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Operator: Greetings, and welcome to the NWPX Infrastructure Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Scott Montross, CEO. Thanks, sir. You may begin. Scott Montross: Good morning, and welcome to Northwest Pipe Company's Third Quarter 2025 Earnings Conference Call. My name is Scott Montross, and I am President and CEO of the company. I'm joined today by Aaron Wilkins, our Chief Financial Officer. By now, all of you should have access to our earnings press release, which was issued yesterday October 29, 2025, at approximately 4 p.m. Eastern time. This call is being webcast, and it is available for replay. As we begin, I'd like to remind everyone that the statements made on this call regarding our expectations for the future are forward-looking statements, and actual results could differ materially. Please refer to our most recent Form 10-K for the year ended December 31, 2024, and in our other SEC filings for a discussion of such risk factors that could cause actual results to differ materially from our expectations. We undertake no obligation to update any forward-looking statements. Thank you all for joining us today. I'll begin with a review of our third quarter performance and share our updated outlook for the remainder of 2025. Aaron will then walk through our financials in greater detail. We're proud to report another quarter of record-setting results, delivering the highest quarterly revenue, gross profit and EPS in our company's history. Consolidated net sales reached $151.1 million, representing growth of 13.4% sequentially and 16% year-over-year. Gross margin expanded by 230 basis points sequentially to 21.3%. EPS grew to $1.38 per share, up 35% versus the prior year period, and we generated over $21 million in operating cash flow during the quarter. These strong results underscore our disciplined execution against our strategic priorities and the sustained demand across both our water transmission systems and precast segments. Let's begin with our WTS segment, which delivered record net sales of $103.9 million, a 20.9% increase year-over-year. This performance was fueled by favorable market dynamics, including stronger-than-expected customer shipping requirements, project mix and timing. Tons produced rose 14% year-over-year, driven by sustained customer demand, while revenue per ton benefited modestly from trade policy dynamics and disciplined pricing strategies. Importantly, while our strong cash flow generation in the third quarter can be attributed to the collective efforts of the entire company, the WTS business was a notable contributor. We saw this trajectory throughout 2025, with improving cash flow through the first nine months of this year versus 2024. This builds on the significant improvements we've achieved over the last few years. Bidding activity remained robust throughout the quarter, and we expect even greater momentum heading into the fourth quarter. At quarter end, our WTS backlog, including confirmed orders stood at $301 million. While this reflects a sequential decline from the $348 million in June due to the elevated shipping activity, it marks an increase from the $282 million a year ago. We anticipate backlog levels will remain above $300 million through year-end, supported by what we expect to be the strongest bidding quarter of the year. In addition, as part of our commitment to environmental stewardship, we recently published our first third-party verified Environmental Product Declaration, or EPD for cement-mortar line welded steel pipe. The EPD measures embodied carbon and overall product life cycle impacts and help us meet by clean and other state-level transparency requirements. It also helps differentiate us from competitors in sustainability-driven bids. This milestone underscores our dedication to transparency and sustainability and infrastructure development. For additional details on water transmission projects underway at NWPX, I encourage you to review our investor presentation available on our website. Turning to Precast segment. Our net sales reached $47.2 million, marking a 6.6% year-over-year increase in landing just shy of the record set last quarter. While shipment volumes declined modestly, an 8% increase in average selling price reflects our pricing discipline. We saw notable strength in our park-related nonresidential business, which has navigated persistent macroeconomic headwinds, including trade policy uncertainty and elevated interest rates. Third quarter results reflect early signs of stabilization and improving trajectory in this business. Residential activity at Geneva moderated slightly during the quarter, partially offsetting gains. Our precast order book closed the quarter at $55 million, in line with recent levels and demonstrating consistent stability over the past several quarters. Looking ahead, we anticipate improved demand and accelerated project starts as interest rates ease. On a consolidated basis, gross profit reached a record $32.2 million, representing a margin of 21.3%, up 50 basis points from 20.8% in the third quarter of 2024. Water Transmission Systems gross profit reached $22.1 million with a margin of 21.3%, up approximately 190 basis points year-over-year and 350 basis points sequentially. This margin expansion reflects strong customer demand, favorable project pricing and consistent operational execution, all while sustaining a healthy backlog. Free cash gross profit totaled $10 million, down modestly from both second quarter and the third quarter of 2024, with gross margins that were flat with the prior quarter. Margins were temporarily impacted by mix shifts at Geneva and increased depreciation associated with new equipment investments. Production volumes rose year-over-year with park up double digits and Geneva up high single digits. Absorption rates are beginning to improve, and we anticipate margin recovery as nonresidential demand continues to build. Momentum within the nonresidential portion of our Precast business is showing encouraging signs of recovery and is expected to contribute positively to our margins. Let me now turn to our capital allocation strategy. Growth remains our top priority. In the third quarter, we continued to advance our Precast product spread strategy across multiple levels. First, optimizing capacity at our park plans by booking orders outside of Texas; second, producing and shipping park products from Geneva; third, producing and shipping Geneva products from park locations; and fourth, expanding precast related offerings to additional Northwest Pipe legacy locations, which includes water transmission systems plants. We currently have two water transmission systems plants that are in the process of getting their national precast concrete association certification. We booked $3.3 million in precast product spread orders in the third quarter, and our full year goal remains to book over $12 million in product spread projects outside of Texas. We also made targeted organic investments, including the installation of a catch basin machine at our Orem plant for Geneva, which will expand our production capabilities. Additionally, we are investing in new forms at our water transmission systems plants to support precast production and further advance our product spread strategy. On the M&A front, we continue to evaluate acquisition opportunities in the precast space, including single-plant candidates that would expand our geographic reach and capabilities. Our acquisition criteria remains disciplined, and we are actively exploring several options. Other capital priorities include paying down debt and returning value to shareholders. During the third quarter, we repurchased approximately 186,000 shares at an average price of $42.90 totaling $8 million. In summary, we remain on track to deliver a record year in 2025, and we are well positioned for continued momentum in 2026. Looking ahead, we're expecting to see a normal fourth quarter due to seasonal factors such as two major holidays, but more importantly, severe weather-related events, which we have a lot of experience with over the last few years. In the fourth quarter, we anticipate modest year-over-year growth in both revenue and margins in our precast business, and revenue and margins for the Water Transmission Systems business to be similar to the year ago period. Our record-setting performance throughout the year underscores the strength and resilience of our business model, the durability of our end markets and the exceptional commitment of our employees who continue to drive consistent execution across both segments. As always, our priorities remain clear. One, maintaining a safe and rewarding workplace; two, focusing on margin over volume; three, intensifying our pursuit of strategic acquisitions; four, implementing cost efficiencies across the organization; and five, returning value to our shareholders when M&A opportunities are limited. Thank you to our entire team for your continued dedication and execution. I will now turn it over to Aaron, who will walk you through our financials in greater detail. Aaron Wilkins: Thank you, Scott, and good morning, everyone. As Scott mentioned, we delivered record-setting results this quarter, achieving the highest quarterly revenue, gross profit and earnings per share in our company's history. In particular, the Water Transmission Systems segment's performance was exceptional, benefiting from several tailwinds, including higher-than-expected volume as well as cost efficiencies realized on improved plant utilization and favorable costing against our project estimates. We believe that shifts in the competitive landscape combined with a favorable demand environment have created conditions where strong quarterly results, such as those seen in the third quarter are occasionally achievable. However, we do not consider this level of performance to represent a new baseline for the WTS segment. I'll now turn to our third quarter profitability. Consolidated net income was $13.5 million or $1.38 per diluted share compared to $10.3 million or $1.02 per diluted share in the third quarter of 2024. This is the highest earnings per share posted in the company's history outside of the third quarter of 2018, which was elevated by a onetime $22 million noncash gain on bargain purchase associated with our acquisition of Ameron Water Group. Our results since that acquisition, including the record results achieved in the third quarter of 2025 serve as continued validation of that acquisition's positive contributions to the organization. Our third quarter consolidated net sales increased 16% to a record $151.1 million compared to $130.2 million in the year ago quarter. Sales for the Water Transmission Systems segment increased 20.9% to a record $103.9 million compared to $85.9 million in the third quarter of 2024. The increase was driven by a 14% increase in tons produced, resulting from changes in project timing and a 6% increase in selling price per ton due to changes in product mix. Precast segment sales in the third quarter increased 6.6% to $47.2 million compared to $44.3 million a year ago. Our performance was driven by an 8% increase in selling prices due to changes in product mix, which was partially offset by a 2% decrease in volume shipped. As a reminder, the products we manufacture are unique. Shipment volumes in the case of precast and production volumes in the case of WTS and the corresponding average sales prices for both segments do not always provide comparable metrics between periods which are highly dependent on the composition of each segment's product mix. Our third quarter consolidated gross profit increased 19% to $32.2 million or 21.3% of sales compared to $27 million or 20.8% of sales in the third quarter of 2024. Water Transmission Systems gross profit increased 33% to a record $22.1 million or 21.3% of segment sales compared to gross profit of $16.6 million or 19.4% of segment sales in the third quarter of 2024, primarily driven by higher pricing due largely to changes in product mix as well as higher production volumes and associated operational efficiency gains. Precast gross profit decreased 3.4% to $10 million or 21.3% of segment sales from $10.4 million or 23.5% of segment sales in the third quarter of 2024, primarily due to changes in product mix. Selling, general and administrative expenses increased 13.2% to $13.1 million compared to $11.6 million in the third quarter of 2024 due to higher compensation and benefits expense. However, as a percentage of sales, SG&A improved to 8.7% from 8.9% in the prior year. For the full year 2025, we now estimate our consolidated selling, general and administrative expenses to be approximately $52 million. Depreciation and amortization expense in the third quarter of 2025 was $4.2 million compared to $4.1 million in the year ago quarter. For the full year, we expect depreciation and amortization expense to be approximately $19 million. Interest expense decreased to $0.8 million from $1.5 million in the third quarter of 2024 due primarily to a decrease in average daily borrowings. For the full year 2025, we expect interest expense of approximately $3 million. Our third quarter income tax expense was $4.7 million, resulting in an effective income tax rate of 26%. This compares to $3.7 million in the year ago quarter or an effective income tax rate of 26.3%. Both quarters were primarily impacted by nondeductible permanent differences. We continue to expect our tax rate for the full year 2025 within the range of 24% and 26%. Next, I'll transition to our financial condition. Our strong balance sheet and ample liquidity support the execution of our capital allocation strategy. As of September 30, 2025, we had $27.6 million of outstanding borrowings on our credit facility, leaving approximately $96 million in additional borrowing capacity on our credit line. For the third quarter, net cash provided by operating activities was $21 million compared to $22.7 million in the third quarter of 2024. The modest decline was primarily due to changes in working capital, partially offset by our increased profitability. Our capital expenditures for the third quarter were $7.8 million compared to $6 million in the third quarter of 2024. The full year 2025, we continue to expect CapEx in the range of $19 million to $22 million, including approximately $5 million for various investment projects, most notably to support precast product spread as well as initiatives to grow both our Park and Geneva businesses $100 million top line in the near term. Accordingly, we generated positive third quarter free cash flow of $13.2 million compared to $16.7 million in the year ago quarter. For the full year 2025, we now anticipate free cash flow to range between $32 million and $37 million, up from our prior outlook. Consistent strong cash generation remains a top priority for our leadership team, which is focused on driving growth, both organically and through prospective M&A as appropriately valued opportunities arise. We remain committed to enhancing shareholder returns. Consistent with our capital allocation strategy, including repurchasing shares. In the third quarter, we repurchased 186,000 shares for an average price of $42.90 per share. To close, we are proud of our strong performance and sustained momentum this quarter, resulting in another period of record-setting results. We remain focused on driving long-term growth and positioning the company for sustained success through the remainder of 2025 and beyond. We want to thank our employees for their strong execution and for their commitment to safety, which remains the foundational value central to our culture. We also appreciate continued confidence and support of our shareholders as we execute our long-term strategy. I'll now turn it over to the operator to begin the question-and-answer session. Operator: [Operator Instructions] The first question comes from Julio Romero with Sidoti & Company. Julio Romero: I wanted to start on the Water Transmission Systems segment. Really impressive to see a [ two-handle ] in front of the segment margin there, obviously, strong execution in the quarter by you and your team. One item you called out was stronger-than-anticipated customer shipping requirements in the quarter. I was hoping you could dive into that a little bit and expand on that and how much of a driver that in particular, was in the quarter? Scott Montross: Yes, I think that was a really big driver of the quarter, Julio. The production levels were strong in the quarter. So we had good absorption levels in the quarter, and we had increased fab work. But the level of shipments that we saw throughout the quarter were pretty significant because just to give you an example, at our Adelanto, California plant, we shipped 421 loads in September alone. And then in Saginaw, our plant in Saginaw, we shipped 272 loads alone. So it was really interesting because when we -- when the numbers came out and it was actually over $100 million at first blush, you start to look at, "Oh man. Maybe it's getting caught up in current assets". But if you look at what's happened to our current assets, really since last year at this time, our AR was up like almost $20 million versus where it was in the second quarter and about $19 million from where it was in the third quarter of '24, which means stuff is being shipped build to the customer. And I think even more importantly, the contract assets, which is when we produce and recognize revenue on something before it's shipped, those numbers versus the second quarter were down $6 million and versus the third quarter of '24, they were down $24 million. So all that stuff moved in the right way, which shows production was good, really the shipments outpaced what the production level was in the quarter, which was really a driver for it. So it increased the revenue, and increased freight revenue that we got and the absorption numbers were fantastic. So that's really the story of the quarter for Water Transmission. Julio Romero: Very helpful there. And you mentioned you expect backlog levels will remain above $300 million through year-end, and that implies pretty significant order acceleration here in the fourth quarter. Can you maybe talk about the drivers of that implied order acceleration? And secondly, what kind of margin profile is anticipated for those orders? Scott Montross: Yes. What I would tell you is, right now, looking at the bidding schedule, we have somewhere in the area of about $200 million worth of work bidding in the fourth quarter. And just to give you a little bit of a perspective on that, we have in the schedule right now, and this is on a tonnage perspective, 60,000 tons worth of projects that are scheduled to bid in the next six weeks. So those are projects like Red River, IPL, there's a reliner project in California. There's projects from Oklahoma City that are scheduled to bid in the next six weeks. So it's a very, very strong bidding quarter. And what you'll really see, Julio, is those bids and those jobs is those are one and put into the backlog, which will keep the backlog above 300 and likely improve it as we go through the end of the quarter. Those projects will be done in 2026. So really, what it's doing is setting us up for a very strong entry into 2026 with those things bidding. Julio Romero: Yes, that's fascinating. I mean Red River is something you've talked about for a long time now for several years, if I'm not mistaken. So to see that bidding in the fourth, is that correct or? Scott Montross: Yes. There is apparently -- in each one of the states is a little bit different, but there's some spending that has to happen. There are actually three large segments of Red River bidding in that time frame, in the fourth quarter. I don't know if they're all within that 6-week period, but they're all bidding and scheduled to bid in the fourth quarter. There's also a segment of IPL that's scheduled to bid in the fourth quarter, which you heard us talking about 10 years ago, which is another extension of that program. So it -- the fourth quarter is going to be a pretty interesting bidding quarter for us. And like we said in the script, it should really work to enhance backlog as we travel through the quarter. Operator: The next question comes from Ted Jackson with Northland Securities. Edward Jackson: All I can say is, wow, what an amazing quarter, wow. I'm going back into water transmission or SPP. I mean you've got tonnage up 14%. I mean, you just had a blowout quarter with it. Can you just talk a bit about kind of the utilization rates that you had across your facilities and kind of like what -- where are you with that? And is there -- I mean, the fact that you could do something like this in the right environment, I mean, you could repeat this. I'm just kind of curious like what are some of the metrics you had... Scott Montross: Yes. For -- I think -- just before I talk about the metrics, I think that these kind of quarters are definitely more possible as we go forward, as Aaron said in his script, it's not a new level that we're getting to. But I think that when you look at a good water transmission quarterly revenue rate, you're looking at something that's between $80 million and $90 million. That's a good quarterly rate, probably more like $82 million to $85 million. But these kind of things can happen. When you look at the utilization that we ran across our facilities in the third quarter, I would call it somewhere in the high 60s to about 70% utilization because we did have a couple of cases in the quarter where there was enough shipment requirement demands from our customers that we actually had to do a little bit of second shift work because normally, our water transmission systems plants are really run on one shift. So I would call it high 60s to low 70s when I looked at it over the last couple of days. And we have a lot more that we can do. And if demand follows it, we can staff up and continue to produce more and more because we're really doing this on one shift at each one of the plants. Edward Jackson: With a 14% rise in tonnage, I mean -- and clearly, very robust bookings world. The businesses out there, the competitors that you have, you're not -- you don't have to fight on price for volume. How much of that -- like, is there an opportunity for you to see better than maybe -- let's take this quarter out, but better than historic margins, given kind of the macro environment you're in right now? Or how is the competition for the use of your facilities these days? I mean how does it compare to... Scott Montross: I think it's pretty stable with the competitive landscape. I think when you look at backlogs across the industry, it appears that everybody's backlog is up a bit. And that's always a recipe for better margins as you move forward. So when you start looking at better than historical margins, we have a market right now that's a good market, right? And I don't want to get too much into the IIJA stuff in front of this. But we have a good market right now, and it's not a blowout market, but it's a good market. And right now, the competitive landscape fits the size of the market very well. Bids are competitive. You've got to continue to work on cost to drive your costs down in the plants, and we do that with lean manufacturing programs and things of that nature and setting metrics in each one of the plants. But I think the landscape is good. It's still very competitive on some bids. We have some bids in the fourth quarter that we expect to be very competitive bids. When you start getting up over -- and we're right now still, Ted, in the demand level that's probably about 140,000 to 145,000 tonnes. It might inch up a little bit above that with what's going on in the fourth quarter, and that's just a pretty good quarter. If you get a quarter that -- or excuse me, demand that's for a year. If you get a year that's over 200,000 tons, I do think that's the point where you can start seeing those margins that are larger than what we've seen historically. Now I started talking about the IIJA a little bit before that, and you probably have other questions on that. But the thought of the IIJA has originally been, "Hey, this is going to cause a substantial spike in the markets for the water transmission systems business as we move forward during some period". But I think that the funding is trickling out relatively slow. And of the $50 billion -- EPA has about $43 million or $44 million, The Bureau of Rec has probably about $8 million, only about $20 million of it has been obligated by the EPA and the Bureau of Rec has about $5 million, $6 million. So only about half of the funds have been obligated at this point. The other thing to note that the funds that have been dispersed is only about $8 billion. So it's not a high percentage of what's out there at this point. So the feeling is, instead of seeing a big spike in the water transmission systems market, what you're going to see is that, that market, like we're seeing right now, maybe a little bit of inch up in the market, extend further out into the future. And for -- as we look at that, we think that's better for the business because normally when you have a big spike, you have a big fall and then the business falls off for a period of time. This level of marketplace as we look out to '26, '27, 928 is a better scenario for the water transmission business over that period of time. And I think it will allow for a stable business, higher stabilized margins and improved performance as we go forward related to cost reductions that we're doing in the plants. Edward Jackson: Okay. I got two more topics and I'll get out of line, too. Just quickly over on to the precast side of the house. I mean, a nice revenue number. I was a little surprised on the margin given that my understanding has been that if the Park business is turning around, then that's typically been a better margin -- set of products for you all. I mean, so maybe you could just unpack that a little bit for me. Is that just because you had some underutilization at Geneva or is my memory on that incorrect? Just kind of curious as to on the market side... Scott Montross: Yes. No, I think you're right, I think the Geneva business is still very strong. It's very strong. But we're now up and fully running the Exact 2500, which is the RCP Manhole machine. So we've got increased depreciation that started associated with that in the building. So that's had a little bit of an impact on the margin at the Geneva business in the quarter. We expect, as we get the exact 2,500 up to the production levels that we want that we'll be adding a second shift to that, that we're working on, which will further enhance the market or the margins. And the old transmatic that we have at Geneva, we'll be able to shut that down and not have to be running that. So that will reduce cost and enhance the margins. So we expect the Geneva margins to start coming back up in the fourth quarter to a more normalized rate. On the Parks side, what I would tell you is the Park margins now are up probably a few hundred basis points from where they were from the beginning of the year. So that is definitely traveling in the right direction and really being driven by, I think, owners and developers are taking into account that the interest rate is going to fall over a period of time. So they're pushing projects into planning in design right now, which is going to continue to build that business over the next 12 months to 18 months. So we think we'll start to see the Park margins probably start to normalize in the next couple of quarters. But the Park margins have really come up by about 300 or maybe even a little bit more than 300 basis points since the beginning of the year. It's really the Geneva fall off with the increased depreciation, the double running of the equipment in the quarter until we get it shut down and then getting the Exact 2,500 up and getting it on to a second shift that impacted the third quarter for Geneva, and we see that coming back in the fourth quarter and the margin starting to return to normal. So it's just a timing thing, Ted. Edward Jackson: Okay. And then my last one is implicit in the guidance that Aaron put forth is that being said, fourth quarter SG&A would be about $13 million. And if you're going to hit your -- when you say $52 million for the year, how would we think about your that expense? I mean I know you're not talking '26, but would we expect a similar run rate for '26, $52 million, $53 million. I mean, just given kind of how those expenses have kind of scaled up during the last fiscal year? Aaron Wilkins: Yes, I would tell you that we always think about it first maybe as kind of a normal sort of inflationary adjustment when we start to model our SG&A for our budgeting process. But the other thing I would tell you is that we internally are pretty devoted to looking at our costs, especially at some of the support centers and the sales cost centers to really try to drive in on the value creation that they're supporting, right? So we're looking at places where potentially some zero basis budgeting where we can potentially look at things that we can scale away. So I think we're going to be having some opportunities to kind of maybe cut modestly kind of from that level up for inflation starting point. I think that's kind of where we'll kind of go with things. Now obviously, if you have things like any sort of M&A or anything like that, that kind of blows everything I just said out of the water. But the other thing that we've really been impacted by in this year has been the bonus expense, too. So that's obviously -- since that's incentive compensation, that's really subjective to the level of profitability of the company to achieve. Edward Jackson: Yes. That's not a bad expense. Aaron Wilkins: And that's what does have us elevated this quarter, particularly on what I expect to be something that elevates us in the fourth quarter as well. Scott Montross: Just a little bit of an add on to that. When you think about SG&A expense, my view when we look at that is that our operating margin should be 10% or above. And we're not quite there yet. So we've got some pretty hard looks going, like Aaron said, on SG&A. We've implemented some zero-based budgeting this year to really kind of hone in on that because the idea is to get those operating margins above 10% on an annual basis, not just for a quarterly basis, but to have that sustained 10% or better for the year. Operator: The next question comes from Jean Veliz with D.A. Davidson. Jean Paul Ramirez: Just looking at precast, can you talk about your ability to push pricing right now as some of the cost inputs begin to ease? And a second part of the question -- go ahead. Scott Montross: No. Let me answer the first one because, Jean, I won't remember the second part by the time I get to the end of the first. Yes, we've been successful in pushing pricing increases at both sides of the precast business recently at the Park side, and that's really driven by, I think, the improvement that we're seeing in the nonresidential side of the business. We're seeing that in our revenue at Park. We're also seeing it in the volumes that we're getting. And it's really supported by what we're seeing in the Dodge Momentum Index. So that's moving in the right direction. And on the Geneva side, for that business still is standing strong. It had a record year last year. It's very likely heading toward another record year this year and price increases are being pushed forward in that. So we are successfully pushing them forward. And we -- as you mentioned, we are seeing the material costs, the cement, the small rock, the large rock, the aggregate piece, all those to the sand, all those kind of flattening out and stabilizing a little bit versus what we've seen over the last couple of years. So what was the second part? Sorry, I interrupted you during the first part. Jean Paul Ramirez: No problem. Thanks for giving us that color. Yes. So just given what you said, I was wondering what the -- what kind of volume posing your expectations versus pricing? Scott Montross: Say that one more time? You cut out for a second. Jean Paul Ramirez: No problem. I was just wondering about how does the volume play into the growth of both these businesses over the next 12 months. Does it make sense? Scott Montross: Yes. I think you'll see a growing volume in the Park side of the business. And that's simply is related to the nonresidential piece. I also think you'll see a volume in the Geneva business that is continuing to inch its way up, and we're starting to do a little bit more nonresidential work at the Geneva plant site. So that will improve the volume next few quarters. And really, I think that by the time we start getting into mid-next year beyond that the Geneva facility is probably going to be on close to $100 million annualized rate, and Park will be a little bit behind that. But running toward that probably maybe more toward the first quarter of 2027. But the -- both of those businesses are expected to improve throughout '26 based on the numbers that we're looking at preliminarily in the plan. Jean Paul Ramirez: Between volume and pricing, what has been a better driver over the next 12 months? Scott Montross: I think probably the volume and the absorption, the higher levels of absorption and the volume will be a little bit more of an impact on what the pricing is. Jean Paul Ramirez: And just one last one for me in the water transmission. Can you just talk about a little bit of more going into next year about your backlog, specifically, just trying to understand more about the sustainability? Or how should we think about what the high watermark is starting in Q1 and through the next year? Scott Montross: For backlog specifically? Jean Paul Ramirez: Yes. And then just probably add a little bit about the revenue cadence as well. Scott Montross: Yes. And I think the backlog is based on the amount of bidding that we have going on in the fourth quarter, we have the expectation that there'll be some wins in that bidding for us and that our backlog is going to continue to inch up through year-end. That's what we anticipate at this point. So we're going to end up pretty strong with backlog going into the first quarter of 2026. As far as revenue for the Water Transmission Systems business, you -- when you look at revenue numbers, for that business, good revenue numbers are somewhere between $80 million and $90 million. At the beginning of the year, generally, you're ending up with revenue numbers because you're coming through some quarters in the first quarter, that's also affected by weather. You're probably something closer in the low 80s in the first quarter. As you climb up to the second and third quarters like we've seen over the last couple of years, you end up something within -- that's more like $85 million up to close to $90 million. And then in the fourth quarter, you're getting down to something that's probably more like mid-80s to low 80s. That's how you can think the revenue on a normalized basis with the water transmission business as it sits right now. But I will say, I think that there's potential now and again, to get a quarter. And when you look at the quarters over the last couple of years, last third quarter, I believe, was the record at that point before the second quarter of this year, which is what I think became the record quarter for us and obviously driven by both water transmission and precast until the first quarter of -- or the third quarter of this year, which became the record. So the second and the third quarters are generally the big ones for both sides of the business, Jean. Operator: We have a follow-up from Julio Romero with Sidoti. Julio Romero: Thanks for taking a couple of follow-ups here. My first one is just on the state of Texas has Proposition 4 on the ballot next week and that dedicates I think, $20 billion towards water infrastructure over the next 20 years with dedicated state taxes. Would your company -- would NWPX benefit from that? And if so, which parts of the portfolio would benefit? Scott Montross: It's definitely on -- for water infrastructure, it's the water transmission systems side, right? The state of Texas, what I would say about the state of Texas is they're not waiting on IIJA funding, okay? They create their own funding. They had the Texas SWIFT program going 10 or 12 years ago, which is the State Water Implementation Fund for Texas. And now they're driving this Proposition 4 forward. So that will certainly have some funding for projects that are water transmission systems projects going forward. In fact, I think the legislation in Texas, even before the vote on this because this has to be voted on here in November, by the citizens. I think the legislation has about $2.5 billion already teed up to go into the Texas Water Development funding to start funding some of these projects. So we will benefit on the water transmission side from these funding mechanisms in Texas, just like we have over the last probably 15 or 20 years, from the SWIFT program for -- you have Lake Texoma, you had IPL and all these different projects. And quite frankly, which is why the state of Texas is always one of the biggest markets for water transmission systems. So it's going to be a good thing. Julio Romero: Very helpful there. And then earlier, you touched on the cash flow benefit from water transmission systems in the quarter. Can you maybe just talk about the sustainability of those cash flow dynamics going into '26 and beyond? Scott Montross: Yes, I think that it's kind of a new way of approaching the business our -- the guys on the water transmission. I mean everybody on the precast side and the water transmission side has done a great job getting cash in. And obviously, the water transmission systems business years ago tied up a lot of cash in current assets, right? Well, what we've done is we put a focus by putting part of the senior level variable compensation based on cash flow, there's a big focus on that and getting progress payments for projects that we're doing, getting paid for steel upfront and things of that nature. So we think the sustainability of that is great as we go forward in the future. We would like to have a target always that our cash flow is similar to what our EPS is, which I think is a good level to have that at. And we're always going to be doing that because really the water transmission systems business has kind of turned into a cash flow machine at this point, and it's really helping drive the growth platform for the company. So that's what's doing it. Material on hand or material on hand payments, prepayments, progress payments, all those things are now happening on the water transmission systems business, something that didn't happen 5 years ago. Aaron Wilkins: Julio, I would say that for your benefit, the water transmission site, cash cycle was something that we had seen kind of usually getting pretty elevated during our busy quarters, see something like Q2, Q3 of those quarters, we'd see a spike because we were basically working the job as opposed to thinking and being very thoughtful of the related working capital management. I would say over the last four quarters, we've been excellent now. We have not seen a spike at all. In fact, our -- we've seen exactly the opposite. We started basically the middle of last year, and what we thought was a very good level of working capital days for the WTS segment, just below 190. And since then, we've seen it decrease down to about 165 days. So on your sustainability part, I mean, I think it's something that is a mindset that Scott has mentioned earlier that has really changed something that he's really pushed through the business and something we talk about which I think it's very sustainable. And I'm actually excited to say that because if he asked me two or three years ago, it was probably more than quite a bane on my existence to be honest with you. Operator: At this time, I would like to turn the call back over to Mr. Scott Montross for closing comments. Scott Montross: Yes. Again, I'd like to thank everybody for joining us today, and we're pretty pleased with the operational execution that we've had in what we consider to be a fairly dynamic environment in 2025. I think really affirms the strategic choices we've made over the last several years and starts to highlight the strength and the resilience of our evolving business model. And I think we just talked about a little bit with Julio. The execution continues to drive growth and free cash flow, particularly in the water transmission systems business, which for many years, tied up a bunch of cash. And like I just said, it's the water transmission systems business has really become a cash flow generating machine. As we look ahead, as we talked about, the bidding activity for water transmission is really strong for the rest of 2026. We think we're going to have very strong backlog momentum building and positioning for positioning to us to go into 2026, very strong. In the precast business, nonresidential side is continuing to gain traction and the Geneva on the residential side remains strong. In closing, we're still committed to, number one, workforce safety. That's the #1 thing that we do. Margin expansion and executing our strategic growth initiatives to create long-term value for our shareholders. I'd just like to thank everybody again for your time and continued support, and we look forward to speaking with you again on the fourth quarter call in the February time frame. So thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator: Hello, and welcome to the AMETEK Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President of Investor Relations and Treasurer, Kevin Coleman. Kevin Coleman: Thank you, Andrew. Good morning, and welcome to AMETEK's Third Quarter 2025 Earnings Conference Call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Dalip Puri, Executive Vice President and Chief Financial Officer. During the course of today's call, we will be making forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to historical results will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization and excluding acquisition-related costs. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We'll begin today's call with prepared remarks, and then we'll open it up for questions. I'll now turn the meeting over to Dave. David Zapico: Thank you, Kevin, and good morning, everyone. AMETEK delivered outstanding results in the third quarter with double-digit growth in sales, orders, operating profit and diluted earnings per share. Organic sales growth was strong in the quarter, leading to outstanding margin expansion and earnings well ahead of our expectations. Given these excellent results and our outlook for the remainder of the year, we are increasing our full year earnings guidance. Now let me turn to our third quarter financial results. Sales were a record $1.89 billion, an increase of 11% from the third quarter of 2024. Organic sales were up 4%, acquisitions added 6 points and foreign currency translation was a 1-point benefit. Orders were also very strong in the quarter with overall orders up 13% to a record $1.97 billion and organic orders up 7%, leading to a record backlog of $3.54 billion. Our operational performance in the quarter was excellent with strong margin expansion and double-digit earnings growth. Operating income in the quarter was a record $496 million, an 11% increase over the third quarter of 2024. Excluding the impact of recent acquisitions, margins were 27%, up 90 basis points versus the prior year. EBITDA in the quarter was a record $592 million, up 11% versus the prior year, with EBITDA margins an outstanding 31.3%. This operating performance led to record earnings of $1.89 per diluted share, up 14% versus the third quarter of 2024. Now let me provide some additional details at the group level. First, the Electronic Instruments Group. EIG delivered outstanding operating performance in the third quarter with strong margin expansion and operating margin levels that reflect the differentiated nature of our products and solutions. EIG sales were a record $1.25 billion, up 10% from last year's third quarter. Organic sales were flat. Acquisitions added 9 points and foreign currency was a 1-point tailwind. EIG operating income was $360 million, up 6% versus the prior year. Operating margins, excluding the impact of recent acquisitions, were 30.4%, up 50 basis points versus the prior year. The Electromechanical Group had an excellent quarter, delivering outstanding sales growth, record operating income and sizable margin expansion. EMG's third quarter sales were a record $646 million, up 13% versus the prior year. Organic sales were up 12% and foreign currency was a 1-point tailwind. Growth was broad-based across all EMG businesses in the quarter. EMG's operating income in the third quarter was a record $164 million, up 25% compared to the prior year. EMG's operating margins were up sharply to 25.4%, a 250 basis point increase from the third quarter of 2024. Our results in the third quarter and thus far this year are a powerful demonstration of the AMETEK growth model in action. Our distributed operating structure and embedded operational excellence culture has allowed our businesses to quickly react to changing market dynamics and deliver excellent results. While there is still macroeconomic uncertainty, given the ongoing trade conflicts, AMETEK is well positioned. We are seeing positive inflection in our Automation & Engineered Solutions markets, along with continued strength across our Aerospace & Defense businesses. Additionally, we are managing a growing pipeline of opportunities within our Power businesses and are benefiting from the strong secular trends driving that market. We are also seeing some improved visibility across our Process markets. Although as noted, we are closely monitoring the trade dynamics and impact on demand timing. Our recent acquisitions, FARO, Virtek, Kern and Paragon are integrating very well into AMETEK and delivering strong results. As Dalip will cover, we have significant balance sheet flexibility, providing us with ample firepower to deploy on strategic acquisitions. Lastly, our operating model continues to shine with our colleagues doing an outstanding job leveraging our global infrastructure and operating systems to drive outstanding performance. Thank you to all colleagues for your tremendous efforts. Now switching to capital deployment. As noted, our integration efforts with recent acquisitions are progressing very well. Strategic acquisitions continue to be a core element of our growth strategy and the primary focus for our capital deployment. We are managing a strong pipeline of attractive acquisition candidates and expect to be active in pursuing strategic opportunities going forward. Complementing our proven acquisition strategy is a consistent commitment to investing in our businesses to best position them for long-term success. For 2025, we now expect to deploy an incremental $90 million toward organic growth initiatives with this investment focused primarily on research and development, sales and digital marketing initiatives. The tangible results of this focus are clear with our third quarter Vitality Index, a strong 26%. The benefits of these investments coming to fruition can be seen in the many new product innovations across the company. I wanted to highlight a few of these new product innovations, the first one from our Virtek Vision business. Virtek Vision is a leading provider of 3D laser projection and quality control inspection systems for critical aerospace and industrial applications. Virtek recently introduced a new AI-powered camera and software monitoring system that complements its advanced 3D laser projection system, further advancing their intelligent real-time inspection capabilities. The IRIS AI Inspection camera addresses customers' critical need for improved quality control and real-time documentation in complex manufacturing workflows. The AI-powered camera captures and documents every step of the build process, creating a complete digital record for each part. A notable feature of this new solution is the ability for users to create custom AI inspection models that can automatically detect anomalies, allowing for real-time process corrections. With this new product launch, Virtek makes powerful digital manufacturing tools intuitive and operator-friendly, helping customers improve quality and productivity. Our NSI-MI Technologies business, the global defense tech leader in advanced RF and microwave test and measurement solutions is also doing an outstanding job developing highly differentiated custom solutions for their customers' critical applications. NSI is aligned with strong secular growth themes tied to advancements in satellite systems, autonomous vehicles and defense systems and as a result, are seeing excellent demand for their advanced measurement solutions. NSI's recently introduced new product, the Vector Digital Receiver advances their antenna, radome and electromagnetic field measurement capabilities, directly supporting the development of next-generation communication systems and advanced sensors for air, land, space and sea applications. I also wanted to congratulate our Rauland business on an impressive recent industry recognition. Rauland is a global leader in advanced clinical communications and workflow solutions for hospitals and health care systems worldwide. For the second consecutive year, Rauland has won the prestigious MedTech Breakthrough Award for Best Clinical Administration hardware device. This award recognizes Rauland's Responder platform for its critical role in addressing key challenges in modern health care, such as nursing shortages and clinician workload stress. The new Responder Enterprise Converge simplifies and coordinates care by improving direct staff to staff and patient-to-staff communication, which leads to faster response times, enhanced patient safety and better staff efficiency. This recognition underscores Rauland's technology leadership and its commitment to developing solutions that empower health care professionals and improve patient outcomes. This is a fantastic example of how our businesses are translating their technological innovation efforts into market-leading award-winning solutions for our customers. Finally, an update on the global trade environment. The situation continues to be very fluid and ever changing. We remain vigilant in monitoring developments and proactively managing potential impacts. As we have discussed, our businesses continue to execute their well-defined mitigation plans, which include targeted pricing, strategic supply chain modifications and utilizing our global manufacturing footprint to adapt to changing demand patterns. Our teams also continue to leverage our U.S. manufacturing presence to support global customers adapting their own supply chains. AMETEK's culture and decentralized operating structure remain key advantages, providing flexibility to implement these actions quickly and effectively. Our proven playbook for navigating these uncertain environments continues to serve us well, and our teams are executing effectively. Now turning to our outlook for the remainder of the year. We continue to expect full year sales to be up mid-single digits on a percentage basis compared to 2024. Given our strong third quarter performance and outlook for the fourth quarter, we are increasing our earnings guidance for the year. Diluted earnings per share for the year are now expected to be in the range of $7.32 to $7.37, up 7% to 8% versus the prior year. This is an increase from our previous guidance range of $7.06 to $7.20 per diluted share. For the fourth quarter, we anticipate overall sales to be up approximately 10% with earnings in the range of $1.90 to $1.95 per share, up 2% to 4% versus the prior year. Fourth quarter earnings growth would be 6% to 9% adjusting for last year's lower-than-normal tax rate. To summarize, AMETEK delivered an excellent third quarter with strong sales and orders growth, robust margin expansion and earnings well ahead of our expectations. Our businesses continue to execute exceptionally well, delivering our differentiated technology solutions across a diverse set of niche markets. The durability of our operating model and our strong cash flow provide us with the flexibility to navigate through challenging market conditions and continue to proactively invest in our businesses and in strategic acquisitions. As a result, we remain firmly positioned to deliver long-term sustainable growth and create value for our shareholders. I will now turn it over to Dalip Puri who will cover some of the financial details of the quarter, then we'll be glad to take your questions. Dalip? Dalip Puri: Thank you, Dave, and good morning, everyone. As Dave noted, AMETEK had an excellent third quarter with strong growth and outstanding operating performance. This allowed us to deliver several financial records as well as double-digit growth in orders, sales, operating income and earnings per share in the quarter. Now let me provide some additional financial highlights for the third quarter. Third quarter general and administrative expenses were $28 million or 1.5% of sales, essentially in line with last year's third quarter. Third quarter interest expense was $23 million. Third quarter other expense was $17.9 million, with the increase versus last year's third quarter primarily due to onetime acquisition-related costs for FARO Technologies. As I noted during our previous earnings conference call, we are excluding onetime acquisition-related costs from adjusted earnings. This approach will be consistently applied to future acquisitions, ensuring comparability and clarity in our non-GAAP financial reporting. The effective tax rate in the quarter was 17.2%, down from 18.8% in the third quarter of 2024. The reduction was driven by a lower effective international tax rate. For 2025, we now anticipate our effective tax rate to be between 18% and 18.5%. As we have stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively from this full year estimated rate. Capital expenditures in the third quarter were $21 million. We expect capital expenditures to be approximately $150 million for the full year or about 2% of sales. Depreciation and amortization expense in the quarter was $103 million. For the full year, we expect depreciation and amortization to be approximately $425 million, including after-tax acquisition-related intangible amortization of approximately $210 million or $0.91 per diluted share. Operating working capital in the third quarter was 18.9% of sales, a slight improvement from the third quarter of 2024. Operating cash flow was $441 million in the quarter, and free cash flow was $420 million. Free cash flow conversion was a strong 113% in the quarter. For 2025, we expect free cash flow conversion of approximately 110% to 115% of net income. Total debt at September 30 was $2.5 billion, up from $2.1 billion at the end of 2024 due to the acquisition of FARO Technologies. Offsetting this debt was cash and cash equivalents of $439 million. At the end of the third quarter, our gross debt-to-EBITDA ratio was 1x, and our net debt-to-EBITDA ratio was 0.9x. We continue to have significant financial capacity and flexibility with over $2 billion in cash and available credit to support our growth initiatives and our capital deployment strategies. In the third quarter, we demonstrated this financial flexibility by deploying approximately $920 million on the acquisition of FARO, $150 million on share repurchases and $71 million in dividends, all while maintaining our financial capacity and a conservative balance sheet with gross leverage around 1x. The share repurchases in the quarter resulted in approximately 800,000 shares of our common stock being repurchased in the open market. In summary, AMETEK delivered an excellent third quarter with strong top line growth, robust margin expansion, outstanding earnings growth and a meaningful increase to full year earnings guidance. Our differentiated technology portfolio, our global manufacturing capabilities, along with our strong cash flow and balance sheet provides us with the foundation to successfully execute our growth strategy and to continue delivering exceptional results. Kevin? Kevin Coleman: Thank you, Dalip. Andrew, could you please open the lines for questions? Operator: [Operator Instructions] And our first question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: That was really good earnings quality, cash flow and margins. So congrats to the team. Maybe we can start with the tour of your key platforms and regions and what stands out in particular. It looks like Paragon really had a strong quarter as well. David Zapico: Yes, Paragon did have another strong quarter. I'll take us the whole way around the horn, and I'll start with our Process market segment. Overall sales were up low teens in Process, driven by contributions from recent acquisitions with organic sales down just slightly in the quarter. We remain encouraged by the strong pipeline of activity across our process end markets. Although trade uncertainty continued to lead to slower decision-making and delays, as I talked about in my prepared remarks, there's very strong project activity and visibility is improving across some of our key markets. For the full year, we expect overall sales for our Process segment to be up mid- to high single digits and continue to expect organic sales to be flat to down low single. I'll go to A&D. Now Aerospace & Defense businesses. They just delivered another excellent quarter with overall organic sales increasing low double digits on a percentage basis. Growth remains strong and balanced across commercial OEM, aftermarket and defense markets, and our businesses continue to win content on new programs and expand content on a wide range of platforms. We continue to expect sales for our A&D businesses to be up high single digits for the year. Power & Industrial businesses delivered strong results in the third quarter with both overall and organic sales up mid-single digits. We have increased our outlook now and expect full year organic sales to be up low to mid-single digits for our Power & Industrial businesses. So we took that from -- we increased it a click to low to mid-single digits for Power. We're benefiting from demand across our grid modernization and electrification applications, including in support of the power build-out needed for AI data centers. And I'll talk about one product there. Our IntelliPower business is a business that provides uninterruptible power systems for data center microgrids and the rugged UPS systems, which are proven in defense and other critical -- mission-critical applications are perfectly suited for the harsh conditions and high reliability requirements of data center microgrids. So similar, other AMETEK businesses are identifying attractive opportunities to expand their current technologies into this market, and we had some initial successes with both the IntelliPower, and we talked about last time, the RTDS simulation systems. And then finally, I'll talk about the Automation & Engineered Solutions business. Another excellent quarter with high single-digit organic sales growth, robust orders growth. Growth was broad-based across our Automation & Engineered Solutions businesses in the quarter. But again, notable strength from Paragon Medical on orders input was outstanding. And we are maintaining our full year forecast for mid-single-digit organic growth in the quarter. And then you asked about the geographies also, Deane. So I'll do that also. Yes, we had -- sales were up mid-single digits in the U.S. And internationally, total international, we're up low single digits with strength in Europe partially offset from Asia -- to help them in Asia. So -- and in the U.S., we have some broad-based strength. We were really solid there. Europe was up low double digits, and it was our automation, our EMIP business and our MAD business that did really well there. And in Asia, it was kind of a tale of 2 stories. We were down mid-single digits driven by China. But if you take China out of it, Asia, excluding China, was up mid- to high single digits. So a changing dynamic there. And with China, we had more of the export issues and things we're dealing with. So we're feeling good about the momentum in a lot of regions of the world, and China was an exception to that. Deane Dray: That's a great update. Just last one, and it's related to the last point, Dave. Any comments about tariffs, the offset? And is that what's driving the softness in China as well? David Zapico: Yes. I'd say what's driving is the tariff renegotiation of price. So the tariffs need to be renegotiated. They need to be included in the pricing and our Chinese customers are going back to the government entities and getting higher prices to pay for our products, and that's causing a delay. And there's a lot of -- I can call it the tariff games in ship where they're trying to time the situation to get a lower price, lower tariff, but we're competitively very strong there. We're not -- our products that we sell are benefiting from -- there aren't viable competitors for most of the things we build. We make high margins when we sell there. So we're kind of -- we have good customers. We have a good team over there, and it's just going to be delayed, but we're solid on the long term. Operator: And our next question comes from the line of Matt Summerville with D.A. Davidson. Matt Summerville: I was wondering if you could maybe double-click a little bit on Paragon. Obviously, that business had been a little bit of a source of concern for some coming out of the gate with the whole medical destocking. So can you give a little bit more granularity on the type of organic sales performance and order growth you saw and kind of remind us how we should think about the go-forward organic algorithm for that business as well as maybe how it's trending from a profitability standpoint relative to what your view would have been when you bought it? David Zapico: Excellent question, Matt. I mean just to remind everybody, Paragon, single-use and consumable surgical instruments and implantable components and attractive medtech markets with good long-term growth rates, very good long-term growth rates. So these are mid- to high single-digit long-term growth rates, growing markets, excellent engineering capability, numerous new product wins, which provide upside for years to come. And they just had another excellent quarter. I mean the EMG orders led the company, and they were substantially up and Paragon led EMG. So it was another quarter of just outstanding double-digit plus-plus orders. And we're in a situation now where we're probably about a little more than halfway done with the restructuring that we're doing. So that's happening, and there's some plant closures involved with that, and I don't want to get into a lot of details, but the cost structure is being reduced. And at the same time, all of that's happening. We're winning new programs and phasing them in, and we were out there about a month ago to see everything, and it's really going great. The margins are now in line with AMETEK's margins, and we think there's more upside. So we think this business is going to be a 35-plus EBITDA business. And when we're done working on it, which will take another year. But I couldn't be more pleased with what's going on with the deal. It outstanding work by the entire Paragon team. I hope some of you can get out there sometime because they're quite an impressive manufacturing facility that we visited last month, and we're very bullish, very bullish on what's happening at Paragon. Matt Summerville: And then maybe just as a follow-up, you expressed, I think, a couple of times in your prepared remarks, a little more optimism with respect to process. Can you just peel back an additional layer and give a little bit more granularity on sort of end markets and whether or not you feel like there's a flush for lack of a better word, that's going to happen here as it relates to maybe some pent-up demand? David Zapico: Yes. It's a very interesting dynamic and it's perceptive for you to pick up on that, Matt. I mean we looked at Process and Process improved just about everywhere sequentially on all the markets and all the geographies except China. So China was the one area that it didn't improve, and we got the tariff repricing negotiation going on. But everywhere else, it's on the right trend. So we're getting more visibility there. And I think that as that business comes back sometime in next year, we're really -- we have a business that's leveraged to succeed because the cost structure is really well controlled. The new product innovation is there. So on the upside, Process is going to have an excellent 2026, I think so. Operator: And our next question comes from the line of Andrew Obin with Bank of America. Andrew Obin: I think I was missing 3 slides on nuclear. Sorry for the joke. Can you just talk -- fantastic quarter. Can you just talk about strength in Europe? Can you just talk about the verticals and geographies? It was a nice surprise to hear that. David Zapico: Yes. Our teams in Europe, it's pretty positive what's happening there. And we saw a couple of different places. I mean we saw an improvement at our Dunkermotoren business. So our Automation segment did extremely well. The Paragon elements of Europe did extremely well. Our Materials Analysis division that was selling analytical instruments to the research market did extremely well, and our Aerospace business was solid. So it just was -- it wasn't 1 or 2 things. It just always positive in Europe, and it led us in growth. It was up low double digits. So we're very happy to see that strength. Andrew Obin: That's terrific. And maybe could you talk about order numbers was another positive surprise in the quarter. Can you just talk about the progression of the order patterns throughout the quarter? And frankly, what happened in October? Did you sustain the momentum into the year-end? David Zapico: Right. Well, October is not over yet, but I'll give you the month-to-date. And -- but overall, it's a pretty simple story. September was the strongest month of the quarter and year. So strongest month of the quarter and year-to-date on both sales and orders. So we had a really good September indicative of momentum, as you suggested. And October isn't over, but it's very solid. I checked it before the meeting, and it's very solid. So it's -- we don't see a slowdown on the order side. Operator: And our next question comes from the line of Chris Snyder with Morgan Stanley. Christopher Snyder: I wanted to ask about the Q4 top line guide, up 10% but Q3 was up 11%. And I thought that we were going to see maybe more M&A contribution in Q4, which would then imply like an organic step back versus an easier comp. So I guess, am I just helping unpacking of the organic and the M&A and even, I guess, maybe the FX as we kind of build into that 10% number for Q4? David Zapico: Yes. I think that it's approximately 10% and we could do a little better, we can do a little worse, but we're certainly feeling confident. So I think the acquisitions are in there at a mid- to high single-digit number, and it gets to about 10%. But with some of the trade dynamics, we get a range on the earnings, but I think it's -- we feel very, very confident in Q4. Christopher Snyder: I appreciate that. And then -- sorry... Dalip Puri: I was just going to say that on the foreign exchange side, we're obviously a very global business, but we're primarily dollar-centric. So as a result, we're not expecting any foreign exchange impact on the top line in Q4 or on the bottom line. And as you've seen in the past quarters, we're very insulated from FX volatility. So that shouldn't be a factor. Christopher Snyder: Got it. I appreciate that. I wanted to ask about the Industrial & Power business, which showed better organic growth in Q3 and you guys raised the guide. Is this all data center power tied? Or are you seeing positive rate of change on more of the industrial kind of typically focused businesses? David Zapico: Yes, I'd say it's more the Power side. It's more the Power side. And the areas that we talked a little bit about, we're seeing backup power systems and microgrids and their solar racks and -- we also sell to the nuclear industry, and they're putting power systems in. So it's that backup power system business in the U.S. that's doing quite well. And the business that I highlighted last quarter, RTDS, they do the real-time simulations for resilient, high-performance power additions to the grid. So they're the company you go to when you want to expand your power, and they're working with the hyperscalers to define the new power additions that they have to put in to power the data center. So those are the 2 areas that we have most traction. The Industrial side of the business is solid. It's not a drag, but the upside is on the Power side. And keep in mind, Chris, we do have a decent sized part of that Power business that sells the traditional transmission and distribution infrastructure. So as the U.S. has to build out the T&D and you get some of the local microgrids, we're in a pretty good position to benefit from that. Operator: [Operator Instructions] Our next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Maybe I'd start with the FARO business. And if you could help us understand kind of the progress there in terms of organic trends. I understand it's still in the sort of acquisition calculus, but maybe help us understand any movement there around sort of organic orders and sales and how you feel about that sort of trending into next year, please? David Zapico: Yes. Well, -- as you know, FARO wouldn't show up in our organic because we don't show up in organic until we've owned it for a year. So -- but FARO, they hit their number, and they hit their number on the top line and the bottom line and had a really good quarter. So that integration is doing well. We have a very good team at FARO. Just to remind you, FARO designs and develops 3D metrology and digital reality solutions. We're #1 or #2 in a bunch of niches in that market. And it's an excellent strategic fit with AMETEK and our Creaform business. So those teams are really getting after it, and they're working on some new products and working on some new channels, and I'm very optimistic about what they're going to be able to do. So it's all arrows are up right now in terms of the acquisition integration. I spent some time with the team. Dalip and I spent some time with the team just within the last couple of weeks. And it's -- we're very pleased with it. They won't show up in organic, but they did meet sales and they did meet their profit commitment for the quarter. Julian Mitchell: And then just my second question would be around, I guess, 2 parts. One is on the Process Industries side. I think it's still sluggish right now, but you sounded more optimistic on next year. So I just wondered if there's something you've seen turning in the orders in the Process Industries side. And secondly, in the U.S., good growth. I wondered if any government shutdown effects weighing in recent months. David Zapico: I'll take the government shutdown first. I mean, so far, to be honest, it hasn't been much of an issue for us. Obviously, if it continues for [indiscernible] or something, it might become a bigger issue. But it's really a nonevent at this point. You talked about Process orders. Yes, they're definitely trending up. Process orders are trending up in all areas and the one distinction was the China part of the business. And China is heavily part of it is research, too. So there's an academia research element to it and the China business. But in other areas, it's all trending up. And we have told you before, we have a good pipeline of new orders, and we'll make money when power and when the organic growth comes back because that business is powerful. You haven't followed us for a long time, but Process business is a powerful business. And so I don't know when it's going to turn up, but when it does, we've run it in the right way, and we keep investing in new products, and we've got the capability what our customers need, and it's going to eventually turn and be positive on the contribution margin basis for sure. Operator: And our next question comes from the line of Rob Wertheimer with Melius Research. Robert Wertheimer: You've touched on some of the dynamics here, but it's still a little bit interesting, the broad-based, I think you said growth across EMG versus EIG on core growth. And I wondered if you might simplify for us whether that's geographic, end market, selling cycle. Maybe just your thoughts on that gap, which is wider than some [indiscernible]. David Zapico: Yes. I think the biggest thing to understand, Rob, is you got to go back to the pandemic. And you had a supply chain crisis, and we have specialized products there and they're OEM products. They're not directly sold to the end user like they are in EIG. So it's mainly an EMG issue with specialized products. So everybody wanted to go out and get a bunch of products that put them on the shelf because they needed to supply their customers. So we had a period of 18%, 20% quarters in terms of orders. And now that -- then we went through a period of destock where people had some excess inventory and now the destocks in. So what you're seeing is that whole destock end is flowing through the EMG business, and it's showing up in places like Paragon. It's showing up in our EMIP businesses. It's showing up in our automation businesses. And also in that EMG group, we have our aerospace, part of our aerospace business there, and that business is going well. So all those businesses are kind of hitting on all cylinders, and that's why everything is up so high. So the one thing that's different, we didn't really have a destock in EIG. We had in EMG. Now we're working through that. Robert Wertheimer: That was perfect. And then I just wanted a little mini teach-in on uninvitable power supply where you mentioned some of the crossover in data centers. I don't know how much business you had in data centers before and whether this is a fully nimble shift to capitalize or some of that, but a little bit less. I'll stop there. David Zapico: Yes. I mean we have, I'll call it, hundreds of millions of dollars in uninterruptible UPS systems. And they're sold to places like nuclear power plants or offshore oil and gas wells or the most difficult applications that you can go into where you cannot fail. And that business has been a good business for us for a long period of time. We have one product that's used on -- usually -- it's basically used on every part of the naval fleet, very industrialized rack mount product. And what we did is we took that product and I don't want to say dummy it down, but we made it work for the data center market. So it's -- they want mission-critical. They want those kind of applications. So we're finding some applications where data centers want to buy the best. They want to find the most -- they need a product that's more durable. And I think on that product, we have a backlog of -- it's not a tremendous amount. It's north of $25 million and a pipeline of another $30 million, something like that. So that's for that product. And we have another product in the RTDS space for the simulation systems. So we have some places that we're going to be able to play now where they're willing to pay for our technology. And our teams have got -- done a good job of identifying attractive opportunities to expand in current technologies while staying true to the AMETEK differentiated technology, because we think in the long run, we don't want to sell things that are -- end up being low margin where you have perfect competition and no one makes money. So it's a low base we have now, but very high growth in that segment. Operator: And our next question comes from the line of Andrew Buscaglia with BNP. Andrew Buscaglia: So some of your positive commentary is very interesting. Some companies are still talking about just like kind of customer hesitation to spend and ongoing delays, especially in Automation. So maybe like what are your conversations with customers like that seem to be a little bit different or where you're seeing a little more confidence? Yes, but just could you talk a little bit more about that and elaborate? David Zapico: Yes. I mean the automation market has been historically a great market for AMETEK, and we pick and choose our customers. These are people that pay for our performance. And there was a slowdown in the market driven by the pandemic effect and the supply chain crisis and the buying. We kind of talked about this for several quarters when we predicted it. So we kind of called bottom last quarter, talked about it a couple of quarters. So it's kind of expected for us. So I really can't comment on what's going on in other areas. I'm not sure I'd have to look at that stuff. And -- but what I know is it kind of played out as we thought it would, and we're on record talking about it, too. So it's pretty much what we thought it was going to happen. Andrew Buscaglia: I guess that's more like your customers are probably comfortable with getting more comfortable with the tariff situation and at least have some -- we have some more clarity relative to 6 months ago maybe. David Zapico: I think that's true, Andrew. I think that's true. Andrew Buscaglia: Okay. Yes. Interesting. I don't know if you said or you mentioned your price versus cost or how that shook out this quarter? David Zapico: Yes. Pricing offset inflation and tariffs. So we're very happy with that. So our price offset total inflation and tariffs, and we had a positive spread on top of that. So we have a highly differentiated nature of the AMETEK product portfolio. We have leadership in these niche markets around the globe. And as we talked about today, these are mission-critical products. That's the nature of our products, and we invest a lot in R&D, and we're doing a good job of servicing our customers and at the same time, offsetting some of the negative events of -- from inflation and tariffs and with a positive spread. Operator: Our next question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: I wanted to just dig into the Automation. I think you called out high single-digit organic growth there, David. Obviously, the comps there are quite easy, but it's still quite strong growth. So I'm actually wondering, could you maybe just parse out what you're seeing? I mean, I think a lot of that's in Europe, inventory adjustments versus end market demand? Any end market color, customer demand would be really helpful. David Zapico: Yes. We talked about several quarters how the European market was lagging. We talked about how we had an incredibly strong position with German machine builders. We talked about the situation. It was just a matter of time. And I think it's just changing. I mean the one thing that would be different for us is we've talked about before, when a lot of people talk about automation, you have to make a distinction between discrete automation and process automation, okay? So you're doing factory automation, I'll call it. We play in the factory automation, but that's not our largest market. We're really in discrete automation where you have to move things very quickly and very precisely. So all the precision machines that are doing things in the different end markets, they have to be very precise. That's our sweet spot. And there's a certain set of customers there that we deal with. It's the medical customers. It's very precise research equipment. It's very -- it's like the S&P 500 in terms of the end markets, but it's the most precise equipment, and it's mainly discrete automation. So we may be seeing -- the factory automation may still be slower and discrete automation as a subset or as a distinct niche for us is strong. And we have kind of the best products there. And those customers are coming back, and we had a great performance this month, and we were coming off the bottom there with some of the destock. So I take your point that it's an easy comp, but it is what it is. Nigel Coe: Yes, yes. I think I was trying to dig into is -- sorry, how much is just destock comps, easy comps versus a real inflection in customer demand. I'm not sure if you've actually got the sell-through data there. But my second question is really around the EMG margins. Obviously, really great momentum there, 25%. It's pretty close to where EMG margins have peaked in the past. But with Paragon, where do you think that sort of margin objective or target might be for EMG going forward? David Zapico: I think Paragon gives us the opportunity to increase it further. And when we sit down and we talk about that business, we'll set a target for next year. But certainly, I would expect we have the capability to have record margins in EMG going forward. Operator: And our next question comes from the line of Robert Jamieson with Vertical Research. Robert Jamieson: Congrats on the quarter today. Just want to get your overall view on overall short-cycle exposure. Last quarter, you talked about short cycle bottoming. Just curious how you're thinking about this as we head into next year, what you saw in the quarter and what you're seeing so far in early 4Q? David Zapico: Yes. Yes. When we talk about our business, we're more of a mid-cycle than short cycle, just maybe a little change in just to make sure we're on the same page. But yes, I think this is a result of the pandemic, the supply chain crisis, and I think that we're in an upward trend now. I think it's still early to talk about next year, but these automation, these EMG areas and MedTech, they're solid and Aero & Defense remains strong. So it feels really good on some of these businesses with solid positions, and we are winning businesses. We are winning new share for these businesses. So EMG is kind of firing on all cylinders now. So... Robert Jamieson: Great. And then I just wondered with a lot of capacity, just can we get an update on the M&A pipeline? Anything that you -- areas that you're particularly interested in? Anything like that would be helpful. David Zapico: Our pipeline remains very strong. We're actively looking at a number of high-quality deals. We have the -- Dalip talked about our capacity to fund them. It's strong. We remain disciplined looking at our returns on capital. We've done it for a long period of time, and it's -- there's no change in that. The pipeline includes a variety of deals, and there are different deal sizes, and they're in different end markets or all end markets that we're in now, though. And our teams are as active as they've ever been working on deals. And I really think that we have the opportunity to differentiate our performance with the M&A element of our growth strategy, combined with our balance sheet and cash flow positions. And it's a good time for us. When you combine our operational excellence capability and our M&A capability, I'm looking to use those 2 factors to drive performance over the next couple of years. Operator: Our next question comes from the line of Joseph Giordano with TD Cowen. Michael Anastasiou: This is Michael on for Joe. So I wanted to unpack the A&D performance. Previously, you mentioned high single-digit organic in the quarter, related content growth in that area. Is that content growth mainly related to FARO? And then can you just maybe unpack for us expectations for a normalized growth range for A&D going forward? You had several years, whether it's on the EIG side or EMG side of high single-digit growth. So just trying to understand how to map that going forward. David Zapico: Yes. First of all, FARO is not in the A&D segment. So 0 contributes to the A&D performance. The other thing is in the quarter, organically, we're up low double digits. So not -- but for the year, we're continuing to confirm high single digits. And in the quarter, the thing about me the truck, it was balanced. I mean we had -- commercial OEM was very strong. We had aftermarket was very strong. The defense markets were very strong, and we're continuing to win content on programs to expand where we're going in the future. So we're not talking about next year right now. But when I think about the Aerospace group, when I think about the Aerospace business, when I think about the Aerospace team, their backlog remains strong, and they have strong positions on key programs. So it looks optimistic. Operator: Our next question comes from the line of Scott Graham with Seaport Research. Scott Graham: Congratulations on the quarter, Dave. I wanted to maybe step back in 40,000 foot this. And I know when you came on board back 8 years ago, one of the big things that you were going to champion was an improvement in the front end and the top line focus as opposed to what has historically been more of a kind of margin lean, let's put it that way. I know you've done a lot of things internally, but it's been sort of an up and down industrial environment. So I was just hoping you indicated just now you won some business I know A&D has been a good market for you since that time. But again, Industrial, other areas have been up and down. Would you see now that winning of business starting to spread out into other end markets given the work that's been done on top line initiatives on a going-forward basis as the industrial economy improves? David Zapico: It's an interesting point. If you had a couple of years of below 50 PMIs, and I don't remember the last time that happened. I think I was at an investor conference and he told me it never happened. So -- and I think that we're extremely well positioned for growth, and it's across all of our businesses. So I'd say as the industrial economy picks up and you recover from having negative PMI for basically 2, 2.5 years. I think you'll see some improvements. The other thing I'd point you to is I've been CEO, I've been with AMETEK for 35 years. I've been with CEO for 9 years. And over those 9 years, we've averaged a 4% organic growth. So this quarter right now, when you have 4% organic growth, you have double digit on the top line, you have double-digit orders, you have double-digit earnings. That's pretty much what we've done for the last 9 or 10 years. And if you go back, it's further than that. So we're -- we have a model. It's consistent. We have a great team working on it. And I do think that we're going to participate in a greater way in terms of organic growth as the industrial economy improves. Operator: I'll now hand the call back over to Vice President of Investor Relations and Treasurer, Kevin Coleman, for any closing remarks. Kevin Coleman: Thank you again, Andrew, and thanks, everyone, for joining our call today. And as a reminder, a replay of the webcast can be accessed in the Investors section of ametek.com. Have a great day. Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.
Operator: Hello, everyone. Thank you for attending today's LKQ Corporation's Third Quarter 2025 Earnings Conference Call. My name is Ken and I will be your moderator today. [Operator Instructions] I would now like to pass the conference over to our host, Joe Boutross, Vice President of Investor Relations, to begin. Joseph Boutross: Thank you, operator. Good morning, everyone and welcome to LKQ's Third Quarter 2025 Earnings Conference Call. With us today are Justin Jude, LKQ's President and Chief Executive Officer; and Rick Galloway, our Senior Vice President and Chief Financial Officer. Please refer to the LKQ website at lkqcorp.com for our earnings release issued this morning. as well as the accompanying slide presentation for this call. Now let me quickly cover the safe harbor. Some of the statements that we make today may be considered forward-looking. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statements. For more information, please refer to the risk factors discussed in our Form 10-K and subsequent reports filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and slide presentation. Hopefully, everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today. And as normal, we're planning to file our 10-Q in the coming days. And with that, I am happy to turn the call over to our CEO, Justin Jude. Justin Jude: Thank you, Joe and good morning to everyone joining us on the call today. I am extremely proud of our performance this quarter, demonstrating both the resilience of our business and the impact of our strategic initiatives. With some positive operational performance and onetime tax benefits, we have confidence in our full year outlook to raise our midpoint and narrow the range. While I understand that most of you are interested in the financials, it's important to emphasize that our strong performance is a direct result of the relentless dedication and commitment of our teams across the globe who have enabled us to execute and succeed against our strategic pillars. Let me make some quick general comments on our markets before diving into specifics. We are seeing ongoing macro challenges, including reduced consumer spending and lower demand for vehicle repairs. As recent headlines have shown, other automotive companies are facing similar issues. However, our team has remained focused on controlling the things that we can control. In most areas of our business, we have outperformed the market and we're able to pass through costs. We are in execution mode. And as I mentioned on our last earnings call, we are focused on a multiyear transformation centered around 4 strategic priorities of simplifying our portfolio and operations, expanding our lean operating model globally with a focus on margin improvement, investing and growing organically and pursuing a disciplined capital allocation strategy. To that end, I would like to highlight certain notable achievements from this quarter. First, we completed the sale of our Self Service segment to Pacific Avenue Capital Partners for $410 million. We were very pleased to see strong interest in business. As a result of this sale, we have not only simplified our business but strengthened our balance sheet, which we believe is prudent to do in these uncertain economic times. The proceeds from the sale of Self Service have been used to reduce debt. We are prioritizing maintaining a strong balance sheet and our investment-grade rating to navigate market challenges, especially in these uncertain times. During the quarter, we had no acquisitions but to be clear, our strategic review process is active and ongoing and in coordination with the finance committee of our Board of Directors. We expect to continue our efforts to simplify our portfolio and operations as markets and opportunities avail themselves. Second, we continue to improve our lean operating model globally with a focus on margin improvement and are acting with urgency to correct inefficiencies. To that end and as we outlined earlier this year, we targeted an additional $75 million in cost savings for 2025. I'm pleased to share that we made meaningful progress since Q2 and achieved $35 million cost savings, well on track to meet the $75 million target. These gains have come primarily through our European business transformation driven from the leadership refresh in Europe earlier this year. Another important milestone under this initiative is our rollout of a common operating platform across Europe. We are on track to go live in early 2026 within a major market, which will put approximately 30% of our European revenue on a common system. Our recent migrations in smaller markets this year have given us confidence in our ability to effectively manage a larger implementation. Notably, the second migration had no operational impact, a direct result of the lessons learned from our earlier launch in the first half of the year. Having scale on a common platform will help us replace legacy systems that are at risk but more importantly, enable us to get back to profitable growth and faster integrations that will drive higher returns on invested capital. Lastly, turning to capital allocation. Our approach remains disciplined. We continue to balance share repurchases and dividend payments as part of a thoughtful return of capital program while also ensuring we maintain a strong balance sheet. Now moving on to our segments. In North America, repairable claims continued to experience downward pressure, though the rate of decline has moderated to approximately 6%. Service levels and inventory fill rates were maintained and not sacrificed during these temporary challenges, enabling results that exceeded the performance of repairable claims. Revenue decreased by 30 basis points per day, marking the smallest decline since Q1 of 2024 and outperforming repairable claims by nearly 600 basis points. Let me highlight a few other positive trends in the U.S. that we think should help improve repairable claims. At the end of Q2, a record of 46.5% of auto insurance policies were shopped in the past year and many of the top carriers filed for [ rated ] reductions boosting new business. These trends signal ongoing pricing pressure from carriers and should help insurance rates normalize. And our part offerings continue to help carriers immediately reduce costs to offset any lower premiums just as they did during the financial crisis. We are also seeing used car prices somewhat stabilized but with continuing volatility month-to-month, values haven't normalized yet. Our diversification into new products and services in North America is generating positive results. During the quarter, our Canadian hard parts business, Bumper to Bumper, posted organic growth improvement both sequentially and year-over-year in a market that is also facing a recession like economy. Additionally, our Elitek business, which provides technical repairs and calibrations, performed well with several key accounts achieving double-digit growth in the quarter. In Europe, organic revenue declined by 4.7% on a per day basis, reflecting a tough operating environment characterized by political uncertainty and weaker consumer confidence. We also decided not to retain certain less profitable revenue. And despite these market dynamics and overall volume pressure, the European team was still able to deliver double-digit EBITDA margins of 10% in the quarter, a 60 bps improvement sequentially as they drive toward a leaner operating model and Rick will dive deeper into margins shortly. The improvements from our Europe operations integration, as discussed at our September 2024 Investor Day will not happen all at once. However, our teams and new leadership are aligned with my approach focused on agile execution to create significant value for our company and shareholders. The challenges in Europe affect the entire industry but LKQ excels in such environments, as shown by our success in North America. Having integrated businesses in tough settings before, I am confident we can achieve similar results in Europe. We made additional progress in the quarter with respect to our SKU rationalization objectives. The SKU rationalization initiative in Europe is intended to decrease complexity and streamline the distribution network in all markets. More than 80% of revenue in the product brands portfolio have been reviewed, an increase from 70% in Q2. Completion of this review is required before further delisting actions can be considered to ensure a full understanding of both opportunities and risks are known. Since the end of 2024, 29,000 SKUs have been delisted. These products had minimal or no sales and remaining applications are still supported by existing SKUs. Additionally, we continue to build out our collision model in the U.K., similar to our model in North America. We have developed our U.K. collision model, particularly around crash parts and paint from a base of 0 into a GBP 200 million business. Today, the top 20 insurers in the U.K. have approved LKQ to supply new aftermarket crash parts to their respective body shop chains under our global Platinum Plus private label brand. Currently, approximately 30% of the estimates received via the collision [ estimatic ] systems are being processed and we expect this figure to grow following the introduction of the salvage model partnership with SYNETIQ. At present, 9 of the top 10 insurers have preapproved the use of recycled parts. Finally, we are very excited about the results in our Specialty segment, which delivered a 9.4% increase in organic revenue, marking the first positive organic growth in 14 quarters. This turnaround reflects the success of our targeted initiatives to sharpen focus, improve pricing and strengthen channel relationships. On our last call, I made some fairly in-depth remarks on streamlining the team across our global footprint and the talent that we now have in place. With another quarter under our belt, we are beginning to see the benefits of this transformation. A culture of execution is radiating through the organization and everyone is accountable to deliver. We've come a long way but there's still more to do. And I'm confident in the team's ability to execute, adapt and lead through cycles, supported by a clear strategy and a relentless focus on execution. Rick, I'll now turn it over to you to walk through the financial segments' results in more detail. Rick Galloway: Thank you, Justin and welcome to everyone joining us today. I want to begin by echoing Justin's remarks regarding our performance in the quarter and the significant progress we made on our multiyear transformation strategy to simplify the business by sharpening our focus on core segments. Executing on our strategic priorities has been challenging in a down market. But as you can see, we have the team that delivers on our commitments in any operating environment. Before I go into specifics on the quarter, I want to quickly explain the impact the sale of Self Service has had on our financial reporting. As mentioned in our 8-K, Self Service is reported as discontinued operations for financial reporting purposes, which means that its operating results are presented separately as a single line item above net income for current and historical periods and our balance sheet information has also been recast to separately disclose the assets and liabilities of Self Service. The net impact on our prior guidance for adjusted diluted earnings per share is approximately $0.15 per share for full year 2025. Under U.S. GAAP, allocated costs commonly known as stranded costs are not reported in discontinued operations. These costs have been recast to the Wholesale North America's segment and totaled approximately $5 million per quarter or around 30 basis points to their segment EBITDA margin for all periods presented. Additionally, because we used the net proceeds to pay down existing revolver borrowings, interest costs totaling approximately $5 million per quarter has been allocated to discontinued operations for all periods presented. To assist in understanding the impact on the historical income statement and segment results, we have included several additional schedules in the tables to the press release and earnings presentation that reflect the recast results by quarter on a comparable basis going back to the beginning of 2024. We have also restated our guidance to reflect the impact of discontinued operations. I will take you through those numbers in a bit. Now turning to Q3 results for continuing operations. As Justin said in his remarks, we are pleased with our results for the quarter. We reported total revenues of $3.5 billion, a 1.3% increase over the prior year. Diluted earnings per share were $0.69, a $0.02 decrease compared to Q3 2024. On an adjusted diluted earnings per share basis, we reported $0.84. As a reminder, this excludes the results of operations from Self Service, which are now reported as discontinued operations. Self Services's operating results contributed approximately $0.03 to discontinued operations. Prior year adjusted diluted earnings per share were $0.86 after adjusting for discontinued operations. Taxes provided a benefit of approximately $0.06 per share compared to the prior year. We updated our annual tax rate estimate and saw a reduction of approximately 50 basis points, primarily attributable to the shift in the geographic mix of income. Additionally, we benefited from several discrete items, which make up the majority of the year-over-year tax benefit. Execution on our balanced capital allocation strategy benefited earnings per share by $0.02 resulting from share repurchases and another $0.01 for interest. Foreign exchange rates added another $0.02 compared to the prior year. Free cash flow was strong during the quarter at $387 million, bringing the year-to-date free cash flow to $573 million. We returned $118 million to shareholders including $40 million to repurchase 1.2 million shares and $78 million for our quarterly dividend. We remain focused on deploying capital in a way that maximizes shareholder value while supporting growth. In Wholesale North America, we were pleased with our top line performance given the soft demand we faced throughout 2025. We are confident we are increasing our market share and we are cautiously optimistic our markets are stabilizing. However, our markets are competitive and our ability to pass along price increases at a level that maintains our margin percentage is constrained and expected to remain challenging in the near term. Wholesale North America posted a segment EBITDA margin of 14.0%, a 180 basis point decrease relative to last year. Gross margin contributed to approximately 70 basis points of the decline due to the dilutive effect of increasing prices to offset dollar-for-dollar higher input costs from tariffs and unfavorable customer mix effect as we continue to grow share with the MSOs. Overhead expenses were approximately 80 basis points higher as a percentage of revenue due to incentive compensation costs, professional fees and credit loss reserves compared to the prior year on flat revenues. In Europe, segment EBITDA margin was 10.0%, a 20 basis point decrease versus last year but a 60 basis point improvement sequentially versus Q2. Gross margin improved by approximately 40 basis points, largely resulting from the portfolio actions taken in 2024. However, the organic revenue decline put pressure on overhead expense leverage resulting in the decrease to segment EBITDA margins. Specialty's EBITDA margin of 7.3% is consistent with the prior year as higher revenue on lower margin product lines led to negative mix effect on gross margin but strong cost controls provided a positive leverage effect on overhead expenses. With organic revenue ticking up in the quarter, we are encouraged by these recent trends. Now turning to the balance sheet. We repaid approximately $262 million of debt in the quarter. As of September 30, we had total debt of $4.2 billion with a total leverage ratio of 2.5x EBITDA. On October 1, with the pretax proceeds from the sale of Self Service, we repaid an additional $390 million in debt, further improving our leverage ratio. We believe it's prudent in these uncertain times to maintain a strong balance sheet to deal with uncertainties and we remain committed to our investment-grade ratings. As of September 30, 2025, our current debt maturities were $537 million, an increase from the end of Q2 as the Canadian term loan is now due within 12 months. For our normal practice, we actively manage our capital structure and we are working through our options with our lending group regarding the Canadian term loan due in the third quarter of 2026. We have no significant concerns regarding our ability to extend the maturity date. Excluding the borrowings that were repaid on October 1 with the proceeds from the sale of Self Service, our effective interest rate was 5.1% at the end of Q3, slightly lower than Q2. Our variable rate debt of $1.5 billion at the end of September was further reduced by $390 million following the receipt of the proceeds of the sale of Self Service on October 1 that were used for debt repayment. I will conclude with our thoughts on the updated guidance for 2025. When we updated guidance last quarter, we anticipated macroeconomic factors in both North America and Europe will continue to drive an uncertain environment. Despite these ongoing headwinds, our operational performance in Q3 was slightly ahead of our expectations. We have now revised our full year outlook based on Q3 results and the sale of Self Service. Our revised outlook and assumptions are included on Slide 12. Let me start with earnings per share. Following our third quarter results and continued execution across the portfolio, we are narrowing our full year 2025 guidance to an adjusted diluted earnings per share of $3 to $3.15. This updated outlook reflects removal of Self Service, which was reclassified to discontinued operations and reflects the strength of our core business performance. Now let me walk you through midpoint to midpoint from the guidance we issued in Q2. In our prior guidance, our midpoint was $3.15. Adjusting for the sale of Self Service, the midpoint of our previous guidance would have come down by $0.15 to $3 even. With the better-than-anticipated performance in Q3, we are increasing our midpoint to $3.07, so a $0.07 increase on a like-for-like basis. We also narrowed the range, putting our updated range of $3 even to $3.15. Please note that our Q4 2024 results included a onetime net benefit of approximately $0.08 per share within our Wholesale North America segment attributable to a favorable legal settlement, partially offset by the impact from a brief cyber incident in Canada. Moving on. We expect reported organic parts and service revenue in the range of negative 200 basis points to negative 300 basis points, a narrowing of the range provided last quarter. Free cash flow is expected to be in the range of $600 million to $750 million, overcoming a roughly $75 million headwind from the sale of Self Service. In the fourth quarter, we expect to make an approximately $60 million payment for taxes on the sale of the business and an additional $15 million of lower cash flow from the loss of Self Services Q4 segment EBITDA. We are mitigating the $75 million headwind by reducing our anticipated capital spend by approximately $50 million and making up the remaining $25 million through improved trade working capital. As noted last quarter, tariffs continued to be a headwind and we expect that the year-end inventory balance will include a full inventory turn inclusive of tariffs. Thank you for your time. And with that, I will now turn the call back to Justin for his closing remarks. Justin Jude: Thank you, Rick. In summary, we delivered solid Q3 results. We beat on adjusted earnings per share, raised the midpoint of our full year guidance and narrowed the range. We generated strong free cash flow and maintained our disciplined capital allocation strategy. I said I was going to simplify the portfolio. And while it's still ongoing, we were able to divest our Self Service segment to a solid buyer for a sale price that exceeded our expectations. North America posted a strong quarter, outperforming the market despite weak repairable claims environment. Under new leadership, the Europe team continues its progress with our integration objectives and delivered double-digit EBITDA in a low demand market. And our Specialty segment posted robust revenue growth for the first time in over 3 years. And none of this would have been possible without our 46,000 team members who drive this performance on a daily basis and I want to give them a huge thank you. We are all committed to continue to improve our results, which will ultimately reward all our stakeholders now and over the long term. Operator, we are now ready to open up the call for questions. Operator: [Operator Instructions] We have our first question from Craig Kennison from RW Baird. Craig Kennison: Wanted to talk about Europe. Can you help us understand the competitive landscape in Europe? And then maybe quantify the low-margin business that you're choosing not to chase? Justin Jude: Yes, Greg -- Craig, thanks for the question. From a competition standpoint, I would say it's really no better, no worse. Most of what we're seeing over there is just the demand across Europe with some of the customer -- consumer sentiment being down, some of the political unrest in certain markets. Some countries are doing good. Some countries are not doing so well. You've probably seen the headlines where there's many suppliers and manufacturers in both the OEM and aftermarket side are downsizing. But look, LKQ, we are a premier distributor across Europe. We've got the best overall value proposition. The cars are aging. Consumers aren't buying new cars. This trend will be good for us in the long run. The market will rebound. And we're not sitting idle, right? We're accelerating our integration, as I talked about in the script and really what we've done in North America -- as we've done in North America to make ourself a leaner model over there to drive more profitable revenue growth in the future and better returns for our shareholders. On your second question on some of the revenue, if there was high service levels or customers were price shopping us and we were the third call, we walked away from some of that. It was -- I mean, it wasn't that many customers overall but -- go ahead, Craig. Craig Kennison: No, that's very helpful. It's what I wanted to follow up on. And then I know there's been significant sort of leadership change in Europe. And I imagine it takes time for traction to build for each of those leaders. I'm just wondering if you can give us an update on how you feel about the traction they're gaining. Justin Jude: Yes, it does take time. I mean they don't know our industry but the talent that we brought on, the skill set, the mindset is very strong. They see a lot of opportunities. They understand the real -- 1 LKQ Europe transformation plan that we have. They've done it before in many other situations in different industries. They're realigning their teams, in some cases, replacing team members if they need to. So they're on board and they're helping drive and pull it through versus us pushing them. So it's been very positive with the new leadership over there. Operator: We have our next question from Jash Patwa from JPMorgan. Jash Patwa: Just a quick one to start. Could you share what you're seeing lately in terms of alternative parts utilization and total loss frequencies in the third quarter? And any color on repairable claims trends quarter-to-date would be helpful as well. And I have a follow-up. Justin Jude: Yes. So if you look on the APU side, I would say, quarter-to-quarter, it's sequentially pretty flat as well as total loss. A lot of that's driven by -- we've talked about in the past, used car pricing. We're still seeing volatility month-to-month within the quarter. So that necessarily hasn't stabilized. But we saw improvements but then it dipped again in the quarter with used car pricing but then it dipped again in September. So a lot of that is not allowing what I would call total losses start to improve. But APU was flat, which is still positive for us that it isn't declining and we still see opportunity with many carriers to grow that APU number. Jash Patwa: Understood. That's super helpful. And just as a follow-up, another strong quarter with North America parts and services organic revenue growth outpacing repairable claims. Could you maybe break down how much of that 30 basis point decline was driven by ticket versus traffic? Just to help us better understand the underlying like-for-like volume trends at LKQ compared to the rest of the industry. Justin Jude: Jash, to make sure I understood, you said ticket versus volume? Or what was that comment or question? Jash Patwa: Yes, just the price versus volume. Justin Jude: Okay. Yes, price we probably had with tariffs being pushed through, that was in that circa 1, maybe 2 -- let me get the exact number here. Rick Galloway: We have roughly $35 million of pricing coming up just related to tariffs. Justin Jude: Yes. Okay. I don't know what that translates to exact percentage-wise. We're seeing ranges from like 1% to 3%, I believe. We've been able to -- we've been very fortunate to pass on tariff dollar for dollar. We haven't made any margin on it but we've been able to pass that tariff on. The volume is still overall down. A little bit of it is price, obviously, but we're way outperforming the market, which is positive for us. The MSOs at this time are gaining share and we're growing with the MSOs I do believe when the repairable claim starts to rebound or improve more, we'll start to see more of the independents come back and get more of the volume. But right now, MSOs are winning more of that share. And -- but once again, we're winning with them. Operator: We have our next question from Bret Jordan from Jefferies. Patrick Buckley: This is Patrick Buckley on for Bret. Could you talk a bit more about what's driving Specialty growth? Are there any signs that this is a transition back to more of a growth cycle for the segment? Justin Jude: The industry still is down, both on the RV side, we're seeing and on the automotive side. One thing that we're doing across all of our segments is we're not cutting service levels, we're not cutting inventory levels. I feel that we're gaining some share at this time. It's not really a market recovery. But I do see the market starting to show signs of good improvements. But I would not say the market is necessarily positive. So it's more share gains right now. We want some more share of wallet with some of our larger customers. So we feel pretty good about when the market does rebound, we'll be even stronger on that. But once again, we did not cut service levels or inventory and I think some of our competition did. Patrick Buckley: Great. That's helpful. And then looking at leverage ratio and capital allocation. I guess could you talk about at what levels do you expect you'll start to focus a bit more on allocating a more significant amount of capital to share buyback? Rick Galloway: I can take that one. Yes. So we finished the quarter at 2.5x levered on our math. Keep in mind, on October 1 is when we got the proceeds for Self Service. And that proceeds -- pretax proceeds, roughly $390 million went to pay down debt. So that further improved our overall leverage. Ideally, we'd like to eventually get down to 2x or below. But that could be a slow walk down. So we're pretty comfortable with where we're at as far as the leverage goes. And then as we obviously delever a bit more, it gives us a little more flexibility to put more towards share repo. So constantly balancing the amounts to make sure that we have a balanced capital allocation approach. Operator: We currently don't have any questions. [Operator Instructions] I can confirm there are no further questions and I will hand back over the call back to Justin Jude, the CEO, for any further remarks. Thank you. Justin Jude: Thanks, operator and thanks for everyone joining the call this morning. We appreciate it and we look forward to speaking to you next February when we report our fourth quarter. Operator: Thank you very much. This concludes today's call. Thank you for your participation. You may now disconnect your line.
Operator: Good day, and welcome to the AMERISAFE Third Quarter 2025 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kathryn Shirley. Please go ahead. Kathryn Shirley: Thank you, operator, and good morning, everyone. Welcome to the AMERISAFE 2025 Third Quarter Investor Call. If you have not received the earnings release, it is available on our website at amerisafe.com. This call is being recorded. A replay of today's call will be available. Details on how to access the replay are in the earnings release. During this call, we will be making forward-looking statements intended to fall within the safe harbor provided under the securities laws. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results may differ materially from the results expressed or implied in these statements if the underlying assumptions prove to be incorrect or as the results of risks, uncertainties and other factors including factors discussed in the earnings release and the comments made during today's call and in the Risk Factors section of our Form 10-K, Form 10-Qs and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO. G. Frost: Thank you, Kathryn, and good morning. We are pleased that our growth strategy in this competitive market is yielding a healthy 20.5% return on average equity and a 90.6% combined ratio for the quarter. Our continued success in the market reflects the strength of the AMERISAFE value proposition. At our core, we are a profitable underwriter, focused on knowing our risk, pricing them appropriately and servicing our policyholders and their workers. In doing so, we are a better carrier for our agents and create long-term value for our shareholders. This is our sixth consecutive quarter of top line growth. Voluntary premiums on policies written in the quarter grew 10.6%. Combined with audit premiums, our gross premiums written grew 7.2% and net earned grew 6.2% over the third quarter of 2024. We are seeing the compound benefits of disciplined underwriting, robust new business production and strong renewal performance. Turning to losses. Our accident year loss ratio was in line with the prior year end quarter at 71%. Frequency remains at historically low levels, while severity continues to not higher on a year-over-year basis. We are confident that our claims handling practices, coupled with upfront risk selection remain consistent and disciplined in the current environment. Thus, the company experienced $8.9 million of favorable reserve development on prior accident years, primarily accident years 2020 and prior. In addition to announcing the quarterly results, we also announced the Board of Directors declared both a regular quarterly dividend of $0.39 per share, and a $1 special dividend payable on December 12, 2025, to shareholders as of record as of December 5, 2025. The Board takes a comprehensive approach when evaluating capital deployment, considering both the regular quarterly dividend, share repurchases and any special dividend within the broader framework of AMERISAFE's capital position operating performance and future growth opportunities. This balanced strategy ensures that we continue to reward shareholders while maintaining the flexibility to invest in the business and support long-term value creation. Our capital management philosophy remains consistent. Profitability drives capital and capital is deployed with discipline. We are proud of our track record. Over the past 13 years, AMERISAFE has declared nearly $50 per share in total dividends, including $12.68 in regular dividends and $37.25 in special dividends per share. Along with managing capital, the continued investment we are making in our people and technology is reflected in our solid top line growth at industry-leading returns, delivering long-term value to our shareholders. With that, I'll turn the call over to Andy to discuss the financials. Anastasios Omiridis: Thank you, Janelle, and good morning to everyone. For the third quarter of 2025, AMERISAFE reported net income of $13.8 million or $0.72 per diluted share and operating net income of $10.6 million or $0.55 per diluted share. During the third quarter of 2024, net income was $14.3 million or $0.75 per diluted share and operating net income was $11.1 million or $0.58 per diluted share. Gross written premiums were $80.3 million in the quarter compared with $74.9 million in Q3 of 2024, increasing 7.2%. Audit premiums increased the top line by $2.5 million compared with $4 million in the prior year quarter. Despite the audit premium headwinds, voluntary premium grew -- growth of 10.6%, fueled by new business production and strong retention is driving top line growth. Our total underwriting and other expenses were $22.1 million in the quarter compared with $21.3 million in the prior year quarter, which resulted in an expense ratio of 31.1% compared with 31.7% in the prior year quarter. The expense ratio reflects ongoing investment in AMERISAFE's growth as we see elevated opportunity in our target markets. Our effective tax rate was 21% compared with -- to 19.5% in the prior year quarter. Turning to our investment portfolio. In the third quarter, net investment income decreased 12.3% to $6.6 million, driven by a decrease in average investable assets following the payment of the special dividend in the fourth quarter of 2024. At quarter end, we held approximately $817 million in investments cash and cash equivalents compared to $899 million at September 30, 2024. The reinvestment rate environment remains fairly strong with some moderation compared to the second quarter of 2025. Yields on new investments exceeded portfolio roll-off by 77 basis points, driving the portfolio tax equivalent book yield to 3.9%, relatively flat versus the third quarter of 2024. The yield on cash held in money market funds ended the quarter at 4% compared to 4.8% at the end of the prior year quarter. The unrealized gain for the equity securities was $4.1 million compared to $3.9 million in the prior year quarter. Both periods were driven by strength in the U.S. equity market. Our investment portfolio remains high quality, carrying a double an average AA minus credit rating with a duration of 4.3 years. The composition of the portfolio is 61% of municipal bonds, 21% in corporate bonds, 3% in U.S. treasuries and agencies, 7% in equity securities and 8% in cash and other investments. Approximately 45% of the portfolio is classified as held to maturity, which maintains a net unrealized loss position of $7.6 million. As a reminder, these securities are carried at amortized costs, and therefore, unrealized gains and losses are not reflected in our reported book value. Our capital position is strong with a high-quality balance sheet, solid loss reserve position and conservative investment portfolio. During the third quarter, the company repurchased roughly 31,000 shares at average cost of $43.72 per share totaling $1.3 million. And finally, a couple of other topics. Book value per share increased to $14.47, up 7.1% year-to-date. Statutory surplus was $259 million compared to $235.1 million at year-end 2024. Lastly, we will be filing our Form 10-Q with the SEC later today, October 30, 2025, after the close of the market. With that, I'd like to turn the call over to the operator for the question-and-answer portion. Operator? Operator: [Operator Instructions] And our first question is going to come from Matt Carletti. Matthew Carletti: Janelle, I was hoping maybe to start off, obviously, voluntary premium growth has been kind of solid double digits for a couple of quarters now, which is a great kind of emerging trend. Could you talk a little bit about where you're seeing success where that growth is coming from, if it's kind of any particular areas? Or maybe it's just more broad-based and it's pretty evenly across kind of all aspects of your business? G. Frost: Thank you for noticing. And I'm also pleased to say it's more broad-based. We have grown policy count in the quarter over second quarter, we grew policy count roughly 2.7%. On a year-to-year basis, it's more like 11% year-over-year for policy count. So we're growing policy count, which is very important. Our insured payrolls are expanding as well, which is also a positive and particularly in this market when you read all of the headlines about things that are happening in unemployment and wage growth expectations. Our skilled labor jobs in our high-hazard industries are faring pretty well, so that helps support premiums in terms of payroll growth. We're seeing still very strong retention on a renewal basis for the quarter. Our renewal retention for the policies for which we offered renewal was 93.6%, and very healthy number. I think actually, that was the same number we had prior year quarter, so good. Even in this crazy competitive market that we're in, we're able to maintain those accounts that we want to maintain through a lot of collaborative effort from the AMERISAFE employees. So I can't emphasize that enough. We have a seasoned sales staff the way we utilize our safety services as part of the risk selection process is truly a value add, not only for our underwriters and helping our underwriters understand the risk and price the risk appropriately. But I'll say a value-add for our policyholders and their agents. The fact that, that is an AMERISAFE contact that they have and that builds relationships with those policyholders and with those agents. So it's critical to what we do, and it's unique to AMERISAFE. So I think that's huge on our part. And then I can't -- I certainly can't not mention our claims handling experience. From a renewal retention standpoint, I truly believe the way we handle claims benefits us from a renewals perspective. If you've had a claim and it's handled by an AMERISAFE employee, we handle it, I think, the right way, and we treat those injured workers well, and that's meaningful to a policyholder. So all of those things together, I think, is really adding to the growth effort in terms of just the amount of collaboration that we're having. We've really been focused on ease of doing business, speed to market and it's just compounding and bearing fruit now in those growth numbers. And I'll caveat that by saying all without -- we're not adding -- we haven't added class codes. We haven't added -- we haven't expanded geographically. It's really market penetration and better serving -- better working with our agents. Matthew Carletti: Great. And then if I kind of try to tie it one step further. So as I look at your business, like, I mean, financially kind of earnings returns have been strong for many years now and really unchanged if you want to look at ROE or something like that. So really strong kind of where the business is. you talked a little bit about the special dividend at the outside of the call and it is a little bit smaller than kind of some of the previous years. So would I be correct to kind of interpret that maybe an output of that is expression of your guys' confidence in the kind of the durability of that growth or that growth going forward and that that's where you'd prefer to allocate capital versus giving it back to those growth opportunities are there? G. Frost: Well said, Mr. Carletti, that is exactly what you should infer into the dividend. I mean I'm excited about the dollar dividend by no question. But I think it definitely infers that we believe what we have going here in terms of our growth strategy is not short-lived that I believe it has longevity. And we've said since the very beginning when we started paying out the special dividend, part of the reason that we were returning that capital to shareholders is because we had internally made the decision. It wasn't the right time to really pour that into organic growth because we wanted that growth to be profitable growth. So now we've had these quarters of top line growth, and it's starting to flow through on the earnings. And so that dividend, we're using that capital and deploying that capital towards that organic growth. Matthew Carletti: Fantastic. I'm glad I put those puzzle pieces together okay. Thanks for the color. Operator: [Operator Instructions] And our next question is going to come from Mark Hughes from Truist. Mark Hughes: Janelle or I'll say, Andy, in the spirit of the question about the special dividend and the growth opportunities. How do you view your leverage now? And how much flexibility do you have on the balance sheet? And this would be underwriting leverage. Anastasios Omiridis: It is going up, but it's at $1. I mean from our standpoint, I don't think it's really changed. It's -- I think it's increased a little bit, but it's right at $1. Mark Hughes: Yes. And then what would you see as kind of the upper bound kind of comfortably where would you be able to take that. Anastasios Omiridis: I would say about $1.5 mark. Mark Hughes: Okay. The -- what's the latest on medical inflation. G. Frost: There's been quite a few articles. AM Best actually put out a segment report on workers' compensation, and they spoke to medical inflation. Certainly, everyone has their eye on it. we're not immune to medical inflation. At the same time, I believe the fee schedules and the fee structure and workers' compensation is probably abating that to some degree for workers' compensation much more than it is for nonworkers' compensation things people are seeing in their health care renewals and those kinds of things. So I do think we have some relief from the fee schedules in terms of medical inflation. Utilization is something -- and I think we talked about this on the last call, utilization is something NCCI sort of pointed to when they talked about the 6% increase based on medical inflation, something certainly we're keeping our eyes on, particularly home health, I've been talking about for a number of years, and I'll continue to talk about home health. But even in terms of physician visits, what we've kind of noticed a little bit more PA visits, our physician assistance visits, which sometimes lead to additional visits because a doctor has to sign off on a release of a patient. So we're just keeping our eye on that. I don't know if there's anything that's more anecdotal than in the data yet, but utilization is something we want to keep our eye on since the fee schedules seem to be doing their job, and we know that there is a shortage in the health care industry, so in terms of some services being available. So those are the things we're watching out for. Mark Hughes: Yes. What's been latest trend in terms of the approved state loss costs, the most recent ones, any trend there? G. Frost: Great question. So we have, I think, 4 states that head increases, Missouri, D.C., Nevada, California, and we talked about California on the last call. Those are the ones that I think had increases. On average, what we're seeing and most of the loss costs for 2026 are already in and approved. And what we're seeing is pretty steady state mid-single-digit declines. I did look at the CIAB study because they survey agents and ask them what they're seeing in terms of their clients' renewals. And I noticed -- and they haven't put their third quarter data out, but in their second quarter data, more than 50%, we're basically seeing no change. So that would say, if that's an accurate depiction of what agents are seeing or what's actually happened in the marketplace, that would lead you to believe that carriers are being relatively disciplined about the loss cost may be down in terms of the absolute loss cost. But what they're using in terms of their average pricing is sort of flat, at least based on that agent survey. So that's a sign of, I would speak to relative discipline in the marketplace. Mark Hughes: Yes. You'd mentioned your insured payrolls are expanding. Any specific comments on wage growth how wage growth is compared to in 3Q last few quarters? G. Frost: Right. So wage growth in the quarter, we saw about 6.7%. As the total was about 8.9%. 6.7% was actual wage changes and a new employee count was 2%. So I was happy to see that 2% in new employee count. If you recall, last quarter, it was actually slightly negative and I wondered, okay, is this a blip? Or is this a data point in terms of is there something happening with integration with our particular employee base, but it sort of bounced back to norms this quarter, so I feel pretty confident about that, that was just a blip last quarter. Mark Hughes: Yes. What was the wage last quarter, wage growth? G. Frost: 5.7%. Yes, if I look at the last 4 quarters, it was 5.5%, 6.3%, 5,7%, 6. 7%. Mark Hughes: Okay. Very good. How about the large losses in the quarter? G. Frost: We ended the quarter with 17 large loss is over $1 million. Mark Hughes: That's year-to-date? G. Frost: Year-to-date, yes. Mark Hughes: Yes. That's up a little bit, isn't it. G. Frost: I think at this point last year, we were at 13, if I recall correctly for 2024, but then we had an uptick in the fourth quarter. Again, I I'll go to my favorite saying, unfortunately, these things are lumpy. I never know what quarter they're going to happen in. And I'll also say this, when you -- when we file the Q later today, I believe, you'll look at claim counts. Reported claim counts on a year-to-date basis are ever so slightly up. And -- but I think it's a pretty remarkable number when you think about how much we've grown policy count, yet the claim counts really haven't varied very much. So I think that speaks to what I was saying earlier about frequency is low. I mean there's no denying there. Mark Hughes: Yes. And then anything on the competitive front, Brand X talking more about getting into high hazard? G. Frost: Great question. It is still extremely competitive. We haven't -- there hasn't been a lot of movement in terms of competitors either increasing or decreasing their appetite. I think we see it occasionally in a particular class, maybe in a given state, but it's usually because maybe they've had a bad experience in that particular state or class code. That's actually one of the selling points for AMERISAFE with our agents is the fact that we are so consistent about our approach. We've been doing this since 1986. And if you look at our footprint and the classes of business that we underwrite, there's a lot of stability there. And that's actually, to me, one of the value propositions for agents for AMERISAFE. Mark Hughes: Yes. Any thoughts when we think about audit premium. Obviously, that's led to some just a little bit of a headwind in terms of the written premium but corrected for that, obviously, you've been up double digits. If you're seeing a little more wage growth, is that a positive for audit premium? Or should that continue to moderate, what are the puts and takes there? G. Frost: That's a really interesting way to look at it. This is just my take on it. I do feel that the wage growth numbers that we're seeing now, speak well to future audit premium. At the same time, I have to be very cognizant of all the things that are happening in the economy right now with inflation and everybody is talking about jobs, jobs, jobs, and we're seeing these headlines of major layoffs. I feel our industry groups being the skilled labor is somewhat protected from the types of layoffs that we seem to be seeing nationwide. A lot of those are at least being anecdotally been pointed to things like AI is helping us gain efficiencies, et cetera, et cetera, and that's why we're lowering head count. But I do think companies are looking for efficiencies as well. That being said, with skilled labor jobs, a little bit of a different story there. So if we can maintain the wage growth, it should bear well for future audit premium moderating, I would think, over time. Mark Hughes: Yes. Yes. Okay. And then last cantered question. How about the construction end market, the next job being important, any observations there? G. Frost: Yes. Based on the payrolls that are being reported to us and the fact that I'll point to that new employee count number kind of bouncing back to normal, the economies for our insured base are holding up really well as of right now. Operator: [Operator Instructions] And our next question is going to come from Bob Farnam from Janney. Robert Farnam: There was -- Mark Hughes asked the question about the claims count, given the growth in the top line in the graph and the number of policies. Actually, I had a question on your claims staff. I mean did you -- have you increased claims staff to be able to handle an influx of more claims, even though I understand that the frequency down it really hasn't happened yet, but I'm just kind of curious how your claims staff is situated in case claims do start to increase. G. Frost: No, we have not really increased the number of claims staff, but I'll backtrack on that a little bit to say we run a very lean organization. But at the same time, when our claim counts were dipping down, we also did not decrease our claims staff because of the expertise they bring to the table and we want to keep those inventories really low, that's not something that we felt like we should dial down and dial back -- and then try to dial back up. So the number of claims staff has not changed. Robert Farnam: Okay. I figured they have -- I mean I understand they have a lower volume of claims they already handled. So I didn't -- I wasn't surprised that they will be able to handle it in-house, but just curious. Do you guys -- are you actively looking to expand into any other states? And if so, what's causing you not to at this point? I'm just kind of curious if you're even looking at this point. G. Frost: We are constantly looking. We have a committee here that is always looking at geographies of where we're not and maybe where we should be or where we are and maybe we're not having a great experience, whatever the case may be. And so I would always say that we are continually considering that, nothing on the near horizon. Robert Farnam: Right. Okay. And the last question I had was on the fee schedules. Obviously, it sounds like that's helping to contain medical costs. I just didn't know, on average, how long do fee schedules stay in place before they're renewed? And do you see that fee schedules are renewed, will they have an impact? G. Frost: Yes, very, very appropriate. They are updated somewhat regularly. And of course, a lot of them are based off -- there's a lot of things based off Medicare and Medicaid. So however, how often that gets updated. And plus it also there's also a political side to that. If I can say if workers' compensation becomes an issue in any given state, legislatively, they will get involved to make some things happen. And as of right now, and I'll knock on this wooden desk, I say workers' comp doesn't seem to be at the top of anyone's agenda because there are so many other things happening in the P&C space, particularly with homeowners and auto, that legislators are more apt to try to find solutions for and workers' comp has been pretty kind of steady state. So I think employers are relatively happy with the things that are happening. Carriers are pretty much satisfied with the way things are happening. So as of right now, it doesn't seem to be on the top, at least to my knowledge, on the top of any legislative agendas in a large way that would cause the fee schedules to change. Robert Farnam: Yes. No, it can make sense. Don't fix what's not broken at this point. Operator: And there appears to be no further questions in the queue at this time. I'd now like to turn the conference back over to Janelle Frost, CEO, for any additional or closing remarks. G. Frost: Thank you. We are pleased with this quarter's results and the successes we're having in adding small incremental growth while maintaining the standards that make AMERISAFE a profitable underwriter of high hazard workers' compensation. Thank you for joining us today. Operator: And this concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to APi Group's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note this call is being recorded. I'll be standing by should you need any assistance. I'll now turn the call over to Adam Fee, Vice President of Investor Relations at APi Group. Please go ahead. Adam Fee: Thank you. Good morning, everyone, and thank you for joining our third quarter 2025 earnings conference call. Joining me on the call today are Russ Becker, our President and CEO; David Jackola, our Executive Vice President and Chief Financial Officer; and Sir Martin Franklin and Jim Lillie, our Board co-chairs. Before we begin, I would like to remind you that certain statements in the company's earnings press release announcement and on this call are forward-looking statements which are based on expectations, intentions and projections regarding the company's future performance, anticipated events or trends and other matters that are not historical facts. These statements are not a guarantee of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. In our press release and filings with the SEC, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, October 30, and we undertake no obligation to update any forward-looking statements we may make except as required by law. As a reminder, we have posted a presentation detailing our third quarter financial performance on the Investor Relations page of our website. Our comments today will also include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our press release and our presentation. It is now my pleasure to turn the call over to Russ. Russell Becker: Thank you, Adam. Good morning, everyone. Thank you for taking the time to join our call this morning. Before we get into our record third quarter results, I would like to thank our approximately 29,000 leaders for their dedication to APi. The safety, health and well-being of each of our teammates is our #1 value. Last month, during September, we recognized Suicide Prevention Month and Construction Suicide Prevention Week. We use this as an opportunity to encourage all of our team members to engage in meaningful conversations about mental health. These conversations are a simple way to embrace the care factor and show our teammates we care about their well-being, including physical and mental health. In addition to the care factor, another one of our foundational beliefs is our central premise, which means that at APi, we recognize that our success only happens when our branches and field leaders are successful. One way we are supporting our branches and field leaders as part of our central premise is through investments in market-leading systems and technologies, including artificial intelligence. We see market-leading technology, not as tools that will replace our field leaders, but rather as a way to empower our branches and field leaders to accelerate their speed of doing business. Work more safely and better serve our customers as we grow into a $10 billion company. A few examples of these investments include the following: APi Echo, which allows our field leaders to record conversations and summarize key notes without having to leave the field or remove their safety gloves. One code, which provides quick access to situation-relevant fire protection code, fire protection code detail to save time for our estimators, designers and field leaders. Connected glasses, which allow our remote experts to guide field leaders in real time, resulting in quicker service to our customers with a higher first-time fixed rate and an AI-enabled predictive tool, which flags customers who have a high attrition risk. This tool allows our local teams to take proactive steps to engage customers and focus on strengthening specific customer relationships. Finally, last year, we launched our global step safety platform, which allows our team members to document and manage safety activities in the field from a mobile device. Establish the safety standards and strategies and gives our leaders better data and visibility into safety metrics to better protect our teammates and help us continuously improve. We are still in the early innings piloting these technologies, but we believe our business-led approach to investing in technology will empower our 29,000 leaders, increased teammate satisfaction and drive growth and margin expansion as we work towards our 10/16/60+ financial targets. As a reminder, these targets are $10 billion in net revenues by 2028, supported by consistent mid-single-digit organic growth, 16% plus adjusted EBITDA margin by 2028. 60% plus of our revenues from inspection, service and monitoring over the long term and $3 billion plus of cumulative adjusted free cash flow through 2028. Our leaders have clear plans for how we intend to deliver on our 10/16/60+ targets with a continued focus on the main initiatives that are enabling us to achieve our 13/60/80 targets. Those initiatives are consistent organic growth, improved inspection service and monitoring revenue mix, disciplined customer and project selection, pricing branch and field optimization, procurement, systems and scale accretive M&A and selective business pruning. And as I like to say, we can always just be better. Now turning to our record third quarter results. The business continues to have strong momentum, delivering robust top line growth while expanding margins. Some highlights include the following: Strong growth in inspection service and monitoring revenues led by double-digit inspection growth in North America for the 21st straight quarter, record backlog in both segments. And finally, accretive bolt-on M&A activity at attractive multiples. For the quarter, net revenues increased by 14%, approximately 10% organically, with strong growth across both segments. In our Safety Services segment, revenues grew organically by approximately 9%, led by North American safety while delivering 40 basis points of segment earnings margin expansion. As expected, Specialty Services continued its strong growth in the third quarter, delivering approximately 12% organic growth with sequential margin expansion. Our continued focus on our margin improvement initiatives allowed APi to deliver year-over-year improvements in adjusted EBITDA margin in the third quarter, with a 10 basis point increase versus last year. We continue to see great momentum in our business, particularly on the project side in North America, where we are being opportunistic but not overcommitting in the high-tech space. These project opportunities are in line with our disciplined customer and project selection are primarily sourced from our existing inspection and service relationships, our margin accretive to our overall project book of business due to their complexity and size and provide a long-term recurring inspection and service revenue opportunity for our local branches. The third quarter was another strong quarter for free cash flow generation. Our consistent free cash flow generation and strong balance sheet provides us with the flexibility to pursue a range of value-enhancing capital deployment alternatives as we head into 2026. We continue to execute our M&A plan, completing 4 bolt-on acquisitions in the quarter, bringing our total for the year to 11 completed bolt-on acquisitions. We remain on track to deploy approximately $250 million in bolt-on M&A at attractive multiples this year. Our pipeline remains robust and continues to grow. Now including fire protection, electronic security and elevator services opportunities globally. Most importantly, our value proposition as a forever home for their team continues to resonate with sellers. In summary, we moved through the fourth quarter and into 2026 with great momentum. Our inspection service and monitoring business continues to expand. Our backlog is at a record high. Our balance sheet remains strong, and we are confident in our leaders' ability to execute our strategy and deliver against our 2025 targets and our 10/16/60+ shareholder value creation framework. I would now like to hand the call over to David to discuss our financial results and guidance in more detail. David? Glenn Jackola: Thanks, Russ, and good morning, everybody. Reported revenues for the 3 months ended September 30 were $2.1 billion, a 14.2% increase compared to $1.83 billion in the prior year period. Organic growth of approximately 10% was driven by continued growth in inspection, service and monitoring revenues, strong growth in project revenues and pricing improvements. Adjusted gross margin for the 3 months ended September 30 was 31.5%, representing a 50 basis point increase compared to the prior year period, driven by disciplined customer and project selection and pricing improvements, partially offset by mix. Adjusted EBITDA increased by 14.7% for the 3 months ended September 30, with adjusted EBITDA margin coming in at 13.5% representing a 10 basis point increase compared to the prior year period. Growth in adjusted EBITDA was driven by strong revenue growth and adjusted gross margin expansion, partially offset by investments to support growth. Adjusted diluted earnings per share for the third quarter was $0.41, representing a $0.07 or 20.6% increase compared to the prior year period. The increase was driven primarily by growth in adjusted EBITDA and a decrease in interest expense. I will now discuss our results in more detail for safety services. Safety Services reported revenues for the 3 months ended September 30 was $1.4 billion, a 15.4% increase compared to $1.2 billion in the prior year. Organic growth of 8.7% was driven by continued growth in inspection service and monitoring revenues, strong growth in project revenues and pricing improvements. Our North America Safety business continued its momentum with double-digit inspection revenue growth. Adjusted gross margin for the 3 months ended September 30 was 37.3%, representing an 80 basis point increase compared to the prior year period, driven by disciplined customer and project selection and pricing improvements leading to margin expansion in inspection service and monitoring revenues and project revenues. Segment earnings increased by 18.6% for the 3 months ended September 30, and segment earnings margin was 16.8%, representing a 40 basis point increase compared to the prior year period primarily due to the increase in adjusted gross margin, partially offset by investments to support growth. I will now discuss our results in more detail for our Specialty Services segment. Specialty Services reported organic revenues for the 3 months ended September 30 were $683 million, an increase of 11.6% compared to $612 million in the prior year period, driven by strong growth in project revenues. Adjusted gross margin for the 3 months ended September 30 was 19.3%, representing a 60 basis point decrease compared to the prior year period, driven primarily by increased project starts mix and increased material costs. Segment earnings increased 3.8% for the 3 months ended September 30, and segment earnings margin was 11.9%, representing an 80 basis point decrease compared to the prior year period, primarily due to the decrease in adjusted gross margin. Turning to cash flow. We continue to focus on driving strong free cash flow conversion improvements year-over-year. For the 3 months ended September 30, adjusted free cash flow came in at $248 million, up $21 million versus last year, representing an adjusted free cash flow conversion of 88%. The strong free cash flow in the third quarter drove adjusted free cash flow of $434 million year-to-date, up $73 million versus last year and representing a conversion rate of 58%. Free cash flow generation has been and continues to be a priority across APi and we are pleased with our performance year-to-date as the business accelerates revenue growth. We expect to finish the year at approximately 75% adjusted free cash flow conversion in line with our prior guidance. As a reminder, the fourth quarter is traditionally our strongest for free cash flow conversion due to seasonality. At the end of the third quarter, our net debt to adjusted EBITDA ratio was approximately 2.0x below our long-term target, allowing us the flexibility to pursue value-enhancing capital deployment opportunities in the remainder of the year and into 2026. As a reminder, our long-term capital deployment priorities remain: one, maintaining net leverage as stated long-term targets. Two, strategic M&A at attractive multiples and three, opportunistic share repurchase. I will now discuss our guidance for the fourth quarter and full year 2025 which, as a reminder, is based on current foreign currency exchange rates. We expect increased full year net revenues of $7.825 billion to $7.925 billion up from $7.65 billion to $7.85 billion, representing reported revenue growth of 12% to 13% and organic growth in net revenues of 7% to 8% for the year. Moving down the P&L. We expect full year adjusted EBITDA of $1.015 billion to $1.045 billion, compared to our previous guidance of $1.05 billion to $1.045 billion, representing adjusted EBITDA growth of approximately 15% at the midpoint and adjusted EBITDA margin above our previously stated 2025 goal of 13%. Our increased full year revenue and adjusted EBITDA guidance is driven by updates to our business outlook, including our third quarter over delivery, our latest outlook for the remainder of the year, and the impact of closed M&A during the quarter. Based on most recent rates, the impact of foreign currency is immaterial to our change in guide. For 2025, we anticipate interest expense to be approximately $145 million, depreciation to be approximately $85 million. Capital expenditures to be approximately $100 million and our adjusted effective tax rate to be approximately 23%. We expect our adjusted diluted weighted average share count for the year to be approximately 424 million. We continue to expect adjusted corporate expenses to be approximately $35 million per quarter with some timing variability throughout the year. As expected, our EBITDA adjustments for restructuring were 0 in the third quarter as we brought those programs to the conclusion at the end of the second quarter. Overall, we are pleased with the team's execution of our strategy in an evolving macroeconomic environment during the year. I look forward to sharing more updates on our progress next quarter. I will now turn the call over to Russ. Russell Becker: Thanks, David. We approached 2026 with strong momentum across our global platform. We continue to accelerate organic growth while expanding adjusted EBITDA margins, growing our recurring inspection service and monitoring business, building on our record backlog and improving our free cash flow generation. We believe our proven operating model built on our inspection and service first strategy, purpose-driven leadership and a disciplined approach to capital allocation positions APi for sustained organic growth, margin expansion and value-accretive M&A. We are confident in our abilities -- we are confident in our leaders' ability to execute our strategy and deliver against our new 10/16/60+ financial targets creating value for all of our stakeholders. With that, I would now like to turn the call over to the operator and open the call for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Andy Kaplowitz from Citigroup. Andrew Kaplowitz: Russ, as organic growth, as you know, has been accelerating in Safety Services, could you give us some more color on how that broke down. For instance, are you seeing a boost in your project business given a bigger data center tailwind? Or would you say it's more broad-based growth, given your comment in the prepared remarks, I'm not overcommitting to high tech? Russell Becker: So I would say that we're seeing very robust activity in the data center space across really both of our segments. Andy, I mean, I don't think, I think going into the year, data centers probably accounted for some place around 7% to 8% of our total revenue, and maybe that's going to push to 9% or 10% based on the tailwinds that we're seeing in the space. So it's not a significant component of our revenue. We continue to see really good activity in the semiconductor space, advanced manufacturing. We're seeing some activity in aviation that's creating opportunities for us. Health care continues to be strong as does critical infrastructure. So we feel -- we've always felt strongly about the end markets we've chosen to play in, and I feel like we're just seeing good robust activity. So I would say that one thing that might be different today than what was different a year or 2 years ago is size and complexity of some of these projects, which limits the players that are able to really participate and deliver on some of the schedules, which creates opportunity for folks like us. Andrew Kaplowitz: Very helpful. And then you mentioned sort of 11 bolt-ons now, still reiterating $250 million plus this year, but it almost seems like you're ahead of plan on M&A. So maybe you can give us a little more color around the progress you're making. Obviously, you've been adding to your Elevator platform, you mentioned multiple other platforms. So just update us on sort of where you are. Is that the right observation and may be a little ahead. How do you think about it? Russell Becker: I think about it more like we're right on track, to be honest with you. I mean we have anticipated activity here in the fourth quarter that we still need to execute on. But I feel like we're right on track, whether it ends up being $275 million, I don't know. That will all depend on our ability to execute on the deals that we have in the pipeline right now. But this idea of us being a forever home for sellers, as we mentioned in our remarks, continues to resonate. And we are seeing a lot of activity, and that has really been positive for us. So most -- the focus has remained primarily in North America in the fire and security space. We are continuing to do work on Elevator. We got one deal done this year, we have a number of deals that are in the pipeline that we're continuing to push forward on. And we are seeing more activity in the international business, but that still remains on a country-by-country basis based on the ability of that country, so to speak, to digest a potential bolt-on. But we are seeing more activity in our international business as well. Operator: Your next question comes from the line of Kathryn Thompson from Thompson Research Group. Kathryn Thompson: And tagging along just and balancing priorities for growth with M&A. So about 45% of fewer end markets today by our calculation benefits from reindustrialization. And granted, as you noted, there's ample opportunity to grow smaller segments like elevator segment. But when you think about balancing your priorities by either industry verticals or broad U.S. trends, how do you balance those two? So -- for instance, based on our work and being able to see data center construction site, the amount of support is going to benefit companies of scale like APi. So do you see a greater balance of your revenues coming from that reindustrialization, see a greater mix? Or -- and how do you balance that against just consolidating a vertical like the elevator and escalator segment? Russell Becker: Well, I mean thanks, Kathryn, and we appreciate you and you being here with us. Well, for sure, the size of some of these projects and the complexity of these projects creates opportunity for folks like us because there's only a handful of national players that can handle the Fire life safety on, say, a large data center project. And so that's an advantage. And for us, as we look at how do we balance that, for us, our geographic footprint is an advantage for us. And the data center market continues to follow power availability -- and so there's areas where there is some concentration of data centers, but you're starting to see these data centers move to different locations. And a lot of it is remote locations. So you have to have people that are willing to travel to these locations, and that's an advantage for us. So as an example, one of our clients is going to build on large extensive data center in El Paso, Texas. We have a very, very strong fire, life safety business in El Paso, Texas, that's positioned to support that, and that's an advantage that we have. And so as we think about the balance of like investing -- continuing to invest in our inspection service and monitoring business, or say, continue to try to consolidate in the elevator space, we're doing both, and we feel like we've got the bandwidth to do both with the way our business is really structured. So we've got the right resources in the elevator space to focus on not only growing the elevator business, but also executing on the elevator business that we currently have. And so we balance that. These large project opportunities flow -- continue to flow through me. So I can see how much activity is going there. And so we're able to ask questions to make sure that we've got the right resources to be able to execute on the work. And one of the things that I talk about all the time that I think sometimes people don't really have a real understanding or maybe even respect for is that in our industry, having too much work is worse than having not enough. And so we watch that very, very closely to make sure that we're taking advantage of the right project-related opportunities so that we get paid the right price for the work that we do and the services that we provide. So we talk about it all the time, and I feel like we're doing a really good job of doing both. Kathryn Thompson: Very helpful with that. And following on that comment of too much work, are there in markets that are generally better margin as you go towards your margin profile, are there markets now that you would like to grow that you see as better margin markets as you focus on growth going forward? Russell Becker: Well, I think the end markets that we're playing in right now today provide the best margin opportunity for the company. And it's because of what I've mentioned, it's based on size, based on complexity. And it's more around your ability to deliver. And the schedules for these data centers as you're aware, are really aggressive. And so like you have to have, you have to have the people. And if you're going to deploy your people to some of these project opportunities the margin opportunity needs to be there. And so -- so it's the size, it's the scale, it's the complexity and it's the schedule and your ability to deliver. And you should get paid for that, and we're seeing that. Operator: Your next question comes from the line of Andy Wittmann from Baird. Andrew J. Wittmann: I guess I want to kind of build on the margin questions here a little bit and just kind of get your assessment, Russ, on the margin performance in the quarter. 10 basis points. You got a lofty 2028 goal. I know one quarter does not make the trend. But just you mentioned some things like, I don't know, materials costs and talking about some investments for growth. And there's that inherent growth margin trade-off that is such a focus for your company. Obviously, you look back at last year, you got big margin gains as a result of kind of slowing down some of the projects that you took on. I guess I wanted to ask you kind of are you at the right balance of growth, it's much better here, but you're not getting quite as much margin. So what's your assessment of kind of your balance between those things? And as you head into '26, you need to maybe throttle down the growth to make some progress towards that big [ '28 ] margin guidance? Russell Becker: Well, Andy, thanks for being here. And well, number one, we're not going to tell you we can do something that we can't do. And I mean, we're a competitive group. And I feel like the margin expansion goal and objective we put out there is realistic, and we will deliver on that. And I feel like we're doing a good job of balancing organic growth with -- inside our existing portfolio today. And -- and as you said, really, even as you framed your question, the reality of this is business really isn't linear. And we will continue to see our margins expand as we move through the remainder of the year and into next year. So I remain optimistic about how we're balancing it. I don't know, David, if you have any color you'd like to add? Glenn Jackola: Yes, I'll add a few points. Russ. Thanks for the time, Andy. Thanks for the question. Underlying, we've seen really good margin expansion in our inspection service and monitoring work. And we're able to continue to get margin-accretive pricing, and we expect that to continue into the future. And I'd say we're still in the early phases of a lot of this contract work that is driving organic revenue growth, particularly. This comment is in the Specialty Services segment, and we'll see margins expand sequentially again in Q4 and into 2026. As those projects move deeper into completion, we tend to move margins up on our projects as we get closer to completion, and we're still in early days in many of those projects. I think there's a lot of opportunity to grow margin. Last thing I'd say is we did deliver a strong quarter and raised our guide for the year. And with that comes some increase in corporate costs and variable compensation that impacted margin in the quarter as well. Andrew J. Wittmann: Okay. Any specific comments on maybe elaboration on the materials and the investments? Russell Becker: Well, we can -- the primary area that when David was talking about investments is continuing to invest in our sales team, primarily in the inspection service and monitoring space. We have really ambitious goals in -- with our -- where we want to take the inspection service and monitoring component of our business when you think about our 2028 objectives, which means in a lot of ways, we need to more than double our sales team and the folks that are doing that work, which means we need to bring more inspectors into the business. So it's primarily when we talk about investment, it's primarily in that piece of our business. So that's a primary when we talk about investment, it's really in building out our sales team and our sales leadership. Operator: Your next question comes from the line of Josh Chan from UBS Financial. Joshua Chan: I think in terms of organic growth, certainly a really strong year, and it seems like it's just getting stronger. I guess you are tracking ahead of your mid-single-digit kind of long-term growth rate. So maybe could you comment on sort of the sustainability to grow mid-single digits on top of the very strong growth this year? Or how are you thinking about kind of the cadence, whether this pulls anything forward or whether you can kind of grow on top of this? Glenn Jackola: Yes, great question. Thanks for being with us, too, Josh. I'll take you back to the organic growth algorithm that we shared at our Investor Day in late May. And when you think about our safety services side of the business, we expect mid- to upper single-digit growth. That's kind of mid- to upper single-digit growth in the service side of the business, driven by both price and share gain and then low to mid-single-digit growth on the project side. Then likewise, we expect mid-single-digit growth over the long term in our specialty business, and we believe that, that algorithm is sustainable over the long run. And to a point that Russ made earlier, when we put out frameworks and expectations we deliver against them. As we've gone deeper into the year where you've seen that outsized revenue growth is really in the in the project part of the business, where we've got an expectation over the long term of that being in the low to mid-single digits. And that was more in the mid- to upper single digits, double digits in places in the third quarter. So do I believe it's sustainable? Yes, and we'll continue to deliver against that growth algorithm. Joshua Chan: Great. Thanks, David for the color there. And then I guess in terms of the guidance, you moved up the revenue guidance nicely, I think, over $100 million at the midpoint. And then you kind of nudged up the EBITDA guidance at midpoint. So could you talk about the translation there in terms of the much higher revenue and then kind of the slightly higher EBITDA? Glenn Jackola: Yes. I'd be happy to, Josh. When you think about what's moving up our revenue guide for the year, it's the same answer that I gave you on the last question which is increased or continued strong strength in the project environment. And we've talked publicly for the last couple of years on how the project side of our business on average is at a lower gross margin than the inspection service and monitoring stream. And so that mix impact influences, and we've talked over the last couple of quarters how as we're ramping up projects, they tend to come in at a lower margin both through at the early part of the project and get marked up as we go through the work and you see that dynamic in the fourth quarter as well. Operator: Your next question comes from the line of Tomo Sano from JPMorgan. Unknown Analyst: This is Ethan on for Tomo. Looking at the M&A pipeline, you guys had 4 bolt-on acquisitions in the quarter and a strong track record of value accretive M&A. What's kind of the current status of that M&A pipeline? And are there any particular geographics or service lines that you're prioritizing for future bolt-on acquisitions? Russell Becker: Well, I mean, the pipeline, I mean, I think you can expect more of the same. You know what I mean. It's kind of just regular cadence for us at this stage of the game. We just keep plugging away and making sure that we're making good choices for the businesses that we choose to bring into the APi family. Culture values and fit being the #1 gate, if you will, that we need to solve for. So I think you're going to continue to see a very similar cadence as you've seen really over the course of the last couple of years. So that part of it is good and the opportunities that are in front of us are really positive. As it relates to focus, it seems like just based on readiness and capability, our -- we -- the majority of our transactions have happened in our North American safety business, primarily in the probably fire protection first, electronic security second and elevators, I would say, are on equal footing, and that's just the way -- that's just kind of the way it's happened. And a lot of that is based on readiness. So -- but I would say fire suppression, fire just in general, electronic security and elevators are kind of all the same as it relates to our priorities. And you're going to see us continue to do more transactions in North America until the international business is in kind of an overarching way, more ready and capable of handling bolt-on M&A activity. We -- all that being said, we continue to do work on opportunities that we see in our international base business, and that's based on country readiness. So we have certain countries that are in a much better place as it relates to being ready to take a bolt-on versus other countries. And that's a gate that we use actually in North America as well. So -- but you should expect a very, very similar cadence of activity. We also continue to look at slightly larger opportunities that are out there in the market, and we continue to do work on those. So lots of good things happening from an M&A perspective right now today. Unknown Analyst: Thank you for providing a little bit of color. On your investments in the sales team. Are you guys seeing -- how is the labor availability and technician retention? And are you guys experiencing any wage pressures or capacity constraints? Russell Becker: So I would tell you that -- well, number one, as it relates to people in general, not just like sales people. Like we talked about the investment in our inspection service and monitoring business really as a whole. And the first tenet of people and talent management is retention. And you have to keep the people that you have. And our retention is very, very strong, I think, north of 90% and I would tell you that, that's driven by the company's purpose of building great leaders in the investments that we continue to make in every single person that's on our team. And that includes the men and the women in the field. And I think that's something that differentiates us. So first, we have to keep the people that we have. Second, you have to really be looking for people in nontraditional places in today's world. And I feel like our team is doing a better and better job like I don't think we're perfect at it, but I think we're doing a better and better job of bringing people in from nontraditional places. And then you have to have the capabilities to train them. And we have these I don't know if I'd call them a center of excellence, but pockets of brilliance anyways, where we've developed training programs and where we can send inspectors and we can send fire alarm technicians. And folks like that. We have a design training center inside one of our businesses that's being utilized by all of their sister companies. And so we recognize the fact that if we want to achieve our goals, 10/16/60+, It's going to take more people in our organization. And so we have to be thinking differently about that. And I feel like our team is really doing a good job. I think we have some more work to do there, but I feel like we're doing a good job in understanding what the people needs are. I look at people, if you -- if our business leaders use people as the reason that they can't grow their business, then that's an excuse. And the reality of it is, is that everybody that's in the industry knows that finding really good people that have the skills to do the work that we need to do for our customers. It's been tight like this for 10 years. And so saying that you can't find the people, that's an excuse. Like you have to think differently about it. And how you're going to build your business. And I feel like our group is doing a nice job there. And that -- it takes leadership to do that. Operator: Your next question comes from the line of Stephanie Moore from Jefferies. Harold Antor: This is Harold Antor on for Stephanie Moore. Just wanted to get an update on Elevated. I think you guys have owned the acquisition a little bit over a year now. So just I guess, what's the organic growth running in that business. How is the cross-selling running? How many cities have you been in? Just any conversations about how that integration is going? Russell Becker: I think Elevated is doing really well. And they're high single-digit, pushing double-digit but high single-digit organic growth. So we feel good about where that business is at. It's really doing well. The cross-selling, again, is just -- we're in maybe the top of the second inning as it relates to cross-selling as those folks get to know their long-term APi teammates, that's going to only accelerate but it's happening more and more. I view that as being very, very positive. As we mentioned earlier, we made one acquisition in the elevator space. It's really not a bolt-on to Elevated. It's kind of what we turned a tweener. It's a really -- it's a nice-sized business and we're operating it independently of Elevated. But I -- we couldn't be happier with where we're at with our -- with the elevator business as it sits today. Harold Antor: Great. And then I guess, just double-clicking on Specialty, another solid quarter of strong performance. I guess what's the size of the pipeline today versus, I guess, the last time you spoke. And I know you're not giving formal 2026 guide, but I guess as we think about the double digit, we mentioned that we prepared to be exiting in 2025. What would -- I guess, do you think that sets up for 2026 to run slightly ahead of that mid-single-digit organic growth performance? Or just any comments there would be very helpful. Russell Becker: Well, I think -- I mean we don't break out backlog by segment, but our backlog remains at record highs across really both segments. And so we feel really, really good about where we're going as we work our way through the fourth quarter and into 2026. We still -- our target is -- David mentioned this earlier in his remarks, and I'll let him make some additional comments about it. But our targeted growth rate is mid-single digit organic. And we'll take advantage of the opportunities that are continue to be presented to us. And if there's an opportunity that we feel like we can execute on, and it's going to be accretive to our margin goals, we're going to grab it and go. But right now, as we move into 2026, the expectation is mid-single digit organic growth. I don't know, David, do you have anything? Glenn Jackola: Yes. I think maybe the only thing I'd add is on the momentum question, if you pull apart our guide for the full year, it's really a strong fourth quarter guide, too. It will be a mid- to upper single-digit organic revenue growth and our highest margin expansion quarter of the year. So we feel like we're exiting 2025 with really good momentum. We've got that project backlog behind us. And most importantly, as Russ mentioned earlier, in the call -- that project work will lead to great inspection service and monitoring opportunities for our teammates which will fuel growth throughout the 2028 strat period. Operator: Your next question comes from the line of Julian Mitchell from Barclays. Julian Mitchell: Maybe my first question would just be around the acquisition sort of contribution, not so much the pipeline of unannounced deals and all that. But just if I look at the announced and closed transactions and so forth. I think M&A contribution to revenue this year is sort of mid-single digits. When you look at the acquisitions that have closed or expected to close by year-end, how should we think about the M&A sales contribution for next year? As it looks today, again, just based on the announced closed and about to close deals. And color on the sort of profitability for those newer acquisitions in aggregate? Glenn Jackola: You're asking a 2026 budget question, Julian. Julian Mitchell: [indiscernible] of announced sort of closed deals nothing perspective or what have you. Glenn Jackola: The best year I can give you on that is that about $1 of purchase price it is about $1, maybe a little bit less in revenue over a 12-month period. And so if you shape that out, you'll get a pretty good sense, I think, of what that will contribute next year, and we expect our deals to be accretive to fleet average from a margin perspective. Julian Mitchell: That's helpful. And then maybe just circling back to the operating leverage question that's come up a handful of times on this call. So is the core assumption leaving aside any outsized acquisitions that might have a different margin profile. But if we just look at the business as it is today, should we assume that, that sort of mid-high teens operating leverage that you've delivered year-to-date, that's a good sort of run rate for the year ahead, just looking at the shape of end market growth rates and the attendant kind of mix differences and all that. Glenn Jackola: Julian, when you say operating leverage, are you -- are you talking about EBITDA growth? Or maybe just can you help clarify that? Julian Mitchell: Sorry, just sure, Adam. So it's sort of incremental EBITDA margin. I think that number, for example, on sort of incremental EBITDA margin in the third quarter just delivered was mid-teens, and it was mid-teens in the first half as well. So your sort of -- your headline EBITDA margin was 13.5%, sort of incremental EBITDA margin just change in EBITDA over change in sales was more like mid-teens. Is that a good kind of run rate when you're looking at the end market mix today? Russell Becker: Yes. I think as you're modeling out into 2026 and beyond, I'd model a somewhat higher incremental going into the future. Operator: Your next question comes from the line of Jasper Bibb from Truist Securities. Jasper Bibb: Following up on the data center comments. Based on what you're seeing in the backlog trend for that sector, should we expect the revenue contribution from data centers to continue to build over the next few quarters, maybe to materially higher number than the 9% to 10% you cited earlier on the call? Russell Becker: I don't think it will be material higher -- materially higher. I can't even say it. I think it might creep to 10%, 11% or something like that as a percent of our revenue, I mean, I'd be surprised if it got to 12%. And one of the things to remember is that the difference between, say, us and some of the other players that are really taking advantage of the data center space is the fire life safety that component of these jobs is like significantly smaller. So like the HVAC/mechanical work on a large data center might be $500 million from a contract value perspective. And like I'm kind of making -- I'm just trying to give you directional guidance on the numbers here. The fire life safety might be $10 million to $15 million on that same data center job. Now we're seeing some of these large, large, very, very large projects where the fire life safety is higher than that. But then the mechanical is probably still 10x of that. And so the contracts, the sizes are different. And so that's the reason that you won't see it incrementally affect us as much as it say might affect of one our peers in the space. Jasper Bibb: Okay. Super helpful context. And then hoping you could maybe update us on early progress on your tech investments and any key milestones thinking about the ERP, for example, we should keep in mind as we think about '26. Glenn Jackola: Yes, absolutely. Thanks for the question. Our tech investment, this is our ERP investment in our Safety Services segment. I'd say is progressing largely as we expected. These are difficult projects, but I'm really pleased that the team is progressing and they're progressing, doing it a lockstep with our business and making sure that this is a business-led project that's meeting the business needs of our branch leaders, our field leaders and our company leaders. So that is moving forward. We're out of the blueprinting phase and we are currently deploying in our pilot company. So really moving forward as we expected. As you think into 2026 from a cost perspective, 2025 is going to be the high watermark for spend on that system deployment project. It will step down a bit as we go into 2026 and then step down further in 2027 as we get near and approach conclusion. Operator: Our final question comes from the line of Jon Tanwanteng from CJS Securities. Jonathan Tanwanteng: A lot of them have been answered already. I guess the one thing that I have is based on -- and following up on the prior question on the incremental margin expectation going forward to be higher than it has been. Should we take that to mean that there's no very large project start quarters in the schedule for the upcoming several quarters. And I understand that's obviously good for growth, but impacts the margin in the quarter. Is that the takeaway we should be having? Russell Becker: Yes. I wouldn't -- I view this whole project start topic that's impacted our year-over-year margins for the past couple of quarters is something that happens at an inflection point. And as we went from being down year-over-year to significantly up year-over-year from a revenue perspective in Q2, it impacted. We were up about $50 million to $60 million in revenue quarter-over-quarter in the Specialty segment in the third quarter. So that impacted. But now as we get into the fourth quarter, and I'd expect our margins in the Specialty segment to be year-over-year accretive and then into Q1 and Q2 of next year, it's just going to be part of the ebbs and flows of our margin and not a major issue. Operator: This concludes the Q&A session portion of today's meeting. I'd now like to turn the call over to Russ Becker for closing remarks. Russell Becker: Thank you. In closing, I would like to thank all our team members for their continued support and dedication to our business. I'm truly grateful for what each and every one of you do on a daily basis. I would also like to thank our long-term shareholders as well as those that have recently joined us for their support. We appreciate your ownership of APi and look forward to updating you on our progress throughout the remainder of the year. Thank you, everybody, for joining the call this morning. Operator: This concludes today's meeting. You may now disconnect.
Operator: Hello, and welcome to this webcast with Rottneros, where CEO, Lennart Eberleh; and CFO, Monica Pasanen will present the report for the third quarter of 2025. After the presentation, there will be a Q&A. [Operator Instructions] And with that said, I hand over the word to you, Lennart. Lennart Eberleh: Thank you very much, Ludwig, and hello, everybody, to this quarter 3 of 2025 on the 30th of October, a rainy and autumn-like day in Sweden. And like the weather, our results are really not as summer like as the picture on the first slide. It has been a challenging market that we've seen during the quarter. We are still struggling with very high raw material prices, although they have peaked, and they are starting to come down. The pulp market has not really improved since the spring. On the contrary, it has moved sideways, and with some lackluster in China. And as a result of that, we've seen a result, which is really not anything we are happy with. As a consequence, we continue to focus on the things we can control ourselves. We have a very strong cost focus. The reorganization is in place. We will see the result of that program towards the end of the year with a full effect of some SEK 35 million to SEK 40 million. We do not stop there. We will work further to see if we can achieve further savings. We have a working capital, which is too high that we have seen some reductions in that we will work with to continue further going onwards. And of course, we go also through all the variable costs we have to see if additional savings can be achieved in those areas. So this is a time where to put up our sleeves and really show that we can be a part of turning this around. If we look into the market, it's, as I've said, a very challenging climate. If we look at the prices in U.S. dollars for the chemical grades, it has come down after a pickup at the beginning of that year, which we thought was the beginning of the cycle. It has stopped then. Stocks have increased. They have now decreased. But if we look into the various grades, which are in stock, short fiber and long fiber, the short fiber has had a better run, and there have been some increases in the short fiber pricing in Asia with 2x $20 during the summer break and the stocks have been coming down to a more normalized level, whereas the long fiber sulfate kraft pulp has increased its stock to a slightly over a balanced level, and thus, the prices have come under pressure. This is valid for the standard grades. If we look into the chemical pulp grades that we make in niches for browned whitened porose grades for filters, we still see a very good and continued good demand in those niches with increased demand from our customers. We'll come back to that in a short while. Translating prices into Swedish krona is, of course, important. And here, we see the effect of the krona that has strengthened over the last months as well. So in addition of reduced list prices in U.S. dollars, these prices also have come down even further if we translate them back to the Swedish krona. And that is, of course, an effect of the weak market that we've seen where it simply has not been possible to forward the price and cost increases that we have seen lately. But if we look into how the market has developed as it is weak, as I've said, mainly in Europe, we see all across the board that all grades are struggling with a small exception of containerboard, which mainly is self-sufficient on recycled fibers. That's not a big market for fresh fibers. And Europe is Rottneros' biggest market with some 65% to 70% of our sales. 2024 for downward production was still a good year. But the first 8 months of 2025, we have seen a slowdown of activity, and this slowdown has increased since May. The slowdown already shown up in the first 4 months, it has accelerated then and especially in the cartonboard area, which is important for us. We've seen that the activity hasn't really come back, and that is weighing on our high-yield pulp production and deliveries. And translating this into the chemical deliveries, we see that Europe is down as much as the U.S. as well. And the entire uptake of some 5% is from China, where we see a strong restocking as the Chinese buyers expect the current prices to be the low price. And if there's anything to be good to be said about the current prices, we are at levels which are not sustainable for the high-cost producers. And thus, I believe that the Chinese buyers are right in assuming that this is the bottom of the cycle. It's time to start buying, and this should have some positive momentum going forward. But there are some imbalances. There is an oversupply or a lack of demand, and that has to be rectified before we will see a strong uptick in the development going forward. And on top of the imbalances as a consequence of a weak downstream market in Europe, we have also seen an emergence of pulp production in China itself. China is still the biggest market for market pulp, both from Europe, Canada and Latin America for short fiber-based products. But they have started over the last decade to make more and more of their own pulp and also integrated pulp and board, which you will see on the next slide. So you see here the availability of domestic wood that until the early 2010s has been the primary raw material for making pulp domestically up until some 10 million tonnes, which is the dotted line. That availability of domestic wood has increased during the last 5 years year-over-year. And that is a consequence of the building market that is weak and down. So a lot of wood is going into building buildings. And as the entire property market has come to hold, these fibers are now finding their ways into the pulp and paper market. So the increase in Chinese production of pulp is fueled by availability of local fibers. And on top, of course, you see that there is also an increased import of wood chips, which are certainly more price sensitive, but they are weighing on the market sentiment in China quite strongly. And if we translate the pulp production in China also into what this means for paper and board output from China, you see the same picture here since 1920, that has moved up to larger volumes, quite strong increase during the first month of 2025. And this is a level of production that cannot be consumed domestically in China. So we have seen exports out of China, both from paper and board into Asia and Europe and other markets where we historically have our customers. So our customers have been -- are meeting these kind of low cost producers from China and had to reduce their own production and thus weighed on the demand for market pulp. There are actions being in place. India, for example, has put duties and tariffs in place to stop this import of low-priced Chinese products. And also, there are discussions in Europe to start antidumping actions against the import of Chinese production. So we will have to see how this is playing out going forward. This is, however, more for standard bulk grades of pulp, hard and softwood bleached grades of standard quality. And if we look into the Rottneros qualities, we still see a strong and increasing demand for our UKP grades for filter and electrotechnical applications, but also ECF grades for specialties or tissue. Printing and writing, an area that we have not been so active in for the last years is now coming back as we have to find new outlets for the volumes that we cannot place within cartonboard. And also a new segment is emerging, which is fiber cement, where our fibers are substituting asbestos fibers to give some strength to cement. So we do see a good development on the sales of our chemical specialty grades, which have grown in the quarter and outpaced the production levels. So we've seen for Rottneros some reduced stocks. The challenge here is to find the market outlets for our high-yield pulp where we have a very cost-efficient mill now after all the changes we had during the last years. We are very efficient when it comes to head count per tonne of pulp produced. The energy efficiency has increased over the last years. So everything is really in place to be performing very well, and we do see good production on those days when we are running. And now with these tariffs being in placed, for example, in India, we see also that some of the export markets are coming down -- coming back and then improving our order books. So there are some lights of hope going forward also for the high-yield pulp area. And with that, I leave over to Monica to guide us through the results for the third quarter and the first 9 months. Monica Pasanen: Thank you, Lennart. One of the highlights is that we have a strengthened balance sheet, thanks to the rights issue during the quarter, but we'll come back to that later on. And we'll start with the profit and loss for the third quarter. We see here that we go from a plus SEK 70 million in EBITDA to minus SEK 21 million. And this is, of course, where we see a very disappointing development. The majority is due to price and currency of our prime product, pulp. Lennart went through the graph, so you could all see the sloping trend, and that is also what we can see in our own pricing when we are looking at the waterfall here. We are also selling a bit less, but that's mainly on the high-yield pulp side. We exited the Asian market earlier on this year when prices were at a level where we were not really covering our variable costs. And now we are getting some volumes back, but we have lost some on volume. We see some positive signs on variable costs. In the previous quarters, we have showed big negative numbers when we have been comparing quarter this year to quarter last year, but now it is evening out. Behind this 0, we have a slight negative impact from higher wood costs, but they are offset by slightly lower other variable costs like chemicals and fuels. What is really positive to see is that we are improving our fixed cost position. We are working very actively, very hard with our fixed costs, and we start seeing improvements. We have to admit that some of the improvements are also due to when our annual maintenance shuts are and when the costs for these annual maintenance costs come into our profit and loss statement. But the majority of the positive improvement is from our cost saving program. We see a fairly large number, minus SEK 34 million for byproducts and other things. And we had lower variable costs for fuels, but at the same time, we get a lower price for our byproducts, mainly tall oil and bark that we are selling. We also sold some emission rights last year, which we didn't do in the last quarter. So those are the main reason behind the minus SEK 34 million. Then if we look at the same picture, but for the first 9 months, we see a similar -- very similar trend. Price and currency having the major impact. On this slide, we see that the variable costs for the first 9 months this year are higher than last year. And if we break it up between wood and other variable costs, it's approximately SEK 100 million higher costs from wood, and then we have positive impact from other variable costs. On these 9 months, we are still seeing higher fixed costs, but that is what we are addressing at the moment, plus that we have some one-off items affecting the comparability. With that, we can continue looking at the wood costs a bit more. 76% of the variable cost for producing pulp is today the cost of wood. If we look 5 years back and would have had a similar picture, the percentage would have been approximately 1/3. And if we take this into SEK 1 million, in a 12-month period, we use approximately SEK 1.2 billion for variable costs to produce our pulp -- sorry, SEK 1.6 billion. The SEK 1.2 billion is the cost for wood. And if we would have had the same wood cost as 5 years ago, this number would have been a bit more than SEK 600 million. So we have a higher cost for wood of approximately SEK 580 million for the volume we are producing now in a 12-month period. And that's, of course, a very big number when you're thinking of what our EBIT is normally. And if we compare it to the cost for our personnel in the last 12 months, that was a bit more than SEK 300 million. So this is -- the cost increase is more than double of that. On the next slide, you will see how the wood prices have evolved. So the comparison year that I talked about was 2021, and it's really from 2022 and forward, we had seen the huge increase in the cost of wood. This is from official numbers from Skogsstyrelsen for the price of spruce wood, pulp wood to our industries. We see here that we have -- that the prices are starting to peak. We don't have the statistics yet for the third quarter. But when looking at our own costs, we see that they were marginally higher in the third quarter of this year compared to last year. And there have been several announcements of price decreases in the market. So it will be interesting to see what the picture looks like when we have the official statistics also for the third quarter. Then we go into the balance sheet. At the beginning of this quarter in July, we successfully concluded the rights issue of approximately SEK 300 million that we raised. That, of course, improved our equity to assets ratio. We're back at 63%, above the 60% line. We used part of the rights issue to reduce our debt. So our net debt position has improved. What is really positive to see during the last 2 quarters is that we have had a positive cash flow from operations before investments. We have had a negative EBITDA, but that has been more than offset with working -- on our working capital and reducing our stocks, and that is something that we are continuing to doing, and we see that we still have good potential to improve our working capital position further. With that, I hand back to Lennart. Lennart Eberleh: Yes. Thank you very much, Monica. And we cannot say anything, but it's very tough times, and it's not only for us, Rottneros, but certainly for the entire industry, which is under stress currently. But we all believe that fiber do have their natural place in business, in packaging, in other convenience products. It's a renewable product. We are self-sufficient when it comes to its sourcing. We do not import anything from outside Europe. We create a lot of energy based on the raw material that we are harvesting. There's more forest standing today in the Nordics than it used to be 100 years ago. So it's responsible managed forests that supply us with renewable fibers that we can turn into lots of various different products. Tissue is a growing area in general, currently a little bit under pressure in Europe, but with more people having more disposable income, the demand for tissue is -- continues to grow. More people are consuming more products and fiber-based packaging materials are the most and best packaging materials that are available. You can recycle them. So the primary fiber that we are harvesting here in the Nordic is then coming into the market and can be recycled down on the continent, various times to create new products and new values. I was into renewable energy. Of course, the energy that is produced as a residue from our sulfate kraft mills is renewable based on biofuels, but also the entire investment in electrifying our society, rebuilding the grids is asking for more cables. Cables need more paper as paper is an insulator in the cable construction. And also in transformers, a lot of fibers is being used. And here, we see one of the very strong end users where we have an excellent position. We are one of the cleanest producers of pulp with extremely low or no conductivity, which is a key performance for these kind of end users. And of course, everything about sustainability, both when it comes of using fibers, but also when it comes to using fibers as a raw material, for example, molded fiber packaging, where we're also working with. And Rottneros packaging is that area where we do put a lot of efforts into. We are now performing the customer evaluation and qualifying trials in Poland. We believe those will be finalized by the end of the year, so we can actually start moving production from Sweden to Poland and then scaling it up. And of course, we also see the emergence of a lot of other players in the market, one of them we have invested into when it comes to dry molding as opposed to the wet molding process that we are having. But we see also a lot of activities with various different players. And I think that is a sign of that there is a belief and need for molded fiber products in the market as a complement to all kinds of other products and especially in light of the single-use plastic directive and the packaging and packaging waste directive, which we are soon to be implementing and customers are asking for solutions that are more suitable than purely plastic-based packaging materials. So to summarize it, we have seen a very challenging market during this year with some imbalances that need to be leveled out before we will see a good pickup, but it seems that we are coming closer to that point. We have definitely seen an increased supply of raw material over the last month. Monica has explained to you the monetary impact of it. And the public statistics will come soon, but we know the deals that we have closed with our suppliers, and we see that these prices are coming down. They will take some time to drill through the stocks which are in the forest along the forest roads in the mills before you see it in the profit and loss statements, but it is coming down. We have done our homework when it comes to stabilizing our operations, making them more efficient, working on operational efficiency. And everything is in place. There are no further big investments needed. We can be very conservative looking forward in controlling our CapEx for the next period. And we are, of course, working extremely hard to both control our cost, but also free up working capital in order to secure the cash that we have in the company. And wrapping all that up, I think even though it is very dark at the moment, there is some light at the end of the tunnel, and we believe we are soon entering a more positive period again. And with that, we leave the word back to Ludwig to guide us through some questions and answers. Operator: Thank you so much for the presentation. And as you mentioned, now it's time for Q&A. So if you have any questions to Lennart and Monica here, you can send them in via the form to the right. And the first question here is, how do you plan to strengthen profitability after the sharp drop in EBITDA this quarter? Monica Pasanen: Should I take that or? Lennart Eberleh: Yes, please. Please go ahead. Monica Pasanen: I think we are on the right track, and we have seen that -- we saw already at the beginning of the year that the market was getting tougher with lower prices. After a while, the Swedish crown strengthened, and the wood prices were increasing at that time. So that is why we have initiated the cost saving program that is now showing that we are decreasing our fixed costs. We are also looking at our variable costs other than wood to be more efficient and to improve on the variable cost side. And not the least, it's not part of profitability, but it's part of the cash flow to be efficient with working capital. And we have had -- we do have a good track record for the last 2 quarters, and we have clear targets to improve even further on the working capital side. Lennart Eberleh: And if we fill in here also, of course, there's a huge potential in fully utilizing the capacity that we have installed in our high-yield pulp and Rottneros mill. We see some markets coming back that have been closed down for some time, but we're also working very hard in introducing new grades based on the entire raw material basket that is available. So we're talking about both the traditional softwood, higher pulp grades, but there are also opportunities for us as we have the technical equipment to make blends of soft and hardwood or pure hardwood and there are various grades of hardwood as well. So there's a good demand for those. And of course, that will generate additional sales and contribution and quickly improve then once it's working out our profits. Operator: What will the cost reduction of SEK 35 million to SEK 40 million have on margins going forward? Monica Pasanen: They will, of course, translate directly into operating profit. So they will be part of the improvement program as will also other actions. As I mentioned when we talked about the wood costs, the SEK 35 million to SEK 40 million on fixed cost is very much is personnel costs and also some other fixed costs, SEK 35 million to SEK 40 million. But if we compare that to the cost of wood, that has increased by approximately SEK 600 million in 4 years or from the lower levels to the very high peaks. The big impact will come when we see that we have lower raw material prices going forward. Operator: How will the proceeds from the rights issue support further growth or stability? Lennart Eberleh: Those proceeds have been used to improve our cash position, balance sheet and pay down debt. As I've said, there are no ongoing big investments planned. We have restructured Rottneros mill from a mill that had 2 pulp lines for newsprint grades and cartonboard grades. Newsprint as we saw has been structurally very much declining, exited that. So now it's one line with 1/3 of the manning working only for cartonboard grades, which is over time growing market area and also Valvik has proven that it is very efficient, and all major reinvestments are completed. So this is really, proceeds to strengthen our balance sheet, make sure we have a good net debt-to-equity ratio and necessary cash funds available to finance the ongoing business. Operator: When do you expect lower wood prices to start improving your earnings? Lennart Eberleh: As we've seen here, we are peaking now, and that will happen over the coming quarters. Operator: And moving on to the last question here. What financial potential do you see in packaging project in Poland? Lennart Eberleh: This is now a milestone 2 of our project. The first one was to finalize the technical development in Sweden. Milestone 2 is to make sure and prove that we can scale up on to an industrial scale and make sure that all these bits and pieces are working together and filling that line, which can produce once fully operational, 100 million trays of any kind of packaging. But compared to the pulp business we have, it is still a marginal contribution to our results. So the result and impact of that will be further down the road. Operator: Thank you so much for presenting here today, Lennett and Monica, and thank you all for tuning in. I wish you a pleasant weekend. Lennart Eberleh: Thank you very much, everybody, and looking forward to talk to you after our Q4 results early on next year. All the best.
Operator: Good morning, ladies and gentlemen, and welcome to the Foraco Third Quarter 2025 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, October 30, 2025. I would now like to turn the conference over to Tim Bremner. Please go ahead. Timothy Bremner: Thank you, operator. Good morning, everyone, and welcome to Foraco International's Q3 2025 Earnings Call. I am Tim Bremner, CEO of Foraco, and joining me today is Fabien Sevestre, our CFO. Earlier today, we released our third quarter 2025 financial results via CNW Newswire prior to the opening of the TSX. If you did not yet receive a copy, you can find it on our website at www.foraco.com. Following our comments, we will open the call for questions, which will be moderated by our operator. This quarter continued to show operational progress and disciplined cost management across our business. Foraco reported Q3 2025 revenue of $71 million or $72 million when excluding foreign exchange effects compared to $79 million in the same period last year. EBITDA was $14 million, representing 20% of revenue compared to 21% in Q3 2024. Earlier this week, we announced the award and renewal of 3 significant long-term contracts in Chile and Canada with a combined expected value of $150 million. These wins demonstrate Foraco's ability to consistently deliver a diversified services offering and the strong value our customers recognize beyond simply price competitiveness. I'll now turn the call over to Fabien for a detailed review of the quarter's financial performance. Fabien? Fabien Sevestre: Thank you, Tim, and good morning, everyone. First of all, and as a reminder, Foraco reports in full IFRS and in U.S. dollars. Revenue for Q3 '25 amounted to $71 million compared to $78 million for the same period last year. By reporting segment, Mining represented 86% and Water represented 14%. In North America, revenue amounted to $26 million in Q3 '25, 29% decrease driven by the completion and deferral of certain Canadian contracts, while new programs in the United States are ramping up and showing encouraging performance. Revenue in Asia Pacific remained stable at constant exchange rates at $24 million, reflecting a high and sustained level of activity after several quarters of growth driven by consistent customer demand. Revenue in South America increased 25%, reflecting momentum as operations in all 3 countries are progressively reaching their targeted performance levels, supported by growing customer demand. In EMEA, revenue grew 32% to $5.4 million, supported by the continued ramp-up of contracts initiated during previous periods. In Q3 '25, the geographical activity split was North America, 36%; Asia Pacific, 33%; South America, 23%; EMEA, 8%. During the quarter, gross margin, including depreciation was $14 million, 20% of revenue compared to $17 million, 22% of revenue in Q3 '24. This decrease was mainly driven by the phasing and ramp-up of new contracts, which are typically associated with lower initial margins. SG&A decreased by 11% to $4.8 million compared to $5.4 million for the same period last year. As a percentage of revenue, SG&A was stable at 7%. As a result, EBIT was $9 million versus $12 million in Q3 '24. EBITDA amounted to $14 million compared to $16 million in Q3 '24. On a 9-month basis, revenue amounted to $195 million compared to $233 million last year. The year-to-date '25 gross profit was 18% versus 22% last year. The year-to-date '25 EBIT was $22 million or 11% of revenue compared to 16% or $36 million in the same period last year. As a percentage of revenue, the EBITDA for the 9-month period was 18% compared to 21% for the same period last year. As at September 30, '25, the working capital requirements was $7 million compared to $23 million for the same period last year. CapEx amounted to $15 million in cash compared to $14 million last year. This CapEx is mainly related to the construction of new proprietary rigs, new rigs and the acquisition of ancillary equipment and growth to support new contracts. At September 30, '25, our net debt, including lease obligation was $72 million or $66 million at constant exchange rates versus $61 million at December 31, '24. I would now hand the call back to Tim for his closing remarks. Tim? Timothy Bremner: Thank you, Fabien. We're encouraged by the strengthening market conditions across our key geographies, particularly in Latin America and by the continued rebound in metal prices and exploration financing. In October, S&P Global reported that total financings for the metal and mining sector increased 93% year-over-year to $12.83 billion. Gold financings rose 136% to $6.71 billion, while base metals led by copper were up 31% to $3.18 billion. This momentum extends to early-stage exploration, which increased 27% quarter-over-quarter and 5% year-over-year. The S&P Exploration Index, which tracks changes in metal prices weighted by exploration spending reached $255, up from $228 in June and $200 a year ago. These are powerful indicators of renewed sector confidence, and they directly translate into increased demand for Foraco's drilling services. Our tender pipeline remains robust and supports our focused growth strategy. We see clear signs of sustained improvement in the mining and exploration environment, and Foraco is well positioned to benefit. We continue to invest in new rigs and technology to support this growth and have redeployed more than 20 rigs internationally, including across Latin America. Our strategy remains focusing on delivering superior margins and strong free cash flow to fund future growth, while maintaining disciplined capital allocation and shareholder returns. With that, operator, we'll now open the call for questions. Operator: [Operator Instructions] Your first question comes from Frederic Tremblay from Desjardins. Frederic Tremblay: Tim, I was wondering if you could maybe characterize your tender pipeline now versus, say, 6, 12 months ago, maybe in terms of the number and size of opportunities that you're seeing? Broadly speaking -- I don't expect precise numbers there, but just general comments on the evolution of the pipeline maybe would be helpful. Timothy Bremner: Right. So the tender pipeline in North America as it relates to gold, especially in copper is very full. And in some sectors, I would say it might be even a little bit overflowing. There's more work that we could respond to. Latin America is one region where we've seen a tremendous improvement. As you know, we work in Brazil, Chile and Argentina. And all 3 of those countries are seeing a robust tender pipeline. Argentina of the 3 is the smallest drilling services market. Chile is obviously the biggest. And the industry in Chile, the services industry, drilling services industry is working at near full capacity, and there are still some significant tenders that are being launched. So it is quite robust in all the geographies concentrated on copper and gold. Frederic Tremblay: Okay. Great. Maybe just to follow up on your comments on North America. Maybe just looking at the conversion of that strong pipeline into revenue. We're noticing that North American revenue, which is currently mainly Canada has been down year-over-year for the past 4 quarters. Do you have any sort of visibility on timing in terms of getting that region back to year-over-year growth in positive territory? Timothy Bremner: So the Canadian market is a very competitive one at the moment. And I think everybody knows that there's a very high concentration of drilling services companies in Canada. And a lot of that activity is in relatively straightforward drilling areas that are super competitive. And it's not a market that we want to enter into because it's strictly a price-driven market. We are focusing on the deeper, more technical, the directional work, and that work exists. And as we pivot away from our other customers, largely the nickel and redeploy those rigs in the gold space, which takes time, we will see that business rebuild in Canada. You've heard me speak about pivoting to gold customers in Canada when we were busy with the deep nickel. We didn't have a lot of capacity. Now that has shifted. We're training our sights on those customers. And we see the opportunities there. And I believe that it's only a matter of time before we are able to secure the work that kind of is in the sweet spot for Foraco, and it will rebuild that revenue. I announced 2 projects in Canada that were significant. And it's the first time that we've been able to announce that for the Canadian market in a number of quarters. So I see some improvement there. The same thing in the U.S., we've got some traction in the U.S. I've been talking about it for quite some time. We are quite busy in the U.S. The tender pipeline in the U.S. is robust. It is a technical market in the U.S. where core recovery and completing the holes to depth is the objective. So it's not as much as a price-driven market. We are proficient at delivering a high-quality technical service and meeting those customer objectives. So again, that is a market well suited for the type of services that we provide and allows us to secure the price levels that deliver the margins that we would like. So I am optimistic about the U.S. market. Operator: Your next question comes from Donangelo Volpe from Beacon Securities. Donangelo Volpe: Just looking for some additional commentary on the dynamics of the recent contract wins. Should we be looking for immediate contribution to the Q4 numbers? And should we anticipate some compression on margins as these projects go through the ramp-up phase? Timothy Bremner: So the work in Canada is renewals. So we're already in the field. We're not going to -- we're not having to remobilize. With respect to Q4, Christmas is coming like it is every year. So we're going to expect and endure the seasonality of Q4 as we always do, and that will -- that includes these projects. The -- so you're not going to see any effects from mobilization and ramp-up from those projects in Canada. Donangelo Volpe: Okay. And then the project outside of Canada, obviously, we'll see like a little bit of a ramp-up phase there? Timothy Bremner: A little bit. It's a repeat customer. It's in an area where we are currently working. We have the rigs available. And it's more straightforward than some of the other ones, but there will be a slight ramp-up on this one as well. The frustrating thing for us is we're at the mercy of the customer schedule. And you've heard me say before that the average award time from a tender to award seems to be increasing. And also, once these projects are award, our customers are giving us a start date. We anticipate that only to experience a delay. And that's been a common theme lately. But we may have some delay in Chile, but not in Canada. Donangelo Volpe: Okay. Great. I appreciate the color there. And then just quickly moving over to the commodity mix for the quarter and also junior and senior exposure for the quarter. Those numbers would be appreciated. Timothy Bremner: Sure. I have those here. So if we look at -- I thought I had right here. Give me 1 second. Apologies. So gold, we're -- for the quarter, we've increased our commodity mix in gold, up from 13% to 16%. And I expect that to increase significantly. We're getting some decent traction there. We're getting some feedback here on the call, sorry. Nickel is off. We were 21%. We're down to 16%. That's not a surprise for anybody. Copper, we're flat at 24%. Iron, we're even at 15%. Water, we are up to 17% from 13%. And lithium is not even on the radar. So we're seeing the main traction in copper and maintaining our weighting in -- sorry, the main traction in gold and maintaining our weighting in copper. And our strategy is again to increase the gold contribution. As for the mix with juniors, it's relatively flat, maybe a slight uptick. But again, our strategy is to focus on the Tier 1 customers that can offer us the long-term opportunities. Operator: [Operator Instructions] Your next question comes from Steven Green from Ordinance Capital. Steven Green: I wonder if you could talk about your utilization rate and how as you increase your revenues, your gross margins will go up as your utilization rate goes up as well. Timothy Bremner: Sure. So with the unutilized capacity that we have, there's a cost associated with that. And as we put these rigs to work, we're not incurring new investment for the rigs that we're putting to work or a modest investment in some cases. And even at constant rates, that will turn into a direct improvement in the EBITDA margin as that utilization rate goes up. We are investing more than we have in rebuilds and reconfiguration of some rigs, especially those that we transfer internationally. But generally speaking, with the increase in utilization rate will drop right to the bottom line as we offset that unabsorbed cost. Operator: There are no further questions at this time. I will now turn the call over to the Foraco team for closing remarks. Please go ahead. Timothy Bremner: Thanks, Sergio. Well, we appreciate your interest, everyone, and we look forward to speaking to you again in the new year when we present Q4. And if you have any follow-up questions, a lot of you know me, I'm happy to take calls or respond to e-mails as you wish. And again, thank you very much for your interest. Have a good day. Operator: Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Hello, and welcome to this webcast with Rottneros, where CEO, Lennart Eberleh; and CFO, Monica Pasanen will present the report for the third quarter of 2025. After the presentation, there will be a Q&A. [Operator Instructions] And with that said, I hand over the word to you, Lennart. Lennart Eberleh: Thank you very much, Ludwig, and hello, everybody, to this quarter 3 of 2025 on the 30th of October, a rainy and autumn-like day in Sweden. And like the weather, our results are really not as summer like as the picture on the first slide. It has been a challenging market that we've seen during the quarter. We are still struggling with very high raw material prices, although they have peaked, and they are starting to come down. The pulp market has not really improved since the spring. On the contrary, it has moved sideways, and with some lackluster in China. And as a result of that, we've seen a result, which is really not anything we are happy with. As a consequence, we continue to focus on the things we can control ourselves. We have a very strong cost focus. The reorganization is in place. We will see the result of that program towards the end of the year with a full effect of some SEK 35 million to SEK 40 million. We do not stop there. We will work further to see if we can achieve further savings. We have a working capital, which is too high that we have seen some reductions in that we will work with to continue further going onwards. And of course, we go also through all the variable costs we have to see if additional savings can be achieved in those areas. So this is a time where to put up our sleeves and really show that we can be a part of turning this around. If we look into the market, it's, as I've said, a very challenging climate. If we look at the prices in U.S. dollars for the chemical grades, it has come down after a pickup at the beginning of that year, which we thought was the beginning of the cycle. It has stopped then. Stocks have increased. They have now decreased. But if we look into the various grades, which are in stock, short fiber and long fiber, the short fiber has had a better run, and there have been some increases in the short fiber pricing in Asia with 2x $20 during the summer break and the stocks have been coming down to a more normalized level, whereas the long fiber sulfate kraft pulp has increased its stock to a slightly over a balanced level, and thus, the prices have come under pressure. This is valid for the standard grades. If we look into the chemical pulp grades that we make in niches for browned whitened porose grades for filters, we still see a very good and continued good demand in those niches with increased demand from our customers. We'll come back to that in a short while. Translating prices into Swedish krona is, of course, important. And here, we see the effect of the krona that has strengthened over the last months as well. So in addition of reduced list prices in U.S. dollars, these prices also have come down even further if we translate them back to the Swedish krona. And that is, of course, an effect of the weak market that we've seen where it simply has not been possible to forward the price and cost increases that we have seen lately. But if we look into how the market has developed as it is weak, as I've said, mainly in Europe, we see all across the board that all grades are struggling with a small exception of containerboard, which mainly is self-sufficient on recycled fibers. That's not a big market for fresh fibers. And Europe is Rottneros' biggest market with some 65% to 70% of our sales. 2024 for downward production was still a good year. But the first 8 months of 2025, we have seen a slowdown of activity, and this slowdown has increased since May. The slowdown already shown up in the first 4 months, it has accelerated then and especially in the cartonboard area, which is important for us. We've seen that the activity hasn't really come back, and that is weighing on our high-yield pulp production and deliveries. And translating this into the chemical deliveries, we see that Europe is down as much as the U.S. as well. And the entire uptake of some 5% is from China, where we see a strong restocking as the Chinese buyers expect the current prices to be the low price. And if there's anything to be good to be said about the current prices, we are at levels which are not sustainable for the high-cost producers. And thus, I believe that the Chinese buyers are right in assuming that this is the bottom of the cycle. It's time to start buying, and this should have some positive momentum going forward. But there are some imbalances. There is an oversupply or a lack of demand, and that has to be rectified before we will see a strong uptick in the development going forward. And on top of the imbalances as a consequence of a weak downstream market in Europe, we have also seen an emergence of pulp production in China itself. China is still the biggest market for market pulp, both from Europe, Canada and Latin America for short fiber-based products. But they have started over the last decade to make more and more of their own pulp and also integrated pulp and board, which you will see on the next slide. So you see here the availability of domestic wood that until the early 2010s has been the primary raw material for making pulp domestically up until some 10 million tonnes, which is the dotted line. That availability of domestic wood has increased during the last 5 years year-over-year. And that is a consequence of the building market that is weak and down. So a lot of wood is going into building buildings. And as the entire property market has come to hold, these fibers are now finding their ways into the pulp and paper market. So the increase in Chinese production of pulp is fueled by availability of local fibers. And on top, of course, you see that there is also an increased import of wood chips, which are certainly more price sensitive, but they are weighing on the market sentiment in China quite strongly. And if we translate the pulp production in China also into what this means for paper and board output from China, you see the same picture here since 1920, that has moved up to larger volumes, quite strong increase during the first month of 2025. And this is a level of production that cannot be consumed domestically in China. So we have seen exports out of China, both from paper and board into Asia and Europe and other markets where we historically have our customers. So our customers have been -- are meeting these kind of low cost producers from China and had to reduce their own production and thus weighed on the demand for market pulp. There are actions being in place. India, for example, has put duties and tariffs in place to stop this import of low-priced Chinese products. And also, there are discussions in Europe to start antidumping actions against the import of Chinese production. So we will have to see how this is playing out going forward. This is, however, more for standard bulk grades of pulp, hard and softwood bleached grades of standard quality. And if we look into the Rottneros qualities, we still see a strong and increasing demand for our UKP grades for filter and electrotechnical applications, but also ECF grades for specialties or tissue. Printing and writing, an area that we have not been so active in for the last years is now coming back as we have to find new outlets for the volumes that we cannot place within cartonboard. And also a new segment is emerging, which is fiber cement, where our fibers are substituting asbestos fibers to give some strength to cement. So we do see a good development on the sales of our chemical specialty grades, which have grown in the quarter and outpaced the production levels. So we've seen for Rottneros some reduced stocks. The challenge here is to find the market outlets for our high-yield pulp where we have a very cost-efficient mill now after all the changes we had during the last years. We are very efficient when it comes to head count per tonne of pulp produced. The energy efficiency has increased over the last years. So everything is really in place to be performing very well, and we do see good production on those days when we are running. And now with these tariffs being in placed, for example, in India, we see also that some of the export markets are coming down -- coming back and then improving our order books. So there are some lights of hope going forward also for the high-yield pulp area. And with that, I leave over to Monica to guide us through the results for the third quarter and the first 9 months. Monica Pasanen: Thank you, Lennart. One of the highlights is that we have a strengthened balance sheet, thanks to the rights issue during the quarter, but we'll come back to that later on. And we'll start with the profit and loss for the third quarter. We see here that we go from a plus SEK 70 million in EBITDA to minus SEK 21 million. And this is, of course, where we see a very disappointing development. The majority is due to price and currency of our prime product, pulp. Lennart went through the graph, so you could all see the sloping trend, and that is also what we can see in our own pricing when we are looking at the waterfall here. We are also selling a bit less, but that's mainly on the high-yield pulp side. We exited the Asian market earlier on this year when prices were at a level where we were not really covering our variable costs. And now we are getting some volumes back, but we have lost some on volume. We see some positive signs on variable costs. In the previous quarters, we have showed big negative numbers when we have been comparing quarter this year to quarter last year, but now it is evening out. Behind this 0, we have a slight negative impact from higher wood costs, but they are offset by slightly lower other variable costs like chemicals and fuels. What is really positive to see is that we are improving our fixed cost position. We are working very actively, very hard with our fixed costs, and we start seeing improvements. We have to admit that some of the improvements are also due to when our annual maintenance shuts are and when the costs for these annual maintenance costs come into our profit and loss statement. But the majority of the positive improvement is from our cost saving program. We see a fairly large number, minus SEK 34 million for byproducts and other things. And we had lower variable costs for fuels, but at the same time, we get a lower price for our byproducts, mainly tall oil and bark that we are selling. We also sold some emission rights last year, which we didn't do in the last quarter. So those are the main reason behind the minus SEK 34 million. Then if we look at the same picture, but for the first 9 months, we see a similar -- very similar trend. Price and currency having the major impact. On this slide, we see that the variable costs for the first 9 months this year are higher than last year. And if we break it up between wood and other variable costs, it's approximately SEK 100 million higher costs from wood, and then we have positive impact from other variable costs. On these 9 months, we are still seeing higher fixed costs, but that is what we are addressing at the moment, plus that we have some one-off items affecting the comparability. With that, we can continue looking at the wood costs a bit more. 76% of the variable cost for producing pulp is today the cost of wood. If we look 5 years back and would have had a similar picture, the percentage would have been approximately 1/3. And if we take this into SEK 1 million, in a 12-month period, we use approximately SEK 1.2 billion for variable costs to produce our pulp -- sorry, SEK 1.6 billion. The SEK 1.2 billion is the cost for wood. And if we would have had the same wood cost as 5 years ago, this number would have been a bit more than SEK 600 million. So we have a higher cost for wood of approximately SEK 580 million for the volume we are producing now in a 12-month period. And that's, of course, a very big number when you're thinking of what our EBIT is normally. And if we compare it to the cost for our personnel in the last 12 months, that was a bit more than SEK 300 million. So this is -- the cost increase is more than double of that. On the next slide, you will see how the wood prices have evolved. So the comparison year that I talked about was 2021, and it's really from 2022 and forward, we had seen the huge increase in the cost of wood. This is from official numbers from Skogsstyrelsen for the price of spruce wood, pulp wood to our industries. We see here that we have -- that the prices are starting to peak. We don't have the statistics yet for the third quarter. But when looking at our own costs, we see that they were marginally higher in the third quarter of this year compared to last year. And there have been several announcements of price decreases in the market. So it will be interesting to see what the picture looks like when we have the official statistics also for the third quarter. Then we go into the balance sheet. At the beginning of this quarter in July, we successfully concluded the rights issue of approximately SEK 300 million that we raised. That, of course, improved our equity to assets ratio. We're back at 63%, above the 60% line. We used part of the rights issue to reduce our debt. So our net debt position has improved. What is really positive to see during the last 2 quarters is that we have had a positive cash flow from operations before investments. We have had a negative EBITDA, but that has been more than offset with working -- on our working capital and reducing our stocks, and that is something that we are continuing to doing, and we see that we still have good potential to improve our working capital position further. With that, I hand back to Lennart. Lennart Eberleh: Yes. Thank you very much, Monica. And we cannot say anything, but it's very tough times, and it's not only for us, Rottneros, but certainly for the entire industry, which is under stress currently. But we all believe that fiber do have their natural place in business, in packaging, in other convenience products. It's a renewable product. We are self-sufficient when it comes to its sourcing. We do not import anything from outside Europe. We create a lot of energy based on the raw material that we are harvesting. There's more forest standing today in the Nordics than it used to be 100 years ago. So it's responsible managed forests that supply us with renewable fibers that we can turn into lots of various different products. Tissue is a growing area in general, currently a little bit under pressure in Europe, but with more people having more disposable income, the demand for tissue is -- continues to grow. More people are consuming more products and fiber-based packaging materials are the most and best packaging materials that are available. You can recycle them. So the primary fiber that we are harvesting here in the Nordic is then coming into the market and can be recycled down on the continent, various times to create new products and new values. I was into renewable energy. Of course, the energy that is produced as a residue from our sulfate kraft mills is renewable based on biofuels, but also the entire investment in electrifying our society, rebuilding the grids is asking for more cables. Cables need more paper as paper is an insulator in the cable construction. And also in transformers, a lot of fibers is being used. And here, we see one of the very strong end users where we have an excellent position. We are one of the cleanest producers of pulp with extremely low or no conductivity, which is a key performance for these kind of end users. And of course, everything about sustainability, both when it comes of using fibers, but also when it comes to using fibers as a raw material, for example, molded fiber packaging, where we're also working with. And Rottneros packaging is that area where we do put a lot of efforts into. We are now performing the customer evaluation and qualifying trials in Poland. We believe those will be finalized by the end of the year, so we can actually start moving production from Sweden to Poland and then scaling it up. And of course, we also see the emergence of a lot of other players in the market, one of them we have invested into when it comes to dry molding as opposed to the wet molding process that we are having. But we see also a lot of activities with various different players. And I think that is a sign of that there is a belief and need for molded fiber products in the market as a complement to all kinds of other products and especially in light of the single-use plastic directive and the packaging and packaging waste directive, which we are soon to be implementing and customers are asking for solutions that are more suitable than purely plastic-based packaging materials. So to summarize it, we have seen a very challenging market during this year with some imbalances that need to be leveled out before we will see a good pickup, but it seems that we are coming closer to that point. We have definitely seen an increased supply of raw material over the last month. Monica has explained to you the monetary impact of it. And the public statistics will come soon, but we know the deals that we have closed with our suppliers, and we see that these prices are coming down. They will take some time to drill through the stocks which are in the forest along the forest roads in the mills before you see it in the profit and loss statements, but it is coming down. We have done our homework when it comes to stabilizing our operations, making them more efficient, working on operational efficiency. And everything is in place. There are no further big investments needed. We can be very conservative looking forward in controlling our CapEx for the next period. And we are, of course, working extremely hard to both control our cost, but also free up working capital in order to secure the cash that we have in the company. And wrapping all that up, I think even though it is very dark at the moment, there is some light at the end of the tunnel, and we believe we are soon entering a more positive period again. And with that, we leave the word back to Ludwig to guide us through some questions and answers. Operator: Thank you so much for the presentation. And as you mentioned, now it's time for Q&A. So if you have any questions to Lennart and Monica here, you can send them in via the form to the right. And the first question here is, how do you plan to strengthen profitability after the sharp drop in EBITDA this quarter? Monica Pasanen: Should I take that or? Lennart Eberleh: Yes, please. Please go ahead. Monica Pasanen: I think we are on the right track, and we have seen that -- we saw already at the beginning of the year that the market was getting tougher with lower prices. After a while, the Swedish crown strengthened, and the wood prices were increasing at that time. So that is why we have initiated the cost saving program that is now showing that we are decreasing our fixed costs. We are also looking at our variable costs other than wood to be more efficient and to improve on the variable cost side. And not the least, it's not part of profitability, but it's part of the cash flow to be efficient with working capital. And we have had -- we do have a good track record for the last 2 quarters, and we have clear targets to improve even further on the working capital side. Lennart Eberleh: And if we fill in here also, of course, there's a huge potential in fully utilizing the capacity that we have installed in our high-yield pulp and Rottneros mill. We see some markets coming back that have been closed down for some time, but we're also working very hard in introducing new grades based on the entire raw material basket that is available. So we're talking about both the traditional softwood, higher pulp grades, but there are also opportunities for us as we have the technical equipment to make blends of soft and hardwood or pure hardwood and there are various grades of hardwood as well. So there's a good demand for those. And of course, that will generate additional sales and contribution and quickly improve then once it's working out our profits. Operator: What will the cost reduction of SEK 35 million to SEK 40 million have on margins going forward? Monica Pasanen: They will, of course, translate directly into operating profit. So they will be part of the improvement program as will also other actions. As I mentioned when we talked about the wood costs, the SEK 35 million to SEK 40 million on fixed cost is very much is personnel costs and also some other fixed costs, SEK 35 million to SEK 40 million. But if we compare that to the cost of wood, that has increased by approximately SEK 600 million in 4 years or from the lower levels to the very high peaks. The big impact will come when we see that we have lower raw material prices going forward. Operator: How will the proceeds from the rights issue support further growth or stability? Lennart Eberleh: Those proceeds have been used to improve our cash position, balance sheet and pay down debt. As I've said, there are no ongoing big investments planned. We have restructured Rottneros mill from a mill that had 2 pulp lines for newsprint grades and cartonboard grades. Newsprint as we saw has been structurally very much declining, exited that. So now it's one line with 1/3 of the manning working only for cartonboard grades, which is over time growing market area and also Valvik has proven that it is very efficient, and all major reinvestments are completed. So this is really, proceeds to strengthen our balance sheet, make sure we have a good net debt-to-equity ratio and necessary cash funds available to finance the ongoing business. Operator: When do you expect lower wood prices to start improving your earnings? Lennart Eberleh: As we've seen here, we are peaking now, and that will happen over the coming quarters. Operator: And moving on to the last question here. What financial potential do you see in packaging project in Poland? Lennart Eberleh: This is now a milestone 2 of our project. The first one was to finalize the technical development in Sweden. Milestone 2 is to make sure and prove that we can scale up on to an industrial scale and make sure that all these bits and pieces are working together and filling that line, which can produce once fully operational, 100 million trays of any kind of packaging. But compared to the pulp business we have, it is still a marginal contribution to our results. So the result and impact of that will be further down the road. Operator: Thank you so much for presenting here today, Lennett and Monica, and thank you all for tuning in. I wish you a pleasant weekend. Lennart Eberleh: Thank you very much, everybody, and looking forward to talk to you after our Q4 results early on next year. All the best.
Operator: Ladies and gentlemen, welcome to Clariant's Third Quarter, 9 Months Figures 2025 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Andreas Schwarzwaelder, Head of Investor Relations. Please go ahead, sir. Andreas Schwarzwaelder: Thank you, Sandra. Ladies and gentlemen, good afternoon. It's my pleasure to welcome you to this call. Joining me today are Conrad Keijzer, Clariant's CEO; and Oliver Rittgen, who joined Clariant as Clariant's CFO on August 1 and participating in his first results call today. Welcome, Oliver. Oliver Rittgen: Thank you. Andreas Schwarzwaelder: Conrad will start today's call by providing a summary of the third quarter developments, followed by Oliver, who will guide us through the business unit results and savings program. Conrad will then conclude with the outlook for the full year 2025. There will be a Q&A session following our presentation. [Operator Instructions] I would like to remind all participants that the presentation includes forward-looking statements, which are subject to risks and uncertainties. Listeners and readers are therefore encouraged to refer to the disclaimer on Slide 2 of today's presentation. As a reminder, the conference call is being recorded. A replay and transcript of this call will be available on the Investor Relations section of the Clariant website. Let me now hand over to Conrad to begin the presentation. Conrad Keijzer: Thank you, Andreas. I'm pleased to report that Clariant achieved significant growth in EBITDA before exceptional items in the third quarter of 2025 showcasing the success of our performance improvement programs and effective price and cost management in a continued challenging market environment for our sector. We delivered sales of CHF 906 million. This represents a 3% decrease in local currencies and a 9% decrease in Swiss francs. Our EBITDA before exceptional items increased by 5% in absolute terms to CHF 162 million. We delivered a significant margin improvement of 230 basis points to 17.9%, driven by our performance improvement programs as well as price and cost management across all of our business units. Our savings program continued to support our performance in Q3. We achieved savings of CHF 19 million and booked CHF 3 million of restructuring charges in the quarter, taking our total savings to CHF 31 million in the first 9 months of 2025. As a reminder, this program is set to deliver CHF 80 million by 2027 with a significant contribution expected this year. We expect to book the total CHF 75 million of restructuring charges related to this program in 2025. Now turning to our 2025 guidance. We anticipate local currency sales growth at the lower end of our guided 1% to 3% range due to weaker industrial production and weaker consumer sentiment. We also confirm our 2025 profitability guidance of 17% to 18% EBITDA margin before exceptional items, underscoring our confidence in sustaining our improved levels of profitability. Last Friday, Clariant's Board of Directors decided to reduce its size from 11 to 8 members. This will be reflected in the nominations for the upcoming AGM 2026 on April 1 next year. Supporting these changes, 5 current directors will not stand for reelection and 2 new independent members will be nominated as appropriate ahead of the 2026 AGM. With this proposal, the Board aligns with Clariant's rightsized organizational setup, and it optimizes independence, tenure and gender diversity. The management team thanks the departing directors for their trustful collaboration over many years. Now moving on to more details relating to our financial performance in the third quarter of 2025. We delivered sales of CHF 906 million. In local currency, this represents a 3% decrease with the reported figure impacted by a 6% negative currency translation effect. We maintained pricing discipline across our portfolio with a year-on-year increase in Adsorbents and Additives and flat pricing in Care Chemicals and Catalysts. Volumes decreased at a low single-digit percentage rate in Care Chemicals and Absorbents and Additives, while Catalysts volumes decreased by 8% as the weak economic environment and utilization rates continue to trade below long-term averages, impacting refill timing. Turning to profitability. As I already noted, we had a strong overall performance with a 230 basis point improvement in EBITDA margins before exceptional items versus the third quarter of 2024. In total, the business units drove a 130 basis point improvement mainly from our performance improvement programs, price and cost management. The remaining 100 basis points was in corporate, with the majority related to phasing of provisions. In Care Chemicals, lower volumes were more than offset by a positive mix effect and contribution from Lucas Meyer Cosmetics. In Catalysts, lower volumes were partly compensated by price and cost management. In Adsorbents and Additives, profitability was positively impacted by pricing and mix effect despite slightly lower volumes. Reported EBITDA increased by 14% to CHF 159 million, representing a reported margin of 17.5%, including CHF 3 million restructuring charges booked in the quarter. With that, I now hand over to Oliver for further details on our business performance in the third quarter. Oliver Rittgen: Thank you, Conrad, and good afternoon, everyone. It's great to join the call today and present the first set of quarterly results as the CFO of Clariant. I look forward to fruitful discussions with our investors and the analyst community going forward. Let us now dive into the third quarter development by business unit, starting with Care Chemicals, where we recorded a strong margin uplift despite a weak industrial market environment. Sales declined by 3% in local currency, entirely due to lower volumes. We recorded high single-digit organic growth in Mining Solutions as we were able to cater for increased demand and compare against prior year, which was impacted by destocking. Sales in Oil Services increased at a mid-single-digit percentage rate, recovering from shut-ins in the first half of this year. As mentioned, the weak industrial market environment also impacted our industrial applications and base chemicals businesses, both recording a high single-digit decline suffering from tariff uncertainties. Finally, Personal and Home Care and Crop Solutions both declined at a low single-digit percentage rate. Regionally, sales in EMEA as well as the Americas decreased by a mid-single-digit percentage rate as destocking led to lower order volumes. Sales in Asia Pacific increased at a low single-digit percentage rate as the capacity expansion in Daya Bay, China drove local volume growth. We recorded an EBITDA before exceptional items of CHF 92 million, representing a stable performance compared to the prior year. This translated into a margin of 18.9%, representing 150 basis points improvement. Profitability was positively impacted by the strong operational performance of Lucas Meyer Cosmetic as well as positive mix effect and contribution from the performance improvement programs. In Catalysts, we were able to drive a margin improvement in a weak demand environment. Sales decreased by 8% in local currency, entirely as a result of lower volumes versus the prior year period. Low double-digit sales growth in Specialties did not offset declines in the other segments. The weak environment and utilization rates continuing to trade below long-term averages, impacting refill timings for Propylene and Catalysts in China in particular, leading to a high double-digit percentage rate decline. Sales in Syngas & Fuels as well as Ethylene were down by a mid-single-digit percentage rate versus a strong comparable in the case of Syngas & Fuels. Regional dynamics were driven by the refill delivery schedules of the business with sales in the Americas increasing at a high double-digit percentage rate, driven by deliveries in Propylene and Ethylene catalysts. In both EMEA and Asia Pacific, sales decreased at a high single-digit percentage rate, driven by lower sales in Ethylene catalysts in EMEA and lower Propylene catalysts in China. In the third quarter, EBITDA before exceptional items decreased by 13% to CHF 33 million, representing a margin of 19.3% versus 18.7% in the prior year. This was driven by gross margin improvement and contributions from performance improvement programs, which more than offset the impact of lower volumes. Moving to Absorbents and Additives, where we also drove a margin improvement of 130 basis points versus prior year, supported by our continued additives growth. Sales increased by 1% in local currency with pricing up 3%, while volumes decreased by 2%. By segment, Adsorbents sales decreased by a mid-single-digit percentage rate, while Additives increased by a high single-digit percentage rate. Regionally, we recorded sales growth in EMEA at a low single-digit percentage rate, driven by pricing. In the Americas, sales decreased at a high single-digit percentage rate as growth in Additives did not fully offset the decline in Adsorbents. Sales increased at a low double-digit percentage rate in Asia Pacific, driven by volume growth in both Adsorbents and Additives. EBITDA before exceptional items increased by 5% to CHF 42 million, with a margin of 17.2% versus 15.9% in the prior year. Profitability was driven by growth and mix effects in Additives as well as benefits from the performance improvement programs. Cost efficiencies and raw materials of 5% also contributed positively. Now turning to our Investor Day savings program. As a reminder, we expect full run rate savings of CHF 80 million from business unit and corporate actions to be delivered by end of 2027 for the savings program that we announced in November of last year. As Conrad mentioned earlier, savings achieved in the first 9 months totaled CHF 31 million with CHF 19 million delivered in the third quarter. Key measures aimed at helping us to deliver these savings are being implemented. These include headcount reduction of approximately 340 full-time equivalents as of 30th of September 2025 across the businesses and corporate functions. The closure of 2 production lines and 2 sites globally as part of our footprint optimization and procurement savings of CHF 15 million related to structural changes in qualifying alternative suppliers and best practice contract management. In the first 9 months of 2025, we booked CHF 63 million of the expected CHF 75 million in restructuring. And with this, I close my remarks and hand back to you, Conrad. Conrad Keijzer: Thank you, Oliver. Let me conclude with our outlook for 2025. There remains an increased level of risk and uncertainty due to tariffs and trade tensions, which has a negative impact on global industrial growth expectations and consumer sentiment. According to the latest assessment of Oxford Economics, the global GDP is mainly driven by AI investments and services, while industrial production is still lagging. In addition, the uncertainty created by tariffs and trade tensions is impacting consumer demand for durable and semi-durable goods. Oxford Economics global GDP growth projection for 2025 has slightly increased from 2.5% after H1 to 2.8% in October, driven by the AI boom in the U.S. On the other hand, the chemicals industry forecast further declined to 2.1% growth from 2.2% growth after the first half year in 2025 and from 2.9% at the beginning of this year. This weakened market environment assumption in the U.S. and Europe, in particular, aligns with our own experience, and we, therefore, expect local currency sales growth to be at the lower end of the 1% to 3% range for 2025. We expect slight local currency growth in Care Chemicals and in Adsorbents and Additives, with sales in Catalysts expected to be slightly below those of 2024. We continue to expect to deliver an EBITDA margin before exceptional items of between 17% and 18%. The continued profitability improvement in prior years and in the first 9 months of this year shows the effectiveness of the structural changes we implemented under our performance improvement programs. We also aim to further improve cash conversion towards our 40% target. Despite these current impacts, we remain committed to delivering our medium-term targets, supported by the continued execution of our targeted initiatives. With that, I turn the call back over to you, Andreas. Andreas Schwarzwaelder: Thank you, Conrad and Oliver. Ladies and gentlemen, we are now opening the floor for questions. [Operator Instructions]. Sandra, please go ahead. Operator: [Operator Instructions] Our first question comes from Thea Badaro from BNP Exane. Thea Badaro: Two questions from me, please. I'll start with the obvious one. You've clearly booked lower exceptionals in the quarter than most people expected. Are you still anticipating the full CHE 75 million to be booked this year? Or do you maybe expect some of it to be pushed into next year? And then my second one is on CapEx. I've noticed that you're now guiding to CHE 180 million versus 10% higher Q2 and 20% higher at the beginning of the year. Where is most of the cost coming from? And how should we think about it through to 2027? Conrad Keijzer: Yes. So I'll let Oliver comment on the one-offs, and I'm sure he also has some comments to be made on CapEx. But basically, if you look high level at CapEx, we're actually very pleased with, I think, a structurally lower level of CapEx when you look at Clariant compared to historic levels. The key reason is that after the opening, in fact, the opening next week of our new Care Chemicals plant, which was an CHE 80 million investment in China. And after the opening of the second line of the Additives line in China, which was a CHE 40 million investment, most of the CapEx, the gross CapEx is actually behind us. So you see now a switch towards more maintenance-oriented CapEx. And that is actually structural because if you look at capacities, we're actually quite happy now with the global footprint, and we don't target any sort of new greenfield plants in the foreseeable future. Maybe Oliver can comment on one-offs in the quarter and moving forward as well as maybe some more detailed comments if you have them on CapEx. Oliver Rittgen: Sure. Yes, I mean, you're right. We booked so far like CHE 63 million of one-offs year-to-date. Q3 was a bit of a smaller one with the CHE 3 million. But we still foresee, as we communicated before, that we're going to hit the CHE 75 million for the full year. And with that, obviously, delivering on the CHE 80 million savings that we envisioned. As we said, CHE 31 million of that we have seen in the first 9 months, and we still have the confidence that more than half of that will be delivered by the end of the year. Maybe one additional comment on CapEx. Yes, indeed, the guidance that we have given with the CHE 180 million is now lower than what we have seen in previous years and also beginning of the year. And additionally, to Conrad's comments, of course, that is also a function of the business dynamics that we're seeing right now and our commitment to deliver on our cash flow commitments that we have given with managing towards the 40% cash conversion that we have been communicating before. Operator: The next question comes from Katie Richards from Barclays. Katie Richards: I've got one on Care Chemicals, please, and then one on Adsorbents and Additives, if I may. So on Care Chemicals, could you just talk us through the margin bridge, please? If I take the 1% raw materials decline and higher energy costs, this looks to have been a slight tailwind for the quarter, maybe about CHE 1 million. And obviously, we have CHE 5 million add back, I think, from the inventory revaluation of Lucas Meyer not occurring this quarter. And then taking into account the volume headwind, it looks like the positive mix effect or the cost savings coming through must have been pretty significant this quarter. So just any color on the bridge here and how significant the positive mix effect would have been outside of Lucas Meyer and then on Adsorbents and Additives, I was quite intrigued by your comments that the Americas decreased high single-digit percentage rates driven by Adsorbents with volumes impacted by the U.S. renewable fuels regulation. I was under the understanding that the EPA was increased in the blending mandate and this would be a benefit for Clariant. So can you explain what's going on here? Is it just full utilization or regulatory uncertainty? Conrad Keijzer: Okay, Katie. Yes, thank you for those questions. I'll make some high-level comments on margins on Care Chemicals, but let Oliver also provide here some additional details, and I also will comment on the Adsorbents, slow demand right now in the U.S. So first of all, on Care Chemicals, we were extremely pleased actually with the step-up in EBITDA margin from basically before exceptional items from 17.4% last year to 18.9%. That is a combination of high level of pricing where actually we've been able to hold prices in an environment where raw materials were actually down by 1%. That is very consistent with our strategy. We are seeing some competitors sort of going out for volume, but we are actually able to hold prices in an environment where there's weak demand. And I think that's a testimony to the strength of our products, but also, I think, a big complement to our frontline sales leaders. Positive effect from pricing on margins, positive effect from mix where you see weakness in the sort of lower-margin segments like industrial applications and base chemicals. And finally, performance improvement programs that are contributing here. Adsorbents, the weakness in renewables in the U.S., yes, there is clearly a weakness right now. If you look at basically biodiesel where we do the purification with our Adsorbents, but also SAF where we do the purification. There were incentive packages that temporarily were taken away by the new Trump administrations. But under the new big and beautiful tax bill, there is actually incentives. There are incentives again. The challenge here is that these still need to be approved by Congress and the current shutdown of the government hasn't helped here. So it is not a structurally lower growth market, but there is a temporary weakness in markets for biodiesel and SAF, but we expect this to pick up actually early next year, yes. Katie Richards: And just one follow-up because you mentioned people going for volume. Some of your competitors have commented on increased agent competition, particularly in surfactants. Do you think you are making volume concessions to protect margins there? Conrad Keijzer: We're not making any concessions. We just are basically holding price. There's no need for us to lower the price on products that are differentiated enough that they add a lot of value to our customers. That's one effect. I think the other effect is the continued repositioning towards more premium, more specialty, more consumer-facing segments in Care Chemicals. Operator: The next question comes from Christian Faitz from Kepler Cheuvreux. Christian Faitz: Two questions, please, from my side. In your Catalysts business, is there any visibility into 2026, i.e., customers flagging, for example, that mothballed plants might be back and might need a Catalysts refill? And then the second question is actually on Lucas Meyer. I mean, well noted that this business continues to contribute nicely to the profit development of your Care Chemicals business. Can you please elucidate a bit if the business kept its high operating margins when it entered Clariant, I believe it was in the 40 -- actually in the higher 40% EBITDA? Or is consumer hesitancy also impacting the Lucas Meyer business a bit? Conrad Keijzer: Yes. Thank you very much, Christian, for these 2 questions. Well, first of all, yes, we're not giving an outlook yet for next year 2026 nor for Catalysts, but maybe I can maybe reference some of the industry data where basically, if you look at chemical production volumes this year, we're heading for, let's say, 2%, 2.5% growth overall globally in chemical production. That is actually a mix between flat growth in Europe, slightly up in the U.S. and, let's say, around a 5% growth in China. If you look, however, for next year, there is an anticipation of further slowing down in chemical production growth. So if you look at next year, the industry outlooks are more like a 1.5% growth for chemical production globally, which basically is an outlook that's based on, again, flat production volumes in Europe. Volumes turning slightly negative actually in the U.S. next year as a result of tariffs and people expect a further slowdown in China from currently, let's say, 5% growth to very low single-digit growth. So in terms of bottoming out, we're certainly not bottoming out this year for our Catalysts business, as you've seen in our numbers. We think though that next year with these outlooks, that is actually a bottom. And on a positive note, in '27, you should see a recovery actually, and that is for all of our businesses, a positive. At some point in time, consumers will start to buy durable and semi-durable goods again, people will start to buy new furniture, new electronics products, et cetera. And that means a recovery will come in chemicals, but it's delayed. Finally, on Lucas Meyer, yes, we're very pleased with the performance inside Clariant, and I can confirm that margins still are, let's say, mid- to high 40s in terms of EBITDA. Operator: The next question comes from Christian Bell from UBS. Christian Bell: Well done on the result. I just have 2 questions. My first question relates to your guidance, which I think I'll ask in 2 parts, if I can. So part of that, to meet your sales guidance, you'll need about 5% organic growth in Q4 to offset foreign exchange of about negative 5%, and that's coming off organic growth of negative 3% in the quarter just been. So just curious, where is that strength coming from by segment? It looks like you'll need a big fourth quarter for both Care and Catalysts. So is that market driven, keeping in mind, you've already indicated that, it doesn't seem likely. So -- or is it sort of specific projects? And then part B to that question is, after narrowing your sales guidance, you've left Q4 EBITDA margin range quite wide by my estimate sort of 14% to 18%. So what's behind that variability? And then I'll wait to ask my second question. Conrad Keijzer: Yes, Christian, the sound was not so great. Could you repeat high level the question in very crisp language because we couldn't hear it very well. Christian Bell: Okay. Yes. So it's about your guidance, what it implies for the fourth quarter, what you need to do to reach your guidance. On sales, it implies that you need to do about 5% organic growth. And I'm wondering where that strength is coming from. It looks like you need to do -- it looks like you need to have big quarters from Care and Catalysts, which seems difficult in the current environment. Conrad Keijzer: Yes. No, clear. Now let me comment on revenue, and I'll let Oliver comment on the profitability on the EBITDA guidance. If you look at revenue guidance for us to land at the low end of the 1% to 3% local currency growth, what we're guiding for. Indeed, you're correct, we need a pickup in the final quarter, not only sequentially, but also relative to prior year. Where we see mainly that happening is in Care Chemicals, where we actually had last year an unusual weak season for de-icing that was entirely weather related. This year, based on a normalized sort of pattern in terms of the weather, we should see a big pickup in Care Chemicals relative to prior year and also sequentially. On top of that, we actually see a strong pipeline in mining. You see that in our numbers, our Q3 numbers as well as in oil services. And both of these increases in Q3 were market share related, which should continue as a positive momentum in the fourth quarter. And finally, the Lucas Meyer business continues to do well, both in terms of revenue and margins. Catalysts is against a very strong Q4 last year. But based on the order book, we expect a solid quarter in Catalysts, both for PDH, propane to propylene orders in the book from China again as well as for ethylene. And finally, Adsorbents and Additives is slowing, as mentioned, but we expect there -- the pattern to continue consistent with prior quarters. But all in all, we do indeed expect a pickup from prior year, which should land us somewhere close to the bottom end of this guidance range. Maybe Oliver, some comments on EBITDA margins. Oliver Rittgen: Yes. Christian, maybe one addition to the top line, which also explains a little bit the bottom line performance. I mean you have seen the Catalysts volume decline of 8% in Q3. There was indeed a bit of a move from some of the orders from Q3 into Q4. This is why you see a softer Q3 in Catalysts. And then obviously, that will be part of that driver for the Q4 performance that we are expecting. And with that, based on the top line picture that Conrad was painting here, the growth in Catalysts, the growth in Care is going to drive margins in the fourth quarter. And then we have 2 counter effects. One is that we slowed down on production in Additives and Adsorbents as a measure also of optimizing our net working capital and staying committed on the cash flow performance. And the second one is the corporate cost phasing that we were mentioning in Q3, which is a different phasing of incentive provisions this year versus previous year. And you see that one coming back -- those costs coming back in Q4 then. And that's going to drive the margin performance and we expect, obviously, to land the margin in the guidance range that we have provided. Christian Bell: I think my question was slightly more simple in a way in that how come you've narrowed your sales guidance, but you haven't sort of narrowed your margin guidance for the fourth quarter. Why is the sort of margin guidance so wide in the fourth quarter alone? Oliver Rittgen: I mean we haven't really adjusted our guidance overall, as you know. I mean, the sales guidance is since second quarter, the 1% to 3% and the margin guidance is also still 17% to 18%. We didn't adjust any of the guidance ranges. So there's no particular reason behind that. Christian Bell: Okay. Cool. And sorry, if I could just squeeze in my second question. I think that sort of follows on from one of the previous ones, some of the commentary around -- from your peers in Care Chemicals segment. Just curious, is there sort of increased competition from Chinese players, a more recent development? Like -- and how do you sort of see that dynamic evolving in the near to medium term? Conrad Keijzer: Yes, increasing competition from Chinese players. We are actually seeing little of that in our segments. So Catalysts is a true specialty business, which requires a lot of IP and technology. We see very limited competition there from Chinese players. In Care Chemicals, certainly in the segments where we are playing, we also see very limited competition. Where we are seeing actually quite some activity is in the Additives area. And that is actually for local players, for example, for UV stabilizers, but even some local players for flame retardants. Now some of these are, frankly, the so-called copycats that are infringing our IP, and we're going obviously against that. But we are well positioned with local manufacturing for flame retardants there. But one of the things that we did see was for the UV stabilizers that we were no longer competitive with the plant out of Muttenz in Switzerland. And this is actually part of the recent restructuring line that we will actually transfer that production from Switzerland to India to become more competitive for these UV stabilizers. But in all of these segments, we have differentiated technology, but local manufacturing in China has become really a prerequisite to be competitive. Operator: The next question comes from James Hooper from Bernstein. James Hooper: The first one is around the Board changes. Can you give us a little bit more background on why you wanted to cut the numbers on the Board? And then also a little bit more on what you're looking for from the new Board members and what you're expecting the Board to do? And then the second one is a little bit about capital allocation. I think it was referenced earlier in the CapEx question that you've been taking CapEx down a little bit in order to protect cash flows. And given the low growth environment we find ourselves in and protected 2026, not a high year of chemical production, is there an extent that you need to trade off your kind of 2027 medium-term targets? You're making great progress on the margins, but are you going to have to choose a little bit between making growth investments in this macro environment or protecting cash flows? Conrad Keijzer: Yes. Thank you very much, James. I'll take the first question on the Board changes, and then Oliver will make some comments on capital allocation and CapEx specifically. Yes, if you look at the Board changes, what we have done recently over the years in the company is actually to right-size the company in terms of -- yes, delayering, in terms of taking out duplication in management. We used to have the decision-making metrics with functional directors, country directors, BU directors. We basically implement full P&Ls and 3 business units. But the Board basically in size has not adjusted. And the consistent feedback from proxy advisers recently has been that they perceive the Board of Clariant -- they perceived the Board of Clariant, I should say, as too large. The feedback from proxy advisers also has been that on gender diversity, we are currently not meeting the 30% target for a minimum representation of females on the Board. And finally, in terms of independent Board members, some of our Board members had a tenure above 12 years, and then they are no longer seen as independent. So it is these 3 elements that consistently have been brought up by the proxy advisers, the size of the Board, the diversity of the Board, the independence of the Board that actually are now being addressed with the reduction of the Board to 8 and by bringing in 2 new independent -- outside Board members. So it's not that we're lacking or we're lacking certain expertise to your question, it's really very much building on the feedback by proxy advisers. Oliver Rittgen: Okay. James, on your capital allocation question and without maybe hitting too much on the '27 because as we said before, we're not looking at specific numbers now for '27, but maybe more in general, how we will look at capital allocation. How we approach it is very much from focusing on a triangle of growth, margin and cash. And the decisions around capital allocation is pretty much balancing this off across the portfolio and the segments that we are having. And capital allocation, of course, is the strategy that we're having here is to fund innovation to drive the growth for the future. And with that also driving that, obviously, the cash generation of the company. In terms of capacity availability for a potential growth, then growth pickup in '27, this is what the industry indicates at the moment. There's capacity available for us. So therefore, we are also well prepared for a potential pickup in that time window. Operator: The next question comes from Tristan Lamotte from Deutsche Bank. Tristan Lamotte: A couple, which are kind of linked and high level. In Chemicals, I was wondering, is your view that something has changed structurally in Europe in H2 '25? Or is this kind of a global and cyclical weakness? I'm just trying to figure out if this weak Q3 level is kind of the new run rate or if there's something kind of exceptional in the H2 that will revert? And then the second part to that question is, I'm just wondering what your current views are on the levels of support that chemicals is getting in Europe and whether this needs to increase and what practically could be done in that regard? It seems there's been a lot of discussion on what needs to happen, but the follow-through to this state has been quite limited. Conrad Keijzer: Thank you, Tristan. Yes. So as far as your question, what has changed, if anything, structurally in H2? Well, I think we need to take a look a little bit back further. So what structurally changed for Europe is actually 2022, and we have no longer access to cheap gas from Russia. That is actually the reason that European production levels in chemicals in Europe are still about 20% below the last year before corona, whereas it has recovered basically in the U.S. and Asia is well ahead of pre-corona levels. So this is the structural change. It is affecting primarily the chemical industry that is high energy intense, which we're clearly not. And it is also affecting parts of the chemical industry that use gas as a footprint, as a feedstock, which we're also not. So, for us, we have a global footprint. We have 65% of our revenue outside Europe. And what we see is a shift of some production and consumption away from Europe, but we pick that then up elsewhere. So, for us, this as being truly specialty is all manageable, but it's fair to say that a good part of the industry is affected by this. To your change, what's Europe doing, I think there are some positive signs. So we had, first of all, the green deal, which was primarily a package of legislation and commitments to carbon neutrality in 2050. What you now see is the new European Commission has this clean industrial deal which is much more focused on the competitiveness of the industry. So Europe needs obviously a competitive industry to deliver the green deal. And I think there are some positive signs here. But in all fairness, there's still some ways to go. And the carbon taxation is obviously something that at the time that this came up was absolutely seen as the right instrument. There was, however, the assumption that other regions in the world will follow. That's one thing. And at the time, the industry was making money. I think 2 things have changed. The other regions have not followed with carbon taxation and the industry right now is struggling to a large extent and can then itself much more difficult it is then to fund this energy transition. So this is -- I think this is on the radar for the European Commission, but still some more work needs to be done here, I think. Operator: The last question is from Walter Bamert from Zürcher Kantonalbank. Walter Bamert: The first question is regarding the Board changes. And there it is mentioned that the 2 new Board members will be independent. Does this apply that these are not from SABIC, so the SABIC members will be reduced from 4 to 2. Conrad Keijzer: Yes, that's correct, Walter. The SABIC representatives have been reduced from 4 to 2. And I will also say that the German shareholders have representation of 2 Board members that also has been reduced from 2 to 1. And indeed, the 2 new Board members coming in from the outside will be independent Board members. Walter Bamert: Okay. And then can you please help me with the headquarter cost, which was very low in the third quarter. Should that be for the full second half be at the level of the previous year, so a reversal? Or should it -- is it rather that the fourth quarter only is at previous year level? Oliver Rittgen: Yes, Walter, indeed, this is a phasing between the 2 quarters, Q3 and Q4. So that cost will come back in Q4. We have a bit of a different phasing of incentives provision from previous year to this year. Walter Bamert: Okay. But I hope for you that the incentives will be at the same level as previous year. [Audio Gap] Operator: Ms. Glazova, your line is open. Angelina Glazova: I think I just have one left at this stage. Could you comment in a bit more detail of what developments you are seeing in the Crop Solutions end market? You have mentioned somewhat softer performance in Q3, but in part due to stronger comparable. How do you see that developing maybe into next year? Because again, some of your peers mentioned somewhat slowing momentum in the end market. Conrad Keijzer: Yes. In terms of Crop, Angelina, we basically compare against a much weaker prior year where there was still destocking. So for the full year, we still see high single-digit growth in Crop Protection. We indeed had -- in the third quarter, we basically had sort of low single-digit negative in Crop Solutions, but that was against actually a strong sort of restocking quarter last year. So underlying, we see good demand. There's nothing here to worry. We actually think for the year, we will end up high single digits. So yes, we -- it's actually a strong segment for us. Operator: We have a question from Ranulf Orr from Citi. Ranulf Orr: I'm just wondering about how you view Clariant's portfolio overall as a kind of combination of fairly discrete businesses. And in the context of a weak -- another weak year in 2026 and frankly, who knows for 2027, I mean, is now maybe the time to start thinking about whether there's value to be had in breaking Clariant up or doing asset swaps to improve your scale in some of the businesses and make the individual units more competitive on a global scale. Conrad Keijzer: Yes. Thank you, Ranulf. So if you look at the portfolio, high level, where we came from was a hybrid between, on the one hand, commodity chemicals and on the other hand, specialty chemicals. Over the years, we have successfully repositioned the business towards purely specialty chemicals. As you are aware, we divested our Masterbatch business. We divested more recently the Pigment business, even more recently, the North America Oil Land business. And what we have now is really a portfolio that really is truly specialty in nature, and we're actually very pleased with the businesses there. To your point, limited growth in '26, limited growth this year. There may, at some point, be a certain level of industry consolidation. That is certainly what most people are predicting. We obviously want to play an active role in that, but you've also seen that we've been very disciplined with the acquisitions that we've made in recent years. All of these have actually strengthened our core businesses and we have no intent to bring in businesses that sort of do not bring true synergy to the existing portfolio. Operator: We have now a question from Chris Counihan from Jefferies. Chris Counihan: I just wanted to come back to the Board changes and the reduction because I'm just sort of thinking back to a few years ago and the accounting investigation that happened, I think, in 2022. And as part of the investigations, you talked about more controls, financial controls over financial reporting, procedures, a lot in the finance side, but I also remember you at that stage talking about more active Board control and involvement in terms of controls at Clariant. So I'm just trying to marry the statements from a few years ago versus now the way forward of reducing the Board size because it almost feels to me like the Board's role in such controls is maybe reducing as well. Conrad Keijzer: Yes. No, Chris, this is totally unrelated. So we basically are in 2025 now. We had the accounting challenge that was actually very early on in my assignment. That was about the 2021 numbers and even 2020 numbers. Then indeed, you're right, Chris, and we discussed it at the time. We identified a number of serious gaps. We brought in a new CFO. We really strengthened our checks and balances and controls, including more appropriate involvement by including our Board members at the time. But no, this is in place now -- solidly in place for a number of years, and these recent announced Board changes are unrelated to that. Andreas Schwarzwaelder: So ladies and gentlemen, before we close today's call, we would like to ask for your feedback by scanning the QR code on the presentation or using the link, www.clariant.com investor/feedback, you will be guided to our feedback tool operated by Quantifier. We appreciate your views and your assessment and sincerely thank you for your support. So this concludes then our today's conference call. As I said, the transcript of the call will be available on the Clariant website in due course. The Investor Relations team is available for any further questions you might have. Once again, thank you for joining the call today, and good afternoon. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good afternoon, and thank you for waiting. We would like to welcome everyone to Ambev's 2025 Third Quarter Results Conference Call. Today with us, we have Mr. Carlos Lisboa, Ambev's CEO; and Mr. Guilherme Fleury, CFO and Investor Relations Officer. As a reminder, this conference presentation is available for download on our website, ir.ambev.com.br as well as through the webcast link. We would like to inform that this event is being recorded. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Ambev's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Ambev and could cause results to differ materially from those expressed in such forward-looking statements. I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature, and unless otherwise stated, percentage changes refer to comparisons with third Q '24 results. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Ambev's normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, operating profit and EBITDA on a fully reported basis in the earnings release. Now I will turn the conference over to Mr. Carlos Lisboa. Mr. Lisboa, you may begin your conference. Carlos Eduardo Lisboa: Good afternoon, everyone. It is a pleasure to be here with you again, and thank you for joining our call today. We closed the second quarter, making important decisions to position ourselves well for the remainder of the year. Reflecting on the third quarter, these choices were even more relevant as industry volumes remain softer than expected, mainly in Brazil. This quarter reflects the results of our choices. Our brands continue healthy with most of our top 10 markets maintaining or improving brand equity, particularly in Brazil. Net revenue grew, supported by resilient net revenue per hectoliter growth, up 7%. Top line performance combined with cost initiatives drove EBITDA growth of 3% with 50 basis points of margin expansion, while normalized EPS grew 8%. Looking at the film rather than the photo, in a year-to-date perspective, we are positive about the decisions we have made and the resilience of our business. Supported by the strength of our brands and our solid market share, top line grew 4%, driven by a healthy net revenue per hectoliter of 7%, which led to EBITDA growth of over 7% with 120 basis points of margin expansion. Cost initiatives continue to make a difference with cash COGS per hectoliter growing below net revenue per hectoliter and normalized EPS grew above 7%. Following our capital allocation strategy and confident on our long-term value creation potential, on October 29, the Board of Directors approved a BRL 2.5 billion share buyback program with the main purpose of canceling shares as a way to return cash to shareholders. Behind these results line the foundations of our growth strategy. Starting with Pillar #1, lead and grow the category. To be a true category captain, we must place our customers and consumers at the center of our decision-making process, being able to better understand and serve the demand, a capability that becomes even more important when the operating environment turns more dynamic, allowing us to: Number one, lead the beer category. Our core brands remain resilient even though volumes declined given its higher sensitivity to industry environment. Our premium and super premium brands strengthened and continue to grow in volumes more than 9%; and number two, shape new avenues of growth. The Balanced Choices portfolio grew 36%, including non-alcohol beers growing above 20%, continued to expand ahead of the company's volume. As leaders, we continue to develop the category, aiming not only to sell more, but to expand the consumer base and the number of occasions over the long term, ultimately creating sustainable value. As for Pillar 2, digitize and monetize the ecosystem. This pillar continues to be instrumental to our business. It provides valuable insights into our consumers, customers and operations while expanding our addressable market. The third quarter marked another solid step towards making our digital ecosystem a competitive advantage for our company. When it comes to new growth engines, BEES Marketplace maintained its strong momentum with GMV growing 100% to an annualized BRL 8 billion, driven by the expansion of our commercial partnerships. Meanwhile, on the direct-to-consumer front, Zé Delivery recorded a 7% increase in GMV even amid a softer industry, supported by a 9% rise in average order value. In revenue management, BEES continues to enable a more assertive and data-driven decisions. With a more granular view of elasticity by brand, pack and customer, we can optimize our discounts and promotions to improve the return on every real invested. For example, this quarter in Brazil, we increased the number of SKUs per pack in 5% and improved by 30% the return on promotions. And in cost and expenses management, BEES also played a key role in the SKU optimization program we mentioned last quarter. It helped us expand the distribution of our main SKUs, improving production efficiency while ensuring that our customers continue to find the right portfolio for their businesses. In summary, the combined impact of the revenue and cost management led to an expansion of our gross margin in the quarter. Speaking of cost performance, let's move into Pillar #3, optimize our business. This year, we have been emphasizing our disciplined approach to costs, and this quarter clearly shows why it matters. While we expected costs to continue to accelerate, driven by FX, commodities and the operational deleverage from lower volumes, our efficiency efforts paid off. We managed to keep costs mostly in line with previous quarter, freeing up resources to continue investing in the long-term growth of our business. Looking ahead, there is still work to be done as we pursue the lower half of our Brazil beer cash COGS per hectoliter guidance, which will support our ambition of protecting consolidated EBITDA margins in the full year. Speaking of margins, our disciplined approach to revenue, cost and expense management once again delivered results. Four of our business units expanded EBITDA margins, and all of them delivered growing or flat EBITDA consistent with the last 2 quarters. Now let's turn to the commercial highlights from our main markets. Starting with Brazil beer. This was the second consecutive quarter of industry softness. It is understandable that this can raise some concerns about the category's prospects. So before we go into our business performance, I would like to take a moment to share a few insights into what we see as situational factors, meaning either short term or cyclical and structural factors that may impact the industry over time. Over the past 2 quarters, the beer category equity has improved, which is a good proxy for future share of throat, while consumers' participation in beer remains stable. This reinforces our view that there are no meaningful short-term structural changes in consumer behavior toward the category. The industry's decline was mostly related to fewer consumption occasions, particularly in the on-trade channel, which was affected by 2 main factors: Number one, weather. The past 6 months were colder than normal, especially in the South and Southeast off a tough comp as 2023 and 2024 were the 2 warmest winters on record. This impact, according to our estimates, represents approximately 70% of the industry decline. And number two, consumer purchasing power. The macro environment, particularly in the North and Northeast, continued to constrain discretionary spending. These are situational drivers for the short-term or cyclical nature, underpinning our confidence in the long-term fundamentals of both the category and our portfolio. That said, let me share 3 potential trends and needs that can turn into structural drivers. Number one, the beer category in Brazil has evolved. We value it, and we will be part of it. However, easy-to-drink beers are still the preferred choice of Brazilians. Number two, certain groups of consumers prefer sweeter beverage. And number three, more consumers are seeking a balanced lifestyle. As a consequence and not by coincidence, we have been working to address these trends and needs. Our portfolio of brands spans a wide range of liquid profiles. Our easy-to-drink brands are relevant in all price segments and the brands that are growing the most in our portfolio address such need. We already lead the ready-to-drink space with products such as Beats and Brutal Fruit, which cater directly to the sweet-seeking consumers. Additionally, we are launching Flying Fish, a successful international brand with the aim of developing the flavored beer segment in Brazil. This segment has been growing globally, reaching over 3% mix of the beer industry in several countries. And for balanced lifestyle seekers, our non-alcohol portfolio, together with Stella Pure Gold and Michelob Ultra has a strong appeal, offering moderation alternative without giving up the great beer experience. In summary, while we read the current industry headwinds as situational, our strong portfolio and innovation agenda ensure we remain well positioned to capture future growth and keep shaping the beer category. Now let's move to our performance in Brazil beer. Over 100% of the volume decline is explained by the industry performance. Our brands once again improving equity, gaining low single-digit sellout market share according to Nielsen, while expanded net revenue per hectoliter. The market share gains came across all relevant segments. In the core segment, volume declined by low teens, reflecting the overall industry context. However, the market share progressed versus last year as relative price improved through the quarter. Premium and super premium brands once again stood out, growing mid-teens and gaining sellout market share, reaching close to 50%. After 6 years of consistent recovery, we achieved the highest share level since 2015 according to our estimates. This performance was driven by Original, Stella family and Corona, the latter 2 at the top end of the price index. And our balanced choice portfolio maintained strong momentum, growing mid-60s. Stella Pure Gold more than doubled its volumes. Michelob Ultra grew over 80%, and our non-alcohol beer portfolio expanded by low 20s, further strengthening our leadership in the segment. Moving to Brazil NAB, throughout 2025, the CSD industry has experienced a deceleration from up low single digit in Q1, to down mid-single digit in Q3 according to Nielsen, driven by similar situational factors that impacted the beer industry. In addition, our revenue management decisions last quarter led to an inventory phasing into this quarter, impacting sell-in performance. In this context, our brands continue to strengthen and our market share grew year-to-date and was stable to low single digit down in the quarter according to our estimates with a net revenue per hectoliter above inflation. Our nonsugar portfolio once again delivered double-digit growth and now accounts for more than 25% of total NAB volumes. In Argentina, the consumption environment remained challenging. Our beer volumes declined mid-single digit, underperforming the industry, reflecting an unfavorable temporary price relativity dynamics. However, brand equity remained stable, supported by the strength of our mega brands. Furthermore, we remain constructive on the long-term prospects for both the country and the beer category. In the Dominican Republic, the operating environment and beer share of throat continued to improve sequentially, supported by a healthier price relativity across categories. Presidente brand, the cornerstone of the category, strengthened its equity once again, reinforcing its leadership and cultural connection with consumers in the country. Finally, in Canada, the beer industry declined by mid-single digit in the quarter. We estimate that we outperformed the industry in both beer and beyond beer. The Ontario market continued to progress, supported by the route-to-market expansion implemented last year. Our beer performance was led by Michelob Ultra, Busch and Corona, which we estimate were among the top 5 volume share gainers in the industry. Now let me hand over to Fleury, who will walk you through our financial performance in more detail. Guilherme Fleury de Figueiredo Parolari: Thank you, Lisboa, and hello, everyone. Today, I would like to walk you through our financial performance highlights using our capital allocation framework. Starting with our priority #1, to invest in our business. Here, our focus is to allocate capital efficiently and maximize return on investments. One way we do that is by driving efficiencies across our cost and expenses baselines, freeing up resources to continue to invest behind our business and our brands, strengthening the connection with our consumers. Building on that, in quarter 3, our disciplined cost management allowed us to quickly adapt our brewing processes to a more challenging operating environment and deliver strong productivity with tighter process controls and lower conversion costs, mainly in our vertical operations. As a result, we expanded EBITDA margin in most of our business units once again. Now moving to net income. Our normalized net income reached BRL 3.8 billion, up 7% year-over-year, mainly driven by a lower effective tax rate, which more than offset higher financial expenses. Our stated net income reached BRL 4.9 billion, up 36% versus last year, reflecting one-off effects I will detail in a moment. In this quarter, our net financial expenses closed at BRL 1.1 billion, about BRL 400 million higher than last year, mostly due to 2 factors we already addressed in quarter 2. One, a higher FX hedging carry costs in Brazil due to interest rate gap between Brazil and the U.S. And two, the cost of sourcing U.S. dollars in Bolivia. On income tax, our effective tax rate in quarter 3 was 6.7% compared with 23.6% a year ago. The decline reflects mostly 3 one-offs, which totaled BRL 630 million and didn't have a relevant cash tax impact in the quarter. Excluding them, our effective tax rate would have been around 20%, consistent with recent levels. Let me go over them. One, following a change in legislation, we recognized a partial reversal of previously recorded tax liabilities associated with the 2017 amnesty program as detailed in Note 8.2 to our Q3 financial statements. Number two, fiscal incentives recognition. And number three, the Barbados divestment that generated a gain of BRL 884 million, where part of it was nontaxable in Dominican Republic. The sale of Barbados is a tangible example of our second capital allocation priority at work, evaluate inorganic opportunities. Here, we completed the first steps of the transaction, transferring control to KOSCAB, a long-term partner in the Caribbean. The transaction simplifies our structure and keeps our brands in the region. Further details are disclosed in Note 1 to our financial statements. Lastly, regarding our third priority, return cash to shareholders over time. As we approach the end of the year, I remain confident on the consistent cash generation of our business. Cash flow from operating activities remained solid, totaling BRL 6.9 billion despite softer volumes and higher cash taxes this quarter. Versus 2024, our cash flow from operating activities is down BRL 1.2 billion, mainly due to a slower monetization pace of existing income tax credits in Brazil. These credits will continue to be used over time, aligned with our tax strategy and are detailed in Note 7 to our Q3 financial statements. Lastly, during the year, we already announced a total dividend of BRL 6 billion. Also, as Lisboa mentioned, we are starting a new BRL 2.5 billion buyback program after the completion of the previous one in June. Both the dividend distribution and the share buyback program reinforce our confidence in our business and our commitment to returning cash to shareholders over time. With that, let me hand it back to you, Lisboa. Carlos Eduardo Lisboa: Thank you, Fleury. As we start the fourth quarter, I believe that we are well positioned to close the year on solid footing and to start 2026 with strong momentum. We are also excited for the FIFA World Cup next year, a great opportunity to connect again 2 of the greatest passions in Latin America, beer and soccer. To close, I want to thank our team for their resilience, especially in moments like this. Our grit and focus on what we can control are inspiring and give me even more confidence that we are becoming a better version of ourselves. Thank you for your attention, and I will now hand it back to the operator for the Q&A. Operator: [Operator Instructions] Our first question comes from Lucas Ferreira with JPMorgan. Lucas Ferreira: My question is on the COGS line. I think that was one of the positive surprises we had with the results, especially in a quarter where production probably was softer, right? I was expecting some sort of effect of a lower fixed cost dilution, but COGS came better than expected. So if you guys can explore that in a bit more details why the COGS were lower specifically this quarter? Does it have to do with the hedging strategy, some sort of a calendarization of that hedge effect or -- but also on the initiatives for reducing your cost base, if you can get into this? And then since you're reiterating the guidance, what would imply for the fourth quarter like sort of big acceleration of the cost per hectoliter, if this acceleration is also has to do with sort of the hedging calendarization or if there is anything else that we have to be aware of? Guilherme Fleury de Figueiredo Parolari: Lucas, it's Fleury here. Can you hear me well? So Lucas, let me just start by saying that, as you probably remember, I think Ambev has been known for its very strict discipline and action-driven organization. And I think that comes on over time. Working in emerging markets, we developed a capacity of navigating volatility while delivering results. Why I'm starting with that is because if you go back one step in Q2, I mentioned to you guys that most of the benefit that we were having in our COGS was related to the SKU rationalization and what we control. On Q3, it's not different from that. It comes from a series of initiatives on what we can control. That goes from production costs, to breweries footprint and production and also utilizing our vertical operations in which we normally have better costs. So in essence, I think this is what the company does well. It's really focused on what we control, a series of initiatives. And I might frustrate you, there's no one single one, but there's a collection of initiatives that has been working through the organization with PMOs, of course, with Lisboa and myself with several areas. So that's how we were able to achieve, I would say, a positive cash COGS increase compared to what we have said before. Now moving to guidance. I think Lisboa made it very clear on his initial speech, but I will reinforce. The guidance is the guidance. We are not changing our guidance for Brazil beer cash COGS per hectoliter, excluding marketplace. What is important to highlight is now with what we know, we will continue to work very hard to deliver the guidance within the first half of the range, if I may say, 5.5% to 7%, which is our ambition. And by doing that, together with our continued disciplined revenue management, I believe we could potentially look into the expansion of margins over time. Operator: Our next question comes from Henrique Brustolin, with Bradesco. Henrique Brustolin: I wanted to explore a little bit more the beer industry environment in Brazil. Very interesting, the comment you made, Lisboa, in terms of the weather representing the 70% of the decline and the remainder, the weaker consumer. I would like to hear a little bit more how you see this trend shaping up into Q4, especially if you could comment on the consumer part of this equation. And also, given that the headwinds were apparently different, right, in the North, Northeast than to the South, Southeast, if you also saw any big difference in terms of the volume performance across these 2 regions or even how the portfolio performed within the different categories? These would be my questions. Carlos Eduardo Lisboa: Henrique, nice talk to you. Thank you for the question. Let me highlight a few points here to clarify some of your doubts, right? First and foremost, everything that we see somehow is very aligned with what we flagged in our second quarter result announcement, right? So -- but having said that, during the quarter, we saw the most important driver, situational driver, which was the weather gaining even more relevance, right, since the winter time pretty much took the entire quarter, right, different from what happened in quarter 2 when mostly impacted June, right? So I think the most important point to have in mind is the following. The underlying consumer engagement, which we measure based on participation and category equity remains very solid, right? And the decline was pretty much connected to a reduce in number of occasions, right? And the reason why for that is exactly the 2 situational factors that I flagged in the beginning of the conversation in the session, right? South and Southeast, pretty much the reasons where we see accounting for majority of the volume in Brazil, pretty much 60%, impacted by colder and rainy conditions compared to a drier, right, and hotter conditions last year, right? And the North and Northeast, the other impact, right, which is connected to disposable income constraints, which, by the way, also impacted the first quarter. This was not necessarily a surprise for us. We have been measuring that since the beginning of this year, right? So it's interesting to see that especially the weather, but also the disposable income constraint impacted mostly something that we also highlight during the second quarter announcement, the out-of-home occasion, which is very relevant for beer in Brazil, right? In other words, impacting particularly bars and restaurants, right? So now moving towards your question about what's coming, right, more. So -- when we reflect about the situational end, right, which is weather and income, the weather remains in October, still a concern for us, Henrique, because we haven't seen any meaningful change. On the other hand, on the structural end, we also see a continuation of a good momentum our brands presented in Q3, right, which is what gives us confidence that we are well positioned for the quarter to come -- the last quarter to come this year, which will give us a pretty nice carryover into next year, which was the part of what we -- sorry, that we had a technical issue, but I was highlighting that we feel good and optimistic about the year to come because we're going to have the chance to jump into a year when we won't probably see that much of a hard comp impact coming from the weather, which was the most important detractor, right, situational detractor for us this year, combined with the chance to put together -- unite 2 amazing passions for Latin Americans, which are beer and soccer with the World Cup. And on top of that, as I mentioned before, this year, when we reflect about participation and occasions, occasions were more impacted by the 2 situational factors. And next year, we're going to have the chance to explore more occasions since the World Cup time will match exactly with the hardest period for us in the year. And on top of that, especially in Brazil, we're going to have a pretty interesting number of holidays that will help us create new consumption occasions for us. Operator: Our next question comes from Nadine Sarwat with Bernstein. Nadine Sarwat: Great to see your commentary about Ambev reaching nearly 50% share of Brazil premium and super premium beer for the first time in a decade, and I appreciate the comments that you made in your prepared remarks. With that benefit of hindsight now of the 6 years of seeing that improvement that you called out, can you comment on which initiatives you feel have been the most successful in getting you and your brands to this point in that segment? And what are your aspirations for your share of that segment over the coming quarters and years. Carlos Eduardo Lisboa: Nadine, thank you for your question. Very interesting. As you said, was a true V curve for us since 2015 until today, right? And just to emphasize what you said, in the last 6 years, we gained 14 points of market share, consistent every single year. And that came mostly as a consequence of our ambition, Nadine, of being a true category captain, right? A captain that will bring to our consumers, not only in Brazil, but across the board in all markets. But since your question is about Brazil, but especially in Brazil, more and more alternatives to enjoy beer in different occasions. And by doing so, expanding our portfolio, we also have a chance to bring more consumers to our portfolio, right? So if I have to answer your question with just one point, that would be my answer, right? Because we are here to build a portfolio strong enough to make our category even more appealing to our consumers. And by the way, beer in Brazil has one of the strongest equities across all markets globally, okay. And the point about the portfolio that I also like the most is the following. We know that as consumers graduate and as we bring new consumers to the category, they want to have optionalities, right? They want to attend different needs in different occasions. And that's exactly when the portfolio makes a difference, right? And today, we have a pretty interesting portfolio with complementary roles to play this mission, right, from Original to Spaten, right, in the first layer of the premium. And then to Corona and Stella family in the latter part of the pricing index with different emotional and functional benefits. And the interesting piece of that is since they are complementary, they are bringing incrementality for us instead of only cannibalization, right? And this is the, in my point of view, the magic around what we are doing here. And it's very interesting because the same way we are building premium, now we are building a new growth engine that we call balance. And the balance piece is also gaining a lot of acceleration. And on top of that, something that I'm not sure was that clear for you all, we are building a new growth engine beyond beer. And that beyond beer business during the last 3 years had been growing double digits, and we have been growing ahead of industry. And today, we are also the leaders as we are the leaders in beyond, as we are the leaders in premium, right? So in essence, we are leading where growth is and where growth will be in the future. Operator: Our next question comes from Thiago Duarte with BTG. Thiago Duarte: My question is, I'm trying to get a sense of the sustainability of the SG&A reduction that we saw not only this quarter, but I think throughout the year, although it might have been stronger this quarter. In the release, you mentioned the variable compensation accrual changes. You also mentioned the phasing in marketing expenses in CAC. So my question is, of the 0.4% consolidated organic reduction year-over-year in SG&A in the quarter, how much would you say is related to this phasing of marketing and bonus accruals? And how much you believe it's more of a sustainable gain in efficiency that you saw in expenses. Then if I may, a quick second question related to pricing in Brazil, Beer Brazil. So I think that's more to you, Lisboa. Looking at the volume performance of the last 2 quarters, how surprised are you of the demand reaction to the price hike that you guys implemented ahead of the second quarter? And how that potentially affects the implementation of pricing that you normally do historically in Q4 of every year? Those would be my questions. Guilherme Fleury de Figueiredo Parolari: Lisboa, do want me to start? Carlos Eduardo Lisboa: Yes. Guilherme Fleury de Figueiredo Parolari: So Thiago, thank you very much for your question. Let me start more broadly, then I'll go into the details. If you look into our consolidated income statement, but that applies to most of the markets in which you operate, what we've been doing is we continue -- despite the impact that we had in volume, we continue to invest in sales and marketing as a percentage of net revenue, slightly increased quarter-over-quarter, and that is the investment that we're very careful of maintaining. Why? Talking about sustainability, is that is the one that connects our brands with our consumers, and that's how we connect with our flywheel on value creation. Specifically, what happened throughout the year is like we've been, I would say, managing well distribution costs even with lower volumes. So we were able to have a better absorption of fixed costs even with declining volume. And on administrative expenses, I think here, it connects a lot with the way we compensate our executives and our employees. If you remember, Ambev is very well known for having a part of the compensation, which is variable, which is important for us, and it's very connected with the performance of the year. If I were to summarize, there are 3 parts. One is the base salary. The other one is the variable compensation, and we also have long-term incentive plans that are discretionary and distribute in order to make for the variance in value creation over time. This long-term incentive is normally share related. So the employees and executives receive with a tenure of 3 years with that. Specifically this year, when I'm talking about variable compensation, this connects a lot with our company, which is in a difficult year, even though we've been working very hard on the levers that we can control, and we are delivering still like margin expansion, so on and so forth. It's also we've been going through a difficult time that is not structured. As Lisboa said, it's conjuncture that affects the volume. Therefore, the variable compensation of our teams were aligned with that. And with what we know today, what we have done was an adjustment on the accrual that we've made throughout the year. So to summarize, we are continuing to invest on what is very important, which is sales and marketing. Our focus and discipline is also helping on the distribution and on the admin that is very connected with how we see the performance of our company with this adjustment on the variable compensation for the year. Now I'll turn to Lisboa. Carlos Eduardo Lisboa: Thiago. Let me touch on the second part. I think the most important message for you is the following. According to our modeling, industry modeling, our price increase has no impact whatsoever on the industry performance this year due to the fact that prices for the industry, for beer, they are still below inflation. What brings somehow a small impact, very small compared to the situational factors that I flagged before is the mix piece because it continues to grow way ahead of volume average growth with a higher price level. But in the end, consumers always have a chance to choose brands without such a higher price to consumer, right? And that's the benefit of having, again, a strong portfolio of brands. and that's exactly what we hold here in Brazil, right? Not only strong core brands with different competitive situations by region, which differ a lot, by the way, in Brazil. Brazil is a continent, right? And on top of that, we have the premium portfolio that also give us optionality to play around and it's very interesting because we are gaining new capabilities with our digital ecosystem, right? And BEES -- within BEES, we have an AI-powered revenue management. In other words, we can personalize promotions to boost sales, optimize discounts and increase ROI simultaneously, right? In the end, just to finalize the point and somehow addressing the final piece of your question in terms of ambition, our ambition is always to keep our prices in line with inflation because we know the pricing component is a very important accessibility for consumers in Brazil, right? And a good part of our consumers come from middle, low pyramid of the population. So it's important for us to always keep control in order to allow them to stay connected to the category. Operator: Next question from Isabella Simonato with Bank of America. Isabella Simonato: I would like to follow up on your last answer, right, about price and volume correlation. I mean, I understand that beer inflation is pretty much in line with general inflation in Brazil. But my guess is that the timing of the price increase, right, that you guys did in June, and that was followed by the competition in the middle of a bad weather season, right? I mean, how much could that have exacerbated or created a different elasticity, right, to that price increase in the moment that it was done? I think -- that's my question. And a little bit similar to what we saw on NAB, right? Because I think it was really surprising to see volumes coming down by that much, especially when we look at the competition, right, volumes move up in the quarter. So I believe you lost share, but more to understand the pricing strategy for this quarter, which unlike peers, is well above inflation, right, and to understand how you're guys seeing the volume reaction on that segment as well? And if I may, a second question on LAS. I think we saw a big -- pretty important pickup on margins. Just if you could elaborate a little bit on the drivers of that, even though volumes in Argentina were not that strong, I think, will be clarifying. Carlos Eduardo Lisboa: Isabella. Look, as you said, beer CPI in line with overall CPI, no change there, right? According to our models, no different elasticity despite -- or caused by the unfavorable weather, right? So in our point of view, the timing of our price increase was very interesting, came at the right moment for us to avoid any kind of distraction vis-a-vis what we flagged for you all in the beginning of this year in terms of ambition for us, right? We said we want to protect and evolve with the profitability of the industry. We want to keep a very tight control and disciplined cost expenses because in the end, we want to bring growth with profitability. That's what we said, and we continue very focused behind that. On the situational side, meaning weather and disposable income, both categories, both industries, right, beer and soft drinks, were somehow impacted, right? But always keep in mind that for beer, the impact is harder because it is impacting mostly the most important occasion for the category, which is out-of-home, right? And you all know what I'm saying here, right? But pay attention to the following. The point about -- I think it's a little bit tricky to compare both businesses, right? We took the price increase for beer in the second quarter of this year. During the third quarter, we saw the relativity change, right, gap shortening, and that gave us the chance to put our share back on track. In fact, we see the balance between share and relative price even in a better position today than before than last year, which is very interesting for us, right? On the contrary, actually, what happened with soft drinks, we increased -- we had our revenue management agenda impacting mostly the end of the quarter 2, right? And that brought an impact and a difference between sell-in and sell-out according to Nielsen, right? The CSD industry declined by mid-single digits, which was pretty much in line with our sellout, okay? The difference comes exactly from the inventory, and that is the consequence of our revenue management decisions in the end of quarter 2. Guilherme Fleury de Figueiredo Parolari: Now moving to, Isabella, to your question about LAS. I think when we look at LAS, their story, you need to understand of 2 different markets that consolidates into that. One is Bolivia and one is Argentina. Let me start with Bolivia. Bolivia continued to be a market that we are delivering strong results throughout the P&L, which is more than offsetting the impact that we had in Argentina, which in the quarter, if I may say, the demand was still recovering, but not there yet. So there were impacts on inventory level. And also, we couldn't fully implement our revenue management in Argentina in the quarter given the economic situation there. So it's a story of 2 markets. One is Argentina that is tougher and the other one is Bolivia. Overall, it's very important to highlight that we remain very confident about the 2 markets and specifically in Argentina, which has been a more difficult environment. Just to remember that we are operating there since 2000. And we believe that we have the best portfolio of brands that connect with the people, the right initiatives there on revenue management and cost to make it continue to be an important engine for our company going forward. Operator: Thank you. This concludes the Q&A session. And I would now like to pass the word back to Ambev's team for closing remarks. Carlos Eduardo Lisboa: Thank you for joining our call today. I would like to leave you with a final message. We are becoming a true ambidextrous company, making progress in all 3 pillars of our strategy, resulting in growth with profitability. Year-to-date, our top line grew 4%, while EBITDA was up 8% and EPS grew 7%. We are taking market intelligence to new levels, better understanding our consumers, their trends and translating them into actionable insights, making an already loved category even stronger. All in all, we are leading where growth is, especially in our main market, Brazil. Thank you, and see you soon. Operator: Thank you. This concludes today's presentation. You may disconnect, and have a nice day.
Jakub Cerný: Hello and good afternoon, ladies and gentlemen. Welcome from Komercni banka, and thank you for sharing your time with us. Today, it is the 30th of October, 2025, and we are going to discuss the results of Komercni banka Group for the first 9 months and third quarter of 2025. Please note that this call is being recorded. Our speakers today will be Jan Juchelka, Chairman of the Board of Directors and CEO of Komercni banka; Jiri Sperl, our Chief Financial Officer; and Anne de Kouchkovsky, Chief Risk Officer. Standing by in case you have questions from them are Miroslav Hirsl, Head of Retail Banking; Katarina Kurucova, Head of Corporate and Investment Banking; and Margus Simson, Chief Digital Officer. As always, we will begin with the presentation of results, which will be followed by the questions-and-answer session. [Operator Instructions] Now let me ask the CEO, Jan Juchelka, to begin the presentation. Thank you. Jan Juchelka: All right. Hello, good morning or good afternoon. Thank you for giving us the opportunity and sharing the time with us for the presentation of Komercni banka results for the first 9 months and for the third quarter. Together with me, there will be Jiri Sperl speaking and Anne de Kouchkovsky speaking either for financial performance or for quality of assets. We can jump directly into Page #4, please. So Komercni, in the first 9 months, was growing nicely its loan book by 3.6% on a year-over-year basis with a strong driver coming from housing loans. Here we were achieving, on a year-over-year basis, almost 50% growth. And we are -- in nominal values, we are coming back to the record high numbers on that particular product. Let me also reiterate for the fact that it's Modra pyramida, the subsidiary which is completely and entirely in charge of this product, and that we have, in parallel with this strong business performance, achieved super high productivity gain when joining together or merging together the 2 product lines, the historical product lines: one from the bank, one from Modra itself. I will come back to it in detail. Deposits were up only mildly by 0.1% on a year-over-year basis. The third quarter, though, injected 2.6% growth. And what we are happy to see is that current accounts are growing by 3.2%, and we hope it's the beginning of a trend, it's not an ad hoc event. Other assets under management, which is, in our case, is pension schemes, insurance schemes, Amundi product, or private banking products were growing by 6.6%. Inside this category, the mutual funds were growing by almost 10%. The bank remained very strong on capital, so 18.4%. Core Tier 1 was 17.6%. Loan-to-deposit ratio in very, I would say, safe territory, 82%. Both short-term and long-term indicators of liquidity being safely high above the required levels. Obviously, and this is something what we will present in detail, there was the asset quality playing important role in the composition of the net profit. The net profit was totaling at CZK 13.6 billion. On reported basis, we are growing by 8.3%. If we take out the one-off effect of sale of our headquarter building exactly in the third quarter of 2024, on a recurring basis, the net profit would be growing at the level of 35.1%. Cost-to-income ratio, also thanks to very strict cost management, was landing at 46.4%. ROE, 14.5% on a standalone basis. What happened also on the side of our business and our financial performance is that we are successfully approaching the very last stage of transferring clients from old to the new world. As of end of September, there was 1.46 million customers already in the new systems, out of which almost 300,000 were newly onboarded customers, so numbers which have never been seen before in the reality of KB. We successfully continue on that front, we are above 1.5 million, and we are above 300,000 newly onboarded clients. On the corporate governance side, we have a new Chairperson of our Supervisory Board, Cecile Bartenieff, also recently appointed Head of Mobility and International Banking and Financial Services at Societe Generale. And we will -- we have announced a new CFO, Etienne Loulergue, to some extent, alumini of Komercni banka because he used to serve as Deputy to Jiri Sperl approximately 5 years ago, will become the CFO of KB Group starting 15 of December, 2025. And as we have Jiri Sperl at his probably last presentation of results today, I wanted to thank him warmly for his professional service, and I am encouraging everyone around this call to enjoy Jiri's presentation today. We were ranked #1 cash management bank in Czech Republic by Euromoney survey, which was conducted in the third quarter of this year. We can move to next page. As we are approaching the advanced stage or very final stage for retail banking of the transformation program, we wanted to refresh everybody's memory of how monumental piece of work is behind us and where is it heading to. So let me say that the light motive of our transformation was simplification. The significant simplification of products and the clients' proposition, including the same users' environment in the mobile phone, in the desktop solution, and in the branch, i.e., relationship manager solution, is one of those aspects. You know, probably, that we have replaced -- we have put in place a new core banking system. We have completely created the analytical layer above that, and as I have already mentioned, these front-end solutions including. The application, which is named KB+, is bringing a new customer experience to either our existing customers or future customers. When a person is equipped by bank ID, which is a dedicated identity, digital identity provided by a joint venture established by banks in Czech Republic, the onboarding takes less than 10 minutes and there is fully functional account immediately at hand to the new customer. The account is, depending on the subscription plan, multicurrency. It's covering 15 currencies and it is holding also, I would say, dynamic exchange rate functionality inside. We are fully equipped with this mobile application by instant payments in Czech koruna, incoming and outgoing, instant currency exchange with preferential rates for those who are paying for their subscriptions. We have terms and saving deposits embedded, building saving embedded, domestic and international ATM withdrawals, and deposits free of charge, travel insurance, insurance of personal belongings, and payment cards. We have a dedicated button for chat and video call. We have virtual assistant insight. We have dividend credit cards, overdrafts, mortgages, consumer loans, loan consolidation inside the solution. We have pension savings, mutual funds, and investment contracts inside the solution. We have periodic cash flow reviews inside the solution, and we will chip in the online brokerage soon in 2026. All of this, because we were launching the new bank in April 2023, was built from scratch, in fact, as a greenfield solution, and I'm very proud of everyone who contributed into this monumental piece of work in favor of our clients. How our clients are liking it? The Net Promoter Score is at 38 positive points. More they use the application, higher the NPS score is recorded. It is #1 most downloaded banking application in the country. We are currently beating also the international challengers and all our competitors. In App Store and Google Play, we are getting 4.3 or 4.5 respectively as a feedback on the quality and satisfaction from the users. One of the less attractive indicators, but super important for us and even more important for our clients is the vital process availability for KB+ customers, which is achieving 99.8%. And again, something what is given or perceived as automatic, I would praise highly everyone who is in charge and who is behind this excellent process stability and availability for the customers. On the side of marketing, we brought to the market, amongst the first banks, the dedicated bracelet for kids and youngsters where they can get the first impression and feelings about taking care of their own money without using mobile phone, without using any other feature. We went out with a series of excellent, if not even artistic set of cards, of payment cards, in co-operation with students of one of the famous artistic universities in Prague. Obviously, as we are staying the ice hockey bank of the Czech Republic, we are also coming out with a dedicated card, payment card, which is dedicated to ice hockey and ice hockey in the Olympic -- in combination with the Olympic Games. Next page is bringing us a bit closer to the numbers and graphs sort of related to the transformation story. So on the left-hand side upper part, you can see that we are sprinting to the finish line of transferring, or migrating if you wish, our retail clients from the old world to the new world. We are almost there. We are confident that we will be delivering what is the key indicator for that, which is 90% of the total number of our clients, whilst onboarding heavily new clients in the system. The predominant share of mobile banking in the new solution is sort of given. So the numbers are very high. 84% of the total interactions with the bank are done from mobile, only 16% from the PC, and 1% from other channels. We are increasing number of clients interactions. So, we have more often and more frequently our clients in the application, which is a great news because it seems that it's designed as more like user-friendly, the ergonomy of the solution is better, and we don't use it only as a service tool, but also as a sales channel. When speaking about sales through a digital solution, let me bring your attention to the lower part of the -- the lower graph at the left-hand side, where we have a school case, if I may say, from both the growth of digital sales and the productivity gain stemming from that. So we have started back in 2020 somewhere around 16.5%. If we moved the X close to 2018, it was probably 14% of our capability of digital sales, which was growing and massively growing after the launch of new era of banking in 2023 to the today's levels of 54%. In parallel with that, thanks to very hard work of our management in retail banking, but also in operations and other parts of the bank, we were constantly pushing down the number of FTEs related to the same activities. So here, you see the results. As far as digital sales per product are concerned, you see that, for example, investment contracts are fully digitized by 100%, overdraft 65% or 66% respectively, et cetera, et cetera, when reading from the right to the left. Starting recently, we are putting the target numbers for digital sales for each of those products individually. Not always, we will be trying to achieve 100%, but what is probably more important that the overall number of 54% will be further growing. And it will be us deciding what is the targeted level. Next page, please. So when speaking about the transformation, it's digital, it's simplification, but it's also searching for other efficiency gain and productivity gain inside the group. One of them, one of the cases was the complete adoption of KB Poradenstvi, which is the network of tied agents originally acting below the name of Modra where we were unifying the brand, where we were simplifying the product portfolio, where we were engaging with the agents and equipping them with the proper proposition, not only from Modra but from the entire KB Group, harmonizing the IT environment for them in order to make them fully integrated into our system, centralizing the -- everything what is back office on that particular activity, and bringing them to the campus of the headquarter of Komercni. We did it also with other companies. Everyone who is 100% owned went through the same process. Modra on its own went through an incredible story for the last couple of years when we were changing the systems, fully digitizing the customer journey, or almost fully digitizing because we don't have still digitized solution for the [ cadaster ] of real estate, but soon to be there. And we have merged everything what was mortgages with Modra pyramida. So instead of having 2 product lines, we are having 1 product line. And again, the achieved productivity gain will be above 100% once the overall transformation is being finalized. SGEF, SG Equipment Finance, Czech and Slovak Republic was fully acquired by KB Group. You probably know that above our heads, there was the disposal of SGEF International by Societe Generale. And as a result, we are 100% owner. So again, the OneGroup principle will be applied, and we will unlock additional potential for both commercial and business activities, as well as the synergies on the side of the back offices. We have picked up also upvest. Why? Because it's a super successful platform for raising money and investing them into real estate development. These guys are able to subscribe high multiples of the previous year, and they do it for a couple of consecutive years already, and we became 100% owner here. So we can move to the next page. And here, I'm bringing you back to the reality of today. So Czech Republic, Czech Republic is a very stable country from both economic and I hope we will confirm also from the political point of view. We are like a couple of weeks after the general elections and the new government is to be established. When speaking about the new government, what we hear from the nominees or from the main representatives of the political movements and parties who won the elections, there should be a fiscal stimulus for Czech economy stemming from this new government. So we will see how that will work. But we very much see investment-oriented -- or public investment or infrastructure investment-oriented group of people preparing themselves to step into the government. If you combine that with the expected or already existing fiscal stimulus for German economy, the overall environment of making business in Czech Republic is being improved more or less as we speak. In combination with that, the representatives of the winners of the election -- of the general elections are also speaking about compressing the energy prices, which might help also with lower level of imposes towards the inflation. So let's see, but at least the first signals are from, let's say, business perspective, pretty promising. The GDP was growing by 2.6% on a year-over-year basis. Industrial production was down, a combination of weakening Germany performance plus a bit of mess on the supply chain part and the impact of tariffs imposed by the United States is bringing a little bit down the industrial production, which is perfectly balanced by strongly growing construction output by 17.1% back in August 2025. This is stemming from infrastructure investments and also pretty booming investments on the side of real estate housing, but not only. The unemployment rates remains very low. On the other side, the wages are growing and beating the inflation. So 7.8% nominal value -- nominal growth, but 5.3% real growth of wages in the country, which is also giving the answer of who is the main engine of the growth of GDP, which is the title remaining in hands of Czech households. The inflation, as I have mentioned, was at 2.3% level in September. Czech National Bank is remaining calm for the time being and is keeping the repo rate at 3.5%, which is minus 50 bps on year-to-date basis, but was not changed for -- at the latest pricing session of the Board of [indiscernible]. Czech koruna is strengthening vis-a-vis Europe and even more vis-a-vis U.S. dollar. Probably, we can move to next page. And this is already the business performance. So as I have already mentioned, the gross loans were up by 3.6%, very strong dynamics related to mortgages and Modra loans, so housing loans in general, 55.2% when you compare Q3 '24 versus Q3 '25. We believe that the finetuning of the capacity of processing the new requests, combined with the fact that the dynamics of the market will remain strong, will bring us to slightly higher market share as KB Group. The rest of the segments were growing at approximately -- we're growing at around 2%, 2.5%, 2.6%, 2.7%. So, I would say, in general, the businesses, the households were taking, let's say, appropriate part of the new financing from KB. When zooming on corporate financing or corporate loans, we are witnessing the growth of 2.7% Q3 versus Q3. Inside that, the SGEF solutions were growing slightly higher than small businesses and corporates. So next page, please. All of this obviously was translated into KB being at and servicing its clients with the main transformative transactions. You can see public sector represented by Elektrarna Dukovany. Also private sector represented by almost the entire rest of the transactions you see in front of you with the exception of 2, which are municipal driven. Everything what is green here represents the format of green financing or green bonds. We can move to the next page, which is bringing us to deposits. It remained stable, plus 0.1%. I would say we would love to see that higher, and we took appropriate measures and established concrete tasks to get higher portion from deposits. When decomposing the deposits on the side of -- by the category, we are happy to see that the dynamics of growth of nonpaid, i.e., current accounts, is coming back to, let's say, better levels, 3.2%, whereas the saving accounts are in competition, mainly with investment solutions. When speaking about investment solutions on the left-hand side, you see that overall, we were growing by 6.6%, the assets under management in mutual funds by almost 10%, whereas the life insurance and pension schemes 2.1% and 2.3% respectively. So next page is bringing us to financial performance, and it's my pleasure to hand over the word to Jiri Sperl. Thank you. Jirí perl: Thank you very much, Jan. Indeed, a very good financial performance in Q3 and first 9 months of the year. I want to repeat key figures once again. So KB Group generated almost CZK 13.6 billion net profit after tax, which is 8.3% more than 1 year ago. And if we put aside the one-off coming from the sale of Vaclavske namesti in Q3 last year, the growth would be even much higher at 35%. It's visible from the waterfall chart on the left-hand side that basically all categories contributed positively. That's true that highest year-on-year impact is coming from super positive cost of risk that thanks to excellent asset quality of KB loan portfolios and also due to release of part of retail overlay provisions switched from the creation of the provision in 2024 to net release in 2025. And so the impact is massive. It is around CZK 2.3 billion. It's also very much worth to mention that also the top line was growing in first 9 months by almost 3%, while costs went down by 4.3% and thus generating very strong positive jaws. Also the quarter-over-quarter perspective, our trend is positive, that's right upper chart, and growing as seen there, i.e., quarter-over-quarter plus 3.3%. Naturally, the very good P&L result transposed also to the solid profitability indicators, ROTE being at 16.5% which -- and this should be reminded as well. At the same time, strong CET1 ratio at almost 18%, exactly 17.6%. This is bringing me to the balance sheet evolution. So the balance sheet shrink a bit year-on-year by 2.3%, which is, however, almost solely due to the very volatile repo operations with the clients. So if we compare the balance sheets year-over-year, it would be roughly CZK 80 billion less in Q3 this year versus 1 year ago. So this is basically explaining full variation. On the liability side, still, there is not a covered bond worth roughly -- or exactly EUR 750 million that was successfully issued in mid of October. And of course, you will see it in the balance sheet during the Q4 results presentation. On the asset side, there are basically no changes in trends, only to mention that the volumes of the [indiscernible] continue to decline a bit year-to-date as we are preferring for the time being investments into repo with the Czech National Bank, and of course, swapped into longer maturities following the long-term duration of our liabilities. Now let me go briefly through the main categories as usual. Although I would say there are not too many surprises, the positive trends do continue and will continue, including mainly positive jaws generation. So let's start with the net interest income. So, to say, despite the fact that NII was, I would say, severely hit by doubling of mandatory reserve requirement as of January 1 this year, it is growing. It is growing solid pace by 3.3% year-on-year. And it's basically the case both for key categories, [ checklist ]. So what I mean is income from the deposits and income from the loans, and both growing by roughly 4%. The drivers behind are, however, a bit different. NII from deposits is positively influenced mainly by spread effect -- by spreads, supported by improved structure of the deposits, while the income from loans is driven solely by volumes and the spreads remains basically flattish. Similar trends are visible also from the quarterly perspective, that's right bottom chart. On quarterly perspective, NII is growing by plus 1.5%. NIM, the chart on the upper left-hand side, on a year-to-date basis, it is 1.70. It is flattish quarter-over-quarter, but positive year-on-year by 6 bps, which is a positive news after some time. On top of that, we are expecting that the trend of the rise is going to continue also in Q4 this year, and I can touch it during the Q&As if needed. Let's move to the fees income. So income from fees and commissions is also growing by plus 3.4%. And there are, again, the usual suspects in terms of growth, i.e., mainly fees from cross-selling and specialized financial services, both growing on a 9-month basis by 13% to 14%. In the area of the cross-sell fees, it is a reflection of both volume growth of nonbank assets under management, but also improved structure, which is still continuing improving. And what I mean is that there is kind of [indiscernible] from more money market type of mutual funds to more dynamic. Quarterly perspective, that's right bottom chart, it's growing 1.3% quarter-over-quarter, and here almost solely supported by the cross-sell fees. At the same time, we also see first signs of improvements on the deposit product fees where the income from new packages/tariffs are classified. The mirror of course can be seen in the transactional fees. Financial operation is growing pretty dynamically year-over-year by 7.6% again on 9 months basis. And here it is solely influenced by the capital markets activities and mainly boosted by interest rates hedging activities, while the FX income from the payments is more or less flattish. That's the blue part of the chart. The dynamics is even higher on a quarter-over-quarter basis, growing by strong 15.4%. And here both elements contributed strongly, including those of the FX from the structured book growing by a strong 10%. Here, to say the jump in FX income from the structural book was somehow expected due to the seasonality or seasonally strong FX convers as I was somehow indicating over 3 months ago. And finally, before passing words to Anne, OpEx. So on 9 months basis, OpEx is declining strongly by 4.3% year-on-year, supported by -- basically by all components, except the depreciation and amortization. So let's go briefly into the structure. So personnel expenses, it's almost solely down on character by the decrease -- by the increased efficiency of the bank and thus decreased the number of the employees. So year-on-year, the number of FTEs is by almost 6% lower. First. Second, administrative costs also declining by minus 4%. But here, that is not the main, let's say, candidate or driver of the growth of the decline. And basically the savings go across all main categories. Skipping to regulatory funds, it was already commented in detail during the Q1 this year presentation, and the exception is depreciation and amortization. And again, here, no surprise. It is still reflecting main investments in digitization and our transformation in more general sense. All in all, this led to the further improvement of our cost-to-income ratio to the level and here commenting 9 months basis as well of 46.1%, while 1 year ago it was 49.2%. And that's the output of the positive jaws as I was commenting briefly before. Having said that, simply the trends are further continuing even in this chapter, and a good evidence is that the quarterly cost-to-income ratio, that's the very bottom part of the chart, that the quarterly cost-to-income ratio in Q3 into this year is the lowest at least since last 2 years. Now let me pass the words to Anne, who is going to comment quality of the assets and cost of risk. Thank you. Unknown Executive: Thank you. Good afternoon to everyone. So as it was mentioned, the loan portfolio grew up by 3.6%, and this is in the context of a very stable credit risk profile. So this is attested in several metrics. So first of all, you see that stage 2 is now below 10%. So this is obviously driven by the release of the inflation overlay that was put on the retail in 2024. So we decided to release in Q3 the part related to the small business segment. We also have a very, I would say, stable NPL share at low level, which is at 1.8% this quarter. And together with this NPL provision coverage ratio is very stable as well. It shows that the portfolio is well performing, well covered, and demonstrating the asset quality. If I go in more, I would say, maybe brief details in the segment on SME and small business and consumer loans, it's a very resilient portfolio. And mortgage loans and large corporates, we are in the low -- even 0 default area. So if we can move to the next slide. Cost of risk, as it was mentioned, it's -- release of cost of risk at CZK 328 million this quarter. I already mentioned and it was also mentioned by Jiri that it's very well driven by the release of this overlay that we had on the retail. But it's also driven by some successful recovery on the non-retail exposures, which led us to recover 100% of our exposure and consequently release the provisions. So all in all, we end the -- for the 9 months at cost of risk of minus 20 basis points. And for the next quarter, we intend to continue to release the remaining part of the inflation overlay on the retail, which is still in place for consumer loans, that will be then released for the fourth quarter, and will lead us to the minus low-teens in the cost of risk for the full year probably as we do not expect, as attested by the portfolio quality, any big event before the year-end. So that's about it on my side. Jirí perl: Yes. Thank you, Anne. And let me complete the presentation with last 2 slides, first one focusing on the capital. So capital remains very strong at 18.43%. There is a slight decline year-to-date, mainly due to the slight negative impact on OCI related to the release of the provisions as commented by Anne, so-called lack of provisions. Still, however, the capital adequacy is safely in the upper part of our management buffer, maybe better said almost at the upper edge of the management buffer, despite accruing [ 100% ] net profit as a dividend and the new methodology, i.e., Basel IV. Also MREL, adequacy is safely within regulatory limits at 28.8%. And this is bringing me to the full year outlook as usual. So there aren't too many changes in the macro, only 2 slight adjustments. First, no cuts of repo rate is expected by the end of this year, which was the case 3 months ago in terms of outlook. And second, there is slightly positive adjustments in the economic growth from 1.9% to 2.1% this year and also for next -- for the years to come. In terms of banking market growth, we keep fully the guidance, i.e., both lending and deposits, at a mid-single-digit pace. In terms of growth of KB, we stick to the original guidance at lending side, i.e., mid-single digit. In terms of deposits, we downgraded the guidance from mid-single digit rather to low- to mid-single digit, but at the same time, the structure of the deposits is expected to improve further. Revenues and OpEx are basically confirmed. Maybe one comment to the top line, probably more precise would be to say lower edge of low- to mid-single digit growth. OpEx as confirmed, i.e., mid-single digit decline -- decrease. And finally, cost of risk guidance, Anne has briefly touched that before, but it significantly improved from around 0 3 months ago to the level of low-teens. Well, that's it. Now before passing word back to studio, probably let me use this opportunity and to say also a couple of words on my side. First, thank you, Jan, for your kind words, and thanks also to all you connected. Indeed, this is my last earnings call in a position of KB's CFO. I have to admit that it has been a great 10 years serving at this position. And I truly appreciated every opportunity to meet with you and discuss the bank's performance and time to time also everything around. As Jan mentioned, Etienne will be stepping into the role as my successor starting mid-December, and I don't have any doubts he will successfully take over. He knows the bank perfect well and has all the qualities needed to help lead KB towards, how to say that, towards its bright future. So, Etienne, all the best in this exciting position. Thank you all once again. And now returning the word to studio. Jan Juchelka: Okay. Thank you. Thank you, Jiri. I will just conclude the call very -- the presentation part of the call very quickly. So we can say that the combination of strong capital base, the already delivered very strict management of costs, the fact that we are approaching the very final stage of the transformation and we have fully functional, very stable, and attractive solution for our retail clients, combined also with the operating efficiency, further, let's say, simplification and scalability of the new digital platform will create a good base for improvement in the commercial momentum of the bank further on. We believe that the cost of risk, which is in negative territory and is commenting by many of you as the good contributor but not like sustainable contributor into the profitability, will turn into enabler for further commercial and business growth in the next months and quarters. We will also free up additional energy and time of our bankers. They were super busy with assisting our clients with migrating from the old to the new world. They will now put all their energy on sales and servicing the clients in day-to-day reality. This is what is somehow framing our hope for the next -- and determination for the next steps, which will be driven by our activity and our, I would say, full dedication to -- for the growth of the bank on the side of business and commercial and financial performance. Thank you very much. I'm giving back the words to Jakub Cerny, and we are ready to answer your questions. Thank you. Jakub Cerný: Thank you to all the speakers. Let me add that we have been also joined by Jitka Haubova, our Chief Operations Officer. So we have the complete Board of Directors with us today, and you can ask Jitka as well. It means that in the next part of today's meeting, we will be happy to answer your questions. Let me remind you that this meeting is being recorded. [Operator Instructions] So our first question comes from the line of Mate Nemes from UBS. Jan Juchelka: We cannot hear you, Mate. Mate Nemes: Can you hear me now? Jan Juchelka: Yes. Mate Nemes: Excellent. Perfect. First of all, I wanted to say thank you to Jiri for years of hard work, transparent commentary and help you provided to analysts in capital markets, and we'll be dearly missing you. My question would be on loan growth. It's good to see that there is acceleration quarter-on-quarter and also year-on-year in loan growth. I think you've been quite clear that that's a focus area for the second half of the year, Jan, to your comments about freeing up time for the bankers, certainly starting to be visible and sales volume of housing loans visibly picking up. I'm wondering if you could give us perhaps some flavor of what you're seeing in the last quarter of the year and expectations also going into 2026. Can we expect this momentum to continue and maybe also see a much awaited recovery in business loan volumes? I think, Jan, last quarter, you were quite positive about potential infrastructure projects and lending towards that. When can we see that in the numbers? Jirí perl: I can probably start and then my colleagues, the heads of business [indiscernible] will complete me. So a couple of comments on first 9 months of the year. I would say that the retail loans were growing relatively strong. It's mainly the case of mortgage loans. So I gave you through that there is a space for improvement in the area of consumer loans. That's one thing. In terms of corporate loans, to say the growth was a bit subdued, but at the same time, we are expecting by the end of the year relatively dynamic move. Why? Because the pipeline is relatively rich and strong. And I'm sure Katarina is going to comment on that. In terms of 2026, we are providing the detailed guidance at the end of the year results, i.e., end of January next year. But I can indicate that the strategy of KB is very much growing, and it will be very much the case for retail as currently all tools are available. So retail is going to be the market shares growing mid- to high-single digit. In terms of corporate, it will be more about the sticking to the market shares, at the same time gaining a bit, but definitely not as dynamic as retail in 2026. Now I'm passing words to my colleagues who will probably go into deeper details of component to me. Thank you. Unknown Executive: Okay. So if I might add a few words on the corporate, not to repeat what was already said. We do see strong pipeline. We are actually seeing acceleration in the lending business for the SMEs. So we are pretty confident towards the year-end. In terms of the large corporates, it's kind of a little shaky market because we are seeing a strong and very lively bond market, which is nice on the fee side also for us. But it also has a negative impact because some of the loans are being refinanced by the bonds issued by the big groups, and also there is a strong pressure on the margins arising from the high appetite on the bond side. So on the large clients, we are optimistic more towards the next year because as you mentioned yourself, there is still quite a huge infrastructure project loading up in Czech Republic, and we are confident to be participating in those. And that should be definitely a very nice contributor to the large segment of our clients in terms of both volumes and profitability. Jan Juchelka: I will probably add one sentence. You probably saw the pages with the tombstones that we were the instrumental bank when financing the preparation of the new nuclear project of the country under the name of EDU II together with other banks, but we were, let's say, the main driving force there. There will be more to come on this side of energy sector. You might recall that there were 2 large transactions. One of them concluded beginning of the year where state was taking over part of the storage capacities and transmission of gas, whereas [ Czech ] as the state-owned -- majority state-owned company was taking over GasNet, which is a distribution of -- regional distribution of gas, et cetera. So we are around these transactions. We will be continuing with that. What is slightly delayed on that front is the transport-related infrastructure project, which partly maybe also because of the elections we're a little bit lagging behind the original schedule and original calendar. The rhetoric of the new representation of the majority in the parliament, at least, is that they will continue intensively on that front, and we want to be part of it as well. Mate Nemes: That's very helpful. Can I have a follow-up perhaps, as you mentioned, the new forming government? Can you share your thoughts on probabilities around a more effective banking tax? Jan Juchelka: With strong disclaimer that we don't have the crystal ball and we don't see the future, the reality is that we don't evidence any strong push on that front and/or any traces of planning or projecting that into the budgetary exercise or in the preparation of the budget. So the Czech Banking Association is obviously acting preventively and trying to get the right feeling about -- around that because rightly you are picking up one of the potential risks for the entire market. For the time being, we don't see anything happening. Jakub Cerný: Our next question comes from the line of David Taranto from Bank of America Securities. David Taranto: I have a quick one. Are there any regulatory headwinds or tailwinds on the capital side over the next year? Anything that could affect the Board's appetite to sustain the 100% payout aside from the internal capital generation? Jirí perl: Should I take it, Jan, or you will? Okay. Well, there was a big methodology change starting this year. I mean, implementation of Basel IV. Probably, you noticed that at the end of the day, the impact of Basel IV for KB was basically neutral. Having said that, almost all components of that have been incorporated even before. For the time being, we are not expecting any regulatory changes. But with the same disclaimer like I was mentioning before, we do not have a crystal ball, but currently nothing is on the table. Maybe here to mention that Basel IV was implemented starting from 2025, but not fully, i.e., it was related to credit risk and operational risk. But still the capital needs for market risk is coming, and you will see that at the beginning of next year. I can just indicate that the impact will be rather positive. Thank you. Jakub Cerný: So the next question comes from the line of [ MC ]. So I would like to ask you to introduce yourself and then ask your question. Jirí perl: That's Marta Czajkowska? Marta Czajkowska-Baldyga: Yes. Sorry. No, it's Marta Czajkowska-Baldyga from IPOPEMA. Sorry for that. So I have 2 questions. [ Audio Gap] Jirí perl: We cannot hear you. Jakub Cerný: Sorry, Marta, could you unmute yourself? Sorry. Marta Czajkowska-Baldyga: Yes. I think that it's -- do you hear me now? Jakub Cerný: We can hear you now, yes. Marta Czajkowska-Baldyga: Okay. So, first of all, thank you, Jiri, for your transparency and your hard work. And 2 questions from my side. First, on the deposit market and the situation right now. Could you please discuss this? I mean, we hear from the competitors that there is increased competition on this market and KB itself lowered its outlook for deposit growth this year. And could you please discuss this development in the context also of potential pressure on the margin? And the second question is on the cost of risk. Could you please disclose how much of the management overlays related to retail segment do you still have on your books to be released in the fourth quarter? And just related to that, would you say that 2026 outlook would still be below the -- through the cycle level in terms of cost of risk? Jirí perl: If I may, I will start again about the deposits, and again, no doubt my colleagues will complement. So based on the growth of deposits in first 9 months or even year-over-year was rather subdued. We are partially commenting on that same answer ago. And by the way, it was the case both for retail and corporate. And one of the reasons on the corporate -- on the retail side was that the branch network was heavily migrating according to the plans and succeeded. We are getting -- or the migration is going to be completed by the end of the year. I'm talking about individuals. But of course, it was about not negligible capacities on our side. For corporate, and that's probably what you are referring to, there was -- in the first half of the year, specifically [indiscernible] competition on the market. And our interpretation at the time was that this was linked to the fact that not all incorporated the impact of the doubling of obligatory reserves as of January this year into the client rates pricing. Now it seems it is going to be normalized. And I believe that at the end of Q3, we can see the first fruits of the change. The Q3 dynamics is much higher. On top of my head, that is around 2.6% where both key segments are growing. And to be frank, we expect that this trend is going to continue. Maybe, to mention here one more point. This was also visible in the market shares for the last 3 months. I don't have in front of me September ones. They should be available by the way today, but August, July and June, KB was gaining market shares in terms of deposits. And now I will have my colleagues to comment further. Thank you. Unknown Executive: So, on retail side, I don't have much to add. Maybe to give you a few details from inside the structure of the deposits, we are doing pretty well on unpaid deposits, current account balances, and you saw it in the presentation. Recently, we stabilized the development of term deposits. So we are now, like, flattish to slow growth again. We are doing really, really well on saving accounts. And I have to admit that some time ago, we probably slightly underestimated the role saving accounts play in collection of deposits. It was all fixed. And now we can see basically week by week how well we cumulated deposits on saving accounts. And we have a few more bullets to shoot to make it even faster. So I'm rather on optimistic side for deposit development on retail. Jan Juchelka: But probably in more general terms, what we see, what is happening on the deposits, we can probably confirm what you heard from the other players that the hunt for the deposits is more visible on the market, plus the clients have changed their management of spurred money, if I may say. They do search for returns. By definition, we are in the Czech Republic. They are searching the safe returns, if I may say. So saving accounts highly probably will be the field where the whole battle will be happening at the highest intensity. There was also one sub-question on overlays and cost of risk until the year-end. I don't know, Anne, if you want to react on that. Unknown Executive: Yes. So your question was the remaining part on the retail, right? So I don't know if the amounts were mentioned earlier, but -- yes, it was mentioned earlier. So we have remaining CZK 100 million, if I'm not mistaken. Jiri, please help me because I'm still struggling a bit between euros and Czech koruna, sorry, as I just joined 2 months ago. And as I said, it is on the consumer lending and we intend to release. And then we have still an overlay on corporate, which is in a bigger amount. This is under discussion because it was created as well on inflation assumption that are not, today, really relevant. But still, given the very unstable environment we are living now in, we will intend to keep overlay on the corporate part. But I cannot really comment because it's really under discussion on the, I would say, which amount, but it should be more or less the same as we have today, but on different assumptions, broader assumptions, like more international geopolitical instability, tariff threats, not only inflation. Jirí perl: Exactly, as Anne was commenting on that. Maybe let me complement by 2, 3 sentences because one of the questions was that the years to come. That [indiscernible] is not sustainable to be in a materialize part data sustainable. So starting from 2026, we are getting back to normal cost of risk, i.e., reverberation. Some of you might remember that according to risk [indiscernible] statement, some are [indiscernible] like through the cycle cost of risk, we are targeting 25 basis points, but it's very likely will not be the case for next year. If I should indicate, you should probably expect, let's say, high-teens in terms of bps. Unknown Executive: Complement -- as it was mentioned by my colleagues from business, we want to push on some segments that are, by definition, creating more cost of risk, which is small business, I mean, SMEs in the corporate and consumer lending in the retail. So that's why we expect to go back more in our limits that are in the risk appetite of the bank. Jakub Cerný: So we don't seem to have further questions as through the platform. So now I would like invite participants who are connected through telephone. [Operator Instructions] So, Marta, you have the floor. Marta Czajkowska-Baldyga: If you could discuss the outlook for remaining part of the year for NII, and if you could be kind enough to tell us if there is any change in that for 2026 going forward? Jirí perl: Yes. I was talking to [indiscernible]. Well, again, I will start – probably, let's start with the main drivers, which are, first, growing of the client base -- further growing of the client base. Of course, critical will be to make them active, first. Second, material increase of the digital sales. First one I would mention would be the continuing change in the structure of our deposits in favor of current accounts. At the same time, let me be very clear that we are not aggressive in that regard. Of course, 5 years ago, it was current accounts portion, and the total deposits was 80%. Now we are closer to 50 and are using very conservative assumptions. On top of that, we are expecting continuing growth of the volumes basically in line with the dynamics visible in Q3, and it is relevant both for loans and deposits. And probably last point to mention is slight improvement of NIM. If I'm saying slight, I compared to, let's say, year-over-year. It will be around, let's say, 5 basis points plus/minus. And the main drivers here will be already mentioned improved structure of the deposits. That's -- for 2026, the story is a bit similar, i.e., the main driver of the growth in the area of net interest income will be shared volumes. As I was mentioning before, a very dynamic growth of both loans and deposits. And also we will see there, let's say, outputs or results of the improved structure of deposit because it is in the P&L for the time being only partially. So in 2026, we should see more visible impact. So in terms of NPIs, we are expecting mid- to high-single digit, and of course, the main driver of that, at least in absolute terms, will be income from net interest income. I'm not sure. Did it help? Or -- okay, [indiscernible]. Jakub Cerný: So let's wait a few moments if anyone has another question, either through the platform or directly asking via telephone. There does not seem so. So I would like to hand back to Jan for a concluding remark. Jan Juchelka: All right. Thank you, everyone, for being with us today. It was a big pleasure for us to share with you our views on not only the results, but some of the key aspects of making banking business in the Czech Republic in the context of the macroeconomic reality. And we do believe that going forward towards 2026, there might be new emphasis for the entire market, and we want to play a significant role as we have done until now. Obviously, and thank you again for very precise questions. You somehow spotted the main aspects or points of our interest of -- not only interest, but of our activities. So we will definitely hunt for higher volumes on both the side of financing, as I will just repeat the words of Anne, mainly in those categories where we are lagging behind our natural market share. So it's more like consumer lending and financing the small businesses and mid-caps. On the side of hunt for deposits, we will definitely continue making our improved propositions for the clients, and work on the appropriate balance between paid and unpaid deposits. Speaking about all the means how to get there is mainly, I would say, favorable starting point on the side of cost of risk and the normalization Anne is mentioning is simply stemming from the fact that we are constantly flying below our line of risk appetite statement. So we have space to grow and the space to grow is mainly in the categories I have already mentioned. Let me also reiterate on the fact that we have made very hard work and series of unpopular decisions on the side of cost management during 2025. Some of the effects will be visible a bit later than in the third quarter. But I need to thank all of my colleagues who have implemented the necessary measures on keeping the positive jaws in place. We feel strong on that discipline and we will continue working on it further on. So we are very much looking forward to meeting you a quarter from now or at your request any time in between you would be interested in knowing more about Komercni banka. Thank you very much for paying attention to our bank, and we are super committed, and we are looking forward to speak to you soon. Thank you. Unknown Executive: Thank you very much. Jakub Cerný: Thank you. This concluded our call today. You can now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Imerys 2025 First 9 Months and Third Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Alessandro Dazza, Chief Executive Officer; and Sebastien Rouge, Chief Financial Officer. Please go ahead. Alessandro Dazza: Thank you. Good afternoon or good evening to all of you, and thank you for joining us today to review Imerys first 9 months and Q3 2025 results. Next to me this evening, as usual, Sebastien Rouge, our CFO. And as usual, please let me start by giving you some highlights for the 9 months we just closed. Imerys' performance for the 9 months is the result of a positive start to the year and a softer second part. Q3 reflected an honestly unexpected slowdown in the U.S. economy as a result of uncertainty caused by the U.S. tariff policy. Europe, even if overall activity remains low, seems to be turning the corner positively. Revenue for the first 9 months was EUR 2.583 billion, slightly down 0.7% like-for-like versus last year. Even in this context, which remains challenging, Imerys posted an EBITDA of EUR 421 million, in line with last year like-for-like and excluding the contribution of joint ventures. This demonstrates the resilience of our company also in difficult times. The adjusted EBITDA for the third quarter '25 was $140 million, representing a 17% margin and again, reflecting disciplined pricing policy, ongoing continuous cost management and positive business dynamic in the polymer and additive businesses. For the full year 2025, the group confirms its adjusted EBITDA target in the range of EUR 540 million to EUR 580 million. Last important as we do not see a significant market recovery or at least is being delayed on top of the ongoing actions on costs, and I will come back to this, the group is launching a comprehensive cost reduction and performance improvement program aimed at simplifying its organization and adjusting its industrial footprint to restore profitability. Finally, some key updates of the quarter. First on EMILI. Imerys has received an indication of interest from a potential investor to acquire a minority stake in the EMILI Lithium Project. Classic, subject to customary due diligence and approvals, this investment should be formalized by the end of January '26 and would allow the completion of the definitive feasibility study of the commercial plant sometimes around the end of next year. Consequently, any decision concerning future phases such as the construction of the industrial pilot plant are on hold and will be made in due course based on market conditions and capital allocation considerations. Second, important good news, Imerys signed today an agreement to purchase SB Mineração in Brazil. SB Mineração is a Brazilian company specialized in the production of ground calcium carbonate or GCC, based in Cachoeiro in the state of Espírito Santo. The company is a leading producer of GCC for various applications, in particular, polymers, thermosets, paints and coatings. In '24, the business generated approximately USD 30 million in revenue with a solid profitability. With this acquisition, Imerys would strengthen its footprint in Brazil, where it is already one of the main producers of carbonates. The completion of the transaction is subject to customary closing conditions, including regulatory approvals. A word on our decarbonization road map. We signed an important partnership in October with LNG to supply green energy to approximately 25% of our European operations via a 10-year corporate purchase agreement for the annual generation of 200 gigawatt hour of renewable electricity in Spain. This agreement will enable the reduction of 70,000 tons of CO2 equivalent per year or 14% of our Scope 2 emissions, so a significant step. Finally, our Imerys Graphite & Carbon business signed 2 strategic partnerships aiming at enlarging its innovative product portfolio for batteries. One is with Cnano, the global leader in carbon nanotubes, the second one with Shanghai ShanShan, who is the global leader in synthetic graphite for lithium-ion batteries. I will not enter the details and more details are available on our website on the 2 specific projects. What is important, both partnerships directly address Europe's crucial need for a regional, resilient and competitive battery supply chain based on state-of-the-art technologies. If we move on now to the next slide. Here, you see Imerys sales performance by geography for the first 9 months, which gives a good picture of the a bit contrasted economic activity by area. Europe represents about 50% of our sales or slightly less, enjoyed finally a light recovery in Q3, thanks to improving construction and industrial activity. And you see this if you compare to what we published in July with the Q2 results. Nevertheless, on a full year basis, year-to-date, business is still lagging behind last year, and we know due to soft activity in industrial sector and a poor construction market until recently. North America, the big surprise of the quarter really subdued in Q3, confirming a trend that we have seen at the end of Q2, mostly affected by tariffs, a weak industrial or weak, sorry, residential markets and a bad quarter in filtration, partly, frankly, relating to our own production issues relating to CapEx and some industrial topics. For the 9 months, sales are basically flat compared to last year or in line with previous year. We should not forget the significant impact of the devaluation of the U.S. dollar, negatively impacting sales at the level of 4% compared to last year, so becoming significant. In Asia, sales are growing nicely, not only in India, but also in China, which remains quite dynamic, especially around new technologies, electric vehicles and strong exports in general. South America, very strong first half, a bit weaker Q3, but I remain confident it will be a good year in South America. On the next slide, as usual, a deep dive on what really shows the robustness of Imerys' business model. On the left side, you can see the evolution of our adjusted EBITDA year-on-year. We do have a significant impact of perimeter, as we saw before, coming from the divestiture of the assets serving the paper market last year in July and of joint ventures, as we have been discussing since the beginning of this year. FX playing a role, as I mentioned before, but fundamentally, the core of Imerys' activity remains solid and adjusted EBITDA was resilient, almost flat compared to last year. On the right side, the balance price costs, which highlights the good continuous work done on cost reductions, first of all, but also on Imerys' agility to react to market changes in terms of pricing when needed. We know this balance remains a key factor for future success. Let's now look at our main underlying markets and their trends, and I'll be quick as we have partly already addressed the main trajectories and trends by geography. So overall, I would say what we saw in Q2 was confirmed in Q3 with overall markets, say, below expectation, especially construction and automotive, while growth in electric vehicles continues strongly, and while tariffs have a limited direct impact on Imerys, the uncertainty created by these tariffs is impacting more in general business activity and unfortunately, specifically some of our customers. To rapidly conclude on this side, construction finally, and potentially restarting in Europe, remains below expectation in the U.S. Consumer goods, resilient, certainly in the U.S., maybe slowing a bit in America for the reasons we have mentioned. Automotive, continued low production levels in Europe and in North America. China, good, benefiting from strong exports, but also these internal stimulus packages or policies launched by the government and of course, very strong EV growth in the area. General industrial activity, soft in Q2 in Western economies, strong or solid in China. so far for market trends. Sebastien, I hand over to you for more details on our accounts. Sébastien Rouge: Thank you, Alessandro. Good evening, everyone. Let me recap some of the key aspects of our financial performance, and we'll start with revenue. The group reports sales at EUR 2.6 billion for the first 9 months of 2025. It represents 0.7% decrease at constant exchange rate and perimeter as compared to last year, with volumes slightly down and prices holding well. You keep in mind the large perimeter effect, EUR 126 million, mainly due to the disposal of the assets serving paper in July '24. We have now an FX impact of minus EUR 47 million coming from a drop mostly of the USD versus euro from Q2 onwards. You can see in the chart, Imerys performance for the third quarter alone, quite similar trend for sales volume and prices and also a high FX impact. Perimeter effect is now positive, thanks to the good performance of Chemviron, the business acquired at the end of last year. If we look now into more details at our 3 business segments, beginning with Performance Minerals, the business generated EUR 1.547 billion since the beginning of '25, representing 60% of Imerys Group. Overall, the business shows a slightly negative organic growth as compared to last year due to a weak Q3, notably in America. Revenue in Q3 for Americas was down 5.7% at constant scope and exchange rate, reaching EUR 199 million. Sales were impacted by a weak residential market in the U.S. suffering from high interest rates, unsold housing inventory and also a soft filtration market. The prices held well. Revenue in Q3 for EMEA and APAC decreased by 3% like-for-like in the third quarter of '25 as compared to last year. Weak volumes, minus 4.1% were driven by low demand across main markets, where our sales to paints and automotive polymer slightly improved. I already mentioned the good performance of Chemviron's diatomite and perlite businesses integrated since January '25. Here as well, price grew in line with H1. Now looking at our solutions for Refractory, Abrasives and Construction business. We note a relative improvement of the business in Q3, posting organic growth in the quarter after a difficult H1. Business revenue reached EUR 278 million in Q3, an increase of 1.9% as compared to last year at constant scope and exchange rate. The recovery is primarily driven by stronger refractory activity, benefiting from positive momentum in the U.S. and China and some volume gains in Europe. In contrast, the construction business experienced a more mixed performance, impacted by soft end markets. In this business, prices as well held well. Now let's complete the segment review with the solutions for energy transition. Q3 revenues for graphite and carbon amounted to EUR 59 million, a 3.6% increase compared to last year at constant scope and exchange rate. Sales growth is still driven by robust end markets, primarily electric vehicles. The business also benefited from successful new product launches, in particular in polymer applications. A small note on the Quartz Corporation, our high-purity Quartz JV, 50% owned by Imerys and not consolidated, as you remember. The activity is showing some signs of normalization. However, these have yet to be confirmed as the solar value chain remains affected by persistent high inventories and the lack of significant reduction in production capacity. Now let's look at the group profitability. For the first 9 months, adjusted EBITDA reached EUR 421 million. It decreased by 21% as compared to last year, reflecting the impact of lower contribution of JVs, perimeter impact and an unfavorable exchange rate effect of minus EUR 11 million. Imerys achieved an adjusted EBITDA margin of 16.3% at the end of Q3 '25. This was supported by improved performance in graphite and carbon, resilient activity in Performance Minerals and a continuous cost management approach. Adjusted EBITDA Q3 '25 decreased by 6%, impacted by volume decrease and a EUR 10 million FX impact, which were partly offset by a positive price cost balance in this quarter again. Ongoing cost-saving initiatives allowed the group to keep fixed cost and overhead slightly lower than last year in absolute value, fully offsetting inflation. If we look now at the other elements of our income statement for the first 9 months of this year. Driven by the decrease of EBITDA in absolute value, current operating income reached EUR 216 million. With slightly higher interest expenses and lower income tax, current net income from continuing operation ended up at EUR 126 million at the end of September. You remember that last year, the group booked EUR 326 million in noncash expenses, mostly originating from the translation reserves associated with the assets serving the paper market that we divested in July '24. This year, in the first 9 months of '25, other operating expenses were limited to EUR 16 million. Year-to-date, net profit is, therefore, positive, reaching EUR 110 million at the end of September. I now hand over back to Alessandro for the outlook. Alessandro Dazza: Thank you, Sebastien. So let me conclude with some good news. First, we remain confident of achieving our guidance, which is not a given under current market circumstances. Second, I'd like to inform you that the date has been set by the relevant court to resume the confirmation hearing on our Chapter 11 case in the U.S. This is now planned to start on February 2 next year. Yes, we all wish it could be earlier, but this was the first available date provided by the court. What is important is having a date for this crucial hearing is a very important step towards the end of this process. Third, as you have seen at the beginning, we have signed, not done yet, but we have signed a new acquisition. It's a classic bolt-on. And as you can see with the recent one, Chemviron, it can be integrated rapidly, well, profitably with a lot of synergies. As you can see when you look specifically at Q3 performance, where the perimeter effect becomes only this acquisition. Then next, we indicated in the past that we were looking for a partner for the EMILI project. Well, I believe we are close to have found the first one. This will secure the financing of the next steps, giving precedence in our plans to the completion of the engineering studies for the DFS. Consequently, we will pause the investments in an industrial pilot plant and review this decision in due time and based on market conditions and capital allocation consideration. Last, you know that we relentlessly work on costs through careful management through our operational excellence program called I-Cube that you heard before. And I believe the EBITDA bridge Sebastien just showed you a few minutes ago confirms the good work done on costs. Nevertheless, we have to acknowledge that today, we do not see a significant rebound in or a market recovery in the nearby future. Therefore, we have to make a step up and the group is launching a comprehensive cost reduction and performance improvement program, aiming at achieving significant cost reduction via leaner, simplified organization and an adjusted industrial footprint with a clear target to improve profitability from 2026 onwards. More details on the program will be available at a later stage for obvious reasons. Thank you. And now I hand over to you for the Q&A session. Operator: [Operator Instructions] We will take our first question and the first question comes from the line of Ebrahim Homani from CIC. Ebrahim Homani: I have 3, if I may. The first one is about the Europe. You said that it is going better and better. Are the volumes already positive in the region? If not, do you expect that the volume will be positive in Q4? My second question is about your EMILI. Could you give us more flavor on the investor interest? Is it an industrial from the automotive industry and maybe more information on the term of this partnership? And my last question is on graphite and carbon. How do you explain the slowdown of the growth? I noticed that it is not a comparison basis effect as in Q3 2024, the branch was already declining. So the low growth, what's the explanation behind this lower growth compared to the H1? Alessandro Dazza: Thank you, Ebrahim. Well, volume in Europe, I remain prudent because we shall be prudent when I look at communications on Q3 coming in the market. I confirm that we believe the worst is behind. Construction in some areas is picking up. And I believe automotive will continue to decline in Q4, but most forecasts believe, again, that the bottom is reached and we should see a positive return of activity or at least a stabilization. Is it Q4? Is it the beginning of next year? We will see. What will definitely have a positive impact on our business in Europe in Q4 is, if you remember, there is an antidumping imposed temporarily, but valid on certain Chinese imports of minerals. And this will trigger a volume increase in Q4 for some businesses. If you look specifically at the RAC business, it was the -- except for graphite and carbon, the one posting organic growth because finally, volumes are starting to return with some gain of shares in Europe. So all in all, I am rather positive on Q4 volume development certainly into next year. On EMILI, as you can imagine, we are in the middle of discussions, by definition, confidential. So we'll be back to you when we can. And I believe it will be relatively short as we indicated in our press release and in our presentation. But bear with me at the moment, everything is covered by confidentiality. Graphite & Carbon, whilst the summer period is always a bit to be taken -- you have a small month normally in August. So you might see less deviation. Market remains solid. Growth remains solid. We have had some -- we have had 2 issues that have a little impact. For sure, we installed SAP in the two operations. And as always, there is some learning of the new system that you have to pay when you do these changes. By the way, we did the same in the U.S. this year. So for sure, this is causing a bit of disruptions. And secondly, when you ramp up at that speed, you need to run your plants. I cannot say flat out because we have capacity to follow growth for the next 3 years, but you don't turn the machine on and it goes along. We are recruiting people. We need to train the people, and frankly, we do have a bit of backlog of orders that we could not supply because we were not able to get all the material out of the door. So for me, is maybe the increase is less than Q2, but there is no negative news from the market that does not confirm the direction. Then of course, the more we grow, the more -- the higher the comparison basis will be coming from the past, but really no bad news in any form Ebrahim on G&C. Operator: Your next question comes from the line of Auguste Deryckx from KEC. Auguste Deryckx Lienart: My questions are on the Quartz JV. Given the weakness of the sector, do you see customers turning to a lower quality product, so a product with a lower purity? So in other words, are you losing market share? And the second question still on Quartz is still given the situation, do you think that you will be able to receive a dividend from the JV? And if so, what can be the level? And if not, how do you plan to crystallize the value of your stake in this JV? Alessandro Dazza: Thank you, Auguste, for the question. Specifically, listen, when you have free capacity in your operations, like it is the case in the value chain of especially solar in China today, of course, you try to save money and you try everything you can. Do we believe that we are or we will lose significant market shares in high purity? No. My view is no. At the moment, I think our customers have been trying to replace this product because of its high price and dependency really on two suppliers for many, many years, is nothing new. So I believe when the market will need to run production at strong level, a normal level to follow market growth. So once inventories are depleted, and last time we said it might be around mid next year, I think it will become again unavoidable to have the best quality because you will have the best productivity. So I remain of the opinion market share in normal conditions will remain for a high-purity top product. And on the same topic, clearly, the year is not as good as last year. Therefore, we have been more careful with the distribution of dividends. We will decide with our partners if and when is the right time. The company is making profit, good profits. You see only half of the net income in our numbers. But if you look really at what is the full potential of this business at EBITDA level, which you see in June and you will see in December, you see that it remains an incredible high-performing profitable business. And therefore, we will discuss openly with our partners what is the best for the business and for its shareholders. And based on that, we'll take the decision, which is not taken as of today, but it is part of the discussion we have as shareholders regularly. Operator: Your next question comes from the line of Sebastian Bray from Berenberg. Sebastian Bray: Can I start with one on the financing costs of the group, please. What is the underlying run rate that is a reasonable assumption for '26? And by when does the company expect to have refinancing in place for the bond that comes due roughly EUR 600 million? Is it towards the end of the year? Or would it expect to have something in the middle? Can I also ask about the review that the group is doing of its cost structure. The -- is this extending to a portfolio review as well? And are there any further assets that the group feels it could potentially divest as part of these considerations? Alessandro Dazza: I'll let Sebastien answer your -- first, Sebastian, welcome to this call. I think it's your first time. I'll let Sebastien answer on the financing side. Sébastien Rouge: Yes. I will probably not answer extremely precisely. This being said, I think you are -- you're asking the good question. We have a next big repayment very early in '27. So we pursue a very careful approach. So we will probably refinance that either late this year or in the first half of 2026 so that we are away from any timing risk, and we will not preannounce that, but I think we'll follow your advice, which is not to do that at the last minute, knowing that on top of that, bond markets are pretty good for corporates these days. Also, I think I think our careful approach on lithium is actually a good sign that will facilitate refinancing. As far as run rate is concerned, I would say it's a little bit mechanical. We have a very detailed of our financing in our annual report, obviously, and unfortunately, when we replace a new -- an old bond by a new bond, there is a little bit of extra interest rate, mechanical, but that, I would say, is true for us like the rest of the market. Alessandro Dazza: Thank you, Sebastien. And coming to your second question, Sebastien. At the moment, there is no plan to significantly review our portfolio. We have done it in the year '23 and '24. Yes, we might sell opportunistically one or the other site, especially if nonperforming or not up to our standards, but it will be very punctual and not really a big topic. On the contrary, as you have seen, we believe we are rather on the acquisition mode, bolt-on, easy, synergetic, profitable if opportunities arise. So cost is really an organizational matter. It's a matter of lean organization, simplification. We will review, as I said, our industrial footprint if it still fits the new markets. These tariffs are causing shifts in ore production with countries that are favored by more positive depositories, other that are paying a higher bill. So within our customer base, and that's what I referred to when I said limited direct impact for Imerys, but for our customer, yes. So there might be movements in where we supply our customers that could trigger, as you say, maybe a closure of a site or a divestiture of a site in a country maybe that has been penalized by lower activity. But we really want to work on costs. We are going to use AI to simplify our administrative processes, lean organization and probably give up some nice to haves that are not affordable when you have challenging market conditions. But the portfolio is a good one. And even the more -- let's say, the business is under more pressure like some businesses in Europe, especially after the energy crisis, if these antidumping measures will be confirmed, I do believe there will be market share gains and a return to a very reasonable profitability as expected. Operator: Your next question comes from the line of Sven Edelfelt from ODDO BHF. Sven Edelfelt: I would have two follow-up questions. Alessandro, you mentioned a first investor with regards to lithium. Does this suggest the participation will be limited to a 10-ish percentage point participation? And therefore, you expect maybe some other investor or maybe I misunderstood. And the second question, on the restructuring cost that you're announcing I don't understand why you are announcing a potential restructuring cost without giving us any number. On the second question related to this one is, does that mean that given what you have from your team on the ground, you don't expect a recovery before 2027 or 2028. What's the sense of doing it right now? That's my question. Alessandro Dazza: Thank you, Sven, for your questions. The first one is, again, I cannot enter more details as we are in the middle of the discussions. But I can definitely say that your interpretation is not the right one. A partner is a partner and every partner is important, and we expect the partner to play a significant role. What I'm saying is that if you look potentially to the end of this project is a very large project one day, if we go to the end. And typically, in mining -- large mining projects, you might have several players joining forces to sustain the CapEx to bring know-how and to develop jointly. So it's nothing to be interpreted other than this, partner important, every partner important. And going forward, we will consider interested party in this project if they bring value any time. On your second one, again, don't interpret that we do not expect any rebound. I expect a rebound in Europe next year. The magnitude to be seen. And when I say high is because all the studies -- economic studies we buy by big experts do foresee a recovery in Europe. They're a bit less optimistic on the recovery in the U.S. They believe the first months of next year, the U.S. might be under pressure because of all the turmoil, inflation uncertainty and uncertainty is the right word and then a recovery in the second half of next year. What I believe is that a significant strong rebound is not for the next 2, 3 quarters. Therefore, better be ready with a stronger company, leaner, more efficient. And when volumes come, that's with a 53%, 54%, 55% contribution margin, when volume comes, then we really see a significant improvement in profitability. So we are just doing an extra mile to be stronger, to be more efficient, to be leaner, waiting for a slow or a rapid recovery in the future. So not pushing back anywhere. I do believe '26 or at least forecast say '26 should be good again, but it's not there and waiting is not an option. We did not communicate more figures Sven because there are legal processes and constraints that are being discussed and no decision is taken. There are consultations ongoing, preparation. But latest by the next communication, we will give for sure all the details in due time when everything has been set, discussed, reviewed, negotiated, approved. So it give us the time just to be there. Operator: There are no further questions. I would like to hand back for closing remarks. Alessandro Dazza: Thank you very much, and thank you for all participants to listening to this evening's press release and presentation on Imerys. Thank you very much. Good evening. Sébastien Rouge: Good evening. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, ladies and gentlemen. I would now like to turn the meeting over to Scott Parsons, Alamos' Senior Vice President of Corporate Development and Investor Relations. Please go ahead, sir. Scott R. Parsons: Thank you, operator, and thanks to everybody for attending Alamos' Third Quarter 2025 Conference Call. In addition to myself, we have on the line today John McCluskey, President and Chief Executive Officer; Greg Fisher, Chief Financial Officer; and Luc Guimond, Chief Operating Officer. We will be referring to a presentation during the conference call that is available through the webcast and on our website. I would also like to remind everyone that our presentation will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes included in the presentation, news release and MD&A as well as the risk factors set out in our annual information form. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Senior VP, Technical Services and a qualified person. Also please bear in mind that all of the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted. Now I'll turn it over to John to provide you with an overview. John McCluskey: Thank Scott. Starting with Slide 3. Before we go into the report for the quarter, I want to acknowledge this has been far from a typical production year for Alamos. We experienced production downtime and lower production in the first half of the year, which we are on pace to make up in the second half. Unfortunately, in recent weeks, downtime at the Magino mill and the seismic event at Island Gold will not give us the time to do so. As a result of these recent events, we've taken the prudent course and lowered guidance for the year by 6% from the midpoint of our original guidance. We have a reputation for taking a conservative approach to guiding the market, and we pride ourselves on providing consistently accurate guidance. Suffice to say, we will continue to make operational improvements to raise the accuracy of our forecasting, recognizing that occasionally, mining can be unpredictable. There remains to be said that while these recent events have a short-term impact, they in no way take away from the quality of our mines and what is without question, 1 of the strongest outlooks in the gold sector. We are already seeing significant improvements this month with better grades at Young-Davidson and throughput from the mines. This will ultimately support lower costs than an 18% production increase, leading to record production in the fourth quarter. Production in the third quarter totaled 141,700 ounces, a 3% increase from the second quarter, driven by stronger performances from Mulatos and Island Gold District. This was slightly below the low end of quarterly guidance, reflecting 1 week of an unplanned downtime within the Magino mill during the last week of September. Reflecting lower costs from the Mulatos district, total cash costs decreased 9% from the second quarter, and all-in sustaining costs decreased 7%, both consistent with guidance. With higher production, a record gold price and lower costs, we delivered record revenue, cash flow from operations and record free cash flow of $130 million in the quarter. We expect a significant improvement in both our fourth quarter production and costs to drive new financial records at critical prices. Turning to Slide 4. Through the majority of the third quarter, we were on track to achieve our full year production guidance. Given the unplanned downtime of the Magino mill in the last week of September and the seismic event at our Island Gold operation in October, we're decreasing our 2025 production guidance to between 560,000 and 580,000 ounces. This represents a 6% decrease from our original guidance released in January. Late in September, a capacitor failure within the Magino mill impacted the electrical drive for the SAG and ball mills. This led to 1 week of downtime and lower third quarter production than originally expected. The mill was restarted by the end of September and continues to demonstrate improvement in October. Due to the unplanned downtime, Island Gold's mill was restarted in late September to focus on processing higher grade underground ore. Given the record gold price environment, we will continue running both mills through the remainder of the year with the increased combined milling capacity supporting additional gold production, higher cash flow and increased profitability. In mid-October, the Island Gold mine experienced a seismic event, which is a normal part of operating an underground mine, no personnel or equipment were impacted and mining rates are expected to continue within budgeted levels. However, it does delayed access to higher grades within one of our mining fronts. As a result, mine grades are expected to be lower than budgeted for the fourth quarter. Even with the lower-than-planned underground grades in fourth quarter, we expect a substantial increase in production from Island Gold District driven by higher combined milling rates. We expect similar increases at Young-Davidson driven by higher mining rates and grades and at Mulatos with the recovery of higher grade ore stacked over the previous 2 quarters. All 3 operations are expected to contribute to an 18% increase in the fourth quarter production at lower cost, driving a further increase in free cash flow at current gold prices. Turning to Slide 5. Short-term challenges we experienced this year have no impact on our strong long-term outlook, which remains firmly intact. The Phase 3+ expansion at Island Gold will be a key driver of our growing production and declining costs over the next several years. The expansion is progressing well and with expected completion in the second half of 2026. The Lynn Lake project is another important part of our organic growth. Forest fires in Northern Manitoba limited our progress on this project this year, but we expect to ramp construction entities in the spring of next year, and initial production is now expected in 2029. This puts us on track to reach 900,000 ounces of lower-cost annual production by the end of this decade. The Island Gold District expansion study currently underway is expected to outline further upside with the potential to increase consolidated production to 1 million ounces per year within a similar time frame. We generated year-to-date free cash flow of nearly $200 million in 2025 and expect to generate growing free cash flow as we execute on this growth. Following the start-up of Lynn Lake, we expect to generate more than $1 billion of free cash flow annually at current gold prices. Now looking at Slide 6. In addition to delivering on our organic growth plans, we continue to surface value from our portfolio of assets. This included announcing the sale of our Turkish development project for a total cash consideration of $470 million. The transaction closed earlier this week and marks a positive outcome, realizing significant value for assets we had written off in 2021. We received $160 million on closing and the remainder, $310 million will be received over the next 2 years. With our strong free cash flow during the third quarter and initial proceeds from the sale of our Turkish assets, our current cash balance has increased to over $600 million. We'll be using the proceeds from the transaction and growing cash position reduced our small debt position, and we expect to be active on our share buyback. We were also recognized for the second consecutive year as a TSX30 winner by the Toronto Stock Exchange for our strong share price performance of 310% over the trailing 3 years. The award is a testament to our long-term track record of outperformance, something we expect to continue to build upon as we deliver on our upcoming catalysts and organic growth times. I'll now turn the call over to our CFO, Greg Fisher, to review our financial performance. Greg Fisher: Thank you, John. On to Slide 7, we sold approximately 136,500 ounces of gold in the third quarter at an average realized price of $3,359 per ounce for record revenues of $462 million. The average realized price was below the London PM Fix for the quarter, primarily due to the delivery of over 12,300 ounces into the gold prepaid facility at a fixed price of $2,524 per ounce. We will deliver the same number of ounces in the fourth quarter, after which the prepay obligation will be completed. As a reminder, the prepaid facility was executed in July 2024 with the proceeds utilized to retire 180,000 ounces of forward sale contracts inherited from Argonaut Gold across 2024 and 2025 with an average price of $1,840 per ounce. Based on an average gold price of almost $3,000 per ounce since July 2024, the company increased cash flow by approximately $40 million over that period. given the decision to buy out the 180,000 ounces of hedges 15 months ago through the execution of that prepaid facility. Quarter-over-quarter, total cash costs and all-in sustaining costs decreased 9% and 7%, respectively, and both were in line with quarterly guidance. We expect total cash costs and all-in sustaining costs to decrease a further 5% in the fourth quarter, driven by higher production across all operations. We remain on track to achieve full year cost guidance, which was revised earlier in the year. We are now reporting total cash costs and all-in sustaining costs, excluding the impact of mark-to-market adjustments for the revaluation of previously issued share-based instruments. This methodology provides a better representation of our total costs associated with producing an ounce of gold and eliminates volatility associated with mark-to-market adjustments. These mark-to-market adjustments to long-term instruments impact both total cash costs and all-in sustaining costs, given the company allocates these costs to mining and processing costs and share-based compensation expense on the income statement. Our reported net earnings were $276 million in the third quarter or $0.66 per share. This included $193 million reversal of a previously recognized impairment related to the Turkish projects as well as unrealized losses on hedge derivatives, foreign exchange impacts and other adjustments totaling $72 million. Excluding these items, adjusted net earnings were $156 million or $0.37 per share. Operating cash flow before changes in noncash working capital was a record $275 million in the third quarter or $0.65 per share. Capital spending totaled $135 million and included $35 million of sustaining capital, $83 million of growth capital and $17 million of capitalized exploration. Our consolidated 2025 capital guidance has been updated to between $539 million and $599 million, a 10% decrease from previous guidance, primarily reflecting lower spending at Lynn Lake with the ramp of construction activities shifting to 2026. Free cash flow for the quarter totaled a record $130 million, a 54% increase from the second quarter, driven by record contributions from all 3 operations. This includes $73 million from the Mulatos District, $72 million from the Island Gold District and $62 million from Young-Davidson. Our cash balance grew 34% from the end of the second quarter to $463 million. Subsequent to quarter end, we received initial cash payments totaling $163 million from the sale of both our noncore Turkish development projects and the Quartz Mountain project, bringing our total cash position to over $600 million currently. Combined with the undrawn balance on the credit facility, our total liquidity is over $1.1 billion. We expect growing production and declining costs to drive increasing free cash flow over the next several years while continuing to fund our organic growth plans. With a growing cash position, we expect to reduce our $250 million of debt currently outstanding while also evaluating opportunities to buy back shares and eliminate a portion of the remaining legacy Argonaut hedges. I will now turn the call over to our COO, Luc Guimond, to provide an overview of our operations. Luc? Luc Guimond: Thank you, Greg. Over to Slide 8. Third quarter production from the Island Gold District totaled 66,800 ounces, a 4% increase from the previous quarter. A more substantial increase is expected in the fourth quarter, driven by an increase in combined milling rates from the Island Gold and Magino mills. Magino's milling rates continued to increase through the third quarter until the last week of September, when a capacitor failure within the electrical house impacted the electrical drive for the SAG and ball mills. This resulted in 1 week of unplanned downtime. The capacitor and electrical drive module were replaced by the end of the quarter, following which milling rates have increased to average a new high in October. Quarter-over-quarter, underground mining rate increased 7% to 1,325 tonnes per day. Open pit mining rates increased 4% to 59,000 tonnes per day, including a 28% increase in ore mined to 17,600 tonnes per day. Grades mined from underground and the open pit were consistent with annual guidance. In mid-October, a seismic event occurred within the underground operation of Island Gold that has delayed access to higher-grade stopes to fill within 1 mining front. Seismic events are not uncommon for underground operations and mining rates are expected to remain within guided levels. However, rates mined in the fourth quarter are now expected to be lower than previously planned. We continue to expect a significant increase in production and decrease in costs in the fourth quarter. However, given the lower expected underground grades and unplanned downtime at the end of the third quarter, production guidance for the full year has been revised lower to between 260,000 from 270,000 ounces. Moving to Slide 9. A number of optimization initiatives have been implemented within the Magino mill over the past year that continue to drive improvements quarter-over-quarter. This included the installation of a redesigned liner and bolt configuration within the SAG mill in July, such that following a liner change and excluding the 1 week of unplanned downtime at the end of September, milling rates increased nearly 10%. With the mill up and running by the end of the third quarter, milling rates have continued to improve in October, approaching 10,000 tonnes per day, a new monthly high for the operation. To minimize potential unplanned downtime in the future and ensure increasing consistency of the operation further review of electrical components was completed to ensure all critical spares have been identified and are on site. Moving to Slide 10. Given the unplanned downtime at the Magino mill, the decision was made to restart the Island Gold mill in the last week of September to focus on processing higher-grade underground ore. Operating the 2 mills will provide additional operational flexibility with increased milling capacity and allow us to capitalize on the higher gold price environment with stronger gold production. The restart of the Island mill provides an additional 1,200 tonnes per day of milling capacity. This is expected to support approximately 3,000 ounces of additional gold production on a quarterly basis, driving increased cash flow and profitability. At current gold prices, this represents nearly $50 million of additional annualized revenue with significantly higher gold prices, more than offsetting the higher processing costs associated with operating the Island Gold mill. We will operate the 2 mills through the end of this year, and we'll evaluate its ongoing operation into 2026 as part of the expansion study. Over to Slide 11. The Phase 3+ expansion continues to progress with the shaft sink now at the 1,350-meter level, 98% of the ultimate depth of 1,379 meters. Work also commenced on the 1,350 level shaft station. The Magino mill expansion to 12,400 tonnes per day is progressing well and is on track for completion in the second half of 2026. Base plant construction is advancing and expected to be completed in the first quarter of 2026. Mechanical and electrical outfitting for the water handling facility and shaft in-house is ongoing and concrete foundation work for the new administrative complex is underway. Over to Slide 12. As of quarter end, we have spent and committed 84% of the total Phase 3+ capital of $835 million. The photos on the right highlight the progress on the shaft sink and 1,350 level shaft station. We expect to be skipping ore from this station in the latter part of next year with the expansion on track for completion in the second half of 2026. Over to Slide 13. We continue to advance the expansion study for the Island Gold District, which includes the evaluation of a larger mill expansion of up to 20,000 tonnes per day. The study is expected to include a larger mineral reserve through ongoing mineral resource conversion with encouraging results from our delineation drilling program supporting a strong rate of conversion and reserve growth. Work currently underway as part of the Phase 3+ expansion to 12,400 tonnes per day is being completed with a larger expansion in mind. This includes sizing the footprint of the new mill building to accommodate additional equipment for a further expansion of up to 20,000 tonnes per day. To ensure all the assays from the recently completed delineation drilling program are incorporated into the expansion study, we have shifted the completion of the expansion study from late this year to the first quarter of 2026. With the larger mineral reserve and higher combined mining and milling rates, we expect the expansion study will demonstrate significant upside to the base case plan released earlier this year. Over to Slide 14. Young-Davidson produced 37,900 ounces in the quarter, similar to the second quarter, reflecting the planned shutdown of the Northgate shaft in the first week of July to change the head ropes. Reflecting the downtime, mining rates averaged 7,300 tonnes per day in the quarter. Given the lower mining rates earlier in the quarter, excess mill capacity and higher grade prices -- sorry, higher gold prices, the low-grade stockpile ore was processed. Mill throughput rates averaged 7,800 tonnes per day in the quarter, a 12% increase over the previous quarter, reflecting the contribution of lower-grade stockpile ore, process grades of 1.79 grams per tonne was 7% lower than mine grades. Reflecting lower mining and milling rates for the first 9 months of the year, production guidance has been revised lower to between 160,000 and 165,000 ounces. Mining rates have returned to targeted levels, averaging 8,000 tonnes per day in September and October and are expected to remain at similar levels for the remainder of the year. Grades mined also increased towards the upper end of guidance in October at 2.25 gram per tonne and are expected to remain at similar levels for the rest of the quarter. Higher mining rates and grades, Young-Davidson is expected to have a much stronger fourth quarter with higher production and lower costs. Mine site all-in sustaining costs decreased in the third quarter, with a further decrease expected in the fourth quarter, the operation remains on track to achieve the full year cost guidance that was revised earlier in the year. Young-Davidson continues delivering strong mine site free cash flow with $62 million generated in the quarter and $160 million in the first 9 months of the year, already surpassing the previous year record of $141 million in 2024. With strong ongoing free cash flow, the operation is on track to deliver well over $200 million for the full year at current gold prices. Over to Slide 15. I Production from the Mulatos District totaled 37,000 ounces in the third quarter, a 9% increase quarter-over-quarter with the operation benefiting from strong ongoing stacking rates and grades and the recovery of previously stacked ounces. This trend is expected to continue with a further increase in production in the fourth quarter as the operation benefits from the recovery of higher grade ore stock in the previous 2 quarters. With higher production expected in the fourth quarter, we are increasing full year product guidance to between 140,000 and 145,000 ounces. Reflecting the stronger production, cost declined in the third quarter and with a further decrease expected in the fourth quarter, the operation is well positioned to meet its full year guidance. The PDA project continued advancing during the quarter. the focus on procurement of long lead items and detailed engineering. Expenditures are expected to increase in the fourth quarter and more significantly into 2026 with the ramp-up of construction activities. Project remains on budget and on track to achieve initial production mid-2027. The Mulatos District generated mine site free cash flow of $73 million in the quarter and $129 million in the first 9 months of the year. It remains well positioned to continue generating strong free cash flow while fully funding construction of PDA. With that, I will turn the call to John. John McCluskey: Thank you, Luc. I want to reiterate that this has not been a typical year for Alamos and not reflective of our long-term record of meeting or exceeding expectations. Our near-term and long-term outlook remains bright, and with one of the strongest growth [indiscernible] in the sector, we remain confident in our ability to deliver on our guidance. We expect to demonstrate this strong outlook, starting with significant increase in production and decrease in costs in the fourth quarter. I'll now turn the call back to the operator who will open up for your questions. Scott R. Parsons: We'd like to open up the call for Q&A now, please. Operator: [Operator Instructions] Our first question is from Cosmos Chiu from CIBC. Cosmos Chiu: Great. Thanks, John and team. Maybe my first question is on Q4. John, as you mentioned, we're expecting increases to production in Q4. You've given us a range, 157,000 to 177,000 ounces, fairly sizable range, especially for quarterly production. Could you maybe just touch on some of the factors that could lead you to the higher end of that guidance versus, say, the lower end? Luc Guimond: Cosmos, it's Luc here. I mean just across the operations, as we've touched on, I mean, we're consistently delivering on the higher mining rates with Young-Davidson at 8,000 tonnes per day. The big driver really for the higher gold production also coming out of Young-Davidson in the fourth quarter is related to grade. Based on the mine plan that we have put forward for the fourth quarter, we're expecting to be at the high end of our guided grades of 205,000 to 225,000. So we're at the higher end of that 225,000 area. With regards to Mulatos, it's really a function of -- we've stacked a lot of gold in the first couple of quarters, Q1, Q2 and certainly Q3, and we'll start to see more of that gold production coming off the leach pad in the fourth quarter, which will drive higher production for Mulatos. Island Gold, we continue with similar guided levels of mining rates and certainly, great performance as well through the fourth quarter as expected from Island. So when you combine those 3 catalysts from those operations, that's what's really driving the higher gold production in the fourth quarter. Cosmos Chiu: Okay. And Luc, since I have you here, maybe -- could you maybe elaborate a little bit on that seismic activity that happened at Island Gold in mid-October. It sounds like it's not a permanent issue. it doesn't seem like it has longer-term impacts but But could you give us a bit more granularity in terms of sort of what happened? Was it in a higher risk area? Luc Guimond: Yes. I can touch on that a bit. So let me just to emphasize, seismicity is just -- is a natural aspect of occurrence that occurs with underground mining operations. As we extract the ore body through development and production blasting, we're changing the stress regime within the mining environment. In this case, the 1 mining front that was affected with this seismic event, really, the reason that we've been -- that we've had to stop production from that 1 area is due to the fact that from a legislative perspective, we need to have 2 means of egress of the Mine, one being the ramp system and in Island's case, the second 1 is an escapeway between the levels. And with this seismic event that happened within this 1 area, the escape was compromised, meaning it needed some rehabilitation in order to bring it back online. So we're just in the process of doing that. It's not a long-term delay. We would expect to be back in that mining front area early December to continue production in there. So it's not a long-term residual effect as a result of the seismicity. But it is normal course of business. We always have seismic events. Some can be lower levels and some can be higher levels. In this case, it just resulted in some damage to the escapeway, which we're addressing. Cosmos Chiu: And Luc, these escapeways, more permanent infrastructures. I would have thought that they are built to a standard that can certainly withstand some of these stress regimes. But again, there's other factors as well. I guess my question is, was that unexpected? Has this happened before? And what do you now have in place in terms of -- again, I understand that these seismic activity happens, but what do you have in place now to hopefully mitigate the risk on a go-forward basis? Luc Guimond: Yes. Look, I mean, I kind of referenced with regards to our ground control management plan and our seismic management plan that we have in place for all of our underground operations. In this case, the ground support continues to develop and change as we get into different mining areas and maybe different elevations of stress that are being seen within the mining operations. So we adjust accordingly with that. We do have a lot of dynamics support in place to mitigate these sort of environments that happen when we do have an elevated stress environment. And in this case, for the most part, I'd say the ground support actually worked as per expected. But just keep in mind, rehabilitation is just kind of also a natural function of an underground operation residually, the scaling activities that occur and some additional ground support requirements as a result of some of these openings being open for a longer term. And in this case, the escapeway being one of those. So it's not uncommon to actually have to go back in and do some rehabilitation. In this case, again, because of the fact that the escapeway has been compromised, we just had to go in and repair that escapeway to be able to resume mining activities within that mining front. Cosmos Chiu: Great. Maybe 1 last question. As you mentioned, the expansion study for Island Gold is now expected in Q1 2026 versus Q4 2025, in part to incorporate potentially including the Island Gold mill in terms of running it into 2026. But I guess, in the maybe bigger picture. Gold prices are certainly much higher now compared to when you put out the Island Gold, the first phase case study. Is there a bit of a shift in terms of thinking here, in terms of lower grade material can actually now be profitable. So maybe running Island Gold for longer, could increase the overall throughput. And in the end, some of that lower grade ore could still generate cash and overall cash flow is higher. Is there that kind of thinking going on right now, John, in terms of how you're looking at the Island Gold and maybe even broader picture as well as the other operations? And then how would that be incorporated into the year-end sort of reserve resource statement that's coming out? Like what kind of gold price would you look at? John McCluskey: That's got to go down as one of the longest questions in history, Cosmos. Look, just looking at Island Gold. We envisioned at the time we acquired Argonaut with the idea of integrating both mines, we envision that, that would ultimately evolve into something like a 20,000 tonne per day operation. And we're doing the work right now in order to bring that in front of the market, probably January, early February of next year. That's the time we're aiming for. That's just the optimal rate that mine ought to run at. It means -- it gets to part of your question. For example, right now, we're milling about 1 gram material coming out of the open pit, and we're stockpiling lower-grade material. It's an absolute fact that with the lower cost and the higher throughput rate, I'm not putting anything into stockpile, just putting it all through the mill, that's a much more profitable way to go about it. We'll be able to demonstrate that with the numbers that we'll provide early next year. But the -- you're not double handling or on a combined grade. In other words, mixing in that lower grade material, it's basically running around 0.5 gram, mixing that in with the 1 gram material. We're still running a pretty decent head grade. But you're just doing it all at a greater scale, you're benefiting from the economies of scale and absolutely doing it at a lower cost because there's no double handling anymore. So from the point of view of this bigger mine that we envision at Island Gold, it also envisions roughly 3,000 tons of underground throughput from the Island mine itself. That takes production up over 0.5 million ounces a year, brings costs down closer to that $1,100, $1,200 ASICs, somewhere in that range. The study will define it more precisely. But you can see that -- we're sitting on roughly somewhere between 11 million and 12 million ounces of reserves and resources. That's a really sensible approach to take for development of that mine. We can get there with relatively as I put it, bite-size capital cost. It's not a real stretch for us to get it there. And it's sort of the next step in our evolution at that project site. We're not thinking about that at either Young-Davidson or Mulatos. Young-Davidson, it's not really that sensitive to the gold price, to be honest. It's just the way that ore body is. We're mining it in a very profitable way. Obviously, we're generating phenomenal cash flows. And now we've got that mill running very, very well, consistently hitting 8,000 tonnes a day. You're going to see Young-Davidson have a great year next year. Long term at Mulatos, the game changer is going to be going underground and mining a high-grade underground sulfide material and processing it through the mill that we're going to build. That really is the future for Mulatos. I mean it's not like we've run out of targets for finding additional oxide material. It's a big district, and we're still poking around doing greenfields exploration in various areas and actually getting some interesting results. But the main thrust of what we're doing at Mulatos is to transition from heap leach -- low-grade heap leach production to higher grade underground production. So that would -- in the grand scheme of things, that's where we're going. It's not like we're taking this 1 concept driven by a higher gold price and trying to apply it across every operation. Luc Guimond: The only other thing I'd add there, Cosmos, is just with regards to the 20,000 tonne per day planned for the Island Gold District, but that hasn't unchanged. I mean we're still looking to put that obviously out. We've changed the guidance on that to put it out early in Q1. But it will outline a plan of running the about 17,000 tonnes per day coming from open pit operations, 3,000 tonnes per day coming from underground operations. So that still is the plan. As far as the Island mill, that we're still continuing to run at this point, which we started in September. We'll evaluate that as part of our business plans for 2026. But given this high gold price environment, giving us more gold production, certainly and more cash flow, it may make sense to continue to run that in 2026, but we're still evaluating that. Cosmos Chiu: Great. Sorry for my extra long question. I just haven't thank Scott Parsons were putting out earnings during Game 5 of the World Series. It certainly has not impacted my performance. John McCluskey: Sure. Operator: A following question is from Ovais Habib from Scotiabank. Ovais Habib: John and Alamos team, a couple of questions from me as well. Cosmos did ask a couple of questions that I had. But just a follow-up to Cosmos' question on the seismic activity at Island Gold. Again, really glad to hear no personnel or equipment were impacted by this event. So that was really good to hear. But in terms of -- and maybe this question is for Luc, in terms of active mining fronts. How many active mining fronts do you have access to at Island Gold as well as how does this impact mine sequencing going into 2026? Luc Guimond: I mean we typically carry about 3 to 4 mining fronts with the mining rates that we're currently running at right now, Ovais. But I mean, obviously, with the ramp-up as we continue to head towards 2,400 tonnes a day through the course of next year, we will be -- our development will put us into a place where we'll be developing more mining fronts. As I mentioned in this case, we've just basically shifted our focus from this 1 mining front that's been put on hold until we get that escapeway in place and look to generate production from some of the other areas of the mine in the interim. But as I mentioned, it's a short-term issue with regards to the seismic event that happened there, and we're looking to resume the mining in that specific mining front early in December. Ovais Habib: And just also in terms of when you do get access to additional money fronts, I mean in terms of -- isn't that a mitigating factor on itself going into 2026 then? Luc Guimond: Sorry, can you repeat that question, Ovais, I didn't quite get it. Ovais Habib: I'm basically trying to figure out is when you do start increasing the number of mining fronts as we go into 2026 and into the expansion, Isn't that a mitigating factor on itself? Luc Guimond: With regards to the production profile, it certainly gives us more flexibility. I think is what you're getting at. Yes, it will give us more flexibility as far as maintaining the mining, the rates that we're looking at. But Again, in this case, we haven't changed our guided levels for Q4 for mining rates. It's just that we've had to refocus some of the activity as far as our production for the fourth quarter because of the fact that we've got about a 6-week interruption from this 1 mining front until we get the escapeway we reestablished. Ovais Habib: Perfect. And just moving on to Magino. With the unplanned downtime at Magino mill, that was, I believe, late September. Were you also able to take advantage of this downtime to do any sort of additional maintenance on the mill as well? Luc Guimond: We did. But through the quarter, I think we spoke about this with the last quarter release that there was a liner bolt configuration redesign that we actioned in the quarter. So we did that in July. We also had some scheduled maintenance in August for the ball mill. But certainly, with that week interruption with regards to the capacitor failing, which led to the drive module also failing that we had to get replaced. We did take the opportunity to do some other plant maintenance within the Magino mill facility as well. Ovais Habib: Okay. And just then moving towards exploration. I don't know if the other Scott is online. So can you give us a brief kind of overview of where you are currently focused on the exploration side and especially if you continue to have success on Island Gold West as well as in close proximity to the Magino? Greg Fisher: Yes, I can provide an overview year-to-date. If you look at Island Gold, I mean, we really did shift our strategy from the start of the year from exploration into delineation and that delineation program now has been completed successfully in the third quarter, both in Magino and in Island Gold, and that really was focusing on converting that inferred mineral base that remains our June update for the expansion study, converting that into reserves. So that process now of the reserve calculation underway with the delineation results coming in or have been received. At Island as well, I mean we'll continue now shifting in the fourth quarter to exploration. So we're drilling Island down plunge. We're drilling the upper portions of Island to the West between Island and Magino. I would say that main Island Gold structure. So that's ongoing. We've also started a Phase 2 drill program at Cline and Edwards, which is building off the success of the first part of the year. That's the [indiscernible] producing mines that are 7 kilometers from the Magino mill. And we're excited about the results that we put out in the first half of the year, and that exploration is ongoing. At Young-Davidson, the hanging wall exploration drift at 9620 has been developed, and we're drilling from that now, and that's focused on defining that high-grade zone in the conglomerate. So we drilled 15 holes there. Our assays are just starting to come in. Drilling is ongoing, and we'll continue stepping out from the zone that we've defined looking to expand on that mineralization. And we're also starting a regional program in the fourth quarter at Young-Davidson focused on our Otisse target, which is only 3 kilometers from the Young-Davidson mill, and we see that as a potential for future open pit ore that could come into the mill at some point in the future. At Mulatos, as John touched on, really focused this year on sulfide exploration across the district and having success in several targets. Building on from the first half of the year, drilling a PDA, continue to expand mineralization at Cerro Pelon, testing a number of other Sulfide targets in that district that the team has worked up, and we're excited by some of the results that we're seeing at Mulatos. And I think that really points to the transition, as John said, from shifting from looking for oxide, which we're still doing, it's still target but really focusing in on building out the sulfide inventory, the high-grade underground components of what could be the future of that district. I guess the last point I'll shift to is Qiqavik, which was the greenfield project in Nunavik in Northern Quebec that we acquired with Orford Mining. That exploration on Qiqavik was executed in the third quarter. We planned on doing 7,000 meters. We did 9,000 meters and really, the objective there was trying to find the source of these high-grade boulders that have been defined across that belt. So we drilled in 5 target areas. Assays are just coming in. But certainly happy that we got -- we accomplished more drilling than we anticipated based on the execution of the program and what we're seeing in some of that core. Operator: Our following question is from Fahad Tariq from Jefferies. Fahad Tariq: Just on the Magino mill, can you maybe provide some more color on how you're thinking about the targeted throughput maybe by the end of this year. I believe it was previously 11,200 tonnes per day and then 12,400 tonnes per day next year. How should we be thinking about that given some of the ramp-up issues so far? Luc Guimond: Yes. It's Luc here. So similar line of sight. As I mentioned through the third quarter there, certainly, we had some changes to make to the SAG mill with regards to the liner bolt configuration, which we did. Scheduled ball mill liner change and then with obviously the failure with the capacitor in September that put us back a bit. But really starting in mid-July up until that capacitor issue that we had at the end of September, the mill was on a path, that was consistently delivering above 10,000 tonnes per day to that period. And since we've prepared the capacitor figure that we had at the end of September and resume milling activities through the month of October. We've been consistently averaging just above 10,000 tonnes per day as well. So our goal hitting that 11,200 by the end of the year still is intact. Just some more fine-tuning that we need to do between now and the end of the quarter to be able to consistently deliver on that. On the 12,400 scenario longer term, we're obviously working on some of that expansion already. We need more additional equipment at the back end of the mill with regards to the CIP, the leach circuit. The refinery in elution in order to be able to handle the higher gold content coming into the plant. So we're working through that. The other aspect of it is also upfront. The crushing capacity is there, and it's just -- we're still evaluating on the grinding capacity requires potentially a third, third grinding circuit in that circuit to be able to support the [indiscernible]. But we're still evaluating that as part of the overall mill expansion, to be honest with you, and that's part of what will come out early in the new year. Fahad Tariq: Okay. That's helpful. And then maybe just as a follow-up. So if the Magino mill is able to get to [ 11,200 ] tonnes per day by the end of this year, things are improving. Would that be reason enough not to keep running the island Gold mill? Scott R. Parsons: I think at these gold prices, Fahad, it's -- I mean, we're evaluating this. But I would think we want as much throughput as we can through and running those 2 mills at these gold prices probably makes sense. Operator: A following question is from Sathish Kasinathan from Bank of America. Sathish Kasinathan: Most of my questions have been asked and answered. So maybe a question for Greg. So with over $600 million in cash balance, you indicated that you will be more active in buybacks. How should we think about the cadence of buybacks on a quarterly or an annual basis? Do you have a target run rate in mind? And also, given your growth projects, how should we think about like a minimum cash balance? Greg Fisher: Yes. Thank you. I mean from a share buyback perspective, we've never put targets in place. I mean, what we always want to do is be opportunistic with respect to that. And we also look at our other needs of capital, whether it's growing the business, whether it's paying down debt. So we're looking at all of those. So I don't want to point to a specific target in terms of the buybacks. But based on the pullback in the share price -- in the gold price that we've seen over the last week to 2 weeks plus the reaction today, we expect to be active on the share buyback. And then in terms of a minimum cash balance. Again, we have lots of liquidity. We have $1.1 billion of liquidity currently. In terms of the current cash balance of $600 million, we want to be active on the share buyback. We want to pay down some debt. We want to evaluate whether we're going to buy back some of the legacy Argonaut hedges. All of those will be sources of capital. But we are ultimately growing the business from 600,000 ounces to upwards of 1 million ounces by the end of the year. So we do need to make sure that we have sufficient capital. But we do have free cash flow as we speak right now. So from a minimum cash balance, I'd say, we probably want to always have at least $300 million -- $250 million to $300 million on the balance sheet. Sathish Kasinathan: Okay. Maybe a question on Young-Davidson. So it seems the mill has been operating at 8,000 tonnes per day for a couple of months now. Do you think the mill's performance has reached a level that it can continue to consistently operate at this level? And given the current gold prices, is there potential for maybe push -- pushing the mill to a higher run rate? Luc Guimond: The mill has been performing quite well at Young-Davidson. I mean, obviously, our -- the overall ore production that's come out through Q3 and some of the previous quarters has been more related to giving all of the [ fee ] that we can from the mining operations. And certainly, in Q3, it was related to the [indiscernible] change that we had to make with regards to the head ropes. But the mill has been performing quite well. It's no issues there. On the aspect of actually looking to see if it can do more, that's something that we've been looking at and seeing with other opportunities to be able to increase the overall throughput through that mill complex. It would not necessarily come from more underground ore. The mine is designed and the infrastructure is designed to support 8,000 tonnes per day. But there's other opportunities with some of the smaller satellite open pit deposits within the region of Young-Davidson that we could look to bring into a mine plan and provide additional mill feed to the YD mill complex with some minor capital requirements to be able to do that. The potential would be to probably get it up to probably 9,000 tonnes per day consistently. Operator: [Operator Instructions] The following question is from Don DeMarco from National Bank. Don DeMarco: John and team. Maybe just a quick question on the capacitor incident. What were the root cause of that? And is there a risk of a repeat? Luc Guimond: The capacitor failure, we're still actually having that analyzed. So I don't have a firm answer on that, but it's not something that you would typically see, to be honest with you. So there could have been a defect within that part itself. I mean we've been running our Island Gold mill complex and our Young-Davidson mill complex for years and have never experienced that sort of failure with a capacitor, but it wasn't just a capacitor. The capacitor failing was part of it, but that led to us some residual damage within the drive unit of the power modules that operates the SAG mill and the ball mill. So we had some other component failure there like resistors and a bus bar and some other electrical components that resulted in some additional Repairs. But this is not a normal course of business. We've never seen this with any of our other operations. So I'd say at this point, it's a one-off, but we still need to do further diagnosis to understand exactly what happened with that capacitor. Don DeMarco: Okay. look forward to that. And it sounds like the timing of mining... Luc Guimond: Just the other thing I would add to that is that from a inventory aspects and just making sure that we have all of the parts. We have done another through -- further thorough review of our electrical components for running that plant to sure that we have all of the critical spares that we need just to prevent any sort of significant downtime moving forward. Don DeMarco: Okay. Then just to my next question, with regard to the Magino mill and combining the 2 ore streams back into that mill, it sounds like it's potentially 2026, maybe later. Seems like there's good reason at this gold price to keep the 1,200 tonne per day Island mill running. But since you've done it before, you've done it once already in July, would the second time round be somewhat routine just with a quicker ramp up? Luc Guimond: Yes, it's pretty seamless, to be honest with you, to put the both ore streams into the one plant. I think I'd mentioned before, we did a couple of batch tests just to confirm the metallurgy back in Q2, Q3, and that all was validated. And frankly, running that combined ore stream into the Magino mill from really mid-July until we did have that capacitor failure at the end of September. Metallurgically cleared everything was performing quite well, both from a gravity recovery point of view as well as overall recovery. The expectations were as per what we were expecting as far as what we modeled to what we were seeing in the plant. So it's a pretty easy simple transition to just provide that ore feed back into the stream and combine the the 2 streams into 1 feeding into the 1 mill complex. Don DeMarco: Okay. And then just as a final question. Turning to Lynn Lake development. We see that the time line has been impacted by the wildfires. How about CapEx? Can you give any more granularity on the implications to the CapEx estimates to develop that project? Luc Guimond: Well, yes, I mean, CapEx-wise, I guess you'll have the inflation component there over the next -- because of the fact that it's been delayed a bit. I think what we've -- we basically lost all of the construction season this summer which is the most productive period that you can have certainly in Northern Manitoba or Northern Ontario, depending on where we're building these operations. So as a result of that, our original time line was mid-2028 now we're moving that out to early 2029. So you're going to have a bit of an inflation factor that gets factored into that. Greg Fisher: Yes. I mean, just adding to that. We put a study a couple of years ago. So you have 3 years of inflation since we put out that study with this additional year that Luc just commented on moving it out to 2029. And inflation on capital projects is run around 5% to 6%. So we can expect a 15% increase in our capital that we put out in the feasibility study for Lynn Lake. Operator: There are no further questions registered at this time. This concludes this morning's call. If you have any other questions that have not been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932, extension 5439.
Operator: Thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Green Brick Partners, Inc. Third Quarter 2020 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Jeff Cox, Chief Financial Officer. You may begin. Jeffery Cox: Good afternoon. And welcome to Green Brick Partners' earnings call for the third quarter ended September 30, 2025. Following today's remarks, we will hold a question-and-answer session. As a reminder, this call is being recorded and will be available for playback. In addition, a presentation will accompany today's webcast, which is available on the company's Investor Relations website at investors.greenbrickpartners.com. On the call today is Jim Brickman, Co-Founder and Chief Executive Officer; Jed Dolson, President and Chief Operating Officer; and myself, Jeff Cox, Chief Financial Officer. Some of the information discussed on this call is forward-looking, including a discussion of the company's financial and operational expectations for 2025 and beyond. In yesterday's press release and SEC filings, the company detailed material risks that may cause its future results to differ from its expectations. The company's statements are as of today, October 30, 2025, and the company has no obligation to update any forward-looking statements it may make. The comments also include non-GAAP financial metrics. The reconciliation of these metrics and the other information required by Regulation G can be found in the earnings release that the company issued yesterday and the aforementioned presentation. With that, I'll turn the call over to Jim. James Brickman: Thank you, Jeff. First, I want to formally recognize Jeff's promotion to Chief Financial Officer, effective earlier this month. Jeff joined the company in June 2023 as Senior Vice President of Finance with over 2 decades of homebuilding experience, and he has been instrumental in helping us establish our wholly owned mortgage company, along with refining our financial systems and processes. I am excited to have Jeff join the senior leadership team and add his talent to Green Brick's deep under 50-year-old talent bench. With that, I am pleased to announce our third quarter results particularly given that we achieved these results against the backdrop of ongoing and persistent affordability challenges faced by many consumers in this housing market. Our performance remained resilient despite eroding consumer confidence and an increasing supply of housing inventory. Our builders adapted quickly to a volatile housing market as we continue to balance price and pace to maximize returns in each of our communities. We achieved 898 net orders, representing a 2.4% increase year-over-year, which is a record for any third quarter. We also closed 953 homes in the quarter, just 3 shied of beating our record third quarter 2024 results. Net income attributable to Green Brick for the third quarter was $78 million or $1.77 per diluted share. As Jed will discuss in more detail shortly, driving our sales volume, required price concessions and other incentives as we address the affordability challenges faced by home buyers in our markets. As expected, these dynamics put downward pressure on our homebuilding gross margins, which declined 160 basis points year-over-year and 70 basis points sequentially to 31.1%. Our results also reflect a $4.8 million warranty adjustment, which improved our gross margins by 90 basis points. Our gross margins remain the highest in the public home building industry and marked the tenth consecutive quarter in which our gross margins exceeded 30%. While the macroeconomic landscape presents headwinds for the entire industry, we believe the core strengths that have driven Green Brick's success over the past decade will enable us to continue to navigate any challenges with confidence and flexibility. As always, we will focus on maintaining operational excellence centered on our disciplined approach to land acquisition and development to position us for future growth. We are laser-focused on maintaining an investment-grade balance sheet to support our targeted expansion in high-volume markets. As Jed will discuss in more detail momentarily, we also continue to concentrate on reducing construction costs and cycle times. We believe we are well positioned to sustain our return metrics that rank among the very best in the homebuilding industry and create long-term shareholder value. We remain focused on growing our business, particularly our Trophy brand. Trophy's growth in DFW in Austin, combined with our planned entering into Houston by the 2026 spring selling season presents significant opportunities for sustained growth over the next few years. This expansion, we believe, allows us to continue serving the critical first time and move up buyer segments, while further diversifying our revenue base and strengthening our presence in key Texas markets. With our highly diversified brand portfolio, we believe we are well positioned to capitalize on demand from all homebuyer segments. While the overall market conditions remain challenging due to a macroeconomic and political uncertainty, we remain vigilant in monitoring and responding to shifts and buyer preferences. We believe that our experienced team and a robust land pipeline and desirable infill and infill adjacent locations will drive continued success in the quarters to come. With that, I'll now turn it over to Jeff to provide more detail about our financial results. Jeff? Jeffery Cox: Thank you, Jim. Given the challenging economic conditions and increased supply of housing inventory in our markets, discounts and incentives increased year-over-year as a percentage of residential unit revenue to 8.1% from 5%. Our average sales price of $524,000 was flat sequentially and down 4.2% year-over-year. Home closings revenue of $499 million declined 4.6% compared to the third quarter last year, and our homebuilding gross margins decreased 160 basis points year-over-year and 70 basis points sequentially to 31.1%. As Jim mentioned earlier, we reduced our warranty reserve by $4.8 million during the quarter, which improved our gross margins by 90 basis points for the quarter and 30 basis points year-to-date. This adjustment was based on an analysis of our warranty reserve accruals compared to actual warranty spend, which was less than previously anticipated. This adjustment reflects continued improvements in our construction quality and the strength and stability of our trade partners. SG&A as a percentage of residential unit revenue for the third quarter was 11.6%, an increase of 60 basis points year-over-year, driven primarily by higher personnel costs and investments in our IT platforms to enhance operational efficiencies. Net income attributable to Green Brick for the third quarter decreased 13% year-over-year to $78 million and diluted earnings per share decreased 11% year-over-year to $1.77 per share. Year-to-date, deliveries increased 5.1% year-over-year to 2,905 homes, and our average sales price declined 3% to $531,000. As a result, we generated home closings revenue of $1.54 billion, an increase of 2% year-to-date from the same period in 2024. Homebuilding gross margin decreased 270 basis points to 30.9%. Year-to-date net income attributable to Green Brick decreased 15% to $235 million and diluted earnings per share declined 13.6% to $5.29. As a reminder, we sold our 49.9% interest in Challenger Homes in the first quarter of last year, which had the impact of adding $0.21 to our 2024 diluted earnings per share. Net new home orders during the third quarter were up 2.4% year-over-year to 898 and down sequentially only 1%. Year-to-date, net new home orders increased 4% year-over-year to 2,912. Average active selling communities of 103 remained relatively unchanged year-over-year. Our sales pace for the third quarter increased marginally to 2.9 per month compared to 2.8 per month in the previous year. We started 950 new homes, which was approximately the same as the prior quarter and down 10% year-over-year. Units under construction at the end of the quarter were approximately 2,200 down 5.5% year-over-year. We will continue to monitor market conditions and seasonal trends and align our starts with our sales pace to appropriately manage our investment in spec inventory. Due to a higher proportion of quick move-in sales, coupled with a 9-day improvement in our average construction cycle time, our backlog value at the end of the third quarter was $466 million, a decrease of 20% year-over-year. Backlog average sales price decreased 4.1% to $690,000 due primarily to higher discounts and incentives. Trophy, our spec home builder represented only 14% of our overall backlog value, down slightly from the previous quarter, but they accounted for nearly half of our closing volume. We recognize the heightened importance of liquidity in the current period of economic uncertainty and market volatility. Our investment-grade balance sheet and low financial leverage, we believe, provide us with flexibility to navigate and adapt to evolving market conditions, ensuring we have capital available for strategic opportunities as they arise. At the end of the third quarter, our net debt to total capital ratio was 9.8% and our debt to total capital ratio was 15.8%, among the best of our small and mid-cap public homebuilding peers. Excluding cash and debt from Green Brick Mortgage, our homebuilding debt and net debt to capital ratio at the end of the quarter was 15.3% and 9.5%, respectively. At the end of the quarter, we maintained a robust cash position of $142 million and total liquidity of $457 million, with $315 million undrawn on our homebuilding credit facilities we believe we are well positioned to weather the challenging market conditions to opportunistically deploy capital to maximize shareholder returns and to accelerate growth as the housing market improves. With that, I'll now turn it over to Jed. Jed Dolson: Thank you, Jeff. We continue to see a challenging sales environment within all consumer segments, which have been impacted by affordability challenges and a weakening job market. While we were encouraged to see mortgage rates decline approximately 60 bps during the quarter, demand remained steady during each of the months during the quarter, even as interest rates remained above 6% throughout the quarter. Our team responded well to the evolving market conditions as evidenced by our record third quarter sales volume and our low cancellation rate of 6.7% in Q3, which was an improvement from 9.9% in Q2 and 8.5% in Q3 of 2024. We continue to have one of the lowest cancellation rates in the public homebuilding industry, and we believe it demonstrates the creditworthiness of our buyers, quality of our product and desirability of our communities. We continue to address the affordability challenges faced by consumers by providing our homebuyers with price concessions, interest rate buydowns and closing cost incentives. Incentives for net new orders during the third quarter were higher by 280 bps year-over-year and 100 bps sequentially, increasing to 8.9%. Incentives moderated during the quarter from a peak in July as the average 30-year mortgage rate declined during the quarter reducing the cost of interest rate buydowns. Rate buydowns remained a necessary tool to drive traffic and sales, especially with our quick move-in homes. With our superior infill and infill adjacent communities and industry-leading gross margins, we believe we are well positioned to adjust pricing as needed to meet market demand and maintain our sales pace. While we recognize the importance of preserving our margins, we also recognize that our industry-leading margins provide us with significant pricing flexibility to compete efficiently in a volatile market. Green Brick Mortgage, our wholly owned mortgage company closed and funded over 350 loans in the third quarter compared to 140 loans in Q2, the average FICO score was 740, and the average debt-to-income ratio was 40%, consistent with the previous quarter. We are excited about the future prospects of Green Brick Mortgage as we are preparing to expand into Austin, Atlanta and Houston later this year and early next year. Green Brick Mortgage continued to increase its capture rate while providing top-tier service to our homebuyers. Operationally, we continue to make meaningful strides in reducing our direct construction costs and enhancing our operational efficiency. The cost for labor and materials for homes closed this quarter was down approximately $2,250 per home compared to the same period last year. We also continued to reduce our construction cycle times, which were down 9 days from a year ago. Trophy's average cycle time in DFW was under 100 days, the lowest in their history. Labor availability remains relatively stable across all of our markets. We recognize the concerns surrounding tariffs and continue to work closely with our vendors and suppliers to mitigate any potential impact. We believe tariffs will have a minimal impact on our earnings next year, although we acknowledge the lack of certainty with respect to final tariff timing, scope or percentages makes it impossible to analyze potential tariff impact with precision. As we navigate through various macro challenges, we are carefully recalibrating our capital allocation plan to align both our long-term growth objectives and respond to changing market conditions. During the quarter, we spent $121 million on land and lot acquisition, excluding cost share reimbursements and $73 million on land development. This brings the year-to-date spend to $231 million for land acquisition and $233 million for land development, respectively. Many of our land development projects involve special financing districts that provide for reimbursement of public infrastructure costs. As work is completed, we're able to recoup a portion of these costs, which reduced our net land development spend. We continue to project approximately $300 million in land development spending for the full year of 2025, which will be partially offset by these reimbursements. We believe our superior land position provides a competitive advantage that will be the foundation for strong growth in subsequent years. Given the strength of our existing land and lot pipeline we remain patient and selective with future land opportunities without compromising the ability to grow our business in the near and intermediate term. At the end of the third quarter, our total lots owned and controlled increased by 11% year-over-year to approximately 41,200 lots, of which over 36,000 lots were owned on our balance sheet and approximately 4,500 were controlled lots. Trophy comprises approximately 70% of our total lots owned and controlled. Excluding approximately 25,000 lots in long-term master plan communities our lot supply is approximately 5 years. Finally, we are on schedule to open our first community in Houston. The construction of our first model home began in October and we anticipate opening for sales in time for the spring selling season. We're excited about expanding Trophy's footprint in one of the largest homebuilding markets in the U.S. With that, I'll turn it over to Jim for closing remarks. James Brickman: Thank you, Jed. In short, we remain optimistic about our long-term prospects and believe we are well positioned to continue producing strong results. We believe our strategic land position, high-quality and diverse product offerings that appeal to multiple segments of the homebuyer market and strong balance sheet will lay the path to future growth and industry-leading returns for our shareholders. I also want to thank the entire Green Brick team for their passion and dedication to delivering exceptional results in the face of a challenging market. This concludes our prepared remarks, and we will now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Alex Rygiel with Texas Capital. Alex Rygiel: Nice quarter. Incentives were up in the third quarter for your new orders. Can you talk a little bit about directionally how we should think about gross margins in the fourth quarter versus the third quarter? James Brickman: Yes, we can all handle that a little bit. Thanks for your question. This is Jim Brickman. We don't give guidance on gross margins quarter-to-quarter. But I think your question does give me a really good opportunity to talk about Green Brick's strategic advantages as we look at our business not only next quarter but many quarters going forward. And I think there are really 2 components to that. First, we have a very long runway of low-priced lots and infill and infill adjacent locations. And no matter what's happening, we believe that our lot price advantage in these lots is going to give us industry-leading margins compared to peers. So that's the first point. And it's really interesting what's happening from my second point is that because we self-develop 90% of our lots, we can deploy capital based upon market demand rather than a land bankers or a land developers contract terms. And we think that will help us maintain margins in our communities where we're not faced with having to produce excess inventory. Alex Rygiel: That's helpful. And then you mentioned that incentives moderated through the third quarter. Has that continued in October? Jeffery Cox: Yes. This is Jeff Alex. Those incentives moderating during the quarter are really primarily a function of the rates coming down over the last couple of months. We're still utilizing the rate buydowns as an effective tool to drive traffic and get sales. We haven't really gotten a lot more aggressive in terms of the target rate that we've been advertising which has really helped us be able to reduce our incentives and improve margins at this point. James Brickman: Jed can chime in, Alex. We haven't seen the market get a lot better or a lot worse. It's pretty much pretty steady. Operator: Your next question comes from the line of Rohit Seth with B. Riley Securities. Rohit Seth: Just on the incentives, where are you today in terms of your mortgage rate buydown? What's your average rise rate you guys are offering? James Brickman: Right, just under 5%, buydown targeted rate. Rohit Seth: Okay. And it sounds like with the rates coming down a little bit, it just lessens cost for your -- for you guys, you're not necessarily buying down rates further. Is that correct? From where we were, say... Jed Dolson: We think we had buy down to 4%, we haven't chased them down that low to generate the sales that we just reported. Rohit Seth: And our incentive levels -- is there much difference between DFW and Atlanta? Jed Dolson: I'd say DFW, there's the ability to produce more homes because it's not as... James Brickman: Yes, there's a difference because our average price point in Atlanta is $300,000 or $400,000 greater. So it's a very different buyer. Jeffery Cox: I would just add on to that as well. We do a lot of spec sales here, primarily with Trophy. So they don't have a big backlog of homes that they're necessarily trying to protect. Atlanta, they do a lot of to-be-built there. So I think we're seeing some higher incentives there, generally speaking, relative to our Texas markets. Rohit Seth: Understood. Okay. And then it seems like Trophy, the expansion into Houston will be a key driver for you. I guess from my seat, looking at the community count, I'm not sure how to size this as we look to 2026. So if you any help there? James Brickman: Well, community count is tough for any analyst right now to look at with us because the new communities we're adding are high-velocity lower-priced communities. So -- and that's many of the communities we're adding this year. So community growth isn't that great, but the sales velocity that's coming on the new communities that we're adding should be favorable. Jed Dolson: Yes. I would just say that we expect Austin to be -- to basically double from where it was this year and then Houston will really be -- we'll get sub-100 closings next year, and that will grow meaningfully the year after that in 2027. Rohit Seth: Okay. Fantastic. And then on the mortgage business, there's pretty nice uptick sequentially. You're growing the business obviously. I mean, do you think this level is sustainable as a go-forward run rate for you guys? Where you're at today or? Jeffery Cox: This is Jeff. Yes, we've been really happy with the progress that the mortgage company has made so far. We're trying to take a measured approach in how we roll this out to our Texas builders and communities. But the goal, as Jed mentioned earlier, is to really have that rolled out to the balance of Texas by the end of this year, targeting Houston and Atlanta at least by the first part of next year. We've got people and systems in place to be able to really leverage and scale that business at this point. And so we're excited about where we think we can take this. James Brickman: Yes. I think the other thing we do from this financial perspective is that next year, we'll be breaking out financial services separately. And by doing that, we'll be pulling SG&A or G&A out of our line, putting it in financial services line that will slightly help our SG&A. Rohit Seth: And then I guess last one is maybe you could just comment on the cost buckets, where -- are you seeing any direct cost savings in your labor, your land costs? Jed Dolson: Yes. This is Jed. I'll take that. We're definitely seeing land and lots either stabilize or slightly come down in price. Lumber continues to be a year-long low every new month that occurs. So that has just fallen every single month this year. Labor is readily available. When we talk to our subs a lot of them are running at 65% to 70% capacity. So they've been able to negotiate reductions with their staff. So, yes, everything on the vertical side is coming down. Rohit Seth: All right, fantastic. I guess I do have a last one, just a 4% ASP decline in the quarter. How much of that was just product mix, plant size and Trophy share versus maybe base pricing? Jeffery Cox: Yes. Trophy share didn't really change year-over-year, but there was some mix that was impacting the average sales price of the 4.3% decline in ASP, I calculate roughly little less than half of that was related to just the mix of closings across our builders. Operator: There are no further questions at this time. I would now like to turn the call back over to Jim Brickman for closing remarks. James Brickman: Well, we're always available if anybody who wants to visit with any of the speakers, Jeff, myself or Jed. So send us an e-mail, give us a call, and we'll be happy to do add more color to anything we talked about today. Thank you. Operator: This concludes today's conference call. You may disconnect.
Heli Jamsa: Good afternoon, and welcome to the Qt Group's Third Quarter 2025 Results Presentation. My name is Heli Jamsa, IR Lead. And with me today are CEO, Juha Varelius; and CFO, Jouni Lintunen, to present the results. After the presentations, we will have Q&A first in the room. And if we have time left, we will move on to questions from the lines. Without further ado, please, Juha, the floor is yours. Juha Varelius: Thank you. Good afternoon, everyone. My name is Juha Varelius, CEO of the company. And as Heli was already saying, I'm going to go through the business performance on Q3 first. Well, our quarterly sales was EUR 40.7 million and the decrease on 3.4% comparable currencies, it was flat basically. And year-to-date, we've been growing 1% on comparable currencies. And our EBITA margin on Q3 was 10.5%. What has actually led into this and why are we below on our expectation is the fact that the market has been a softer longer than we've been anticipating. So if we look at the -- what we've been missing is basically larger deals. The number of the deals we've been making this year and on a Q3 has been pretty steady and growing. And so we've been doing more deals than we've been doing before and we've not been losing any customers. So the churn rate per se is at the same level that it has traditionally been, but the average deal size has been lower. So what we are experiencing on a few segments, particularly where our customers are suffering, we are doing smaller deals. Our customers are reviewing the number of licenses they require and they try to go forward with the, let's say, kind of a -- with a minimum investment. So there is still life in the market. We see the activity in the market. We don't see any competing technologies. So we're dealing with the same customers. We're getting new customers, but the deal sizes are lower. We've also experienced some shift from 3-year deal to 1-year deals. And we were expecting that this -- on the second half, this market condition would get better. Well, it hasn't. And we gave a profit warning because we anticipate that basically this same development will continue in the fourth quarter as well. So we were looking for that market demand would be stronger. Now we don't anticipate that anymore. Of course, we could have been waiting and see what's going to happen on big deals on a Q4. I'm going to talk about that in the future outlook more. But as we concluded that the -- we had a bit of same thing on the second quarter and now in the third quarter that we saw the bigger deals moving forward and the overall deal size being smaller. We think that this outlook that we've now given is more on a realistic size. The distribution license revenue on third quarter was on the previous year level. Overall, this year, the distribution license revenue has been developing favorably, and that's been on our expectations. So -- but on our license sales, we've been suffering both on a QA and Qt side. Personnel-wise, we had 922 people on September 30 and year-on-year increase is 64. We are, of course, cautious on the cost side, but on the long term, we are still continuing our investment as planned because we don't see on a long-term vision any changes in that sense. We did complete the IAR acquisition a couple of weeks ago. And like we've said before, where do we see IAR is that the -- we do have a more comprehensive product portfolio. We see our strategy as that when we look at the development process of our customers, we want to be on the whole process. And with IAR, we are now with their compiler. It's in the very beginning of this development process, so to say, so that when customers are starting a new project, the first thing they will do is that they will choose the hardware and then they start looking for a compiler. And after that comes actually how to develop software and so on. So it will give us a benefit, of course, to be aware of customer projects on an earlier phase. It also gives us a benefit that we can be yet even a more one-stop shop for our customers. They don't have to go and shop various things from various places. And specifically on our QA, our testing offering, it's a complementary or we can do cross-sell. So when people buy the IAR product, also that needs to be tested. So we have a cross-sell opportunity over there. IAR is well positioned in safety critical systems, which is also an area where Qt works. So we do have safety critical, you can see in the automotive, for example, quite a lot and on medical. So they are typically the same segments where we work. We do have coincidentally also offices pretty much on the same locations throughout the world. So we are operating in the same segment and this strengthens our position in embedded world quite a lot. So we are becoming a Nordic powerhouse going global. IAR is selling perpetual licenses. They have started the subscription change on licensing model, which we did a couple of years back. We are now reviewing -- we're doing a bit different scenarios that on what scale and on what speed we're going to be doing that transition going into next year. As of now, I don't have an info to give that what that's going to look like. But of course, more aggressive you're going to be the effect on revenue is going to be greater on the short term and then on later, it will grow faster. But what is the kind of a speed of change, we haven't yet decided, and we are doing that study as we speak as well as we're doing the next year's budgeting and so on and so forth. So we do look that the IAR is going to be a very complementary product for our portfolio, and we've started the integration work now. When we made a public offer, it was on a due diligence -- on a light due diligence. Now we are going through the processes. We've started the integration work. And like I said, we started the planning for next year budget. We started the planning for the subscription change. And once we have those ready, then we're going to share more on that information to you on a later stage. And with these words, I hand it over to Jouni. Jouni Lintunen: All right. Thank you, Juha, and welcome from my behalf as well to the earnings call of Q3. I will dig into a little bit more details on P&L, income statement and balance sheet as well. Juha already discussed quite in detail already about the top line net sales. We reported negative 3.4% net sales growth. And we see that happening driven by the customers' kind of cautiousness for most parts. We are seeing the headwind from the FX, specific from U.S. and the magnitude of that was a negative 1.4% in the Q3. So in other words, in comparable currencies, the net sales were flat year-on-year. For first 9 months, we are reporting a negative 1% reported net sales growth. With the constant currencies, we are around 1% positive, so flat all in all. We did some flattening on the materials and services part. There's still an increase of roughly EUR 100,000. That's the resources -- external resources that we are using for our customer consulting projects. So kind of insignificant in any means, though. Our headcount, as Juha described, was up by 64 year-on-year. And we have been adding resources into R&D, product management and also customer-facing organization during this period. And these are specifically the growth areas we see to be contributing going forward. This headcount increase, it reflects very much in line to personnel expenses growth, 10% in Q3 or 9% for the first 3 quarters. Some increase in depreciation. We have extended our -- in some -- extended the premises in some of the locations of ours -- in our locations and also in Finland during this year. So this shows a slight increase in that line. The other operating expenses, the expense side, it's up roughly by EUR 2 million. That's for most part driven by the IAR-related acquisition costs. And that impact is EUR 1.7 million now in Q3 or roughly 4 points in the EBITA margin, if you will. So run rate EBITA margin, excluding the one-off, would be somewhere 15% level, still close to 10% or 9% down from last year's. The amortization, specifically from froglogic and Axivion acquisitions back in '21 and '22 remains unchanged, EUR 2 million a quarter, EUR 6 million for year-to-date. And this leads us to the EBIT of EUR 2.3 million or 5.6%, down by 13% points from last year's. And the year-to-date EBIT percent is 13.2%. The financial items did not play that big a role now in Q3. There was not that much fluctuation in the exchange rates. We are suffering from the headwind from the first half year from USD fluctuation specifically by EUR 1.8 million. Our income tax was for third quarter, EUR 650,000, for first 3 quarters EUR 3.4 million, which equals to roughly 21% effective tax rate, which is our run rate and a good scenario going forward as well. And then this leads us to a net profit of EUR 1.4 million for the period -- for the quarter or EUR 13 million for the year-to-date numbers. On the balance sheet side, we see a significant increase in cash balance. I mean that's the reason of the seasonality of the business and that shows as well in the accounts receivable, trade receivables bucket, which went down by roughly EUR 16 million from end of last year. And this is driven by the seasonality of the business we execute. I mean, fourth quarter is always the busiest one with highest number of invoicing. And then the cash will be collected in the first half year time. And then again, fourth quarter will be the busiest one. We also see a reduction in the contract assets by EUR 3.9 million, which is a reflection that we have not been booking any major significant deals recently with multiyear deals with extended payment terms. So this is kind of contributing to cash flow, which is EUR 32.4 million for year-to-date. When it comes to the equity and liabilities, there's very little movement on that in accounts payable or any other items. And I mean, this balance sheet obviously will be subject to change now quite significantly because of the acquisition of IAR and then that will be taken into account into Q4 finances then in February. With these words, I will hand it back to Juha to go through the outlook and guidance for this year. Juha Varelius: Yes. Thank you. Well, we don't see any changes on our long-term growth prospects in a sense that the -- we do see all our customers planning for new products. They're going to be launching new products. They are designing new products. We do see graphical user interfaces coming more and more into play. We see on testing that the more and more software is being developed that needs to be tested to be robust. So in that sense, we don't see a -- on a long term, we don't see a whole lot of change on that. However, we do see that the -- on the short term, what we see in our customers, there has been lay-offs in our customer base on different regions and segments. Basically, on all our regions, we see that our customers are on many cases on a saving mode, if you like. And we do see that there is -- on embedded market, specifically, we see on consumer electronics, we see in automotive that there is a bit of a downturn on our customers on that. Do we see that, that's going to continue in the long term? No, we don't. And do we see, like I've said before, that the -- is there a need to develop further new products, new product launches? Definitely. So the number of devices will be growing. The software will be growing. AI will be generating a lot of software. And whatever software AI develops, all of it needs to be tested because we never know what the AI does. The market uncertainty, this is a, as I say, a great question that how long do we think that this is going to last. And as a matter of fact, I was thinking and I was -- we were kind of hopeful and we were -- well, not hopeful, we were pretty certain that the second half would be better. Well, that's not been the case. And we see that this market uncertainty on the embedded segment will definitely continue. How long? At this point, I don't want to make that estimation. But the -- let me put it this way. I don't see it getting any worse. So we don't -- I think that the cost savings that we're seeing, companies are doing it and I don't expect it to get any more challenging than it is as of today. So we estimate that the -- we gave a profit warning and we gave the new estimation for this year, 3% to 10% year-on-year comparable exchange rates and margin between 20% to 30%. And as you know, the large part of that delivery will come on the fourth quarter. We took a very -- well, if we were on a positive side, now we are -- our estimations, we've been on a conservative side on the -- that the -- how do we see on 2025. As we go forward into -- if we look into the next year, like I said, the basis what we have on our -- how do we prospect market going forward, we do expect this market to get better. And we're kind of on a low end of this turn as we speak now. Well, it's the usual I already mentioned that basically on our segments, the automotive, consumer electronics are suffering the most, defense and medical, maybe the least. So it's a good thing that we are on multiple different industries. If I look on the regions, maybe U.S. been for us -- kind of varies that which region is the best. Probably U.S. was suffering a bit more than Europe, apart from the -- on APAC, we're doing better. And well, of course, when you think of it, it's kind of no surprise that the Chinese automotive is doing pretty well. But it doesn't kind of offset that how we're suffering in the other parts of the world. So that's basically the outlook we have. And now if you have questions, please. Felix Henriksson: Felix Henriksson, Nordea. 3 questions, if I may. It sounds like your customers are reducing the number of licenses that they have in use. What is the reason for that? What do they tell you? Is it merely because of cost savings or is there anything to do with structural matters with developers becoming more efficient and companies seeing a lower number of licenses and that sort of thing? Juha Varelius: Well, they have less developers. They're downsizing, right? So if we look on the IT market, I think it's 2 years back, there was a shortage of developers. I mean, everybody were anxious to get developers. It was very hard to find them. And that was kind of a bottleneck for IT company growth. If you look now at the job market, I mean, there are developers unemployed basically at this point of time. So now it's kind of the opposite. If you look at the big companies in the U.S., for example, that how big lay-offs there's been during the course of the, let's say, 1.5 years now. So that's one of the reasons. Then the other is the overall cost awareness, let me put it this way. So it was very typical for our customers that whatever they had when they renewed, they renewed the same amount with the same deal like a 3-year deal and so and so many developers. Now they are calculating exactly that how many do we need and they try to survive with the least amount of licenses. And then when they start new projects, when they are starting a project, they started with as small amount of developers as possible and try to go forward like that, whereas before, they started in a bigger scale. So that's where it comes from. But like I said, the churn has not increased. So we still have the same customers. They continue their development. They are just more cautious on the spending. And also the number of the deals we do, so the number of new customers, that is actually even increasing than what we've been doing before. Felix Henriksson: And secondly, what about quality assurance? Did that grow in Q3? Because it sounds like you seem to think that there's a bit of a structural tailwind from AI in that area. Is the demand on that front any better than for traditional Qt developers? Juha Varelius: I would say that our QA business is the license sales is suffering a bit same things than on Qt. So the growth on QA has been slow as well. We've also -- well, testing is kind of -- it's -- development is something that you either do development or you don't. Testing, you can always not to test and hope for the best. So you don't have to test everything and completely and so on and so forth. So that is -- for customers, it's easier to adjust on a testing bit than on development bit. But I would say that our license sales has been sluggish, both on QA and Qt. Felix Henriksson: Were quality assurance sales down year-on-year? Juha Varelius: No, it's not down, but it's – yes, same roughly -- follows pretty much closely to what Qt is doing. Felix Henriksson: And then regarding the one-off costs relating to the IAR acquisition, they were for the full year, at least a bit higher than what I had anticipated. Will there be any one-off costs in 2026 from that? Juha Varelius: 2026 on IAR? Felix Henriksson: Yes, these one-time costs. Juha Varelius: I don't think so, but you never know if there are surprises that we need to close down something or do something extraordinary that we are not anticipating. But I mean, these one-off costs are -- well, this money so far has been flowing mainly to bankers. So what can I say? It's a big amount. But the -- so do I anticipate any one-off costs on 2026? Well, at this point, I'm not aware of. But of course, if there would be something that we would totally write-off, then there would be, but we don't see that as of now, no. Antti Luiro: Antti Luiro from Inderes. I could ask on the lack of large license deals and kind of the drivers behind that. What -- do you have any sort of idea where that comes from? Why are larger deals not coming in? Juha Varelius: Well, they are being postponed. Yes. So they've been pushed forward. The big projects, they are waiting to start. So a bigger deal usually comes. So in our business, the first deal is always a smaller one. Then there is -- the people start developing, then there is the expansion and that comes a bigger deal. And there have been postponements on those projects. They've been kind of -- well, put on hold is a wrong word, but they continue with a smaller amount of developers, they don't scale up. That's the -- so the projects are not going away, but they go on a lower flame, so to speak. Antti Luiro: Right. So does that mean that they are basically extending the time lines for getting those products out or... Juha Varelius: Yes, they're doing -- yes, basically, they're doing with less, yes. Antti Luiro: Okay. I could also go back to the discussion around having less licenses sold to the same customers and then optimizing the amount. Drilling down to the AI effect because you could assume that developers are getting more efficient every year. You could see a recurring effect that companies downsize every year because they can do more with less. Do you see that as a realistic risk for the market and your license sales volumes or do you think that the customers might just, at some point, expand the scope of their products because the AI can help them do more? Juha Varelius: Well, if I look at AI as of now, where I see that -- you can use it is that on the web technologies or mobile technologies. So if you want to do a simple mobile app, for example, you can have the AI helping on that. If you want to do kind of simple things that are very easy to verify that what they are, yes, you can do that with an AI. If you're doing any safety critical functional safety type of things, you can't -- or let's say, that the infotainment system on a car it's a very complicated system. AI can't do that. Will it be able to do that some day? Well, of course, you can take both views. Some people say that in a few years, we don't have to work anymore because AI is doing everything and other people are saying that, well, maybe not. So I think that on embedded before the AI starts doing so much work that there is really less need for developers, that's kind of down the road and let's see how that goes. On top of that, AI is not very reliable, as you know. So as of today, you can do simple things with AI. On testing, for example, you can do -- you can have test scripts written by AI. And if that's not complete, well, then the test is not complete, but it's not end of the world. Those type of things you can do. And you can use -- it can be a helper. But do I see that developers being so much more efficient that there'd be need for less on embedded side? Not really. Do I see that what's really affecting our customers is the lack of demand and their profitability is under pressure and they need to do less. That's more of the reason as of now. Unknown Analyst: [Indiscernible] Private Investor. So my question is about the competitive landscape. What's going on in there? And are you seeing any sort of advances in the competitive technologies that might be impacting the license volumes? Juha Varelius: No. Yes, that's -- and I can elaborate on that. So we do have the usual suspects. We do actually see the -- I don't know if you've heard me speak before, but so we have Android on the IVI on the automotive, but there is not a whole lot of change. There is Flutter that the Flutter was coming and that was kind of the recent emerging technology came from mobile and web and they were kind of making inroads into embedded. We don't see them that much anymore. And as far as I know, they are more in a maintenance mode nowadays and they've cut back on their development. We do see Unity. Unity is very good on the 3D. And on advanced 3D, if you want to have very nice-looking 3D, then Unity is -- it's a good choice. However, it consumes more hardware. So you need to have more powerful hardware, more expensive hardware. And it's fairly expensive on the -- per item cost on Unity is much higher than on our pricing, for example. So what we now see is that on kind of good times, we saw Unity being used also on kind of a middle tier automotive or middle tier cars, whereas now we see that customers are looking at cheaper offerings for low and middle tier and Unity can be used only on a high tier vehicles. So basically, this cost pressure is, on that sense, it's working on our benefit rather than and more against Unity. So we don't see a change over there. And we don't see -- at this point of time, we don't see any new technologies that would be coming into our territory. And like I said before, we don't have any customer -- our customer churn is the same that it's been for years. And that's kind of a natural, I would say, natural churn that the project ending and whatnot. We don't -- we haven't seen that and we haven't seen any reduction on the number of the deals we're making. So we're selling as well as before, even a bit better on a number of deals, but the actual sizes are smaller. Waltteri Rossi: Waltteri Rossi from Danske Bank. First, on Q4, as the problem this year has been especially related to the large deals. Do you expect Q4 sales to be under more pressure actually compared to Q2 and Q3? Because I would assume that there is even more of those large deals. Juha Varelius: Yes. And so, yes -- well, yes. And when we gave our estimation for our full year guidance, we kind of took that into account that there will be less, yes. So we were more conservative on that one, especially for that particular reason. Waltteri Rossi: All right. Then about the license maturity mix once again. Would you say that the 3-year license lower-than-expected renewal rate has had over or under 5% impact on this year's sales? Juha Varelius: How much is 5%? I would say that on -- it's somewhere between EUR 3 million to EUR 5 million on the third quarter is the effect, yes. Waltteri Rossi: On the third quarter? Juha Varelius: Third quarter. I was trying to calculate what percentage, but yes, somewhere between that. Waltteri Rossi: And how much would you say year-to-date? Juha Varelius: That figure I don't have out of my head. But I knew that you're going to ask, so I looked at Q3 specifically. Waltteri Rossi: All right. Last one about the underlying market conditions. Do you expect the market to improve still this year or are we going to have to wait until next year for that to happen? Juha Varelius: Well, yes, I was more hopeful when we were here on the beginning of the third quarter, I was expecting a -- obviously, I was expecting a better third quarter. That's for sure. I was expecting the -- and that didn't happen, right? And so we are now more conservative on that and we don't expect much of a change on the fourth quarter and hence our guidance. Are we going to see better next year? Well, at some point, this starts turning for sure. And so yes, we are expecting -- we're kind of seeing that it doesn't get any worse than this, but when do we see it turn to better, on what particular quarter that will happen, it's -- well, I can't say that. And as you can see from our fourth quarter guidance, it's fairly conservative. So we don't expect any big turn this year. Jaakko Tyrväinen: Jaakko Tyrvainen from SEB. I could continue on the AI and the related productivity gains on software development. Are you seeing such kind of a trend or pattern that proprietary development would become, again, a bit more appealing for the clients or do they still need to trust in some sort of tools when developing the embedded solutions? Juha Varelius: Yes, they are definitely going to be using tools. That's for sure, yes. And I think that the -- like I said, on embedded development, you can use AI for writing test scripts on embedded development. You can use AI on design phase to give you trade ideas that what could be different kind of different kind of solutions and ideas, creativity ideas. But the actual coding on embedded, I don't see that the AI will be there for anytime soon to replace the developers. No, we don't see that risk. But on simple tasks, you can -- I've used the AI like that it's a great buddy -- it's your best work buddy. It can help you out on many – automating many simple tasks and whatnot. But the actual coding, I don't see that on embedded for the foreseeable -- in many, many years that would change. I mean you can use AI doing simple mobile apps, for example, now. But -- and of course, there is also the other side of the room saying that it's going to advance so quickly that we're going to all be surprised. Well, usually on these new things, as you know, is that when the change starts happening, it takes many, many years and people kind of even forget it and nothing happens and then the change comes later on. But on this embedded coding, not in the -- well, foreseeable future is always kind of a scary word, but not in the coming years, let's put it that way. Jaakko Tyrväinen: Okay. And still using the word of AI, have you included any kind of AI features in your own products? And has that improved the customers' productivity so much that they need less licenses perhaps? So are you basically cannibalizing the renewals by including such features? Juha Varelius: No, no. I mean these embedded systems that people build using Qt, they are very complicated systems, very big platforms and whatnot. So no, that's not the case. I think what we see is that the -- well, first to your question, yes, we utilize AI in many aspects in our products. Is that downscaling the number? Is that affecting less license sales? Definitely not. We do see that there is -- our customers are feeling the pain that they are not selling their products as much as they would like to and they have cost pressures, and that's where -- that's what we are seeing. And those cost pressures are not only that they're selling less. Many of our customers are having high tariffs, for example, selling stuff in the U.S. I mean, like the -- well, I don't know what's going to be the South Korean car manufacturers' tariff, but it used to be 25% before. Trum now visited and them, they've made a deal. I don't know if it's now 15%. But I mean many, many of our customers are having a 15% cost increase on stuff they are selling to U.S. So -- and then there is a bit of an oversupply on some industries and whatnot, and this is causing the overall friction in the -- on embedded business. Jaakko Tyrväinen: Okay. Then finally, on the license maturity mix, you mentioned that customers are perhaps now choosing a bit more on the 1-year licenses. Doesn't this imply that you should have a pretty nice growth in your 1-year license base for '26? And could you elaborate a bit what type of a growth you are seeing in renewing 1-year licenses when going to '26? Juha Varelius: Well, yes. Of course, yes. I mean, on a short term, it affects us specifically. As you know, that our monetization model is that if you buy a 3-year license, we book it as revenue at that point of time as one goes. So if people are buying more 1-year licenses, we book it at that point, which is obviously less than a 3-year license, right? But then the good thing is that the 1-year is going to renew next year. So obviously, it's going to help us, absolutely. Jaakko Tyrväinen: And how much larger is the base now versus a year ago? Juha Varelius: Well, I can't answer that. But I mean, the logic is right that it will help us next year, of course. Matti Riikonen: It's Matti Riikonen, DNB Carnegie. A couple of questions. First, regarding your cost base at the moment. It's now clearly more elevated because you have done growth investments, but you haven't got the growth. So you are going with a pretty heavy cost load into 2026. So how are you going to tackle that? Should we expect lower margins in '26 because of that or do you think that just operating leverage would work in your favor in '26 to basically set it to the right path? Juha Varelius: Yes. So you should not expect lower margins because of that and the operating leverage will fix that. And in the case that, let's say, that this would be a permanent situation that the revenue will never ever grow, obviously, then we would not have growth investments and we would get -- we would still get the profitability, right? Now the one thing that will affect our profit margin next year is obviously IAR. And that effect, I'm not fully aware yet and it depends on how aggressive subscription change we take. If we take very aggressive subscription change to IAR, then the revenue might be flat or even decreasing, which would mean that the IAR profitability would be diluting our group profitability. I will give guidance to that once we've made those decisions and I know that what the effect will be. But the IAR profitability traditionally has been lower than Qt. So obviously, there is potentially an effect. Having said that, IAR profitability will obviously improve because they are not any more listed company and whatnot. So we're going to get some savings out of there. We have some ideas over there that how can we improve some of the performance on revenue even if the subscription is over there. So that remains to be seen. But overall, that is the moving part over there. I would not be worried about the Qt profitability. And by the way, of course, we're going to have one-offs the same type on the fourth quarter than we had on the third quarter. Matti Riikonen: Okay. Now regarding Q4, you have a fairly big hockey stick model for Q4 to meet the full year numbers because in the first 3 quarters you haven't grown at all basically. So when the customers know that and they kind of want you to give them discounts at the end of Q4 to close the deals this year, not next year, so usually that creates a psychological kind of challenge. So is there a greater risk that if you stick to your discount policy and don't give any discounts then there would be a bigger share of those deals being postponed to '26? Juha Varelius: Yes, that is a risk, yes. Of course. Matti Riikonen: Right. Then a question of your forecast model. Throughout this year, we have basically been disappointing in each quarter. And your sales forecast model looks to be kind of broken or it hasn't worked like it did in the previous years. So have you scrutinized what's wrong? And how can you improve the accuracy so that going forward your forecasts would be a bit closer to reality? Juha Varelius: Yes. So we have 2 ways of looking into the forecast. The one is that actually starts from the bottom up. So the sales -- each salesperson, they have their pipelines and they make the forecast. They make what is their best case and what is the most likely case. And it's been built upwards from the pipeline and the sales makes their forecast through that. And then we have through finance, which is more like a scientific model that they've been looking at the pipeline over the history and they've been -- they have forecasting model that this pipeline is likely to get into the sales, kind of an AI approach. And both -- basically both have been broken this year. So what we did -- so if you look on the third quarter, for example, when I was here telling you what are my expectations on the third quarter, we had a pipeline and we had a forecast model done by the sales that this is the most likely out of this pipeline. And we do have -- and the same thing from finance. So we know that if this is the pipeline most likely with these multiples, this is how it's going to turn into sales. And that was not the case, right? And so when we look into more detail on the big bulk of things, that's how it's been moving around roughly there, but less. And then these bigger deals being missing over there. So if we look at the end of the day on these numbers, it doesn't have to be -- the deviation doesn't have to be that many millions, right? So if you're missing some of the bigger deals over there, then all of a sudden, you are on the -- out of the scale what you were forecasting. And that's basically been the -- what's been misleading us, say a bit. So we haven't been closing the pipeline as we did in the history. And when you look what's been the reason behind on that on the pipeline, we've been closing the deals on the pipeline, but the deal has been smaller. So the average deal size has been smaller. So have we been able to forecast that we have this amount of deals, are we going to close this amount of deals? Yes, we have. We've done even a bit better than we've been expecting. But the deal sizes on those pipelines, they've been smaller. So the deal has been closed, but on a smaller amount that's been expected. And that we need to adjust going forward in our forecasting. So our customers have been closing the deals, but smaller than we've been anticipating. And then your follow-up question is that have we been giving discounts so that the deal has been shrunk? No, we haven't. It's been less licenses basically. And that's where we've gone wrong. So now on a Q4 or at the -- when we saw what happened on Q3, we took a more conservative look for our Q4, because in our old world, if we look at what's our pipeline for Q4, it's big enough for a bigger sales than we have, but we took a more conservative view how that pipeline is going to be closing. Matti Riikonen: All right. So that was actually partly an answer to my next question, which was that, did I really hear you correctly saying that you think that your guidance for Q4, and of course, this year is conservative? Juha Varelius: We think that if it goes like the Q3, then this is the best guidance we can give. If we look on the pipeline and if we look at the -- we take the older history kind of the multiples, then it would be conservative. But now we've seen 3 quarters that the pipeline doesn't close as it used to be. So I think that this guidance that we are now giving is very best we can give. And I think that that's going to happen given the fact that we are using now the multiples that be into reality on the second and third quarter. So for the old world, it's conservative. For this world, I think it's spot on. Jaakko Tyrväinen: Jaakko Tyrvainen from SEB still continuing. In the aftermath of the, let's say, Q3 and perhaps the year-to-date performance, which has been the most kind of a disappointing revenue stream for you? Has it been the renewals or the new license sales or the quality assurance tools or the distribution license? Juha Varelius: Well, new sales, definitely. So new sales has been the -- that's been lower than we anticipated. We've had our challenges on renewals, but I'm very happy with our renewals team. They are doing a magnificent job. And of course, they do have this challenge that people, when they renew, they're going to go through each licensees and there are reductions on some cases, but our customers are renewing. So the projects are continuing. They are not resigning. They are not churning. They do have a pressure on the renewals, but less so. But new sales being the biggest challenge for this year for sure. And if I look on Qt and QA, I would roughly say that the same challenge. Jaakko Tyrväinen: And then finally, I know it's a bit difficult to have the apples-to-apples comparison in your case, but could you elaborate a bit what is the magnitude of average price hikes during the year? Juha Varelius: Average price hikes? Jaakko Tyrväinen: I believe you have hiked prices. Juha Varelius: Yes. We have -- I would say that not significant. We've increased our distribution license. It's kind of -- it's a -- there are different buckets in our distribution licenses and we've changed the pricing on the different buckets. But I would not say that not a huge impact on that, no. Heli Jamsa: There are no more questions in the room. I think we can check if there is anybody on the line. No. So we can conclude the Q3 results and maybe some final remarks. Juha Varelius: Yes. Thank you, everybody, for great questions. I think we kind of covered pretty much everything. Like I said, we do have -- I want to emphasize the fact that we're doing the number -- the number of the deals we're doing is looking good and promising. It's actually bigger than we've been experiencing so far. What we do see is that our existing customers and new customers are very cautious on buying the number of licenses, and we've seen deal sizes decreasing. We haven't seen any decrease on our churn. And so we continue with the same customers we've had. We don't see any new technologies or competition coming into the market on that effect. How long do we think that this embedded market downturn will continue? Well, definitely, it will continue into Q4 and going into the next year. Do we think that we're kind of on the bottom of the downturn here? Definitely. And do we see that we're going to be going forward upward from here? Yes, but the timing is a bit of a question. Do we think that -- are we concerned about the next year profitability because we've been investing on a long-term growth for next year? No, we are not. And we do expect the return on the normal profitability that you've been expecting to see from us. And like I said, we're very thrilled about the IAR acquisition. We are now going through with them, different customers, integration facts and whatnot. We are preparing a budget for next year. And depending on how aggressive we are going to go into the subscription change, that depends on what's going to be the IAR profitability next year and how that will effect on group profitability. So that is the moving part and we're going to get -- give you more info on later once we've concluded that work. I don't expect that to take a very long time because we need to get going in the early next year. So all in all, disappointing Q2, but we are very -- we think that the future looks better and we are in a good move to execute in -- towards better performance on the top line. Thank you.
Operator: Good morning, ladies and gentlemen. I would now like to turn the meeting over to Scott Parsons, Alamos' Senior Vice President of Corporate Development and Investor Relations. Please go ahead, sir. Scott R. Parsons: Thank you, operator, and thanks to everybody for attending Alamos' Third Quarter 2025 Conference Call. In addition to myself, we have on the line today John McCluskey, President and Chief Executive Officer; Greg Fisher, Chief Financial Officer; and Luc Guimond, Chief Operating Officer. We will be referring to a presentation during the conference call that is available through the webcast and on our website. I would also like to remind everyone that our presentation will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes included in the presentation, news release and MD&A as well as the risk factors set out in our annual information form. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Senior VP, Technical Services and a qualified person. Also please bear in mind that all of the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted. Now I'll turn it over to John to provide you with an overview. John McCluskey: Thank Scott. Starting with Slide 3. Before we go into the report for the quarter, I want to acknowledge this has been far from a typical production year for Alamos. We experienced production downtime and lower production in the first half of the year, which we are on pace to make up in the second half. Unfortunately, in recent weeks, downtime at the Magino mill and the seismic event at Island Gold will not give us the time to do so. As a result of these recent events, we've taken the prudent course and lowered guidance for the year by 6% from the midpoint of our original guidance. We have a reputation for taking a conservative approach to guiding the market, and we pride ourselves on providing consistently accurate guidance. Suffice to say, we will continue to make operational improvements to raise the accuracy of our forecasting, recognizing that occasionally, mining can be unpredictable. There remains to be said that while these recent events have a short-term impact, they in no way take away from the quality of our mines and what is without question, 1 of the strongest outlooks in the gold sector. We are already seeing significant improvements this month with better grades at Young-Davidson and throughput from the mines. This will ultimately support lower costs than an 18% production increase, leading to record production in the fourth quarter. Production in the third quarter totaled 141,700 ounces, a 3% increase from the second quarter, driven by stronger performances from Mulatos and Island Gold District. This was slightly below the low end of quarterly guidance, reflecting 1 week of an unplanned downtime within the Magino mill during the last week of September. Reflecting lower costs from the Mulatos district, total cash costs decreased 9% from the second quarter, and all-in sustaining costs decreased 7%, both consistent with guidance. With higher production, a record gold price and lower costs, we delivered record revenue, cash flow from operations and record free cash flow of $130 million in the quarter. We expect a significant improvement in both our fourth quarter production and costs to drive new financial records at critical prices. Turning to Slide 4. Through the majority of the third quarter, we were on track to achieve our full year production guidance. Given the unplanned downtime of the Magino mill in the last week of September and the seismic event at our Island Gold operation in October, we're decreasing our 2025 production guidance to between 560,000 and 580,000 ounces. This represents a 6% decrease from our original guidance released in January. Late in September, a capacitor failure within the Magino mill impacted the electrical drive for the SAG and ball mills. This led to 1 week of downtime and lower third quarter production than originally expected. The mill was restarted by the end of September and continues to demonstrate improvement in October. Due to the unplanned downtime, Island Gold's mill was restarted in late September to focus on processing higher grade underground ore. Given the record gold price environment, we will continue running both mills through the remainder of the year with the increased combined milling capacity supporting additional gold production, higher cash flow and increased profitability. In mid-October, the Island Gold mine experienced a seismic event, which is a normal part of operating an underground mine, no personnel or equipment were impacted and mining rates are expected to continue within budgeted levels. However, it does delayed access to higher grades within one of our mining fronts. As a result, mine grades are expected to be lower than budgeted for the fourth quarter. Even with the lower-than-planned underground grades in fourth quarter, we expect a substantial increase in production from Island Gold District driven by higher combined milling rates. We expect similar increases at Young-Davidson driven by higher mining rates and grades and at Mulatos with the recovery of higher grade ore stacked over the previous 2 quarters. All 3 operations are expected to contribute to an 18% increase in the fourth quarter production at lower cost, driving a further increase in free cash flow at current gold prices. Turning to Slide 5. Short-term challenges we experienced this year have no impact on our strong long-term outlook, which remains firmly intact. The Phase 3+ expansion at Island Gold will be a key driver of our growing production and declining costs over the next several years. The expansion is progressing well and with expected completion in the second half of 2026. The Lynn Lake project is another important part of our organic growth. Forest fires in Northern Manitoba limited our progress on this project this year, but we expect to ramp construction entities in the spring of next year, and initial production is now expected in 2029. This puts us on track to reach 900,000 ounces of lower-cost annual production by the end of this decade. The Island Gold District expansion study currently underway is expected to outline further upside with the potential to increase consolidated production to 1 million ounces per year within a similar time frame. We generated year-to-date free cash flow of nearly $200 million in 2025 and expect to generate growing free cash flow as we execute on this growth. Following the start-up of Lynn Lake, we expect to generate more than $1 billion of free cash flow annually at current gold prices. Now looking at Slide 6. In addition to delivering on our organic growth plans, we continue to surface value from our portfolio of assets. This included announcing the sale of our Turkish development project for a total cash consideration of $470 million. The transaction closed earlier this week and marks a positive outcome, realizing significant value for assets we had written off in 2021. We received $160 million on closing and the remainder, $310 million will be received over the next 2 years. With our strong free cash flow during the third quarter and initial proceeds from the sale of our Turkish assets, our current cash balance has increased to over $600 million. We'll be using the proceeds from the transaction and growing cash position reduced our small debt position, and we expect to be active on our share buyback. We were also recognized for the second consecutive year as a TSX30 winner by the Toronto Stock Exchange for our strong share price performance of 310% over the trailing 3 years. The award is a testament to our long-term track record of outperformance, something we expect to continue to build upon as we deliver on our upcoming catalysts and organic growth times. I'll now turn the call over to our CFO, Greg Fisher, to review our financial performance. Greg Fisher: Thank you, John. On to Slide 7, we sold approximately 136,500 ounces of gold in the third quarter at an average realized price of $3,359 per ounce for record revenues of $462 million. The average realized price was below the London PM Fix for the quarter, primarily due to the delivery of over 12,300 ounces into the gold prepaid facility at a fixed price of $2,524 per ounce. We will deliver the same number of ounces in the fourth quarter, after which the prepay obligation will be completed. As a reminder, the prepaid facility was executed in July 2024 with the proceeds utilized to retire 180,000 ounces of forward sale contracts inherited from Argonaut Gold across 2024 and 2025 with an average price of $1,840 per ounce. Based on an average gold price of almost $3,000 per ounce since July 2024, the company increased cash flow by approximately $40 million over that period. given the decision to buy out the 180,000 ounces of hedges 15 months ago through the execution of that prepaid facility. Quarter-over-quarter, total cash costs and all-in sustaining costs decreased 9% and 7%, respectively, and both were in line with quarterly guidance. We expect total cash costs and all-in sustaining costs to decrease a further 5% in the fourth quarter, driven by higher production across all operations. We remain on track to achieve full year cost guidance, which was revised earlier in the year. We are now reporting total cash costs and all-in sustaining costs, excluding the impact of mark-to-market adjustments for the revaluation of previously issued share-based instruments. This methodology provides a better representation of our total costs associated with producing an ounce of gold and eliminates volatility associated with mark-to-market adjustments. These mark-to-market adjustments to long-term instruments impact both total cash costs and all-in sustaining costs, given the company allocates these costs to mining and processing costs and share-based compensation expense on the income statement. Our reported net earnings were $276 million in the third quarter or $0.66 per share. This included $193 million reversal of a previously recognized impairment related to the Turkish projects as well as unrealized losses on hedge derivatives, foreign exchange impacts and other adjustments totaling $72 million. Excluding these items, adjusted net earnings were $156 million or $0.37 per share. Operating cash flow before changes in noncash working capital was a record $275 million in the third quarter or $0.65 per share. Capital spending totaled $135 million and included $35 million of sustaining capital, $83 million of growth capital and $17 million of capitalized exploration. Our consolidated 2025 capital guidance has been updated to between $539 million and $599 million, a 10% decrease from previous guidance, primarily reflecting lower spending at Lynn Lake with the ramp of construction activities shifting to 2026. Free cash flow for the quarter totaled a record $130 million, a 54% increase from the second quarter, driven by record contributions from all 3 operations. This includes $73 million from the Mulatos District, $72 million from the Island Gold District and $62 million from Young-Davidson. Our cash balance grew 34% from the end of the second quarter to $463 million. Subsequent to quarter end, we received initial cash payments totaling $163 million from the sale of both our noncore Turkish development projects and the Quartz Mountain project, bringing our total cash position to over $600 million currently. Combined with the undrawn balance on the credit facility, our total liquidity is over $1.1 billion. We expect growing production and declining costs to drive increasing free cash flow over the next several years while continuing to fund our organic growth plans. With a growing cash position, we expect to reduce our $250 million of debt currently outstanding while also evaluating opportunities to buy back shares and eliminate a portion of the remaining legacy Argonaut hedges. I will now turn the call over to our COO, Luc Guimond, to provide an overview of our operations. Luc? Luc Guimond: Thank you, Greg. Over to Slide 8. Third quarter production from the Island Gold District totaled 66,800 ounces, a 4% increase from the previous quarter. A more substantial increase is expected in the fourth quarter, driven by an increase in combined milling rates from the Island Gold and Magino mills. Magino's milling rates continued to increase through the third quarter until the last week of September, when a capacitor failure within the electrical house impacted the electrical drive for the SAG and ball mills. This resulted in 1 week of unplanned downtime. The capacitor and electrical drive module were replaced by the end of the quarter, following which milling rates have increased to average a new high in October. Quarter-over-quarter, underground mining rate increased 7% to 1,325 tonnes per day. Open pit mining rates increased 4% to 59,000 tonnes per day, including a 28% increase in ore mined to 17,600 tonnes per day. Grades mined from underground and the open pit were consistent with annual guidance. In mid-October, a seismic event occurred within the underground operation of Island Gold that has delayed access to higher-grade stopes to fill within 1 mining front. Seismic events are not uncommon for underground operations and mining rates are expected to remain within guided levels. However, rates mined in the fourth quarter are now expected to be lower than previously planned. We continue to expect a significant increase in production and decrease in costs in the fourth quarter. However, given the lower expected underground grades and unplanned downtime at the end of the third quarter, production guidance for the full year has been revised lower to between 260,000 from 270,000 ounces. Moving to Slide 9. A number of optimization initiatives have been implemented within the Magino mill over the past year that continue to drive improvements quarter-over-quarter. This included the installation of a redesigned liner and bolt configuration within the SAG mill in July, such that following a liner change and excluding the 1 week of unplanned downtime at the end of September, milling rates increased nearly 10%. With the mill up and running by the end of the third quarter, milling rates have continued to improve in October, approaching 10,000 tonnes per day, a new monthly high for the operation. To minimize potential unplanned downtime in the future and ensure increasing consistency of the operation further review of electrical components was completed to ensure all critical spares have been identified and are on site. Moving to Slide 10. Given the unplanned downtime at the Magino mill, the decision was made to restart the Island Gold mill in the last week of September to focus on processing higher-grade underground ore. Operating the 2 mills will provide additional operational flexibility with increased milling capacity and allow us to capitalize on the higher gold price environment with stronger gold production. The restart of the Island mill provides an additional 1,200 tonnes per day of milling capacity. This is expected to support approximately 3,000 ounces of additional gold production on a quarterly basis, driving increased cash flow and profitability. At current gold prices, this represents nearly $50 million of additional annualized revenue with significantly higher gold prices, more than offsetting the higher processing costs associated with operating the Island Gold mill. We will operate the 2 mills through the end of this year, and we'll evaluate its ongoing operation into 2026 as part of the expansion study. Over to Slide 11. The Phase 3+ expansion continues to progress with the shaft sink now at the 1,350-meter level, 98% of the ultimate depth of 1,379 meters. Work also commenced on the 1,350 level shaft station. The Magino mill expansion to 12,400 tonnes per day is progressing well and is on track for completion in the second half of 2026. Base plant construction is advancing and expected to be completed in the first quarter of 2026. Mechanical and electrical outfitting for the water handling facility and shaft in-house is ongoing and concrete foundation work for the new administrative complex is underway. Over to Slide 12. As of quarter end, we have spent and committed 84% of the total Phase 3+ capital of $835 million. The photos on the right highlight the progress on the shaft sink and 1,350 level shaft station. We expect to be skipping ore from this station in the latter part of next year with the expansion on track for completion in the second half of 2026. Over to Slide 13. We continue to advance the expansion study for the Island Gold District, which includes the evaluation of a larger mill expansion of up to 20,000 tonnes per day. The study is expected to include a larger mineral reserve through ongoing mineral resource conversion with encouraging results from our delineation drilling program supporting a strong rate of conversion and reserve growth. Work currently underway as part of the Phase 3+ expansion to 12,400 tonnes per day is being completed with a larger expansion in mind. This includes sizing the footprint of the new mill building to accommodate additional equipment for a further expansion of up to 20,000 tonnes per day. To ensure all the assays from the recently completed delineation drilling program are incorporated into the expansion study, we have shifted the completion of the expansion study from late this year to the first quarter of 2026. With the larger mineral reserve and higher combined mining and milling rates, we expect the expansion study will demonstrate significant upside to the base case plan released earlier this year. Over to Slide 14. Young-Davidson produced 37,900 ounces in the quarter, similar to the second quarter, reflecting the planned shutdown of the Northgate shaft in the first week of July to change the head ropes. Reflecting the downtime, mining rates averaged 7,300 tonnes per day in the quarter. Given the lower mining rates earlier in the quarter, excess mill capacity and higher grade prices -- sorry, higher gold prices, the low-grade stockpile ore was processed. Mill throughput rates averaged 7,800 tonnes per day in the quarter, a 12% increase over the previous quarter, reflecting the contribution of lower-grade stockpile ore, process grades of 1.79 grams per tonne was 7% lower than mine grades. Reflecting lower mining and milling rates for the first 9 months of the year, production guidance has been revised lower to between 160,000 and 165,000 ounces. Mining rates have returned to targeted levels, averaging 8,000 tonnes per day in September and October and are expected to remain at similar levels for the remainder of the year. Grades mined also increased towards the upper end of guidance in October at 2.25 gram per tonne and are expected to remain at similar levels for the rest of the quarter. Higher mining rates and grades, Young-Davidson is expected to have a much stronger fourth quarter with higher production and lower costs. Mine site all-in sustaining costs decreased in the third quarter, with a further decrease expected in the fourth quarter, the operation remains on track to achieve the full year cost guidance that was revised earlier in the year. Young-Davidson continues delivering strong mine site free cash flow with $62 million generated in the quarter and $160 million in the first 9 months of the year, already surpassing the previous year record of $141 million in 2024. With strong ongoing free cash flow, the operation is on track to deliver well over $200 million for the full year at current gold prices. Over to Slide 15. I Production from the Mulatos District totaled 37,000 ounces in the third quarter, a 9% increase quarter-over-quarter with the operation benefiting from strong ongoing stacking rates and grades and the recovery of previously stacked ounces. This trend is expected to continue with a further increase in production in the fourth quarter as the operation benefits from the recovery of higher grade ore stock in the previous 2 quarters. With higher production expected in the fourth quarter, we are increasing full year product guidance to between 140,000 and 145,000 ounces. Reflecting the stronger production, cost declined in the third quarter and with a further decrease expected in the fourth quarter, the operation is well positioned to meet its full year guidance. The PDA project continued advancing during the quarter. the focus on procurement of long lead items and detailed engineering. Expenditures are expected to increase in the fourth quarter and more significantly into 2026 with the ramp-up of construction activities. Project remains on budget and on track to achieve initial production mid-2027. The Mulatos District generated mine site free cash flow of $73 million in the quarter and $129 million in the first 9 months of the year. It remains well positioned to continue generating strong free cash flow while fully funding construction of PDA. With that, I will turn the call to John. John McCluskey: Thank you, Luc. I want to reiterate that this has not been a typical year for Alamos and not reflective of our long-term record of meeting or exceeding expectations. Our near-term and long-term outlook remains bright, and with one of the strongest growth [indiscernible] in the sector, we remain confident in our ability to deliver on our guidance. We expect to demonstrate this strong outlook, starting with significant increase in production and decrease in costs in the fourth quarter. I'll now turn the call back to the operator who will open up for your questions. Scott R. Parsons: We'd like to open up the call for Q&A now, please. Operator: [Operator Instructions] Our first question is from Cosmos Chiu from CIBC. Cosmos Chiu: Great. Thanks, John and team. Maybe my first question is on Q4. John, as you mentioned, we're expecting increases to production in Q4. You've given us a range, 157,000 to 177,000 ounces, fairly sizable range, especially for quarterly production. Could you maybe just touch on some of the factors that could lead you to the higher end of that guidance versus, say, the lower end? Luc Guimond: Cosmos, it's Luc here. I mean just across the operations, as we've touched on, I mean, we're consistently delivering on the higher mining rates with Young-Davidson at 8,000 tonnes per day. The big driver really for the higher gold production also coming out of Young-Davidson in the fourth quarter is related to grade. Based on the mine plan that we have put forward for the fourth quarter, we're expecting to be at the high end of our guided grades of 205,000 to 225,000. So we're at the higher end of that 225,000 area. With regards to Mulatos, it's really a function of -- we've stacked a lot of gold in the first couple of quarters, Q1, Q2 and certainly Q3, and we'll start to see more of that gold production coming off the leach pad in the fourth quarter, which will drive higher production for Mulatos. Island Gold, we continue with similar guided levels of mining rates and certainly, great performance as well through the fourth quarter as expected from Island. So when you combine those 3 catalysts from those operations, that's what's really driving the higher gold production in the fourth quarter. Cosmos Chiu: Okay. And Luc, since I have you here, maybe -- could you maybe elaborate a little bit on that seismic activity that happened at Island Gold in mid-October. It sounds like it's not a permanent issue. it doesn't seem like it has longer-term impacts but But could you give us a bit more granularity in terms of sort of what happened? Was it in a higher risk area? Luc Guimond: Yes. I can touch on that a bit. So let me just to emphasize, seismicity is just -- is a natural aspect of occurrence that occurs with underground mining operations. As we extract the ore body through development and production blasting, we're changing the stress regime within the mining environment. In this case, the 1 mining front that was affected with this seismic event, really, the reason that we've been -- that we've had to stop production from that 1 area is due to the fact that from a legislative perspective, we need to have 2 means of egress of the Mine, one being the ramp system and in Island's case, the second 1 is an escapeway between the levels. And with this seismic event that happened within this 1 area, the escape was compromised, meaning it needed some rehabilitation in order to bring it back online. So we're just in the process of doing that. It's not a long-term delay. We would expect to be back in that mining front area early December to continue production in there. So it's not a long-term residual effect as a result of the seismicity. But it is normal course of business. We always have seismic events. Some can be lower levels and some can be higher levels. In this case, it just resulted in some damage to the escapeway, which we're addressing. Cosmos Chiu: And Luc, these escapeways, more permanent infrastructures. I would have thought that they are built to a standard that can certainly withstand some of these stress regimes. But again, there's other factors as well. I guess my question is, was that unexpected? Has this happened before? And what do you now have in place in terms of -- again, I understand that these seismic activity happens, but what do you have in place now to hopefully mitigate the risk on a go-forward basis? Luc Guimond: Yes. Look, I mean, I kind of referenced with regards to our ground control management plan and our seismic management plan that we have in place for all of our underground operations. In this case, the ground support continues to develop and change as we get into different mining areas and maybe different elevations of stress that are being seen within the mining operations. So we adjust accordingly with that. We do have a lot of dynamics support in place to mitigate these sort of environments that happen when we do have an elevated stress environment. And in this case, for the most part, I'd say the ground support actually worked as per expected. But just keep in mind, rehabilitation is just kind of also a natural function of an underground operation residually, the scaling activities that occur and some additional ground support requirements as a result of some of these openings being open for a longer term. And in this case, the escapeway being one of those. So it's not uncommon to actually have to go back in and do some rehabilitation. In this case, again, because of the fact that the escapeway has been compromised, we just had to go in and repair that escapeway to be able to resume mining activities within that mining front. Cosmos Chiu: Great. Maybe 1 last question. As you mentioned, the expansion study for Island Gold is now expected in Q1 2026 versus Q4 2025, in part to incorporate potentially including the Island Gold mill in terms of running it into 2026. But I guess, in the maybe bigger picture. Gold prices are certainly much higher now compared to when you put out the Island Gold, the first phase case study. Is there a bit of a shift in terms of thinking here, in terms of lower grade material can actually now be profitable. So maybe running Island Gold for longer, could increase the overall throughput. And in the end, some of that lower grade ore could still generate cash and overall cash flow is higher. Is there that kind of thinking going on right now, John, in terms of how you're looking at the Island Gold and maybe even broader picture as well as the other operations? And then how would that be incorporated into the year-end sort of reserve resource statement that's coming out? Like what kind of gold price would you look at? John McCluskey: That's got to go down as one of the longest questions in history, Cosmos. Look, just looking at Island Gold. We envisioned at the time we acquired Argonaut with the idea of integrating both mines, we envision that, that would ultimately evolve into something like a 20,000 tonne per day operation. And we're doing the work right now in order to bring that in front of the market, probably January, early February of next year. That's the time we're aiming for. That's just the optimal rate that mine ought to run at. It means -- it gets to part of your question. For example, right now, we're milling about 1 gram material coming out of the open pit, and we're stockpiling lower-grade material. It's an absolute fact that with the lower cost and the higher throughput rate, I'm not putting anything into stockpile, just putting it all through the mill, that's a much more profitable way to go about it. We'll be able to demonstrate that with the numbers that we'll provide early next year. But the -- you're not double handling or on a combined grade. In other words, mixing in that lower grade material, it's basically running around 0.5 gram, mixing that in with the 1 gram material. We're still running a pretty decent head grade. But you're just doing it all at a greater scale, you're benefiting from the economies of scale and absolutely doing it at a lower cost because there's no double handling anymore. So from the point of view of this bigger mine that we envision at Island Gold, it also envisions roughly 3,000 tons of underground throughput from the Island mine itself. That takes production up over 0.5 million ounces a year, brings costs down closer to that $1,100, $1,200 ASICs, somewhere in that range. The study will define it more precisely. But you can see that -- we're sitting on roughly somewhere between 11 million and 12 million ounces of reserves and resources. That's a really sensible approach to take for development of that mine. We can get there with relatively as I put it, bite-size capital cost. It's not a real stretch for us to get it there. And it's sort of the next step in our evolution at that project site. We're not thinking about that at either Young-Davidson or Mulatos. Young-Davidson, it's not really that sensitive to the gold price, to be honest. It's just the way that ore body is. We're mining it in a very profitable way. Obviously, we're generating phenomenal cash flows. And now we've got that mill running very, very well, consistently hitting 8,000 tonnes a day. You're going to see Young-Davidson have a great year next year. Long term at Mulatos, the game changer is going to be going underground and mining a high-grade underground sulfide material and processing it through the mill that we're going to build. That really is the future for Mulatos. I mean it's not like we've run out of targets for finding additional oxide material. It's a big district, and we're still poking around doing greenfields exploration in various areas and actually getting some interesting results. But the main thrust of what we're doing at Mulatos is to transition from heap leach -- low-grade heap leach production to higher grade underground production. So that would -- in the grand scheme of things, that's where we're going. It's not like we're taking this 1 concept driven by a higher gold price and trying to apply it across every operation. Luc Guimond: The only other thing I'd add there, Cosmos, is just with regards to the 20,000 tonne per day planned for the Island Gold District, but that hasn't unchanged. I mean we're still looking to put that obviously out. We've changed the guidance on that to put it out early in Q1. But it will outline a plan of running the about 17,000 tonnes per day coming from open pit operations, 3,000 tonnes per day coming from underground operations. So that still is the plan. As far as the Island mill, that we're still continuing to run at this point, which we started in September. We'll evaluate that as part of our business plans for 2026. But given this high gold price environment, giving us more gold production, certainly and more cash flow, it may make sense to continue to run that in 2026, but we're still evaluating that. Cosmos Chiu: Great. Sorry for my extra long question. I just haven't thank Scott Parsons were putting out earnings during Game 5 of the World Series. It certainly has not impacted my performance. John McCluskey: Sure. Operator: A following question is from Ovais Habib from Scotiabank. Ovais Habib: John and Alamos team, a couple of questions from me as well. Cosmos did ask a couple of questions that I had. But just a follow-up to Cosmos' question on the seismic activity at Island Gold. Again, really glad to hear no personnel or equipment were impacted by this event. So that was really good to hear. But in terms of -- and maybe this question is for Luc, in terms of active mining fronts. How many active mining fronts do you have access to at Island Gold as well as how does this impact mine sequencing going into 2026? Luc Guimond: I mean we typically carry about 3 to 4 mining fronts with the mining rates that we're currently running at right now, Ovais. But I mean, obviously, with the ramp-up as we continue to head towards 2,400 tonnes a day through the course of next year, we will be -- our development will put us into a place where we'll be developing more mining fronts. As I mentioned in this case, we've just basically shifted our focus from this 1 mining front that's been put on hold until we get that escapeway in place and look to generate production from some of the other areas of the mine in the interim. But as I mentioned, it's a short-term issue with regards to the seismic event that happened there, and we're looking to resume the mining in that specific mining front early in December. Ovais Habib: And just also in terms of when you do get access to additional money fronts, I mean in terms of -- isn't that a mitigating factor on itself going into 2026 then? Luc Guimond: Sorry, can you repeat that question, Ovais, I didn't quite get it. Ovais Habib: I'm basically trying to figure out is when you do start increasing the number of mining fronts as we go into 2026 and into the expansion, Isn't that a mitigating factor on itself? Luc Guimond: With regards to the production profile, it certainly gives us more flexibility. I think is what you're getting at. Yes, it will give us more flexibility as far as maintaining the mining, the rates that we're looking at. But Again, in this case, we haven't changed our guided levels for Q4 for mining rates. It's just that we've had to refocus some of the activity as far as our production for the fourth quarter because of the fact that we've got about a 6-week interruption from this 1 mining front until we get the escapeway we reestablished. Ovais Habib: Perfect. And just moving on to Magino. With the unplanned downtime at Magino mill, that was, I believe, late September. Were you also able to take advantage of this downtime to do any sort of additional maintenance on the mill as well? Luc Guimond: We did. But through the quarter, I think we spoke about this with the last quarter release that there was a liner bolt configuration redesign that we actioned in the quarter. So we did that in July. We also had some scheduled maintenance in August for the ball mill. But certainly, with that week interruption with regards to the capacitor failing, which led to the drive module also failing that we had to get replaced. We did take the opportunity to do some other plant maintenance within the Magino mill facility as well. Ovais Habib: Okay. And just then moving towards exploration. I don't know if the other Scott is online. So can you give us a brief kind of overview of where you are currently focused on the exploration side and especially if you continue to have success on Island Gold West as well as in close proximity to the Magino? Greg Fisher: Yes, I can provide an overview year-to-date. If you look at Island Gold, I mean, we really did shift our strategy from the start of the year from exploration into delineation and that delineation program now has been completed successfully in the third quarter, both in Magino and in Island Gold, and that really was focusing on converting that inferred mineral base that remains our June update for the expansion study, converting that into reserves. So that process now of the reserve calculation underway with the delineation results coming in or have been received. At Island as well, I mean we'll continue now shifting in the fourth quarter to exploration. So we're drilling Island down plunge. We're drilling the upper portions of Island to the West between Island and Magino. I would say that main Island Gold structure. So that's ongoing. We've also started a Phase 2 drill program at Cline and Edwards, which is building off the success of the first part of the year. That's the [indiscernible] producing mines that are 7 kilometers from the Magino mill. And we're excited about the results that we put out in the first half of the year, and that exploration is ongoing. At Young-Davidson, the hanging wall exploration drift at 9620 has been developed, and we're drilling from that now, and that's focused on defining that high-grade zone in the conglomerate. So we drilled 15 holes there. Our assays are just starting to come in. Drilling is ongoing, and we'll continue stepping out from the zone that we've defined looking to expand on that mineralization. And we're also starting a regional program in the fourth quarter at Young-Davidson focused on our Otisse target, which is only 3 kilometers from the Young-Davidson mill, and we see that as a potential for future open pit ore that could come into the mill at some point in the future. At Mulatos, as John touched on, really focused this year on sulfide exploration across the district and having success in several targets. Building on from the first half of the year, drilling a PDA, continue to expand mineralization at Cerro Pelon, testing a number of other Sulfide targets in that district that the team has worked up, and we're excited by some of the results that we're seeing at Mulatos. And I think that really points to the transition, as John said, from shifting from looking for oxide, which we're still doing, it's still target but really focusing in on building out the sulfide inventory, the high-grade underground components of what could be the future of that district. I guess the last point I'll shift to is Qiqavik, which was the greenfield project in Nunavik in Northern Quebec that we acquired with Orford Mining. That exploration on Qiqavik was executed in the third quarter. We planned on doing 7,000 meters. We did 9,000 meters and really, the objective there was trying to find the source of these high-grade boulders that have been defined across that belt. So we drilled in 5 target areas. Assays are just coming in. But certainly happy that we got -- we accomplished more drilling than we anticipated based on the execution of the program and what we're seeing in some of that core. Operator: Our following question is from Fahad Tariq from Jefferies. Fahad Tariq: Just on the Magino mill, can you maybe provide some more color on how you're thinking about the targeted throughput maybe by the end of this year. I believe it was previously 11,200 tonnes per day and then 12,400 tonnes per day next year. How should we be thinking about that given some of the ramp-up issues so far? Luc Guimond: Yes. It's Luc here. So similar line of sight. As I mentioned through the third quarter there, certainly, we had some changes to make to the SAG mill with regards to the liner bolt configuration, which we did. Scheduled ball mill liner change and then with obviously the failure with the capacitor in September that put us back a bit. But really starting in mid-July up until that capacitor issue that we had at the end of September, the mill was on a path, that was consistently delivering above 10,000 tonnes per day to that period. And since we've prepared the capacitor figure that we had at the end of September and resume milling activities through the month of October. We've been consistently averaging just above 10,000 tonnes per day as well. So our goal hitting that 11,200 by the end of the year still is intact. Just some more fine-tuning that we need to do between now and the end of the quarter to be able to consistently deliver on that. On the 12,400 scenario longer term, we're obviously working on some of that expansion already. We need more additional equipment at the back end of the mill with regards to the CIP, the leach circuit. The refinery in elution in order to be able to handle the higher gold content coming into the plant. So we're working through that. The other aspect of it is also upfront. The crushing capacity is there, and it's just -- we're still evaluating on the grinding capacity requires potentially a third, third grinding circuit in that circuit to be able to support the [indiscernible]. But we're still evaluating that as part of the overall mill expansion, to be honest with you, and that's part of what will come out early in the new year. Fahad Tariq: Okay. That's helpful. And then maybe just as a follow-up. So if the Magino mill is able to get to [ 11,200 ] tonnes per day by the end of this year, things are improving. Would that be reason enough not to keep running the island Gold mill? Scott R. Parsons: I think at these gold prices, Fahad, it's -- I mean, we're evaluating this. But I would think we want as much throughput as we can through and running those 2 mills at these gold prices probably makes sense. Operator: A following question is from Sathish Kasinathan from Bank of America. Sathish Kasinathan: Most of my questions have been asked and answered. So maybe a question for Greg. So with over $600 million in cash balance, you indicated that you will be more active in buybacks. How should we think about the cadence of buybacks on a quarterly or an annual basis? Do you have a target run rate in mind? And also, given your growth projects, how should we think about like a minimum cash balance? Greg Fisher: Yes. Thank you. I mean from a share buyback perspective, we've never put targets in place. I mean, what we always want to do is be opportunistic with respect to that. And we also look at our other needs of capital, whether it's growing the business, whether it's paying down debt. So we're looking at all of those. So I don't want to point to a specific target in terms of the buybacks. But based on the pullback in the share price -- in the gold price that we've seen over the last week to 2 weeks plus the reaction today, we expect to be active on the share buyback. And then in terms of a minimum cash balance. Again, we have lots of liquidity. We have $1.1 billion of liquidity currently. In terms of the current cash balance of $600 million, we want to be active on the share buyback. We want to pay down some debt. We want to evaluate whether we're going to buy back some of the legacy Argonaut hedges. All of those will be sources of capital. But we are ultimately growing the business from 600,000 ounces to upwards of 1 million ounces by the end of the year. So we do need to make sure that we have sufficient capital. But we do have free cash flow as we speak right now. So from a minimum cash balance, I'd say, we probably want to always have at least $300 million -- $250 million to $300 million on the balance sheet. Sathish Kasinathan: Okay. Maybe a question on Young-Davidson. So it seems the mill has been operating at 8,000 tonnes per day for a couple of months now. Do you think the mill's performance has reached a level that it can continue to consistently operate at this level? And given the current gold prices, is there potential for maybe push -- pushing the mill to a higher run rate? Luc Guimond: The mill has been performing quite well at Young-Davidson. I mean, obviously, our -- the overall ore production that's come out through Q3 and some of the previous quarters has been more related to giving all of the [ fee ] that we can from the mining operations. And certainly, in Q3, it was related to the [indiscernible] change that we had to make with regards to the head ropes. But the mill has been performing quite well. It's no issues there. On the aspect of actually looking to see if it can do more, that's something that we've been looking at and seeing with other opportunities to be able to increase the overall throughput through that mill complex. It would not necessarily come from more underground ore. The mine is designed and the infrastructure is designed to support 8,000 tonnes per day. But there's other opportunities with some of the smaller satellite open pit deposits within the region of Young-Davidson that we could look to bring into a mine plan and provide additional mill feed to the YD mill complex with some minor capital requirements to be able to do that. The potential would be to probably get it up to probably 9,000 tonnes per day consistently. Operator: [Operator Instructions] The following question is from Don DeMarco from National Bank. Don DeMarco: John and team. Maybe just a quick question on the capacitor incident. What were the root cause of that? And is there a risk of a repeat? Luc Guimond: The capacitor failure, we're still actually having that analyzed. So I don't have a firm answer on that, but it's not something that you would typically see, to be honest with you. So there could have been a defect within that part itself. I mean we've been running our Island Gold mill complex and our Young-Davidson mill complex for years and have never experienced that sort of failure with a capacitor, but it wasn't just a capacitor. The capacitor failing was part of it, but that led to us some residual damage within the drive unit of the power modules that operates the SAG mill and the ball mill. So we had some other component failure there like resistors and a bus bar and some other electrical components that resulted in some additional Repairs. But this is not a normal course of business. We've never seen this with any of our other operations. So I'd say at this point, it's a one-off, but we still need to do further diagnosis to understand exactly what happened with that capacitor. Don DeMarco: Okay. look forward to that. And it sounds like the timing of mining... Luc Guimond: Just the other thing I would add to that is that from a inventory aspects and just making sure that we have all of the parts. We have done another through -- further thorough review of our electrical components for running that plant to sure that we have all of the critical spares that we need just to prevent any sort of significant downtime moving forward. Don DeMarco: Okay. Then just to my next question, with regard to the Magino mill and combining the 2 ore streams back into that mill, it sounds like it's potentially 2026, maybe later. Seems like there's good reason at this gold price to keep the 1,200 tonne per day Island mill running. But since you've done it before, you've done it once already in July, would the second time round be somewhat routine just with a quicker ramp up? Luc Guimond: Yes, it's pretty seamless, to be honest with you, to put the both ore streams into the one plant. I think I'd mentioned before, we did a couple of batch tests just to confirm the metallurgy back in Q2, Q3, and that all was validated. And frankly, running that combined ore stream into the Magino mill from really mid-July until we did have that capacitor failure at the end of September. Metallurgically cleared everything was performing quite well, both from a gravity recovery point of view as well as overall recovery. The expectations were as per what we were expecting as far as what we modeled to what we were seeing in the plant. So it's a pretty easy simple transition to just provide that ore feed back into the stream and combine the the 2 streams into 1 feeding into the 1 mill complex. Don DeMarco: Okay. And then just as a final question. Turning to Lynn Lake development. We see that the time line has been impacted by the wildfires. How about CapEx? Can you give any more granularity on the implications to the CapEx estimates to develop that project? Luc Guimond: Well, yes, I mean, CapEx-wise, I guess you'll have the inflation component there over the next -- because of the fact that it's been delayed a bit. I think what we've -- we basically lost all of the construction season this summer which is the most productive period that you can have certainly in Northern Manitoba or Northern Ontario, depending on where we're building these operations. So as a result of that, our original time line was mid-2028 now we're moving that out to early 2029. So you're going to have a bit of an inflation factor that gets factored into that. Greg Fisher: Yes. I mean, just adding to that. We put a study a couple of years ago. So you have 3 years of inflation since we put out that study with this additional year that Luc just commented on moving it out to 2029. And inflation on capital projects is run around 5% to 6%. So we can expect a 15% increase in our capital that we put out in the feasibility study for Lynn Lake. Operator: There are no further questions registered at this time. This concludes this morning's call. If you have any other questions that have not been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932, extension 5439.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden reports third quarter 2025 results call. Just a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the call over to Aaron Reddington, Vice President of Investor Relations. Please go ahead, sir. Aaron Reddington: Good morning, everyone, and thank you for joining us for Belden's third quarter 2025 earnings conference call. With me today are Belden's President and CEO, Ashish Chand; and Senior Vice President and CFO, Jeremy Parks. Ashish will provide a strategic overview of our business, and then Jeremy will provide a detailed review of our financial and operating results followed by Q&A. We issued our earnings release earlier this morning and have prepared a slide presentation that we will reference on this call. The press release, presentation and transcript of these prepared remarks are currently available online at investor.belden.com. Turning to Slide 2. I'd like to remind everyone that today's call will include forward-looking statements, which are subject to risks and uncertainties as detailed in our press release and most recent Form 10-K. We will also reference certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in the appendix to our presentation and on our website. I will now turn the call over to our President and CEO, Ashish Chand. Ashish Chand: Thank you, Aaron, and good morning, everyone. We appreciate you joining us. Let's begin with Slide 4, which highlights our key accomplishments and messages for the third quarter. My comments today will reference adjusted results. First, I want to recognize the dedicated efforts of our team. Their focus enabled us to deliver another solid quarter, building on our steady momentum. We executed well, delivering record results that surpassed our expectations. For the third quarter, both revenue and earnings per share came in above the high end of our guidance, reaching new quarterly records for Belden. This achievement underscores the ongoing progress of our solutions transformation, which continues to expand across the organization. Revenue reached $698 million, up 7% year-over-year, and adjusted earnings per share grew to $1.97. We delivered continued organic growth with overall organic revenue up 4% for the quarter. Positive contributions came from key markets, including Germany and China, confirming the favorable turn we experienced earlier this year in these major automation markets. This trend was further validated in our Automation Solutions segment, which demonstrated particular strength, achieving 10% organic revenue growth driven by broad momentum, including double-digit gains in discrete manufacturing. Order activity remained healthy for the quarter with orders up 7% year-over-year. We ended the quarter with a book-to-bill ratio of 1.0 compared to 0.99 in the prior year period, positioning us well as we look ahead. Despite headwinds from tariff and copper pass-throughs, our margins for the period performed well. We achieved healthy adjusted gross margins of 38.2%, up 40 basis points year-over-year, reflecting continued strength in our solutions offering even with the impact of these pass-throughs. Our business continues to generate healthy cash flow with trailing 12-month free cash flow at $214 million. We maintained our disciplined capital deployment, repurchasing approximately 400,000 shares in the third quarter for $50 million, bringing our year-to-date total to 1.4 million shares for $150 million. Overall, this was a quarter of solid execution, and I'm pleased with our record performance. The progress we are making with our solutions transformation is clear in our results, and we are well positioned to build on this momentum going forward. Now please turn to Slide 5. I'd like to highlight another key win this quarter that demonstrates the power of our solution strategy and our ability to drive digital transformation in critical infrastructure. We recently secured a $14 million multiyear solutions award with a leading utility provider to modernize their communications infrastructure, a key element of their operational technology platform. This project involves replacing aging legacy systems with a future-ready network to support mission-critical applications. The challenge for this utility was to transition from outdated systems to a modern packet-based network that could meet stringent demands for reliability, security and low latency, essential for grid resiliency and efficiency. Leveraging a deep vertical market knowledge and solutions approach, our team collaborated with the customer, culminating in a successful on-site Proof of Concept. This POC effectively showcased Belden's advanced technologies and service capabilities, validating our proposed solution. Our XTran platform was selected as the core of this modernization effort. Purpose-built for utility networks, XTran delivers connectivity to large complex networks that include new and legacy systems and protocols. This hybrid capability is crucial for easing migration and future-proofing critical network infrastructure. This win underscores Belden's deep expertise in utility networks and our proven capability to deliver secure, resilient OD communication systems. Our end-to-end delivery model, including products, services and support ensures seamless implementation and solution delivery. This project is a clear testament to how our solutions-driven approach combined with our specialized portfolio and deep market understanding allows us to capture opportunities in vital sectors. We are establishing a repeatable model for similar large-scale modernization projects within the utility market, further solidifying our position as a trusted partner in critical infrastructure. We are confident in the momentum this creates and the long-term value we provide for our customers. Now please turn to Slide 6. I'd like to shift our focus to an area where Belden is making strategic advancements, positioning us well for the next wave of industrial innovation, Physical AI. Earlier this week, we announced a collaboration with Accenture and NVIDIA. This partnership combines our industrial networking expertise with their advanced AI capabilities to deliver integrated Physical AI solutions. We've already secured commercial traction with an initial pilot program and are scheduled for commercial deployment later this year. This pilot, a virtual safety fence solution designed to improve worker safety in manufacturing environments was successfully tested and is now being commercially deployed at a major U.S. manufacturer. This test and commercial deployment demonstrate the real-world impact and market readiness of our Physical AI solutions as modern manufacturing increasingly integrates autonomous systems alongside human operators. Let's take a moment and consider the broader opportunity in this emerging space. First, Physical AI represents an evolution in automation where AI directly interacts with the physical world. It enables intelligent automation and real-time decision-making, offering massive opportunities to improve safety, efficiency and further digitize industrial environments. Belden is uniquely positioned to play a foundational role in the emerging world of Physical AI. Advanced applications demand an industrial-grade network capable of real-time synchronized precision. Our time-sensitive networking capabilities are crucial enabling microsecond precision for data streams essential in environments where safety and quality are critical. This strategic push underscores Belden's successful evolution into a solutions company within the industrial market. It serves as clear proof that we are moving beyond simply providing connectivity products to enabling advanced solutions that drive significant value for our customers. Given our strengths in intelligent edge deployment in converging IT/OT environments, we believe that Belden is well positioned to be a key enabler of Physical AI in manufacturing and material handling, driving safer, smarter and more productive environments globally. Physical AI represents an emerging growth opportunity for our business as we continue to advance ideas and technologies. I will now request Jeremy to provide additional insight into our third quarter financial performance. Jeremy Parks: Thank you, Ashish. My comments today will cover our third quarter results, a review of our segments, the balance sheet and cash flow and finally, our outlook. As a reminder, I will be referencing adjusted results today. Now please turn to Slide 7. As Ashish noted, our solid execution this quarter drove consistent top line growth, which translated directly to margin expansion and improved profitability. Revenue for the quarter was $698 million, up 7% year-over-year and ahead of expectations set forth in prior guidance. Revenue was up 4% organically on a year-over-year basis. Our Automation Solutions segment saw organic revenue growth of 10%, while Smart Infrastructure Solutions organic revenue was down 1%. Orders for the quarter were up 7% year-over-year. As a result, gross profit margins were 38.2%, increasing 40 basis points compared to the prior year. EBITDA was $118 million with EBITDA margins at 17%, down 20 basis points year-over-year. We successfully maintained our overall profitability for the quarter through proactive management of tariff and copper price changes, leveraging strategic sourcing and effective pricing actions. Our margin percentages for the period reflect the necessary pass-through of these costs. Going forward, you can expect us to deliver incremental margins in line with our long-term targets. Net income was $79 million, up from $71 million in the prior year quarter, and EPS was $1.97, up 16% and ahead of expectations set forth in prior guidance. Now please turn to Slide 8 for a review of our business segment results for the quarter. Our Automation Solutions segment delivered another solid quarter, demonstrating continued recovery and steady execution. Revenue grew 14% year-over-year with EBITDA up 10%. Margins remained healthy at 20.8%, impacted by the pass-through of tariffs and copper. Order trends also remained robust with orders up 14% year-over-year. This strong order activity drove the segment's 10% organic growth with positive contributions across all regions. As Ashish highlighted, we saw continued strength in Germany and China with ample year-over-year growth, albeit from a lower base. This broad-based momentum extended into our core verticals, which saw double-digit expansion in discrete manufacturing and mass transit. Revenue in Smart Infrastructure Solutions was down 1% year-over-year with margins for the segment steady at 12.6%. Within our markets, smart buildings was up 3% year-over-year, driven by strength in our key growth verticals as we continue to advance our solutions offerings. Broadband Solutions was down 4% year-over-year, but up 7% sequentially. While technology upgrades in the broadband space have seen some temporary moderation in the back half of 2025, we are encouraged by the adoption of new fiber products and also to see the early BEAD awards as many of the top recipients are major customers for Belden. Next, please turn to Slide 9 for our balance sheet and cash flow highlights. Our balance sheet remains a source of significant strength and flexibility, enabling our disciplined capital allocation strategy. Our cash and cash equivalents balance at the end of the third quarter was $314 million compared to $370 million in the fourth quarter of 2024. Our cash position reflects typical seasonality and the deployment of $150 million towards share repurchases so far this year. Our financial leverage was a reasonable 2.1x net debt to EBITDA, consistent with our expectations. We intend to maintain net leverage of approximately 1.5x over the long term. However, this may fluctuate as we pursue strategic opportunities consistent with our capital allocation priorities. For the trailing 12 months, our free cash flow was $214 million. Year-to-date, we repurchased 1.4 million shares, further reducing our share count, which is now more than 12% lower than it was at the end of 2021. We currently have $190 million remaining on our repurchase authorization. Our capital allocation priorities remain unchanged, investing internally in opportunities to advance organic growth, pursuing disciplined M&A and returning capital to shareholders through buybacks. While the current financial market environment is dynamic, we continue to evaluate M&A opportunities with rigor and remain committed to deploying capital in ways that create long-term value. As a reminder, our next debt maturity is not until 2027, and all of our debt is fixed with rates averaging 3.5%. Please turn to Slide 10 for our fourth quarter outlook. Our team has executed well in the current environment, as shown in our record third quarter results. We are encouraged by the strong and consistent trends in our Automation Solutions segment, which provides a solid foundation for our outlook. In the fourth quarter, we anticipate that sequential growth from Automation Solutions will be mostly offset by a more muted quarter in Smart Infrastructure Solutions, resulting in overall performance that is roughly flat sequentially. Assuming the continuation of current market conditions, revenues for the fourth quarter are expected to be between $690 million and $700 million, representing a 4% to 5% increase over the prior year quarter. Adjusted EPS is expected to be between $1.90 and $2, representing a 1% decrease to 4% increase over the prior year quarter. For the fourth quarter, we are projecting a tax rate of 14% as we continue to execute our planning strategies. That concludes my prepared remarks. I would now like to turn the call back to Ashish. Ashish Chand: Thank you, Jeremy. Now please turn to Slide 11. To summarize, our third quarter performance reflects the strength and resilience of our business and the continued progress of our solutions transformation. We delivered solid results in a dynamic environment with consistent order activity, record earnings and healthy cash generation. It is important to reflect on the journey that has brought us to this point. Over the past few years, our industry has faced significant headwinds, including periods of destocking, ongoing tariff challenges and a muted manufacturing environment. Despite these external pressures, our team's dedication and strategic focus have allowed Belden to not only navigate these periods, but to emerge stronger. This resiliency is clearly demonstrated in our current performance. Not only did we achieve record quarterly revenue and EPS, but our trailing 12-month performance also reached new highs. We are proud to report trailing 12-month revenue reaching nearly $2.7 billion and record trailing 12-month adjusted EPS of $7.38. This exceptional performance, especially in a year that presented its share of challenges, truly underscores our team's focused execution and the inherent resilience of our business model. Looking at our long-term trajectory, these results are no accident. From 2019 through the trailing 12 months ending in the third quarter, we delivered a revenue CAGR of 5% and an adjusted EPS CAGR of 12%. This powerful and consistent value creation over multiple years clearly demonstrates the impact of our strategic initiatives and how our solutions transformation has repositioned Belden in the minds of our customers. Further, our transformation is validated in the marketplace as evidenced by the multiyear utility modernization project we discussed earlier, where we are replacing aging infrastructure with a future-ready network. It's also clearly evident in our strategic advancements in Physical AI, where we are enabling safer, smarter factories and other work environments with real-time precision. These are tangible examples of us moving beyond just products to enabling advanced solutions that drive significant value for customers. We remain mindful of the ongoing operating environment. However, the fundamental trends driving our business, reindustrialization, automation, digitization and the convergence of IT and OT are intact and building momentum. We believe Belden is well positioned to benefit as these secular trends play out. Our solutions transformation is delivering tangible results, expanding our addressable market and positioning us for consistent growth and margin expansion. We remain committed to disciplined execution and thoughtful capital allocation, ensuring we create lasting value for our shareholders. That concludes our prepared remarks. Operator, please open the call for questions. Operator: [Operator Instructions] We'll move to our first question from Steven Fox with Fox Advisors. Steven Fox: I guess for my first question, obviously, the utility market is a massive opportunity in general. And so, I'm wondering how we think about how you attack it? Like what's the go-to-market strategy? And then how quickly you can sort of penetrate different parts of it? And then I had a follow-up. Ashish Chand: Sure, Steve. So, across the market in power transmission and distribution because that's the specific area that we want to focus on within the broader utility market. We have a fairly mixed landscape. So, we have networks that are still using SONET SDH systems for their telecoms. And as a result, they can only transmit a certain kind of data, which is very limited. They can't -- for example, the networks don't lend themselves to smart grid type bidirectional transmission. So the first fundamental opportunity really is to upgrade all of these to a packet-based what we call MPLS-TP, packet-based IP-based network. That is where the core XTran offering that we have, which is engineered over many decades in Belgium. This is an acquisition we made about 5 years ago. But the way we differentiate ourselves in that market, apart from just offering that core MPLS-TP switching portfolio is really through the whole services and support process, right? So the win we talked about today really hinged on us being able to go in with our consultants at the outset and do a very deep study across their network, come up with very tangible savings for them or productivity opportunities for them in terms of things that would impact their P&L. For example, reducing the time it takes to find a fault, which therefore reduces any SLA-based fines they have to pay or it could be simply making the equipment procurement process more efficient through more predictability. So, there are multiple use cases. But basically, with that approach, we were able to give them not just the packet switching backbone, but a fully integrated design. And we -- these professional services include by the way, multiyear software training and management. They include helping them with future expansion as their networks grow. So that's how we are attacking that market. And in terms of scale, Steve, I think at this point, especially if I focus on the U.S. and Western Europe, where there is a huge demand, especially given the surge in data centers. I think we are currently penetrating maybe 7% to 10% of the market. So, the scale opportunity is pretty big. And I think that's reflected in our growth rates in PT&D, which have tended to be double digit. Steven Fox: Great. That's helpful. And I'm pretty sure from looking at your picture on Slide 5, the New Jersey grid doesn't look like that, but that's my problem. Anyway, the second question, Jeremy, I was just curious, there's a lot of puts and takes in terms of like outside forces on the margins and then the mix. Can you just be a little more specific thinking about year-over-year and quarter-over-quarter, how much -- I just want to make sure I understand the pass-through impact on margins versus the more solutions? And then any other things we should be thinking about relative to like copper and sourcing and things like that? Jeremy Parks: Yes. Sure, Steve. So, if you look at gross margins on a year-over-year basis, the change in copper prices impacted margins by about 50 basis points, and it's literally just the pass-through of higher copper. So maintaining EPS and EBITDA covering that fully, but a little bit of margin degradation. So that's 50 basis points year-over-year. There is an impact from tariffs. It would be maybe slightly less than the copper impact. And then maybe a little bit of mix on a year-over-year basis, but nothing substantial. If you bridge sequentially from Q2 to Q3, the copper impact is not as extensive. I would say probably the pass-through impact from both copper and tariffs together are maybe 30 or 40 basis points. And then there's also a little bit of unfavorable mix sequentially, just driven by strength in our industrial construction cable that seems to be coming back, partially because of some of these energy applications. Operator: We'll move to our next question from William Stein with Truist Securities. William Stein: Ashish, you talked about Physical AI today. That was pretty exciting for us. I'm hoping if you can extend that conversation to what was posted by, I think, one of your customers or perhaps customers, customers, NVIDIA posted something about your involvement in a gray space application and data center. So I'm hoping you can update on us -- update on that topic, maybe combined with the Physical AI to sort of size your position in those opportunities today and maybe give us a view as to what we should expect in the future? Ashish Chand: Yes. Well, I think this is a very exciting topic. So I'm going to start -- bear with me, I'm going to start with a little bit of basic information and then build it up. So, as we think about AI for the last 3 to 4 years, the first 2/3 of that journey has been more around Chatbots really. And then over the last, let's say, 1 year or so, we are now seeing the whole phenomenon around agents. But a lot of those agents still exist in the digital world, right, inside a data center. Now those agents are emerging into the physical world, and they need a fair amount of orchestration. And those agents could take the form of robots, humanoids, different kinds of equipment, AGVs, et cetera, et cetera. So really, the idea that in workplaces, whether they are manufacturing workplaces or other workplaces, you might have employees that are human and employees that are actually agents working together. You might even have agents and agents working together, right? So that's the kind of future workplace scenario. So, the announcement we -- you, I think, are referring to was actually made as a combination of NVIDIA, Accenture and Belden. And there was a different announcement, I think, about the gray space, which is also relevant, but let me focus on the first one. So, we announced the successful completion of a pilot and we are on the cusp of commercializing this with a very large automotive customer in the U.S., but this was essentially a virtual safety fence application. And it leveraged a few things from each of us. So from Belden at the core, it was the time-sensitive networking portfolio. And I just want to differentiate time-sensitive networking, which is very prevalent in the high-end mission-critical spaces like industrial manufacturing or process is different to the conventional best effort networking, which is more relevant in enterprise spaces, right? So, we used our time-sensitive networks. We use Belden Horizon as the orchestration platform. Accenture built an application on top of Horizon that took that data into the NVIDIA Omniverse and used their libraries to build this entire autonomous system for virtual safety. And I think there were some interesting highlights. So first of all, we did not have any data going to the cloud for safety. Everything was on the site on the edge so that it was very low latency. Now the data stream itself was raw video from a camera versus thousands of sensors on the floor, right? So, it was a camera feed. In fact, it was 3 cameras. So, there was kind of triangulation and spatial depth created in that process. And just from the feed of 3 cameras, this autonomous system was able to analyze and review that data and really as a human being, act as a traffic cop for safety. And I think the third thing this did was it basically removed any ambiguity that network is actually the fourth critical technology to make this digital transformation successful. The other 3 being AI, data engineering and cloud. And although in this case, we didn't send any data to the cloud, obviously, over time, models have to be trained on the cloud. And so data will go to the cloud, but it will be selective data. Now in terms of scaling, there are different studies available. There's one that says -- that's pretty prominent that says that in about -- by 2030, so let's say, in 5 years, the number of physical devices that need network connections will reach close to 1 trillion IoT connections. So 4 to 5x of what we have today. And all of these will need some kind of edge compute capability because all the data will not go to the cloud. And I can easily see another aspect here that, that data will be multimodal. It will be vision, sound, vibration, temperature, pressure, et cetera. Remember, now we have agents in the physical world who are dealing with these kinds of data streams, right, different kind of variety and volume of data versus simple digital data in the data center. And the applications that we are currently exploring or actually piloting include quality inspection, passenger safety, asset location and these go across a few different vertical markets. So sorry, we'll give you a long-ish answer because I want to start with the fundamentals, but the core finding for us here is that without time-sensitive networking and without an orchestration platform like Belden Horizon, it is very difficult to make that edge and IT/OT convergence convert into Physical AI. And I think that's what we've successfully proven here. We are being obviously modest in terms of where all this can go, but really, there is no limit. William Stein: And anything on the white space project that was also highlighted that was one that's more, I think, not necessarily cloud, but certainly data center related. Ashish Chand: Yes. So, we have been building out a data center practice that combines the technologies from both what you think of as previously industrial or automation portfolio and the smart infrastructure portfolio. And we've been fairly successful. I think we spoke about this on our last call, we had a large win with an AI hyperscaler in the cooling space. And then since then, we've had more success deploying these converged IT/OT solutions into a combination of white space and gray space. And our data center growth this quarter is up double digits because of that initiative. Again, our focus, frankly, is less on building the data center capacity itself, but it's more on the long-term sustainable use of applications that come out of the data center. But obviously, right now, there is a big phenomenon around building capacity. And I think there's a big concern around the heating electrification aspects, which allow us to step in with these technologies will that we previously used on the automation and industrial side. So that's the win we -- one of our customers highlighted. And again, we appreciate working with Accenture and their customers because we are finding a lot of convergence here given their -- so the commonality of our installed base and their customer base is turning out to be very scalable for us. Operator: We'll take our next question from Mark Delaney with Goldman Sachs. Mark Delaney: First on broadband, I was hoping you could share more with respect to your outlook over the near and medium term for the broadband segment and how helpful the BEAD awards that the company cited in its prepared remarks may be for growth? Ashish Chand: So I'll make a couple -- thanks, Mark. I'll make a couple of comments and then maybe Jeremy can add to that. So, in general, if you think about the upgrades that the MSOs have been working on for the last few years, different customers have different technology stacks that they use to deliver those DOCSIS upgrades to consumers. And based on those different technology stacks and there's different electronic components, interoperability, et cetera, we sometimes see a little more -- there are some ups and downs in that process. And we've seen a little bit of that moderation in the back half of '25. I think it's basically timing. But on the other hand, there's a lot more clarity in the market since the BEAD announcements came. In fact, our accounts -- the accounts we serve in the MSO market are big beneficiaries of BEAD. We've also seen a lot more adoption of new fiber technology from Belden across these accounts. So on a net basis, I think the -- we are very positive about that space other than some technical interoperability based slowdown that we have seen in the short term. Jeremy Parks: Yes. Just in terms of the Q4 guide, Mark, broadband, you should expect broadband to be down year-over-year in the fourth quarter, roughly the same as what we did in the third quarter, so maybe down 1% or 2% sequentially, down roughly 4% on a year-over-year basis. Looking forward into 2026, we're not guiding at this point. So we'll probably have more of a perspective for you in 90 days. But I think at this point in time, we're optimistic, like Ashish said, about growth in 2026. Some of these upgrades still need to happen. MSOs still need to spend some money, I think, on their networks, and it feels like we're getting a little bit of certainty over the BEAD funding, which should be a helper. So, I think we're optimistic going into 2026. We just have to work through the fourth quarter here. Mark Delaney: Very helpful. And kind of dovetails my other question was just some early thoughts on 2026, just qualitatively, and Jeremy, you just spoke a bit on broadband. But as you think about the business more generally, you spoke about bookings and orders being up 7%. And just based on some of the conversations you're having with customers, some of the drivers like what you just spoke about tied to automating factories and supporting some of the data center build-out. I mean, qualitatively, do you think that revenue next year has the potential to grow? Jeremy Parks: Yes, absolutely. I think if you look at the automation business, the industrial markets, they continue to get a little bit better every quarter. PMIs are close to 50, almost everywhere, even Germany, which I think is positive. So for sure, we bottomed out in a lot of places, and we're seeing more and more strength on the industrial side of the business. And Ashish talked in great detail about some of the opportunities with respect to technology and Physical AI and some of those aspects. So I think we feel very positive about the automation business and industrial markets. With respect to Smart Buildings, we've got opportunities in data center, both in the white space and the gray space, and we're doing more and more with respect to these converged solutions that bring to bear both smart buildings and automation solutions products. And so, I think we feel pretty good about those markets as well. So, like I said, we'll have more to say in 90 days about our outlook for 2026 or at least first quarter 2026. But as we sit here today, I think we're optimistic. Operator: [Operator Instructions] We'll take our next question from David Williams with Benchmark. David Williams: Congratulations on the really solid quarter here. I guess maybe my first question, just want to talk a little bit about the reshoring trends that we've talked about in the past. And this quarter, it feels a lot different than we've had in the past in terms of just your cautious tone and maybe even your discussions around hesitancy of some of the customers. But just kind of curious if you could maybe share what you're seeing on the reshoring side and if your thoughts are still maybe the same as they've been in the past in terms of maybe we'll see some of that going into next year. Jeremy Parks: Yes, Dave. I think one of the reasons we feel good about the automation business, we've talked about that multiple times on this call is that phenomenon of reshoring. So, we are having conversations right now with multiple customers who are looking to bring manufacturing back into the U.S. This includes pharmaceutical customers, consumer packaged goods, logistics, automotive process, semi. I mean, the list is fairly long. Without taking names, I can just tell you that this is pretty much a list of the top players in the industry. And we have seen already results from that in Q3. That's, I think, part of the reason why automotive has grown in 10% this quarter. Part of it is really the U.S. reshoring trend. Now what we do see here is that it's not necessarily a hasty build. People are planning very carefully a 3-to 5-year journey as they think about their facilities. And therefore, they're also asking us to plan with them on a 3-to 5-year basis, the whole network and data infrastructure, which I think plays well to Belden's strengths because it's not really driven by price, but it's driven more by total cost of ownership. So yes, very bullish on the reshoring trend, and we are seeing tangible results and numbers as we speak. David Williams: Great. And then just maybe from the smart infrastructure side, as you kind of look out and see everything that's developed there, and you've been making some investments for some time. Just kind of think about how should we think 2026 should trend on the smart infrastructure side? And is there anything, I guess, that is more positive, more negative as you kind of enter the fourth quarter here? Jeremy Parks: Yes. So first of all, we've seen within the buildings portion of that business, which we now -- as you know, Dave, we combine that go-to-market with our automation business, and we are going with this IT/OT converged offering. So we've seen -- we saw strength there, especially in our growth verticals, which were almost at 10%, right, which is kind of high for that business. And we see a lot of activity in -- obviously, in health care and data centers, we've talked about that. But we also see growth in areas like stadiums and hospitality and other such more KPI-focused networks versus the old plain vanilla commercial real estate. So our dependence on that portion has gone down and our focus on these other markets is really paying off right now. So I think as I look forward, obviously, we're not guiding '26 right now, but similar to what we said on the broadband space, we are optimistic about those verticals. We feel we have a differentiated offering because we are able to solve an integrated problem. So typically, when we go in for example, to a stadium, we talk about the whole thing, including the HVAC control, the packet substation, the network, the audio/video aspect, safety, drones, et cetera. So that really differentiates us from our competitors. So yes, I would kind of classify that as similar to automation in those markets, the same kind of positive feeling. Operator: We'll move to our next question from Chris Dankert with Loop Capital Markets. Christopher Dankert: I guess I've noticed the R&D investment has stepped up a bit. I assume is that to support this kind of edge compute and time-sensitive feedback network opportunity that's out there? Should we expect that R&D to kind of continue being up at an accelerated pace? Does it moderate into '23? Just any color you can provide around that investment? Ashish Chand: Absolutely. So indeed, Chris, we've obviously been upgrading some of these critical elements of our portfolio, right, the time-sensitive networks. There's been work done on the XTran side with MPLS-TP. There are more edge devices being released. But a big part of the R&D investment has really been on the development of the Belden Horizon orchestration platform. So, the one thing that we were missing, if you go back 4 to 5 years, we had all these devices that were operating as kind of stand-alone islands of excellence, but we were not orchestrating the data for our customers in one place. And the effort required to build that orchestration platform, which is called Belden Horizon and to keep upgrading it, especially now as we build applications on it that can take raw data and analyze it without going to the cloud, that's required a fair amount of investment. Now I do expect, based on where we have reached, I do expect that rate of investment to slow down because I think we've reached some kind of a critical point here now in terms of capability. But I would think of the bulk of the increase in 2025 in R&D more around that software capability and of course, a little bit around the upgrade of hardware. Christopher Dankert: Got it. That's really great color. And then you just touched a moment ago on the adjusted go-to-market. I guess any additional color you can give us there in terms of have you changed the sales structure to support that adjusted go-to-market? Are you thinking about kind of products versus solutions as almost 2 separate approaches to sales at this point? Maybe just any kind of color you can give us on how you're thinking about that changing paradigm. Ashish Chand: Yes. I think there are 3 fundamental things here, Chris. The first is we've built a fairly comprehensive consulting organization, right? So if you go back again, 3, 4 years, we didn't have consultants working with customers directly. They were more internal consultants. But now we have, first of all, digital automation consultants who go in and talk about the entire workflow that the customer has and design a data flow to support that workflow that helps the customer get to their KPIs. And this is a good -- the example we shared today is a good illustration of that. Then we have in step 2 solutions consultants who go in and then help the customer create a solution to support that data flow that they've approved. After which we really have commercial sales get in and do the more conventional selling, negotiating, et cetera. And during this process, often, we have people asking for validation in our CIC, right? So, we can prove that data flow will get them to the KPIs they need. In some cases, it's savings. In some cases, it's more capacity, more productivity, more safety, whatever that P&L item is. So first of all, that sales process is far more expanded with this consulting front end. We didn't have that previously. Second, we are going to market now for solutions with a whole ITOT converged approach, and we are saying you have multiple use cases and applications that can exist on the same backbone -- so why don't we design a comprehensive backbone that is future-proof and allows you to keep adding more use cases as you go. And by the way, some of those use cases will at some point become autonomous use cases. Not everybody is ready for that yet, but I think they all want to be -- they want to see that come up in the future. And then, yes, the third thing is we do have a solutions-oriented sales organization, which is where most of our investments are going in, but we are still maintaining -- we have a healthy aftermarket and product revenue also. So we are still maintaining a product-oriented sales team. Now these teams report into the same senior management, so they are well orchestrated. But yes, so there are these 3 changes, the more consulting-driven front end, the converged IT/OD or industrial plus enterprise approach and yes, a specialist solutions sales force. And it's worked out pretty well for us, and it's differentiated us dramatically in the market. Operator: There are no further questions at this time. I'd like to turn the conference back over to Aaron for closing remarks. Aaron Reddington: Thank you, Operator, and thank you, everyone, for joining today's call. If you have any questions, please contact the IR team here at Belden. Our e-mail address is investor.relations@belden.com. Operator: Thank you, ladies and gentlemen. This concludes our call for today. You may now disconnect from the call and thank you for participating.
Terje Pilskog: Good morning, everyone, and welcome to our third quarter presentation. Today, we are presenting another quarter with strong financials and also good progress on our strategic priorities. We will also provide an update on our strategy and targets towards 2030. And then reflecting on our last 12 months, we have made significant progress on our strategic priorities, both in terms of growing our renewables portfolio and also in terms of strengthening our balance sheet. And we expect this momentum to continue and at an even higher pace than what we have seen over the last 12 months. So let me start with the highlights of the quarter, and then Hans Jakob will take you through the financials. And then I will come up -- come back with an update on our strategy and our targets towards 2030. So then in terms of the highlights of the quarter, our total proportionate revenues increased by 22% to nearly NOK 3 billion in the quarter. And our EBITDA was NOK 1.1 billion, representing increased activity levels and especially in our D&C segment, where we have had very good progress. Our projects under construction are progressing well with revenues of NOK 1.8 billion in the D&C segment and a very strong margin of 11.4%. And I'm also very pleased with the development of the backlog that it is now at an all-time high of 3.4 gigawatts after we have included a new project in Colombia, 130 megawatts after we have signed a PPA there and also included 80 megawatts of battery projects in the Philippines after these projects are progressing and getting closer to construction. And here, I would also like to highlight the progress that we are making on Release, our platform for leasing out solar and BESS equipment in Africa. Here, we have started installing a new solar and battery system and lease contract with Eneo in Cameroon, and we have also signed 2 new lease contracts in Liberia and Sierra Leone. Then we also continue to strengthen our balance sheet, and we repaid NOK 953 million of corporate debt during the quarter. With this, our net interest-bearing debt on corporate level is now down to NOK 4.3 billion. And finally, based on the strong progress on pipeline growth and corporate debt reductions, we are increasing our ambitions for our self-funded growth plan going forward, and we will talk more about this towards the end of the presentation. So now let me talk about power production. We generated 1,202 gigawatt hours in the quarter, and this is an increase of 7% adjusting for the divestments during the year. This is driven by good hydrology in the Philippines and also a new project coming into operation during the year in Botswana. Revenues came in at NOK 1.2 billion, and this also represents a small increase from the same quarter last year, adjusted for divested assets, and this is also driven by the increase in generation. So now let's talk a bit also in terms of more details on the Philippines. The Philippines delivered a strong quarter, both in terms of power generation, in terms of ancillary services and also in terms of financial contribution. Power production increased by 16% from last year to 354 gigawatt hours, and this is again based on strong hydrology. Contract volumes were also significantly up to about 150 gigawatt hours. This is based on selling replacement power to other energy companies on shorter-term contracts. And these contracts are limited to the second half where we have very good hydrology and we are long on energy generation. Prices in the Philippines have been down in the quarter, but based on our flexible generation portfolio and trading activities, we've been able to secure above-average market prices for the spot sales that we're doing in the Philippines. Revenues reached NOK 385 million in the quarter, and this is compared to NOK 432 million in the same quarter last year when we had a catch-up effect of NOK 60 million. And underlying EBITDA increased to NOK 10 million by NOK 10 million to NOK 332 million, also reflecting good cost control in our venture in the Philippines. Then in terms of construction. We currently have close to 2 gigawatts of solar and battery storage projects under construction in 6 different countries. And since last reporting, we have had very good progress across the portfolio, and we have recorded D&C revenues in the range of NOK 1.8 billion and also with a very strong gross margin of 11.4%. The EBITDA for the D&C segment came in at NOK 135 million. In South Africa, Grootfontein is undergoing commissioning and testing as we speak and will come into operation shortly. In Tunisia, construction is progressing well and also for these projects, we expect them to reach operation by the end of this year. We expect COD in the first half of 2026 for our projects in Brazil, in Botswana and also in the Philippines. While when it comes to Mogobe, our first pure battery project in South Africa, we expect this to come into operation in the second half of next year. And then finally, the Obelisk project in Egypt. This one is being built in 2 phases with these 2 different phases coming into operation in the first half and the second half of next year. I'm incredibly pleased with the progress that we are currently doing on construction across all these different projects in all of these different countries and very, very proud of the teams and seeing what the teams are able to do related to the construction progress. At the end of the quarter, we still have NOK 4.1 billion of remaining contract value, and we continue to expect to be able to realize 10% to 12% gross margin related to these projects. So let me then zoom out a bit and comment on our total growth portfolio. And growth continues to be supported by our integrated business model, limiting our net equity investments into our projects. This is enabling us to scale through a self-funded approach without overstretching our balance sheet. On the left-hand side here, you will see our project portfolio in construction with estimated EPC revenues in total for the whole portfolio of about NOK 9 billion and with NOK 4.1 billion remaining contract value. Below, you will see our backlog, which includes awarded projects with secured offtake agreements. This now represents close to NOK 17 billion in additional EPC revenues for our D&C segment. We target construction start for 2 of these projects in 2026, while the rest of the project is expected to come into construction through 2026. Some projects have moved out in time, as you will probably recognize, but none of the projects have fallen out of the backlog, and we still aim to bring all of these projects into construction. As we have emphasized before, revenue recognition resembles an S-curve for our construction period for the projects. And we aim to have positive working capital through how we are structuring our projects through the construction time lines for the projects. As you understand, we have a transformative period ahead of us. We have a strong portfolio of secured projects, which will enable us to more than double our operating capacity over the next 2 to 3 years to more than 9 gigawatts. Now I will hand over to Hans Jakob to take you through the financials. Hans Jakob Hegge: Thank you, Terje, and I'm pleased to say that we delivered strong results across the group. We have higher production and high D&C activity, and we had a very good quarter in the Philippines. I'll walk you through the group financials and the performance of our operating segments and also cover the improvements in our capital structure. Starting with group level performance. We delivered strong results in the quarter. Consolidated revenues was NOK 1.1 billion compared to NOK 3 billion last year, where we had sales gains from divestments in South Africa. The EBITDA reached NOK 785 million. The results are impacted by an impairment in Mendubim of NOK 130 million due to new assessment of future curtailment levels and power prices. To the right, you see the proportionate financials. Revenues increased by 22% to NOK 2.95 billion, while EBITDA ended at NOK 1.1 billion. Adjusted for sales gains, we are in line with the same quarter last year. Now let me take you through the segments. Starting with Power Production, which delivered another solid quarter. Revenues reached close to NOK 1.2 billion compared to NOK 1.8 billion in the same quarter last year, where we also had sales gains and a catch-up payment in the Philippines. EBITDA was NOK 955 million. On a 12-month rolling basis, you can see a positive trend, which shows both underlying growth and strong contribution from divestments. The slight downtick in the quarter are partly explained by the strong Q3 last year due to the divestments in South Africa. The last 12 months, we have delivered more than NOK 5.7 billion in revenues and NOK 4.8 billion in EBITDA. Overall, we are very pleased with the generation from our operating assets. In our D&C segment, activity levels continue to increase. Proportionate revenues were NOK 1.76 billion and the EBITDA of NOK 135 million, more than doubling quarter-on-quarter. The trend of the last 12 months confirm the long-term strength and scalability of our D&C business and gives a clear picture of the strong momentum that we are building. D&C revenues in the last 12 months have reached NOK 4.5 billion with a steady increase over the last 5 quarters, and we aim to continue. Rolling EBITDA ended at NOK 261 million with strong contributions from high-margin projects and disciplined cost control. The increasing trend reflects higher activity levels across several geographies with Obelisk in Egypt in the forefront. With a strong backlog moving into construction, we expect D&C to remain a key engine going forward with continued profitable growth. At the end of the quarter, we had available liquidity of NOK 4.7 billion. Let me explain some of the main movements. We received NOK 424 million in distributions from power plants, including proceeds from refinancing in the Philippines, had positive working capital movements of NOK 1.4 billion, mainly related to milestone payments for Obelisk, invested NOK 414 million net in growth projects, paid NOK 139 million in interest and NOK 943 million in debt repayments. The RCF is currently undrawn. We continue to strengthen our capital structure. The net corporate debt was reduced to NOK 4.3 billion from NOK 5.6 billion in the second quarter. The reduction was mainly driven by the change in cash and close to NOK 1 billion of corporate debt repayments. The reduction was mainly driven by the change in cash, as I said, and the NOK 1 billion of corporate debt reductions. So this is a very positive trend, where we on project level, have increased the net debt from -- by NOK 2.3 billion to NOK 15.9 billion as we continue to grow. The debt for projects under construction had a net increase of NOK 2.5 billion, mainly related to Obelisk. And finally, I'll take you through the outlook before I give the floor back to Terje. So the outlook for 2025 with a full year perspective, where we estimate the power production between 4,100 and 4,200 gigawatt hours. Our estimated full year EBITDA midpoint is increased by NOK 50 million to NOK 435 billion. This is driven by an estimated strong performance in the Philippines in the fourth quarter. For the fourth quarter, we expect the total power production between 1,000 and 1,100 gigawatt hours and the EBITDA in the Philippines of NOK 280 million to NOK 380 million based on normal hydrology, strong contributions from ancillary services. And in the D&C segment, we have remaining contract value of NOK 4.1 billion and a gross margin estimate of 10% to 12% on average across the portfolio for projects under construction. For corporate, we expect a full year EBITDA of NOK 115 million to NOK 125 million negative, which is in line with the previous estimate. These estimates reflect a strong base for operating assets, high construction activity and a healthy cost control. And by that, Terje, please take us through the strategy update. Terje Pilskog: Thank you, Hans Jakob. So it has become a bit of a tradition during our third quarter presentation to also give a strategy update. And this time, we will increase also the time perspective until 2030. And to be clear, we are increasing our growth rate. We continue to be self-funded, and we will continue to take down the corporate debt levels. These are the main pillars of also how we are going to drive our strategy going forward. And we are on a steady course to provide profitable growth from an all-time high construction program, while our financial flexibility will continue to improve going forward. So let me start by taking stock of our progress on the strategy communicated last year. We have made good progress on all key priorities, and I'm pleased to say that we are ahead of plan. Regarding growth, we have already secured projects in construction and backlog that will take us beyond the target of NOK 750 million in equity investments annually. On divestments, we have secured NOK 2.6 billion in proceeds, and we have allocated more than 75% of these proceeds to bring down our debt on corporate level. And our corporate interest-bearing debt is now at NOK 6.7 billion, which is a significant reduction of the NOK 9.2 billion that we had last year. So all in all, we are on track to reach our 2027 targets communicated last year and well positioned to capture future attractive growth going forward. And then in terms of the industry, we continue to see a very positive development when it comes to the renewables industry going forward, and this is really supporting our growth ambitions. Solar panel, wind turbines and battery prices continue to come down, and they are now again at all-time low levels. And especially the reduction on battery prices is really a game changer for the industry and a game changer in the markets where we are operating. This increases the usability and significantly also increases the market size and opportunity space for us as a renewable energy players. And this is a development I think it would have been difficult to foresee only a few years ago in terms of how rapidly this is developing. And we can now deliver dispatchable renewables at competitive prices in most of the markets where we are operating. And further, with batteries, in addition, we can also provide ancillary services, frequency regulation and also load shifting to the grid. So it's also increasing the services that we can provide in these markets. So this makes renewables the most attractive source of energy in the markets where we operate and not only as intermittent power, but also as dispatchable and baseload power. So this development will continue to fuel the growth of renewables going forward in our markets. Bloomberg estimates that investments in renewables will exceed $100 trillion annually in relevant markets in the years to come. And that will exceed -- and this means that it will exceed $500 trillion in the period from now until 2030 in our emerging markets. And this assumes a deployment of 2,500 gigawatts of renewables in this period. So this is massive in terms of deployment. And Scatec, we have a strong track record, and we are well positioned to compete in this space. And the key for us going forward is really to identify the good opportunities and be able to identify opportunities where we are able to capture attractive value. So in summary, our strategic progress over the last years, coupled with the development of the renewables industry represents a strong basis for increasing our growth ambitions going forward. And then based on this, we, as I have already said, increased our growth targets towards 2030, while we will continue to deleverage. We target to invest on average at least NOK 1 billion annually in equity in new projects in this period, and we will continue to focus on selected markets where we see renewables fundamentally making sense and where we see that we have a strong position and we will also continue to build on our multi-technology skills where we're able to deploy hybrid projects. I will say that we have good visibility on short-term growth, and we have the ability and we will continue to stay disciplined relative to our investment hurdles. We will also continue to deleverage our corporate balance sheet, and we aim to bring down our corporate debt to about NOK 4 billion by 2030. And this will obviously increase our interest expenses and the burden on our balance sheet -- from our balance sheet significantly in this period. Finally, we stay committed to optimize our portfolio to become even more capital efficient, and we target to realize another NOK 3.4 billion in divestment proceeds in the period, and we will continue to optimize investment structures so that we can also capture value in an efficient way and use our capital in a very efficient way. So then in terms of growth, our targets are backed by, as I've said, very good short-term visibility and a strong pipeline. We currently have 2 gigawatts under construction. And in addition, we have a backlog of 3.4 gigawatts after we have added a project in Colombia and also battery projects in the Philippines, as I mentioned previously. So these backlog projects are expected to start construction over the next year. And altogether with these projects, we will be able to more than double our capacity in operation to more than 9 gigawatts. Further, we have a large pipeline of 7.6 gigawatts of maturing quality projects. And in addition, we also have a significant portfolio of early stage and greenfield opportunities that we are developing over time and that will also move into the pipeline as these ones are maturing. And we have not talked so much recently about the opportunities that we are working on because our main focus has been on conversion, conversion from pipeline to backlog and from backlog to construction. But we have more than 10 gigawatts of also opportunity projects that have not yet been included in pipeline that we continue to work on. And to be clear, we will continue to focus on the markets where renewables fundamentally are competitive and where we see good opportunities to build scale over time. And these markets are characterized by attractive solar and wind resources, obviously, a growing economy with sizable and growing energy demand and clear energy targets with stable and supportive regulatory environments for renewables. And our main regions are highlighted here on the map, and these are markets with some of the world's best solar irradiation and wind resources. And we will continue focusing the main portion of our growth capital on existing markets, existing countries where we do already have strong positions. However, we also see value in having a diversified portfolio across different markets with strong potential for renewables, and we will invest in solid projects where the fundamentals are strong and where we see outlook for long-term growth and building scale over time. So let me then address some of these markets and also shed some light on the opportunities to grow beyond what we have currently communicated as pipeline. So Egypt provides favorable conditions with its strategy to promote industrial decarbonization, energy security and to achieve 42% renewable energy in the generation mix by 2030. And here, we continue to have discussions on new projects to support the government in reaching these targets. South Africa is offering attractive public tender rounds, which we have been successful in for many years. And in addition, we do see a growing market for private offtake, and we are positioning ourselves here in the C&I segment through our Lyra platform, where we are developing this together with our partners, Stanlib and Standard Bank. And in South Africa, we are developing a broad greenfield portfolio of new projects that are not yet included in our pipeline to make sure that we are well positioned for opportunities also in the future. The Philippines has a target of 35% electricity generation from renewable energy by 2030 and 50% by 2040. And today, they are only at 22%. Together with our partner, Aboitiz, we develop a multi-technology pipeline to also address this market opportunity going forward. Then let me also mention Tunisia and Romania. These are examples of relatively new growth countries for us with a very large potential. Here, we are more early stage. We are building our development teams, and we are developing pipelines for capturing opportunities here on a long-term perspective. And all of these are examples. Our pipeline includes only projects that are at least 50% likely to reach financial close and move into construction. But obviously, and to illustrate that here, we do have a significant volume of opportunities, which is coming behind this pipeline and will move into pipeline as they mature. Then let me talk a bit about also our multi-technology approach. As I've said, we see that battery technology and the development within batteries is really a game changer for the industry, and Scatec is at the forefront of the development here. So let me share some examples. First, in South Africa, we have Kenhardt, soon to be 2 years in operation, and this project is already showcasing how renewables can provide dispatchable and baseload power in a competitive manner with other technologies. Second, also in South Africa, we have 2 battery storage projects that is enabling Eskom to unlock grid capacity at constrained points in the grid. Both were awarded in tenders and the first one, Mogobe is already in construction. Third, we have the Philippines, where we have battery storage projects providing ancillary services to enhance grid stability. Here, we have 24 megawatts already in operation. We have 56 megawatts in construction, and we have 80 megawatts that we have now moved into backlog, and we are also developing more projects together with Aboitiz supporting this going forward. And finally, we also have Egypt where we are constructing the hybrid Obelisk and Obelisk is building on the learnings and experience that we gained in Kenhardt. And here, we are adding battery capacity to enable delivering more energy during the peak hours in the evening so that it more fits with the needs of the grid in Egypt. So these are examples, and it's just the beginning as we expect this development and our track record to unlock significant new opportunities going forward. So let me then also, before I move on, emphasize that we will continue even in light of all of this growth to stay disciplined with regards to our investment hurdles as we pursue these new projects going forward. We have strict investment criteria, and we will only move forward with projects that are meeting these hurdles and our guardrails. Our equity return hurdle continues to be 1.2x cost of equity for our projects. And our cost of equity is adjusted for the market and the country that we are in and is specific for the projects that we realize, and we are adjusting it amongst other for factors like country risk, FX risk and also offtaker risk. And as an indication, the average equity IRR from our power production and services for projects under construction and backlog is in the range of 15%. And obviously, we also do construction for most of our projects. And then we also get a significant uplift from both development fees and construction margins, increasing average equity IRRs to around 30% on a net equity basis. And on top of this, when projects are in operation, we will continue to seek ways of optimizing the value through, for instance, refinancing and also farming down equity in some of these projects. So then -- we also then move to the second strategic priority. We will continue to deleverage and we target to bring the corporate debt level down to NOK 4 billion by 2030. And we have already made good progress since last year, and we are reducing the debt. We have reduced the debt by about NOK 2.5 billion to NOK 6.7 billion during the year. And already now, we start seeing the results of our efforts to strengthen the capital structure. The run rate of corporate interest expenses has significantly reduced, and this will reduce the burden on our corporate -- of the corporate debt on our free cash flows going forward, and this is important for us. And further, the credit margin on our bonds, they have also been vastly reduced over the last 2 years. We issued our last bond at a credit margin of 350 basis points, and this one is now trading at an implied margin close to 250 basis points. And this is -- and here, we have seen a significant improvement of our credit margins and debt costs only over the last couple of years. So strengthening the balance sheet and improving our financial flexibility will continue to remain a key priority for us going forward. And then finally, in terms of financial flexibility, we target NOK 3.4 billion in additional divestments by 2030. We have shown good progress already in this area. So this is on top of the NOK 2.6 billion that we have already realized. And thus, in the period from our strategy update last year and to 2030, we target to realize in total in the range of NOK 6 billion in divestment proceeds. So we stay focused on capital recycling to fund further growth and also debt repayments. So let me then summarize. Q3 was a very strong quarter for us. We had good financial results, but most importantly, we have seen very good progress on our growth activities, both in terms of construction progress, but also in terms of increasing our backlog. And finally, during the quarter, obviously, we have also seen very good progress on reducing the corporate debt levels. Then we are also seeing a continued very positive development of the industry. Component prices are at all-time low, and we continue to see new opportunities being emerged and delivered in terms of the very good ability of renewables now to compete with all other sources of energy generation. Renewables in our markets is now the most cost-efficient source of energy, not only on an intermittent basis, but also as dispatchable or baseload power. And then based on these 2 very positive developments, we're very comfortable with increasing our growth rates. We are upping our growth rate to have a target to invest NOK 1 billion in new equity annually in the period until 2030 at the same time as we will bring down debt and continue to grow on a self-funded basis. Thank you very much for your attention. And I think we will now open up for Q&A. Operator: Thank you, Terje. Thank you, Hans Jakob. Yes, we'll then open up for Q&A. We will just start with our audience here and then move on to the ones that are listening online. [Operator Instructions]. Starting with Daniel from ABG. Unknown Analyst: Daniel from ABG. So one question on the backlog and the new growth targets. So based on the backlog you now have, how much of the new growth targets in the period towards 2030 would you say is already covered by that from your view? So that is my first question. Terje Pilskog: Well, I mean we are talking about NOK 1 billion in equity investments annually. And obviously, we are indicating a growth target and the backlog is represented in terms of gigawatts and megawatts, not in terms of money. But I do believe that we have a significant portion of that growth target already in our backlog. I'm not going to come out with a precise percentage. But as I said towards the end there, we are quite comfortable with the backlog that we are having, and we believe that we are now in a position where we can really be disciplined in terms of the hurdle rates and making sure that we only do investments that are meeting our hurdle rates. Unknown Analyst: Okay. Good. Then I have a second question. I think you said last quarter that you are in advanced talks on potential deals. So I don't know if you have any new comments on that this quarter versus last quarter. Hans Jakob Hegge: Maybe you can check my outlook and see where I'm traveling, but no -- joke to the side. I think that still holds. As Terje said before, doing 1 to 2 of these per year is time consuming and it's a lengthy process. So we are a bit cautious on coloring more, but advanced talks is fairly accurate. Unknown Analyst: And maybe a last one on Mendubim. Can you maybe add some color there in terms of lowered assumptions? Terje Pilskog: Yes. On Mendubim, we have new reports on the markets that we have procured. And in these reports, we see that the expected curtailment levels are going to expand further into the future than what we had seen before. But we now also see that there are very concrete initiatives in Brazil in terms of improving the grid and making sure that the curtailment levels will come down over time. But the impairment is based on seeing that curtailment will last a bit longer than what we had anticipated before based on new external reports. Operator: Okay. Anyone else would like to ask a question? Thomas [indiscernible]. Unknown Analyst: I usually have a lot of questions, but today, everything was pretty clear. So that's good. Could you just touch a bit upon the Philippines, ancillary services, you continue to say that you get a strong contribution there. And you also mentioned that new projects with dispatchable renewable energy will open up opportunities for doing ancillary services also in other markets. Yes. Could you just elaborate a bit on that opportunity? Terje Pilskog: Yes. I think in the Philippines, you see what is being contributed by ancillary services. And I don't think we'll start dissecting what's coming from batteries and what's coming from the hydropower plants. But clearly, the ancillary services volumes and prices in the Philippines has been very attractive over the last year, also with the opening up of the ancillary service market so that you both have contracted revenues and you have also more they had spot-related revenue. So it gives a very good platform on the revenue levels in the Philippines. And we do see that this is a market that is going to increase going forward with further additions of renewables, intermittent renewables in the market. So we believe that it's going to be an opportunity that's going to be there for some time that can be captured from also new volumes being brought into the market also from our side. In the other markets, I think we -- in most of the other markets that are more regulated than the Philippines, I think we will see to an increasing degree that the batteries will come as part of a hybrid project, where the project will offer a number of different services to the grid and to the grid operator, not only providing electricity, but also providing regulating power, and that is being part of sort of what you are selling in, in new projects going forward in these markets. But -- so the situation will obviously be slightly different in regulated markets relative to deregulated markets. And then I think we also see in many of the markets where we are, the emergence of capacity or storage auctions and tenders and that this is becoming more and more an integrated part of how the regulators are thinking about developing the grids going forward, not only strengthening the grid, but also providing storage batteries to manage their regulating power and unlock grid points. Unknown Analyst: In terms of the expected returns on projects that are combined solar and battery, do you see kind of terms improving as in terms of when you just had solar stand-alone, say, 1.5 years when you started as CEO? Terje Pilskog: Yes. I'm not going to give you sort of a straight answer on that question. I think we will -- on all our projects, we will continue to make sure that we meet our investment criteria, investment hurdles. Obviously, in markets where you are more exposed to different types of risks, we will seek to get a higher return than in the markets where sort of everything is contracted. Unknown Analyst: And in terms of -- you booked a lot of contingencies at Kenhardt because, of course, yes, you have those to be released? And you won't comment on contingencies coming, but could you say when the contingencies would come if there are any on the projects that you are now? Terje Pilskog: Well, I mean, in principle, contingencies will be released as you are comfortable with the risk of schedule and quality and everything on the construction coming down. So I mean, naturally, contingencies are more likely to be released towards the end of the project and then the project has been finished than during the construction of the project. If you talk about EPC-related contingencies, obviously, which I think you are. Operator: More questions? [indiscernible]. Unknown Analyst: I have a couple of questions. Firstly, on the impairment in Brazil, what was the hurdle rate used in the impairment testing? Hans Jakob Hegge: Well, I don't think we have talked loudly about it. I'd rather rephrase saying based on the external report on long-term assumptions, it was difficult for us to defend the value. So we thought we were more better off long term also doing this impairment now, basically. And I could segue into compensating measures and so on, but your direct question, we're not answering that specifically. But we have done an extensive review of all our assets, and we did an impairment in Mendubim particularly. Unknown Analyst: Okay. And -- but will we find it in the annual report? Hans Jakob Hegge: A comment on... Unknown Analyst: Hurdle rates for impairment testing being a CDU? Hans Jakob Hegge: I can't recall us going into that level of detail, but Andreas and I can check it off and basically -- and back to you. Unknown Analyst: Okay. And how much of the asset was impaired? Or what was the gross value of the asset prior to the impairment? Hans Jakob Hegge: [indiscernible]. Unknown Analyst: 25% of the gross assets. Okay. Thank you. And my second question is, it seems to me that you probably had some headwind on currency in the third quarter because of the strengthening of the NOK against a lot of these currencies that you have assets in. Did that have any material impact on the results from power production in the third quarter? Hans Jakob Hegge: No is the short answer. Unknown Analyst: Because it's hedged and everything is. Hans Jakob Hegge: Yes. Nothing significant -- commented on it. Unknown Analyst: Okay. And my last question is when will we see Scatec do projects only relying on, say, market or spot prices? I appreciate that you might do long-term contracts, but are we there that you will pursue projects, which is basically selling into a well-functioning market without any sort of subsidies and initiate that kind of projects? Terje Pilskog: Well, I mean, we are already doing it in the Philippines, I mean, with our battery projects in the Philippines. So we are doing it. The -- and this obviously is very much linked to the overall model on how we realize the projects. If you do something which is very much based on merchant or you have shorter-term contracts or you don't have contracts for 100%, then your leverage in the project will go down and you have to carry more of sort of the CapEx through the equity that you inject into the project. So I mean, it depends also on how we want to realize projects and how we think about being capital efficient in the way we move forward. In the Philippines, we can still get project financing on a merchant basis based on the large portfolio that we already have there. So there, we have a very, very good advantage from that point of view. But I think -- I mean, as we move into other markets where more of the offtake is related to corporate PPAs, maybe some contracts for differences, other type of structures, you will maybe see that a portion of the project might be exposed to more merchants, like, for instance, we already have in Mendubim, where about 60% to 65% of the project is selling on a contract to Alunorte, while the rest is being sold into the market on short to medium-term contracts. So I think it's not sort of -- it's not black or white. We want to see it as a transition in most of the markets where we are. Unknown Analyst: But you still have a preference for longer-term coverage because of the leverage you will be able to obtain. Terje Pilskog: Yes. And I think it's incredibly important. I mean things are changing now with the technology of the industry where you can combine and you can provide more baseload, you can provide merit, you can also provide some flexibility based on renewables in hybrid structures. But obviously, we are not going to take on a type of risk that we don't feel that we can manage, right? You will never go in and sell a pure solar project into a merchant market because you know there might be low prices during the day if there's over implementation of solar and then you want to be stuck there having to take low prices. So you need to sort of put yourself and your projects into a position where you control the risk and you have the flexibility you need if you're going to be taking merchant risk. Operator: Thomas had another question. Unknown Analyst: A quick follow-up on kind of those merchant projects because looking from the outside on the eastern parts of Europe, say, Romania, for instance, if you're allowed to connect the Chinese battery to the grid, it looks like a completely no-brainer. In terms of kind of the payback times you see on average day ahead prices. I mean the spread is multiple, multiple times of what you need to break even. Number one, do you see the possibility of getting those grid connections for stand-alone battery projects in the eastern parts of Europe? And number two, do they accept Chinese equipment, full turnkey projects? Terje Pilskog: Well, I think on the first one, yes, we do see those opportunities in certain markets in Europe and also certain other markets. Obviously, it's about sort of -- it's about timing. It's about when you can get the grid connection and then you can get the project installed in terms of limitations on Chinese equipment. It is not about Europe itself in terms of there is a limitation or not, but it's more about what financing institutions are you working together with and what will those financing institutions accept to fund in terms of Chinese equipment. But I don't see, in general, a limitation of bringing Chinese equipment into Europe. Unknown Analyst: Work with Chinese financing institutions on SPD level? Terje Pilskog: You could, but I think we see -- we probably see other more attractive financing alternatives and working with the Chinese, which is mainly vendor financing, which we don't think is that interesting. Unknown Analyst: So we should not be surprised if we see stand-alone battery projects in the Eastern parts of Europe? Terje Pilskog: No, I don't think you should be surprised. Operator: We have a couple of questions from our online listeners as well. This is from Jørgen in Danske Bank. Related to your new unlifted divestment proceeds amount of NOK 3.4 billion by 2030. Can you elaborate on this? Has your scope been expanded? Or does this still align with previous perspectives? And also any changes to sales process? Terje Pilskog: Well, I mean, our scope has been expanded in the sense that we now look towards 2030. But in terms of what we are considering for divestments, farm-downs and capital recycling, the scope is still the same. And we will continue to look at divestments in markets where we don't see continued attractive growth opportunities. But we will also look at farm-downs, recycling capital in some of our larger markets where we may think it makes sense to recycle the capital and invest into new opportunities. So that still remains the same. Operator: One more question from Jørgen related to Mendubim. I think we partly have covered it, but the question is also, could this also have effect on other projects or other projects in Brazil and then might trigger impairments on those projects. Hans Jakob Hegge: It's covered in the report, and we specifically say that we have no grounds to speculate. We have done the impairment assessment of all assets, and it's only Mendubim. This is also partly due to contract structures, counterparties and geographical location. Operator: Thank you, Hans Jakob. I actually think we have covered the rest of the questions here. So if there are no further questions, I think we will thank you for listening and end today's presentation. Thank you. Terje Pilskog: Thank you.
Operator: Good day, everyone, and welcome to the Estée Lauder Company's Fiscal 2026 First Quarter Conference Call. Today's webcast is being recorded. For opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Rainey Mancini. Laraine Mancini: Hello. On today's webcast are Stephane de la Faverie, President and Chief Executive Officer; and Akhil Shrivastava, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes the noncomparable impact of acquisitions, divestitures, brand closures and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com site and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. Throughout our discussion, our profit recovery and growth plan will be referred to as our PRGP. During the Q&A session, we ask that you please limit yourself to one question, so we can respond to all of you with the time scheduled for this webcast. And now I'll turn the webcast over to Stephane. Stephane de la Faverie: Thank you, Rainey, and hello to everyone. It is good to be with you to discuss our first quarter results and share the great work our teams are delivering across the action plan priorities for Beauty Reimagined. Let me begin with the first quarter. We delivered organic sales growth of 3%, a significant sequential acceleration from the 13% decline in the fourth quarter. We are pleased by the diversity of our performance. As Mainland China contributed nicely to return to growth, the rest of our markets in total improved sequentially, including high single-digit growth in our priority emerging markets, led by Mexico, Turkey and India's double-digit growth. And Travel Retail grew on a favorable comparable compared to last year low base. We also got off to a strong start to the fiscal year with significant improvement in operating profitability. These results reinforce the confidence we have in our fiscal '26 outlook, a pivotal step towards restoring sustainable sales growth and rebuilding our operating margin to solid double digit in the next few years. The first three action plan priorities of Beauty Reimagined: Accelerate best-in-class consumer coverage; create transformative innovation; and boost consumer-facing investment are increasingly amplifying each other to drive accelerating retail sales growth in key markets. In China, we significantly outperformed Prestige Beauty, as our retail sales increased double digit ahead of industry up high single digit. Seven of our brands grew double digit with Le Labo nearly triple digits. We gained share in every category as well as both brick-and-mortar and online. Impressively, we have gained Prestige Beauty share in 5 of the last 6 quarters, which is unparalleled among the biggest Prestige Beauty players. In U.S. Prestige Beauty, our retail sales growth accelerated sequentially. In the quarter, we grew 8% in skin care versus the category up 6%. The Ordinary drove our share gain in skin care, while we also gained share in Hair Care led by Aveda. All told, we maintained our Prestige Beauty share calendar year-to-date. The Estée Lauder brand achieved its third consecutive quarter of overall share gain in the U.S., thanks to excellent uptake in innovation. This quarter, it gained share in each of skin care, makeup and fragrance. Impressively, we delivered strong unit share gain in U.S. Prestige Beauty, demonstrating our strategic actions are driving new consumer acquisition. In several of Western European markets, Prestige Beauty continues to see slow growth, in some cases, negative growth. In France, the biggest category in Prestige Beauty in Western Europe, we gained share in France and Spain. For the U.K., the largest market in the region and where Prestige Beauty is much more resilient, industry sales growth reaccelerated to nearly 10%, and we realized a strong sequential improvement in our retail sales trends. We still have much work to do in the U.K., but we are moving in the right direction. Our improving retail sales performance in many key markets around the world is a testament to our team's incredibly strong execution of Beauty Reimagined, starting with accelerating best-in-class coverage. We are advancing with speed to reach consumers where they are. Capitalizing on the learnings that we have had with Amazon in the U.S., Canada and Japan, we opened Amazon storefront in Mexico with Clinique, The Ordinary and Estée Lauder and the U.K. with The Ordinary. We announced our presence on TikTok Shop, launching Clinique, M·A·C and Dr. Jart in the U.S. as well as The Ordinary in Malaysia and Singapore. Impressively M·A·C was awarded TikTok Shop Top Brand Campaign Award for 2025 in Personal Care and Life, recognized for the stellar grand opening and tremendous initial success. Our newest TikTok Shop has served to strengthen the performance across channel given how consumers discover, engage and transact. This collective action in our online consumer coverage complemented first quarter growth from our existing presence on fast-growing retailers like Tmall, JD, Douyin and Notino. As a result, global online organic sales growth accelerated to double digit from mid-single digit in the fourth quarter, leading us to believe we outperformed Prestige Beauty in this strategic channel. For our European Travel Retail business, we made great progress in expanding our consumer coverage in fragrance through new retail activation, new doors and upgrading the existing fleet across our luxury portfolio. This strategic expansion contributed to our double-digit retail sales growth for France across several of our major retailers in the region for the quarter. We also drove similarly strong retail sales growth in the Americas Travel Retail for fragrance, in part from our all new distribution with Duty Free Americas. Looking at innovation, newness from TOM FORD, KILIAN PARIS, Jo Malone London and Aramis kicked off France rich pipeline for fiscal '26. These launches, some of which created halo benefit on existing products, combined with the Le Labo outstanding growth made France our best-performing category, rising 13%. We continue to expect France to be Prestige Beauty's fastest-growing category for fiscal '26, driven by luxury, the largest mix of our France business and where we are the leader as well as over the next few years, driven by both domestic markets and the Travel Retail channel. On that note, we are thrilled to have opened our new France atelier in Paris, where our team will blend state-of-the-art technology, data-driven intelligence, leveraging AI and olfactory expertise to craft the next generation of extraordinary scents, all while innovating much quicker than we have in the past. Skin care further drove our organic sales growth in the first quarter. We had an exciting slate of innovation in high-growth subcategory and across Prestige price tiers, including breakthrough launches in eye, acne and longevity targeting all age groups. This introduction, coupled with newness from earlier in the calendar year, contributed to skin care's growth. We continue to boost our consumer-facing investment to drive new consumer acquisition, focusing on high ROI opportunities like our brand building, freestanding stores and demand generation media activation. We opened 14 net new freestanding stores for our fragrance portfolio, including a row of new boutique in New York City's SoHo District for Frédéric Malle, TOM FORD, Jo Malone London and KILIAN PARIS. We introduced stunning new campaign from TOM FORD debut of Black Orchid Reserve to I Only Wear M·A·C and La Mer Gives Skin Life. And we are reengaged in creating new consumer experience across Travel Retail corridors. To fuel our first three action priorities, we made great strides delivering on the promise of PRGP, which Akhil will describe in more detail. Finally, we are especially encouraged by the momentum we are building as we reimagine the way we work, our fifth action plan priority. Our new executive team is fully in place. Our four newly reorganized regions are fully operational and throughout the organization, we are empowering faster decision-making. As you will recall, we committed in February to increasingly collaborate with partners in areas of business where they can support us to become the best consumer-centric Prestige Beauty company in the world. We are, therefore, thrilled to announce our new partnership with Shopify to modernize and scale our direct-to-consumer business in a phased approach, creating a best-in-class omnichannel consumer experience globally. Looking ahead, for the balance of the fiscal year, we continue executing on our action plan priorities, including investing in exciting holiday activation and expanding consumer coverage. As announced yesterday, this includes M·A·C entering U.S. Sephora spanning select stores as well as online and Sephora at Kohl's, which allows us to better connect with younger consumer and accelerate M·A·C turnaround in the U.S. Before I close, I want to share a few accomplishments from our just published fiscal 2025 Social Impact and Sustainability report. Since we announced our first set of public goals in 2019, we are proud to have achieved several of them across climate, water, waste, sourcing, ingredient transparency and impactful social investment. In introducing additional 2030 goals, we are reemphasizing our focus on women and girl advancement guided in spirit by our founder, with a new commitment to contribute $50 million to support health, education, leadership and entrepreneurship. In closing, the first quarter marked the beginning of our return to growth as anticipated for our fiscal 2026 outlook. While the macroeconomic environment globally continues to be dynamic with a variety of headwinds and tailwinds, we remain vigilant and focused on achieving our ambition for Beauty Reimagined. I am incredibly grateful to our employees around the world, who delivered a strong start to fiscal '26 onward and upward. I will now turn the call over to Akhil. Akhil Shrivastava: Thank you, Stephane. Hello, everyone, and thank you for joining us today. Overall, we are encouraged with our return to growth and the improvement in margins and cash flow results, thanks to the tremendous efforts of our teams globally. We are determined to continue driving value creation and executing with excellence and urgency across the pillars of Beauty Reimagined. Before I share an update on our reaffirmed full year outlook, I'll start with a quick recap of our first quarter results. For more detail on our first quarter performance, please refer to our press release issued this morning. Starting with organic net sales, we grew 3% compared to last year. This was driven by double-digit growth in fragrance and low single-digit growth in skin care. Together, these led to high single-digit growth in both Asia Pacific and Mainland China. Sales from our makeup and hair care categories declined, partially driving the low single-digit decrease in the Americas. Turning now to margins. Our gross margin expanded 60 basis points and was 73.3% in the quarter. This was driven by sales growth as well as strong net benefits from our PRGP, reflecting operational efficiencies, lower promotional activity and ongoing reductions in excess and obsolescence. These results more than offset the headwinds from inflation and foreign exchange transactions. In terms of operating margin, we expanded 300 basis points to 7.3% compared to 4.3% last year. This expansion reflects net benefits from our PRGP. Specifically, they drove a 3% reduction in nonconsumer-facing expenses, even with the normalization of employee incentive costs. As a result, we were able to fund consumer-facing investments, which increased by 4%. We are delivering on our strategic priority to improve operating margin for the full year as we strengthen overall cost efficiency and leverage under our PRGP. We are continuing to fuel consumer-facing investments that build brand desirability while maintaining discipline on nonconsumer-facing expenses. Our effective tax rate for the quarter was 40.5%, up from 38.8% last year. The quarterly rate is based on our estimated full year geographical mix of earnings and is expected to improve in the second half of the year as profitability builds throughout the year. In addition, the elevated rate includes the unfavorable impact associated with previously issued stock-based compensation. We are evaluating tax planning opportunities aligned with the strategic changes we have been making to our organizational structure and mix of business. Our return to sales growth, combined with strong cost efficiency and leverage, more than doubled diluted EPS to $0.32, up from $0.14 last year. In terms of our overall PRGP, building upon the work we did last year, we are continuing to execute with rigor, discipline and clear purpose to optimize key elements across our cost structure. We are driving momentum across the P&L, focusing on operational excellence to improve gross margin, streamlining our organization to enhance agility, effectiveness and efficiency through ongoing restructuring and leveraging our competitive approach to procurement to reduce costs and maximize ROI across all areas of spend. These efforts continue to advance our PRGP initiatives, creating fuel for growth, improving profitability and positioning the company for sustainable long-term value creation. Proceeding now to the restructuring component of our PRGP. Through September 30, we recorded $697 million of total cumulative charges, primarily in employee-related costs. Turning now to cash flows. For the 3 months, we used $340 million in net cash flows from operating activities, a significant improvement as compared to the $670 million use of cash last year. The improvement primarily reflects higher earnings as well as a favorable change in operating assets and liabilities despite an increase in restructuring payments. We invested $96 million in CapEx, prioritizing consumer-facing investments to fuel growth while optimizing all other CapEx investments. For the quarter, CapEx was down 32% versus the prior year, reflecting the phasing of projects. With a full year outlook to invest roughly 4% of projected sales and CapEx, we are maintaining a more efficient and normalized level of investment to drive long-term sustainable growth. Also in the quarter, we paid $150 million in deferred consideration associated with the fiscal 2023 acquisition of the TOM FORD brand. Turning now to outlook. We are reaffirming our fiscal 2026 full year outlook. While we don't expect a linear path, given macro volatility and prior year comparisons, our first quarter results give us confidence as we remain focused on delivering our full year outlook. In terms of organic net sales, we still expect flat to 3% growth for the full year. We anticipate stronger performance in the first half with favorable comparisons in Asia Pacific, driven by our global Travel Retail business as well as in Mainland China. We are seeing improvement in consumer sentiment in Mainland China, though it remains subdued and has yet to fully recover from historical lows. In our global Travel Retail business, we have good momentum in the West, fueled by consumer-facing investments and distribution expansion. That said, persistent challenges in the east continue to pressure retail sales. We expect these challenges to have a greater impact in the second half, particularly as we face tougher comparisons to last year when Mainland China returned to growth and our global Travel Retail business started shipping in line with retail. Despite this anticipated variability, we are encouraged by the start of the fiscal year and by our return to growth. Before I close, let me reaffirm our assumptions regarding evolving trade policies and enacted tariffs. Based on information available and net of our planned mitigation actions through October 24, we continue to expect tariff-related headwinds to impact profitability by approximately $100 million. This does not include any subsequent or future changes. We continue to evaluate additional strategies to further mitigate these impacts, including more PRGP initiatives and potential pricing actions. In closing, our focus remains on being the most consumer-centric beauty company and creating long-term value through sustainable growth, margin improvement and cash productivity. To our teams around the world, thank you. Your dedication to executing across all pillars of Beauty Reimagined is reflected in our results and is driving a return to sustainable sales growth and rebuilding our operating margin to solid double digit over the next few years. That concludes our prepared remarks. I'll now turn it over to the operator to begin the Q&A session. Operator: [Operator Instructions] Our first question today will come from Lauren Lieberman of Barclays. Lauren Lieberman: I was hoping you could talk a little bit about volume trends versus price mix. I know it's not something you usually talk about regularly, but it is disclosed in your 10-Qs. And I think this quarter, given some of the comparisons and the distribution gains, there probably has been a nice move in volumes within your overall organic sales growth. But I'd love to just hear a little bit more about your perspective on the importance of driving volume over time as part of the algorithm. Stephane de la Faverie: Thank you, Lauren. I'll start and maybe Akhil can just add some flavors to it. I think let me start from the comment that I made on the U.S. because for us, we saw in the quarter significant share gain from a volume standpoint, which has been driven by several things. Some of the price adjustments that we've done with new launches in part of the Beauty Reimagined, all the new innovation that we've put forward, if you remember, have clearly committed to make sure that we are at the right price point, at the right price band for every single of our four categories. And we've done that already with products like Studio Fix in M·A·C, but also we've done it in other geographies where we adjusted prices, namely Clinique in U.K., where we have had great, great success with the repositioning of DDML. But in the U.S., the most significant part for us was actually the market share gain in units that is showing that we are bringing new consumer to the company and to our brand. And if you remember, that's part of Beauty Reimagined, it was really important for us that we are investing in the demand generation at the top of the funnel to just bring new consumers to our brands. So I think we're seeing the momentum from a unit standpoint going on. Obviously, it's driven by also macroeconomic trends that's where we see a lot more demand at the entry of Prestige, and we've seen a strong acceleration with The Ordinary. We've seen a rebound also with M·A·C in the U.S. and starting to see some momentum in many markets. So I think it's a combination, Lauren, of categories, consumer demand also, but price points that we are driving throughout the organization. And we believe that allows us to just bring a lot new consumer to the company overall and contributing to the market share gain in many markets and the rebound and the growth that we are seeing in the quarter. Akhil Shrivastava: Thank you, Stephane. Lauren, as we have spoken, fundamentally, the strategy is to start winning more consumers. So as part of that, one of the things we have done, and Stephane has talked about it in many forums, we have looked at our pricing to be in the right band in many core categories where our pricing -- we adjusted pricing, and we have seen overall unit response. In addition, after many years of inflationary pricing that we have done, we did take a careful look at our overall portfolio and our pricing this year is lower than overall in the prior year, simply because as inflation has subsided and overall industry had taken a lot of pricing. So we believe -- of course, our business is made up of many different categories. I mean, makeup -- and so it's hard to make unit comments, but with the 3% organic sales growth, and pricing, we believe, is sub-2%, we expect to have unit growth barring the mix. And of course, we are working to understand the drivers of unit mix and volume by business where it makes the most sense because in our business between fragrance and skin care, it's hard to make an overall comment. But our goal is to drive unit. Our goal is to bring more consumers and we are starting to see positive results here. I hope that answers. Stephane de la Faverie: One quick thing, Lauren, just to add like a very data point that is important. Where we see the biggest move in terms of unit is also in the perfume category for us. And we've had a significant influx of innovation, and that's also linked to what, Akhil, and I said about accelerating innovation, accelerating innovation at the right price point, and we are seeing a lot more also smaller sizing driving the growth over the world for perfume. And this is one of the things that we are seeing, and we are doubling down and accelerating going forward. Akhil Shrivastava: Yes. We returned to unit growth this quarter, which is a great positive. Operator: The next question comes from Dara Mohsenian of Morgan Stanley. Dara Mohsenian: So first, just short-term clarity. You referenced the strong start to the year with 3% organic sales growth in fiscal Q1, but kept the full year top line guidance at the high end, that implies the balance of the year is more in line with Q1 or below if you use the lower end of the guidance. So just conceptually, is that conservatism or early in the year? Trying to understand if the Q1 result gives you more optimism, particularly given the comments about a stronger first half. And then also just longer term, obviously, solid share gains in Mainland China in the last few quarters, you've made a number of internal improvements. Just as you look out longer term over the next few years, do you think those share gains can continue, maybe give us a bit of a short-term report card on what's driving that and how sustainable those factors may be as you look out? Stephane de la Faverie: Thank you, Dara. A multiple-pronged question. Let me start maybe with Douyin because I think it's going to be important to really understand like the impact of China, also on the full year guidance. And I'll start and Akhil will give some flavor about the balancing of our year. So first of all, in China, we are really happy with our share gain. As mentioned in our prepared remarks, we are well ahead of the market, and we are in double-digit growth. We have 7 brands in double digit, and we have actually many more in positive for the quarter. And that's been really encouraging because for us, it is no longer just growth on a few brands, but it's basically across the portfolio, across categories, and like I said, also in brick-and-mortar and online where we are gaining significant share. So when I see China, I see obviously a stabilization to a slight acceleration of the market that is mainly driven by us. We're seeing a peak of consumer confidence on the Chinese consumer starting to rebound, but don't get me wrong, it's still subdued compared to historical peak. But we're seeing all of that moving in the right direction. But if you remember, our balance between the first half and the second half are very different because we are still lapsing in the first half of our fiscal year lower number, both in China and Travel Retail. And in the second half, this is where we're starting to anniversary the beginning of the recovery that we experienced last year in China, which obviously, we are early in the fiscal year. And while we are as a team extremely confident in our outlook for the year, we need to understand the balance between the two. And I would say a few macro environment things that are taking into consideration. One, there's still a lot of volatility out there. And I said like the environment is extremely dynamic. Trade policies are still there. Obviously, it's still very fluid as we saw even in the middle of the night, things are changing and one day is positive; some days, we have to just mitigate new news, but we are navigating a lot of volatility. And there's still many areas of the world where while we are seeing a recovery of consumer confidence, as I said, like in China, it is still very subdued in other areas, mainly in the West and in Europe. So all of that taking into consideration gives us that we still have to navigate early into the fiscal year, a great start, but a lot of volatility. And I think what I wanted is, Akhil, to just give a little bit more flavor also how do we see the balance of the first half and the second half. Akhil Shrivastava: Yes. Thank you, Stephane. Dara, I mean, when we gave you the full year guidance, it was a very thoughtful guidance, which allowed us to run our long-term play to start investing in a business, start driving retail and really consistently doing the right thing to build retail. So that guidance was well done. We are pleased to see that we are progressing against that guidance. However, to your question on why we are not reaffirming guidance, first of all, the macro environment continues to, overall, be challenging. We are pleased to see the progress in China definitely, and not only pleased to see the overall market progress, our significant outperformance, as Stephane called out, in China. So we are happy to see that. But when you look at the broader beauty market around the world, there are pluses and minuses. So they're still there, and of course, we're also happy to hear the trade news this morning, but the environment continues to be overall macro with significant variability. Secondly, our industry outlook we gave you was 2% to 3%. We still believe that is the outlook. If we see positive to that, our intention, as Stephane has consistently said, is to grow share. So not only we want to be in line with the market, we want to be ahead in key places, as we have said. And then last point is our cadence. Our cadence, as you can see, last year, our Travel Retail business was significantly lower in shipments in first half, and China also was having significant declines. That is in our first half. So when we see the positives this first quarter and what we expect in the first half of the year, that will be helped by that base period. Second half base period would be more challenging in Travel Retail and China. So all of that was incorporated in our full year outlook. Of course, we are not giving you specific quarter outlook, but we expect quarter 2 to see similar type strengths, as we have seen. We have the strong holiday plans. We are executing with excellence in all our markets. So there is definitely a front-half, back-half story. But overall, we are confident that we want to grow in line and ahead of retail, which we said, what, 2% to 3%. And that's why we kept the broader guidance because of the variability. So hopefully, this gives you a good perspective. And then we will continue to invest when we see the right opportunities because we want this turnaround that we are architecting to be sustainable for many, many years to come. Operator: The next question comes from Filippo Falorni of Citi. Filippo Falorni: I wanted to ask on margins. Obviously, solid performance in Q1, both at the gross and operating margin line. Can you just discuss your outlook for the year? Is it broadly unchanged, both at the gross and operating margin? And just the solid start, does it give you more confidence in potentially being towards the higher end of those margin targets, just given the strength of the business and also like the news this morning on tariffs? And then maybe just lastly, what's embedded from a reinvestment standpoint, if you can talk about that as well? Akhil Shrivastava: Thank you, Filippo. So overall, when we gave the guidance on margin, 9.4% to 9.9%, it included that the gross margin will be likely flat to positive. We will offset the tariff impact within the year-on-year and try to build a flat-to-positive gross margin. So a lot of our gross margin progress was going to come from SG&A, which is what we demonstrated in Q1. So that's the overall picture, which means, as we said in our prepared remarks as well, that consumer facing, we will invest, which was your other question. So we invested in consumer-facing, positive, and nonconsumer facing was down, which is creating the leverage. That's what you see -- saw play out in quarter 1. Of course, you have to remember that in quarter 1, there is not a lot of tariff because these things come as a variance release. So there is a lag between when tariffs happen and when they hit our P&L. So you should see that impacting gross margin in rest of the year starting from Q2, Q3 to Q4. So the guidance we gave on gross margin still broadly stands. Today morning announcements are definitely a favorable welcome. The improve things not only on tariffs, they improve things on consumer sentiment, which is very important for all the businesses operating in both countries. So that, we take as definitely as a positive, but the tariff amount dollars while we haven't done the math, it is not going to be material because we do not bring -- I mean our manufacturing is not coming in from China here. We do bring materials. So overall, we stand by our margin progression. We, of course, want to drive this margin progression quarter-on-quarter. But as we said, our goal is to deliver it on the year. we see an investment opportunity, we will reinvest. We have consistently reinvested since Stephane and I started giving guidance in February. We increased consumer-facing last year, as you saw, while the sales was down, and we increased it this year as well. So that is part of a plan to build a sustainable long-term turnaround. Stephane de la Faverie: Yes. And just maybe one thing, Filippo, to just confirm all of that. We're not changing our guidance for the time being. We are just reaffirming our guidance. But it is important that you realize that as a team, we're feeling really confident because of the strong start of the fiscal year, especially with what we've delivered in Q1 because a lot of the action that we'll put as part of Beauty Reimagined, that it is consumer coverage, that is the acceleration of innovation or, as Akhil said, the fact that we've increased consumer-facing investment by 4% in the first quarter are starting to just really activate the demand. And we've seen actually in many places, as we discussed earlier with one of the questions, that you need growth going. And I would say, just to give some sign of additional confidence, Q2 is a big quarter in beauty in general for us because you're going into 11/11, you have like Cyber Monday, you have the holidays. So this is just like one of the largest quarter. We are basically pleased with the beginning of the quarter. We have a very strong holiday programs that are in place. And while it's too early to comment on 11/11, in China, Golden Week, which was the first week of October, was really strong, and we believe that we grew ahead of the market, again, in a very dynamic China, which -- and actually, the interesting also note, it was not only in China Mainland, but we've seen actually a recovery of air traffic even in China, where air traffic was up 14% in Hainan, which drove a lot of strong demand, and we were in double-digit growth during Golden Week. So all of that gives us the confidence that we are off to a very strong start of the year. It is not about guiding in any way, shape or form Q2, but it is about saying that we're confident and we are reaffirming our guidance in the year. And as we are seeing all the benefits of Beauty Reimagined from a consumer-facing starting to pay dividend, then we will adjust the year accordingly. Operator: The next question comes from Bonnie Herzog of Goldman Sachs. Bonnie Herzog: I had a question on Asia travel retail. Could you provide just, I guess, a little more color on inventory levels and movements in the quarter? And then overall, I guess, how would you characterize the demand backdrop and conversion trends that you're seeing within Travel Retail? I guess I'm trying to get a sense of if we're past the trough and when we should start to see better conversion trends, especially with some of the benefits of your activations? Stephane de la Faverie: Thanks, Bonnie. I'll start. Look, Travel Retail is still very volatile. That's where we start basically with the market. And you've asked specifically a question for TR Asia in general, but TR West is actually in a good place, and we're seeing a lot of positive. But let me focus on TR East. It's a tale of different cities because I think we are starting to just lapse some of the worst decline. But let me divide Asia in several buckets because we are seeing a lot of momentum, for instance, in Travel Retail Japan. We were in double-digit growth like in the first quarter, which was good. If you look at the rest of Travel Retail APAC, if you exclude China and Korea, we also believe that we are gaining share with some positive momentum, especially in the emerging market, Oceania. Now when you look at the China ecosystem of Travel Retail, and I reaffirm what we've said, we are back to the right level of inventory, and we are managing the inventory based on the demand, and this is it. This is the way we are doing it for now and for the future. And we are back in line to industry penetration of Travel Retail that we intend to maintain as long as the demand continues to be what it is. What is interesting within the China ecosystem of Travel Retail, we're seeing for the first time, as I said in the past question, traffic starting to be positive again in September. I was myself in Hainan a few weeks ago and experienced actually a high foot traffic. Conversion, Bonnie, is slightly -- is still down, okay? I don't want to just say like conversion is picking up. But we, as The Estée Lauder Companies, are putting a lot in place to drive retail activation. We are investing in retail podium with like Estée Lauder, with Jo Malone, with Le Labo, with TOM FORD. We are really deploying the entire arsenal of our brand, which led us to believe that the strong performance that we've seen during Golden Week, which tends to just drive a lot more traffic, showed us actually gaining market share. Now obviously, Golden Week is October 1 to October 8. So I'm just not concluding anything for the quarter. But I'm showing some beginning of rebound through strong retail activation on our part, but also traffic resuming and some level of conversion getting better when you provide the right experience to the consumer. Akhil Shrivastava: Thank you, Stephane. And just to add to it, Bonnie, your comment on inventory. So as we have consistently communicated, both Stephane and I, that, look, our Travel Retail inventory are now more rightsized relative to the retail we are seeing. And we are working to drive retail, which, of course, as you asked, and Stephane commented, is coming back, but not everywhere overall. It's starting to come back in parts of Travel Retail. So our inventory is -- you should feel good that our inventory is in the right range. Of course, we adjust it up and down based on the retailers, working capital needs, et cetera, but there is nothing that should concern anybody that our Travel Retail inventory is elevated or less. It's in the right place, and it is significantly lower than where it was 1 year ago, both in absolute terms and ratios of forward-looking retail. So we feel good about that, which has really allowed us to focus on building the business and really managing it to retail and all of the points that Stephane made. And on Travel Retail, we are starting to really double down in the West and Americas. So not only our position of strength in East, but now we want to position ourselves in a much stronger way in the global Travel Retail. Operator: The next question comes from Steve Powers of Deutsche Bank. Stephen Robert Powers: Stephane, I think, you've mentioned in the past, several times that you felt coming into the role that Estée Lauder just hadn't moved fast enough into new channels to keep up with the consumer. Clearly, we've seen lots of action in recent quarters to close that gap, be it Amazon, Shopee in Southeast Asia, Amazon or even the move to M·A·C into Sephora. So I guess acknowledging that consumers will continue to move around and you'll have to adjust. I'm curious as to what degree you think you still have opportunities to catch up and how that plays into future planning? And I guess a little bit of how that varies across regions, if you could? Stephane de la Faverie: Steve, first of all, thank you for acknowledging that we are moving with speed like where the consumer is moving. I've made it very clear to you and to, frankly, first of all, to the entire organization is we are moving where the consumer is moving. As long as where we go, we can build equity and desirability for our brand. And this is what we've done today. You actually yourself mentioned, we are in Amazon in the U.S., in Canada, in Japan, in the U.K., in Mexico, and we're continuing to look for other places. We have TikTok Shop, which is really interesting for us because TikTok Shop not only -- I don't necessarily consider it as a channel, I consider it as really an ecosystem that allows us to recruit new consumers, and we are able to retain them on the channel and on other channels. So it was also Shopee in Asia. It was like Kakao also where we accelerated our brand. M·A·C in the U.S. with Sephora is a major step in the right direction, let alone also the partnership that we've announced 24 hours ago with Shopify, that is really going to allow us to be best-in-class direct-to-consumer where we are really tackling all our online connection and freestanding store connection with this really first-in-class partnership that we've announced. So I think you're seeing us moving with speed and clarity of what it is. And so I've been, frankly, traveling around the world next -- nonstop over the past few months, in the past few quarters. There's not a market where the team is not focused on looking at new channels, but also going deeper in the existing channel. I can tell you, for instance, that in Europe, Continental or even the emerging market, the team is, as we speak, rolling out more distribution for TOM FORD, for Jo Malone, for KILIAN. We've added 40 net new freestanding stores across our Forest brand, led by Le Labo and Jo Malone. So you're seeing us really moving quickly. And I can tell you, this is now deeply embedded in the organization. We are going fast. And the new organization that we've put in place with the new 4 cluster geographical region, and the brand and who does what in the organization allows us, frankly, to just move much faster through the organization and frankly, deploy the innovation according to the need of the retailers where we move and deploy much more sophisticated media targeting that allows us, by age group and by retail and by region, to deploy our media and to really go after the highest ROI possible. So you can count on us to see our brand being deployed again in more channel in the future. But again, as long as this channel maintain, preserve or enhance our brand equities around the world. Hope it helps. Operator: The next question comes from Peter Grom of UBS. Peter Grom: So I wanted to go back to Filippo's question just on margin, but more on the phasing. Akhil, I think back in August, you mentioned greater operating margin expansion in the back half and that it would build sequentially through the year. And I guess, if that were still the case? Based on what we saw in the first quarter, that would suggest maybe some decent upside relative to the full year guidance. So recognize that you have greater confidence today, but just wanted to ask if there's a change in view on the phasing. Akhil Shrivastava: I think overall, when you look at our margin range between 9.4% to 9.9%, I mean, 7% margin that we have is still lower. So clearly, we will build in absolute terms sequentially. And I think in our business, we definitely should continue to look at sequential progress relative to -- even on a quarter-on-quarter barring for seasonality. So we are not changing our -- it's 1 quarter of information, there's not enough information for us to change that phasing. Of course, we are working to make sure every day we are adding things to plan, so that we can, of course, deliver our plan in spite of any situations and hopefully, be able to come better than that. That would be the ambition of any company, and that's our ambition as well. But at this point, there is not enough information to change our phasing. What you are seeing this quarter definitely is the good work on SG&A and investment in consumer-facing. However, to build consistent sales, we do want to make sure that we have enough fuel to invest so that we can keep driving the business. And the work on PRGP is broad-based. I just want to reiterate that. While we are focusing on the quarterly point, the bigger point is, the company has built a cost muscle in a way that it never had before beyond the growth work -- the points we talked. So the cost muscle that we have built is allowing us to look at COGS area, allowing us to look at OpEx area through the enterprise business services work we have set, procurement work, continued restructuring. So we continue to believe the significant long-term opportunity on SG&A. While your question is definitely related to the specific quarter phasing, we believe there is a significant opportunity, as both Stephane and have commented, on expanding margin to solid double digit over the next few years. And that is the work we are every day focused on while, of course, giving you good guidance on quarter and quarterly phasing. So the overall upside remains, and we are working to bring that home every day, every month. Stephane de la Faverie: And Peter, what I would add to just Akhil, I just want you to just see, obviously, what I said a few minutes ago. Very strong confidence of where we started the year. In case so we're starting, we're off to a very strong start with the 3% growth and the 300 basis point margin improvement. As Akhil said, obviously, we're not there yet to the full year profit, which we continue to build, and we have actually a path to get there. Absolutely, I reinforce the fact that we are confident in delivering the guidance that we gave, both on the top line and the bottom line, on the growth margin, investing in our brands and et cetera. What I'm actually really encouraged in what we're seeing is actually the fast reacceleration of our retail in geographies like China, the ability to maintain our market share in the U.S., which is the first time in many, many years, as I mentioned many times, but also our ability to just grow in unit, again, which means that we are bringing new consumers. Let alone, we haven't really talked much about innovation. We have a slew of innovation coming in Q1, but we have a lot coming in Q2 and Q3 that we can discuss, which is going to allow us to just connect with the consumer at different price point, different age groups, different categories. Every single of our brands and regions are working on deploying new innovation. So I think you are going to see a continuous acceleration of ourselves and the continuous rebuilding of the operating margin towards the guidance that we are giving for the year and towards the solid double-digit operating margin for the future. And that's really what we are laser-focused as a team at delivering sequential improvement, and proving the organization and the world that we can do it sequentially, but in a very strong fashion as demonstrated in the first quarter. Operator: The next question comes from Chris Carey of Wells Fargo Securities. Christopher Carey: So I have a question that tracks well potentially with how you answered the prior question. I think as we look over the next few years toward solid double-digit margins, there's a few different ways you can get there. Obviously, growing the top line is paramount, perhaps you can improve gross margins a bit or you can manage -- lower your cost structure over time. I think I hear, of course, that you're certainly committed to staying well invested over this time horizon so as to deliver the most important metric, which is sustainable accelerating revenue growth. So can you just talk about perhaps your ability to sustain stable, let's call it, SG&A dollars over the next few years, even while you'll be leading into consumer-facing investments? I think sometimes with the cost savings program it's difficult to parse out the net numbers, but just the ability to kind of hold stable cost even as you're investing? And connected to that, there's a pretty significant earnings leverage opportunity in the tax rate. I get a ton of questions about this. And candidly, I don't always have great answers. Can you just give us a sense of how tax planning will factor over the next 3 to 5 years and what the opportunities are? Stephane de la Faverie: Thank you, Chris. Let me take the first part of the question, and Akhil will just go into the tax. Look, I think your question kind of answered already a little bit where we are going because if I just take it a little bit like from Beauty Reimagined, we're doing all of the above. We are improving gross margin. And if you remember, in fiscal '25, we made significant improvement in our gross margin. And this year, we said that we are maintaining it while absorbing the impact of, you know, the tariff. But actually, you said it, Chris, we're building a lot of leverage in our gross margin for future because I made it very clear that the innovation that we are bringing to market, not only is at the right suggested retail price for the consumer, but is also built to be accretive to the category where we are launching it, that is skin care, that is makeup, that is hair or that is like perfume. So we are just really making sure that we are building it. We've also demonstrated a significant discipline on the management of inventory that also helps us from a cash flow management tremendously. And I really believe that we are going towards like being best-in-class. And our value chain team is continuing to do a lot -- to create a lot of efficiency that when we go to unit growth, as we are starting to experience, we're going to get a lot of leverage because that's important. The P&L that we are building is being built for leverage. SG&A, we decreased 3% in Q1 and through the PRGP, and I can't believe that it's -- Chris, like question #7, we haven't even mentioned PRGP up to this point. But PRGP is here to create also a lot of leverage to reduce the penetration of SG&A in our total P&L. And there is a strong discipline now the way that we are managing expenses and we are always putting expense in favor of consumer-facing to further accelerate the top line because with top line, we know we'll get more units, we will get more leverage, gross margin will improve, percentage of SG&A will go down and then we are able to ignite growth and obviously get a lot of leverage from an operating margin. So we haven't really talked about the PRGP today, but PRGP is going in the right direction, giving us actually the right momentum to invest in consumer-facing and to delay the P&L of the organization to be much more agile, to be faster, but more importantly, also to create a lot more efficiency that is going to allow us to, frankly, go not only to maintaining share, but to beat -- and to beat the market and to grow share in the future and to get a lot of leverage. So that's the way I would like you to see the P&L and what we are building and the momentum that we have. We are actually quite early into the process because we are not even at the 1-year anniversary of the launch of Beauty Reimagined. We're only in the third quarter and a lot of progress has been made, and it gives you kind of a sense of where and how the P&L is going to be dealt. Obviously, tax is something that we are focused on, as Akhil said, and he's just going to say a few more words about it. Akhil Shrivastava: Yes. And before I go into tax, I just want to add one thing on the margin part, which Stephane said. Like with 3% sales growth this quarter, you can see the leverage that we got. So there are multiple paths to the solid double-digit margin. One, like you said, gross margin where we ended last year at 74%. That still has significant upside on gross margin. And when you break our SG&A into consumer-facing and nonconsumer-facing, in nonconsumer-facing, we are already demonstrating to you significant cost reduction. And with a company that could be much bigger on sales, that trend on nonconsumer-facing, we intend to continue. Even within consumer-facing, we are bringing significant tools to drive ROI. So we intend to buy marketing inputs at much better price and much better effectiveness, so not only we will improve nonconsumer-facing, we intend to improve consumer-facing investment ROI in a significant way. So there are three pronged ways to go from the current margin we have to solid double digit across all of those three pillars as Stephane said. On tax rate, we have commented on our high tax rate. We gave a guidance for 36% this year, which should be lower than last year, so it should start to move in the right direction, but there is significant -- we are not happy with this tax rate. It is driven by our geographical mix of earnings. We are looking through our PRGP restructuring to look at tax planning opportunities. A significant part of our business is international markets, as you know. So that is driven by that, plus the stock comp effect, negative effect of stock comp previously has impacted us. So we intend to give you more clarity as we work through this year and drive this favorability on tax rate. I mean every point of tax rate gives us significant improvement as you're pointing out. And as I commented in the last call, this is clearly a piece of work we are doing. These things do take a little bit of time and have to be done very methodically and in the right way. But this is clearly one of our top priorities. So expect to hear more from us in the coming calls. Operator: That concludes today's question-and-answer session. If you were unable to join for the entire webcast, a playback will be available after 1:00 p.m. Eastern Time today through November 15. Please visit the Investors section of the company's website to view a replay of the webcast. That concludes Estée Lauder's conference call. I would like to thank you all for your participation, and wish you a good day.
Operator: Good day, ladies and gentlemen, and welcome to the Third Quarter 2025 ACRES Commercial Realty Corp. Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would like to now introduce your host for today's conference, Kyle Brengel, Vice President, Operations. You may begin. Kyle K. Brengel: Good morning, and thank you for joining our call. I would like to highlight that we have posted the third quarter 2025 earnings presentation to our website. This presentation contains summary and detailed information about the quarterly results of the company. Before we begin, I want to remind everyone that certain statements made during this call are not based on historical information and may constitute forward-looking statements. When used in this conference call, the words believes, anticipates, expects and similar expressions are intended to identify forward-looking statements. Although the company believes these forward-looking statements are based on reasonable assumptions, such statements are based on management's current expectations and beliefs and are subject to several trends, risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on Forms 8-K, 10-Q and 10-K, and in particular, the Risk Factors section of its Form 10-K. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of these forward-looking statements. Furthermore, certain non-GAAP financial measures may be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute to the financial information presented in accordance with GAAP. Reconciliations of non-GAAP financial measures to the most comparable measures, prepared in accordance with generally accepted accounting principles, are contained in the earnings presentation for the past quarter. With me on the call today are Mark Fogel, President and CEO; and Eldron Blackwell, ACR's CFO. I will now turn the call over to Mark. Mark Fogel: Good morning, everyone, and thank you for joining our call. Today, I will provide an overview of our loan operations, real estate investments and the health of the investment portfolio, while Eldron Blackwell, our CFO, will discuss the financial statements, liquidity condition, book value and operating results for the third quarter 2025. Of course, we look forward to your questions at the end of our prepared remarks. The ACRES team remains focused on executing on our business strategy by building a pipeline of high-quality investments, actively managing the portfolio and focusing on growth in both earnings and book value for our shareholders. In the third quarter, we funded new commitments of $106.4 million, offset by loan payoffs, sales and paydowns of $153.2 million, producing a net decrease to the loan portfolio of $46.8 million. We expect a substantial number of new loan closings in the fourth quarter, which will produce positive growth in the portfolio for the full year. The weighted average spread of the floating rate loans in our $1.4 billion commercial real estate loan portfolio is now 3.63% over 1-month term SOFR rates. Portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. The company ended the quarter with $1.4 billion of commercial real estate loans across 46 individual investments. At September 30, our weighted average risk rating was 3.0, an increase from 2.9 at June 30, and the number of loans rated 4 or 5 was 13, both at the end of last quarter and the end of this quarter. During the quarter, we sold one of our real estate investments, which resulted in a gross capital gain of $13.1 million. This gain on sale represented a significant part of our strategic plan to use our capital loss carryforward to maximize shareholder value. During the quarter, we also closed on a construction loan with a third-party lender to convert an REO office property in Chicago to a Class A 252-unit multifamily property. The property had previously been contributed to a joint venture with a Chicago-based developer. We expect the grand opening of the property during Q3 2026. As we exit our real estate investments and the loan portfolio continues to amortize, we expect to redeploy capital into attractive CRE loans. As always, we will seek to optimize our portfolio leverage in order to drive equity returns. In summary, the ACRES team continues to be focused on the overall quality of the investment portfolio, including investments in real estate with the goal of improving credit quality and recycling capital into new investments to enhance shareholder value. We will now have ACR's CFO, Eldron Blackwell, discuss the financial statements and operating results during the third quarter. Eldron Blackwell: Thank you, and good morning, everyone. GAAP net income allocable to common shares in the third quarter was $9.8 million or $1.34 per share diluted. GAAP net income for the quarter included a $13.1 million gross gain on the sale of one of our real estate investments, as Mark discussed. Net real estate operations declined by $2.7 million over the prior quarter due to a loss of $2.8 million. Of that loss, $2 million was due to exit fees on the construction and [ PACE ] financing and other accelerated costs on the balance sheet from the aforementioned real estate investment sale and to a lesser extent, from the operating performance at our two hotels. During the quarter, we saw a decrease in current expected credit losses or CECL reserves of $4 million or $0.54 per share as compared to a decrease in CECL reserves during the second quarter of $780,000, which was primarily driven by improvements in the modeled credit risk of our CRE loan portfolio and improvements in expected macroeconomic factors during the quarter. The total allowance for credit losses at September 30 was $26.4 million and represented 1.89% or 189 basis points on our $1.4 billion CRE loan portfolio at par and was composed of $4.7 million in specific reserves and $21.7 million in general credit reserves. Earnings available for distribution, or EAD, for the third quarter 2025 was $1.01 per share as compared to $0.04 per share for the second quarter. Quarter-over-quarter, EAD saw a net $1.30 increase due to the real estate investment gain on sale, offset by a $0.37 decrease from real estate operations. The net EAD gain is our allocable portion of the gain based on our ownership percentage in the investment. GAAP book value per share was $29.63 on September 30 versus $27.93 on June 30. Additionally, during the quarter, we used $2.9 million to repurchase 153,000 common shares at an approximate 36% discount to book value at September 30. There was approximately $2.5 million remaining on the Board-approved program at quarter end. Available liquidity at September 30 was $64 million, which comprised $41 million of unrestricted cash and $23 million of projected financing available on unlevered assets. Our GAAP debt-to-equity leverage ratio decreased to 2.7x at September 30 from 3x at June 30 from net repayments on our CRE loan portfolio and the payoff of asset-specific financing on the sold real estate investment. At the end of the third quarter 2025, the company's net operating loss carryforward was $32.1 million or approximately $4.55 per share. With that, I will turn the call to Andrew Fentress for closing remarks. Andrew Fentress: Thank you, Eldron. The third quarter showed progress on our stated goals of selling assets, redeploying the gains into new loans. We're nearly complete on this mission and are excited about the next steps. We have a full pipeline that will soon be available for securitization and get the company on track to maximize income in EAD. This quarter marked the fifth anniversary since we assumed the role of manager for ACR. In this 5-year period, book value has increased 12.7% per year, and the stock has increased 41.8% per year. We're excited for the next chapter in the company's evolution and look forward to your questions. I'll now turn the call back over to the operator. Thank you. Operator: [Operator Instructions] And we'll take our first question from Matthew Erdner with JonesTrading. Matthew Erdner: Congrats on a solid quarter there. As it relates to kind of the asset-specific financing or I guess, the reinvestment there, what are you guys looking for in the market to kind of go out with a CLO? Or is it just a matter of getting some originations out the door in the fourth quarter, get the portfolio a little bit bigger and then go into the market? Andrew Fentress: Yes. Thanks, Matt. It's really what you just said in the latter part of your question, which is we're in the marketplace, originating new loans currently. We expect by the end of the fourth quarter, beginning of the first quarter to have sufficient collateral on warehouse to execute a transaction sometime in Q1. Matthew Erdner: Got it. And then as a follow-up to that, it looks like there's no fully extended maturities for the remainder of the year. Are you guys expecting any loans to pay off early? And if not, have you guys committed any capital loans quarter-to-date just to try and target kind of that 1.5 to 1.7 year-end target that you guys have laid out in the past? Mark Fogel: Yes. We don't see anything significant with respect to payoffs at this juncture. And yes, we're still on the same target for net growth that we've laid out in the past. Matthew Erdner: Got it. That's helpful. And then as it relates to those loans, do you expect to be more active on the construction side or as a part of the bridge that you guys have done in the past also? Mark Fogel: In the REIT, we do not typically provide construction financing. On the other side of our business, within our fund business, we do provide construction loans, which actually is a help to the REIT eventually as we provide bridge loans to those construction loans to take those out. So we are active on the construction financing side, but on the fund part of our business, which will eventually benefit the REIT as those loans migrate into bridge loans. Matthew Erdner: We'll put some numbers on that real quick. So right now, in the portfolio on the fund side, there's about $650 million to $700 million of construction that's underway. And as Mark said, we expect some percentage of that over time to migrate into the REIT through the reinvestment periods of the CRE CLO. Operator: [Operator Instructions] We'll take our next question from Chris Muller with Citizens Capital Markets. Christopher Muller: Nice to see the market rewarding you guys with your stock up 10% this morning. So -- also, great to see the REO sale and growth in book value. And kudos to you guys for being patient and sticking to your strategy. Do you have any thoughts of where book value could settle once the remaining properties get sold? Or maybe asked a little bit differently, should we expect further chunky increases to book value as those properties get sold? Andrew Fentress: This is Andrew. I think we've said our target when we took over was approximately $30 a share. So we're creeping up on that objective. I don't want to give guidance really too much ahead or above that. There are really three properties that are remaining, and I think with what we know about those, the $30 is a reasonable objective. Christopher Muller: Got it. And then I guess on property sales, following up on that a little bit. With the Fed now back on an easing cycle, have you guys seen a pickup in interest in those properties? And is there anything that you could share on potential timing of future sales? Is that like a 1Q type event? Or is it going to come later in the back half of '26? Andrew Fentress: I think on one of them, we've got reasonable visibility sometime in the next couple of quarters. And the other are operating businesses that will probably benefit from a valuation as the Fed eases a little bit, but we'll really rely more heavily on the operating metrics of the properties themselves, less so on multiples. Christopher Muller: Got it. And just one more, if I could throw it out there. And you guys get asked this question a lot, but I'm going to throw it out there anyway. Is there anything that you can share on potential dividend and any timing around that? Andrew Fentress: Yes. We've stated pretty clearly that once we hit our book value objectives, and we think we've gone through the exercise of monetizing the assets and utilizing the tax gains or the tax losses of the gains we have that, that would be an appropriate time to begin paying a dividend again. And as I said, we're getting close. We really only got one or two more to sell. Christopher Muller: Congrats again on a really great quarter. Operator: [Operator Instructions] And it looks like we have no additional questions at this time. I'd like to now turn it back to our speakers for any closing or additional remarks. Andrew Fentress: Great. Thank you so much, operator, for hosting the call. We appreciate everybody's participation. If anybody has questions or follow-ups, we're always available. We look forward to talking to you again soon, one-on-one or at our next quarterly call. Thank you so much. Have a great holiday season, everybody. Operator: Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect.