's really the impact of a delay. Lawson Winder: Okay. Relatively small percent of the overall CapEx. And then if I could -- I think I've asked you this before, but like I acknowledge you do not like to give guidance on gold production for -- on a quarterly basis. Just with Kisladag, there's obviously a lot of variability when it comes to the leaching times. Can you give us any sort of directional point or hint here on Q4, just when you consider what was stacked at the end of Q2, what was stacked in Q3? And yes, I'll just leave it there. Anything would be very helpful. George Burns: Yes. I mean, again point you back to guidance, although Q3, we had some negative impacts, we're still going to hit our guidance at Kisladag for the year. As you say, Q4 is a little bit tough. We had lower placements, precisely understanding how that's going to impact Q4 versus Q1, it's difficult to say. There's a bit of art and science in heap leaching. But all I can tell you at this point, we're comfortable we're going to be within guidance at Kisladag for the year. And so Q4, don't expect anything dramatic one way or another. It's going to be a good year at Kisladag. Operator: That's all the time we have for today. This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good afternoon, everyone, and welcome to PriceSmart, Inc.'s Earnings Release Conference Call for the Fourth Quarter of Fiscal Year 2025, which ended on August 31, 2025. After remarks from our company's representatives, David Price, Chief Executive Officer; and Gualberto Hernandez, Chief Financial Officer, you will be given an opportunity to ask questions as time permits. As a reminder, this conference call is limited to 1 hour and is being recorded today, Friday, October 31, 2025. A digital replay will be available following the conclusion of today's conference call through November 7, 2025, by dialing 1 (800) 770-2030 for domestic callers or 1 (647) 362-9199 for international callers and by entering the replay access code 5898084. For opening remarks, I would like to turn the call over to PriceSmart's Chief Financial Officer, Gualberto Hernandez. Please proceed, sir. Gualberto Hernandez: Thank you, operator, and welcome to PriceSmart Inc.'s earnings call for the fourth quarter of fiscal year 2025, which ended on August 31, 2025. We will be discussing the information that we provided in our earnings press release and our 10-K, which were both released yesterday afternoon, October 30, 2025. Also in these remarks, we refer to non-GAAP financial measures. You can find a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures in our earnings press release and our 10-K. These documents are available on our Investor Relations website at investors.pricesmart.com, where you can also sign up for e-mail alerts. As a reminder, all statements made on this conference call other than statements of historical fact are forward-looking statements concerning the company's anticipated plans, revenues and related matters. Forward-looking statements include, but are not limited to, statements containing the words expect, believe, plan, will, may, should, estimate and some other expressions. All forward-looking statements are based on current expectations and assumptions as of today, October 31, 2025. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks detailed in the company's report on Form 10-K filed yesterday and other filings with the SEC, which are accessible on the SEC's website at www.sec.gov. These risks may be updated from time to time. The company undertakes no obligation to update forward-looking statements made during this call. Now I will turn the call over to David Price, PriceSmart's Chief Executive Officer. David Price: Thank you, Gualberto, and good morning, everyone. I'd like to start by expressing my sincere gratitude to the entire PriceSmart team. This is the first earnings call for both Gualberto and me in our new roles, and we're excited to be here with our shareholders. We're settling in well and energized by the opportunities ahead. I also want to thank Robert Price, our Executive Chairman, for his invaluable leadership during his multiple tenures as CEO, especially his most recent one. In his current role, Robert and I are working closely together, and I'm deeply appreciative of the productive, positive and collaborative relationship we have built. This year's results reflect the passion and dedication of our teams across clubs, distribution centers and offices in 13 countries working together to serve our members. We saw strong momentum in membership sales and income, driven by the commitment of our teams across digital, supply chain, merchandising and operations. They delivered on our mission and provided the value our members expect. Since stepping into the CEO role on September 1, I've had the opportunity to visit many of our clubs, distribution centers and offices. What I've seen firsthand makes me incredibly optimistic about the future of PriceSmart. But most importantly, I continue to be inspired by the passion and dedication of our teams throughout the regions we serve. I'm also excited to share a major milestone for the company. We have officially moved into our new corporate headquarters in San Diego. This move represents a meaningful step forward, providing us space designed to foster the kind of culture and ways of working that will support our people and mission for years to come. Now let's turn to the key factors and strategic priorities we are focused on to continue driving sales and delivering greater value to our members, starting with real estate. In August 2025, we opened our seventh warehouse club in Guatemala located in Quetzaltenango. In the third quarter of fiscal year 2025, we purchased land for our sixth warehouse club in the Dominican Republic in La Romana, about 73 miles east of the nearest club in Santo Domingo. The club will be built on a 5-acre property and is expected to open in spring 2026. In the first quarter of fiscal year 2026, we purchased land for our third warehouse club in Jamaica located in Montego Bay, about 100 miles west of the nearest club in Kingston. This club will also be built on a 5-acre site and is anticipated to open in summer 2026. Additionally, we executed a land lease for our fourth warehouse club in Jamaica located on South Camp Road, about 6 miles southeast from the nearest club in the capital of Kingston. The club will also be built on a 3-acre property and is anticipated to open in fall 2026. Once these 3 new clubs are open, we will operate 59 warehouse clubs in total. Before I continue, I want to take a moment to acknowledge the impact of Hurricane Melissa on our team members, their families and our members in Jamaica, the Dominican Republic and across the region. Our thoughts are with everyone affected, and we remain committed to supporting recovery efforts and ensuring the safety and well-being of our people and communities. Our operations in Jamaica were affected by both the preparations for and the impact of the storms landfall, resulting in the closure of our Jamaica clubs for a couple of days earlier this week. I'm deeply grateful for the dedicated efforts of our team. And with those efforts, we were able to reopen our clubs on Wednesday, October 29. Going forward, our focus continues to be the safety of our employees and our members. We are advancing on our plans to enter Chile, a market we believe offers strong potential for multiple PriceSmart warehouse clubs. As part of this initiative, we've hired a country general manager and signed an executory agreement for a prospective club site. While we haven't announced a target opening date, we're moving quickly and managing key factors that influence our opening dates, such as permitting and construction. In addition to opening new clubs in existing markets and Chile, we're continuing to optimize our current footprint, increasing club size, improving efficiency and expanding parking spaces at high-volume locations remain some of the most effective ways to drive sales and enhance the member experience. To support this strategy, we'll begin expansions and remodels at select clubs and parking lots across our markets in fiscal year 2026. Now moving to our supply chain transformation strategy. One of the key drivers in keeping prices low is improving how we move and distribute merchandise to our clubs. Today, we operate major distribution centers in Miami, Costa Rica and Panama. In the first quarter of fiscal year 2026, we adapted our Panama facility to handle cold merchandise and began operations at a new dry distribution center in Guatemala. Looking ahead, we plan to open PriceSmart run distribution centers in Trinidad and the Dominican Republic during fiscal year 2026. These local facilities are expected to improve product availability, reduce lead times and lower landed costs, among others [indiscernible] . Alongside these new distribution centers, we've begun implementing third-party distribution centers in China to consolidate merchandise sourced in the country, driving greater efficiencies and lowering costs. We're also exploring additional ways to enhance logistics in multi-club markets by leveraging a mix of PriceSmart managed and third-party operations. Finally, in select countries, we've introduced our own fleet of trucks to deliver merchandise directly to the clubs and capitalize on backhaul opportunities. In fiscal year 2025, we made significant progress migrating to our new forecasting and replenishment system, the RELEX platform. While we didn't complete implementation as originally anticipated, we remain on track and expect to finalize the migration in fiscal year 2026. This upgrade is a critical part of our supply chain strategy and is expected to boost productivity, improve inventory management and increase in-stock availability, ultimately driving sales growth and operational efficiency. Turning now to other ways we're enhancing membership. Our private label brand, member selection is a cornerstone of our strategy and a key differentiator in our product mix. These products are crafted to deliver high quality at competitive prices, offering our members exceptional value without compromise. During fiscal year 2025, private label sales represented 28.1% of total merchandise sales, up 50 basis points from 27.6% in the comparable period of fiscal year 2024. Some of the top-selling private label items this year included shredded mozzarella cheese, hypoallergenic baby wipes and cold extracted extra virgin olive oil. In Central America, we've renewed and enhanced our co-branded consumer credit card with Banco Credomatic BAC, which launched in July 2025. This new agreement offers higher cash back rewards on purchases at PriceSmart, pricemart.com, on BAC's travel program and other retailers and services, adding even more value for our members in that region. We continue to invest in omnichannel capabilities to meet our members where they are. Digital channel sales reached $306.7 million in fiscal year 2025, up 21.6% year-over-year and represented 6% of total net merchandise sales. Orders placed directly through our website or app grew 22.4% and average transaction value increased 3.7% compared to last fiscal year. As of August 31, 2025, approximately 60.1% of our members had created an online profile and 32.4% of our membership base has made a purchase on pricesmart.com or our app. We see continued opportunity in this space, and we will keep investing to enhance the digital experience we offer our members. For example, in fiscal year 2026, we will begin migrating our mobile application to fully native iOS and Android architecture to enhance speed, reliability and accessibility for our members. This foundation will allow faster deployment of new features and help us deliver an outstanding member experience in our digital channels. In the first quarter of fiscal year 2026, we expect to complete implementation of our new point-of-sale system, ELERA, a Toshiba product in all English-speaking Caribbean markets. Later in fiscal year 2026, we'll begin rolling out this system in our Spanish-speaking markets. ELERA will help us achieve faster checkout times, improve productivity and expand payment options among other benefits. Also in the first quarter of this fiscal year 2026, we began implementing Workday's human capital management system to replace legacy HR applications. This upgrade is designed to enhance the employee experience with modern, user-friendly tools while improving processes, strengthening compliance, providing scalable, integrated data to support our future growth. Now I'd like to highlight some of our sales results, starting with a strong fourth quarter. Net merchandise sales and total revenue were both over $1.3 billion in the fourth quarter. Net merchandise sales increased by 9.2% or 9.1% in constant currency. Comparable net merchandise sales in U.S. dollars and constant currency both increased by 7.5%. For the fiscal year ended August 31, 2025, total net merchandise sales reached almost $5.2 billion and total revenues were almost $5.3 billion. Net merchandise sales increased by 7.7% or 8.5% in constant currency, and comparable net merchandise sales increased by 6.7% or 7.5% in constant currency for the 12-month and 52-week periods, respectively. During the quarter, our average sales ticket grew by 0.5% and transactions grew 8.7% versus the same prior year period. For the 12-month period, our average ticket grew by 1.7% and transactions grew by 5.9% versus the prior year. The average price per item remained relatively flat year-over-year, while average items per basket increased approximately 1.7% compared to the prior year. Now looking at our business by segment. First, in Central America, where we had 32 clubs at quarter end, net merchandise sales for the fourth quarter increased 8.9% or 8% in constant currency, with a 6% increase in comparable net merchandise sales or 5.3% in constant currency. Additionally, we opened our ninth warehouse club in Costa Rica in April 2025 and our seventh warehouse club in Guatemala in August 2025, resulting in our high single-digit net merchandise sales growth. Although lower than net merchandise sales, all our markets in Central America had positive comparable net merchandise sales growth, validating the strong demand we're seeing in the region. Our Central America segment contributed approximately 360 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the quarter. Second, in the Caribbean, where we had 14 clubs at quarter end, net merchandise sales for the fourth quarter increased 6.3% or 7.5% in constant currency and comparable net merchandise sales increased 6.5% or 7.8% in constant currency. All of our markets in this segment had positive comparable net merchandise sales growth. Our Caribbean region contributed approximately 180 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the quarter. Last, in Colombia, where we had 10 clubs open at the end of our fourth quarter, net merchandise sales for the fourth quarter increased 18.2% or 18.7% in constant currency and comparable net merchandise sales increased 18.3% or 18.8% in constant currency. Colombia contributed approximately 210 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the quarter. In terms of merchandise categories, when comparing our fourth quarter sales to the same period in the prior year, our foods category grew approximately 7.6%. Our nonfoods category increased approximately 7.9% and our food services and bakery category increased approximately 7.5%. Our health services, including optical, audiology and pharmacy increased approximately 17%. Membership accounts grew 6.2% year-over-year to over 2 million. Platinum membership represented 17.9% of our total base as of August 31, 2025. That's up from 12.3% at the end of the prior year. This growth reflects our increased focus on the segment through targeted Platinum promotional campaigns. Fourth quarter membership income reached $22.6 million, a 14.9% increase over the same period last year, driven by higher Platinum penetration and a $5 annual fee increase for all membership types implemented gradually across fiscal year 2024 in all but one market. We continued with a strong 12-month renewal rate of 88.8% for fiscal year 2025. With that, I'll turn it over to Gualberto to continue the financial review. Gualberto Hernandez: Thank you, David. Continuing with the income statement. Total gross margin as a percentage of net merchandise sales for the fourth quarter of fiscal year 2025 remained unchanged at 15.7% when compared to the fourth quarter of fiscal year 2024. In dollars, total gross margin increased by $16.9 million or approximately 9% versus the same quarter of the prior fiscal year. Total revenue margins for the fourth quarter increased 10 basis points to 17.4% of total revenue when compared to the same period last year. The 10 basis point increase is primarily driven by the strong membership results that David mentioned before. Moving to SG&A. Total SG&A expenses increased to 13.5% of total revenues for the fourth quarter of fiscal year 2025 compared to 13.3% for the fourth quarter of fiscal year 2024. For the full fiscal year 2025, total SG&A expenses increased to 12.9% of total revenues compared to 12.7% of total revenues for fiscal year 2024. The increase in both periods is primarily due to investments in technology. The company incurred costs of approximately $600,000 in the fourth quarter and $3.7 million in the fiscal year related to growth and technology projects, such as the implementation of the RELEX and ELERA systems. Additionally, we had approximately $700,000 in the fourth quarter and $1.6 million in the fiscal year of onetime expenses associated with CFO transition costs as well as approximately $600,000 in the fourth quarter and $1.1 million in the fiscal year related to the relocation of the San Diego corporate office. For fiscal year 2026, G&A expenses will be impacted by the compensation of our Chief Executive Officer as our interim Chief Executive Officer in fiscal year 2025 declined to receive compensation for his services during his term. Operating income in the quarter increased 7.2% versus prior year to $52.8 million. Operating income for the fiscal year increased 5.2% versus prior year to $232.5 million. In other expenses in the fourth quarter, we recorded a loss of $6.4 million. This is better than the fourth quarter of fiscal year 2024 by $1 million, primarily driven by a decrease in foreign currency conversion transaction costs. Our effective tax rate for the fourth quarter of fiscal year 2025 came in at 32% versus 30.4% a year ago as we fell into a minimum tax position in some of our markets to close the year. Tax planning is central to us as it's a significant expense. It's also complicated as we operate in many jurisdictions, making it particularly complex to estimate quarter-by-quarter as the tax provision is projected and calculated on an annual basis. Despite the increase in the rate in the fourth quarter, it's important to note that for the full fiscal year 2025, the effective tax rate was 28.4%, down from 31.1% for the prior year period. This shows the result of our continued efforts in the area. Net income for the fourth quarter of fiscal year 2025 was $31.5 million or $1.02 per diluted share compared to $29.1 million or $0.94 per diluted share in the fourth quarter of fiscal year 2024. For the full fiscal year 2025, net income was $147.9 million or $4.82 per diluted share compared to $138.9 million or $4.57 per diluted share in the comparable prior year period. Adjusted EBITDA for the fourth quarter of fiscal year 2025 was $75.5 million compared to $70.7 million in the same period last year. Adjusted EBITDA for fiscal year 2025 was $320.7 million compared to $303.6 million in the same period last year. Moving on to our balance sheet and cash flow. We ended the quarter with cash, cash equivalents and restricted cash totaling $285.3 million in addition to approximately $73.2 million of short-term investments. From a cash flow perspective, net cash provided by operating activities reached $261.3 million in the fiscal year, an increase of $53.7 million versus prior year. Changes in our merchandise inventory and accounts payable positions contributed $17.7 million to the overall increase. The primary cause of this was a lower year-over-year increase in inventory compared to prior year due to 1 less club that opened in fiscal year 2025 versus the 3 clubs that we opened in fiscal year 2024 and due to the timing of holiday seasonal buildup. Net cash used in investing activities decreased by $46.6 million for fiscal year 2025 compared to the prior year, primarily due to a decrease in additions to property and equipment of $10.4 million and a net decrease in purchases less proceeds of short-term investments of $35.4. Net cash provided by financial activities during fiscal year 2025 increased by $164.2 million, primarily driven by $65.4 million net increase in long-term bank borrowings, a $66.8 million decrease in repurchases of our common stock and a $27.4 million decrease in cash dividend payments. When reviewing our cash balances, it is important to note that as of August 31, 2025, we had $59.7 million of cash, cash equivalents and short-term investments denominated in local currency in Trinidad, which we could not readily convert into U.S. dollars. In Honduras, we're currently able to source substantially all the U.S. dollars that we need, but we faced similar U.S. dollar liquidity challenges in the country from fiscal year 2023 to the first half of fiscal year 2025. We're monitoring this closely as the Central Bank still has strict controls there on the availability of U.S. dollars. Looking forward a little into our current first quarter, our comparable net merchandise sales for the 8 weeks ended October 26, 2025, were up 7.2% and 6.5% in constant currency. In closing, we are proud of all our accomplishments in the fourth quarter and fiscal year 2025. As we enter fiscal year 2026, we remain dedicated to our members, our people and our communities. We're excited about the many initiatives we have underway, especially on the technological front to make our point-of-sale, supply chain and other front and back-office processes more efficient and are looking forward to a year of growth in fiscal year 2026. Thank you for joining our call today. I will now turn the call over to the operator to take your questions. Operator, you may now start taking our callers' questions. Operator: [Operator Instructions] Your first question comes from Jon Braatz with Kansas City Capital. Jon Braatz: David, in Jamaica, I take it that you -- with the stores being open that they were undamaged during the hurricane. Is that correct? David Price: [Technical Difficulty] can you hear me? Jon Braatz: I don't know if you heard my question or not. David Price: I did, Jon. Okay. Let's restart. Yes. So regarding our clubs in Jamaica, they were not damaged. And we take great care in how we construct those buildings and knowing very well that we're in a hurricane area. And luckily, the storm turned west -- well, luckily for those locations, the storm turned westward kind of at the last minute. So we were kind of spared the full brunt of the storm. So we're open and we're flowing in the Kingston Port, we're starting to get merchandise in and -- but different parts of the islands had different impacts, right? And so it's going to take time for the country to recover. Jon Braatz: Okay. So you're getting merchandise in to reset? David Price: Yes. Jon Braatz: Okay. Okay. Looking at the 2 stores that you are going to build in Trinidad, Montego Bay and South Camp, South Camp is a smaller acreage. Is it going to be a smaller store than what is typical? David Price: That's not the intention. We're going to have to do some changes in our parking format to support the sort of parking that we require, but the intention is to have a typical size club there. Operator: Your next question comes from the line of Hector Maya with Scotiabank. Héctor Maya López: Congratulations to you both on your new roles. I know that you are still assessing the potential opportunities for expansion in Chile. And we saw your store opening pipeline for 2026 and 2027 and wanted to know if everything goes well in your analysis in Chile, would it be fair to assume that any first openings there might come in 2026 or 2027? Or should we assume that it might still take longer than 2027 to see something there? And also maybe -- sorry, yes, that one first and I have a follow-up. David Price: Okay. Well, thank you, Hector, for calling in today and for your question. So we haven't provided any information beyond what's in the 10-K about our opening plans. We do have a site that's under executory agreement. And so that's good. We continue to make progress there. And -- but we have not provided opening date information at this point. So that's all I can share with you. But I appreciate the question. Héctor Maya López: Understand. That's fair. Also on EBITDA margins by segment, could you please share a bit of the dynamics by country and if there were any methodology changes there, just making sure. Gualberto Hernandez: Yes, Hector, thank you for the question. There were no changes in the methodology. And as you know, we don't disclose details on this. But I can tell you that we have not seen any material mix changes that would impact EBITDA. Operator: Your next question comes from the line of John Braatz with Kansas City Capital. Jon Braatz: I'm back. David, as we look ahead in the next calendar year, there's going to be some changes in remittances from the U.S. back to a number of your countries. I guess my question is, there's a 1% [ increase ] Do you think that could have an impact on the sales performance of some of your stores? David Price: Thank you, John, for the question. That's an informed question. I mean you're right that several of our markets have a significant portion of GDP represented by remittances, particularly in Jamaica, Honduras, El Salvador, the largest, but Guatemala is not insignificant, neither is Nicaragua. Having said that, we have no indication so far a slowdown that's impacted consumption that we can see. Certainly, it's not out of the realm of cost that those will be an impact. But at this point, we don't have an indication that there's an impact from that flow of [indiscernible] Operator: That concludes our question-and-answer session. I will now turn it back over to David for closing comments. David Price: Great. Thank you very much. I just want to thank everyone for calling in today and send another message of gratitude to our team just for everything they do. We wouldn't be here without all of our great employees on the ground and in our central office. So thanks a lot, everyone. Have a good day. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the Magna International Third Quarter 2025 Results Webcast. [Operator Instructions] I would now like to turn the call over to Louis Tonelli, Vice President of Investor Relations. Please go ahead. Louis Tonelli: Thanks, operator. Hello, everyone, and welcome to our conference call covering our third quarter 2025 results. Joining me today are Swamy Kotagiri and Phil Fracassa, our CFO. Yesterday, our Board of Directors met and approved our financial results for the third quarter of 2025 and our updated outlook. We issued a press release this morning outlining our results. You'll find the press release, today's conference call webcast, the slide presentation to go along with the call and our updated quarterly financial review all in the Investor Relations section of our website at magna.com. Before we get started, just as a reminder, the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation. Such statements involve certain risks, assumptions and uncertainties, which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements. Please refer to today's press release for a complete description of our safe harbor disclaimer. Please also refer to the reminder slides included in our presentation that relate to our commentary today. With that, I'll pass it over to Swamy. Seetarama Kotagiri: Thank you, Louis. Good morning, everyone. I appreciate you joining our call today. Let's get started. I'm pleased to share a few key highlights from our strong third quarter. Our financial performance reflects continued solid execution across the business and meaningful progress on our performance improvement initiatives. Quarterly results exceeded expectations and showed year-over-year improvements. Sales grew 2%. Adjusted EBIT increased 3%, adjusted EBIT margin expanded by 10 basis points despite a 35 basis point headwind from unrecovered tariffs. Adjusted diluted EPS rose 4% and driven by stronger earnings and a lower share count. Free cash flow improved by nearly $400 million. Looking ahead, we are raising our full year outlook, including higher sales supported by improved light vehicle production and continued launch execution. An increase in the low end and midpoint of our adjusted EBIT margin range reflecting strong pull-through on higher sales and benefits from cost savings initiatives. Higher adjusted net income, primarily driven by increased adjusted EBIT and a lower effective tax rate. We remain focused on generating robust free cash flow and maintaining a disciplined approach to capital allocation. You can see this in our reduced capital spending outlook, now approximately $1.5 billion or 3.6% of sales, below our prior range and well below our initial outlook of $1.8 billion. With higher earnings and lower capital spend, we have increased our full year free cash flow outlook by $200 million. This positions us to reduce our leverage ratio to below 1.7 by year-end. We also continue working with customers to mitigate tariff impacts. During the quarter, we reached agreements with additional OEMs for recovery of 2025 net tariff exposures. Negotiations with remaining customers are ongoing, and we expect to substantially complete this by year-end. Our outlook assumes less than a 10 basis point impact to 2025 adjusted EBIT margin from tariffs. Overall, these results reinforce our confidence in the strategy and our ability to deliver sustainable value for shareholders. I would like to take a moment to highlight some recent business awards and technology program launches. First, we were awarded complete vehicle assembly business with a Chinese-based OEM, XPENG. This is a significant milestone, it marks the first time a Chinese automaker has chosen Magna's complete vehicle operations in Austria to serve the European market. Serial production began this past quarter on 2 electric vehicle models for this customer. In addition, we launched production in the third quarter on a vehicle program for a second China-based OEM with another program for that customer scheduled to start next year. These wins reinforce Magna's strong position in vehicle manufacturing and demonstrate the value of our flexible state-of-the-art production process, which enable fast-to-market high-quality vehicles for the European market. As we have for decades, we continue to launch innovative technologies that support our customers. This past quarter, we began launching a dedicated hybrid drive with a leading China-based OEM. Our 800-volt solution delivers a winning combination of efficiency, versatility and comfort for consumers. Our driveline portfolio spans all powertrain configurations from ICE and mild hybrids to high-voltage hybrids and full battery electric vehicles. This success underscores the strength of our building block strategy in powertrain. And in advanced safety, our mirror integrated driver and occupant monitoring system is meeting growing global demand for DMS technologies. As you may recall, this product earned a 2024 Automotive News PACE Award for its innovation and safety impact. We are launching this system with multiple customers worldwide and volumes are expected to reach several million units annually. Next, let me cover our improved outlook. While the current environment makes forecasting more challenging than usual, we remain focused on what we can control and continue to adapt to evolving conditions. Compared to our previous outlook, we have increased our North American production forecast to 15 million units, up about 300,000 units. Roughly 2/3 of this increase reflects expected outperformance in the second half with the remainder tied to adjustments to first half estimates. We are holding Europe production relatively unchanged. For China, we have raised our estimate to 31.5 million units. About half of this increase reflects second half outperformance and the other half relates to adjustments to first half estimates. We have also updated our foreign exchange assumptions to reflect recent rates, now expecting a slightly stronger euro, Canadian dollar and Chinese RMB for 2025 compared to our prior outlook. We have increased our sales estimate range largely as a result of the expected higher light vehicle production, particularly in North America. We also raised the low end and midpoint of our adjusted EBIT margin range and now expect margins between 5.4% and 5.6%, reflecting our solid Q3 results supported by continued execution in the fourth quarter. Looking sequentially, we expect fourth quarter margins to improve from the third quarter, driven primarily by commercial and net tariff recoveries from customers. And as of today, we are on track to achieve those. We updated our interest outlook due to some expense booked in the third quarter related to a discrete prior year tax settlement. We lowered our assumptions for taxes to approximately 24% from 25%, mainly due to better utilization of tax attributes and a favorable change in equity income. Factoring all that in, we increased adjusted net income to a range of $1.45 billion to $1.55 billion, largely reflecting increases in adjusted EBIT and the lower effective tax rate. We are reducing our capital spending outlook to approximately $1.5 billion, reflecting our continued efforts to optimize investment without compromising growth. As a result of higher earnings and lower capital spending, we have raised our free cash flow range by about $200 million to $1.0 billion to $1.2 billion representing more than 70% of adjusted net income at the midpoint. To summarize, we remain confident in our fourth quarter outlook supported by strong year-to-date execution and ongoing operational discipline despite industry challenges. We are on track to deliver the full year outlook we shared in February. A testament to the resilience of our business and the capability of our global team. Before I turn the call over, I would like to welcome Phil Fracassa, who joined Magna as our new CFO in September. He brings extensive public company CFO, automotive and industrial sector experience as well as a proven track record of driving profitable growth and shareholder value creation through disciplined capital allocation. Phil succeeds Pat McCann, who stepped down from the CFO role and is serving in an advisory capacity until his retirement in February 2026. I would like to thank Pat for his many contributions to Magna over his distinguished 26-year career. With that, I'll pass the call over to Phil. Philip Fracassa: Thanks, Swamy, and good morning, everyone. I'm pleased to be with you today. Magna is a company that I've admired for a long time. For its history of innovation, unmatched capabilities and deep relationships with customers. In my initial time here, I've seen our guiding principles in action and I'm energized by the ownership mentality that our entire team brings to all that we do. We operate in a sector of the economy where the only constant these days has changed, but this creates opportunities and Magna is well positioned to capitalize on them. So I'm excited to partner with Swamy and the team as we work to drive durable shareholder value. Now on to our results. As Swamy indicated, we delivered a strong third quarter, up year-over-year and ahead of our expectations, almost across the board. Comparing our third quarter to the same period last year, Consolidated sales were $10.5 billion, up 2%. This compares to a 3% increase in global light vehicle production. Adjusted EBIT was up 3% to $613 million. Our margin was 5.9%, up 10 basis points from last year, and that's despite the continued headwind from tariffs. Adjusted EPS came in at $1.33, up 4% and free cash flow in the quarter was $572 million, up $398 million from last year and well ahead of our expectations. Now I'll take you through some of the details. Let's start with sales. Looking at the market, North American, European and Chinese light vehicle production were all higher in the quarter, and overall global production increased 3% compared to the third quarter of last year. On a sales-weighted basis for Magna, light vehicle production increased an estimated 5%. Our third quarter sales were up 2% from last year. Excluding currency, organic sales were up modestly, but lagged the market in the quarter as we had expected. The increase in our total sales largely reflects the launch of new programs, including VW, Skoda Elroq, the Ford Expedition, Lincoln Navigator and Cadillac Vistiq, the favorable impact of foreign currency translation and higher global light vehicle production. These were partially offset by lower production on certain programs, including end of production on the Chevy Malibu. The expected decline in complete vehicle assembly volumes including end of production on the Jaguar E and I-PACE in Austria and normal course customer price concessions. Moving next to EBIT. Third quarter adjusted EBIT was $613 million. which was up $19 million or 3% from last year. Adjusted EBIT margin was 5.9%, up 10 basis points. In the quarter, our EBIT margin was impacted positively by 65 basis points from net operational performance improvements. This reflects strong execution on our operational excellence and other cost savings initiatives, partially offset by higher labor and other input costs as well as new facility costs and 30 basis points related to higher equity income as several of our equity method JVs, including China JVs delivered strong performance in the quarter with higher sales and favorable mix, net favorable commercial items and other productivity and cost improvements. These were partially offset by negative 50 basis points from discrete items. This is comprised mainly of lower net favorable commercial items compared to last year and 35 basis points for tariff costs incurred but not yet recovered. This is mainly timing as we continue to pursue recovery from our customers, and we remain on track for tariffs to be only a modest headwind to margins for the full year, less than 10 basis points, as we said before. Note that volume and other items were essentially flat in the quarter as earnings on higher sales and foreign currency gains were substantially offset by the impact of higher compensation expense. Looking below the EBIT line, interest was $11 million higher than last year due mainly to some discrete interest expense in the quarter for the settlement of a prior year tax audit. Our third quarter adjusted tax rate was 26.5%, lower than last year, primarily due to the favorable year-over-year impact of currency adjustments recognized for U.S. GAAP. This was partially offset by an unfavorable change in our jurisdictional mix of earnings, increases in our reserves for uncertain tax positions and a slight decrease in tax benefits related to R&D. Net income was $375 million, $6 million or about 2% higher than last year. mainly reflecting the higher EBIT, partially offset by the higher interest expense. And third quarter adjusted earnings per share was $1.33, up 4% from last year, reflecting the higher net income as well as 2% fewer diluted shares outstanding resulting from share buybacks over the past 12 months. Let's take a brief look at our segment performance for the quarter, which you can see summarized on this slide. Three of our 4 operating segments posted increased sales year-over-year with a notable 10% increase in seating. Exception was complete vehicles, which was down 6%. This was largely expected and reflects the end of production of the Jaguar E and I-PACE at the end of 2024. But as Swamy mentioned earlier, we're excited about our recent new business wins with China-based OEMs, which is a new growth market for our complete vehicle business. In 3 of our 4 segments also posted improved adjusted EBIT margin year-over-year with notable margin expansion and strong incremental margins in body exteriors and structures. The exception was Power & Vision, where margins were down on a tough comp last year. In the quarter, P&V was impacted by lower sales on a local currency basis. Lower net favorable commercial items and higher tariff costs as P&V has relatively more exposure to tariffs than other Magna segments. These were partially offset by continued productivity and efficiency improvements, higher equity income and lower launch costs. Despite being down year-on-year, P&V margins were slightly ahead of our expectations for the quarter, and we have held the low end of our EBIT margin range and our updated outlook for P&V. Our Power & Vision segment has differentiated technologies and a strong market position, and we're confident in the long-term margin outlook for this segment. Turning to a review of our cash flow. In the third quarter, we generated $787 million in cash from operations, for changes in working capital, along with $125 million from favorable working capital movements. Investment activities in the quarter included $267 million for fixed assets and a $100 million increase in investments, other assets and intangibles. Overall, we generated free cash flow of $572 million in the third quarter, higher than we were forecasting and $398 million better than the same period a year ago. The increase was driven mainly by lower capital spending and favorable working capital performance, and we continue to return capital to shareholders, paying dividends of $136 million in the quarter. Our balance sheet and capital structure remained strong with low single A investment-grade ratings from the major credit rating agencies. At the end of September, we had $4.7 billion in total liquidity, including $1.3 billion of cash on hand, which provides ongoing financial flexibility. During the quarter, we repaid $650 million of near-term maturing senior notes. Our refinancing is now complete, and we have no senior note maturities until 2027. Currently, our adjusted debt-to-EBITDA ratio is at 1.88x, a little better than we anticipated coming into the quarter. We have been executing well on delevering throughout 2025. And as Swamy said earlier, we expect to end the year below 1.7x. And lastly, subject to the approval by the Toronto Stock Exchange. Our Board yesterday approved a new normal course issuer bid, or NCIB, authorizing the company to repurchase up to 10% of our public flow or around 25 million shares. We expect the NCIB to be effective in early November and remain in effect for a period of 1 year. Since the initiation of the NCIB approved last year, Magna has repurchased 5.8 million shares or roughly 2% of shares outstanding. This allowed us to return $253 million in cash to shareholders while still reducing leverage and navigating a challenging environment. Our new NCIB reinforces our commitment to share buybacks as a key component of our disciplined capital allocation strategy as we look ahead to 2026. So in summary, we delivered strong financial performance in the third quarter, which exceeded our expectations and showed both top and bottom line improvements versus last year despite the unfavorable impact of tariffs and commercial items in the quarter. We're benefiting from operational excellence initiatives across the company, and we expect these efforts to drive further margin upside over time. We've also increased our outlook to reflect our third quarter performance and expectations for a solid finish to the year. We're planning for higher sales, supported by an increased and expected light vehicle production, particularly in North America, and that's net of the expected fourth quarter impact of potential supply chain disruption. We've raised the low end and midpoint of our adjusted EBIT margin range, and we increased our outlook for adjusted net income, largely due to the higher expected EBIT. We'll continue to focus on free cash flow generation and capital discipline as evidenced by a further reduction in our capital spending outlook. As a result of this and expected higher earnings, we have raised our 2025 free cash flow outlook by about $200 million. And lastly, we continue to mitigate the impact of tariffs. We settled with additional OEMs in the third quarter and we're on track to complete substantially all remaining customer negotiations by year-end. Let me close where I started and reiterate how thrilled I am to be part of the talented and dedicated Magna team. This past quarter was a testament to the resilience of our business and the effectiveness of our strategy, and we're excited about the opportunities that lie ahead. With that, we'd be happy to take your questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Etienne Ricard of BMO Capital Markets. Etienne Ricard: Thank you, and good morning. As we think about 2026, can you remind us what improvements to operating margins we should see from efficiency gains and across which segments do you still have lots of potential to expand margins? Seetarama Kotagiri: Good morning, Etienne. I think the best way to look at this is a little bit going back into the previous calls, where we talked about margin improvement from '23, '24 we said we were going to do about 115 basis points, which was done. We talked about an additional 75 basis points split between '25 and '26. I can say the '25 we are well on our way and on track. And we have good visibility for the 35 to 40 basis points going into '26. So if you look at the 5.5%, which is the midpoint of the range we are talking about finishing '25 and add the operational improvements of the 35 to 40 basis points it should give you a good foundation of how we are going into '26. On top of that, there are some programs which we have talked about, which are coming in like launching now into '26 with new economics, compared to what we had from the inflation impacted time frame of '23 to '25. So take all of that in, if you assume volumes to be flattish going from '25 to '26. We see the margins building on top of the exit of the 5.5% in '25. The second part of the question, I think it's a little bit difficult to talk segment by segment. But I can tell you the operational activities are across the company, and that's what is giving us traction, and we are very optimistic about it. Etienne Ricard: Okay. I appreciate the details. And I also want to cover the lower pace of capital expenditures. So this is good for free cash flow over the near term. But could you please remind us why this is not expected to materially affect growth prospects in future years? Seetarama Kotagiri: So Etienne, I think we have always said our long-term average ratio -- CapEx to sales ratio is, I would say, the low to mid 4s. And if you have looked at the CapEx spend in the past years going into '22, '23, '24, we had a higher CapEx spend cycle, and that depends very much on the cycle that the OEMs go through in giving out programs, right? Then we went through a big cycle of EV releases at that point in time. Now with that investment behind us, we have been constantly talking about looking at different -- as part of our continuous improvement in operational activities, looking at efficiencies, looking at consolidations and closing of facilities, looking at optimizing footprint. All of that has given us the opportunity to optimize. But I can very clearly tell you that the team is very focused on not curtailing CapEx at the expense of growth. we are very much focused on organic growth with right profitability. Operator: Your next question comes from the line of Dan Levy of Barclays. Dan Levy: First, maybe you could just talk through what you've embedded in your guidance and what you're seeing as it relates to some of these production disruptions out in the market between Ford, Novelis, JLR and Nexperia, just what's the impact to you? And what's embedded in the guidance and how you're planning around those. Seetarama Kotagiri: Dan, I think the Novelis and the Nexperia situation are still a little bit fluid, but we have taken into account based on the releases that we have and there is visibility. Obviously, there is more color as we have conversations with the customers. We have taken all of that in the Q4. But there is a little bit of indirect impact too, right, because this situation is impacting OEMs and other suppliers. So if that has an impact on the overall production, obviously, that could have an indirect impact. But we have taken to the best of our knowledge, the information that's been provided already in the outlook that we have given. Philip Fracassa: Yes. Dan, if I could maybe just add, this is Phil. So the 15 million unit assumption that we have in for the full year for North America would reflect our estimate of lost production. So if you compare that number to maybe some of the external forecasted it is a little bit lower, and that's where we would have embedded our assumption. Dan Levy: Okay. And Nexperia, and I know it's a wide range of potential outcomes, but we are a month in and you do have a large electronics business. What's the -- is there any sort of range of outcomes that you might be gauging within the results? Seetarama Kotagiri: Yes, I think it impacts largely the electronics group, but it's not only for the electronics group, Dan, you can imagine there is associated systems in powertrain and other parts of Magna. We have a task force activity that's obviously very active in looking at the supply chain analysis, the runout dates. We have identified and released alternative parts, obviously in conversation with the customers. We're tracking the EMS suppliers. Wherever possible, purchase through brokers. So there's a very constant communication with customers and suppliers. I don't know if we can get into every segment by segment, but I can say we have taken the impact to the extent we have seen, again, just not from the outside forecasters, but also program-by-program customer discussions. Dan Levy: Okay. Got it. And then maybe as a follow-up, if you could just walk through the large implied step-up into margins in the fourth quarter that are within your guide. I mean, pretty much all of the segments have a large step-up in margins. Perhaps you could just talk to the underlying strength in those? Seetarama Kotagiri: So a couple of points, Dan. I think as we look through, obviously, one is the traction of the operational activities that we've been talking about. The second part is we have mentioned the second half of the year being heavy in tariff and commercial recoveries. And obviously, it's heavy ended into the fourth quarter. But we have substantially negotiated with the customers. There is some ongoing discussions, but we feel pretty good with the frameworks that are in place, and we believe the roughly 10 basis points impact due to tariff for the year. I think we feel comfortable at this point in time. I would say those are the key points. And if you remember last time, we talked about, I don't know, 35 basis points of the full year EBIT coming in fourth quarter. That was very relevant, and we are trying to give cadence going from Q3 to Q4. It's been a little bit of a stronger Q3. Now if you look at the math of the midpoint of the sales and the midpoint of the EBIT. I would still say we are in the low 30s as a percent of EBIT for the full year. So all in all, it's on track and looking good. Operator: Your next question comes from the line of James Picariello of BNP Paribas. James Picariello: I wanted to first ask about the latest Ford recalls that happened over the last few months, regarding a rear facing -- the rear-facing camera, which I believe is Magna's. And correct me on the number, but it's well north of 1 million vehicles, I think. I'm just curious what -- how that maybe translates or not to future warranty spend for you guys? Yes. That's my first question. Seetarama Kotagiri: James, yes. We'll disclose the warranty expenses in our quarterly and annual reports, as you know. We are working constructively with our customers to reach resolution. For the more recent announcement, James, I would say the information is still coming through, need a little bit better understanding of the scope of the issue. As you can imagine, there is complexities in the system with various interfaces. We have to assess the overall. It's a little bit early from that standpoint. And as we gain more information, we will definitely be in a better position to come back and give you more granularity. James Picariello: Got it. Understood. And then my follow-up, just can you speak to the new nameplates that are at Magna Steyr and what that could translate to in terms of future volumes, run rate production? And then just latest thoughts on capital allocation with respect to share buybacks? Seetarama Kotagiri: Yes, James, again. I think one of the key things is the flexibility that we have in our Magna Steyr facility to be able to do multiple propulsion systems or multiple models to the same line. So I don't think you'll see a significant -- given the capability and the way it is set up and the business model that we have working with the customers there, we don't expect to see an uptick in capital because of those programs in Steyr. Now with respect to the programs, as I mentioned in my remarks, XPENG, we are doing SKD of 2 models. And there is another Chinese OEM we are working with, which is due to launch a third model in there. So all in all, we are excited about that. If you remember, we have capacity of roughly 150,000 units, I would say. But if you look averaged out over years, long period of time, I would say we do well with about 100,000 to 120,000 units. Typically, that's what has been average. So we are continuing to work launching these programs, but there is additional discussions ongoing to further optimize the facility there. Philip Fracassa: Yes. And maybe to the point on share buybacks. So obviously, share buybacks remain an essential part of our capital allocation strategy at the company. As you know, we've kind of paused this year just given all of the uncertainty that was -- that's been out there. We've shifted and focused instead on delevering, and that's gone very well. It's absolutely trending ahead of schedule. And we did announce, as you saw the new NCIB, which would allow the company to purchase up to 10% of our shares over the next 12 months. So I think that the leverage coming down quicker than we anticipated, the strong free cash flow, which we expect to continue, I think, sets us up really well to lean into buybacks as we're looking ahead to 2026. And I think that it will continue to factor in. Operator: Your next question comes from the line of Joe Spak of UBS. Joseph Spak: Just was wondering if you could help me a little bit here. Like if I track the impact all year long on tariffs and in your comment of less than 10 basis points impact for the year. It seems like you're counting on, I don't know, at least $40 million, maybe a little bit more recoveries in the fourth quarter. Is that math right? I know you said that was one of the drivers of the margin inflection in the fourth quarter. I just want to make sure we're properly calibrated there. And then I know you said you're making progress on negotiations, but is there any risk, do you think, to receiving them given some of the distractions at the customers? Seetarama Kotagiri: Joe, I think if you look at the overall in our last calls, we mentioned roughly an annualized impact of about $200 million. But, as you know, the tariff situation started, Louis, I would say April, March, April time frame. So you can take the $200 million annualized and get the number for the year. I think in the fourth quarter, there's more than $40 million, I would say. But there is frameworks in place, Joe, which gives me the comfort to say we are working through. The framework is there, discussions have been collaborative, which gives me comfort. Is there a risk? Obviously, there could be just as you know, in this industry. But looking at the past history, looking at the status of where we are today, I feel comfortable. And as we talk about 10 basis points, right, which is roughly in the $30 million range that we believe would be the tariff impact for 2025 that's unrecovered or unmitigated Joseph Spak: That's helpful. And then I know you're going to be pretty limited today in sort of talking about next year. But just again, so we think about this now, it does seem right, like maybe you have this positive in the fourth quarter, you're fairly neutral for the year. So if we think about maybe for '26 is -- are things -- are recoveries and headwind sort of better aligned. So the margin variation quarter-to-quarter related to this should be much reduced. So we don't have this like big 1 half, 2 half inflection like you did in '25. Is that a good baseline to think about for next year that it's a little bit more balanced? Seetarama Kotagiri: I think that will be the focus, Joe. But tariffs was a new thing this year, as you know, and we had to come up with the framework. I would say there is good groundwork and framework in place. This being the first year and as we are coming towards the end, that should help going into 2026, if you have to deal with it. I think there is still going to be some amount of cadence topics going from one quarter to the other, just based on continuous improvements, the programs finishing and the new programs coming and so on and so forth. But we are in the process of the business planning now. I think by the time we come to February, we'll get a much better picture to at least give you somewhat of a sense of is there more lumpiness or it's getting back to normalcy. Operator: Your next question comes from the line of Tom Narayan of RBC Capital Markets. Gautam Narayan: Best wishes to Pat. My first question is on the Seating margins just guided for Q4. and I know a lot of the segments are seeing this, but it's especially magnified in Seating, it seems. I know this segment was -- had some challenges in the past due to just some program-specific things. Just curious if you could help us understand how much of the sequential improvement is coming from the tariff and commercial recoveries? And then how much is just underlying kind of business improvement? I know you also called out engineering coming down. I'm not sure if that impacts Q4 as well. But just curious on your thoughts on Seating in Q4 and how we should think about that going forward. Philip Fracassa: Yes. Maybe I'll start Tom. So on Seating, obviously, a really strong third quarter with revenue up and good margin performance. But to your question, the margin improvement Q3 to Q4, the big contributors would be recoveries for tariffs because Seating does have pretty large tariff exposure. So there are the recoveries we've got to get. But there's also continued operational excellence initiatives there, too. But if we had to point to the primary drivers of the margin because we do expect the implied guidance would say volumes would be down a little bit year-on-year and even down a little bit sequentially. So we've got the volume headwind in there, too, but overcoming it with the recoveries, commercial tariffs, and also continued focus on operational excellence. Louis Tonelli: And there's a little bit of engineering that's coming down. It should be a bit of a tailwind for us. Seetarama Kotagiri: And that's for the fourth quarter in general. I think, Tom, just maybe stepping back, I want to say Seating is a good business. In our past couple of years, there was pressure on margins due to program-specific issues like end of production of Ford Edge, there was a cancellation of BV Explorer and Chevy Equinox moved from Ontario. And as you mentioned rightly, I've been talking about a European OEM program in North America which had issues, and that's going to be behind us. The newer version with the right, call it, financial metrics, launches in '26 into '27, and you'll see that additional impact going forward in '27. So I would say structurally, it's a really good business. It's got a strong position in China with China-based OEMs. So all in all, it's -- the team has done -- the Seating team has done a great job taking costs out as part of the operational excellence. So I think we'll continue to see the margin improve going forward. Gautam Narayan: Great. And my follow-up has to do with the Steyr and the Chinese OEM wins. Does this create like a flywheel to sell other Magna products from other segments? And then just curious if there were any kind of frictions from your European OEM customers, legacy ones, given the encroachment of Chinese OEMs into Europe is a very hot topic. And I know some of the OEMs are kind of concerned about it. Seetarama Kotagiri: I think, Tom, we would like to look at each of the business that needs to stand on itself, right? Obviously, if there are opportunities for other parts, other systems of Magna to be there, yes, but we are not going to make one dependent on the other, right? So it's standing on its own merit, that's how we're going to look at it. obviously, there could be opportunities, but we have to look at it. To be honest, no, we have not seen any discussions with other OEMs. This is part of a business for Magna, and we have worked with various OEMs in the past, right, as you know. Then we are following the same business model, same principles. So we have not heard anything. And we are very close to the customers as [indiscernible]. Operator: Your next question comes from the line of Emmanuel Rosner of Wolfe Research. Emmanuel Rosner: So I appreciate your early thoughts on some of the operational performance that could continue into 2026. Another angle I was hoping to get an update on is you've in the past pointed to a large amount of new business that would launch and ramp up into 2026, boosting revenue pretty materially and obviously coming with some operating leverage and helping margins further into next year. So can you maybe talk to us about how those launches are progressing, whether the magnitude of the revenue uptake into next year from those is still broadly similar to what you mentioned in the past? And any other consideration on that launches and revenue uptake, please? Seetarama Kotagiri: Emmanuel, I think for 2025 going into '26, when we talked about launches, we talked about it in the context of new economics, right? The terms of setting labor back, labor rates and labor discussions at the start of production, not when we won the program as an example, and so on. We have specifically always talked about winning programs based on returns. If you just look at all of those, that was the step up, I would say, or inflection in the profitability going with these new programs. As far as the launches and the cadence goes, looking at our team, they're doing very good. We look at it very periodically, right, at high amount of detail. I can say there is nothing that stands out today. All the launches are moving pretty good. Louis Tonelli: Yes. We got to look at what the volumes are going to be on all the programs. It's something we're going to go through as part of our business planning process, what are the revised volume expectations for all the key programs. What does that do to our sales growth, et cetera. So that's still part of our plan process that's coming. Seetarama Kotagiri: Yes. I think we can say we're doing a good job of controlling the controllables in our hand, but the externalities of volumes and so on, we still are going to go through and understand better in the business plan process. Philip Fracassa: Yes, so more to come in February on that. Emmanuel Rosner: Yes. Now, looking forward to that. Just a quick follow-up on this and then I wanted to ask you also about the fourth quarter drivers. But just a quick follow-up on this top line thing. Are we still talking about launches of decent magnitude? So I understand the volume themselves would fluctuate. But we're not -- are you experiencing cancellations or major pushouts or anything like this? Seetarama Kotagiri: I wouldn't say, Emmanuel, anything of significance. We already talked in the past about the big EV programs that everybody knows about. Other than that, we haven't seen anything substantial beyond. Emmanuel Rosner: Okay. And then I guess my second question was, so when -- you've spoken earlier in the year about this big step-up in margin between the first half and the second half, which you're reiterating today. I mean some of this was commercial recoveries. There were some engineering recoveries. There were some tariff recovery in there. All that stuff seems to be on track. I think there was also a piece of the uptick that was supposed to be tied to warranty costs. Is that still also on track and helping towards the fourth quarter? Seetarama Kotagiri: Yes. In terms of looking at my comments from the last time to where we are, you are right, we need to keep our focus on obviously executing operationally. Yes, you mentioned commercial and tariff that is still continuing, as I mentioned in my remarks. Nothing specific about warranty, I think if you're talking about there was one topic on Seating in the first quarter. I would say we are in a good place with respect to that. Nothing -- no surprise there. Philip Fracassa: Yes. I mean, yes, I would agree. I think when you think of the fourth quarter, you've got -- it's really continued execution on the operational excellence initiatives is in there, the recoveries, commercial tariffs. I would say there's nothing material related to warranty baked into the fourth quarter, if you will. It's really mainly volumes holding up, executing well and then continuing to focus on cost controls. Seetarama Kotagiri: And just maybe year-over-year, the warranty in '25 has been higher. So the outlook that we are talking about in performance is despite that increase in warranty. Operator: Your next question comes from the line of Colin Langan of Wells Fargo. Colin Langan: Early, you mentioned sort of you have the 5.5% base for 2025, you have about 35 to 40 basis points of continued sort of performance help that gets you to like 5.9%. And then I think you mentioned some of the launches are coming in at more profits and maybe you could go a bit higher. I believe the last update, I think from Q4 was 6.5 to 7.2 it seems still like a big jump for you kind of walking. Is that just kind of sale at this point? Or should we still think of that as a relevant target as we think about '26? Seetarama Kotagiri: Colin, I think let us finish the business plan process. I think, as you know, one of the big variables is going to be volumes in the market, right? When I talk to you about the 35 to 40 basis points, obviously, that's again controlling what we have in our hands in terms of operations and executing. We feel pretty good about that. Some of it will obviously depend on the volumes. Given all the activities that we have done in setting up the right cost structure and we -- it's a journey. We're not stopping there. We'll continue to look at it with the discipline we have had in capital. We see a good path going into '26. And as volumes come, you'll see, obviously, the flow through to the bottom line to be much better. Louis Tonelli: Yes. And to Swamy's point, if you look at where we said we thought North American volumes would be in February for '26, it was like 15.4%. If you look at where it sits today, it's 14.7%. So maybe by the time we get there, it's higher than that. But I mean, that delta has to be is going to have an [ impact ]. Colin Langan: Got it. And then any update on how the ADAS business is performing? Because if I look at Power & Vision sales seem actually fairly flat. I thought there was supposed to be some ADAS growth driving there. Is that still up? And if it is, what is offsetting some of that weakness in there? Seetarama Kotagiri: As we go through there, that segment has a lot of dynamic factors. As you can imagine, powertrain, EVs and hybrids and ICE mix and program changes. From an ADAS perspective, Colin, I would say there is some, again, industry dynamics there. The OEMs are continuing to still evaluate the architecture. Some decisions have been pushed out from a China strategy in terms of looking at chips and their own perception strategy. And the Western OEMs continue to take a path. So we've been a little bit cautious. I would say the growth that we would have assumed maybe 3 or 4 years ago to what we are looking is a little bit dampened. And the only reason is that we want to be cautious of how many platforms we want to work, right? We have to be focused on picking a platform so that we can engineer once and deploy multiple times. So there is a little bit of more work to do on the ADAS side, again, based on the industry and OEMs and architectures and trends. Operator: Your next question comes from the line of Mark Delaney of Goldman Sachs. Mark Delaney: I'd like to thank Pat for all his help and wish him the best going forward. And Phil, looking forward to working with you going forward. I had a question on the complete vehicles business. And Swamy, you mentioned earlier in the call that 100,000 to 120,000 is a more comfortable level to be operating. I do want to clarify with the award and momentum you've been seeing in that business with some of the Chinese-based OEM programs, do you already have line of sight into volumes, getting the complete vehicle business to that kind of level in Austria? Or do you need to win additional business to get there? And the second part of the question, if you get to those sort of volumes, what should we think about in terms of more normalized EBIT margin within the complete vehicle business? Because you think of time in the past, it was kind of 3%, 4% and I'm wondering if it can get back to at least those sort of levels, if not maybe even higher as you ramp some of this new business. Seetarama Kotagiri: Mark, I think a couple of points to mention. The 100,000 120,000 I mentioned was more a context of what the business has run typically in the past, right? We've been talking over the last 1.5 years where we restructured or the team has done a great job restructuring to the current volumes and the current visibility. So even with the lower volumes running there, they've been able to maintain the margin. So that's one thing to note. The second one, as you know, this business or this segment runs on a different business model. It's a little bit on capacity utilization. So the risk exposure is a little different or lower. And when you talk about margins, as you know, besides complete vehicle assembly, in that segment, we also have engineering revenue, right? Which has a little bit of ups and downs depending upon the seasonality. So that changes the EBIT percentage, depending on how much of what mix, right? We feel pretty comfortable that we have the right cost structure or we have optimized. We are not keeping the cost structure hoping new business will come. We'll continue to look for the right opportunities there. And the engineering continues, it's a good strength of ours, and we'll look at it. So I feel to expect somewhere in the mid-2s to 3% range would be normal. Mark Delaney: Okay. That's helpful on the margin. I guess just in terms of the volumes, maybe it's not quite at those sorts of volumes as it was historically, but the business has operated to be profitable at lower levels. Is that the right understanding? Seetarama Kotagiri: Exactly. Mark Delaney: Okay. And then the other point -- the other question I had was also on the complete vehicle business. And with some of the AV upfitting work that Magna is doing. I wanted to talk, is that reported within complete vehicles or another part of the business? I realize that the volume of AVs are still small, but I imagine that might be an opportunity for some engineering collaboration and just want to understand how impactful some of the AV announcements where Magna's doing AV upfitting? Just kind of how big that might be for your business today? Seetarama Kotagiri: Yes, Mark, you're right. The operating of the full autonomous vehicles is in this segment. It's an interesting one, but continue to look at it, look at the business model and work with them. We are very -- we are at the table is the best way to put it, and we have an advantage of being at the table. But we're also looking what's the value that we can bring and we do, I think from an engineering perspective and the expertise of integrating vehicles. So there is a possible opportunity there, but too early to quantify. Operator: The next question comes from the line of Jonathan Goldman of Scotiabank. Jonathan Goldman: Maybe we can circle back to 2026, and I respect you're still in the planning stages. But Swamy, you alluded to maybe flat next year in terms of volumes and rather than put a fine point on any number, what's your expectation in terms of production being aligned with sales? Seetarama Kotagiri: Good question, Jonathan. And I think you're asking me to look at the crystal ball a little bit. I think our assumption has been always to look at bottoms-up what we get from our customers, the releases and our own information that's available at Magna and then triangulate with the external forecasters, right. If the tariffs and the price continues the way it is versus being passed on to the consumers. There might be a pressure on the sales side of things, don't know. That is something we have to see. At this point of time, and this is just me personally looking at it, and we are looking -- it could be flattish. But like Louis mentioned a few minutes ago, in the next few months, we'll get a little bit more visibility on that. Louis Tonelli: And I mean, inventory levels in North America in particular, are pretty healthy levels. [indiscernible] reason to believe that they're going to bring those numbers -- that they're going to work off inventory. I don't think that's an issue, whether they decide to build more than they sell, that's -- yes, it's really up to the OEMs, we can't really determine that. Jonathan Goldman: Yes, that's a fair comment. And I guess my second question then is on CapEx, thinking about it maybe going forward. I think you've cut CapEx guidance 4 times in a row, just pretty impressive. I think this year, you're going to be at the mid-3s. Should that be the appropriate rate going forward if we're thinking about modeling CapEx in '26 and beyond? . Seetarama Kotagiri: No, Jonathan. Like I said, I would look at the 4 to 4.5 or low 4s to mid 4s being the long-term average. That's kind of how we look at business. Like I said, it's important for us, the organic growth, free cash flow, it's a good balance. Given we had 2 or 3 years of high CapEx, we have been super focused on looking at everything which programs and how there is enough uncertainty in the market, too. So that discipline will stay on. But I think the best way to look at it is over a longer period of time to be averaged the 4 to 4.5. But with that said, going into '26, I would look at the low 4s as a good way to start, which doesn't mean we are not going to stop further optimizing it, but I would say that's a good starting point. Operator: Your next question comes from the line of Michael Glen of Raymond James. Michael Glen: Swamy, can you provide an update in terms of how your customers are viewing the cross-border supply chains in North America right now? Is the approach to auto parts moving to the U.S. to become more U.S.-centric, something you're hearing more about and how Magna is positioned in the U.S. right now from a capacity perspective? Seetarama Kotagiri: Michael, I think the customers are, I would say, taking a very calm approach of figuring out, as you know, our industry is a long cycle. What we are producing today has been decided 3 or 4 years ago. I think the big topic has been how to mitigate what we have in our control, like increasing the USMCA content, looking at the supply base, looking at vertical integration and so on and so forth. That's where the focus is. I haven't seen any substantive changes that will impact right away. But are they looking at scenarios 2 or 3 years down the road as they contemplate new models and new vehicles? Yes. The good thing is, as Magna, we have a footprint in U.S. and we'll look at how we can optimize working with the customers. So -- but this is a long-term thinking process rather than a reaction to what's happening now and today. Michael Glen: Okay. And just a follow-up on that. Are you able to give some thoughts into the pluses and minus to Magna redomiciling into the U.S. Seetarama Kotagiri: That's not on the table and we have not considered it. Magna is a Canadian company, has been headquartered there. We are a global company. We have a great footprint and a great employee base. Like I said, our focus is right now on grinding through and being as flexible as possible. So thanks, everyone, for listening in today. We continue to execute, and we remain focused on the initiatives that are driving value for our customers and shareholders, including operational excellence is a big focus, new launches, capital discipline and free cash flow generation. We plan to both get back within our target leverage ratio and are committed to our capital allocation strategy, including share buybacks. And we remain highly confident in Magna's future. Thank you for listening, and have a great day. Operator: Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Lynas Rare Earths Quarterly Results Briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Lynas Rare Earth. Please go ahead. Unknown Executive: Good morning, and welcome to our investor briefing for the September quarter of FY '26. Today's briefing will be presented by Amanda Lacaze, CEO and Managing Director. And joining Amanda today are Gaudenz Sturzenegger, CFO; Daniel Havas, VP, Strategy and Investor Relations; Chris Jenney, VP, Sales and Market Development; and Sarah Leonard, General Counsel and Company Secretary. I'll now hand over to Amanda Lacaze. Please go ahead, Amanda. Amanda Lacaze: Thanks, Jen, and good morning, everybody. Thank you all for joining us this morning. And I am sure because I actually have a sneak preview that there are many questions. There are many in the queue already. So I will keep my introductory comments relatively short. I expect many of you will want to talk about the various geopolitics. We do live in an interesting world, don't we. But I want to start by talking about our business performance because we had a strong quarter in terms of business operations. The operating cash flow at about $55 million positive, was a really pleasing return to a more -- what we would see as a better level. And we see that, that as we look at current market settings gives us quite a deal of confidence as we move forward. Of course, we saw -- we are still seeing some runoff, particularly associated with the major projects, particularly Mt Weld, but that should mostly be flushed through the system by the end of this calendar year. That strong operating cash flow, of course, reflects sales. I know that everyone likes to get very focused on production numbers. And of course, we are very focused on production numbers. But what actually matters is what we sell. We don't bank tonnes, we bank dollars. And so we had a good quarter in terms of sales at $200 million for the quarter, the best in several years, reflecting both the higher volume and also the higher prices that were achieved during the quarter. Production at just over 2,000 tonnes of NdPr and sort of very positively nearly 4,000 tonnes in total. I thought it was quite interesting that we had a number of sort of -- we've seen a number of comments about, well, it was a bit less than what was expected. But then when I really interrogated those, we're talking about less than 100 tonnes being the difference between expectation and performance. Put that in perspective, it's about 4 days production for us. So we had our production where we wanted our production to be. It served all of our key customers without creating any supply side pressure or causing us to need to sell ahead of finalizing a number of agreements on which we are working. With respect to the heavies, and I may regret the fact that -- no, on the heavies, we have, for the first time, disclosed the amount of Dy, Tb. And once again, I read some commentary about it being a bit lower than was expected. And I would remind everyone that the way that we have characterized the Dy, Tb -- so we've got at Malaysia at present is it was really an opportunity sort of development for us. We had some mixer-settlers available. It's just a small circuit which is selectively separating a portion of the Dy, Tb, not even all of it within the SEGH that we produce alongside our current NdPr, but sufficient to test the market ahead of our larger expansion. I would also just to assist people to understand this, we're not actually selling our SEGH into the market at all, at present we are stockpiling it ahead of future processing capability. And then in response to some of the questions I've had about sort of sales volumes and how quickly do they come online. Some are done and dusted. Others, this is a new product and customers have certain qualification periods. Suffice to say that in terms of testing the market, we have identified extremely strong demand and we have also identified a preparedness to pay because of the scarcity of the material from outside China sources. And of course, that is the reason why it is the first of our -- towards 2030 projects that we will be bringing online, which is the full-scale HRE separation facility. And to do the full-scale separation requires us ultimately to put in a new building, put in new mixer-settlers, precipitation, filtration and tunnel -- and furnaces. So -- but we -- as I think everybody who follows us knows, we are always keen to move as quickly as we can. And so we have looked at what are opportunities to incrementally increase production as we move forward with the larger plan. And that includes doing some work with our current FX configuration, which would allow us to bring samarium online, samarium production online in the first half of 2026 calendar year. And samarium is an element which is in demand at present. We require those customers who need it to finalize some agreements with us on price. As I said, the little circuit that we've got at present is sufficient to have given us an opportunity to test the market. And as we think about how we derive value from our heavies, it is a combination of the margin just on that sale of the heavies. But bear in mind, it's relatively small market. The total outside China market for Dy, we estimated about 400 tonnes. So there's a certain amount which comes from just the pure margin on sales. And more beneficially really in the medium to long-term is the ability to bundle it with our other products in a way that serves customers' total needs rather than them having to have multiple suppliers. During the quarter, operations ran very smoothly. At Mt Weld, we operated on our old plant for most of the quarter as we were completing our commissioning activities for the new plant, which are progressing to plan. And we had a pretty exciting time where as we're bringing on our new gas hybrid renewable power station, we were able to run the plant for, I think, close to a week or on 100% renewable power only. And that's pretty exciting for everybody in Lynas. In Kalgoorlie, as we've identified, we made certain flow sheet adjustments, which are now delivering results. And we expect now to be able to progressively ramp up production in very good order. And at the LAMP, running very smoothly. But as we've indicated in the release, we will be doing these tie-in works for Sm and SX during this quarter. That alongside some of the continuing market volatility means that we are going to manage our production rates very carefully and may trim that to accommodate some of that tie-in work because we see the early production of samarium as being very valuable. During the quarter, many of you who are on the call participated in our capital raise, which sets us up for the next stage of growth, creatively known towards 2030. We've already disclosed some of the areas where we will be utilizing that funding, the HRE -- new HRE plant in Malaysia being the most significant. And then we've also released 2 magnet non-binding MOUs, but I can assure you that we are progressing to definitive documentation of those MOUs as quickly as possible. We are also continuing to negotiate long-term supply agreements with key end users in each of the sort of key categories. So magnet buyers most certainly, but also electronics. I mean this is a high demand market and particularly in terms of micro capacitors, significant growth and a preparedness to pay for quality, which Lynas can deliver. So then turning a little to the geopolitics and the issue -- the effect on the market. And I say again that we are managing carefully and sort of managing risk as we look into this very volatile market. But lets suffice to say that rare earth has -- well, in our view because we think rare earth is the most important thing, we wake up thinking about it in the morning and go to bed thinking about it at night. But it's definitely got the attention that it deserves from various different governments. And as you look at some of the announcements that have been made, you can see that for now, the key focus has been on some of the development projects. And I would offer the view that this is because they are relatively easy for governments to execute with their current funding instruments. Every government has something like our EFA or has other sort of [indiscernible] or other sort of debt funding capability. But some of the other sort of policy initiatives are a little more complex and will require governments to think about some different systems to be able to support it. But I would assure you that governments do understand that this is not a simple supply side fix, even though some of the announcements may lead you to think that they think that right now. There is a recognition that -- there is a market failure, which is shown in the price and also in the development of processing capability, including metals and magnets outside of China. And it's actually a little less about resource, but resource has a very long lead time, but it is more about market failure. And I think as everybody who's even sort of a passing observer would know, the MP deal does address all these elements. It addresses the issue of market failure with the price for. It addresses the issue of market value and processing with its support for the development of magnet making in the U.S. And I think that it seemed to come out of nowhere, but MP was facing an existential crisis as a result of the tariffs and trade restrictions between China and the U.S. and sort of the timely implementation of that there was important. But I think that what we're seeing right now is many governments who are actually working together, we're looking forward to hearing some expected outcomes from the G7 to ensure that the policy settings are right and that the like-minded governments are aligned in their approach. And I think governments also understand that there is no use pouring capital into this sector if the businesses can't be profitable in the long-term. And of course, that is the importance of getting the policy settings right, particularly on price. For Lynas, yes, because as I said before, we always like to get things done yesterday. Working with government can sometimes be a little frustrating because things take the time that things take. However, I would remind everyone that as the only proven operator in the current proven supply chain, we have options and we have value. And we will not spend that value cheaply. But whilst the market continues to be volatile, we will manage prudently. And I would simply point you to our track record of ensuring that we do get full value from whatever dynamics we see in the market. So for us, as we look at this, we see a good quarter in terms of performance, the uplift in price because we are a current producer, is flowing through into our bank accounts immediately. And we continue to see the international focus on the rare earths market is ultimately a very positive thing for Lynas and look forward to sharing with you in the future some better outcomes in that space. So with that, I'm happy to take questions. Operator: [Operator Instructions] First question comes from Daniel Morgan from Barrenjoey. Daniel Morgan: A question -- my first question is just on production volume, which was slightly down sequentially quarter-on-quarter. Just looking to understand that a bit more. Is that a reflection of demand being still patchy? Is it you're looking to negotiate offtakes and so why -- let's not produce a lot and go into inventory? Or is it -- three, there has been some disruption to the operations from tie-ins at Mt Weld, some modifications to fixed volume -- fixed quality at Kalgoorlie, et cetera. Can I just understand how -- volume, how are you looking to set the business near term? Amanda Lacaze: Yes, Daniel, we produced almost exactly what we intended to produce. So yes, you're right. I think it was 80 tonnes, 70 tonnes less than it was last quarter, but somewhere around about that 2,000 tonnes was we were very comfortable with that. It was not -- there were no significant operating disruptions and certainly not from the newer assets. And yes, we don't -- we never see value. I mean, we carry a little bit of inventory, but we never see value in producing a lot of product for inventory. And this was sufficient to ensure that we met customer needs across all geographic markets. So we do continue to make sales to, of course, our Japanese customers, but also to customers in China and in the rest of the world. But we were able to serve all of that and there were no issues with Mt Weld. Kalgoorlie, as we said, we had operating at lower rates as we did make some flow sheet changes there, which now appear to be doing exactly what we planned for them to do and the lab worked very -- exactly according to plan. Daniel Morgan: Sorry, just to clarify, should I take that as 2,000 tonnes a quarter as sort of where the business should sit for the near-term until something changes? Amanda Lacaze: I think we will -- I think the market is so volatile right now, but we will be cautious about sort of even giving that vague of guidance, Daniel. Suffice to say that we will ensure that we are continuing to meet the demand of all of our strategic customers and are working on developing new sales agreements. Operator: Next, we have David Deckelbaum from TD Cowen. David Deckelbaum: Congrats on all the exciting announcements out there. I wanted to follow up just to talk about the heavies facility in Malaysia and the priority around samarium. Is that informed by just process flow sheet? Or is that where you see the highest value products coming out of the heavy mix? Or is it in response to extremely near-term potential around offtake agreements? Amanda Lacaze: It's mostly about demand. So the highest demand materials of the Dy and Tb. Unfortunately, we can't significantly increase that production until we put in that new circuits. The samarium we can do by making a change to one of our circuits, which adds an additional outlet. And so given that there is significant demand for samarium in some very targeted sectors, we think that we can do that without causing too much disruption to production. So that would mean that instead of having to wait until 2027 for that material, it will -- it should be available in the first half of next year. But it definitely is an in-demand material, but we are finalizing relevant price agreements on that as we speak, which are an important part of us sort of deciding to proceed on this pathway. Operator: Next question, we have Jonathon Sharp from CLSA. Jonathon Sharp: Amanda and team, congratulations on yesterday's announcement, definitely a big positive. And my understanding is that this will likely open doors to other customers, not just with heavies, but also NdPr. So really should help with those NdPr sales as you ramp up, which is positive, but that's not my question. My question is around incremental cost of processing the heavies, specifically in the solvent extraction separation phase. Now I know you're not going to tell us what the costs are. But so maybe I'll ask it another way, what proportion of total unit costs of the heavies within the solvent extraction? I would imagine it's quite low. Amanda Lacaze: Okay. So there are no -- with what we're doing right now, there are no significant incremental variable cost to the separation of the heavies, right? Because we had -- the circuits were already in place. They already had -- we did have to load those, but that's already been done sort of in the back half of last financial year. And the contribution to cost of running that circuit and running the furnaces and product finishing is not significant. So really, this is giving us a almost -- this tiny little circuit gives us a bit of a free kick. When it comes to the bigger facility that will come into operation in 18 months' time, once again, we would see that it's not going to be -- there will be some incremental costs, but what we're basically doing is today, we process or up until sort of May, we process the HEG. It goes through solvent extraction and then it goes through product finishing, the wet cycle and then into the -- and is [ confined ]. And so what we're doing is that we won't be using those facilities, and we will be able to use what we've freed up there for other products. And it will be simply going through the different facilities. So we have the capital cost of all of the new mixer-settlers. We will have the capital cost of first fill of those loading them with material, but the incremental cost to process will be relatively small. Jonathon Sharp: Okay. I'd love to know the amount, but I know you're not going to tell me, so I will jump back in the queue. I have another question later. Operator: Next, we have Chen Jiang from Bank of America. Chen Jiang: My question is for your price realization for this quarter. Well, in AUD, $54 per kilogram, but you have heavy rare earths produced for this quarter. For example, the European so-called benchmark for terbium is around $4,000 per kilogram. That's like 4x versus China's price, right? And the same as dysprosium. I'm wondering what happened to your price realization for this quarter? NdPr quarter-over-quarter in China was up 26% and then you have heavy. So if you can provide us any color on the heavy price, how does that work, the European price versus China price as well as your NdPr price? Like I'm not saying that NdPr price jump realized in your revenue. Amanda Lacaze: Sure. Okay, okay. First of all, the heavies pricing, right, you can see we made 9 tonnes, right? Even if we sold every one of those 9 tonnes for, I don't know, $10,000 a kilo, it is not going to move the dial on the average pricing yet, right? So let's just put that aside. And then on the NdPr, as we've explained previously, some of our major customer contracts are reference an end of prior month price. So when the price is going up, we tend to lag it a bit on the way up. And when it's coming down, we lag it on the way down. So you have not seen the full value in this quarter of the uplift in price during the quarter. And that's just a reflection of the way that our pricing contracts operate. Chen Jiang: Can I have a follow-up, Amanda? Just on what you commented on -- on the NdPr. So the weaker than expected realized price is because your pricing contracts lagged a month or 2 and then you have increasing NdPr price. And then for the heavies, which means you quoted some amount, but are you achieving the sort of the European price versus the price... Amanda Lacaze: I'm not even sure where you're getting the European price from. We are achieving on the products that we have sold to date, we are very pleased with the price, and it is not pegged to -- it is -- each of the prices is a customer-specific price and negotiated with each customer on a commercial and confidence basis. But it is not anything even vaguely like the inside China price. It is -- as we said, the market demand is strong, and we have a great deal of flexibility in choosing to whom we sell and at what price we sell. Operator: Next, we have Paul Young from Goldman Sachs. Paul Young: Amanda, another question on the heavy rare earth circuit. Just trying to understand from a -- first of all, thanks for providing the production data. It does take a while for the heavies to work through the circuit a couple of quarters. So I understand there's a lag there. But just trying to understand the capacity and production from a modeling standpoint, what we should be throwing in the models. And I know that you did have -- or you do have, sorry, 1,500 tonnes of SEG capacity. And this announcement, the $180 million, you're achieving another -- you'll get 3,000 tonnes of heavy rare earth oxide products. So just wanting to understand, is this incremental? So at the end of this, are we getting 1,500 tonnes, and 3,000 tonnes to 4,500 tonnes of total capacity of heavies oxides? Amanda Lacaze: No, no, no. We won't -- we will have the one outcome, which is the tonnage that we were talking about yesterday. It is not additive to the tighter little Dy, Tb circuit that we have in place right now. Once we put in the new facility, right, we will then free that circuit up and we will use it productively for some other purpose. Paul Young: Yes. Understood. Okay. That's helpful, Amanda. Just a Part B to that then. Just with Mt Weld, when you look at on the go forward, when Mt Weld fully ramped up and you look at the Duncan or when you look at the assemblage and the heavies coming through, whether you campaign that or not? Can Mt Weld under the expanded scenario or the expansion, I should say, fully feed that heavy circuit? Or will you have -- at what percentage? And will you have spare capacity to take, I guess, a third-party on clays in Malaysia? Amanda Lacaze: Yes, yes. Okay. Excellent question, Paul. We could high grade -- I've got quotation marks around in the air here, but high grade for the heavies at Mt Weld, which would mean that we would deplete them faster, of course, if required to 100% feed that circuit. But between now and when that circuit comes online, we have a number of things that we need to do to improve. We will -- we -- our recoveries on heavies are not at the same rate as our recoveries on light because we haven't managed for that over many years, to be fair. And they do perform differently right from the float circuit in Mt Weld through to Malaysia. So we will be -- I want everyone to always understand we are thoughtful in the way that we manage these things. And so there's no point in sort of mining more heavies, but then having it report to tailings because we haven't actually optimized our processing. And we've got time to do that before the new plant is operating in Malaysia. So that's the first thing for us to do. But our preference would be that, that facility will take feedstock from -- and absolutely, our preference is from developed ionic clay deposits in Malaysia in addition to the feedstock coming from Mt Weld. And so we have a team whose job is to work with various Malaysian partners on that development process. The Malaysian ionic clay, all indications are that it will perform in the same way that the ionic clays in Southern China or Myanmar and Laos perform, and we see this as being an excellent opportunity to further contribute to Malaysian economic development. And also because as we know, ionic clays will typically give us a higher sort of proportion of heavies and so therefore, suitable for feeding into this new plant. So that's a very long answer to your question, Paul, which was, yes, we could, if we had to serve it out of Mt Weld, but our preference will be that we have at least 2 feedstocks and potentially more if any other projects come online into that facility. Operator: Next, we have Mitch Ryan from Jefferies. Mitch Ryan: You called about -- just can you comment on the cost pressure as you move consumables supply chain away from China? How long do you expect until your supply chain is completely independent? And could you help us understand sort of what percent of your cost base do those consumables currently represent? Amanda Lacaze: Yes. So we are -- we have been working on this since the first trade spat that started in April because China is quite nuanced in its use of non-price controls alongside the price controls that it's used over time. And so we have identified alternate supply sources for all inputs in our facilities, both consumables and also equipment. We, at present, see that there will be some cost penalties associated with those, but we won't see those in this financial year because of the way that we've managed inventory in particular. So given how much things can change at present in the rare earth world on almost a daily basis. I'm disinclined to provide a cost forecast, Mitch, for sort of 9 months' time. But we are confident in our ability to source relevant materials without crippling the business. I wouldn't want to be trying to build a new rare earth facility, however, just right now with no access to any China equipment at all. When we built Kalgoorlie, we did make a decision not to put any Chinese equipment in it. It's probably got to probably on the equipment cost, cost us probably about 25% to 30% more than if we had Chinese sourced equipment. So I think this will be a bit of a challenge for some of the new projects coming -- proposing to construct over the next little while. Mitch Ryan: And just given that comment, I assume, therefore, that the heavy rare earth circuit that's being proposed, Malaysia will also apply the same strategy. Amanda Lacaze: Sure. Yes. Well, Ryan, I can assure you this that if we went to a Chinese supplier today and ask them to ship to Lynas a new piece of kit of some sort that they would probably say, thank you very much, but our production line is full, if they were being polite. And if they weren't being polite, they just say no. Operator: Next, we have Reg Spencer from Canaccord. Reg Spencer: I'd like to ask about a topic that seems to be getting everyone breathless at the moment, and that's price floors. We know that such things have been floated with respect to the Australian critical minerals reserve, and we all have to think that Lynas would be a candidate to get some such floor pricing. What do you think -- what kind of impact is that going to have given that you are working on additional supply contracts independent of Asian Metals Index. And aside from the Japanese contracts, what kind of impact on pricing should we be thinking about? I'm really just trying to figure out where the base level pricing or reference point should be for your main product being your NdPr? Amanda Lacaze: Yes. Good question, Reg. I think that governments do recognize, as I said in my opening comments, that it's one thing to put the capital on the ground to build a project. The next challenge is to make it work. But it's all together another thing for that to become a profitable business, and to become a profitable and sustainable business, it needs to have pricing -- a functioning market in terms of pricing. So I think governments absolutely do understand this. And they also understand that whilst it's important to support and we support this development of the industry over time, I mean the ultimate remedy for all of this is to have an outside China industry of sufficient scale to balance out the inside China capability. But today, there is only one -- there is a functioning supply chain, and Lynas is at the heart of that supply chain. And so therefore, ensuring that policies are put in place, which support that supply chain success is really important. So I think, as you said, Reg, it is highlighted in a number of the announcements. I think we look here in Australia, and we see that the government is not fearful of taking action to support or to intervene where industries are at risk. But I think that what we've got is a number of governments who are seeking to make sure that whatever they do is aligned and ultimately constructive. Having said that, our view would be that the MP deal sets the flag -- goal posts here, that would be a better way to describe it wouldn't. And I mean the goals, not the behind. Reg Spencer: I have a follow-up associated question to that, but I'll take that offline and pass it on. Operator: Next, we have Austin Yun of Macquarie. Austin Yun: Just a quick one. As you point out in the opening remarks, MP is not a full solution for the U.S. government. I'm conscious that you do have a project in the U.S. right next door and feeding into this heavy risk demand. keen to get an update on that discussion and a lot has happened in the last few weeks. Does the current market condition provide a bit of support to accelerate that project? Amanda Lacaze: We have referenced this in the report, and we also did use a carefully considered form of words when we went to the market for the capital at the end of August. We -- where we are at present is that there is significant uncertainty as to whether we will proceed with that facility and if so, in what form. But we continue to work with the DOW and in particular, on offtake agreements, which will ensure that the DOW has the materials, which are critical for their applications. And that Lynas is in a position to be able to gain benefit from capability and that includes the construction of the plant in Malaysia. I think I've talked previously about sort of the fact that when we are doing something ourselves on our own sites, we're able to deliver projects much more quickly than on any other scenario and much more cost effectively. And ultimately, that's why we've made the decision to sort of focus our attention on delivering the new plant in Malaysia. Bearing in mind, that a lot of our engineering and design work that we've undertaken over the past 4 or 5 years actually feeds in very productively to that. And it's well worth remembering also that it remains that the key markets for rare earths remain in East Asia and Southeast and East Asia. And so it also remains that the location of our processing facility in Malaysia is really fit for purpose. Operator: Next, we have Matthew Hope from Ord Minnett. Matthew Hope: Just wanted to circle back to the NdPr pricing. Certainly, with your discussion about what was happening in the market, you're referencing China. And again, I think you indicated your Japan contacts are linked to end of month prices in China. Just wondering, is there any mechanism to start to delink from China, because China pricing is obviously quite different from the rest of the world in most products and even NdPr seems to be a bit lower than what's outside China. So is there any mechanism to sort of renegotiate those or change them? Or do they roll off over time? Amanda Lacaze: We can change them, but customers have to have a preparedness to pay. And right now, notwithstanding everything which is written, most customers have an option to source magnets from outside China or magnets from inside China and still 90% of them are sourced from inside China. So we are able -- on occasion, we would say that -- we often talk about this is probably 3 segments of customers; one who understands that they should embrace a risk-based pricing model because of the risk to their business of having to shut down. And bear in mind, there are at least a couple of [ crass ] lines that shut down in April, May this year as a result of the new licensing regime in China. There's a group of customers who are continuing to assess and recognize they probably need to do things differently. And then there's a fairly substantial group of customers who think that they keep their fingers crossed and their eyes closed and wish very hard that this will all go away and they'll be able to just continue to use cheap materials from China. We're working through those groups. And of course, our primary focus is on the first group, which is the one to recognize that risk-based pricing, which is fair pricing is something that they need to embrace within their business. And we are progressively sort of working on various different agreements with those customers. But across the market, well, you're just going to have a different price outside China from the one inside China is -- that's not something -- that's something which will rely upon customer performance and potentially policy settings. The various governments can influence that pretty quickly with -- and we've seen it with some of the sort of settings, for example, U.S. defense industries can't use material sourced from China from the 1st of January 2027 under the DFARS Act. So I mean, governments can do it, but not all customers outside China understand that, if they want ongoing supply that they need to pay a fair price. Matthew Hope: Right. Okay. And just in the Dy, Tb, noted what you said about the recoveries being lower and the fact that the circuit is very small. So does that mean that the sort of 9 tonnes of Dy and Tb that we -- that's produced in September quarter, is that kind of normalized? Or is it still got a fair way [indiscernible] to actually ramp up? Amanda Lacaze: It's got some upside to that, Matthew. Operator: Next, we have Rahul Anand from Morgan Stanley. Rahul Anand: Look, a lot of my questions have been asked, but I still have one which I wanted to touch upon, which is the Malaysian ionic clay deposits. Could you help us perhaps understand sort of how much you've looked into them? I'm sure you've looked at them a lot given your land plant. But I want to understand in terms of -- firstly, in terms of the processing side of things, I would believe that the processing costs are lower, but then some ionic clays can be problematic as well in terms of acid use and obviously, carbonation, et cetera. How do these things sit? And then why has Malaysia sort of not been able to do that themselves in the past and kind of has struggled in terms of volumes? Amanda Lacaze: Yes. So we're quite progressed. We have announced one MOU with the client state government. And the deposits which are sitting in Malaysia either it's not quite as easy as it is in Australia where the Crown owns all of the minerals under the ground. Some of them are owned by the state. Some of them are owned privately. Some of them are owned by the Royal families. So we're sort of working through that process and where relevant are executing agreements with the relevant owners. Now we're in Pahang, so sort of the states sitting on the East Coast of Malaysia are particularly attractive to us, a, because they appear to have the right sort of geology and b, because of their proximity to the plant. In terms of the ability to process and upgrade that material and why haven't the Malaysians done it to date, fair bit of that material has previously gone into China for processing. And so there's not been sort of the same focus on domestic processing. But last year, the Malaysian government recognizing the value of this and introduced a moratorium on the export of unprocessed rare earth materials with the objective of encouraging more development in this sector. And as I said, very responsive, therefore, to Lynas as sort of a company with skills in this area. But the more general comment about why hasn't it been done is because not very -- many people know about processing rare earths. Lynas is one of the very few firms outside of China that does know how to do it. And so that's really the partnership that we're looking to develop in Malaysia, and we see it as a highly prospective opportunity for future feedstock for particularly the heavy circuit, but those plays also -- not only will they bring us heavies, but they will bring us additional NdPr as well. Operator: Next, we have Regan Burrows from Bell Potter Securities. Regan Burrows: A lot of questions have been asked. Just one on, I guess, the broader market dynamics. Obviously, the governments around the world, especially in the Western world are supporting a lot of these projects, and we're seeing a lot of companies state that they will come online within the next couple of years and add supply to the market. I'm just curious on your view, is there enough room for everyone to be feeding into the ex-China market? And how does that sort of infer your thinking around capacity expansions up to that 12,000 tonne per annum rate? Amanda Lacaze: Thanks, Regan. I don't actually spend much time thinking about them. I've got more than enough time to think about our own business. I think that the earliest date that anyone is even sort of suggesting is, I think late '27, and I would be surprised if there's anything come into the market at scale at that time. But the more substantive question is, is there demand outside China? Yes, there is. Can it be served with the industry structured the way that it is today? Well, actually, it could be serviced via -- in terms of resource by sort of current operators, that is Lynas and MP. However, it is the metal and magnet steps that need to significantly grow to be able to serve the outside China demand. But industry forecasts are for continuing growth, and there is no reason to suppose that it won't continue to grow somewhere in the -- certainly in the high-single or low double-digit numbers on an annualized basis. So there's going to be much demand. And as I said in my earlier comments, the best thing for everybody is for there should be critical mass in the outside China industry. But it is really important, and I think that governments do understand this, there is still a big gap between where we are today and getting to a stage where there is a large functioning outside China industry. And in the meantime, it's incumbent on them to protect the current functioning supply chain and Lynas is at the center of that. So yes, look, there's demand. It's just a case of making sure that there's capability in all stages of the value chain. Regan Burrows: And so if you see, I guess, that -- call it last, but if you see that supply into the market, does that, I guess, shape your thinking around capacity from lab and your business? Amanda Lacaze: I think not particularly, no. We run our own race. We focus on customers that we seek to acquire and anyone who wants to chase us, that's fine, but we run our own race. Operator: Next, we have Scott Ryall from Rimor Equity Research. Scott Ryall: Thanks very much for the detail you've offered today. I'm looking, I guess, a bit more at the future. When you did your equity raising at the time of the full year result, which if you can believe it is only 2 months ago, almost to the day, you gave some splits around the uses of the funds, particularly in those growth areas of add resource scale, increase downstream capacity and expand into the metal and magnet supply chain. You gave some indicative splits there. And I'm just wondering if you have adjusted any thinking given such a lot has happened in this sector over the last 2 months as to where the best incremental returns on capital for Lynas are across those growth areas over the next 5 years as you work towards your 2030 strategy plays, if anything has changed materially? Or as you say, you're still running your own race? Amanda Lacaze: No, nothing has changed materially. I think that what we've said and we said then was the first project that we would bring back to the market would be the heavies, and we have done that. And it is -- and that is because it is absolutely a gap right now in the non-Chinese market. There's been a lot of questions today about -- and I've responded and maybe be a little bit harsh on some customers. But whilst customers are still reliant upon China for their heavies, right? It makes it sort of tricky for them to be shifting their light sort of demand as well. So that's why the heavy has been absolutely front and center for us in terms of development, and we can have that operating and we have an excellent track record in terms of execution. We can have that operating, we expect in calendar 2027 with some of -- as we said, the product earlier. And that we think will be really important in terms of our overall product offering into the market and giving customers confidence to switch their supply chains. So it remains Top of the Pops. And then because it's not just about the margin on the heavies, but it is about the NdPr that goes with it. And then we look at that and we say, okay, so we've got capacity there, and you would have noted that we probably got a bit of headroom in that capacity. So that means that the next thing, which is really important for us to nail is, additional complementary feedstock sources, right? We ultimately are a minerals and minerals processing company. So we live or die on the quality of our resources. And so adding more to that is sort of the next priority, very quickly followed by ensuring that there are -- that there is the opportunity for us to sell that into non-China processing facilities, both metal and magnet making. So the 3 areas remain exactly the same with the priority being, as I've just described, but that is really pretty much what we said 2 months ago. I think you would all be very disappointed notwithstanding everything which is going on sort of geopolitically, if 2 months after a capital raise, I said to you, "Oh no, all the cars are in the air and we're going to change everything." You would be, what's going on. Don't they know what they're doing here. I think it is very easy to get distracted by the daily -- sort of the daily announcements. But if we try to change course every time a politician somewhere in the world has some sort of a thought bubble, then we would not be the business that we are today. So we understand the market. We understand what our customers need and that ultimately is the thing. You can't run a business on government funding [indiscernible]. You actually need to meet your customers' needs and be a supplier of choice. And we understand what are the policy settings that we want from government to make this a proper functioning market into the future. But -- so Scott, long answer, the short answer is what we said when we asked you to sign a check stands. Scott Ryall: I'm smiling and nodding with you. Amanda Lacaze: I see that it's 3 minutes past 12. So I'm not sure, Maggie, how many... Operator: One last question from Matthew is a follow-up. Would you like to take it? Amanda Lacaze: Okay. Yes, sure. Operator: So we have Matthew. Matthew Hope: Just a question on the Noveon MOU. Was the intention there just to sell more rare earths to Noveon? Or is it actually to get involved more like JS Link get involved in the entire magnet factory and the profits there from? Amanda Lacaze: So you know what? Chris Jenney, who's our Head of Sales and Market Development, is online, and he is working very closely with Noveon, and I'm going to let him answer that question. Chris Jenney: Thanks, Amanda. Matthew, yes, great question. Yes, it's early days. Noveon is a fantastic operator. They're the only existing magnet supplier into the U.S. with very aggressive growth plans. So we're working through them what is the best model, not just for commercial customers, but also defense customers. So we'll keep you updated as we progress. Amanda Lacaze: And Matthew, we will sell more product, and we potentially will engage directly in how to support the aggressive growth plans that Chris has articulated. Operator: Thank you, Amanda. We have no more questions. Amanda Lacaze: Well, once again, thank you all for joining us. The rare earths market continues to be an exciting place to operate. So yes, look forward to catching up with all of you in the near future. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Welcome to the COP Defense Properties Third Quarter 2025 Results Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Venkat Kommineni, COPT's Defense Vice President of Investor Relations. Mr. Kommineni, please go ahead. Venkat Kommineni: Thank you, Kevin. Good afternoon, and welcome to COP Defense's conference call to discuss third quarter results. With me today are Steve Budorick, President and CEO; Britt Snider, Executive Vice President and COO; and Anthony Mifsud, Executive Vice President and CFO. Reconciliations of GAAP and non-GAAP financial measures that management discusses are available on our website in the results press release and presentation and in our supplemental information package. As a reminder, forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed in our SEC filings. Actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update them. Steve? Stephen E. Budorick: Good afternoon, and thank you for joining us. The company's strong performance during the first half of the year continued throughout the third quarter and has resulted in an increase to our guidance for the year across several financial and operating metrics. We've extended our streak of achieving or outperforming our FFO per share guidance to 31 consecutive quarters. And in October, we successfully closed on 3 important financings, which prefund our 2026 bond maturity and provide additional liquidity to fund our external growth. Turning to results. FFO per share as adjusted for comparability was $0.69 in the quarter, $0.02 above the midpoint of guidance and $2.02 for the first 9 months. This is a 6.2% year-over-year increase for the quarter and a 5.2% increase for the first 9 months. Same-property cash NOI increased 4.6% year-over-year for both the quarter and the first 9 months. We continue to outperform on the leasing front. The portfolio ended the quarter at 95.7% leased. That's our highest level in 20 years. We signed 78,000 square feet of vacancy leasing in the quarter and 432,000 square feet during the first 9 months. This volume represents 36% of the unleased space we had at the beginning of the year. Recall, our initial vacancy leasing target of 400,000 square feet was increased to 450,000 square feet at the end of the second quarter. So our achievement year-to-date already represents 96% of that elevated target. Tenant retention remains strong at 82%, both during the quarter and the first 9 months. We reduced our lease expiration exposure through year-end 2026 by 25% or 1 million square feet since last quarter, and we expect significant progress in the fourth quarter. In recent weeks, we committed $72 million of capital to 2 external growth investments, both of which enhance our relationships with existing Defense/IT tenants. First, we commenced construction of 7700 Advanced Gateway in our Redstone Gateway campus, 100% pre-leased $27 million development, which is our fourth build-to-suit project with this tenant at that location. Second, we acquired Stonegate I in Chantilly, Virginia, a $40 million purchase of a strategic property fully leased to a top 20 U.S. defense contractor, which represents this tenant's ninth location in our portfolio. Year-to-date, we have committed roughly $125 million of capital to 3 new investments against our original target of $225 million. We are in the advanced stages of negotiations on multiple build-to-suit opportunities, and we expect to exceed our original capital commitment target. Turning to guidance. First, based on our strong performance year-to-date, we are increasing the midpoint of 2025 guidance for the following 6 metrics. FFO per share increases by $0.03 to $2.70 a share, which equates to 5.1% growth over 2024's results and is $0.04 above our initial guidance. Same-property cash NOI growth increased to 75 basis points to 4%, which is 125 basis points above initial guidance. Same property year-end occupancy increases by 20 basis points to 94.2%. Cash rent spreads on renewals increases by 200 basis points to 2%. Our vacancy leasing target increases by another 50,000 square feet to 500,000 square feet, which is 25% or 100,000 square feet above our initial target. and capital committed to new investments increases by $25 million to $250 million. Britt and Anthony will provide more details on these increases. On September 2, President Trump announced the relocation of Space Command's headquarters from Peterson Space Force -- based in Colorado Springs to Redstone Arsenal in Huntsville. The Command is expected to relocate to our Redstone Gateway secured parcel. Since the announcement, we've been active dialogue with the leadership at both Space Command and Redstone Arsenal to optimize their programming and sequencing activities for their new facilities. We expect the Command to lease roughly 450,000 square feet in total, most likely in increments over time. Beyond the direct development opportunity with Space Command, we also expect defense contractor growth that supports the Command will emerge in the Huntsville market. The government estimates this could eventually drive a 2:1 contractor tail over time, but this won't start to significantly materialize until Space Command has completed its relocation expected in 2027. Of similar importance, the missions at Redstone Arsenal will play a key role in building the planned Golden Dome Missile Defense Shield and is driving contractor opportunities more quickly than the Space Command relocation. In addition to the mission work our tenants already conduct to support missile defense in the park, we are in discussions with defense contractors seeking space to compete for the incremental opportunities arising from Golden Dome and one new lease has already been signed since the July funding and additional contract awards are expected as soon as year-end. Turning to the government shutdown. Since the end of September, the Senate has failed to pass a continuing resolution, putting the government into shutdown, which continues today. As a reminder, one, the government shutdowns do not materially impact our business as we still collect rent. And two, our buildings are well occupied because they are leased to essential missions. However, the shutdown does create some uncertainty around the timing of lease activities. Given the significant volume of government lease renewals contemplated in the fourth quarter, an extended shutdown could modestly impact our full year guidance for tenant retention and cash rent spreads due to timing delays. To be clear, any delay as a result of the shutdown only impacts the when for these renewals, not the if. Looking forward, we expect that when the FY 2026 defense appropriation is approved, it will support additional demand for our portfolio as the priority missions our tenants support are expected to see increased funding to counter an increasingly complex national security environment. These missions include intelligence, surveillance and reconnaissance, cybersecurity and network activities, naval sea and air technology development, unmanned aerial vehicles and missile defense and space activities. So with that, I'll turn the call over to Britt. Britt Snider: Thank you, Steve. Throughout the year, we have continued to see strong demand from defense contractors looking for new or incremental space to support mission programs and contracts, a significant amount of which requires SCIF. As we had anticipated, occupancy in our total portfolio declined 10 basis points sequentially, but the lease rate increased 10 basis points. More importantly, the lease rate in our Defense/IT portfolio increased 20 basis points to 97%. The short-term occupancy decline over the quarter was driven primarily by 2 known nonrenewals totaling less than 80,000 square feet. This expiring area has already been leased to defense contractors with occupancy commencing in the first half of next year. In the Fort Meade BW corridor, we leased the space related to 41,000 square foot -- 41,000 square foot nonrenewal by a financial services tenant in Columbia Gateway to RealmOne, a rapidly growing cybersecurity innovator. RealmOne is expanding its footprint in the park from a little over 10,000 square feet to over 50,000 square feet. This is a continuation of our successful effort to increase the concentration of defense and cyber tenants in our Columbia Gateway portfolio. And in Huntsville, we leased the space related to a 37,000 square foot nonrenewal resulting from M&A activity to Georgia Tech Research Institute or GTRI, for its expansion. GTRI is doubling its footprint to 75,000 square feet and will fully occupy 8800 Redstone Gateway. GTRI is a DoD-sponsored university affiliated research center, which serves missions at the Redstone Arsenal, including Army Air Defense Systems and the Missile Defense Agency. We continue to outperform in terms of vacancy leasing as we leased 78,000 square feet during the quarter and 432,000 square feet during the first 9 months of the year. Our third quarter volume exceeded our plan as we anticipated activity in the back half of the year would moderate due to the delayed appropriation, which wasn't passed until July. Despite the late appropriation approval, we have seen some contractors move forward and execute leases. Currently, we have another 110,000 square feet of deals in advanced negotiations, which led us to raise our full year target again to 500,000 square feet. Moving to renewal leasing. We executed nearly 800,000 square feet in the third quarter and achieved an exceptional tenant retention rate of 82%. During the first 9 months of the year, we executed 1.7 million square feet, also achieving a tenant retention rate of 82%, which is right in line with the midpoint of our full year guidance range of 82.5%. On Slide 23 of the flip book, we provide an update on our lease expirations in the fourth quarter, which totaled 1.7 million square feet in our Defense/IT portfolio. All but 75,000 square feet of these expirations are U.S. government leases and nearly 1.4 million square feet or 80% of these expirations are in secure full building leases to the U.S. government. We are working with the government on these renewals and expect 100% retention on these leases. Our retention rate guidance assumes that we renew roughly 700,000 square feet of this U.S. government space by year-end and the remaining 660,000 square feet in 2026. Turning to large leases expiring between third quarter of 2024 and through year-end of 2026, as shown on Slide 24 of the flip book, we renewed 5 large leases in the quarter, totaling 640,000 square feet at a 100% retention rate. This included a secure full building lease with the U.S. government in Maryland, a lease with Boeing in Alabama in their defense, space and security business and 3 data center shell leases in Northern Virginia, of which we own 10%, where cash rent spreads increased 91%. Over the last 5 quarters, we've renewed 1.9 million square feet of large leases at a 97% retention rate. We have 2 million square feet of large leases expiring over the next 5 quarters, and we continue to expect a 95% retention rate on the full set of large lease expirations. Cash rent spreads on renewals were up 7.5% during the quarter and up 2.4% during the first 9 months of the year. The outperformance in cash rent spreads during the quarter was driven by the extension of a lease with the U.S. government on our secure parcel in Huntsville, which was not contemplated in our previous guidance. The 210,000 square foot lease was extended for another 10 years and will now expire in 2040. We are increasing the midpoint of full year guidance for cash rent spreads by 200 basis points, which takes into account this lease and some early renewals expected in the fourth quarter, which were not previously anticipated. With respect to capital commitments, during the quarter, we executed a 101,000 square foot lease with Yulista and commenced construction on 7700 Advance Gateway, a $27 million development project. The tenant serves DoD missions at the Redstone Arsenal, including the U.S. Army Aviation and Missile Center. Our relationship with Yulista began in 2020 when we delivered their 3-building campus in Huntsville, totaling nearly 370,000 square feet. This expansion strengthens our relationship as Yulista is currently our 14th largest tenant and will occupy nearly 0.5 million square feet in our Redstone Gateway portfolio. Yesterday, we received more good news regarding Huntsville. We signed a 32,000 square foot lease with a defense contractor at 8500 Advance Gateway. This active development project, which we commenced only 2 quarters ago, is now 20% pre-leased. The tenant also serves DoD missions at the arsenal, including the Missile Defense Agency and its technology is central to the Golden Dome initiative. This is our first new lease tied to the Golden Dome, which was funded in July. We also have a strong pipeline of demand on the remaining availability in this building with over 300,000 square feet of prospects on 125,000 square feet of space, and we anticipate additional pre-leasing activity in the coming quarters. On Slide 13 of the flip book, we provide an overview of the $40 million acquisition in the Westfield submarket in Chantilly, Virginia completed just yesterday, which meets all of our investment criteria. Stonegate I is a 142,000 square foot building that is 100% leased to the 16th largest U.S. defense contractor in terms of defense revenue with 10 years of lease term remaining. We acquired the building at a 9% initial cash NOI yield, which exceeds our development yield threshold. The tenant's mission group serves defense demand drivers in the Westfield submarket, and the mission set has been executed out of this space for the last 25 years, and the property contains significant security enhancements. This building is a natural extension of our deep concentration in this important submarket. We own 10 buildings totaling over 1.5 million square feet that are over 94% leased, all within a 1-mile radius of Stonegate. We are the dominant landlord in this supply-constrained submarket as we now own roughly 1/3 of the 4 million square feet of office inventory. And the bulk of our current tenants serve the same demand drivers as the tenant in this building. In addition, Cushman & Wakefield identifies the Westfield submarket as the tightest submarket in Northern Virginia at 94% leased with Class A office rents increasing 25% over the past 5 years. Moving to our development pipeline. We have 1.3 million square feet of opportunities, which we consider 50% likely to win or better within 2 years or less. Beyond that, we are tracking another 1 million square feet of potential development opportunities. 100% of this 2.3 million square feet of development demand is at our Defense/IT locations. Overall, our leasing results continue to surpass our expectations and our recent accretive capital deployment initiatives serve to further expand our dominant footprint in 2 of our highly leased and supply-constrained submarkets strategically expand our relationships with our top defense tenants and above all, drive FFO per share growth and create shareholder value. With that, I'll hand it over to Anthony. Anthony Mifsud: Thank you, Britt. We reported third quarter FFO per share as adjusted for comparability of $0.69, which was $0.02 above the midpoint of guidance and represents a year-over-year increase of 6.2%. The outperformance versus the midpoint of our guidance was a combination of higher-than-anticipated same-property cash NOI, lower-than-anticipated interest expense as well as a $0.01 gain on an alternative investment. During the quarter, our same-property cash NOI increased 4.6%. The growth was driven primarily by the benefit from a 40 basis point increase in average occupancy in the same-property portfolio, lower-than-anticipated net operating expenses, including receipt of a nonrecurring real estate tax refunds and the burn off of free rent on development leases placed into service in 2023 and on leases that commenced later in 2024. The outperformance for the quarter was driven primarily by the net operating expense savings. Based on our achievement year-to-date, we are increasing the midpoint of our full year guidance for same-property cash NOI by 75 basis points to 4% with 4.6% growth during the first 9 months of the year, there are 2 offsetting factors to note in the fourth quarter. The first is $1 million of real estate tax refunds in the fourth quarter of last year that will not recur this year. And the second is the impact to NOI from a few previously discussed nonrenewals in the Fort Meade BW corridor, each of which are under 30,000 square feet. Despite these nonrenewals, we are increasing the midpoint of our year-end same-property occupancy by 20 basis points to 94.2% due to a few earlier-than-anticipated lease commencements now expected late in the fourth quarter. We've been very active in the capital markets over the past few months. When we established 2025 guidance in February, our forecast assumed we would prefund the capital required to repay our $400 million 2.25% bond in the fourth quarter. We are very pleased to report that we've had great success on this front, along with 2 other financings, all of which demonstrate the tremendous support we have from both fixed income investors and the banking community. On the bond issuance, in late September, we announced a $300 million 5-year unsecured bond offering at an initial credit spread of 125 to 130 basis points. The order book surpassed $3 billion, more than 10x oversubscribed. As a result of this tremendous investor demand, we upsized the offering to $400 million and priced the offering at a credit spread of 95 basis points and a yield to maturity of 4.6%. The credit spread achieved was tighter than the trading levels of all of our equal and higher-rated office peers, and these bonds continue to trade at levels that are tighter than those peers. We sincerely appreciate the support from the fixed income investor base and strongly believe this execution and the credit spread achieved is a testament to their appreciation of the resiliency of our cash flows and the strength of our strategy, portfolio, operations and balance sheet. In October, we recast our revolving credit facility. The last time we recast this facility was in the fall of 2022, a period when the debt capital markets were particularly constrained for office companies, which resulted in a downsized facility from $800 million to $600 million. With this new facility, we upsized the capacity by $200 million back to $800 million, extended the maturity by 3 years to 2030, expanded our bank group and most importantly, attained pricing at BBB flat, Baa2 spread levels as opposed to our current BBB- Baa3 rating. As a result, the SOFR spread on the credit facility declined by 20 basis points to 85 basis points. The SOFR spread on the term loan declined by 25 basis points to 105 basis points, and we eliminated the 10 basis point SOFR transition charge on both loans. Also in October, we closed on a $200 million 4-year secured revolving credit facility. This facility can be used to fund any investment or for general corporate purposes. However, we plan on using the capital to fund the construction of our development projects. Needless to say, we are very pleased with the $400 million of additional capital capacity from the line of credit and a new development facility and thankful for the commitment and support from existing and new lenders to the company. With respect to guidance, we are increasing the midpoint of 2025 FFO per share by $0.03 to $2.70, while narrowing the overall range. This increase is a result of our $0.02 of outperformance in the quarter and $0.01 from better-than-anticipated rate on the bond offering and the acquisition of Stonegate I. We are establishing fourth quarter guidance for FFO per share as adjusted for comparability in a range of $0.67 to $0.69, which is a $0.01 sequential decline based on the $0.01 nonrecurring gain in the third quarter and a $0.01 drag from the bond offering in the fourth quarter as the proceeds will be held as cash until maturity. These items are partially offset by the impact of Stonegate I. In 2026, prefunding the March maturity will result in a $0.01 drag in the first quarter until the repayment on March 15 and a $0.07 refinancing drag over the remainder of the year based on the roughly 235 basis point negative spread between the new bond and the maturing bond. This refinancing headwind is partially offset by the acquisition of Stonegate I, which is expected to be accretive to FFO per share by nearly $0.05 in 2025 and nearly $0.02 in 2026. The successful financing activities over the past few weeks generated the capital to repay our March 2026 bond maturity and puts us in an even stronger position to capitalize on external growth opportunities and deliver shareholder value. With that, I'll turn the call back to Steve. Stephen E. Budorick: So we achieved great results, highlighted by our strong leasing and recent capital deployment. We delivered FFO per share growth of 6.2% year-over-year, marking our 21st consecutive quarter of year-over-year growth. We expect 2025 to be our seventh consecutive year of FFO growth per share, and our revised guidance implies an annual increase of 5.1%. We increased the midpoint of 2025 guidance for 6 key metrics. We committed $72 million of capital to 2 new investments, both of which are fully leased, and we expect additional activity in the fourth quarter. And notably, we had great success on 3 financings, increasing our liquidity by $400 million and achieving a sector-leading credit spread on our bond offering. Finally, we continue to anticipate self-funding the equity capital invested in development and acquisitions on a leverage-neutral basis and compound annual FFO per share growth of over 4% between 2023 and 2026. So we are well on track to deliver another successful full year. Operator, please open the call for questions. Operator: [Operator Instructions] Our first question comes from Blaine Heck with Wells Fargo. Blaine Heck: Steve, can you give us an update on how you're thinking about how long of a lag there could be before we start to see the increased budget once approved and other positive policy decisions to really start impacting leasing decisions and activity mainly outside of Huntsville, which I think has its own demand driver dynamics. Stephen E. Budorick: Yes. So kind of pick up on your last point. Remember, the Golden Dome activities are already funded for the initial down payment through the One Big Beautiful Bill Act, and we see demand building right away. I wish I had a more specific answer for the first part of the question, which is when will the appropriation get approved. Clearly, the shutdown is not helping things. And before the shutdown, it was expected to do a continuing resolution into the end of November and then appropriate the 9 budgets in December. I'm not exactly sure it's not clear to us how that might be affected by the extended shutdown. Blaine Heck: That's helpful. I guess once approved, would you expect kind of a 6-month lag, a 9-month lag? How do you think this cycle compares with others that you've been through? And what was the lag that you've experienced in the past? Stephen E. Budorick: I got it. I would say this one, you'll start to see activity, I would think no later than 6 months. And I only say that, which is in contrast to our usual comments that demand arises 9 to 12 and sometimes 18 months after appropriation because we've had so many discussions with tenants that are contract contingent. They're planning for an expected win of a contract, and they need that appropriation for contract awards flow. So I would think it would be quicker this time around. There is pent-up need and expectation. Blaine Heck: Great. That's really helpful. Second question with respect to the acquisition of Stonegate I. I guess when I look at the aerial view in your presentation, this property seems to be just a little bit outside of the cluster that you've historically owned in that market. So without asking details on the seller, I'm just wondering if this acquisition might lead to more opportunities to acquire in that market and whether you'd be interested in growing -- continuing to grow your market share there? Stephen E. Budorick: Well, first, I'll take a little exception to your analysis. We have 2 buildings immediately across the street from this building and a secure campus kitty corner on that intersection. And it fits quite nicely into the geographical footprint of our portfolio in that market. And you'll come on a tour, and I'll show you that in person. With regard to expanding our concentration in that market, I've been interested in doing that for a long period of time. It's a -- we have key demand drivers in the market. It's one of the markets where although we have -- we're now up to about 1/3 of the inventory, that's relatively low for our deep concentration in the submarkets that we tend to have. So there are other good assets and there are a significant amount of defense contractors in buildings we don't own. And if the opportunity arose to acquire them with the kind of returns we achieved on this one, I would strongly look to do so. Operator: Our next question comes from Steve Sakwa with Evercore ISI. Steve Sakwa: Yes, just on that Stonegate, I guess, Steve, given the location, the tenant, kind of the work they put in, I guess I'm a little surprised at how good the yield is for you. Obviously, that's a great outcome for you guys. But I guess why is the yield so high on this? It just strikes me as kind of an above-market return for what seems like little risk. So is there something we're missing here? Stephen E. Budorick: There are 3 factors that really play into it. One, the seller had a specific time line to sell this asset, and they were delayed in getting their renewal done. We started looking at this building, I think, late 2024. So there was a pressured time frame to execute. We were by no means the lowest bidder, but the strength of our bid was clearly superior in terms of surety of capital and time to execute a transaction. So that was the second major factor. The third is the tenant was involved in influencing the outcome because they had a very strong preference that the asset be transferred to us because of our deep relationship with them. As I mentioned in our remarks, this is the ninth lease we have with the tenant in the building. And so all those 3 factors worked in our favor. Steve Sakwa: Okay. And I know I can't remember if it was Britt or Anthony talked about Page 23 where you have the 1.7 million square feet of space rolling. And I know you're highly confident that basically all the space is going to get renewed. But you do have this one purple box where you're basically, I guess, expecting about 660,000 feet to effectively get pushed into the first quarter of '26, which is understandable. Just from an accounting standpoint, what happens if that lease expires but doesn't get renewed? Does that go into holdover rent? Does it just stay at the same rent? What sort of happens from, I guess, your financials on that space? Anthony Mifsud: So on our financials, Steve, we execute holdover agreements or standstill agreements with the government. In the term of the expiration through the expected renewal date. So based on those standstill agreements, they continue to pay us rent at the expiring cash rent level. And that's what we will recognize as NOI during that standstill period. And then once the renewal is executed, we will catch up in that quarter for the impact on the straight-line rent of the term of the renewal. Steve Sakwa: Got it. So basically, there's -- you're just teated a little bit in terms of the uplift, you'll get that in the first quarter, but there's no negative impact in the fourth quarter from that holdover. That's correct. Operator: Our next question comes from Seth Bergey with Citi. Seth Bergey: With the Missile Defense Agency or Redstone Arsenal, do you kind of view the Golden Dome property as creating any near-term development opportunities? Or does this -- do you kind of currently view that as just driving leasing demand for that real estate? Stephen E. Budorick: Well, the answer is yes. Our portfolio is so well occupied now. An additional lease has got to go into a new development. We literally have no operating or minimal operating square footage to lease. The lease that we did execute yesterday, that's in a new development. And certainly, there are conversations with several contractors that contemplate much bigger commitments that would require build-to-suit or significant pre-leases to accommodate. So in essence, I think all of that Golden Dome incremental opportunity will be manifested in new developments. Seth Bergey: And is that kind of contemplated in the potential development square footage bucket? Or is that further out where that would be kind of incremental to what you've kind of outlined? Stephen E. Budorick: So the way we develop that pipeline, those are known opportunities where we've had conversations with specific tenants. There is no speculative kind of allowance put into that. So yes, there's quite a few of them in the active -- those prospects, we expect 50% likely to win in 2 years or less as well as some in the next 1 million square feet. Operator: Our next question comes from Rich Anderson with Cantor Fitzgerald. Richard Anderson: So Steve, can you talk a little bit about the process with Space Command moving from Peterson to Huntsville? I mean its worst kept secret perhaps, but was that a lobbying effort by you, by the government because they liked Huntsville? Like who drove the initial thought about moving it there? And what did you have to do as an organization to push that through to the point where we're at now where you've kind of gotten it to happen? Can you just talk about that? Stephen E. Budorick: Sure. The process is really quite protracted. Under Trump's first term, he created Space Force and then that kind of led to the natural creation of an integrated combatant command, Space Command. We're talking about Space Command relocating to Redstone Arsenal, not Space Force, to be clear. At that point in time, the Air Force was charged with determining the best location for the combatant command. And they went through a very comprehensive process. Many states and other facilities were competing to be the awardee. And that process determined Redstone Arsenal was the optimal location for the command. Subsequent to that decision, Other locations filed protests. It was reviewed by oversight in the DoD. It was readjudicated as properly awarded one time, then it was challenged again based on changes in criteria. We went through that process. It came out first again. It was readjudicated a second time. These last 2 events occurred during the Biden administration to Redstone Arsenal. And then President Joe Biden signed an executive order freezing it in Colorado. In the current administration, the executive order was overturned and the proper decision is determined by the DoD process. was allowed to be awarded to Redstone Arsenal. So I'd love to think I have influence to make that kind of stuff happening. But the reality is I'm rather -- or we are rather inconsequential. Now with regard to the opportunity coming to us, we're an integrated value proposition with the command on Redstone Arsenal. Remember, the Army is our indirect joint venture partner because we lease the space from them. And our purpose is to serve our shareholders, of course, but we're also there to help the missions on Redstone Arsenal succeed. So we're part of that value proposition, and we actually represent the quickest way to establish the proper mission operability for the United States government and taxpayer, and that's why we're getting the opportunity. Britt Snider: And Rich, this is Britt. I mean just one extra thing on that. I mean they really need to be behind the fence, and they can't wait for Milon. So the ability for us to control that secured parcel through an enhanced use lease behind the fence, that's really -- and there's really no other option that could meet their speed requirements and achieve the security they need. Richard Anderson: So it sounds like 450,000 directly 2x contract or tail, so call it 1.5 million square feet eventually associated with this effort. Is that Chapter 1? Or is there like a kind of a big growth story behind that in your mind? Stephen E. Budorick: So in my mind, I think that's the buck. Chapter 1 is the command, Chapter 2 is growth in the support of the command. Certainly, the command's importance and challenges are going to increase over time as the progression of defense activities further moves into space. And certainly, Golden Dome is going to be a huge component of developing new capabilities that, that command will have to coordinate. So that's one of the reasons why it makes so much sense to put the command here are the agencies that are building the systems that command is going to rely upon. Richard Anderson: That's my next question. The interplay between Golden Dome missile command and Space Command, I guess, is an obvious part of the selling point as well. Is that fair to say? Stephen E. Budorick: That's very fair. And remember, there's also NASA in a 50-year history of missile rocket and space activities and a deep, deep pool of PhD level workers that support those activities in Huntsville, Alabama. Richard Anderson: Okay. And my second question is perhaps not as cool and exciting, but just as equally as important. You had some really great success in terms of your debt issuance, interplay with the banks a 10x oversupplied that you talked about, Anthony. What do you think is driving -- what is -- what are the fixed income investor communities getting that the equity investor community is not getting? Because oftentimes, we see this -- we do a lot of work on fixed income investing and how that might foreshadow fortunes for the stock. Why is the fixed income community so sort of willing to be so supportive of you, whereas not that you've been -- your people aren't turned their back on the story, but you still haven't had the same type of performance in the equity markets that you had in the fixed income markets. Anything you can sort of talk about in terms of your conversations? Anthony Mifsud: Well, the fixed income investor community and the conversations we've had leading up to the offering as well as interactions that we have with them throughout the year, focus on really the things that we mentioned for the reasons for the success of the transaction. They look a little bit backward more than forward. They look at how the company has performed during the cycles, and they look at how the company performed during COVID, how we performed during the high inflationary environment of the last several years during the higher interest rate environment. And they -- from that, they see that the strategy that has been executed has created an incredibly resilient cash flow base and that the when you think about fixed income investors, typically, they would look at development and sort of turn their noses to it. Our -- the fixed income investors actually have a deep appreciation for the development pipeline that we execute because they see it in terms of the high level of pre-leasing and build-to-suit as incremental EBITDA in the future that's contractual that will continue to support the unsecured bonds. So how that then translates into how an equity investor might view the company, I'm not quite sure. But the fixed income community absolutely appreciates the strength of the strategy and the performance of the company over the past several years. Operator: Our next question comes from Dylan Burzinski with Green Street. Dylan Burzinski: Great to hear that the leasing story continues to play out. I guess just one thing that we were curious about, I think it was last week or maybe a week before the Trump administration or there was an article that the Trump administration has been making cuts to cyber defense and U.S. Cyber Command. So just sort of curious if that's having any sort of impact on the leasing demand prospects in the Fort Meade area given the prominence of the cyber demand there. Stephen E. Budorick: Well, I'm not familiar with the article you're looking at. So I can't really address that question specifically. But Cyber Command got a huge step-up funding in the one Big Beautiful Bill and the expected increase is significant for FY '26. I'm kind of shocked at the tone of the article as you describe it. I don't know if he's looking at some overhead in cyber activities outside of the DoD, but I can't really answer the question. Dylan. Britt Snider: I've seen some of that, too, and it's -- I've seen it more on the CISA side and less on -- not really on Cyber Command. In fact, there's a number of -- yes, I mean, there's a number of different efforts going on from a leasing perspective here that we're actually very encouraged about from Cyber Command and some of the related contractors. So I have heard some of that with CISA, but not Cyber Command. But... Stephen E. Budorick: Remember, Cyber Command is DoD activity. CISA is the rest of the government, and we don't serve CIS. Dylan Burzinski: Okay. That makes sense. And as I just look at it, sometimes these headlines just only talk about the high-level stuff rather than get into the details. So those comments are appreciated. Operator: And I'm not showing any further questions at this time. I'd like to turn the call back over to Mr. Budorick for closing remarks. Stephen E. Budorick: Thank you all for joining our call today. We are in our offices this afternoon, so please coordinate to Venkat if you'd like a follow-up call and enjoy your Halloween. Operator: Thank you for participating in today's COPT Defense Properties Third Quarter 2025 Results Conference Call. This concludes the presentation. You may now disconnect. Good day.
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's Third Quarter 202 Earnings Call. [Operator Instructions] Please be advised that this conference call may contain statements that are forward-looking in nature and subject to a number of risks and uncertainties that could cause actual results to differ materially. I would also like to remind everyone that this conference call is being recorded on October 31, 2025. Joining us on today's call are Alain Bedard, Chairman, President and Chief Executive Officer; and David Saperstein, Chief Financial Officer. I'll now turn the call over to Alain Bedard. Please go ahead, sir. Alain Bedard: Well, thank you for the introduction, operator, and welcome, everyone, to this morning's call. Last evening, we reported our quarterly results that shows additional progress with operating margins, especially for our U.S. LTL. In fact, across our entire company, the men and women of TFI International doubled down on our core operating principle, which is setting us up nicely for the eventual rebound in freight volumes. I'm also pleased with our free cash flow performance as this is always one of our top priorities. At more than $570 million year-to-date, this was slightly above the 9-month results from 2024. We use our strong free cash flow to strategically invest in the long term and whenever possible, return the excess to shareholders. Speaking of which, as you may have seen in our press release, yesterday, our Board approved a 4% increase in our quarterly dividend to $0.47 per share, suggesting a yield of close to 2%. Equally important, during and subsequent to the quarter, we repurchased additional shares, which I'll speak to in a moment and while maintaining a very solid balance sheet. With that, let's review our overall third quarter results. We generated total revenue before fuel surcharge of $1.7 billion, and that compares to $1.9 billion in the year ago quarter. In aggregate, we produced $153 million of operating income or a margin of 8.9%. We've recorded adjusted net income of $99 million as compared to $134 million in the third quarter of 2024 and an adjusted EPS of $1.20 is relative to $1.58 in the year ago quarter. Rounding out our consolidated results, our net cash from operating activities came in at $255 million, up sequentially, but down from $351 million in the same quarter last year. And finally, our free cash flow from the third quarter was nearly $200 million, also up sequentially. In addition, as I mentioned, this brought our year-end-to-date free cash flow to just over $570 million. So overall, when I look at our consolidated performance, first and foremost, I recognize the hard work of our team with everyone across our segments working to make the most out of a subdued freight environment and most importantly, setting us to capitalize on the next cycle. How do they do this? Well, they focus on long-held core operating principle, ensuring that quality of revenue and aiming for constantly improving efficiencies. Additionally, as we make meaningful progress on service improvement in U.S. LTL, it's gratifying to see the team recognized in this regard by leading third-party customer research firms. So we very much appreciate their hard work. Now, let's take a closer look at each of our 3 business segments, beginning with LTL. This quarter, our LTL operation represented 40% of segmented revenue before fuel surcharge, which was down 11% versus a year ago to $687 million. Notably, our U.S. LTL operation showed additional progress on margin for a second quarter in a row, producing a 92.2% OR, which matched the performance of a year earlier. Total LTL operating income of $78 million was up sequentially from the second quarter, but compared to $96 million a year earlier. Our combined operating ratio for LTL was 88.8%, and that's also improved sequentially, in fact, for the second quarter in a row, but still compared to 87.3% in the prior year third quarter. Our return on invested capital for LTL was 11.9%. Turning to Truckload. It was 39% of segmented revenue before fuel surcharge at $684 million, which compared to $723 million in the year ago quarter, with tariff impacts on steel and other commodities still waiting on freight volumes. Operating income of $53 million compares to $70 million last year, and our Truckload OR came at 92.3% versus 90.6%. Lastly, our Truckload return on invested capital was 6% for the quarter. Our third and final segment to discuss is Logistics, which produced $368 million of revenue before fuel surcharge or 21% of segmented revenue, and this compared to $426 million in the third quarter of 2024. Operating income came in at $31 million versus $49 million last year, and this represents a margin of 8.4% versus 11.4%. Our logistics return on invested capital was 14.6%. So next, I'll move on to our balance sheet, which remains very strong, benefiting from a free cash flow I mentioned of nearly $200 million during the quarter and more than $570 million year-to-date, which is stronger than last year. We end up September with a funded debt-to-EBITDA ratio of 2.4x. From this position of strength, we are able to not only pay our dividend, which I mentioned, the Board agreed to raise today, but we also repurchased a total of $67 million worth of shares during the quarter. That brought our total return of capital to shareholders to more than $100 million during the third quarter alone. As I mentioned at the outset, this is one of our key business principles to return excess cash to shareholders whenever possible. And I should add that subsequent to Q3, we also have repurchased an additional $17 million worth of share as we continue to effectively reduce our share count. So before we turn to Q&A, I'll provide a fourth quarter outlook. We expect fourth quarter adjusted diluted EPS to be in the range of $0.80 to $0.90. And we now expect full year net CapEx, excluding real estate, to be $100 million to $175 million compared to $200 million earlier. Similar to last quarter, I'll note that our outlook assumes no significant change either positive or negative in the actual operating environment. And with that, operator, David and I would be happy to take questions. If you could please open the lines. Operator: [Operator Instructions] Your first question will be from Ravi Shanker at Morgan Stanley. Ravi Shanker: So Alain, I would love your overall thoughts on the state of the LTL market today. Obviously, macro still remains pretty depressed, but you guys are taking idiosyncratic actions as well. So if you just could address kind of where do you think volumes are going? What do you think the pricing environment is like, that would be great. Alain Bedard: Yes. Well, very good question, Ravi. I think that like most of our peers so far, I mean, we're off to a very slow start in Q4 with all kinds of reasons. I mean, we have this special situation in the U.S. with the government shutdown and things like that. So I mean, we anticipate that probably in our guidance, what we have in there is Q4 versus Q3, okay, we'll probably see a deterioration of the OR between 200 to 300 basis points, okay, because of this slow environment, slow volume environment. Now going into '26, we're starting to have a feeling that after 3 years of very, very hard difficult freight recession, we believe that finally, all the effect of that Big Beautiful Bills and the fact that the consumer will probably get some tax refund, et cetera, et cetera, the investment, okay, that will probably take place in the industrial sector in the U.S., we feel way, way, way better about '26 than what we went through about 2025. Now we -- what we were able to do with TForce Freight, I think it's a confirmation that the new team is really all hands on deck. We've been working on our costs. We've also been working and improving our service. That's been confirmed by the famous Mastio report. We are improving. We still have a lot of work to do, but still we're heading in the right direction. And I'm very happy with the team, with what the guys are working on right now. We're looking at '26. We need to do some major investment in AI, okay, to help us reduce our costs and be more efficient, provide a better service. So in that regard, we have some projects that should take place in '26. So I mean, Q4 '25, difficult all over for us, I believe. But I think that finally, the sun is going to start coming up in '26. Ravi Shanker: Understood. That's really helpful. And just you very quickly addressed that as well. But if you can just talk about the progress you made with kind of fixing some of the internal initiatives in the LTL business. How far along are you? And kind of what do you think are the next few steps you can expect in the next quarter or 2? Alain Bedard: Yes. Well, one of the first things that we did, Ravi, with Kal and his team there is we fixed the small- and medium-sized business, where we were way -- we've lost too much of that in '24. And when Kal took it over with Chris and the rest of the team there, they said, well, we definitely need to change that, right? So what you see there, okay, in Q3 and also the improvement in Q2, some of that is the improved quality of revenue, quality of freight that we do. So that's basically step number one. Step number two is we were a little bit too relaxed on some aspect of our business. So for instance, our approach us with temp account was you deliver the freight and hope to get paid, okay, when an account does not exist with you. Well, I don't think no one is doing that, right? So we were an exception in the U.S. We fixed that in Q2 and for the rest of the year. So now if you order at TForce Freight and you have a ship and we don't know who's going to be paying the bill. So we hold on to the freight until we know who actually is going to be paying that bill. So that's also another improvement that because of past procedures, we were losing a lot of dollars because of that negligence of our process at the time. Now also, we've hired a guy to run our fleet management team. And I'll give you just a small example. Last meeting we had the other day in Dallas, it used to be that a truck, a TForce Freight get into a shop and that truck is stuck there for 85 hours. Well, now we're down to about 45 hours. It's still too much, but that helps, okay, the cost because now the truck is available, so you don't have to rent a truck for 5 days or 6 days because now instead of being stuck there for like 2 weeks, now the truck is stuck there for now a week, right? So these are all the small details that Kal and the team there are looking at. We have a new team also that's focusing on claims because our claim ratio at 0.7% of revenue is not good. I mean it's never been good. So we have to do something. If you look at our claim ratio in Canada, we're always in that 0.2% of revenue, which is normal, right? But we're at 0.7%. So now we have a team that focus on that day in, day out in trying to get that 0.7% down to a more normal level, right? So these are all small things that the guys are doing, and we'll be announcing also, Ravi, very soon, probably next week that now within TForce Freight, we have one executive that's going to be a Chief Commercial Officer for all of our LTL operation in the U.S. So again, this is because our focus is on quality of revenue, growing the number of shipments. And this is what I think that we will start to see in '26. Operator: Next question will be from Jordan Alliger from Goldman Sachs. Jordan Alliger: Just maybe just following up on that. It sounds like real progress is being made, which is great. So hopefully, next year will be better in terms of the underlying demand. So in the context of that, how do you think now that sort of maybe it's getting to that point? How do you think either incremental margins or where LTL OR in the U.S. could ultimately get to? I mean, do you have any updated thoughts on that? Because clearly, what you've done has improved the company versus the last time we had strength in the LTL market? Alain Bedard: Yes. Yes, absolutely, Jordan. And we -- if you look at our U.S. LTL versus our Canadian LTL, I mean, in Canada, we have a deep bench, and we've been at it for a long time. In the U.S., I mean, don't forget, we're in that business since we bought UPS Freight. And now we're beefing up our talent team. And that's going to help go through that period that hopefully is going to be some tailwinds for the LTL industry in general. And we'll be, I think, well positioned to take advantage of that. But the focus at TFI with every business unit has always been do more with less, okay? And this is why, like I said earlier to Ravi is we are really focused in '26, what kind of implementation we could do with the new AI tools that are available to be in a position to do a better job, provide better service at a better cost for all of our customers. And there, I'm not just talking about TForce Freight or LTL, I'm talking about our package in Canada, our P&C business in Canada. I'm talking also about our truckload operation in the U.S. This is really going to be a big focus of ours in '26 because now contrary to '24, this AI thing there is really something that's going to change a lot of stuff. I mean we know that down the road, I don't know if it's 10 years from now, okay, you'll be probably able to drive a truck without a driver, right? So when you think about that, all the edge that a nonunion carrier has versus a union carrier, well, that edge down the road will probably disappear, right? It's like -- but this is 10, 15 years from now, I don't know. But one thing is for sure is that us, we are embracing AI, big time. We'll be investing on that. That's a big focus of ours in '26. This market has been difficult for us for the last 3 years, okay? Hopefully, the market turns in '26. We don't control that. But what we can control is our cost and our focus, and this is something that I'm reviewing the plan for '26 as we speak, next 2 weeks. So it's a big focus of ours, Jordan. Jordan Alliger: Okay. Great. I mean, I guess, suffice it to say, I mean, without necessarily putting a number then and a time frame, I would suspect, given what you've done, when we do get to a positive volume environment, you'd expect fairly quick reaction to the operating ratio to the improvement. Alain Bedard: Yes. Yes, for sure. Because don't forget, you know what, George, if you look at what we were able to do, with sadly 10% less top line, okay, in our U.S. LTL. And we maintained the same OR as the previous year at 92.2%. So that tells you the heavy lifting that our guys are doing today, okay, and becoming more process-oriented. I'll give you another example. shippers loading count, okay? So you get a trailer and the load and count is from the shipper. But if you don't check, maybe there's a mistake. But we were too relaxed on that. So now Kal and the team says no more, no more. This is -- we get a full trailers from the shipper. We have to check, okay? And if there's a shortage, well, we have to tell the customer right away and not wait and get a claim 3 months down the road because there was a shortage. I mean this is just being professional in our business, right? Operator: Next question will be from Scott Group at Wolfe Research. Scott Group: So I wanted to see if we can dig into the fourth quarter guidance a little bit. So I think I heard you say, Alain, the U.S. LTL margins 200 to 300 basis points worse. It's sort of hard to get all the way to that -- to your guidance unless like, I guess, the rest of the business is doing particularly badly. Maybe, I don't know, you or David, maybe just walk us through some of like the segment expectations, that could be helpful. Alain Bedard: You know what, Scott, that's a very good question. So I've got David next to me. He's the CFO. So I think I'm going to let that to David. He's the numbers guy. Scott Group: Scott, so yes, embedded in that guidance is a U.S. LTL OR in Q4 of 96%. Specialized truckload between 93% and 94% and logistics also between 93% and 94%. And that logistics piece is down substantially when you run the numbers on what that suggests year-over-year, operating income contribution in logistics is down by about half. Alain Bedard: Right. And logistics, Scott, I mean, as you know, we move all the trucks that are being manufactured in North America for PACCAR and Freightliner. So these guys are down like 40%. So that's a huge effect on us. And also globally, our logistics operation in the U.S. is also down. The Canadian ones are on plan, doing better. But in the U.S., we're also down. We're running about 92% of plan right now. So this is what we are showing there. I mean, like this -- I'll give you another example because of government shutdown, DoD is dead, Department of Defense. I mean, one of our divisions, 30% of the revenue comes from the Department of Defense, right? So this is out of our control. The same thing with the OEM, okay, selling less trucks. This is something that is out of our control, but we know it's short term. It could be 2 quarters, 3 quarters. I mean, those guys will be selling trucks soon. And that's why we're also keeping the staff. We're keeping the team because we'll be suffering for a few quarters because of that situation, okay? But we know that this freight is going to come back. And it's the same thing with our truckload operation that service the Department of Defense. I mean we know that this shutdown will stop at one point. David Saperstein: Yes. And then in terms of rounding out the rest, P&C and Canadian LTL, we see those in the 82%, 83% range and Canadian Truckload around 90%. Scott Group: Okay. Very helpful. And then, Alain, it feels like on the U.S. LTL side, one of the messages in the last year or so is we got to get service better before we can start focusing on price. Where are we in terms of the ability to start getting a little bit more focused on price? And then maybe just with that, it feels like we're seeing some stabilization in the GFP business? Is there any potential to start growing that business again? Alain Bedard: Yes. Yes, you're absolutely right, Scott. GFP finally is we got some stability, and now we could start growing again because the business we get from GFP comes mostly from the small and medium-sized accounts. So once that you start going back the small and medium-sized account, normally, you should have a benefit to your GFP. In terms of the service, what I would say is that right now, about 21% of our linehaul miles are on the rail versus 30% or 35% like it used to be. So for sure, our 4-day service has improved tremendously, right? Because we use less rail today than we were using about a year ago. So that's number one. Next-day service, we're up to par. I mean if we compare our next-day service to our peers, I mean, we're there. Where we still have issues is second day and third-day service and the guys are working actively on that. We are improving. We're not where we should be, but that is really the goal is to get this up to our peers on the second and third day service. And then slowly in '26, and I think we'll get there, we can start being seen as a professional carrier that respect, the commitment that they give to customers and get a price that is closer to the market versus right now, we're still a discounter, okay, versus the market. David Saperstein: Yes. And to follow up on what Mr. Bedard said on service, I think one of your peers pointed out that we were the most improved carrier in Mastio in this year's survey. And I can tell you that, that's underpinned by real data that we're seeing. So our small medium-sized revenue -- small, medium-sized percent of revenue is higher than it was last year. We're at 27.4% relative to 26.7% last year, this quarter. Then on service, we've improved 340 basis points in terms of our on time. Our missed pickups year-over-year, they're down 60% and then our reschedules are down 34%. Alain Bedard: So these are facts, Scott. So I mean, this is going to help us like you've asked the question to get better profitability from the top line. David Saperstein: And more freight. Alain Bedard: And more freight. David Saperstein: Better retention. Alain Bedard: Yes. Less turnover. David Saperstein: Less turnover. Operator: Next question will be from Walter Spracklin of RBC Capital Markets. Walter Spracklin: Alain, on 2026, you said the sun is coming up, and you've been very pragmatic, very, very clear about when you see things that are poor and when you things that are turning. And so that's very interesting for you to say and to hear you say. And I'm just curious, is that a commentary on price? Is it a commentary on demand? And specifically, are you seeing any real evidence either from the CDL restrictions and English language proficiency requirements that are now being mandated? Is that -- are you seeing that impact today on price? And are you seeing any light at the end of the tunnel in terms of overall demand as you go into 2026? Alain Bedard: Okay. So Walter, let me a little bit more specific. When I see the sun coming out, it's mostly the U.S. I think Canada, okay, because we still don't have a deal with the U.S., it's going to be probably the same in '26 like we have been going through in '25, right? But on the U.S. side, if you look at our truckload operation in the U.S., our velocity is down. Our miles are down, but our revenue per mile is up until now, right? So what we're starting to see is maybe a little bit of contraction in the offer. And that could be, like you just said, Walter, this thing about the CDL, okay, those permits are not being renewed, okay? The same is true of the English proficiency thing. The early stage, okay, but I believe that, okay, this is going to help us correct the imbalance between the offer and the demand, okay? Also the fact that the truck sales are down like 40%. That's also something that tells you that some capacity is running out of the system, right? Now for us, Canadian, I'm sure you saw what Champagne was saying about his new budget that he's going to be talking about soon, okay? Hopefully, in Canada, we'll have something similar with those Driver Inc., thing there, okay, where finally, we were able to convince the federal government to say, if you're a trucker, you have to issue either a T4 as an employee or a T4A as a subcontractor, right, Walter? So the Canadian finally also could be a help for us in '26, maybe not on the volume, but the offer could reduce. As a matter of fact, we just saw one of the Driver Inc., up for sale, okay? I mean we're not going to buy a Driver Inc., company. But just to say that those guys are starting to feel things are changing in Canada. So I think that globally, the Canadian situation is going to be difficult in '26 because we don't have a deal with the U.S. yet. .I think we'll have one, but we don't have one yet. Maybe it's going to go all the way to the summer '26. But I think that the U.S., okay, that's going to change. That's going to change with all the benefit of this OBB, the Big Beautiful Bill and everything that's going on, the reinvestment, okay, trying to bring those jobs back into the -- all of this to me is, guys, let's get ready, okay? I think after 3 years of a freight recession has been really, really bad, we're starting to see some capacity out. As a matter of fact, even we have one of our peers in Alabama, 500 trucks. The guy is out. David Saperstein: They're in bankruptcy. Yes, exactly. We're seeing those come across our desk more and more now. Alain Bedard: Exactly. We also have a freight guy, a freight broker, okay, closing shops. Walter Spracklin: So as you become a bit more optimistic on '26 then, does that change at all your strategy on M&A? Do you pull that forward at all? Is it contingent on the seller? Just curious your update on what -- and I'm talking not the tuck-ins, I mean a larger platform acquisition. Alain Bedard: Yes. Yes. So you know what? This takes time, right? And we've been at it for quite a while. And because we don't have a deal, what we're doing is we're buying back TFI, right? So that's what we've been doing. I think that in '26, hopefully, we could have -- it's always difficult to do a deal when the target doesn't want to sell, right? This is not easy to do, right? So sometimes you're better off to say, you know what, let's wait, okay, and let's work on a different file where at least you got a seller that's motivated, right? So to me, I'm still convinced that '26, probably mid-'26, later into '26, we could do something of size. We have the capacity, we have the potential, we have the target, okay, to do that. But there again, I mean, TFI stock is so cheap that when we talk to our Board, they say, "Hey, Alain, why would you invest $1 billion, $2 billion, $3 billion, okay? Why don't you just buy back TFI, okay? And we've been doing that slowly. But now things could change with this macro environment and maybe it's best to put the buyback on hold for now, although we have our Board and the TSX approved the renewal of our NCIB, but maybe put that on hold for now, depending on the stock valuation and get ready for the next step, the next chapter of my life on M&A. Operator: The next question will be from Jason Seidl at TD Cowen. Jason Seidl: Getting back to your comments about a potential trade deal with the U.S., and I share your hopes that it's sooner versus later. But if it is later, have you given any thoughts to maybe some further cost reductions that you might have to take given that you saw CN out there the other day laying off about 400 people. Alain Bedard: Yes. Well, you know what, Jason, I don't know that. What I could tell you, though, is that because we're so embracing AI, I think that with this tool, we'll be in a position to do more with less. I think that to do some layoff right now of quality people that are part of our team, the same story is true of our logistics, right? So as I was saying, Jason, about our truck moving operation, we know that this is just a few quarters. So we are suffering because we're keeping our people, right? Because these are good people. They're doing a good job. So we'll be suffering on that. And we are still suffering on the Canadian side in our Truckload sector. As an example, steel, okay? Well, Steel is dead for us. But we are a big steel hauler. So what do you do? I mean now we have those trucks parked, and we have those drivers at home because that's the only thing we could do. But then we have to protect our staff because the problem is when this business gets back on track, you don't want have to be rehire drivers and at the same time, also rehire the staff. So this is why by investing more in technology through this AI thing there, I mean, we'll be able to be better positioned to be fast, to react much faster to market condition. Jason Seidl: Well, Alain, as a follow-up there, as we think about JHT, sort of can you give us some numbers in terms of how much of a drag it's placing on the margins at logistics? And in terms of the AI, how quickly do you think some of your investments are going to bear fruit that we can see as we move throughout '26? Alain Bedard: Yes. I'll give you an example, Jason, about the AI. So when I'm talking to Kal and his team at TForce Freight, I'm saying, you know what, guys, we have to find a solution if Waymo can run taxi in Austin, Texas without a driver. I mean, how can we not run shunters in our yard without a driver, right? Is there a way, guys, let's wake up and smell the coffee. Let's open our mind that we have to change. And if Waymo is able to run cab in Austin, in a city, okay, why can't we run shunters in a yard, okay, without the drivers. So these are all things that we're looking at, Jason, to be more efficient, right? So. David Saperstein: Sales augmentation as well, right? Increasing the productivity massively of salespeople in terms of effecting in terms of identifying targets that fit not just names, it's -- okay, what's their business look like? How does that fit with our network? The solutions can do a lot of that work and then increase the velocity of the contacts and the outreach and the back and forth, it's remarkable. So that's another important application that we're looking at right now, and we're rolling out right now. Jason Seidl: That's some good color. And the margin hit from JHT? Alain Bedard: Well, JHT, I mean, the margin at JHT is probably depending on what you talk about, if you're talking about trucks that move from Mexico, okay, to the U.S. or Canada, I mean, the margin is not the same because we use a Mexican partner to move that truck from Mexico into the U.S. or Canada. Also, don't forget that we have experienced drivers in there. We also have a logistics division. So when the volumes are down, our logistics division, is very small, okay, because the logistics gets the overflow. So right now, there's no overflow. So this is why -- and as you know, Jason, in our logistics, the margins are really good, okay, on the overflow. So this is a little bit of a complex story. But what I can tell you is that JHT is a diamond for us because it's very well run. I mean the guys -- and this is why we're suffering so much right now because the volumes are down, but we probably have 50% too much staff for the volumes we have. But we're keeping those guys, right? Because when the things go back to normal volume with Freightliner and PACCAR, we want to be there. We want to be there to be able to service them, right? Operator: Next question will be from Konark Gupta at Scotia Capital. Konark Gupta: Alain, you mentioned about AI quite a lot on this call and technology. And I'm pretty sure I think that's the next evolution for you guys and everybody in the industry. I think, though, you reduced the CapEx guidance for this year. I'm just curious, when you think about the year or years ahead to invest for technology and for eventual rebound in volumes. I mean, how do you see the capital planning for those things? I mean, should you see a significant increase in CapEx for that? David Saperstein: So on the AI, no. These are licenses, it might be $30 per person per month, $35. It depends on what exactly we're talking about what -- but these are light, very nimble tools that we add on, like in sales, you'll add it on to your CRM. So I wouldn't -- first of all, that's not going to be CapEx, would be expense, and it will not be noticeable. We're not building data centers and that kind of thing. We're just customers and adopters of the technologies that are out there. As it relates to regular CapEx on trucks, there's no question that this is a very, very light year, right? At the outset of this year, we set out to do $200 million of net CapEx. Normal for this business would be more around $300 million. But the volumes are so low. We're driving so few miles that we -- and we had excess equipment from the Daseke acquisition that we're able to reduce the CapEx without really meaningfully aging the fleet. And so that's fine. But you should think about a more normal net CapEx number for us to be around $300 million, but that's also will take place in a year where there's more normal earnings, right? So free cash flow would be higher than it is this year, even with that increased CapEx. Alain Bedard: And the other thing, too, is that our CapEx has been delayed at TForce Freight because the supplier was not sure because the trucks, they are assembled in Mexico. right? And all this tariff thing situation, the trucks have been delayed by about 3 months. So right now, we're getting trucks in October, November that were supposed to come in Q3, right? And some of trucks also will come in Q1 '26 that were supposed to be part of '25. So this is why this revised CapEx that you see is it's exceptional that we're so low in a year like '25. I mean we should -- if things come back like we think they will in the U.S., we should get back to a more normal environment, okay, of activity, miles and freight. So for sure, we'll be back to normal CapEx. Konark Gupta: Makes sense. And just quickly to follow up. You mentioned Daseke in terms of access equipment you got there. Where is the integration process on Daseke now? I mean like it's been a while, I guess, right? You had Daseke in the system. And I'm sure obviously the volumes are soft and all that, but what you can control from a self-help perspective, like are you fully done there? Or there's more to do? Alain Bedard: You know what? On the Daseke, on the financial side, okay? So we're done, okay? By the end of '25, we're done, okay? Fleet management, financial, so they run MIR now, okay, like Contrans. They also run on Infineon for financial like Contrans, okay, which is our Truckload division, right? So this is done. In terms of the day-to-day TMS, okay, there, we're still working on McLeod and TMW, okay, updating those systems and also making sure that we have visibility across all the divisions because Daseke was more of a siloed kind of company, okay? So that is going to change during the course of '26. Sales is also something that we're working on at our U.S. truckload operation. And this is something I'm still discussing with my friend, Steve, okay, how we're going to go about the commercial operation in '26. This is still something that needs to be ironed out. But for sure, we need to invest more on the commercial side of our U.S. specialty truckload because I believe that with everything that's going on in the U.S., we need a sales team that are aggressive because there's going to be more business. Operator: Next question will be from Ken Hoexter of Bank of America. Ken Hoexter: Can you address the start in October on volumes relative to the down 7% tonnage in the fourth quarter, 11% shipments? David Saperstein: Yes. I mean the start to October, we're not in the habit of giving monthly data, as you know. But the start to October is soft, like the industry leader pointed out on -- when they reported recently. Ken Hoexter: So I just want to understand if it accelerate because I guess, David, just to clarify, right, when Alain said LTL 200 to 300 basis points deterioration, you said 96, which would be a 380 basis point sequential deterioration. I just want to -- was there anything in there that's getting worse? Or I didn't know if the volumes were accelerating the downside, just understanding what was in the numbers there. David Saperstein: No, listen, the 96% is what's embedded in the guidance. That's what our current forecast says, and that is driven by our observation of the first month of the quarter. So yes, October was weaker than it usually is, weaker than expected. Alain Bedard: Yes. Ken, because me, I'm always being optimistic. This is why me -- that's the target when I talk to Kal. But David is the CFO. He's the numbers guy. So sometimes we have different perspective. But you got to trust probably better David because he's the numbers guy. Ken Hoexter: Okay. And then just following up on that. The logistics, I guess similarly, right, the OR deterioration, you mentioned the JHT -- or is that getting more expensive or deteriorating OR because of what's going on in terms of reduced capacity availability from ELP and the CLs you're talking about? Just want to understand kind of the negative mix. Was it really just on the top line like you're talking about with LTL and the volumes? Or is there -- is it the cost side kicking in as well? David Saperstein: No, it's not the cost side. It's not like it's harder for us to get capacity. It's a combination of -- we -- remember, our logistics broker -- the brokerage portion of our logistics, most of it is LTL -- so if LTL is off to a slow start in Q4, the same is going to be true for our LTL brokerage in terms of demand. And then -- but the majority of the drag in that segment is coming from the truck moving business and the dynamic that we've talked about in terms of holding on to our people during that period. Ken Hoexter: And then Alain, I guess, just to wrap up. Alain Bedard: Excuse me, I was just going to add, Ken, that this is -- the old red is killing us at JHT because like David is saying is we're keeping the staff. We're keeping the team because we know this is short term. So, excuse me. Please go ahead. Ken Hoexter: No, exact same issue, right, which is short term on that because you mentioned the government shutdown. It's surprising because it seemed like a lot of companies were avoiding that thing, we don't really move that stuff. But it sounds like, I guess, you're seeing not only direct business where particularly for the DoD customer, but I guess the derivative of that. Is that kind of having another flow-through on other or derivative customers increasing that demand or not necessarily at this point too early? David Saperstein: Yes. Yes. Well, one thing is for sure, Ken, is that everything is slow right now because think about the fact that some people are not being paid or delayed in the payment of their salaries. So for sure, the demand is slow right now. And it will correct itself as soon as there's a deal in the U.S. We don't know when. I think it's going to be soon. And DoD, it's a big part of our specialty truckload, Ken. I mean, 30% of our business normally is moving freight for the Department of Defense. So it's just one example that this is why our guidance for Q4 is exceptionally low. This is not normal for us. But it's like a perfect storm where our logistics has been affected badly, okay? Our truckload is the same. So -- and also the fact that in Canada, I mean, it's pretty difficult as we speak, right, because of the trade between the 2 countries. So it's like a perfect storm for us. But $0.80 to $0.90, I mean, EPS for us is not normal. It's exceptionally low, okay? But we have to give guidance that is proper. Ken Hoexter: Yes. One more on that real temporary question, but -- and I don't want to talk about the government shutdown on the post office, but the post office is threatening, I guess, to make drastic changes of changing how many days you get deliveries and things like that. Is that a huge potential for P&C? Or is that a cost issue? I just want to understand if that longer term, not just the takeaway of the strike minimal volumes. I'm thinking bigger picture long term, does that change the structure for your P&C business? Alain Bedard: Well, for sure, Ken. If finally, these guys in Ottawa decide to -- because you're talking about Canada, right, Ken? Ken Hoexter: Yes, just Canada, yes. Yes. Alain Bedard: Yes, yes. You're talking about Canada. So for sure, I mean, I think that the guys in Ottawa now wake up and they see that things have to change. Things have to change, and we are way more efficient than them, okay? So whatever change they do, okay, it should help us on the longer term, Ken, in Canada. You know what, I'll give you an example of what's going on, credit cards, okay? So credit cards from financial institution used to be with Canada Post. Now it's mostly us, right? And a year ago, there was another strike. So we did that, then they went back to Canada Post. But now the discussion we're having with them, this is going to be a permanent change because I think the financial institutions are sick and tired of back and forth. Operator: Next question will be from Cameron Doerksen at National Bank Capital Markets. Cameron Doerksen: A question on the Canadian LTL shipments down quite a bit there, I think 12%, but revenue per shipment was nicely positive. Just wondering if you could describe, I guess, the -- what you're seeing in the Canadian LTL space? Are you just being more selective in the business that you're chasing there? Alain Bedard: No, no, Cameron. It's just our customers -- the weight per shipment is down, right? So I mean, they're less busy. And us, I mean, we're not losing customers, major customers, one that I think we've lost one customer that I'm thinking of, yes, okay? But in general, we're not -- there's no churn in customers unusual. It's just like lower activity, Cameron. Cameron Doerksen: Okay. And just on -- going back to your comments around, I guess, the Driver Inc., and hopefully, this change in the government will actually result in some change as we look ahead to next year. If that does happen, what does that impact on your business? Is this something where you just expect that some of these driver in carriers will just not be able to be in the market at all, and so there's a volume positive for you? Or is it more just that they're are underpricing in the market and this will just lift the pricing across all carriers if they don't have that benefit anymore? Alain Bedard: Yes. Yes. Well, we know these guys have been cheating all along. And we know that now if they have to issue T4A, the cheating is going to disappear. So I mean if you look at the evolution of our OR in Canada, the Canadian Truckload, I mean, it's just a disaster because we used to run 80 to 85 OR. And now we're running a 90 OR. Why is that? Well, because we have to be more competitive, et cetera, et cetera. So this is -- this was always unfair competition to us. So we think that now with this new issues, okay, you're going to start to see some change. Another thing also that's important to notice is the safety record of those guys is not good. So people are starting to understand. So we've got customers now that are stating, we don't want to deal with those Driver Inc., anymore, right? So we have won a paper guy big in Quebec that said, "Hey, you know what, you have to certify that you're not a Driver Inc., because more and more, there's also not just the cost, but the safety of these guys, okay, has been questioned now, right? So this is like to me, in '26, when I look at Canada, the market is going to be probably a little bit more difficult, but the supply is going to be also much less. So we'll probably be in a better position in '26 than we were in '25 because slowly, okay, those drivers will have to adjust. They will have to adjust the rates. They cannot cheat because right now, a Driver Inc., guy is not paying any taxes. Now he gets a T4A, oops, Revenue Canada is aware of him. And if he doesn't pay his taxes, then he's going to end up with a little bit of an issue. Operator: Next question will be from Brian Ossenbeck at JPMorgan. Brian Ossenbeck: Just going back to the Mastio survey and the big improvement you noted, when do you start to get credit for that? Is that something that you do at once? Obviously, it's continuous, but you get some credit the first time you make a couple of big steps and then they start to give you more volume and then maybe more price later. And then just related to that, I'm trying to understand how you can be pretty good on 4-day service and next day, but not necessarily 2 to 3 day. So what's the part I'm missing there? Alain Bedard: Okay, Brian. I'll let David talk about the Mastio report. But what I can tell you is that the 4-day, okay, where we were able to make some changes is that we move freight from rail to road, right? So when you do that, you are in control, right? So this is why we're doing really well on 4-day versus what we used to do. And next day, because we come from the UPS environment where everything was kind of next day, these guys have always been good on next day. So we're just -- it's just a continuation of what these guys have done all along. The second day and the third day, this has been the issue, okay, where we're not acting as being professional. We don't monitor. We just let the other guy do the job. So now it's a focus of ours because this is a big issue because you have a commitment that you give to a customer that is going to be there in 3 days, but it's not there in 3 days, it's there in 5 days. Well, that doesn't work, right? So you've got to be having process in place that you manage that. So this is something where in the old days, there was no real focus. And now through this new focus of the team, it has been a major focus of ours. And we know that second day and third day, okay, we were not as good as our peers, right? But we're getting there because we're making a lot of changes and a lot of improvements. So that's the difference between 4 days, 2 days, 3 days, Brian. David Saperstein: And in terms of how you get credit, in our experience so far, we would expect to see the impact first on volumes, right? So your turnover and your churn comes down. You're able to retain more business that you get. Then you start to get more wallet share from the same customer. Because remember, our customers -- a lot of the big customers use all of us, right? They use lots of carriers. It's just a question of how much they're allocating to each one. And so you do a good job, start to get a little bit more. So the first place that we would expect to see it is on volume. Pricing will come later. And pricing, frankly, is going to be a little bit of a function of the supply-demand imbalance correcting itself or at least normalizing and the market being a little bit more balanced, right? When there's -- the market is more balanced and our service is improving and we're getting more freight from people, then we could start to see pricing. The other thing I'll point out on this is that the beauty is that we've made big improvements, but there's still a long way to go, right? We're not best-in-class yet. We've still got another hundreds of basis points to improve on time. We can drive our missed pickups way down further, reschedules way down further. Our claims can come down way further. So we're still in the early stages, and there's a lot more value for us to create for our customers in the form of better service and ultimately for our shareholders when that plays through to the numbers. Brian Ossenbeck: And then just the relative size of the 2 to 3 days, it sounds like that's probably the bigger chunk of the market or the opportunity relative to maybe the 4 in the next day. Alain Bedard: Yes, absolutely, Brian. Because I would say that next day for us is about not even 20% of our volume today and 4 days is probably about the same. So I mean, the big chunk of our business is between 2 and 3 days. And this is where we are the weakest today, and this is where our focus is, is, guys, this is where we have to work on, right? So we made some major improvement in the 4 days there, we're good. We're good on the next-day service, fine. But let's do the job on the 2 and 3 days, and we are improving, absolutely. Operator: The next question will be from Tom Wadewitz at UBS. Thomas Wadewitz: So Alain, I wanted to get your thoughts on just kind of the size of the terminal network for U.S. LTL and where you would want to be for shipments. I think that was something where you kind of -- you inherited some or you bought something that had over 30,000 shipments a day, I don't know, 33,000, whatever it was, a wind down on kind of your own initiatives and the cycle went down. And I think that has been a component that you're like, well, we can't be a 90 or mid-80s OR company if we're just way underutilized. So how do you think about where the network is and how much volume is a piece of ultimately getting to the goals, like maybe how large that gap is? Because that seems like a factor that would ultimately matter as well. Alain Bedard: You're absolutely right, Tom. And as a matter of fact, in Q4, we will probably swap 3 terminals with one of our peers to readjust the size of our terminal, versus those guys, right? So this is an ongoing thing, okay, that we continue to do. Cash-wise, probably in our Q4 between what we're buying and what we're selling, we should see a net positive between USD 40 million and USD 50 million in Q4. But still, even with that, going into '26, I would say that -- we probably have another 2,000 doors too many, okay? Now the challenge that we gave our team is that the network was probably built to support 40,000 shipments a day, and we're doing half of that, right? So organically, it's going to take us some time. But can we go organically from 20,000 shipments a day to 40,000 shipments a day? That takes a long time. So this is for sure. There's more to go. There's more to come into adjusting our network, okay, to today's reality, and we'll keep doing that. So we're talking to all of our peers all the time. And what's the number of doors that we would need today, probably more like 5,000 to 6,000 to 7,000 doors. But these doors have to be in the right location, right? So that's the other thing that we're working on in some areas. I'll give you an example. Dallas, I don't have too many doors in Dallas because we're doing well in Dallas, and we are increasing our volume in Dallas. Chicago, the same, right? So we got areas that we are growing, okay? Now you say, well, your volume is down, yes, because in other areas, we are losing, right? But we were working on balancing the network absolutely like everything else, Tom. Thomas Wadewitz: Is that an issue on service that if you kind of rationalize or it's not -- it's size of terminal for you, it's not necessarily like reach of the network? Alain Bedard: No, it's not an issue for service, Tom. I mean, no. Operator: Next question will be from Benoit Poirier at Desjardins Capital Markets. Benoit Poirier: Thanks, Alain, for the great comments about the impact of regulation, both sides of the border. Obviously, you mentioned some color about 2026 being more of a sunny picture, especially on the U.S. LTL. I'm just curious what kind of OR could you produce in a flat volume environment in 2026? And maybe another scenario where you see a more bullish stance in terms of volume? Alain Bedard: Well, I think if everything stays the same, I think that in this kind of an environment where the volumes are light, et cetera, et cetera, if you look at our Q2, if you look at our Q3, for sure, last year's Q1 was a disaster for us at 99. I mean, I don't think that we'll be in that position. So can we say no volume growth, okay, for '26 versus the same kind of environment, '26 that we've been seeing in '25 with the investment that we're doing in our cost management and all that. So probably a 200 basis point globally improvement, 200 to 300 basis points versus what we are delivering in '25 into '26. Benoit Poirier: Okay. That's very great color. And just with respect to the Chief Commercial Officer role, is it fair to say that the candidate has already been identified and is coming from the outside? And I'm just curious to see how it will change the jobs performed by Kal and the team overall. Alain Bedard: No, the guy comes from the family. The guy is within TFI. Operator: Next question will be from Bruce Chan at Stifel. Julia Pernille Buhl: This is actually Pernille Buhl on for Bruce. I appreciate all the color here. So a quick one. I wanted to ask about CapEx. In terms of CapEx budget from here, how would you expect it to trend going forward? What investments are sort of needed as far as maintenance and potentially growth? David Saperstein: Yes. So for this year, we're -- we've updated our guidance to $150 million to $175 million net CapEx for '25. And -- in normal years, it would be more like $300 million, okay? And that's all maintenance CapEx. The way that we think about CapEx is really about maintaining the fleet that we need. We're not seeking to grow the fleet organically when volumes turn, we just use that opportunity to get more productivity out of our assets, use that opportunity to take the highest paying freight and we get the operating leverage that way. Operator: Next question will be from Ariel Rosa at Citigroup. Ariel Rosa: So I wanted to ask about tariff impacts and what you're seeing there? To what extent do you think tariffs are kind of holding back business, whether it's cross-border or in Canada versus how much of kind of the volume weakness is related to kind of cyclical factors or kind of underlying economic factors that would be independent of the tariffs? And then to the extent that we get a little bit more tariff clarity, do you see that as a positive or an incremental positive into 2026? Alain Bedard: Well, one thing is for sure. If you don't know the rules, everybody sits on the sideline, right? And the problem we have right now is that we don't have a deal. I mean, Mexico or Canada, both countries, big traders in the U.S., we don't have a deal. right? So this is why it's so important that in '26, at one point, okay, there has to be a deal between the 3 countries, right? So -- and in the meantime, okay, in terms of not knowing where we're going, right, for sure, it's a big effect, right? If you take the aluminum, okay, I was reading what the President of Rio Tinto is saying, I mean, aluminum is not affecting them, okay, the tariff, okay? So -- but what they're doing is they're shipping some of their aluminum from Canada to the Europe. Well, it's affecting me because I don't have any ships, right? But down the road, okay, this is temporary. I mean, for sure, this will change as soon as we have clarity on tariffs finalized all that, I mean, that product will go back to the U.S., right? So it's just we need to have a deal between the 3 countries. And once we have that, whatever it is, okay, then we know what to do and what kind of adjustment will be needed. And then it's going to be clear sailing. Ariel Rosa: Yes. Well, let's hope we get some clarity on that in the months ahead. And then just as a follow-up, Alain, I wanted to ask about how you're thinking about the dynamics between LTL and Truckload right now. Do you think there's a lot of LTL volume that's slipped into the Truckload market? And obviously, if we get some tightening here because of some of these enforcement actions, how positive of an effect can that have for the LTL market? Alain Bedard: Well, that's for sure. I mean when you think about that, you're a truckload guy, you're stuck, okay? So what do you do? I mean, you try to get the good heavy 5, 10 pallets of LTL and you give the shipper a good rate, right? So right now, what's happening in the LTL industry is that there's lots of freight that has been moved to the truckload guys, and this is good rates, good freight for LTL. So we'll see what happens. When the truckload guys get busier, okay, are they going to walk away from that freight because now they don't need to do that? Probably experience tells us that this is what happens, okay? But we'll probably see that sometimes in '26, hopefully, okay? But who knows when, right? Operator: And at this time, Mr. Bedard, we have no other questions registered. Please proceed. Alain Bedard: Well, thank you, operator, and we appreciate everyone joining us today. Thank you for your interest in TFI International. We look forward to finishing the year strong and are confident we'll be entering '26 in a position of strength. I look forward to seeing many of you at several investors conference and we'll be attending before year-end. And as always, please don't hesitate to reach out with any further questions. Have a terrific Halloween, and have a great weekend, guys. Thank you. Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.
Operator: Good afternoon. Welcome to the First Business Financial Services Third Quarter 2025. [Operator Instructions] [Technical Difficulty]. CEO, Corey Chambas, please go ahead. Corey Chambas: Good afternoon, everyone, and thank you for joining us. We appreciate your time and your interest in First Business Bank. Joining me today is our President and Chief Operating Officer, Dave Seiler; and our CFO, Brian Spielmann. Today, we'll discuss our financial performance, followed by a Q&A session. I'd like to direct you to our third quarter earnings release and supplemental earnings call slides, which are available through our website at ir.firstbusiness.bank. We encourage you to review these along with our other investor materials. Before we begin, please note, this call may include forward-looking statements, and the company's actual results may differ materially from those indicated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release and the company's most recent annual report Form 10-K and as may be supplemented from time to time in the company's other filings with the SEC, all of which are expressly incorporated herein by reference. There, you can also find information related to any non-GAAP financial measures we discuss on today's call, including reconciliations of such measures. First Business delivered another outstanding quarter. Our team again produced high-quality loan and deposit growth sourced from core client relationships. We maintained a strong net interest margin and produced positive operating leverage, driving improved efficiency. Private Wealth assets continue to expand, delivering significant annuity-like fee income and operating revenue reached record levels, reiterating the value of our revenue diversification. These highlights contributed to robust profitability metrics. Year-to-date ROA grew 15 basis points to 1.23% compared to the same period of 2024. Year-to-date return on average tangible common equity grew to over 15%, up from just under 14% in 2024. And most importantly for shareholders, we grew tangible book value per share an impressive 16% from a year ago. We are very pleased with the quality of this quarter's results, which Dave will expand upon more now. Dave? David Seiler: Thank you, Corey. Third quarter performance was very strong across the board and reflects our consistent growth and profitability. Our model is designed to drive 10% long-term growth, and we view quarterly results as a tool for tracking our success towards this. Our pretax pre-provision earnings are a good indicator of the success of our model. We saw 18% growth from the second quarter and 20% growth compared to the first 9 months of 2024. Credit costs can impact results meaningfully and the provision for credit losses this quarter was better than expectations, leading to earnings per share growth of 26% from the second quarter and 25% year-to-date. A primary driver of these exceptional results was the record level of noninterest income generated during the quarter. That include elevated swap fees and income from SBIC funds as well as 2 nonrecurring items, which totaled about $770,000 that Brian will cover. Swap income grew nearly 6x from the linked quarter and income from SBIC funds grew over 4x from the linked quarter. While both items are variable quarter-to-quarter, third quarter levels exceeded our expectations and were outside our historical range. This quarter's fee income performance showcases our successful revenue diversification efforts that we believe provide significant long-term benefits and differentiate us from our peers. Fee income comprised 19% of our operating revenue for year-to-date 2025 and 2024 compared to about 15% for peers. I'll highlight, as a business-only bank, we've achieved this outperformance without the heavy fee revenue stream of a residential mortgage or consumer business. This reflects the success of our investments for growth and efficiency and high-quality, high-producing talent we attract. It's also one of the drivers of our strong ratio of operating revenue per average FTE, which has been 30% to 40% above our peers over the past 5 years. Looking ahead, we'd expect annual fee income growth to approximate 10%. However, we would expect Q4 operating fee income to be more in line with our recent 4-quarter average. Net interest income growth was also substantial and reflects continued and robust balance sheet expansion. You can see the highlights on Slide 3 of the earnings call slides and our quarterly loan and deposit growth trends on Slide 4. Loan balances grew about $85 million or 10% annualized during the quarter and $286 million or 9% over the same period last year. We had strong growth across our geography with our Kansas City and Northeast Wisconsin markets leading the way. We continue to see solid demand for our conventional and niche C&I products and pipelines look strong for the fourth quarter. Activity levels in our asset-based lending group continue to exceed what we've seen in the last 2 years, and we are positioned to capture growth opportunities in this space. Our accounts receivable financing business is similarly poised for growth. We've been investing in these businesses, which also performed well during economic downturns through business development officer hires, technology and process improvements. We know how to lend to these clients, and our solid underwriting process has historically driven better-than-average loss rates across cycles. We value the strong risk-adjusted returns our niche C&I businesses provide. We also continued to see strong growth in core deposits, up 9% from both the linked and prior year quarters. Our South Central Wisconsin market led the way in our deposit growth by landing several large new relationships. We track service charges on deposits as a proxy for new relationship deposit growth and these fees grew 25% from last year's third quarter. On to asset quality, which was pretty stable with nonperforming assets decreasing slightly during the quarter. Net charge-offs totaled $1.3 million and were primarily from previously reserved equipment finance loans. In total, NPAs decreased by $5.2 million to 0.58% of total assets compared to 0.72% last quarter. Our overall portfolio continues to perform as expected, and we have no areas of particular concern. The transportation loans in our small ticket equipment finance portfolio continue to shrink, and our CRE markets remain strong. Additionally, we don't have direct consumer exposure so we wouldn't be impacted by things like credit card and auto loan delinquencies. This is a positive differentiator for our business-focused model. Before passing it to Brian, I'll make one quick note on the government shutdown. We do not currently anticipate any negative credit exposure related to the federal government shutdown. We do, however, depend on federal government processing to complete SBA loan closings. This may affect the already variable timing of SBA loan sale premiums. Our SBA loan pipeline is strong. And while pricing continues to be extremely competitive, we continue to win deals. Now I'll hand it off to Brian. Brian Spielmann: Thanks, Dave. Third quarter net interest margin grew 1 basis point to 3.68%, reflecting our continued strong balance sheet management. You can see a breakdown of this on Slide 6 of our earnings supplement. As you know, our margin includes fees in lieu of interest, which refers to the recurring but somewhat variable amount of interest income we earn from items like prepayment fees, collection of nonaccrual interest and asset-based loan fees. These fees increased by $482,000 from Q2 and contributed 23 basis points to margin in Q3, up 5 basis points compared to 18 basis points in Q2. Fees in lieu of interest contributed 21 basis points on average this year compared to 16 basis points on average over the past 3 years. On a year-to-date basis, net interest margin grew to 3.68% from 3.62% for the same period of 2024. We're very pleased with our ability to maintain a strong and stable margin in this environment. And this again shows the value of our risk-mitigating match funding strategy. Given the current interest rate environment, I'll remind you that our balance sheet is intentionally interest rate neutral. Looking forward, we continue to target a range of 3.60% to 3.65% for margin. A few additional notes on our record fee income this quarter. The $770,000 in nonrecurring items, Dave mentioned, consists of 2 distinct components. First, a $537,000 fee was recognized related to the exit of an accounts receivable finance credit. While these types of fees are not unusual, the size of this particular fee was larger than typical. Second, we received $234,000 in BOLI insurance proceeds during the quarter, and we offset this income with a contribution to the First Business Charitable Foundation. As Dave mentioned, we expect SBIC income and swap fee income will return to more typical levels in the fourth quarter. We expect to continue investing in additional SBIC funds as a long-term earnings catalyst and effective use of capital. SBA gains are a bit of a wildcard for the near term given the government shutdown and potential backlog at the SBA, but we expect they will rebound and benefit from our continued investment in the business. Our expenses were well contained in Q3. Compensation expense grew about $900,000 due to an annual cash bonus accrual update tied to strong total bank performance. Excluding this accrual update, compensation expense declined by about $183,000. I'll note that we currently have a higher level of open positions we are actively working to fill. Compounded with increases in benefit costs, we expect 2026 compensation levels to grow a bit more than the 7% year-to-date growth in 2025. I'll reiterate that when we think about expenses, our primary objective is achieving annual positive operating leverage. That is annual expense growth at some level modestly below our target level of 10% annual revenue growth. We saw a significant positive operating leverage in the third quarter due to our 16% revenue growth. We would expect this gap to narrow to a more normal level as revenue growth returns to our long-term target of 10%. This reflects consideration of the high revenue produced this quarter, including some onetime items as well as our ongoing commitment to investing in talent and technology for growth. On taxes, our effective tax rate varies modestly quarter-to-quarter, in part due to the timing of tax benefits received from our investment and limited partnerships. Our 2025 year-to-date effective tax rate of 16.3% was within our expected annual range of 16% to 18%, and we continue to believe this range is appropriate looking forward. Finally, our strong earnings are generating more than enough capital to facilitate our expected organic growth. We continue to believe reinvestment in the growth of the company typically provides the best return for our shareholders. But of course, we regularly evaluate all the capital management tools at our disposal to maximize shareholder returns. And now, I'll hand it back over to Corey. Corey Chambas: Thank you, Brian. Our 2025 progress toward our long-term strategic plan goals has been excellent and can be seen on Slide 12. These outcomes demonstrate the value of consistency and execution. We continue to work our plan by focusing on solid underwriting, building out efficient systems, prioritizing client relationships and profitability and investing in talent. We are very optimistic about the future and believe our discipline and consistency will continue to serve First Business Bank and our shareholders well. I want to thank you for taking time to join us today. We're happy to take your questions now. Operator: [Operator Instructions] For your first question, Daniel Tamayo from Raymond James. Daniel Tamayo: Maybe just a clarification first on the fee income guide. The 10%, I think you said 10% next year. Is that an all-in number? Or should we be pulling any of these onetime items out that you've had in '25 so far? Brian Spielmann: I would say it's adjusted for the Q3 items. If you pull those nonrecurring items out, $77,000 and adjust off of that based off the kind of 4 quarter average, excluding that, that's your good starting point then for 10% growth off of that. Daniel Tamayo: Got it. Okay. And then maybe looking at the margin. So if you normalize the fees in lieu of interest, your core margin is really kind of exactly where it should be in terms of where you're thinking about the guidance you've given, 3.60% to 3.65%. Deposit costs have continued to rise a bit, just thinking about understanding the match funding nature of your balance sheet. But as we do get rate cuts, just thinking about how these -- the funding side and the loan side would be coming down, you're expecting those betas to be pretty similar kind of initially and over the next few quarters? Brian Spielmann: Correct. Our betas on both sides of the balance sheet have historically been pretty consistent, which gives us comfort in the continued message around that 3.60% to 3.65%. On the deposit side, new client acquisition is expensive. So we're bringing on clients at, say, SOFR right now, but then we're having opportunities to lend out at -- in our specialty areas at SOFR plus 4, so we have that spread that contributes to the net interest margin long term. And kind of point to that on Slide 5 of the supplemental materials, but this kind of shows our long-term growth rate in the C&I businesses versus the CRE business and so where we think our ability to continue to do that and be able to pay for those higher cost deposits. I would add that when we're having those conversations for new clients with those higher prices, we're having conversations around expectations for rate cuts. And so that's built in early on with the conversation, and we're having luck bringing when those rates down when there are rate cuts to help stabilize margins. Daniel Tamayo: Understood. That's helpful. And just a cleanup question here. Do you have the classified or criticized balances at quarter end or at least the direction from where they were at June 30. Brian Spielmann: We have that in the Q that will be filed tomorrow. I can tell you they're very consistent, nothing materially changed. We actually have a decrease in our total NPLs that you saw in the release, but nothing significant to report in terms of the adversely classified population. Operator: Next question will be from Jeff Rulis from D.A. Davidson. Jeff Rulis: I wanted to maybe refine just a small part of the margin. The fees in lieu, could you remind me if there's any historical -- those tend to be higher, lower or not impacted in times of rate reductions. Is that something to think about? I know that we model for core, but I just wanted to see if the next 12 months, if we see additional rate cuts if that is any impact on that figure? Brian Spielmann: Yes. The fees in lieu of interest have historically been pretty idiosyncratic, where on average, that's why we get some of the average detailed long-term average because it's around 20 basis points, I think, but we'll have spikes here and there. Cory, do you want to add to that? Corey Chambas: Yes. The one thought I have on that, Jeff, is the biggest piece of fee in lieu, it comes from a variety of places, but the biggest one would be from our asset-based lending group. They have -- their deals are contractual. So if somebody breaks a contract, that's where we get significant fees in lieu. But unlike thinking, well, rates are going down, so people might leave, those are all floating rate deals. So they're going to float. It's not like a fixed rate real estate loan when the rates go down, somebody might want to refinance. Those deals refinance because the company gets stronger and it becomes bankable on a conventional basis. But as -- but those deals aren't fixed rate deals where that would become attractive. So I was trying to think of any forces of movement in rates, but I don't really see anything with that. Jeff Rulis: Got it. I appreciate it, kind of chasing that down, but pretty clear. On the -- I guess, kind of a segue to the asset-based lending. The large loan, the $6.1 million, that seemed locked up in litigation for a while. I just wanted to check in on that time line. And does this feel like a '26 event? Just any update there would be helpful. David Seiler: Yes. Well, I think your description is pretty good, Jeff. It's locked up in litigation. So there's really no change, and it's taking a very long time, but it's -- there's really no change in our belief that we're going to get -- fully recover that. Corey Chambas: And given the geography of where this is, that's normal as we understand it from the court system there is it's just really slow. Jeff Rulis: Got you. Okay. And maybe one last one, just on, I think Brian sort of teased the capital close of the formal remarks, but just saying looking at growing capital and just wanted to kind of reconfirm the priorities. I think, obviously, organic growth, you've got a fantastic position in that and don't really need to chase other opportunities. But maybe if you could touch on other capital tools as well as if there was one area on the acquisition front that you would consider what would that be? Brian Spielmann: I can speak to the capital tools and maybe Corey or Dave will jump in on the M&A front. But as far as the capital tools we have that we evaluate quarterly and annually is going to be just our common stock dividend increase. We've done that for 13 consecutive years. We'll evaluate that now here going into January. And just a reminder, we also have a $5 million repurchase agreement out there with [indiscernible]. There's no maturity on that. And so that's something we also continue to evaluate in terms of best use of that, comparing it to on balance sheet growth we have been doing of late to drive that shareholder value. Corey Chambas: And just to tack on to that, Jeff, you're not wrong. Capital has continued to build. We're above where we're comfortable with our capital levels. And we've been able to do that through strong earnings even though we've been growing at 10%. So we are accumulating a bit extra. So at some point, maybe we grow a little faster, that would be awesome. But 10% growth is a pretty good mark already as it is. But then as Brian said, yes, then at some point, you look at other capital options. On the acquisition side, I think an ideal acquisition candidate for us would be something that would fit inside our private wealth business, some kind of money management business. Unfortunately, those are really rare, hard to find. And as we've -- when we've looked at those before, we've gotten very close. Those are typically owned by individuals, 1 or 2 people, and then you're sort of dealing with an emotional seller. And the one time I can tell you years ago, we were -- I mean, we were like on the precipice of this thing happening and then the guy couldn't sell his baby. It just -- so you have emotional sellers harder to do deals in that space, I think, because of that. So other than that, is something that tucked into one of our niche areas where we have nice platforms built out and could add a little more scale. That would be a fine fit for us as well. But again, when we can do 10% organically, we're not going to overpay. We're not going to stretch on something that doesn't fit our credit standards, which is typically why those other businesses screen out when we do take a look at those. We're just -- as we've said in the past, we play in the top quartile in the credit spectrum of any of the businesses that we're in, any of the business lines or niches. And by mathematical reasoning, average is below that. So the typical one you see is going to be not going to fit into our credit standards. So that's why those typically fall by the wayside. Operator: Next question will be from Nathan Race from Piper Sandler. Nathan Race: Going back to the margin discussion, Brian, just given the variability around the fees in lieu of interest, wondering if you have any thoughts around kind of just the adjusted margin outlook. I know you reiterated 3.60% to 3.65% on a reported basis, but if we strip that out, any thoughts on just kind of how that adjusted margin stabilizes in the future or perhaps expands? Brian Spielmann: Yes. I would say stability is the key there. And I would go off of our long-term average that we've been talking about 20 basis points. And so just backing into that, I could say 3.4% to 3.45% is going to be our adjusted margin range and expectations. So you can tell we're right around there right now, but have a little bit of room there still to continue to go after these nice deposit relationships. But again, the ability to lend that back out in those higher-yielding C&I areas is going to be key. Nathan Race: Understood. That's helpful. And I appreciate that you guys are still expecting 10% loan and deposit growth going forward. Just curious, when you look across your Wisconsin, Kansas City footprint, do you see -- and also the national verticals, do you see enough opportunities to generate that growth with the existing team? Are you guys looking at any markets or any kind of adjacent areas to your footprint where maybe you want to establish your presence or is kind of the existing landscape fertile ground enough to execute on that growth outlook? David Seiler: Right. So when we look at our Southeast Wisconsin market and the Kansas City market, we don't have high market shares in those markets. So we think there is a really nice opportunity to grow market share and grow those markets for us. And then additionally, all of our niche C&I businesses are national. And we think we have a lot of runway in front of us there. So I think we're pretty optimistic right now in terms of being able to continue the growth for the foreseeable future. Corey Chambas: And I would add something to that as well, Nate, we set our Board meeting this morning. The Board was asking us about it because it's like, "How long can you keep doing 10%?" And we'd say, "Well, we've been doing it, and we believe we can continue to do it if we can add talent." So that's part of -- because the first part is, is there a market opportunity, and Dave just outlined that there's lots of market opportunity and some of our other specialty businesses, there's lots of national opportunity in those. So then it's about talent. Do you have the right talent and enough talent. And we -- since we started this last strategic plan, we've added 21 business development officers. So as long as we can keep adding that business development talent, we have the market -- markets have capacity. And so if we can keep attracting and retaining the talent, and that's where we really -- our culture is really important to us. It has people happy working for us. They don't leave. So we don't have a kind of a hole in the bucket as we're bringing new people in. So good performers like it here, and that also attracts talent from the outside because folks want to be on a winning team. And so that helps us to continue to grow that business development talent pool. So as long as we keep winning the talent game, we can continue to grow at this kind of a pace. Nathan Race: Got it. Makes sense. Really helpful. One last one, Brian, on expenses. Is the 4Q in terms of the fourth quarter run rate, is it similar to expect something that we saw here in 3Q and that would put you around 8% growth for this year. Is that kind of a decent proxy as you think about the expense growth trajectory into 2026? Brian Spielmann: Yes, it's a good place to start. We had our bonus accrual update here in Q3 because of the strong performance that brought in about $900,000 of additional expense, but that also means then a higher run rate to finish the year. And then we talked about a lot of open positions. So I think he maybe could back out a little bit, but it's a pretty good spot to start -- to that 8% growth rate relative to our 10% operating revenue targets, so. Operator: Next question will be from Damon DelMonte from KBW. Damon Del Monte: Just looking for a little bit more color on the investment and wealth management area. If you look at the kind of the year-to-date revenues generated by that area, it's had a nice lift over 2024. Is that more of a function of adding new accounts and new customers? Or is there more market appreciation baked into those numbers? Corey Chambas: So well, it's a combination of the 2, right? Obviously, markets have done very well, but we have a lot of focus on building new relationships and acquiring new relationships. So I would say it's a good mix there, but we've done a nice job adding relationships this year. Damon Del Monte: Okay. Great. And then you guys have mentioned about -- Cory, I think you mentioned about the talent hires, 21 business development officers since your last business plan. What has been your recipe for success for adding people? Is it from market disruption where people are getting displaced? Is it been just opportunistic relationship building with people in the markets that you kind of cross path with? Like what's kind of been the driver of the additional people? Corey Chambas: Yes. I would say it's more of the latter relationships. The people who run our different -- our market presidents, people who run different business lines, we let them know that part of their job, they're supposed to be out prospecting for new clients, but they're also supposed to be prospecting for new bankers. And that should be -- they should be treating it the same way. They should be knowing in their market who the talented folks are. And you need to cultivate those relationships over long periods of time. And so they're working that all the time. And like I said, when people see you winning and being successful and then if they get uncomfortable where they are because potentially they've gone through an acquisition and things have changed or whatever makes them not real aligned with the philosophy of the organization that they're with. If you're the one who's developed a relationship, just like a prospective client, we -- you might have heard us say before, we like to say we have foam fingers that say we're #2 because we want to be in the position to take over that relationship when somebody becomes disgruntled with the large bank that they're with and that typically happens. We want to be there, have the relationship and they move to us kind of no questions asked when they finally throw in the towel. Same thing with the talent that we want. We want to develop those relationships and work those. And it also happens in the same way with some of the folks, the person who's fairly newly in charge of our asset-based lending group, been in the industry a long time, has a lot of good relationships. The guy who's running our SBA group. I mean their BDOs are people they've worked with in the past. So they're following those leaders that they've worked with in the past. And so that's primarily how we get the talent. Damon Del Monte: Got it. Okay. I appreciate that color. And then I guess just lastly, obviously, a very positive and continued positive outlook for loan growth. So is it fair to assume that kind of the overall borrower sentiment remains positive in the markets that you're in? Others have kind of talked about borrowers kind of being a little bit more reluctant waiting for rates to come down or more clarity on the prospects for their business. But it seems like you guys continue to just power through regardless of the broader sentiment. So just curious on your local sentiment. Corey Chambas: Yes, I'd say it's pretty positive. I would say the -- if you took a sampling of our business clients, probably the -- or most common answer that you would get is that this year is their third best year ever. And the last 2 were the best ever. And so it's really good. Things are still really good, just not quite as good as they were the last 2 years. So people are positive. They've had to deal with questions about tariffs and different things that make life a little confusing. But I would say most of our clients are -- they're entrepreneurial. They're positive, optimistic people, otherwise, you wouldn't start a business because that's a tough endeavor. And they do kind of what we do for the most part. They just put their head down and say, "We're just going to keep winning and we're going to succeed." And so while there is some uncertainty, I don't think any of them are kind of going into a shell in any way, shape or form. Operator: Next question will be from Brian Martin from Janney. Brian Martin: Just one question, Brian, just back to margin, just one thing. The funding pressure, a little bit of funding uptick you saw on the core margin, if you will. I guess are you beginning to see that stabilize in terms of -- it sounds as though you would given kind of the dynamics of holding the margin steady, but just kind of wondering how you're seeing the trends there on the funding side and what may be the driver of that this quarter? Brian Spielmann: Yes. I would say the driver of this quarter in particular is specific to some CD relationships we brought on at the end of Q2. That's really what drove a decent amount of that pricing pressure reported in Q3. I would say from what we're seeing in newer opportunities with now 2 rate cuts behind us, the pressures -- the premium we're seeing for new clients, new deposit acquisition is coming down a little bit. So we are seeing some relief there. It is -- for our highest rates for these ones we're really trying to track, we were over SOFR for a bit. Now we're at SOFR. We have had ones that are now below SOFR again for those new, new money relationships. So we're seeing better rates across the board for new money. Brian Martin: Got you. Okay. That's helpful. And then just in terms of -- just one question back to those open positions. I mean, the majority of those open positions are -- are they more operational or back office? Or are they more revenue producing in terms of where the talent is you're looking for today? David Seiler: Yes. Brian, I think they're really across the board. I don't think there's a concentration in business development folks or other positions throughout the company. Brian Martin: Okay. All right. And just in terms of the specialty businesses, can you just talk about where maybe over the next 12 to 15 months, where is the greatest opportunity? Where are you seeing the best opportunity today to grow that book of business? And then it sounds as though the expectation would be that, that book in aggregate would outgrow the traditional book is how you're thinking about things today and that seems accurate. Corey Chambas: Yes. I would say the places where we see the strongest pipelines right now and activity level, asset-based lending would be one of those. That kind of was slow for quite a while for us, and that's picked up. We've had more new deal activity there. Our accounts receivable finance business has strong pipelines and really good activity and floor plan, and that's been really consistent. Our floor plan business has been really strong and steady. Brian Martin: Okay. And in terms of credit risk, in those businesses, remind us where the greatest risk is there? Is there a concern out there as you grow these businesses a little bit quicker, especially given kind of the market conditions there or just the fears out there, I guess? Corey Chambas: No, I don't think so in those business lines. We've -- any of those businesses that we've built, we've built with real specialists. I think one place banks can get into trouble is even like when we got into asset-based lending back in 1995, I mean, I knew what an asset-based deal was, and so did Jerry Smith, but we also knew we didn't know how to monitor them correctly. But we knew they needed to be monitored. So we brought in somebody at that time from Bank One's asset-based group. We built out the full team with a field examiner, collateral analysts, et cetera. So we've always done that. So the -- and again, we play in that kind of top quartile piece of each of those businesses. So what we've seen is there's less credit risk and credit costs in those businesses than even in our conventional book over time. And a lot of the reason is while, some of those -- let's take asset-based lending compared to a conventional C&I loan, the asset-based loan, that company's balance sheet is going to be weaker. The earnings history is going to be sketchier, but we're all over the collateral. We're out there examining it. Before we go into the deal, we already know what -- at what price we think we could liquidate out of it if we had to liquidate the inventory. Whereas a conventional C&I deal where you may have the same kind of collateral receivables and inventory, you don't do that kind of monitoring on it. And when things go south on one of those deals, suddenly, you don't have what you think you had in terms of collateral. It's just kind of how those end up turning out. And you don't have the real-time information like you do on asset-based lending or factoring where you've got daily information coming in. And so in the absence of fraud, if you act quickly, you should be able to get out of those deals whole, and that's our expectation on those kinds of business lines. Brian Martin: Got you. No, that's helpful. And just, I guess, in terms of just the SBA, I know Brian mentioned it, I guess bottom line is, if the shutdown persists, is it just your expectation would be that the business that would normally flow through this quarter will just fall into 1Q? And just until we see more clarity on that, that's kind of where it's at? David Seiler: Right. I think to a certain extent, it would be pushed out depending upon when the government opens back up. But where we're really impacted is after we have a credit that goes through underwriting and is accepted -- approved and accepted by the client, that's when we have to go out and get the e-tran from the SBA. And that's what we can't do today. So we can talk with clients, we can structure deals, we can get deals approved. We just can't really start the closing process without that e-tran number. And then the other thing we can't do is sell a loan once it's closed and funded. And both of those 2 things will open up when the government opens up. Corey Chambas: But the e-tran numbers, we anticipated the closing. David Seiler: Right. We did anticipate the closing and we were able to get a few deals or a good chunk of deals kind of far enough along in our pipeline where we could get the e-tran numbers in anticipation of the government shutdown. Operator: There are no further questions at this time. I will now turn the call over to Corey Chambas. Please continue. Corey Chambas: Thank you for joining us today. We appreciate your time and interest in First Business Bank, and we look forward to sharing our progress next quarter once again. Again, appreciate it, and have a great weekend. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Lynas Rare Earths Quarterly Results Briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Lynas Rare Earth. Please go ahead. Unknown Executive: Good morning, and welcome to our investor briefing for the September quarter of FY '26. Today's briefing will be presented by Amanda Lacaze, CEO and Managing Director. And joining Amanda today are Gaudenz Sturzenegger, CFO; Daniel Havas, VP, Strategy and Investor Relations; Chris Jenney, VP, Sales and Market Development; and Sarah Leonard, General Counsel and Company Secretary. I'll now hand over to Amanda Lacaze. Please go ahead, Amanda. Amanda Lacaze: Thanks, Jen, and good morning, everybody. Thank you all for joining us this morning. And I am sure because I actually have a sneak preview that there are many questions. There are many in the queue already. So I will keep my introductory comments relatively short. I expect many of you will want to talk about the various geopolitics. We do live in an interesting world, don't we. But I want to start by talking about our business performance because we had a strong quarter in terms of business operations. The operating cash flow at about $55 million positive, was a really pleasing return to a more -- what we would see as a better level. And we see that, that as we look at current market settings gives us quite a deal of confidence as we move forward. Of course, we saw -- we are still seeing some runoff, particularly associated with the major projects, particularly Mt Weld, but that should mostly be flushed through the system by the end of this calendar year. That strong operating cash flow, of course, reflects sales. I know that everyone likes to get very focused on production numbers. And of course, we are very focused on production numbers. But what actually matters is what we sell. We don't bank tonnes, we bank dollars. And so we had a good quarter in terms of sales at $200 million for the quarter, the best in several years, reflecting both the higher volume and also the higher prices that were achieved during the quarter. Production at just over 2,000 tonnes of NdPr and sort of very positively nearly 4,000 tonnes in total. I thought it was quite interesting that we had a number of sort of -- we've seen a number of comments about, well, it was a bit less than what was expected. But then when I really interrogated those, we're talking about less than 100 tonnes being the difference between expectation and performance. Put that in perspective, it's about 4 days production for us. So we had our production where we wanted our production to be. It served all of our key customers without creating any supply side pressure or causing us to need to sell ahead of finalizing a number of agreements on which we are working. With respect to the heavies, and I may regret the fact that -- no, on the heavies, we have, for the first time, disclosed the amount of Dy, Tb. And once again, I read some commentary about it being a bit lower than was expected. And I would remind everyone that the way that we have characterized the Dy, Tb -- so we've got at Malaysia at present is it was really an opportunity sort of development for us. We had some mixer-settlers available. It's just a small circuit which is selectively separating a portion of the Dy, Tb, not even all of it within the SEGH that we produce alongside our current NdPr, but sufficient to test the market ahead of our larger expansion. I would also just to assist people to understand this, we're not actually selling our SEGH into the market at all, at present we are stockpiling it ahead of future processing capability. And then in response to some of the questions I've had about sort of sales volumes and how quickly do they come online. Some are done and dusted. Others, this is a new product and customers have certain qualification periods. Suffice to say that in terms of testing the market, we have identified extremely strong demand and we have also identified a preparedness to pay because of the scarcity of the material from outside China sources. And of course, that is the reason why it is the first of our -- towards 2030 projects that we will be bringing online, which is the full-scale HRE separation facility. And to do the full-scale separation requires us ultimately to put in a new building, put in new mixer-settlers, precipitation, filtration and tunnel -- and furnaces. So -- but we -- as I think everybody who follows us knows, we are always keen to move as quickly as we can. And so we have looked at what are opportunities to incrementally increase production as we move forward with the larger plan. And that includes doing some work with our current FX configuration, which would allow us to bring samarium online, samarium production online in the first half of 2026 calendar year. And samarium is an element which is in demand at present. We require those customers who need it to finalize some agreements with us on price. As I said, the little circuit that we've got at present is sufficient to have given us an opportunity to test the market. And as we think about how we derive value from our heavies, it is a combination of the margin just on that sale of the heavies. But bear in mind, it's relatively small market. The total outside China market for Dy, we estimated about 400 tonnes. So there's a certain amount which comes from just the pure margin on sales. And more beneficially really in the medium to long-term is the ability to bundle it with our other products in a way that serves customers' total needs rather than them having to have multiple suppliers. During the quarter, operations ran very smoothly. At Mt Weld, we operated on our old plant for most of the quarter as we were completing our commissioning activities for the new plant, which are progressing to plan. And we had a pretty exciting time where as we're bringing on our new gas hybrid renewable power station, we were able to run the plant for, I think, close to a week or on 100% renewable power only. And that's pretty exciting for everybody in Lynas. In Kalgoorlie, as we've identified, we made certain flow sheet adjustments, which are now delivering results. And we expect now to be able to progressively ramp up production in very good order. And at the LAMP, running very smoothly. But as we've indicated in the release, we will be doing these tie-in works for Sm and SX during this quarter. That alongside some of the continuing market volatility means that we are going to manage our production rates very carefully and may trim that to accommodate some of that tie-in work because we see the early production of samarium as being very valuable. During the quarter, many of you who are on the call participated in our capital raise, which sets us up for the next stage of growth, creatively known towards 2030. We've already disclosed some of the areas where we will be utilizing that funding, the HRE -- new HRE plant in Malaysia being the most significant. And then we've also released 2 magnet non-binding MOUs, but I can assure you that we are progressing to definitive documentation of those MOUs as quickly as possible. We are also continuing to negotiate long-term supply agreements with key end users in each of the sort of key categories. So magnet buyers most certainly, but also electronics. I mean this is a high demand market and particularly in terms of micro capacitors, significant growth and a preparedness to pay for quality, which Lynas can deliver. So then turning a little to the geopolitics and the issue -- the effect on the market. And I say again that we are managing carefully and sort of managing risk as we look into this very volatile market. But lets suffice to say that rare earth has -- well, in our view because we think rare earth is the most important thing, we wake up thinking about it in the morning and go to bed thinking about it at night. But it's definitely got the attention that it deserves from various different governments. And as you look at some of the announcements that have been made, you can see that for now, the key focus has been on some of the development projects. And I would offer the view that this is because they are relatively easy for governments to execute with their current funding instruments. Every government has something like our EFA or has other sort of [indiscernible] or other sort of debt funding capability. But some of the other sort of policy initiatives are a little more complex and will require governments to think about some different systems to be able to support it. But I would assure you that governments do understand that this is not a simple supply side fix, even though some of the announcements may lead you to think that they think that right now. There is a recognition that -- there is a market failure, which is shown in the price and also in the development of processing capability, including metals and magnets outside of China. And it's actually a little less about resource, but resource has a very long lead time, but it is more about market failure. And I think as everybody who's even sort of a passing observer would know, the MP deal does address all these elements. It addresses the issue of market failure with the price for. It addresses the issue of market value and processing with its support for the development of magnet making in the U.S. And I think that it seemed to come out of nowhere, but MP was facing an existential crisis as a result of the tariffs and trade restrictions between China and the U.S. and sort of the timely implementation of that there was important. But I think that what we're seeing right now is many governments who are actually working together, we're looking forward to hearing some expected outcomes from the G7 to ensure that the policy settings are right and that the like-minded governments are aligned in their approach. And I think governments also understand that there is no use pouring capital into this sector if the businesses can't be profitable in the long-term. And of course, that is the importance of getting the policy settings right, particularly on price. For Lynas, yes, because as I said before, we always like to get things done yesterday. Working with government can sometimes be a little frustrating because things take the time that things take. However, I would remind everyone that as the only proven operator in the current proven supply chain, we have options and we have value. And we will not spend that value cheaply. But whilst the market continues to be volatile, we will manage prudently. And I would simply point you to our track record of ensuring that we do get full value from whatever dynamics we see in the market. So for us, as we look at this, we see a good quarter in terms of performance, the uplift in price because we are a current producer, is flowing through into our bank accounts immediately. And we continue to see the international focus on the rare earths market is ultimately a very positive thing for Lynas and look forward to sharing with you in the future some better outcomes in that space. So with that, I'm happy to take questions. Operator: [Operator Instructions] First question comes from Daniel Morgan from Barrenjoey. Daniel Morgan: A question -- my first question is just on production volume, which was slightly down sequentially quarter-on-quarter. Just looking to understand that a bit more. Is that a reflection of demand being still patchy? Is it you're looking to negotiate offtakes and so why -- let's not produce a lot and go into inventory? Or is it -- three, there has been some disruption to the operations from tie-ins at Mt Weld, some modifications to fixed volume -- fixed quality at Kalgoorlie, et cetera. Can I just understand how -- volume, how are you looking to set the business near term? Amanda Lacaze: Yes, Daniel, we produced almost exactly what we intended to produce. So yes, you're right. I think it was 80 tonnes, 70 tonnes less than it was last quarter, but somewhere around about that 2,000 tonnes was we were very comfortable with that. It was not -- there were no significant operating disruptions and certainly not from the newer assets. And yes, we don't -- we never see value. I mean, we carry a little bit of inventory, but we never see value in producing a lot of product for inventory. And this was sufficient to ensure that we met customer needs across all geographic markets. So we do continue to make sales to, of course, our Japanese customers, but also to customers in China and in the rest of the world. But we were able to serve all of that and there were no issues with Mt Weld. Kalgoorlie, as we said, we had operating at lower rates as we did make some flow sheet changes there, which now appear to be doing exactly what we planned for them to do and the lab worked very -- exactly according to plan. Daniel Morgan: Sorry, just to clarify, should I take that as 2,000 tonnes a quarter as sort of where the business should sit for the near-term until something changes? Amanda Lacaze: I think we will -- I think the market is so volatile right now, but we will be cautious about sort of even giving that vague of guidance, Daniel. Suffice to say that we will ensure that we are continuing to meet the demand of all of our strategic customers and are working on developing new sales agreements. Operator: Next, we have David Deckelbaum from TD Cowen. David Deckelbaum: Congrats on all the exciting announcements out there. I wanted to follow up just to talk about the heavies facility in Malaysia and the priority around samarium. Is that informed by just process flow sheet? Or is that where you see the highest value products coming out of the heavy mix? Or is it in response to extremely near-term potential around offtake agreements? Amanda Lacaze: It's mostly about demand. So the highest demand materials of the Dy and Tb. Unfortunately, we can't significantly increase that production until we put in that new circuits. The samarium we can do by making a change to one of our circuits, which adds an additional outlet. And so given that there is significant demand for samarium in some very targeted sectors, we think that we can do that without causing too much disruption to production. So that would mean that instead of having to wait until 2027 for that material, it will -- it should be available in the first half of next year. But it definitely is an in-demand material, but we are finalizing relevant price agreements on that as we speak, which are an important part of us sort of deciding to proceed on this pathway. Operator: Next question, we have Jonathon Sharp from CLSA. Jonathon Sharp: Amanda and team, congratulations on yesterday's announcement, definitely a big positive. And my understanding is that this will likely open doors to other customers, not just with heavies, but also NdPr. So really should help with those NdPr sales as you ramp up, which is positive, but that's not my question. My question is around incremental cost of processing the heavies, specifically in the solvent extraction separation phase. Now I know you're not going to tell us what the costs are. But so maybe I'll ask it another way, what proportion of total unit costs of the heavies within the solvent extraction? I would imagine it's quite low. Amanda Lacaze: Okay. So there are no -- with what we're doing right now, there are no significant incremental variable cost to the separation of the heavies, right? Because we had -- the circuits were already in place. They already had -- we did have to load those, but that's already been done sort of in the back half of last financial year. And the contribution to cost of running that circuit and running the furnaces and product finishing is not significant. So really, this is giving us a almost -- this tiny little circuit gives us a bit of a free kick. When it comes to the bigger facility that will come into operation in 18 months' time, once again, we would see that it's not going to be -- there will be some incremental costs, but what we're basically doing is today, we process or up until sort of May, we process the HEG. It goes through solvent extraction and then it goes through product finishing, the wet cycle and then into the -- and is [ confined ]. And so what we're doing is that we won't be using those facilities, and we will be able to use what we've freed up there for other products. And it will be simply going through the different facilities. So we have the capital cost of all of the new mixer-settlers. We will have the capital cost of first fill of those loading them with material, but the incremental cost to process will be relatively small. Jonathon Sharp: Okay. I'd love to know the amount, but I know you're not going to tell me, so I will jump back in the queue. I have another question later. Operator: Next, we have Chen Jiang from Bank of America. Chen Jiang: My question is for your price realization for this quarter. Well, in AUD, $54 per kilogram, but you have heavy rare earths produced for this quarter. For example, the European so-called benchmark for terbium is around $4,000 per kilogram. That's like 4x versus China's price, right? And the same as dysprosium. I'm wondering what happened to your price realization for this quarter? NdPr quarter-over-quarter in China was up 26% and then you have heavy. So if you can provide us any color on the heavy price, how does that work, the European price versus China price as well as your NdPr price? Like I'm not saying that NdPr price jump realized in your revenue. Amanda Lacaze: Sure. Okay, okay. First of all, the heavies pricing, right, you can see we made 9 tonnes, right? Even if we sold every one of those 9 tonnes for, I don't know, $10,000 a kilo, it is not going to move the dial on the average pricing yet, right? So let's just put that aside. And then on the NdPr, as we've explained previously, some of our major customer contracts are reference an end of prior month price. So when the price is going up, we tend to lag it a bit on the way up. And when it's coming down, we lag it on the way down. So you have not seen the full value in this quarter of the uplift in price during the quarter. And that's just a reflection of the way that our pricing contracts operate. Chen Jiang: Can I have a follow-up, Amanda? Just on what you commented on -- on the NdPr. So the weaker than expected realized price is because your pricing contracts lagged a month or 2 and then you have increasing NdPr price. And then for the heavies, which means you quoted some amount, but are you achieving the sort of the European price versus the price... Amanda Lacaze: I'm not even sure where you're getting the European price from. We are achieving on the products that we have sold to date, we are very pleased with the price, and it is not pegged to -- it is -- each of the prices is a customer-specific price and negotiated with each customer on a commercial and confidence basis. But it is not anything even vaguely like the inside China price. It is -- as we said, the market demand is strong, and we have a great deal of flexibility in choosing to whom we sell and at what price we sell. Operator: Next, we have Paul Young from Goldman Sachs. Paul Young: Amanda, another question on the heavy rare earth circuit. Just trying to understand from a -- first of all, thanks for providing the production data. It does take a while for the heavies to work through the circuit a couple of quarters. So I understand there's a lag there. But just trying to understand the capacity and production from a modeling standpoint, what we should be throwing in the models. And I know that you did have -- or you do have, sorry, 1,500 tonnes of SEG capacity. And this announcement, the $180 million, you're achieving another -- you'll get 3,000 tonnes of heavy rare earth oxide products. So just wanting to understand, is this incremental? So at the end of this, are we getting 1,500 tonnes, and 3,000 tonnes to 4,500 tonnes of total capacity of heavies oxides? Amanda Lacaze: No, no, no. We won't -- we will have the one outcome, which is the tonnage that we were talking about yesterday. It is not additive to the tighter little Dy, Tb circuit that we have in place right now. Once we put in the new facility, right, we will then free that circuit up and we will use it productively for some other purpose. Paul Young: Yes. Understood. Okay. That's helpful, Amanda. Just a Part B to that then. Just with Mt Weld, when you look at on the go forward, when Mt Weld fully ramped up and you look at the Duncan or when you look at the assemblage and the heavies coming through, whether you campaign that or not? Can Mt Weld under the expanded scenario or the expansion, I should say, fully feed that heavy circuit? Or will you have -- at what percentage? And will you have spare capacity to take, I guess, a third-party on clays in Malaysia? Amanda Lacaze: Yes, yes. Okay. Excellent question, Paul. We could high grade -- I've got quotation marks around in the air here, but high grade for the heavies at Mt Weld, which would mean that we would deplete them faster, of course, if required to 100% feed that circuit. But between now and when that circuit comes online, we have a number of things that we need to do to improve. We will -- we -- our recoveries on heavies are not at the same rate as our recoveries on light because we haven't managed for that over many years, to be fair. And they do perform differently right from the float circuit in Mt Weld through to Malaysia. So we will be -- I want everyone to always understand we are thoughtful in the way that we manage these things. And so there's no point in sort of mining more heavies, but then having it report to tailings because we haven't actually optimized our processing. And we've got time to do that before the new plant is operating in Malaysia. So that's the first thing for us to do. But our preference would be that, that facility will take feedstock from -- and absolutely, our preference is from developed ionic clay deposits in Malaysia in addition to the feedstock coming from Mt Weld. And so we have a team whose job is to work with various Malaysian partners on that development process. The Malaysian ionic clay, all indications are that it will perform in the same way that the ionic clays in Southern China or Myanmar and Laos perform, and we see this as being an excellent opportunity to further contribute to Malaysian economic development. And also because as we know, ionic clays will typically give us a higher sort of proportion of heavies and so therefore, suitable for feeding into this new plant. So that's a very long answer to your question, Paul, which was, yes, we could, if we had to serve it out of Mt Weld, but our preference will be that we have at least 2 feedstocks and potentially more if any other projects come online into that facility. Operator: Next, we have Mitch Ryan from Jefferies. Mitch Ryan: You called about -- just can you comment on the cost pressure as you move consumables supply chain away from China? How long do you expect until your supply chain is completely independent? And could you help us understand sort of what percent of your cost base do those consumables currently represent? Amanda Lacaze: Yes. So we are -- we have been working on this since the first trade spat that started in April because China is quite nuanced in its use of non-price controls alongside the price controls that it's used over time. And so we have identified alternate supply sources for all inputs in our facilities, both consumables and also equipment. We, at present, see that there will be some cost penalties associated with those, but we won't see those in this financial year because of the way that we've managed inventory in particular. So given how much things can change at present in the rare earth world on almost a daily basis. I'm disinclined to provide a cost forecast, Mitch, for sort of 9 months' time. But we are confident in our ability to source relevant materials without crippling the business. I wouldn't want to be trying to build a new rare earth facility, however, just right now with no access to any China equipment at all. When we built Kalgoorlie, we did make a decision not to put any Chinese equipment in it. It's probably got to probably on the equipment cost, cost us probably about 25% to 30% more than if we had Chinese sourced equipment. So I think this will be a bit of a challenge for some of the new projects coming -- proposing to construct over the next little while. Mitch Ryan: And just given that comment, I assume, therefore, that the heavy rare earth circuit that's being proposed, Malaysia will also apply the same strategy. Amanda Lacaze: Sure. Yes. Well, Ryan, I can assure you this that if we went to a Chinese supplier today and ask them to ship to Lynas a new piece of kit of some sort that they would probably say, thank you very much, but our production line is full, if they were being polite. And if they weren't being polite, they just say no. Operator: Next, we have Reg Spencer from Canaccord. Reg Spencer: I'd like to ask about a topic that seems to be getting everyone breathless at the moment, and that's price floors. We know that such things have been floated with respect to the Australian critical minerals reserve, and we all have to think that Lynas would be a candidate to get some such floor pricing. What do you think -- what kind of impact is that going to have given that you are working on additional supply contracts independent of Asian Metals Index. And aside from the Japanese contracts, what kind of impact on pricing should we be thinking about? I'm really just trying to figure out where the base level pricing or reference point should be for your main product being your NdPr? Amanda Lacaze: Yes. Good question, Reg. I think that governments do recognize, as I said in my opening comments, that it's one thing to put the capital on the ground to build a project. The next challenge is to make it work. But it's all together another thing for that to become a profitable business, and to become a profitable and sustainable business, it needs to have pricing -- a functioning market in terms of pricing. So I think governments absolutely do understand this. And they also understand that whilst it's important to support and we support this development of the industry over time, I mean the ultimate remedy for all of this is to have an outside China industry of sufficient scale to balance out the inside China capability. But today, there is only one -- there is a functioning supply chain, and Lynas is at the heart of that supply chain. And so therefore, ensuring that policies are put in place, which support that supply chain success is really important. So I think, as you said, Reg, it is highlighted in a number of the announcements. I think we look here in Australia, and we see that the government is not fearful of taking action to support or to intervene where industries are at risk. But I think that what we've got is a number of governments who are seeking to make sure that whatever they do is aligned and ultimately constructive. Having said that, our view would be that the MP deal sets the flag -- goal posts here, that would be a better way to describe it wouldn't. And I mean the goals, not the behind. Reg Spencer: I have a follow-up associated question to that, but I'll take that offline and pass it on. Operator: Next, we have Austin Yun of Macquarie. Austin Yun: Just a quick one. As you point out in the opening remarks, MP is not a full solution for the U.S. government. I'm conscious that you do have a project in the U.S. right next door and feeding into this heavy risk demand. keen to get an update on that discussion and a lot has happened in the last few weeks. Does the current market condition provide a bit of support to accelerate that project? Amanda Lacaze: We have referenced this in the report, and we also did use a carefully considered form of words when we went to the market for the capital at the end of August. We -- where we are at present is that there is significant uncertainty as to whether we will proceed with that facility and if so, in what form. But we continue to work with the DOW and in particular, on offtake agreements, which will ensure that the DOW has the materials, which are critical for their applications. And that Lynas is in a position to be able to gain benefit from capability and that includes the construction of the plant in Malaysia. I think I've talked previously about sort of the fact that when we are doing something ourselves on our own sites, we're able to deliver projects much more quickly than on any other scenario and much more cost effectively. And ultimately, that's why we've made the decision to sort of focus our attention on delivering the new plant in Malaysia. Bearing in mind, that a lot of our engineering and design work that we've undertaken over the past 4 or 5 years actually feeds in very productively to that. And it's well worth remembering also that it remains that the key markets for rare earths remain in East Asia and Southeast and East Asia. And so it also remains that the location of our processing facility in Malaysia is really fit for purpose. Operator: Next, we have Matthew Hope from Ord Minnett. Matthew Hope: Just wanted to circle back to the NdPr pricing. Certainly, with your discussion about what was happening in the market, you're referencing China. And again, I think you indicated your Japan contacts are linked to end of month prices in China. Just wondering, is there any mechanism to start to delink from China, because China pricing is obviously quite different from the rest of the world in most products and even NdPr seems to be a bit lower than what's outside China. So is there any mechanism to sort of renegotiate those or change them? Or do they roll off over time? Amanda Lacaze: We can change them, but customers have to have a preparedness to pay. And right now, notwithstanding everything which is written, most customers have an option to source magnets from outside China or magnets from inside China and still 90% of them are sourced from inside China. So we are able -- on occasion, we would say that -- we often talk about this is probably 3 segments of customers; one who understands that they should embrace a risk-based pricing model because of the risk to their business of having to shut down. And bear in mind, there are at least a couple of [ crass ] lines that shut down in April, May this year as a result of the new licensing regime in China. There's a group of customers who are continuing to assess and recognize they probably need to do things differently. And then there's a fairly substantial group of customers who think that they keep their fingers crossed and their eyes closed and wish very hard that this will all go away and they'll be able to just continue to use cheap materials from China. We're working through those groups. And of course, our primary focus is on the first group, which is the one to recognize that risk-based pricing, which is fair pricing is something that they need to embrace within their business. And we are progressively sort of working on various different agreements with those customers. But across the market, well, you're just going to have a different price outside China from the one inside China is -- that's not something -- that's something which will rely upon customer performance and potentially policy settings. The various governments can influence that pretty quickly with -- and we've seen it with some of the sort of settings, for example, U.S. defense industries can't use material sourced from China from the 1st of January 2027 under the DFARS Act. So I mean, governments can do it, but not all customers outside China understand that, if they want ongoing supply that they need to pay a fair price. Matthew Hope: Right. Okay. And just in the Dy, Tb, noted what you said about the recoveries being lower and the fact that the circuit is very small. So does that mean that the sort of 9 tonnes of Dy and Tb that we -- that's produced in September quarter, is that kind of normalized? Or is it still got a fair way [indiscernible] to actually ramp up? Amanda Lacaze: It's got some upside to that, Matthew. Operator: Next, we have Rahul Anand from Morgan Stanley. Rahul Anand: Look, a lot of my questions have been asked, but I still have one which I wanted to touch upon, which is the Malaysian ionic clay deposits. Could you help us perhaps understand sort of how much you've looked into them? I'm sure you've looked at them a lot given your land plant. But I want to understand in terms of -- firstly, in terms of the processing side of things, I would believe that the processing costs are lower, but then some ionic clays can be problematic as well in terms of acid use and obviously, carbonation, et cetera. How do these things sit? And then why has Malaysia sort of not been able to do that themselves in the past and kind of has struggled in terms of volumes? Amanda Lacaze: Yes. So we're quite progressed. We have announced one MOU with the client state government. And the deposits which are sitting in Malaysia either it's not quite as easy as it is in Australia where the Crown owns all of the minerals under the ground. Some of them are owned by the state. Some of them are owned privately. Some of them are owned by the Royal families. So we're sort of working through that process and where relevant are executing agreements with the relevant owners. Now we're in Pahang, so sort of the states sitting on the East Coast of Malaysia are particularly attractive to us, a, because they appear to have the right sort of geology and b, because of their proximity to the plant. In terms of the ability to process and upgrade that material and why haven't the Malaysians done it to date, fair bit of that material has previously gone into China for processing. And so there's not been sort of the same focus on domestic processing. But last year, the Malaysian government recognizing the value of this and introduced a moratorium on the export of unprocessed rare earth materials with the objective of encouraging more development in this sector. And as I said, very responsive, therefore, to Lynas as sort of a company with skills in this area. But the more general comment about why hasn't it been done is because not very -- many people know about processing rare earths. Lynas is one of the very few firms outside of China that does know how to do it. And so that's really the partnership that we're looking to develop in Malaysia, and we see it as a highly prospective opportunity for future feedstock for particularly the heavy circuit, but those plays also -- not only will they bring us heavies, but they will bring us additional NdPr as well. Operator: Next, we have Regan Burrows from Bell Potter Securities. Regan Burrows: A lot of questions have been asked. Just one on, I guess, the broader market dynamics. Obviously, the governments around the world, especially in the Western world are supporting a lot of these projects, and we're seeing a lot of companies state that they will come online within the next couple of years and add supply to the market. I'm just curious on your view, is there enough room for everyone to be feeding into the ex-China market? And how does that sort of infer your thinking around capacity expansions up to that 12,000 tonne per annum rate? Amanda Lacaze: Thanks, Regan. I don't actually spend much time thinking about them. I've got more than enough time to think about our own business. I think that the earliest date that anyone is even sort of suggesting is, I think late '27, and I would be surprised if there's anything come into the market at scale at that time. But the more substantive question is, is there demand outside China? Yes, there is. Can it be served with the industry structured the way that it is today? Well, actually, it could be serviced via -- in terms of resource by sort of current operators, that is Lynas and MP. However, it is the metal and magnet steps that need to significantly grow to be able to serve the outside China demand. But industry forecasts are for continuing growth, and there is no reason to suppose that it won't continue to grow somewhere in the -- certainly in the high-single or low double-digit numbers on an annualized basis. So there's going to be much demand. And as I said in my earlier comments, the best thing for everybody is for there should be critical mass in the outside China industry. But it is really important, and I think that governments do understand this, there is still a big gap between where we are today and getting to a stage where there is a large functioning outside China industry. And in the meantime, it's incumbent on them to protect the current functioning supply chain and Lynas is at the center of that. So yes, look, there's demand. It's just a case of making sure that there's capability in all stages of the value chain. Regan Burrows: And so if you see, I guess, that -- call it last, but if you see that supply into the market, does that, I guess, shape your thinking around capacity from lab and your business? Amanda Lacaze: I think not particularly, no. We run our own race. We focus on customers that we seek to acquire and anyone who wants to chase us, that's fine, but we run our own race. Operator: Next, we have Scott Ryall from Rimor Equity Research. Scott Ryall: Thanks very much for the detail you've offered today. I'm looking, I guess, a bit more at the future. When you did your equity raising at the time of the full year result, which if you can believe it is only 2 months ago, almost to the day, you gave some splits around the uses of the funds, particularly in those growth areas of add resource scale, increase downstream capacity and expand into the metal and magnet supply chain. You gave some indicative splits there. And I'm just wondering if you have adjusted any thinking given such a lot has happened in this sector over the last 2 months as to where the best incremental returns on capital for Lynas are across those growth areas over the next 5 years as you work towards your 2030 strategy plays, if anything has changed materially? Or as you say, you're still running your own race? Amanda Lacaze: No, nothing has changed materially. I think that what we've said and we said then was the first project that we would bring back to the market would be the heavies, and we have done that. And it is -- and that is because it is absolutely a gap right now in the non-Chinese market. There's been a lot of questions today about -- and I've responded and maybe be a little bit harsh on some customers. But whilst customers are still reliant upon China for their heavies, right? It makes it sort of tricky for them to be shifting their light sort of demand as well. So that's why the heavy has been absolutely front and center for us in terms of development, and we can have that operating and we have an excellent track record in terms of execution. We can have that operating, we expect in calendar 2027 with some of -- as we said, the product earlier. And that we think will be really important in terms of our overall product offering into the market and giving customers confidence to switch their supply chains. So it remains Top of the Pops. And then because it's not just about the margin on the heavies, but it is about the NdPr that goes with it. And then we look at that and we say, okay, so we've got capacity there, and you would have noted that we probably got a bit of headroom in that capacity. So that means that the next thing, which is really important for us to nail is, additional complementary feedstock sources, right? We ultimately are a minerals and minerals processing company. So we live or die on the quality of our resources. And so adding more to that is sort of the next priority, very quickly followed by ensuring that there are -- that there is the opportunity for us to sell that into non-China processing facilities, both metal and magnet making. So the 3 areas remain exactly the same with the priority being, as I've just described, but that is really pretty much what we said 2 months ago. I think you would all be very disappointed notwithstanding everything which is going on sort of geopolitically, if 2 months after a capital raise, I said to you, "Oh no, all the cars are in the air and we're going to change everything." You would be, what's going on. Don't they know what they're doing here. I think it is very easy to get distracted by the daily -- sort of the daily announcements. But if we try to change course every time a politician somewhere in the world has some sort of a thought bubble, then we would not be the business that we are today. So we understand the market. We understand what our customers need and that ultimately is the thing. You can't run a business on government funding [indiscernible]. You actually need to meet your customers' needs and be a supplier of choice. And we understand what are the policy settings that we want from government to make this a proper functioning market into the future. But -- so Scott, long answer, the short answer is what we said when we asked you to sign a check stands. Scott Ryall: I'm smiling and nodding with you. Amanda Lacaze: I see that it's 3 minutes past 12. So I'm not sure, Maggie, how many... Operator: One last question from Matthew is a follow-up. Would you like to take it? Amanda Lacaze: Okay. Yes, sure. Operator: So we have Matthew. Matthew Hope: Just a question on the Noveon MOU. Was the intention there just to sell more rare earths to Noveon? Or is it actually to get involved more like JS Link get involved in the entire magnet factory and the profits there from? Amanda Lacaze: So you know what? Chris Jenney, who's our Head of Sales and Market Development, is online, and he is working very closely with Noveon, and I'm going to let him answer that question. Chris Jenney: Thanks, Amanda. Matthew, yes, great question. Yes, it's early days. Noveon is a fantastic operator. They're the only existing magnet supplier into the U.S. with very aggressive growth plans. So we're working through them what is the best model, not just for commercial customers, but also defense customers. So we'll keep you updated as we progress. Amanda Lacaze: And Matthew, we will sell more product, and we potentially will engage directly in how to support the aggressive growth plans that Chris has articulated. Operator: Thank you, Amanda. We have no more questions. Amanda Lacaze: Well, once again, thank you all for joining us. The rare earths market continues to be an exciting place to operate. So yes, look forward to catching up with all of you in the near future. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.