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Raul Sinha: Good morning, and welcome to Santander's Third Quarter 2025 Results Presentation. For the call today, we will be joined by Hector Grisi, our Group CEO; and Jose Garcia-Cantera, our CFO. Hector, over to you. Hector Blas Grisi Checa: Thanks, Raul. Good morning and everyone, and thank you for joining Santander results presentation. We will follow the usual structure. First, I will go over our results with a special focus on the performance of our global businesses. Then Jose, our CFO, will then provide a detailed view of the financials, and then I will wrap up with some final remarks before we open for Q&A. Before we begin, a quick note that all figures in the presentation continue to include Poland until the disposal is completed. Q3 was another record quarter, reflecting the strength of our strategy and the resilience of our business model in a more demanding environment. Our quarterly profit hit a new record at EUR 3.5 billion, making 9 months '25 the best 9-month period ever, driven by strong revenue growth across the global businesses and our solid customer base, which increased by 7 million year-on-year to 178 million as we enhance customer experience by leveraging our global platforms. We achieved this while we continue to invest for the future through ONE Transformation, making excellent progress towards a simpler and more integrated model. This has enabled further efficiency gains and a 70 basis points increase to our RoTE to 16.1%. Our balance sheet remains also solid with a strong capital ratio, which ended the quarter with an all-time high of 13.1% and a robust credit quality. All of this drove a strong shareholder value creation with TNAV plus cash dividend per share growing 15% despite some currency headwinds. We are approaching the end of our '23-'25 strategic plan well on track to meet our targets. Thanks to our profitability and our disciplined capital allocation, which is further improving profitability. Remember that earlier this year, we raised our RoTE target to around 16.5% post-AT1, equivalent to above 17% pre-AT1 from our original Investor Day target range of 15% to 17%. At the same time, we're already operating with a CET1 ratio above 13%, clearly exceeding our original post-Basel III target of above 12% with 88% of RWAs generating returns above our cost of equity. Finally, after our latest inorganic transactions, we decided to accelerate the execution of our EUR 10 billion share buybacks and upgrade our target, so we announced that we expect to distribute at least EUR 10 billion to our shareholders through share buybacks for '25-'26, subject to regulatory approvals. Let's go now into our income statement. Our P&L remained very solid with profit growing double digits year-on-year, once again reflecting the strength and diversification of our model. We delivered strong top line growth with revenue up 4% in constant euros, supported by NII, which increased 2%, but especially by a new record quarter in fees, up 8%, supported by significant customer growth and the network benefits that we are capturing through our global businesses. At the same time, expenses grew below revenue, down 1% in euros, in line with our target, showing the positive effects from our transformation. This performance translated into solid growth in net operating income, again demonstrating the sustainability of our results. Our prudent approach to risk is also evident in our robust credit quality trends with a cost of risk that is consistently improving year-on-year. Overall, as we have shown over time, our results are sustainable and less volatile than peers even in a more challenging environment. We are ahead of our plan executing our transformation, boosting our operational leverage and structurally improving both revenue and cost. Simplification, automation and active spread management have already delivered 259 basis points of efficiencies. Our global businesses added 101 basis points and our in-house and global tech capabilities, another 88 basis points, exceeding the level expected by the end of '25. And there is still more to come. We see further upside as we stay focused on rolling out common platforms across Retail and Consumer while also capturing additional efficiencies from Wealth, CIB and Payments by leveraging our global network. And all this is something that is entirely under our control. All our global businesses delivered strong profit growth while we improved the group's profitability. Customer activity and diversification continue to drive revenue growth. In a less favorable interest rate environment, our CIB, Wealth and Payments businesses, which are more fee driven, are seeing increased revenue with fees up 7%, 19% and 16%, respectively. At the same time, some of our franchises and emerging markets performed better with lower rates. Our Consumer business is a great example with NII up 6% year-on-year. In addition, our customer focus and solid track record in active balance sheet management explained the resilient NII performance in Retail, which excluding Argentina, grew 1% year-on-year. At the same time, we're extracting the potential from our scale. Scale gives us efficiency and also the flexibility to allocate capital quickly, something very few others can replicate. Combined with our strict capital discipline and focus on profitability, this is driving higher RoTE which most of our businesses already above the targets we set for '25. It is this unique combination of customer focus, scale and diversification that enables us to deliver strong and recurring results, putting us in an excellent position to navigate the challenges ahead. In Retail, we are transforming the way we operate to become a digital bank with branches, combining cutting-edge technology with the expertise and proximity of our teams. We continue to digitalize and enhance customer journeys, driving double-digit growth in digital sales. A key milestone was the launch of the new app in Brazil that introduces conversational capabilities that we are now preparing its rollout across more countries. In cost, we are making the most of AI to speed up simplification and automation, which is reducing manual activities and allowing teams to focus more on customer interactions and value-added activities. As a result, dedication of teams to noncommercial activities has dropped by 17% during the last 12 months. We are progressing in the rollout of our global platform, Gravity. Our back-end technology is fully implemented in Spain and Chile, and we expect to deploy it in Mexico in Q4. Retail profit grew high single-digit year-on-year, driven by sound revenue performances across most countries. Costs declined in real terms and credit quality remained solid. In a more demanding environment, NII grew year-on-year, excluding Argentina, reflecting our focus on profitability and the disciplined margin management and fees rose 5%, supported by higher customer activity, our ongoing digitalization and improved customer journeys. We will keep scaling our transformation to boost efficiency and contribute to group's growth. By improving customer experience and simplifying operations, we expect to continue growing our customer base while reducing cost in euros. In Consumer, we continue to advance in our priority to become the preferred choice for our partners and customers by delivering the best solutions and strengthening our cost competitive advantage across our footprint. Deploying global platforms is key to scale our business and to reduce cost to serve. We recently announced the integration of Santander Consumer Finance and Openbank in Europe, a natural step that simplifies our business, reduce cost and improve our product offering. We keep enhancing our value proposition and Openbank is again a great example. In Germany, it now offers a new AI-powered investment broker. In the U.S. and Mexico, Openbank has attracted EUR 6.2 billion in deposits as part of our broader deposit gathering strategy. We continue to expand and consolidate partnerships, offering global best-in-class solutions with top OEMs. Zinia continued to grow, reaching record volumes during Amazon Prime Days and introducing installment payments for Amazon customers in Spain. Profit grew 6% year-on-year in a challenging context of weaker car registrations in Europe, driven by NII growth and solid cost of risk performance, especially in the U.S. We continue to prioritize profitability over volumes, lower funding costs and accelerating transformation while actively managing capital to maximize returns. We expect Consumer to be one of the drivers of the group's profit, supported by NII growth as the business benefits from lower rates and progresses in our strategy to lower funding cost, solid fee income performance as insurance penetration improves and further cost efficiencies as we accelerate our transformation. In CIB, we are building a world-class business to better serve our corporate and institutional clients across our footprint while maintaining our low-risk profile. Number one, we continue to deepen our client relationships and strengthen our position in our core markets, leveraging our centers of expertise and expanded coverage. This is translating into market share gains in the U.S. as we achieve greater relevance in the investment banking space. Number two, our enhanced capabilities are enabling us for significant opportunities across CIB, improving our cross-business value proposition and driving solid growth in our institutional franchise in Global Markets, where revenue rose 27% year-on-year. Even in a more challenging environment, CIB keeps on delivering solid results with profit up 10% year-on-year, supported by solid fee growth across business lines and exceptional performance of Global Markets early in the year. All of this, while we maintain one of the best efficiency ratios in the sector and a RoTE of around 20%, reflecting our strict focus on profitability and capital discipline. We will build on the capabilities developed in recent years to drive revenue growth in CIB across the group, driven by stronger connectivity across countries, products and businesses. In Wealth, we are building the best wealth and insurance manager in Europe and the Americas. Number one, in Private Banking, we remain focused on expanding our fee businesses and consolidating our global position through value-added solutions. We continue developing our new Global Family Office service, which after just 3 months of activity is bringing advisory services to our first clients in Spain who represent a total wealth of more than EUR 500 million. Number two, in asset management, we keep reinforcing distribution and investment capabilities in alternatives and streamlining our liquid product platform. Number three, in Insurance, we are focused in 2 new verticals: Life & Pensions with new products for senior customers in Brazil and annuities from Private Banking and affluent clients in Spain; and P&C, where we expanded our value offering to SMEs with new protection business products in collaborations with Getnet. Number four, collaboration with other businesses is a major growth driver for Wealth. Collaboration revenues have been a strong growth lever with PB and CIB working hand-in-hand from tailored capital market structures for ultra-high net worth individuals to new joint opportunities. In summary, all of this is supporting strong growth and high profitability levels. Profit rose 21% off the back of strong commercial activity and double-digit fee growth across the 3 businesses. Efficiency improved 1.3 percentage points year-on-year and RoTE is close to 70%, confirming wealth position as one of the most efficient and profitable businesses in the group. Finally, Payments, where we hold a unique positions on both sides of the value chain. In merchant acquiring, we're expanding our global platform with a single API to serve all our customers across our footprint and is now live across our 5 countries in Latin America, reinforcing Getnet's positioning in the region. PagoNxt Payments is leveraging the best proprietary technology to deliver account-to-account processing, FX, fraud detection and other value-added services. Volumes processed by our Payments Hub were more than 5x higher than last year. In Cards, where we are amongst the largest issuers globally with 107 million active cards, we continue to expand the business and deliver best-in-class products. As part of our debit to credit strategy to promote the benefits of using credit cards, this quarter, we launched Pay Smarter in 5 of our countries. We also kept strengthening the integration between Cards and Merchant Solutions, expanding our bundling proposition with Getnet in Brazil, which now joins Spain, Chile, Portugal and Argentina. Payments delivered a strong quarter, resulting in double-digit revenue increase year-on-year, both in Cards and PagoNxt with controlled cost, driving profit growth of more than 60% and improving PagoNxt EBITDA margin to 32%, already above our '25 Investor Day target with Getnet being one of the best among peers. Our strong operational and financial performance is driving higher profitability and double-digit value creation for the 10th consecutive quarter. Post-AT1 RoTE reached 16.1%, up nearly 1 percentage point year-on-year, reflecting our disciplined capital allocation strategy. Earnings per share rose 16%, supported by solid profit generation and fewer shares following buybacks. As a result, TNAV plus cash dividend per share increased 15%. We maintain our upgraded target to distribute at least EUR 10 billion to our own shareholders through share buybacks for '25 and '26, subject to regulatory approvals. Since '21 and including the program that is underway, we will have repurchased more than 15% of our outstanding shares, providing a return on investment of approximately 20% to our shareholders. I will leave you now with Jose, who will go into our financial performance in more detail. José Antonio García Cantera: Thank you, Hector, and good morning, everyone. I will go into more detail on the group's P&L and capital performance. Let me first remind you that as we always do, we are presenting growth rates in both current and constant euros. The difference was around 5 percentage points as of September, mainly due to the depreciation of the Brazilian real and the Mexican peso towards the end of last year. As the CEO explained, we are yet again reporting record results this quarter for the sixth consecutive quarter. Revenue grew 4% with a good cost performance in line with our objectives for 2025. Cost of risk improved in the quarter, supported by robust labor markets and our prudent risk management. There are several positives and negatives in the other results line, but the concepts that explain most of the significant drop in this line year-on-year are the write-downs in PagoNxt in the second quarter of last year and the temporary levy on revenue earned in Spain, which this year is being recorded under the tax line. For the last 2 years, we have reported a continuous upward trend in profit, which grew 3% this quarter in constant euros on the back of a resilient NII performance, cost under control and lower loan loss provisions. Total revenue increased 4% to EUR 46 billion, on track to meet our 2025 target, even with less favorable interest rates than initially anticipated. This growth was underpinned by customer activity and more than 7 million new customers. All global businesses contributed to revenue growth. Payments accelerated with revenue up 19% as both PagoNxt and Cards delivered double-digit growth in NII and fees, driven by higher activity. Wealth also maintained the positive trends from the first half with revenue rising 13%, supported by record assets under management and a strong commercial momentum. CIB grew 6% year-on-year, driven especially by Global Markets and our growth initiatives in the U.S. Consumer also had a strong performance, supported by strong net interest income growth across most of our footprint. And finally, in Retail, revenue rose even in a less favorable interest rate context, thanks to our active margin management and our increased focus on fees. The group's net interest income increased 3% year-on-year, excluding Argentina. Although the majority of group's NII comes from Retail and Consumer, this quarter, most of our businesses contributed to the overall growth year-on-year, which was supported by active asset and liability pricing management. This is most evident in Consumer, both in Europe and the U.S. with improving loan yields and a funding structure with a larger share of customer deposits. Also in Retail, especially in the U.K., Chile and Mexico. Strong activity in Cards, particularly in Brazil, higher volumes and lower funding costs related to market activities and CIB on our efforts to adapt the sensitivity of our balance sheet to protect NII on the new cycle of interest rates. A good example of this is Retail, where net interest income increased across most countries in a less favorable context of interest rates. In the quarter, net interest income was impacted by the Argentine peso. Excluding Argentina, NII was flat and net interest margin declined only 4 basis points for similar reasons I just mentioned. This performance is in line with our guidance of NII going slightly up in 2025 in constant euros, excluding Argentina and slightly down in current euros. We believe net interest income is approaching its trough as we move into a more balanced environment with rates in Brazil expected to ease and lower rates in Europe likely to support consumer volumes and funding costs. Net fee income achieved yet another record period as the number of active customers continue to increase and our transformation promotes connectivity across the group, deploys high value-added products and services and delivers the best customer experience. Fees grew high single-digits, above our target for the year and well above inflation and cost. This was supported by positive activity trends, customer growth and a product mix that is shifting towards more value-added products and services. This shift is evident across all global businesses. Retail fees rose 5%, increases across most of our footprint. CIB increased 7%, up from record levels last year, boosted by an excellent first quarter and year-on-year growth across all business lines, particularly in Global Banking in the U.S. Wealth maintained strong momentum across business lines, backed by record assets under management. Double-digit growth in Payments, both in PagoNxt and Cards, supported by higher activity levels. As discussed in previous quarters, this year, Consumer is affected by new insurance regulation in Germany. Nevertheless, we saw a recovery this quarter, supported by our strategic focus on Insurance with rising penetration expected to translate into higher fee generation as activity accelerates. As we advance our transformation, enhancing customer experience and connectivity and continue to attract more customers, we expect a strong and sustainable fee performance. ONE Transformation is key to understanding why we are improving profitability in most of our markets, leveraging the connectivity that our global businesses provide. The improvements are already very evident. Our costs dropped 1% year-on-year in current euros, which translates into better efficiency levels already amongst the best in the industry. In Retail and Consumer, which are the -- which are leading our transformation, costs are evolving very positively, down 1% in real terms, even with pressure on salaries in some countries and the upfront cost of rolling our global platforms. In CIB, Wealth and Payments, where we are investing, costs grew. However, they showed positive operating jaws with a double-digit fee increase, as I have just explained. This excellent performance resulted in a 5% rise in net operating income from already high levels last year, and our efficiency ratio improved to 41.3%, the best we have reported in more than 15 years. Going forward, we expect sustainable improvements in operational leverage as we further implement the structural changes to our model, especially in Retail and Consumer, which represent 70% of our cost base. The risk profile of our balance sheet remains low with robust credit quality across our footprint on the back of low unemployment and easing monetary policies in most countries. Loan loss provisions increased 5% year-on-year, reflecting the decision to reduce NPLs and also some deterioration in Brazil in the context of higher interest rates. Credit quality continued to improve year-on-year as reflected both in the NPL ratio and cost of risk. The NPL ratio was fairly stable at 2.92%. Remember that much of our NPL ratio -- NPL portfolio has collateral, guarantees and provisions that account for more than 80% of its total exposure. Cost of risk improved year-on-year and quarter-on-quarter to 1.13% despite the management actions I just explained. In Retail, cost of risk improved year-on-year across all our main countries and was steady in the quarter. In Consumer, cost of risk also improved both year-on-year and quarter-on-quarter as the excellent trends in the U.S. continued in the third quarter, even with the usual seasonality. U.S. auto has demonstrated to be highly profitable and resilient business through multiple macroeconomic cycles. It continues to perform better than expected even after some normalization of the delinquency rate in line with our expectations with over 90-day delinquency at historically low levels, backed by strong labor markets and resilient used car values. Finally, our lending exposure to private markets is less than 1% of group's lending exposure. We anticipate a stable cost of risk going forward, supported by stable labor markets. Moving on to capital. As you know, we have been working on improving our capital productivity and accelerating our capital generation for some time. Our CET1 ratio increased again to 13.1% and is now above the top end of our 12% to 13% operating range. This quarter, we generated 56 basis points of capital from attributable profit, which enabled us to accumulate capital after allocating some capital to profitable organic risk-weighted asset growth, mostly offset by asset rotation initiatives, compensating capital distribution charges for shareholder remuneration and AT1s and absorbing other charges, including some regulatory headwinds, which, as we discussed last quarter, this year will be lower than initially expected as some of them have been postponed to 2026 and some of the technical notes published by the EBA were more favorable than anticipated. We continue to deploy capital to the most profitable opportunities and leverage our global asset desks, mobilization capabilities to maximize capital productivity. Our disciplined capital allocation delivered a new book RoRWA of 2.8% in the quarter, equivalent to a return on tangible equity of 22%, well above that of our back book. Hector, back to you. Hector Blas Grisi Checa: Thanks, Jose. In conclusion, these are great results. Good business dynamics and our business model supported solid revenue growth with fees rising high single digits while we reduced cost in euros. Cost of risk improved and remains in line with our target of around 1.15% at the end of the year. We grew the CET1 ratio again to 13.1%, exceeding the upper end of our operating range on the back of our strong capital generation, while we profitably grow our business organically and continue to reward our shareholders. Our RoTE improved and is on track to reach our target of around 16.5% in '25 and TNAV plus cash dividend per share keeps growing double digits. In summary, very solid results even in a less favorable environment than we initially anticipated, which makes us confident that we will achieve all our '25 targets. We expect to maintain the good trends supported by our focus on profitable growth as we deepen in our transformation in a context of resilient labor markets. We are building a stronger and more connected Santander to track the full potential of our unique combination of customer focus, scale and diversification. This is exactly what makes us confident that we will keep on growing and creating long-term value across different economic cycles. And the best is yet to come. Now we will be happy to take your questions. Thank you. Raul Sinha: Thank you, Hector. Thank you, Jose. Could we go to the first question, please? Operator: [Operator Instructions] We already have the first question from the line of Ignacio Ulargui from BNP. Ignacio Ulargui: I have 2 questions. I mean, looking to your RoTE target for the year of 16.5% has to be an acceleration into the fourth quarter to get to that level. What would be the main drivers for that? I mean, don't you feel revenue and NII has probably troughed this quarter, we should see a more decisive increase in the quarters to come? Or would be fees what drives that performance? I mean, linked to that, how should we think into 2026 on those lines? I have -- the second question is a bit of a clarification looking to the credit quality in Brazil. There has been a small improvement in the quarter. Provisions have come down. How should we think about cost of risk? And I mean, there has been any kind of release of provisions that you took in 2Q for the extraordinary top-up that you did? Or it's just underlying improvement of credit quality and provisioning? Hector Blas Grisi Checa: Thank you, Ignacio. First of all, let me discuss a little bit about the RoTE of the 16.5% of CET1 target. First of all, I mean, as you have seen, in the first 9 months, we have delivered a record profit with a RoTE of 16.1%. But if you see just in Q3, the underlying RoTE is well above the 16.5%, okay? So it's very important that you see that. Second, we expect a really strong performance in Q4, basically driven by a number of factors. You can see, first of all, we also have seasonality higher fees. We have an increased momentum from the execution of ONE Transformation, and we're reiterating the guidance of around EUR 62 billion in revenue for '25. We see lower cost and the cost of risk around 1.15% that we have discussed and other results of around EUR 3 billion. So I do believe that our strategy, the business model, the diversification, the disciplined approach to capital allocation will deliver a compounding effect that will continue yielding the positive results we're aiming for. So I see that we're going to get around that circa 16.5%. The important thing also to take into account is the disciplined capital allocation that is driving a 15% growth in value creation and higher shareholder remuneration and with the CET1 that you have seen that is strong at levels of around 13.1%, okay? So it is very important for that. I mean, as you were also, I mean, the outlook for '26, as you have seen over the last 2 years, we have shown consistent execution of the strategy, and we have delivered RoTE every year from below the 15% that we were back in '22, okay? As you know and we have discussed, we will provide further details over the next -- for the next 3-year plan, our Investor Day that is going to be in February '26. So wait us for that. But it is important to understand that if you see every single unit of the bank basically showing improvement, first of all, every single business unit, global business is also improving. And as we already said, we're only scratching the surface of the potential with ONE Transformation. As we have discussed previously, and I said back in the Investor Day in the beginning of '23 is that our aim was to become the best bank in every single geography. And up to today, we are best-in-class in 5 of our geographies, but we still have 5 geographies to close the gap with the #1 in that market. So that basically gives you the view that we will continue improving. And then we have, as you know, '26 is also a transition year with the impact from Poland reducing net profit by EUR 700 million and the TSB contribution that is likely to be more material once we make progress on the integration. So also on the current cost base is elevated given the migration towards global platforms, which is resulting in some duplication of cost. But nonetheless, I do see that we have a very promising '26. In terms of -- sorry, Jose, go ahead. José Antonio García Cantera: No, no, cost of risk in Brazil. Hector Blas Grisi Checa: Yes. I also want to talk about cost of risk in Brazil. Look, in the quarter, loan loss provisions fell 9% quarter-on-quarter, okay? 12-month cost of risk remained stable at around 4.71%. Over the last 2 years, we have derisked the balance sheet as we have been explaining to you every single quarter. With a rapid contraction of unsecured and less profitable lines such as personal and payroll loans that remember that I explained to you that we were changing the mix, and that's basically helping us out. However, I mean, we have rates that are the highest in the developed world. I mean, 10% -- 10 points of real rates, which is also a challenging environment for companies, especially agribusiness, corporates. So it's a difficult environment. Hopefully, rates, and we basically believe we will be coming down a little bit during the first quarter. So I do believe that credit quality, volume growth and earnings will be supported by an improving macro, which we have seen. Even with these rates, remember that Brazil is going to grow around 2% the year. And as I said, hopefully, by the end of '27, we see rates falling down to 10.5%. Jose can basically give you more details. José Antonio García Cantera: Just to add, if you look at cost of risk on a quarterly basis, in 2024, cost of risk was 4.5% every quarter. In the first 2 quarters of this year, we had cost of risk of 4.9%. It's back to 4.5% in the third quarter. There's nothing extraordinary, no reversal of provisions or anything. So it's a more normalized asset quality level, the one that we've seen in the third quarter. And we would expect to finish the year within the range that we guided you for, which is somewhere between 4.7% to 4.8% or around 4.8% cost of risk. Operator: Next question from Cecilia Romero from Barclays. Cecilia Romero Reyes: The first one is on capital. You have guided for around 20 basis points of regulatory headwinds, if I'm not mistaken, for the rest of the year, which now obviously looks like it will come in Q4. Is that still the case? Considering Q4 is typically a more intensive risk-weighted asset quarter and that there could be an additional hit from U.K. motor provisions. How comfortable are you with the 13% CET1 target? And then my second one is on corporate actions. For the Santander Bank Polska sale and the TSB acquisition, is everything still on track to be closed by year-end and early 2026, respectively? And is there any changes to capital impacts or any of the financial impacts previously announced? Hector Blas Grisi Checa: Thank you, Cecilia. So in terms of -- I'm going to basically answer you #2. So in terms of Santander Bank Polska, I mean, I review every single week the advance on that one, and I believe that we're right on track to close on Q1. In terms of capital, I will ask Jose basically to give you his overview of what you have asked. José Antonio García Cantera: So the outlook for regulatory and supervisory charges is now better, as I said during the presentation because some charges that we expected this year have been postponed and probably will be lower than we had anticipated. They have been postponed to '26. And also some of the technical notes, model adjustments, et cetera, came in better than expected. So for the year as a whole, I would say that regulatory and supervisory charges will be in the region of 20 to 25 basis points. We have had 16 in the first 9 months of the year. In terms of targets, we believe that we will generate capital in the fourth quarter from the 13.1% that we reported in September. So the -- let's say, the view that we have today on capital is that the ratio will increase in the fourth quarter further. In terms of the capital charges, et cetera, related to the acquisitions, nothing has changed. We think Poland will generate around 90 basis points of capital. We don't know exactly because it depends on the deductions, but it will be around 90 basis points. The acquisition of TSB is around 50, 52 basis points capital charge. And remember that we announced once we closed Poland, a share buyback in the amount of EUR 3.2 billion, so -- which is around 50 basis points. So those are the capital charges from the transactions, and we haven't -- they haven't changed in the last couple of months. So we don't expect them to change materially from the numbers I gave you. Operator: Next question from Francisco Riquel from Alantra. Francisco Riquel: My first question is on NII in Spain, which is 1% up quarter-on-quarter. You were guiding for a decline. You already improved the full year guidance from minus 6%, minus 7% to minus 4%, minus 5%. So I wonder if you can update again on this guidance because I think I feel trends are better than expected and comment also on the margin dynamics. I see the customer spread is down, but NIM is stable. So what should we expect for NII loan growth in Spain in Q4 and in 2026? And then my second question is, I wonder if you can update on the rollout of the Gravity platform. You have recently completed in large markets like Spain and Chile. I wonder what type of efficiency and productivity gains are you capturing already? And what shall we expect on a full year basis? Hector Blas Grisi Checa: Thank you, Francisco. Yes, you have said, I mean, NII in Spain is much better. I think that the Spanish team has done a great job in terms of managing betas. And as Jose explained in his presentation, we have done a pretty good job in that sense. That's why you see NII basically up 1%. We expect, I mean, to continue fourth quarter up low single-digits from flat that we have expected. So -- and we expect to basically have that. For '26, I will basically tell you that, I mean, we have good dynamics. But nevertheless, we expect -- it is important that you wait for the beautiful picture that you have in front of you in terms of the Investor Day, we will give you a little pretty good idea of what we expect. In terms of the rollout with Gravity, I'm glad you asked the question. I think that, look, it's very important. As a matter of fact, we just migrated Mexico this weekend, okay? That's another large market that is being migrated. So to tell you exactly how it works is basically once we migrate a country to Gravity, we start basically shutting down the mainframes. Let me give you an example. Remember that Spain was migrated in April. We had -- used to have 5 mainframes in Spain. 2 already have been shut down. We're still waiting to shut down another 3 more that we will be closed down over the next 18 months. Once we shut down those, that basically decreased costs quite a lot because every time we do that, I mean, actually, we save a lot of money by all the charges that we get from the suppliers in terms of that. So to give you exact numbers, I mean, we can contact you later because I don't have the exact numbers that we will get from that. But I do believe by the end of '26, all the big countries will be migrated, and we will start the migration with the smaller countries. What I can tell you is the results are pretty good. The NPS with the customers is getting better. The response, I don't know what market is and if you're a customer of ours, but hopefully, you are, you're going to see that the speed has become a lot better. It's a lot easier because we don't go back and forward to the mainframe every single time you consult your balance on your current account or anything like that. It's pretty much faster. So I think that the results are there. Spain is getting less cost out of what we have done. Chile, the response has been really, really good. Mexico migration was a success, and we expect to be closing -- I mean, decreasing the amount of capacity. We're using the mainframe right away, and we'll see it over. But you see the results on '26. That's when exactly happens because we will be shutting down the mainframes on those markets. José Antonio García Cantera: Okay. If I may add some details on NII, you asked about the difference between customer margins and NII. I think we are -- as Hector said, we are doing a great job in managing cost of deposits, a lot better than we anticipated. We are growing volumes at a lower cost. So that's one component relative to the initial guidance we gave at the beginning of the year. The other one is obviously all the hedging decisions that we've taken. Right now, we have around EUR 50 billion of Spanish government bonds at an average yield of 3.4% and a duration of 5 years. That's expected to add quite a lot to the NII in the fourth quarter and next year. So on a sequential basis, I think, as I said, we are close to the trough. It's possible that we see a slight decrease quarter-on-quarter, maybe 1 or 2 quarters more, but from very, very close to basically flattish, but basically probably slightly down quarter-on-quarter. So if you look at the year as a whole, you're right. We guided for minus 6%, then minus 4%, and it's going to be flat or slightly down year-on-year. But the outlook for 2026 beyond these 1, 2 quarters where it might be marginally down is quite positive. Operator: Next question from Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: Here is Sofie from Goldman Sachs. So my first question would be around the kind of litigation provisions still to come. You took a provision in the Corporate Centre in the fourth quarter. How much -- or is there any additional details that you could give around this provision? And how much should we expect still to come from U.K. motor and also AXA provisions? Do you have any other litigation provisions that we should expect in any other countries over the next quarter or year? That would be my first question. Then my second question would be if you could maybe talk a little bit more about the net interest income outlook in Brazil. I know interest rates are expected to come down. But in the kind of short term -- short to medium term, what do you expect in terms of volume growth? Could you remind us of your rate sensitivity in Brazil? And how long does it take for lower rates to help the Brazilian net interest income? Hector Blas Grisi Checa: Thank you, Sofie. Okay. I mean, first of all, on this situation of the litigation provisions to come. First of all, on the U.K. AXA situation, we do not expect the net impact of the judgment to be material for the group, okay? In October 22, the court granted Santander permission to appeal and the case will now proceed to the Court of Appeal. Given this is an ongoing matter, we are not able to comment any further. I'm sorry about that. In terms of the U.K. motor finance, in '24, as you know, we took almost a GBP 300 million provision for the U.K. FCA motor finance review. We have noted that the FCA has recently published a consultation into a proposed reduce scheme and Santander U.K. is reviewing the consultation in detail basically to understand the potential implications. We also know that the FCA's proposed approach differs in an important respect from the Supreme Court's ruling and the legal basis for the redress scheme relevant period is not clear, and it remains at the consultation stage. So there is, therefore, a certainty regarding the final scope methodology and the timing of the redress scheme that may ultimately be implemented. So at this point, I think it's very complicated. And the important thing that I can tell you that is not expected to be material for the group and no more than a few points of CET1. So we will provide you further update on the Q4 results, and we reiterate that we're on track for the results and the guidance that we have given you for '25 on all the targets. In terms of NII outlook for Brazil, what I can tell you is interesting to say basically that we need to put Brazil in context. So it's very important to understand that. The loan book in Brazil is only 9% of the total group loans. Diversification is working. The impact of higher rates and inflation in Brazil has been positively offset by the stronger performance in Europe and in other businesses. But Brazil is also -- it's important to say, it is growing by 2% in '25. Labor markets have been resilient, okay, despite the challenging rate environment. And as I said before, interest rates are the highest, I mean, in terms of real rates, which is an important point to take. So what we have done is that we are changing the mix, and we are going to a higher quality business, which means lower margins, but more stable asset quality, which is very important. And I feel comfortable and confident that as monetary policy eases, the business will do even better than we did in the last easing cycle. Also, you got to remember, as you know very well, that we have negative sensitivity to high rates in Brazil. So we expect once the rates start coming down that, that basically will help us out and we will give better margins for us. If we've been that, I don't know, Jose, if you would like to complement. José Antonio García Cantera: Yes. Just some details on that. Interest rate sensitivity today to 100 basis point move in the curve is EUR 75 million upwards and downwards. You know that this is lower than it has been in the last few years. We've been decreasing the overall sensitivity, but more importantly, we've been moving the sensitivity towards -- we've made the sensitivity more sort of homogeneous along the curve. So we no longer depend as much on short-term rates, but we have a spread sensitivity from 0 to 3, 4 years, which we think is the right position to be in front of the lower rates. We expect next year. So we would expect NII to be stable in 2025 with basically stable revenue and with fees up. This basically on loans that are also going to be stable in 2025. So again, no further, I would say, the sensitivity we have when we look at 2025 -- sorry, 2026 and 2027 should contribute positively to NII evolution in Brazil in the next couple of years. Operator: Next question from Alvaro Serrano from Morgan Stanley. Alvaro de Tejada: I kind of have a follow-up on costs and another one on U.S. asset quality. On cost, cost income continues to improve sequentially quarter-on-quarter. My follow-up is, apologies, Hector, I heard you say that Mexico Gravity was implemented this weekend, but I don't -- I missed if you can give us the pipeline of the next few countries over the next few quarters. And as we think about next year's cost in medium term, I noted in the past, you've said you can achieve flat costs in retail in particular. Is this possible in places like Brazil and Mexico? Because in Mexico, sorry, your cost income is not as good as peers. So just wondering if there's an advantage there that we're not taking into account? And the second on costs -- sorry, on cost of risk in the U.S. Jose, I noted your comments saying that stable asset quality performance in the U.S. But if we look at ABS data at an aggregate level, there is a deterioration, it looks like in subprime auto, which you have some exposure to. Can you maybe talk us through why you think you're not seeing that deterioration? Is it because you haven't been growing that much in the segment over the last 2, 3 years? You're not exposed to undocumented where there has been some trouble. Maybe some more color on that stable asset quality performance in the U.S. that you've noted. Hector Blas Grisi Checa: Thank you, Alvaro. So first of all, let me give you a general view on cost on the group, and then we'll get into the details of Gravity and then flat cost in Mexico, Brazil, which, by the way, are pretty good questions. And then I'll address the U.S., which thank you very much. I knew you were coming with that one, so I was prepared, okay? So costs remain very well controlled in the first 9 months of '25, as you have seen, so minus 1% in current, all right? I must tell you that we will reiterate the guidance to deliver lower cost in current euros versus '25 versus '24, okay? Because we see that we're done in absolute terms and the cost growth remains below the revenue growth, which is very important in this group. Remember, always positive jaws, underpinning the confidence in delivering the positive operating leverage that we are creating through ONE Transformation. Remember, ONE Transformation is all about increasing revenues and decreasing cost, and that basically creates the operating leverage that we're working for. Short-term costs are higher as we continue to invest in the global platforms. As I explained to you, I mean, Mexico, even though we had the migration this weekend, I mean, the mainframe is still basically consuming MIPS because we want to keep this in parallel until we stabilize Gravity. Once Gravity is stabilized, we start basically decreasing the amount of MIPS that we consume on the mainframe. By the way, then we start decreasing the cost that we have. So -- and we have the same in many different platforms, Alvaro. So that's why I say that '26 is the most difficult year because that's where we are doing this transformation in which the global platforms are coming in, Gravity, Plard, Payments Hub, et cetera, and we start in parallel running those. By the way, just getting into Mexico, Mexico is the worst one by far because Mexico is the one that we needed to upgrade the most and it's the one that has most dual platforms working on. They have in dual Plard for credit cards, and they have Pampa working at the same time where we're doing the migration. We have Gravity and the mainframe at the same time because we're doing the migration. We have in Payments Hub and transfer working at the same time because we're going to decommission transfer towards the end of the year. So you'll see that Mexico will start basically getting more -- I mean, in the level of our peers. And by the way, our only peers that you are talking about is Banorte and BBVA because the rest are further ahead from us in cost. We're much better. I mean I would say that we are a little better in average but we need to get -- I couldn't agree more. We need to get to our peers, and that's exactly what we're working on. And the same thing is -- I will tell you is Brazil, okay? So Brazil is going to be the same, but I mean, we implement, for example, Brazil just got the new version 24 of the global app that is coming in. It's the first country to do so. We already have 1 million customers migrated, but we need to migrate 60 million customers at the end. So this takes time. But nevertheless, we are also at the same time, because we're doing the simplification and the automation, we've been able to maintain cost. And you were asking precisely about what's going in Retail and Commercial, which is a really good question. How are we basically doing to decrease cost in Retail and Commercial at the same time, we're doing this deployment. It's because in Retail and Commercial, we are doing interesting things in terms of basically concentrate on simplification. You take a look at the number of products that we had 3 years ago, it was over 10,000 products. Just to give you an example, 300 different credit cards in Brazil. We're down to 17 different credit cards in Brazil. Mortgages in Mexico, we have 17 different types of mortgages in Mexico. We're down to 3. So the amount of things are going. The important thing is basically change the legacy on the back of the bank. That's where the big job is being taken on in terms of simplifying all the legacy that we have, and that's a huge amount of cost. Sorry to extend myself, but it's very important that you understand what ONE Transformation is all about. It's not just about the platforms, it's a lot about simplification and automation of processes, which really change exactly what we're doing. So I'm confident that '26, even though it's a tough year in terms of everything that I'm explaining to you, we will be able to maintain costs flat or down in the group because that's exactly where we are concentrated, okay? So it's very important that you get that. I don't know if that basically answers all of your question. If not, please let me know, and I will gladly give you all the details on that. But the thing is, I mean, the amount of money that you save once you're decommissioning, and that's the most important part, the discipline on the commissioning, you really start to see the savings coming on and you have seen it because there was no other way that we could be giving you this number in cost if we were not really doing those commissions and being very disciplined about it. In terms of cost of risk in the U.S., first of all, it's important what I was telling you. We continue to be and to high exposure to prime and near prime. If I'm correct, 38% of our book is prime and near prime, okay? As you say correctly, the amount of origination has come down significantly. We were at the peak about 2 years ago at around EUR 35 billion in origination. We're down to EUR 22 billion, EUR 23 billion. And at the end of the year, it's going to be EUR 24 billion in origination. The origination that we do in subprime and this subprime is very well managed and it's not the same that the other player basically was doing. As you say, we never get into with undocumented customers. So it's a completely different model than the one we have. So what you see is what Jose explained in his presentation that we see that even 30 days and 60 days delinquency is normalizing, 90 days is still below what we expected. So we expect less provisions even in the fourth quarter from the U.S. auto business because of that. So I don't want to give you an exact figure because, I mean, you never know what happens towards the end, but we see nonetheless that labor market is still strong. Manheim is up 2% year-on-year, even though it has decreased a little bit in the past 3, 4 months, but nothing to concern us. And the customers, what's happening after 90 days is that they want to keep their autos because they know that it's going to be much more expensive to go out into the market. So that's why 90-day delinquencies, people are basically coming back to us and renegotiating because they want to keep their autos. So I don't know if that basically answers your question. Jose, I don't know if I left anything out. José Antonio García Cantera: Just again, in terms of cost of risk, the second half tends to be worse than the first half. But when you look -- when you compare quarter-on-quarter '26 against -- sorry, '25 against '24 the numbers are coming in better every single quarter than we had last year. So in the third quarter, last year, cost of risk was 1.85%. It is 1.69% in the third quarter of this year in the U.S. Remember, at the beginning of the year, we guided for cost of risk slightly above 2%. Today, we see cost of risk in the U.S. below 2% in 2025. So actually better than we expected. Again, knowing that there is some seasonality in the second half, but the numbers should be better. And just to give you a bit of more details on what Hector just said, when we look at loans past due over 60 days, and if we look at the last 10 years, this number for non-prime has moved between 4% to 8%. And we are within that range at the moment. So it's not -- by any means, it has been going up recently, but it's within the range that we've seen in the last 10 years. When we look at prime, for instance, over 60 days, it's below 3%. And again, this figure has been moving a bit higher, a bit lower than 2% for the last 10 years. So very much normalized. It's true that in the last couple of quarters, we're seeing some increase in this ratio, but this is not translated into losses because the recovery rates remain very robust. So when we look at actual losses, net loss in prime, it's basically below 3%, which is much better probably that we saw, for instance, during the period of 2010 to 2020 or 2019. And if we look at non-prime, losses are below 7%, which is the best we've seen, excluding the post-COVID period, these are the better numbers, the best numbers that we've seen in many, many years. So net-net, actually very normal behavior is what we see in the U.S. Operator: Next question from Carlos Peixoto from CaixaBank BPI. Carlos Peixoto: First question would actually be regarding first brands in the U.S. So there was the press reports over previously this month regarding some engagement with Jefferies and the possibility of Santander being involved in the refinancing of first brands. I'm just trying to understand here whether there is any relevant exposure? Or do you see this as a risk for the group? The second question would actually be focused on the corporate tax rate. So how do you see -- what should we expect in terms of overall corporate tax rates in the full year or in the fourth quarter? If you prefer for the group as a whole, but focusing as well on Brazil, we had this quarter low tax rate given the interest payments on capital. Should we see a similar effect in the fourth quarter? Or should we see it reverting back to the previous levels now in the first? Hector Blas Grisi Checa: Thank you, Carlos. I must tell you in terms of first grants, as you know, we don't discuss customers. What I can tell you is that whatever we have is not material for the group at all. José Antonio García Cantera: Tax rate. Yes, the tax rate for the group in the first 9 months of the year was 26.6%, which basically it's -- in Spain, it was 37.5%. Excluding Spain, 24.1%. This is a little bit better, not significantly better than what we anticipated. There are 2 reasons for this. In the U.S., tax rate is 10%. Remember that we said that when the EV vehicles, the aid program finalizes and the tax rate would normalize gradually, and we thought that it would normalize faster than it is normalizing. So actually, the tax rate is lower in the U.S. than we thought, slightly lower in Brazil, nothing significant. So for year-end, we would expect the tax rate to be around the same level it is today, 27%. Operator: Next question from Britta Schmidt from Autonomous. Britta Schmidt: A couple of follow-ups on credit, please. In Mexico, I think there's some comments on model updates and higher SME provisions. Can you help us disentangle these 2? What was the impact of the model updates? And what are you seeing in terms of the SME pressure? And do you expect that to continue or get worse? In Brazil, there were also some selected issues in the corporate world. Can you maybe comment whether you've got any exposure here and whether you still feel happy with the provision that you built in the last quarter? And then lastly, Argentina came in quite high as well. Is this only lending or are there also impacts in potentially the bond portfolio? And maybe you can share with us a little bit as to what you expect for Argentina in the coming quarters with regards to results, hyperinflation and also FX developments? Hector Blas Grisi Checa: Thank you, Britta. I will address the questions on Brazil and Argentina and then Jose will tell you a little bit, I mean, what's going on. But let me tell you that in Mexico, I mean, the portfolios are performing really well. We have had some model updates, anything, but nothing that hits capital in that. And SMEs basically, actually, we're growing in the segment because we have really good roll. So I can tell you that we're going to be for that, but Jose will give you better details. In terms of Brazil corporates, I can tell you, we have taken a deeper look on the portfolio because with 10% real rates, corporates suffer in that environment. So we have reviewed the portfolio in detail. We have actually understood and located exactly what the problems are, and we're working on them. But I don't see any significant situations on the portfolio up to this point. All of them are under control and they were taken -- we're really taking care of them. So on the corporate side, -- and we don't have anything material that would be a material impact for the group, at least on the next few months, okay? But -- and I don't foresee it because even the situation, as I said, Brazil is growing 2%. So in that sense, the economy is still growing. Argentina is an interesting story. I actually was in Argentina. I was in Brazil a couple of months ago. And what I can tell you is the situation is complicated. In one sense, it's complicated because, as you know, inflation is at around the levels between 25% to 30%, and that's where the year is going to end. Rates because the government has really, I would say, basically, there is no pesos to lend in Argentina, okay? So the government is squeezing pesos out to really decrease inflation in a strong way. So that basically -- that has basically taken rates to -- real rates to levels that are tremendously high. So what you see in Argentina happening is that the cost of risk is growing tremendously hard. So we've been very cautious in Argentina because of that. I mean, cost of risk in Argentina went almost to the level of 7%. And that's why, I mean, with real rates at this level, it's really impossible to make money with 60 points of real rates. So what we've been doing is being very cautious. We're basically being -- the only lending that we're doing in Argentina is to exporters in dollars. That's the majority thing and energy -- I mean, and energy companies. So we're basically involved in situations in Vaca Muerta, where there is a lot of opportunities and the portfolio is basically going very well. But I must tell you to lend in pesos in Argentina in this market today is hard because of the real rates. So hopefully, let's see what the government does with this victory that they just had. They had a pretty good rally. The peso appreciated a little bit. So hopefully, let's see that they ease up a little bit on the economy, the rates -- real rates start to come down, and we see a much better next few months. But today, we're being very cautious in the way we manage credit in Argentina. Jose? José Antonio García Cantera: Mexico, yes, we've updated the models, the provisioning models and some capital models. The consequence is that without really seeing any significant deterioration in real asset quality, there has been a movement from Stage 2 to Stage 3. So it's around 10% of the Stage 2 loans moved into Stage 3, but it's the consequence of the model, not that the actual deterioration was taking place. In any case, cost of risk in the third quarter is still below 3%. In the third quarter alone, if we look at the last 12 months cost of risk at 2.6%, below 3%. And remember at the beginning of the year that we said cost of risk in Mexico would not go above 3%. It's actually quite well below 3% because the overall performance is pretty good. But in this quarter, in particular, again, it's this technical change from Stage 2 to Stage 3. Operator: Next question from Pablo de la Torre Cuevas from RBC. Pablo de la Torre Cuevas: I just want to get your thoughts on the deposit for the U.K. into the next year. One of your peers talked about muted deposit growth in 2026 and another has spoken of elevated competition in term deposits. So just interested in your thoughts there as deposit growth has been a big driver of top line growth over the last couple of years for U.K. banks. And then if we translate that into U.K. NIM directionally and excluding TSB, would you expect underlying U.K. NIM to grow as much in 2026 as it has been in 2025, driven by that structural hedge repricing? José Antonio García Cantera: So structural hedge right now is EUR 106 billion at 2.7% yield and 2.5 years of duration. So this should have positive contribution to NII next year. Second comment, we expect rates to go down from 4% to 3.5% by year-end next year. It could go down even -- there could be even 3 cuts, but we believe that we give today more probability to 2 cuts. Volumes should be up next year. So overall, we would expect NII to actually increase in the U.K. in 2026, excluding TSB, of course. And we are talking low to mid-single digits increase in NII. Raul Sinha: Thanks very much, Jose. Ben, hopefully, that answers your question, but we can take it offline if you've got any further details on deposits outstanding. Could we have the next question, please? Operator: Next question from Borja Ramirez from Citi. Borja Ramirez Segura: I have 2. Firstly, on capital, I believe it may have been mentioned that in Q4, it's generally more intensive in terms of the SRTs. So I would like to ask if you could provide any details on the capital benefit that we may see in Q4 linked to SRTs? And then my second question would be on other provisions. If I understood well, it was mentioned that other provisions would be around EUR 3 billion for 2025. Given that you have booked EUR 2.5 billion in the 9 months, this seems to imply EUR 0.5 billion for Q4. So I would like to ask if my numbers are correct, of course, if -- what are the assumptions on provisions? José Antonio García Cantera: Thank you, Borja. The first one, yes, the fourth quarter is the most active in risk-weighted asset mobilization initiatives. And as a consequence, we would expect net risk-weighted asset growth to be close to 0 in the fourth quarter. It was slightly positive in the third quarter. We have gross risk-weighted assets up EUR 11 billion and asset mobilization initiatives between EUR 7 billion to EUR 8 billion in the third quarter. So the fourth quarter the net gain from SRTs, which, by the way, is not the only way we are mobilizing capital. In the third quarter, we mobilized as much by asset sales as securitizations and also we had some hedges. So we are using different tools to optimize the capital and increase the capital productivity. So putting all this together against risk-weighted asset growth in the fourth quarter, it should be very, very close to 0. Your second question, when you speak about other provisions, I presume that you're talking about other results, so the line below provisions. And yes, this line should be substantially lower than last year because of the one-offs that we had last year and because the banking tax in Spain last year was accounted for in other results now is in the tax line. And yes, we would expect this line to be a bit higher than EUR 3 billion in the year. EUR 3 billion, EUR 3.2 billion is the reasonable number. In the absence of any substantial one-offs that at this point, we do not envision. But in the absence of substantial one-offs, the answer is yes. And the reason is, excluding these one-offs, what is in this line is the labor cost in Brazil, operational risk. It tends to be a bit higher in the fourth quarter, but not to deviate a lot from, let's say, EUR 3.2 billion for the year, again, excluding one-offs. Operator: Next question from Andrea Filtri from Mediobanca. Andrea Filtri: The first is a bit of a back of the envelope. Your 16.5% RoTE target discounts around EUR 13.6 billion profits in 2025, which would only imply EUR 3.3 billion left for Q4 '25, which would be a deceleration quarter-on-quarter, while your RoTE guidance implies a marked acceleration in Q4. So which of the 2 is right? And second question, more conceptual on insurance and the Danish Compromise. You have made statements prior on the intention to gain Danish Compromise like benefits at Santander. Could you elaborate a little bit how you intend to do that and what sort of benefit you could get? Hector Blas Grisi Checa: Okay, Andrea. First of all, and I know you're very bright, probably brighter than me, but you need to redo your numbers because for me, actually, the numbers shall be going up. So that will be my comment on that one. In terms of -- okay, in terms of Insurance and what we're doing with Danish Compromise, the only thing I could say is we have formally approved -- I mean, sorry, applied with the ECB for enhanced supervision, and that's the only thing that I could discuss at this point. And let's see what the ECB decides. And if they give us enhanced supervision, that will give us basically the trend to see the following path or the following step. Raul Sinha: Yes, Andrea, post-AT1, 16.5% would be slightly higher than the numbers, but we're very happy to give you a call after and take you through the details. We have the next question please? Operator: Next question from Ignacio Cerezo from UBS. Ignacio Cerezo Olmos: First one is if you can give some color on any excess capital above the 13% by the end of the year if that is going to be used for incremental capital return or there's going to be some uses of that capital, thinking of potentially restructuring costs, for example? And then the second one is on the payout mix between cash and buybacks, considering higher share prices and lower profitability of buying back stock, if you think it makes sense conceptually to be moving towards the cash dividend component basically of the payout mix in the future? Hector Blas Grisi Checa: As you know, we have a very strict capital hierarchy, okay? First of all, as we have said, we're going to prioritize organic profitable growth. Second, we're going to follow it by ordinary distribution. Then we do any bolt-on acquisitions that must be complementary and to generate attractive financial returns. And those need to surpass those of any organic investments or buybacks, okay? So I believe that at this point, we feel very comfortable with the capital levels that we have. And the capital allocation framework has been fundamental pillar of the strategy, as you have seen. And we will continue the disciplined and strict capital approach that we have had to capital, all right? So in that sense, then I will ask Jose basically to give you more details on the buyback. José Antonio García Cantera: So this is a very interesting intellectual and financial discussion because you have all types of technical papers written on this matter. But the way we see this, and obviously, this is for the Board to decide, and it will decide in the Board of Directors that will take place in December about the dividend policy for next year. But the way we see that or I see that is that when you are looking at improving profitability going forward and when you are looking at a cost of capital that is at worst stable, probably improving, and then you add growth, high single-digit growth buying back shares is still a very good value proposition. Obviously, the new business is being written at a return on tangible equity, as I said, of 22%. That is the first and most important use of our capital, but there's not an infinite amount of capital that we can put to work at 22%. So once we have covered that bucket, buying back shares, again, when you're looking at improving profitability, stable lower cost of capital and growth in profits is still a very good value proposition for shareholders. Raul Sinha: More details to come next year, not sure. I hope you understand. We've got 2 more questions left. Could we go to the next question, please. Operator: Next question from Fernando Gil de Santivanes from Intesa Sanpaolo. Fernando Gil de Santivañes d´Ornellas: Can you hear me okay? Raul Sinha: Go ahead. Fernando Gil de Santivañes d´Ornellas: Okay. First question, a follow-up in Spain regarding the repricing on rates, are we done in the repricing? And what is the bank risk appetite going forward regarding the actual pricing trends, especially in the loan yields? And the second question is on DCB Europe. I see the NII up 13% year-on-year, 5% Q-on-Q. What is driving these upgrades? And can you comment what is -- what should we expect going forward? Hector Blas Grisi Checa: Look, in terms of Spain, what I tell you, I mean, it's a very competitive market, as you know. We have rates in -- even with the Spanish bond at [ 330 ], we have mortgages down, and we have seen 190s, 175s. I think that the market is being rational in that point. So hopefully, there is some rationality in the months to come, and we see rates at much better levels. And we have been very disciplined and very focused on profitability, and we will continue to do so even if we lose a little bit of market share that you have seen that we have lost a little bit of market share because of that discipline. So we don't believe that mortgages today at 175 makes sense to do in the bank. So we won't do them and exactly when the price and when there is a lot of competition on the high-risk name in the corporate side, et cetera, we're going to maintain our level of risk reward that we believe is the right one. So we will continue, and we will put a lot of discipline in that sense. In terms of what we see in terms of DCB, give me 1 second. But look, I mean, in global DCB, first of all, it is important to say that we are improving the RoTE from 24% to 10.4% post-AT1s in '25. So it's important. Part of the improvement is explained by the lower conduct basically of the charges that we have remember on the Swiss francs, mainly in Poland, but the underlying attributable profit is growing at 6%. So that basically is positive. NII is growing 6% year-on-year. That's well above credit, which is up 2% and is benefiting for the focus on profitability, as we have said. The yields on loans have improved 25 basis points and the cost of deposits has come down by 39 basis points. As you know, in this business, we are sensitive to higher rates, negative sensitivity to higher rates. When rates start to come down, we have much better margins. And also, it's important to say that we have improving credit quality. The cost of risk is down for 2.01%. That's less than 10 basis points versus Q3 '24. And 12 months cost of risk is at 2.06%, down 3 basis points quarter-on-quarter. And we have excellent LPs performance as we have said. Our strategy is to expand the deposit gathering capabilities through Openbank. As you know, it has been a success. We are doing that in Germany. And also, as we have announced, we are merging Openbank and DCB Europe that basically will enable us to basically have much more control, better management and the deposits close to the origination of the assets. So that basically would be a help to have much better margins, much better operation and also much better cost. Raul Sinha: Could we have the last question, please? Operator: Last question from Miruna Chirea from Jefferies. Miruna Chirea: I just had a quick one, please, on Openbank. I was wondering how your progress in Openbank is going in Mexico and in the U.S. If you could give us maybe an update in terms of the balance of deposits that you've raised in those markets since you launched? And then secondly, to this point that you are making now on merging Openbank and Santander Consumer Finance in Europe, could you give us just a bit more color on what kind of synergies could you see there by merging the 2 lines of business and the overall rationale for this? Hector Blas Grisi Checa: Thank you, Miruna. Okay. So Openbank Mexico and the U.S., this is basically -- I'm giving it to you from the back of my mind. If I'm correct, it's EUR 6.5 billion in deposits on the 2 combined, if I remember correctly. And we're talking about 160,000 customers in the U.S. And in Mexico, I don't recall -- I'll give you the exact number. Sorry, basically, I don't have it in front of me. We're trying to find it out for you. Let me -- in the meantime, let me discuss a little bit what's the rationale behind the merger that we're doing with Openbank and DCB. As you know, I mean, we've been operating in parallel. It's one unit, and we have one boss basically managing both of those businesses. At this point, I mean, we had 2 of everything because there were 2 separate institutions. That basically will help us a lot in terms of cost because now we're going to have just one for both of them. So cost systems, et cetera. So a lot of that is going to be a lot of synergies in that sense. But the most important synergy is the amount of deposits that we have in the bank that will be basically used to eliminate or try to eliminate as much the negative sensitivity that we have when rates basically go up. When you have a sustainable deposit base that will basically help you out to match it to the assets and you have a much better planning if you have that. Openbank, as you know, is the largest deposit base of any digital bank in Europe. We believe there's a huge opportunity to continue like that and also will help us to upgrade our operations in Germany, which we have a really good deposit base there, and we would like to increase it and continue basically growing the business as we see fit. So all in all, I think it's going to be a pretty good combination. Yes, in the U.S., it is EUR 5.8 billion in deposits, and we're talking about 162,000 new customers in Openbank. Raul Sinha: Thank you, Miruna. I think that we are out of questions. Thank you, everybody, for your time this morning. This concludes our analyst presentation, and we look forward to speaking to you soon. Have a good day.
Aapo Kilpinen: Ladies and gentlemen, dear Remedy investors, welcome to the webcast for Remedy's Third Quarter of 2025. My name is Aapo Kilpinen from Remedy's Investor Relations. Joining with me today, our Remedy's Interim CEO, Markus Maki; and Remedy's CFO, Santtu Kallionpaa. Markus will guide us through the Q3 business review and then Santtu will dive deeper into the financials. We'll then look at the outlook for the year and end with a Q&A session at the end of the webcast. If you have any questions already, feel free to send those over by leaving them to the box below the webcast. But without further ado, Markus, please, the stage is yours. Markus Maki: Thank you Aapo, for the movie style announcement and introductions. Welcome, everybody. I thought I would say a few words about myself to start with since this is my first review, I'm here with you, with the audience. So I'm one of the original founders of Remedy. I've been Chairman of the Board since 1997 until this point now. And I've been operationally involved also since founding of the company for the past 30 years. And I've done almost every role outside of the kind of artistic domains during my history with Remedy. And I've also been an interim CEO before about 10 years ago. So just before we got listed to the First North Marketplace. So it's not the first time I'm stepping into [ these ] shoes either. I wanted to bring a bit of a context kind of to the history. And Remedy's history has been built on games being successful, profitable in the past. This is an exceptional track record for any games company. It's also rare that a games company is even alive after 30 years, and this is the success that we've built this company. But now if you look at kind of the more recent history, we started for what was for Remedy a massive growth spurt, both in personnel and in the number of simultaneous projects in 2017. And for a company that had grown, let's say, much more slowly for the past previous 20 years, I think on hindsight, if you look at the recent results, the expansion, the growth was a bit too rapid, and it has caused us to miss some critical signals. But we've done some great stuff. We have a really talented, great team. We don't have a need for personnel or project count growth at the moment. What we need to do is to learn to move faster and act more decisively in the future. So the focus is on the games. And we have some really fantastic stuff coming up, and that's going to be my key focus as the interim CEO to ensure that we succeed with those. If you go to the topic of today's cast, it's, of course, Q3 highlights. And I won't go too deep into the numbers, Santtu will cover them more. And we also kind of disclosed this in our profit warning as the pre numbers a couple of weeks ago. I think the big thing that I would want to highlight here is the positive operating cash flow, which is something that is, let's say, really nice to have money in the bank at this point. Looking at kind of the quarter highlights, we had a great 30-year anniversary celebration in August. We pushed really hard to improve Firebreak with a major update in September. And as then the results of that were not sufficient, we did recognize a noncash impairment of the majority of the capitalized development costs for it, and it also caused us to update our outlook. And as a last highlight, we had the change of the CEO and also a change of Chairman of the Board. But let's spend a bit of time talking about Firebreak. Just a few observations from my side. So the game was launched in June, and we bought multiple smaller updates and then the major update in September. And all of the focus was to improve the game, work with the player feedback, make what players want to do. We also had the first discount campaigns, and we did see the player metrics and the feedback improve after the update. But unfortunately, our sales were not on a high enough level. And I think it's kind of easy to say now that changing the first impressions in players' mind is going to be really, really difficult. But this resulted in the write-down of the capitalized development costs and the profit warning. I guess there's quite a lot of questions about the future of Firebreak, and we do still plan on updating the game, and we have the next update planned for later this year as it's been on an advanced state of development. We have had a road map based on the success of the game. But going forward in '26 and onwards, we are going to evaluate the updates quite strictly based on the commercial viability of the game. So this is not me saying that we wouldn't update the game, we will, but we will be critical about the return on investment. And while it didn't really go how we wanted, I still wanted to say that we gained some valuable learnings from the investment. First of all, I think it's a big achievement that a first multiplayer game that Remedy has done since Death Rally '96 was technically successful, launching on all of the major platforms at the same time and working for the players technically. This is something that not even all experienced multiplayer studios succeed in. We have also been able to operate the game in a live service model and managed to update the game and learned a lot about that. I think the second part of the learning is gaining knowledge how to really work with the digital marketing channels for games, what works there, what doesn't work there, how do we drive audience to the, for example, the Steam page and just opening up our experience on all of those channels. And we've also gone through one round of full technical publishing steps, whether it's console certification, storefrom setups, stuff like that. And both of these things are things that have been in most parts done by our external publishing partners in the past. So these are, in my mind, valuable experiences in self-publishing journey we have undertaken and it really hopefully lowers the risk profile for our future launches. As a last thing about Firebreak, I wanted to kind of go back to a bit higher level and remind everybody that Firebreak was our smallest project, both budget and team-wise. And even though it didn't succeed commercially, I'm still proud of what we achieved as a company. If you look at kind of the larger market atmosphere and so on, especially Finnish stock-listed companies are often criticized that they don't invest in finding new businesses and finding new customers. That's what we tried to do here. And we knew that Firebreak was the risky venture in our portfolio, and I think it was done for all of the right reasons. So with that, let's move forward to kind of looking at the other games we have in the market. So Alan Wake 2, we had good sales. Royalties grew in Q3 compared to the previous quarters this year. We have the game now as the PlayStation Plus game of October, and that's great for the life cycle of the product as well. And we have seen, as with Control, that great games can sell for a long time in the digital marketplaces and new opportunities can come up over time. For example, we had some encouraging early results in bringing the game to Chinese markets with Epic. On Control, we've been focusing kind of on the marketing and sales since we've now been in full control, no pun intended of the publishing of the game. And we've been working with all of the sales channels there and had a great 30-year celebration activation to drive the sales. We have had good sales traction for what's now a 6-year-old title. I think we are all amazed how it's doing still, and we will continue doing systematic work on expanding the reach of the franchise and -- for example, looking at kind of the outside of our traditional strong markets, what opportunities we do have. Then as a reminder of our portfolio of the games we have in development, 4 projects. Control and Max Payne have the bigger teams. They are in full production and they're tracking towards their milestone calls. The new project, which we are not yet revealing anything, is in proof-of-concept phase with a smaller team. A quick look at the strategy and targets. Here, there's nothing really that's changing on the top level. This is what we have communicated earlier. These are still our strategic goals. All of the building blocks for achieving these are in place. It's just a matter of execution and getting there faster. And on strategy and targets, we do remain committed to what we communicated about a year ago in our CMD on these targets. So with that, I will be passing over to Santtu for the financials. Santtu Kallionpaa: All right. Thank you, Markus, and good afternoon, everyone. And now the financials. Let's start from the revenue. So in the third quarter of 2025, our revenue was EUR 12.2 million, declining by 32 percentage compared to the third quarter of the previous year. Decline was driven by development fees, which were EUR 6.1 million being lower than in the comparison period. This is explained by a onetime payment, which was recognized in Q3 2024 related to the development work done for Control 2 before the start of the strategic partnership with Annapurna. Now during Q3 2025, the sources of the development fees were the Max Payne 1 and 2 remake related fees from our partner, Rockstar, and Control 2 related fees from Annapurna. Remedy game sales and royalties increased significantly from the comparison period and were EUR 6.0 million. Growth was driven mainly by revenue from FBC: Firebreak subscription service agreements, royalties from Alan Wake 2 and game sales of Control. Our revenue was impacted negatively by weak USD rate. And as an additional information, FX neutral change for Q3 revenue was minus 29 percentage, whereas the reported change was minus 32 percentage. FX neutral change was calculated with 2024 average FX rates for USD, pound and Swedish crown. If you look back at our historical revenues, the total revenue year-to-date for 2025 is now EUR 42.5 million, which remains on a higher level compared to the previous year's Q1 to Q3 revenue, EUR 39 million. We can start to see the effects of the self-publishing strategy as the game sales and royalties have started to provide a larger share of our total revenue stream compared to the previous years. In 2025, game sales and royalties have generated 43 percentage of our total revenue so far. In comparison, during the first 3 quarters of 2024, royalty share was 9 percentage of the total revenue. In Q3 2025, development fees accounted for approximately half of the total revenue. If we exclude the onetime payment from Q3 2024, our total revenue would have been up plus 55 percentage in Q3 2025 from the comparison period. Operating profit of the third quarter 2025 was EUR 16.4 million negative. The operating profit was affected by a recognition of a noncash impairment of EUR 14.9 million related to FBC: Firebreak, capitalized development costs and allocated purchase publishing and distribution rights. The impairment covers majority of these capitalized costs. Without the impairment, the operating profit would have been EUR 1.5 million negative. Q3 EBITDA was EUR 0.7 million positive. The decline in EBITDA compared to the previous year is explained by the higher revenue level in the comparison period, which was driven by the recognized onetime payment for Control 2 development. In Q3 2025, the total operating expenses, excluding depreciations, remained on a same level as in the comparison period. Then let's look at the analysis of unnetted amounts of expenses and capitalization, which provides transparency in our costs. If you look at the external development of personnel expenses in the third quarter of 2025, our total cost level decreased by 9 percentage from EUR 11.4 million to EUR 10.4 million. External work expenses were EUR 3.1 million and on a 36.5 percentage lower level than in the comparison period when they were EUR 4.9 million. The change in external services cost level is part of normal game development process, and there is variation in the level of outsourcing following the needs of the game projects. Personnel expenses increased year-on-year by 11.7 percentage and were EUR 7.2 million in Q3 2025. Headcount grew by 7.7 percentage. Capitalized development expenses were on a higher level than in comparison period. Capitalized amount is in relation to the direct costs of the projects' development costs. In the third quarter of 2025, the depreciations related to game projects were on a high level due to the recognized noncash impairment of EUR 14.9 million related to FBC: Firebreak. This impairment represents a majority of the game's capitalized development costs and allocated purchase, publishing and distribution rights. Excluding the impairment, depreciation expenses in total were EUR 2.2 million, of which EUR 1.5 million were related to game projects. The other depreciations remained on a stable level year-on-year also in Q3 2025. In the comparison period, Q3 2024, we depreciated EUR 3.4 million expenses capitalized related to Control franchise products, which was connected to entering the deal with Annapurna. Going forward, following the impairment that we recognized on Q3 2025 depreciations related to FBC: Firebreak will be on a low level as the remaining activated costs related to the game is modest. In addition to FBC: Firebreak, depreciations will keep running also for Alan Wake 2. Then let's move to the cash flow. So during the third quarter of 2025, cash flow increased compared to the previous year as we received more inflowing sales-related payments. Paid operating expenses remained on a similar level to the comparison period Q3 2024. This year's Q3 includes also considerable nonrecurring element related to Firebreak subscription service contracts. Also, if you look at our net working capital at the end of Q3 2025, it was on a similar level compared to the net working capital at the end of 2024. It's anyway, good to keep in mind the timing of development fee payments as well as some royalty and game-related payments are agreement based and there are variations in the timing of revenue accruals and the actual cash flow impacts. End of the third quarter, our total cash level was EUR 36.5 million, increasing by EUR 8.9 million from the previous quarter. The main explanation for the increased cash reserve is the timing of incoming revenue cash flows. At the end of Q3 2025, we had EUR 17.7 million in cash management investments and EUR 18.8 million in cash. Then let's still look our results from the historical perspective from Q1 to Q3 2025. Our revenue was EUR 42.5 million with the share of game sales growing steadily during this year compared to the previous years. We can see that our EBITDA margin has been improving year-on-year since the end of year 2023 and is now year-to-date 17.6% percentage. Additionally, positive development of game sales and royalties as share of total sales is definitely one of the positives for this year. However, this year, our year-to-date operating profit margin is worse than previous year being 36.7% at negative following the impairment booking done for Q3. And now Markus will continue regarding the outlook. Markus Maki: This is going to be fairly short. Thank you, Santtu. So this is the updated outlook we did on 10th of October, together with the profit warning so that we expect our revenue to increase from previous year, but operating profit will be negative and below the previous year. That's kind of it from the presentation part. And I think now it's time for Q&A. Aapo Kilpinen: Correct. Thank you so much, Santtu. Thank you so much, Markus. We are moving forward to the Q&A session. Feel free to leave any questions by typing them to the field below the webcast. We already have a couple of good questions in the pipeline. So let's begin with those. The first question is, now that Remedy announced its CEO change, what will change in the company? Markus Maki: That's a good question. I think it's first best to say that I am the interim CEO. And my role is here to make sure that our path and key targets are getting hit, and we are moving as fast as possible towards the direction that will bring us profitability. But I think it's too early to speculate on larger scale changes. Aapo Kilpinen: Very good. Can you elaborate on what kind of a background emphasis or expertise is Remedy looking for in its next CEO? Markus Maki: I've seen kind of what we collected in the Board, what we expect. And often, these things kind of become some kind of a unicorn, you want everything and everything. I think the key thing is experience in leading a company of our type and size, but I don't want to go too much into the detail. I think it's going to be about the person that we find rather than exact set of past competencies or work history. Aapo Kilpinen: Very good. Another question. Can you elaborate on why the CEO change happened quickly? Markus Maki: Well, the CEO change is a Board decision. So I don't know what's quickly there. So that's -- I can't comment more on that. Aapo Kilpinen: Very good. Moving towards FBC: Firebreak, have you made or are you planning to make personnel reductions as a result of balancing the investments made in FBC: Firebreak? Markus Maki: We are moving people from Firebreak to help with some of the other teams, but we don't have any other plans at this point. Aapo Kilpinen: The next question is how large of a team is working on FBC: Firebreak at the moment? Markus Maki: At the moment, we haven't really disclosed the exact team sizes. I just said that it's the smallest team in our kind of portfolio of products that we work on, and it is now clearly smaller than it was at or before or immediately after launch already. Aapo Kilpinen: Very good. What have been the specific key learnings in self-publishing from FBC: Firebreak? What worked and what did not work and what will be done differently going forward? Markus Maki: That's something that warrants quite a lot more analysis also on our part and quite a long kind of an answer. I would say one thing maybe that kind of change -- as I said, changing people's opinion after the launch is going to be super difficult. And driving conversion in a game that has mixed team reviews is supremely hard. And that also kind of limits some of the, for example, marketing conversion and so on learnings that we can actually do with a title like Firebreak, but we've still learned a lot. Aapo Kilpinen: Very good. A bit looking into the future, to what degree are live service model and/or multiplayer modes, something you want to pursue in your games currently in the production pipeline? Markus Maki: This is something that we haven't announced anything on. And let's not -- let's take one step at a time as well. And we will -- when we have something more on this, we'll talk about it. But I want to repeat the fact that every company should invest into finding new audiences, new customers, new business models. And I hope that Remedy will continue to do that in some way or form in the future as well. Aapo Kilpinen: Very good. Markus, in hindsight, what do you think about the Vanguard, Kestrel and Firebreak projects from the perspective of a founder owner and former Chairman of the Board? Markus Maki: I think both for Vanguard and Firebreak, I think there was a solid reason to start them and do them. I think there is -- like I just said also that growth is very difficult, and we were growing too fast. I think having, for example, 2 projects that were kind of new business for remedy at the same time, at least partially at the same time. In hindsight, I think that was too much. And that was also on the board. And so lesson learned, at least for me. Aapo Kilpinen: Very good. Markus, you discussed the need of increasing speed and decisiveness inside the organization. Has there been advances in development speed in the past years? And currently, how do you plan to increase development speed and decisiveness? Markus Maki: I think it's -- speed is -- in an organization of our size, speed is dependent on the information that our people and our team have. And that's something that I'm trying to be very open with everybody that what are the goals, what are the targets, what are the key decision points that we have. And I think that will bring on more speed in -- I don't say in development necessarily that we need it. We need it in decisions. We need to make better quality decisions faster. I think that's across the organization. It's not just a CEO thing. And that requires transparency, openness, frank discussions and information. Aapo Kilpinen: Very good. Reflecting a bit, what have been the biggest lessons Remedy has learned from developing multiplayer games? And can these be utilized in future game projects? Markus Maki: Well, I think it depends on the future project, whether we can use them or not and how much. I certainly think that even in single-player games, having some sort of persistent online site might be very valuable for the gamers in the future. And we build competencies around that, for example. So yes, definite maybe, let's say it that way. Aapo Kilpinen: Very good. a question, you have moved development resources to other projects from FBC: Firebreak, but also during the last quarter, employee count increased. What headcount for Remedy would be sufficient at this stage? Markus Maki: I think we are currently at a fairly comfortable place with the headcount. We also have a lot of external development outsourcing. Some of our projects have been ramping down a bit on those. This will be also kind of, of course, visible in the financial data going forward. But I think we're in a good place with the personnel we have right now. We have the least amount of open positions that we've had in years. Aapo Kilpinen: Yes. Very good. A final question regarding FBC: Firebreak. Are you planning on shutting down the project at the moment? Markus Maki: I have absolutely no plans on shutting down the project because there is -- it's not a cost issue. We don't have an expensive -- super expensive infrastructure, for example, that we would need to run and so on. It's going to be available for the gamers going forward as well. Aapo Kilpinen: Very good. Moving forward to the games in the market, can you comment on the reception of Alan Wake 2 through PS Plus considering that the channel might attract players that are not traditional Remedy or survival, [ horror ] or genre fans? Markus Maki: I think we're going through the questions fairly quickly or what did you say. On PlayStation Plus, I think that it's a great place to kind of, at this point, 2 years after the launch to get a bit more visibility into the project, get a bit new audience into it. And I think it was Sam who said yesterday that, hey, it's great. I haven't heard about this game, but it's the best game ever. And yes, that's also, of course, positive for the game for the brand for our business in the future. Aapo Kilpinen: Very good. Regarding the new proof-of-concept project announced, is it too early to comment if Remedy has already committed on a specific publishing model et cetera, self-publishing or financing model for this specific game? Markus Maki: It's too early to comment, period. Aapo Kilpinen: Very good. Perhaps next question is towards Santtu. How will Remedy ensure that enough cash flow is produced in the future, 2, 3 years to fund the ongoing projects? Santtu Kallionpaa: Well, we can say that we have strong games in the pipeline. And currently, we have a very strong cash position. So we are confident with our financial position also going forward. Markus Maki: And I would add to that, that we do have a partner project with Max Payne right now. And we have had partner projects before that can be, let's say, a tool in the toolbox in the future as well. So, yes. But again, too early to go to specifics. Aapo Kilpinen: Yes. The next question kind of builds on that. The impairment had a EUR 15 million negative impact on the health of your balance sheet. What kind of an impact that will have on your target to move to self-publishing as it requires a solid balance sheet? Santtu Kallionpaa: Well, I would say that even after the impairment, our balance sheet is still very healthy. And we can say that now the financial risk that was related to balance sheet values of FBC: Firebreak that has been taken away. And as I said, we have EUR 36.5 million in our cash at the moment. So that is enough for our future needs. Aapo Kilpinen: Very good. A question regarding Alan Wake. How many copies has Alan Wake sold so far? And how does it compare to your own expectations? Markus Maki: We don't really comment on exact number of copies in these kind of forums. When we have something to release on those, we will then release it via other channels. We are happy with the sales. Aapo Kilpinen: And then can you open up the split between royalties and game sales during this quarter? Santtu Kallionpaa: Well, we are currently reporting royalties and game sales in the same bucket. So we are not sharing details regarding that. We can, of course, say that if you're talking about the game sales, the kind of FBC: Firebreak related B2B income, the revenue from the B2B deals, that is a major part of our game sales. Additionally, we have said that there are Alan Wake 2 related royalties and also game sales from other Remedy game catalog in the market. Aapo Kilpinen: Very good. And then a question regarding the development fees, Santtu. Can you elaborate on why the development fees were only EUR 6.1 million in Q3, the lowest since 2021? Santtu Kallionpaa: Yes. Development fees are based on the milestones that have been agreed in the contracts, and they are not necessarily split evenly in the calendar. It means basically that the kind of income from the development fees that varies depending on the stage of the project, and there may be variation also going forward. Development fees might be going higher level and lower -- or also lower level going forward. Aapo Kilpinen: Another question then what is included in the current intangible assets on the balance sheet and is Control 2 a large majority? Markus Maki: Yes. We can say that Control 2 is a major part of our intangible assets at the moment. Additionally, now when we have one project in the proof-of-concept stage, we have also started the activations related to it. Aapo Kilpinen: Very good. Are you still expecting Firebreak's B2B income to come in the coming quarters? Santtu Kallionpaa: Yes. We will continue accruing Firebreak-related B2B income until the end of the subscription service deals. Additionally, we can say that the majority from the cash flow related to those deals is now in our cash, but there will also be some following payments going forward. Aapo Kilpinen: Very good. A question, in general, what is the plan with the big cash pile? Is there a consideration for buybacks? Markus Maki: I think this is for me. Obviously, things like share buybacks are a tool that the Board has in their toolbox, but this is not for the management to comment at this point. Aapo Kilpinen: Very good. A couple of final comments on the pipeline. Can you shortly comment on the production developments of Max Payne on as you remake and Control 2? Markus Maki: Well, shortly, no, not more than I kind of said earlier that they are proceeding according to the milestone plan. This is something that we are actually changing the line a bit, and you saw that from the quarterly report that we are -- when there are some highlights in the projects, we will, of course, be forthcoming with them to everybody. But at the same time, these are multiyear projects and expecting key highlights for every project for every quarter, I think, is just going to send wrong signals and we are not going to be doing that in the future in the same way. Aapo Kilpinen: Very good. Okay. A couple more general questions then at the end. Regarding the long-term tail and ongoing sales for Alan Wake 2, are there plans to expand the global accessibility to added locations, et cetera, the Middle Eastern and North African markets? Markus Maki: That's a nice question. This is definitely something that -- obviously, we want our games to have the widest possible audience. With Alan Wake, we are working with our publishing partner, Epic, and do these decisions with them. So this is not, I would say, fully also not in our control. There's also kind of Alan Wake is a huge game and for example, a full voice over localization is not, let's say, pennies and requires quite a lot of effort. So we are looking at these opportunities optimistically, and we would want our game to be accessible to as wide audiences as possible. Aapo Kilpinen: Very good. Expanding on that question, looking at the success of Alan Wake 2, what have you learned about the distribution model as you think about maximizing the long-term tail and audience reach for the game? Markus Maki: On Alan Wake 2, I think the -- what we now, for example, did, we opened with HeyBox in China and saw some success. So yes, we are looking together with Epic on various ways to kind of boost the long tail of the sales of the game. And again, this is a discussion that we continuously have with Epic. Aapo Kilpinen: Very good. And then a question in regards to Northlight. Would you consider to release the Northlight engine, for example, sourcing it as a B2B or for a more wide public? Markus Maki: This is a question that's about as old as Remedy itself. I've gotten this at least 20 years. And I think the answer is kind of yes and no. But we've always trended on the no because Northlight strength is that it's a focused engine for our team, for our kind of games. And that means that it is a subset of platforms, features and so on compared to a general purpose engine like Unity or Unreal. And that is actually also its competitive advantage. And that is why we can do it with a smaller team than the hundreds and hundreds of developers working on those engines. We don't need to do external support, for example, that we would need to do. I think open sourcing is probably the more interesting path. I'm also always been kind of a proponent of modding and user-generated content. I would love to see more of that. But these are not, let's say, trivial things to kind of implement well in the current technologies. So yes and no. Aapo Kilpinen: Very good. And the final question, considering the suboptimal outcome of FBC: Firebreak, what specifically makes you confident in reaching the targets set for 2027? Markus Maki: Well, what makes me confident is that we have a strong portfolio of products coming up and how they are proceeding. That's the quick answer. Aapo Kilpinen: Simple as that. Markus Maki: Yes. Aapo Kilpinen: All right. Thank you, everybody so much. It's time to wrap up the Q&A session. If you have any additional questions, feel free to send those over at the e-mail address now visible on the screen. We will be back with the next earnings webcast, which is our financial statements release for the full year. But until then, bye-bye from us.
Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to Equinor Analyst Call Q3. [Operator Instructions] After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Bård Glad Pedersen, Senior Vice President and Head of Investor Relations. Please go ahead. Bård Pedersen: Thank you very much, operator, and welcome to everybody who has called in for the analyst call for Equinor's third quarter results. Torgrim Reitan, our CFO, is here with me, and he will take you through the results before we open for the Q&A. As usual, we will close this session within 1 hour. So with that, Torgrim, I hand you to take us through the results. Torgrim Reitan: Okay. So thank you, Bård and good morning, and thank you for joining us. Before we get to our results, I have a look at the photo Bacalhau, which came on stream in October. It is the first presold project in Brazil, developed by an international operator. We reserved more than 1 billion barrels and production capacity of 220,000 barrels per day. This will contribute significantly to our international growth. The results and cash flow we report today are driven by strong operational performance. Production is up 7% from third quarter last year. Johan Sverdrup delivered close to 100% regularity and Johan Castberg is producing a plateau with a premium to Brent of around $5. The adjusted operating income was $6.2 billion before tax and net income was negative $0.2 billion, impacted by net impairments, mainly due to lower long-term oil price outlook. Year-to-date, our cash flow from operations after tax has been strong at $14.7 billion. Our adjusted earnings per share was $0.37, impacted by negative results from financial items and a one-off effect related to decommissioning of Titan. Energy markets continue to be volatile. Geopolitical unrest, tariffs and trade tensions continue to impact pricing and trading conditions. We are prepared for this. We have a solid balance sheet, strong production and a robust portfolio. In addition, we take forceful action to manage costs. These efforts are visible in our results. Costs are now stable year-to-date compared to last year, and this is in line with what we had at the Capital Markets update in February. Operating costs for our Renewables business have decreased by around 50% compared to the third quarter last year, and we expect it to be down by 30% on an annual basis. And this is driven by less business development and reduced early phase work. On the NCS, we have stopped 2 early phase electrification projects that were not sufficiently profitable and this reduces costs now and CapEx going forward. By this, we are demonstrating that we can beat inflation and we can keep costs flat even if we are delivering strong production growth. At Bacalhau, we started production from the first producer and ramp-up will continue through 2026. On the NCS, we had 7 commercial discoveries. And I want to highlight Aker BP's important discovery in the Yggdrasil area, where we have a material ownership position. And then let me also mention Smørbukk Midt . It was discovered and put in production during the third quarter, and we expect payback within 6 months. As you know, we participated in Ørsted's rights issue. It was executed at a significant discount and overview of the underlying value in Ørsted supported our participation. The cash flow impact of around $900 million will be in the fourth quarter, impacting our net debt ratio by around 2 percentage points. Following this decision, we will now seek a more active role by nominating a candidate for the Board. We believe a closer industrial and strategic collaboration between Ørsted and Equinor can create value for shareholders in both companies. Then to capital distribution. For the quarter, the Board approved an ordinary cash dividend of $0.37 per share and a fourth and final tranche of the share buyback program for 2025, of up to $1.266 billion, including the state's share. With this, total capital distribution for the year will be around $9 billion. Safety remains our top priority. This quarter, we continue to have strong safety results. However, we had a tragic fatality at Mongstad and you know that safety work needs to continue with full force. Learnings from the accident will be implemented. In the quarter, we produced 2,130,000 barrels per day. This is 7% up from last year, and we are on track to deliver on our guiding 4% production growth for the year. On the NCS, production was even stronger with 9% growth. Johan Castberg, a new field on stream of developments in Brent and strong performance at Johan Sverdrup are important contributors. NCS gas production was impacted by planned maintenance and the prolonged shutdown of Hammerfest LNG. U.S. onshore gas production was up 40%, capturing higher prices and U.S. offshore was up 9% from last year. Internationally, outside the U.S., production was down due to the temporary stop at Peregrino and the divestment in Azerbaijan and Nigeria. We produced around 1.4 terawatt hours of power this quarter, mainly driven by the start-up of new turbines at Dogger Bank A and contributions from onshore renewable assets. As Empire Wind in New York, all 54 monopiles are now installed and the project execution is progressing well. In October, Maersk informed us of an issue concerning its contract for the wind turbine installation vessel that is planned to be used at the Empire Wind in 2026. We are working to solve this quickly. Now over to our financial results. Liquids prices were lower than the same quarter last year, while average gas prices were higher, particularly in the U.S. Adjusted operating income from E&P Norway totaled $5.6 billion before tax and $1.3 billion after tax. These results were impacted by production roles, but also increased depreciations due to new fields coming on stream. Our E&P International results reflect lower production but also lower depreciation. Peregrino and our assets tied to Adura IJV are classified as held for sale. As such, we no longer depreciate that. Our E&P U.S. results are driven by increased production, but these results were impacted by a one-off effect related to decommissioning of the U.S. offshore Titan field of $268 million. It has very limited cash flow effect in the quarter, but we are now booking expected future operating costs related to this. For M&P, we are changing our guiding and expect to deliver average adjusted operating income of around $400 million per quarter. The upside potential is larger than the downside risk to this guiding. The updated guiding is mainly due to changed market conditions. In addition, it reflects that we have previously divested some gas infrastructure. Our renewables results reflect high project activities, but also significantly lower business development and early phase costs. In our reported financial -- yes, in the reported financial results, we have net impairments of $754 million. The main driver for these impairments is lower long-term oil price assumptions. Our E&P International business booked an impairment of $650 million tied to our assets being transferred to the Adura IJV due to lower price assumptions. More than half of the impairment is due to no depreciation on the assets held for sale. In the U.S. offshore assets, we had impairments of $385 million, mainly due to lower price assumptions. In M&P, we have a reversal at Mongstad of $300 million due to higher expected refinery margins. This quarter, cash flow from operations was $9.1 billion, repaid to NCS tax installments totaling $3.9 billion. Next quarter, we will have 3 installments of around NOK 20 billion each. We distributed $5.6 billion to our shareholders, including the state's share of buybacks from last year of $4.3 billion. Organic CapEx was $3.4 billion, and our net cash flow was negative $3.6 billion. We have a solid financial position with more than $22 billion in cash and cash equivalents. Our net debt to capital employed ratio decreased to 12.2% this quarter. At current forward prices, we expect the net debt ratio at the end of the year to be in the lower end of the guided range, 15% to 30%, the same as we have said at earlier quarters. Finally, we maintain our guiding from CMU in February, both in terms of production and CapEx as well as capital distribution. So thank you. And then over to you Bård for the Q&A session. Bård Pedersen: Thank you, Torgrim. [Operator Instructions] We have good list already. So let's get going. And first one on the list is Irene Himona from Bernstein. Irene Himona: So my first question is on the unit depreciation charge in Norway. It's up about 13% from Q2. Can we assume that is the new normal level going forward? And then my second question is on Ørsted. You obviously decided to participate in the rights issue and to turn from a passive to an active shareholder with a Board seat. Can you elaborate a little bit on what it is that you think Ørsted is perhaps not doing very well where your active participation may help them improve. And then what type of industrial cooperation do you envisage that would benefit both sides? Torgrim Reitan: Thank you, Irene. So first of all, the unit depreciation charge on [ E&PN ] is up. So that is driven by new assets onstream this quarter and in particular, Johan Castberg and also smaller developments coming onstream as well. So these will sort of depreciate over time. So you should expect a gradual reduction going forward on that basis. So that's the first one. The second one is related to Ørsted. Yes. So let me give you a little bit of further context around that. We participated in the rights issue. And clearly, that's sort of a recommitment to our shareholding, and we would like to use the opportunity to clarify more around how we think around the ownership position. And we do want to take a more active role as a shareholder with also Board seats in due time. Then important for me to say that the offshore wind industry is leading through its first real downturn. So with a lot of challenges. And we have seen that with Ørsted and we have seen that in the share price development in Ørsted. So in times like that, consolidation is typically what happens. And we also do think that this industry needs consolidation. We do think that a closer collaboration industrially and strategically between Ørsted and ourselves will create shareholder value for our shareholders, I mean Equinor shareholders but also Ørsted's shareholders in a way. And we do believe that's sort of the competence base that we have very well complement Ørsted and being part of the Board with a long-term industrial perspective in a company like this will benefit both parties. Then I do appreciate that there are uncertainties related to what this means. And let me be very clear that in the current environment, we are going to limit sort of capital commitments into Offshore Wind. It is an industry that is challenged. So the assets that we have in our own portfolio, we will continue to develop in Empire Wind, Dogger Bank and Baltic projects. Beyond that, we will be very, very careful with further commitments into Offshore Wind. And the same goes to our holding in Ørsted. So the threshold to commit new significant capital is high for the time being. So I just want to leave that with you because I do appreciate that there are sort of questions to what might happen here. Bård Pedersen: The next question is from Biraj Borkhataria from RBC. Biraj Borkhataria: Just the first one on the MMP guidance. I wonder if you could just dive into a bit more detail around the change in factors there. And also, you've gone from a range of $400 million to $800 million to a single figure. And I was wondering if there's a sort of signal factor in there that either you see fewer opportunistic -- opportunities to trade or if you are just taking less risk given the environment is changing? And then just a follow up on the question before Ørsted, just trying to understand why you didn't consider a Board seat in the first place? Because I recall it just wasn't really part of the discussion at the time around the CMU. So just trying to get the understanding of -- obviously, the environment has changed, policy has changed, but has your investment thesis on that business investment changed? Torgrim Reitan: All right. So thanks, Biraj. So first, on MMP guiding, yes. So we are changing the guiding to around $400 million on a quarterly basis. We're sort of -- we see that the risk is asymmetrical here. So more upside than risk to the downside. It is a change. We used to have $400 million to $800 million, as you might know. I think it's important to remind you what we had before the war in Ukraine, then the guiding was $250 million to $500 million as such. So what we see now is that the market has changed rather a lot. On the gas side, in Europe, the situation has normalized with -- both on the absolute price levels and volatility and also then the volatility globally and sort of the market globally is driven to a large extent by political decisions that actually structures in the market, making it quite harder to trade around and position ourselves around. So the sort of market dynamics that drives this. In addition, sort of we had earlier divested gas transportation assets, that we are sort of -- we don't have anymore. So we take the opportunity to take that out as well. So -- and then why not a range? Because I mean you have seen that even if we had a broad range from $400 million to $800 million earlier, we tended to overshoot quite a bit, actually, even with the range. It just explains that opportunity might be very good, and it might sort of -- we don't want to limit it to -- have it limited by a range. What we want to do is that on the invite to consensus that we send out a few weeks ahead of quarter, we will give an update related to MMP results and specialties to give you a little bit more guiding into it, but for -- on a regular basis on the longer term, I mean, around $400 million is a prudent number. Last point on this that this is not Equinor specific. This is what sort of all of us are currently experiencing. So if you listen to our peers and if you listen to the trading houses, we all see that you need to work much harder for every dollar you can make in the trading environment for the time being. So yes, so that is that one. The second question was related to Ørsted. We do believe that we have something to offer in the Board in Ørsted and it is particularly related to having a long-term industrial owner to -- that the company can rely on through cycles and then through developments. And as a company, we have extensive experience in managing cycles and thinking long term. In addition, we have clearly a lot of competencies related to project developments and the risk management as such. So we do you see that as something that can benefit both parties. Bård Pedersen: Next one on my list Teodor Sveen-Nilsen from Sparebank 1 Markets. Teodor Nilsen: First one, just want to follow up on the Ørsted question recently asked here. I just want to know what has actually changed in what you can offer from the first time you acquired shares until now the recent share issue. So that is the first question. And second question that is on Bacalhau, congrats on first oil there. How should we think around the ramp-up pace to plateau? Torgrim Reitan: Yes. So thanks Teodor, on your first question. Well, in the current situation, it was also important to signal that we were a supportive shareholder in what has sort of happened over the last few months. And then as part of that, being -- taking a Board seat is important. On Bacalhau, yes. So it's Bacalhau started on 15th of October. And it is probably the most complex development that we have done. It is at more than 2,000 meters of water depth and it is massive. So I'm very proud of reporting that it is started. On your question on the ramp-up. I mean, there are 2 drillships on location currently. There will be 19 wells being drilled on Phase 1, 11 producers, but also injectors, both water injectors and gas injectors as such. So this will sort of gradually happen. This is not going to be a ramp-up like you have seen on Johan Castberg. So this is sort of continuous drilling and completion to 2025 and it will continue in 2026 as such. So this -- it's too early to say, give an exact date when it will be on plateau, but things are progressing well. Yes. Bård Pedersen: Next one is Jason Gabelman from TD Cowen. Jason Gabelman: I am going to start also on Ørsted. And it's, I guess, a bit tangentially related to what's going on. But as we think about potential outcomes one of the thoughts in the market is a formation of a joint venture between the 2 parties. And with that, there's a lot of speculation on cash, that would need to be contributed into the joint venture from Equinor standpoint. So the question is really, as you look at your 3 offshore wind projects. How much equity capital have you spent in those projects thus far? And how much is left to be spent on those 3 projects? And then my follow-up is on the global gas market. There's been maybe a surprising amount of LNG projects sanctioned year-to-date. You've seen China demand slowing down, some thoughts on Power of Siberia 2 coming online at some point next decade. Can you just talk about your outlook for the global gas market? And if it's shifted at all just given the developments that we've seen year-to-date in that market. Torgrim Reitan: Thanks, Jason. On Ørsted, the potential outcome here is I don't want to speculate on that, and it's not natural to say much more on that now. But clearly, there are various alternatives. I can give a little bit insight in sort of what is it that the sort of -- we will be looking for in this. We will be looking for in sort of improving the free cash flow for Equinor, that is one driver. The other one is are there ways where we can visualize or make clearer the underlying valuation within the offshore activity that we currently have, are there ways to do that? And the third one is that clearly, we we'll be very careful in -- with significant further capital commitments within Offshore Wind in the current environment. So those are the things which are sort of driving us. When it comes to the 3 projects and remaining equity injections, I can give you a little bit of insight into it. Dogger Bank is well underway and sort of production is gradually being started up. So there are sort of -- there is some more equity that will be injected. But clearly, project financing and the leverage of those projects is in sort of in the [ 70s ] as such. Within Empire Wind, what you will see there is that we have a significant equity injection in 2026, which is close to $2 billion. The year after, we expect to receive investment tax credit for approximately the same amount. So Empire Wind over the next 2 years is pretty cash flow neutral before it is finalized. And then we have the Baltic 2 and 3 projects in Poland with a very high leverage, good projects. So it's fairly limited equity that is needed to fund those. So I just want to leave with you that sort of clearly, there are 3 mega projects underway with limited remaining capital needs associated with them. Okay. Let's see here. That was a long answer, but it was an important question. Then on sort of the global gas market. So first of all, I would like to say that in the short term, this winter, the market seems tighter than many actually things. We are on a storage level around 83%, which is 12 percentage points below last year. So if we see a cold winter, it can really have a significant impact on the market. I would say if you see a normal winter, we might see prices where last year as such. So I would say in the short term, price is very much driven by weather and temperature as such. If you look a little bit further, and that's sort of where you have your question related to more LNG. And yes, there are more LNG coming. This is not new information. This is not a surprise. This is what the whole world has been sort of planning for, for quite a while. And the question is, of course, how fast will this come on stream? And will there be delays? So clearly something to watch. We see still actually a quite healthy demand from Asia, Asia in totality around 3% growth per year, and that sort of will take up a significant part here. What else is to watch is actually U.S. gas prices. And U.S. gas prices has become recently much more a political topic internally, domestically in the U.S. because everyone sees that with all data center and AI will have a significant impact on power prices and power has to come from somewhere and natural gas clearly important so. So utility bills in the households is more and more becoming an election topic as such, and that might put limitations on exports of natural gas. So this is clearly an area we follow very closely. But there's no doubt there is significant amount of LNG coming. And our gas $2 per MBTU, cost and transportation selling into an $11 market, we are very, very robust. And as one maybe last point to mention here that is sort of the sanctioning on Russian LNG -- potential 17 Bcm. That will lead the European markets as well. Thanks, Jason. Bård Pedersen: Next question is from Chris Kuplent from Bank of America. Christopher Kuplent: Just some I guess, rather boring questions, Torgrim about detail. I wonder whether you can help us review what's happened in the 9 months on your net working capital, great results, I guess. And whether you can combine that review with an outlook where you think we're heading? And if I could ask you to do the same, particularly for your Norwegian business, I understand there's a lot of moving parts in terms of assets for sale outside of Norway, but Norway has seen a significant decline in the discount to Brent that you've been able to achieve in Q3. Again, I would love to have your review of that and outlook, if possible. Torgrim Reitan: All right. Thanks, Chris. Yes. So working capital is clearly a very important part of what we manage and manage diligently. So this quarter, working capital is down by $1 billion, 3 points -- the total working capital now is $3.7 billion. So that's that is the reduction during the year, actually done by some $3 billion. So the question you had is what is sort of normal level and what have you. I mean, the reduction we have seen is very much linked to commodity prices and MNP-related reductions. So I won't sort of give any outlook on this, but I would say that given the structures in the markets, the volatility in the markets and the absolute price levels, it is sort of a fair level. I mean, you remember during the energy crisis, we had a massive amount of working capital, and of course, earned a lot of money. But volatility and price levels are not there anymore. So -- but I would say it's a fair level, it's a fair level. Then the second question was sort of a discount to Brent. Yes, I mean, Johan Castberg came on stream during the summer. And Johan Castberg is able to achieve $5 premium to Brent as such, and that clearly has an impact to the discounted Brent overall on the shelf. Bård Pedersen: The next question is from Henri Patricot from UBS. Henri Patricot: Two, please. The first one, I was wondering if you can give us an update on latest thinking on timing of the Peregrino disposal? And then secondly, on Johan Sverdrup, you mentioned here the field continues to produce at a very high level? Or are you thinking about the evolution of that going into 2026? And to what extent do we start to see a decline next year? Torgrim Reitan: All right. Okay. First Peregrino. So Peregrino was shut in during the autumn. It came back on stream on October 17th as such and is currently producing more than 100,000 barrels per day. So we have transacted and we will divest out of our 60% ownership position in the assets, and that will be divested to Prio in Brazil. So there are 2 legs of this transaction. 40% of the 60%, we expect to close during the fourth quarter and the remaining 20% in the first quarter next year. So the headline transaction value was $3.5 billion with an effective date of 1st of January '24, which is quite a while. So there will be a pro et contra settlement since then. So what you should expect is that on that consideration we will receive is a little bit below $3 billion, and that will be split into sort of 2/3 of that in the fourth quarter and 1/3 in the first quarter. Just want to leave with you that this is -- in Brazil is still very important to us. The reason why we did it was twofold. It was attractive opportunity. And also, we are redeploying resources to Bacalhau and Ria in Brazil, sort of high grading the portfolio in Brazil. So the long-term commitment to Brazil is very much intact. Then Johan Sverdrup. Yes. So Johan Sverdrup keeps delivering very well in the quarter, close to 100% regularity, which is a very good achievement in itself. We have worked the asset very, very hard to optimize production and recovery rates. Now we are looking at a recovery rate of 75%, in that asset. It was 65% when we sanctioned it and 65% is still a very, very high number. So what we are currently working on is multilateral wells, a retrofit existing well into multilateral wells, so we have successfully done that. And then water management is very, very important because water management will continue to increase as we produce these wells. And that has also been done in a very good way. And then we sanctioned Phase 3 this summer with the common stream by end of 2027. So in 2025, we were able to maintain the production more or less on the same level as '23 and '24. But we have fast forwarded a lot of production. So this asset will start to decline. So next year, you should expect lower production from Johan Sverdrup than in 2025. But you know what we're doing, this is at core of our competence base. So we will clearly work very hard on maintaining as high production as possible from that asset. Bård Pedersen: [Operator Instructions] And the next question is Michele Della Vigna from Goldman Sachs. Michele Della Vigna: I wanted to come back to your comment about effectively restricting or being very capital efficient on Offshore Wind, given the acceleration in power demand we're seeing globally. I was just wondering, are there some other areas in the power markets where instead you see opportunities and you could look at redeploying some of the capital you're taking away from Offshore Wind at this time of low returns for those developments. Torgrim Reitan: Okay. So, we do believe that there is value to be had within sort of the Power segment. And we have recently established a new business area called exactly Power as such. So what we clearly will be looking for are sort of opportunities that sort of builds on the portfolio we have and clearly -- and the customer base that we have. And we have a big presence related to our gas positions in Europe and in the U.S. So that's sort of the totality, the way we think about it. I have to be very clear that sort of we have no intentions to significantly step up investments into this area. We are facing periods with lower prices. And for us, it will be very important to remain very capital disciplined in anything that we do. And everything we do need to have a significant profitability and returns before we commit any capital to it. Bård Pedersen: Next one, please one question from you to Peter Low from Rothschild & Redburn. Peter Low: Perhaps a question on the cash tax paid in the quarter, which I think was maybe a bit lower than expected. So it looks like you paid 2 NCS installments of $3.9 billion, but the total cash tax paid in the cash flow statement was $3.8 billion. Were you getting refunds in other regions? Or can you perhaps explain that number a little bit? Torgrim Reitan: Yes. Thanks, Peter. So a couple of things. So 2 tax installments in the second quarter, there will be 3 next quarter in Norway. So just be aware of that. It is a timing effect related to falling prices. So we are still paying taxes based on a higher price environment. So you just be aware of that. And also internationally, the reported tax is much higher than paid tax that goes particularly across the U.K. with the EPL and then sort of Rosebank investments being offset against tax and in the U.S. as well. So yes. Bård Pedersen: The next one is as Naisheng Cui from Barclays. Naisheng Cui: Just one follow-up on MMP guidance, please. I think you mentioned in your report that part of the reason you cut MMP guidance is because divestment of gas infrastructure assets. I wonder if you could isolate the impact on that place rather than the market condition change. Torgrim Reitan: Okay, thanks. I can do that's $40 million per year. We did that sort of 1.5 years ago or something like that or 2 years ago. At that point in time, we delivered sort of guiding repeated in the quarter. So we didn't see the need to sort of strip that out. But when we now changed the guiding, we thought it was useful to mention it. Bård Pedersen: Just to be clear, Nash, the $40 million effect is on a quarterly basis. I think you might have said for year, but it's per quarter. Torgrim Reitan: Yes, that's per quarter. Yes. Thanks, Bård. Bård Pedersen: Next one is Paul Redman from BNP Paribas. Paul Redman: And I might be a little bit early, but I just wanted to ask about how you're thinking about the distribution program for next year. We're going into 2026 with quite volatile view on oil prices. difficult view into gas prices, your debt came down this quarter, and I think you're guiding to a reversion of some of that into 4Q. So I just wanted to ask about how we should maybe think about a distribution program for 2026. And then just a confirmation on whether you're going to guide to that the 4Q results or at the Capital Markets Day later in the year? Torgrim Reitan: Okay. Thanks. Thanks, Paul. Yes. All right. So first of all, there's lot of good reasons to be prepared for lower prices and we all know that. Last year, we took down investments by $8 billion for a few years and also cost down. We will continue to push on this to improve free cash flow in the current environment. So this is an ongoing thing. I just want you to be aware of that. So that is so. Secondly, capital distribution will have a priority in our capital allocation model. Cash dividend -- the cash dividend, you should consider that as a bankable. I mean, that will come. On top of that, we will use share buyback and share buyback will be used on a regular basis. It is a natural part of our capital distribution framework as such. So -- and we clearly aim to be competitive when it comes to the overall capital distribution. And to be precise on competitive, I leave with you a couple of things. We know that our peers are using a formulas related to cash flow. You should think about that type of sort of levels as sort of being competitive when it comes to ourselves. I think it's worth mentioning that sort of we have specialties around the Norwegian tax, so percentage points. We always should be a little bit lower for consistency as such. Then your question on sort of what will happen next year as such. We will announce this on the fourth quarter results in February. There are a couple of specialties I would like to draw your attention to. And that is next year, we have a significant investments related to Empire Wind equity, that is around $2 billion. The year after, we will get it back through the investment tax credit. So when we consider capital distribution for 2026, we will look through that. We will take a 2-year perspective when we do consider our capital distribution for the year. So -- and this is why it doesn't make sense to have -- that's why we are not sort of running with the formula because there might be years where we would like to lean on the balance sheet and there are other years where we clearly would like to build a balance sheet as well. But I think that is very important for me to say that those type of effects we will see through and we will see through that we are competitive when it comes to capital distribution. You also mentioned the net debt, and I just want to use the opportunity to say a few words there. We are currently at 12%. We expect to be in the low end of the range by year-end. There are a couple of things I would like to bring with you -- to you. Point one, there are 3 tax installments there will be payment of the rights issue, $900 million in the quarter and there will also be part of the Peregrino transaction funds coming back. But my point is we maintain the guiding for net debt to year-end, even if we have participated in the Ørsted right issue with $900 million, it is driven by strong underlying operations and cash flow and also improvement in net working capital as we talked about earlier. So a long answer, Paul, but an important question. Bård Pedersen: Next one on the list is Martijn Rats from Morgan Stanley. Martijn Rats: Well, only one for me. I wanted to ask about the impairment charge, because it's more of a question of just sort of trying to make sure I interpret this correctly. So the long-term oil price assumption has come down, but it's still $75 a barrel. But that has triggered $750 million of impairments, which sort of suggests that there were projects in your portfolio that had breakevens well above $75 a barrel. And I was wondering if that is the correct interpretation. If your projects have breakevens below $75, but you lower the long-term assumption, it wouldn't trigger an impairment, right? Am I interpreting this correctly? Torgrim Reitan: Martijn, thank you for your question. Well, there are qualifications that needs to be made. So first of all, we have the assets on the U.K. side, which are impaired with $650 million. First of all, I would like to say, this has absolutely nothing to do with a transaction with Shell. This is an isolated effect, and it is driven by lower oil price assumption, as you said. A very important driver for this is that these assets are held for sale in the book. So they haven't been depreciated for -- since the beginning of the year. If they had been depreciated on a normal basis, the impairment would have been significantly lower. The second point on the U.K. portfolio is that part of that asset base is linked to the acquisition we did with Suncor and the Buzzard field, which sits in the balance sheet at sort of acquisition cost as such and that has also had an impact for that asset. There are 2 assets in the Gulf of Mexico also impaired. Those are also mainly driven by price. Those are assets run by -- operated by significant U.S. operators. As such, one of the assets has been a challenging asset operational wise for several years as such. So I mean, it's -- yes, I mean, it is one asset in the U.S. Gulf of Mexico that has been a challenge. The remainder of the asset portfolio is very robust for impairments. So thanks, Martijn. Bård Pedersen: Next one is JPMorgan, Matt Lofting. Matthew Lofting: I just wanted to come back Empire Wind, Torgrim, I think you mentioned in your opening remarks that there was an availability issue that's emerged on in the installation vessel with Maersk. Could you just expand on what's happening there and sort of any risk that, that poses to the future development progress of Empire Wind into next year? Torgrim Reitan: Thanks, Matt. So first of all, I think it's fair to say that Empire Wind has had a demanding year with a stop work order that has been reversed. And I just want to use the opportunity to say that the lost time has been catched up and we are back on track. And I must say that I'm very proud of what our organization has been able to do in a critical year like this. We are 55% complete. All monopiles are in the seabed. So on this issue, this is a dispute within Maersk and Seatrium, which is the yard in Singapore. The vessel is more or less completed and finished and Maersk has sort of canceled the contract as such. So we are close to the situation. We are working to either see to that this solution is resolved or looking for other opportunities. Important for me to say that this is a well-functioning market and there are other opportunities available in the market. So we will manage this -- we'll manage this, not risk-free naturally, but we will give you an update as this progress. Bård Pedersen: We move on to James Carmichael from Berenberg. James Carmichael: Just quickly on the U.K. and Rosebank. I was just wondering what the latest is on that approval process. And then I guess maybe just sort of general thoughts on the U.K. as we maybe get a bit closer to some clarity on the fiscal outlook here. Torgrim Reitan: Okay. All right. Thanks, James. So on Rosebank, as you might may be aware of sort of the permit was sort of taken away due to that Scope 3 emission should have been taken care of in the award. So we have submitted our response recently to the regulator, and they turn around and put it into public constellation right away. That has started, and we expect the consultation to end at the 20th of November. There is no set date for the decision, but clearly, we work very closely with the ministries to get this moving as quickly as possible as such. The second part of your question, what was that, James, about fiscal outlook in the U.K? James Carmichael: Yes. I guess just general thoughts on the U.K., obviously, some uncertainty on the fiscal outlook, we've got some clarity there soon. Yes, just some context around that. Torgrim Reitan: I think it's fair to say that there has been repeatedly tax changes on the U.K. side over years. This is nothing that we appreciate and clearly would advocate for strong and stable fiscal framework to create a basis for investing as such. Yes. Bård Pedersen: Kim Fustier from HSBC is next on my list. Kim Fustier: I noticed that one of your Norwegian competitors has recently expressed some concerns that there may not be enough projects on the NCS within a year or 2 to sustain a healthy domestic supply chain. Obviously, you're also moving away from big greenfield projects to smaller brownfields. So it's kind of an industry-wide issue. Just interested in hearing your views on sort of the outlook for the NCS supply chain and cost inflation. Torgrim Reitan: All right. Thanks Kim. We are currently having a period with very high activity. A bit of that is driven by the tax incentive program put in place during COVID as such and many of these projects are soon coming into production. So it is natural that there will be a lower activity past that asset. So I think our job as a company is to adapt to that and adjust. I think it's -- I just want to use the opportunity to talk about a project that we have established called NCS 2035. And this links very much to what we said at the Capital Markets Day in the winter, maintaining production level on the NCS all the way to 2035. That future will contain more but smaller discoveries. It will take quicker developments, and we have to operate at lower costs. So for instance, we will drill 30 exploration wells per year and that is more than we do currently. And we will put forward 6 to 8 subsea developments per year, which is also more than what we have done currently. So by what we are doing, clearly, we will be a significant contributor to maintaining a high activity level on the Norwegian Continental Shelf and also the industry in Norway. So very optimistic about what we can achieve through different way of working and different way of working with suppliers. Bård Pedersen: We are fast approaching the hour, but let's take one final question, and that is you Steffen Evjen from DNB. Steffen Evjen: So a quick one. Just remind me on the tax credit in the U.S. What's the milestone you have to get that credit paid? Is that first power or COD on the project? Torgrim Reitan: Yes. Yes, it is production start, that is sort of the criteria, and it is first power. That is sort of the ultimate. So that is what we plan for in 2027. Bård Pedersen: Thank you very much. We are now at the hour. I would like to thank you all for calling in and for your questions. As always, the Investor Relations team remain available. So if there's any outstanding questions, please give us a call, and we will do our best to help you. Thank you very much, and have a good rest of the day. Operator: Ladies and gentlemen, that concludes today's call. You may now disconnect. Thank you, and have a great day.
Operator: Welcome, everyone, to UMC's 2025 Third Quarter Earnings Conference Call. [Operator Instructions] For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within 2 hours after the conference has finished. Please visit our website, www.umc.com, under the Investor Relations, Investors, Events section. Now, I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin. Michael Lin: Thank you, and welcome to UMC's conference call for the third quarter of 2025. I'm joined by Mr. Jason Wang, President of UMC; and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the third quarter financial results, followed by our President's key message to address UMC's focus and fourth quarter 2025 guidance. Once our President and CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website, www.umc.com, under the Investors, Financial section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risks that may be beyond the company's control. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC and the ROC security authorities. During this conference, you may view our financial presentations material, which is being broadcast live through the Internet. Now, I would like to introduce UMC's CFO, Mr. Chi-Tung Liu, to discuss UMC's third quarter 2025 financial results. Chi-Tung Liu: Thank you, Michael. I'd like to go through the third quarter 2025 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on Page 4, in third quarter of 2025, consolidated revenue was TWD 59.13 billion, with gross margin at 29.8%. Net income attributable to the stockholder of the parent was TWD 14.98 billion and the earnings per ordinary share were TWD 1.2. Capacity utilization rate climbed to 78% in that quarter with wafer shipment just marked 1 million 12-inch equivalent wafers. On Page 5, on the sequential comparison, third quarter revenue of TWD 59.12 billion increased slightly compared to the previous quarter, mainly due to higher wafer shipment, although the NT dollar exchange rate was an unfavorable factor of around 3%. Gross margin also climbed on back of the better capacity utilization rate to 29.8%. And net income reached nearly TWD 15 billion or an EPS of TWD 1.2 per share in NT dollar terms. On year-over-year comparison, on Page 6, for the first 3 quarters, revenue grew 2.2% year-over-year to TWD 175.7 billion. Gross margin was around 28.4% or nearly TWD 50 billion for the first 3 quarters of 2025. Overall, net income for the first 3 quarters is down to TWD 2.54 per share compared to TWD 3.12 in the previous 3 quarters of 2024. On Page 7, cash still above TWD 100 billion, and total equity of the company is now TWD 361 billion at the end of third quarter of 2025. ASP on Page 8 shows we remain firm for the past 2 quarters. On Page 9, for revenue breakdown, we see -- we can see that the North America represents about 25% of the total revenue in the third quarter, which is 5% higher compared to 20% in the previous quarter. On the contrary, Asia declined by nearly 4 percentage points to 63% in the third quarter of 2025. IDM versus fabless remain unchanged on Page 10 for the third quarter of 2025. On Page 11, we noticed the communication and computers edge up in terms of sales mix when consumers declined by nearly 4 percentage points to 29% in the third quarter. On Page 12, the segment sales breakdown by technology, 22 and 28 still remain our main technology node, when 22 continued to climb in terms of percentage. Total 22 and 28 revenue reached about 35%. For 40-nanometer and 65-nanometer revenue, somewhat unchanged, in about 17% and 18%, respectively. For our quarterly capacity for the third quarter, we see a minor increase coming out of our 12x Xiamen fab with now the monthly capacity is nearly 32,000 wafers per month, and total available capacity will remain flat for the coming quarters. On the last page of my presentation, our annual CapEx is heading to our budget number of $1.8 billion with 90% in 12-inch and 10% in 8-inch. The above is a summary of UMC results for third quarter of 2025. More details are available in the report, which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wang. Jason Wang: Thank you, Chi-Tung. Good evening, everyone. Here, I would like to share UMC's third quarter results. In the third quarter, we observed demand growth across most market segments, which drove a 3.4% increase in wafer shipments and improved utilization rate to 78%. In particular, we benefited from a pickup in sales of smartphones and notebooks, driving replenishment order from customers. Our 22-nanometer technology platform continues to provide us with the differentiation in the market, with 22-nanometer revenue now accounting for more than 10% of the total sales in 2025 alone, we are projecting over 50 product tape-outs, and we expect 22-nanometer contribution will continue to increase in 2026. Aligned with our strategy of providing customers with highly differentiated specialty technologies, we recently announced the readiness of our 55-nanometer BCD platform. In addition to mobile and consumer applications, the new platform is also complemented with the most rigorous automotive standards for automotive and industrial use. Looking ahead to the fourth quarter, we are anticipating wafer shipment to be comparable with third quarter's volumes, wrapping up 2025 with shipment growth in the low teens. UMC continues to deliver competitive process technologies that enable diverse applications, which position the company to benefit from a broad-based market recovery. With the 22-nanometer logic and specialty platform, in particular, we expect to drive growth. Now, let's move on to fourth quarter 2025 guidance. Our wafer shipment will remain flat. ASP in U.S. dollar will remain firm. Gross margin will be approximately in the high 20% range. Capacity utilization rate will be in the mid-70% range. Our 2025 cash-based CapEx budget will remain unchanged at USD 1.8 billion. That concludes my comments. Thank you all for your attention. Now, we are ready for questions. Operator: [Operator Instructions] First, we'll have [indiscernible], Bank of America for questions. Unknown Analyst: My first question is regarding the near-term outlook. Could you discuss more in detail on how you see the business by end market is trending into the current quarter in fourth quarter? It seems the guidance is above seasonal, so just wondering if there's anything driving that. And also just your initial view into first half next year, did you get any feedback from your customers on the potential restocking, or in general, they are still pretty conservative at this stage? Jason Wang: Sure. I mean, while we're going into Q4, we can -- as I said, we wrap up the 2025 shipments to a low teens. It's now that we project the 2025 shipment growth was supported by our differentiated 22-nanometer technology and other specialty offerings across both 12- and 8-inch amid a broad-based market demand recovery. On the 12-inch size, shipment growth was driven by a strong momentum from 22-nanometer logic for ISP, Wi-Fi connectivity as well as the high-end smartphone display driver IC. In addition to 22 and 28, overall 12-inch wafer shipment will outpace our addressable market due to our comprehensive value-added specialty portfolio of nonvolatile memory, RFSOI and BCD. On the 8-inch size, we expect a high single-digit growth in 2025, mainly led by the PMIC and LDDI. So in summary, the strength of 22-nanometer and the specialty process across both 12-inch and 8-inch platform underpin our confidence in achieving a low teens percentage shipment growth in 2025. So for 2025 Q4, we remain -- the shipment outlook remain flat. If we're looking into the early look of 2026, I think we're still going to experience some seasonality, but if I look at the entire year, despite the ongoing global economic geopolitical uncertainty, we believe our 2025 business growth momentum will continue into 2026, where we expect the wafer shipment will increase year-over-year. In addition to some TAM expansion, our 22 eHV -- 22-nanometer eHV platform, which is serving the high-end smartphone OLED display driver application, will be one of the key growth engines. We expect the overall 22- and 28-nanometer revenue to achieve double-digit year-over-year growth in 2026. However, there's still going to be some seasonality that we may have to go through. So Q1 may be one of the challenging quarter for the year. Supported by the strong customer adoption of our 22-nanometer technology, in addition, our technology readiness in RFSOI for smartphone RF front-end device will also fuel our growth in 2026. And besides the growth of the communications segment, we also foresee our enhanced version of PMIC solution, which will also continue to drive recovery in our 8-inch segment. In 2025, we foresee PMIC business will grow in the high single-digit range, and this growth momentum will extend into 2026. Our effort on the enhancing our technology competitiveness, particularly for the PMIC application, have started to yield some tangible results, and that will actually help us with the -- to strengthen our position in this market segment and for 2026 growth. If we look beyond 2026, we'll continue to develop new derivative technology to enhance our differentiated and our competitive -- enhance our competitive position. Furthermore, we are expanding our addressable market into 12-nanometer FinFET, as you know, and as well as some of the advanced packaging space. The UMC portfolio -- technology portfolio is well positioned to serve a growing demand of the power efficiency optimization, high-bandwidth data transfer as well as the improved connectivity. So I think in general, we are relatively confident in 2026, but it's still kind of early to go into the quarterly guidance. Unknown Analyst: Yes. That's pretty intensive. And I think just a quick follow-up to my first question is just when you mentioned the growth momentum could continue into 2026 compared with 2025, are you saying that the wafer shipment could actually still be growing by low teens next year at least? Because you mentioned a lot of growth drivers by applications just now, especially on 22-nanometer, 28-nanometer and also 8-inch. So just wondering whether you are implying that the wafer shipment could grow by another low teens at least for 2026? Jason Wang: I mean, we're not giving the blended -- the wafer shipment at this time. We're probably ready to provide you more clarity into Q1, but 22 and 28 particularly, yes, I think that when we go into 2026, we're still expecting a double-digit year-over-year growth. Unknown Analyst: And then my second question would be on your gross margin trend. I think for the fourth quarter, you guided flat shipment and also pricing. The FX seems to be -- foreign exchange seems to be more favorable at this stage. So why does the gross margin does not go higher than the third quarter? I'm just curious why that is the case. Or should we think about high 70% utilization is going to translate into like high 20 percentage gross margins going forward? Chi-Tung Liu: Gross margin in third quarter is actually, in fact, slightly higher than that of the previous quarter. The gross margin also primarily depends on utilization rate, ASP, product mix, depreciation and foreign exchange. As you know, even though the foreign exchange rate may be on a forecast basis, better than forecast, but still appreciate against U.S. dollars, our key receivable currency, so still in an unfavorable situation, as I mentioned earlier, that almost eat up about 3% of our total revenue. And we do expect the Q4 '25 gross margin still will remain in the bandwidth of high 20 percentage range. Despite the variables such as our depreciation, we will still see quarterly increase. And this year, we are facing 20% plus increase in annual depreciation expenses. So I hope that answers your questions. Unknown Analyst: Yes. And then just a relevant follow-up is in your cost structure. You have been able to manage the other manufacturing cost item quite nicely down in third quarter despite the fact that the labor cost is higher, electricity cost is higher and also the material or even the wafer shipment is slightly higher compared with second quarter. So could you just elaborate in more detail on how should we think about the other manufacturing costs, which I believe should be mostly variable cost? How should we think about that going to trend? Chi-Tung Liu: So part of our employee compensation is bonus, which is based upon profit sharing. So when we have a better quarter-over-quarter profit in the third quarter, we do have to factor in higher bonus, which increased the compensation expenses in the third quarter. Unknown Analyst: But it was still down compared with second quarter. So I was just wondering if there's any reason driving that decline and would that trend continue. Chi-Tung Liu: No, the trend will not continue. It will fluctuate along with our rolling profit recognition. Operator: Next one, Charlie Chan, Morgan Stanley. Charlie Chan: Congratulations for very strong results, especially on the gross margin side. So maybe starting with the so-called geopolitical uncertainty. So, Jason, can you elaborate a little bit what kind of macro uncertainty you see will continue in 2026? And I was asked by one of your customers about -- there seems to be some speculation about semi-tariff may come next January. So any kind of impact -- potential impact to your business or operation? And also another uncertainty, it was a couple of weeks ago, right, the rare earth kind of supply. Does your team run through some analysis about the potential impact if rare earth will be restricted again? Jason Wang: Sure. A couple of things, right? I mean, you mentioned about geopolitical dynamics on the tariffs. So maybe I'll start up on the tariff first. We do understand there are uncertainties and risks from the potential impact of tariffs, and we will remain cautious of those potential business impacts, and we'll be mindful in our business planning going into 2026. At this current point, we haven't seen anything yet, but we are cautious. The -- amidst the uncertainties, we'll also continue to focus on the fundamental of our business. That is the technology differentiation, manufacturing excellence and then customer trust to further strengthen our competitiveness -- competitive position. So I think we still have to go back to the fundamentals. For UMC, to address the geopolitical concerns, I do believe that UMC has a geo-diversified manufacturing site across the globe. And the global semiconductor landscape is evolving. Customer and governments are increasingly emphasizing the geographic diversification and supply chain resilience along with the tariff. But to address the structural changes and align with the customer needs, our strategic initiative, including the capacity buildup in Singapore and the U.S. and are designed to complement our Taiwan facility, will enable us to better support our customers across multiple regions. Over the long term, we are targeting a balanced capacity split between Taiwan and overseas locations, but we welcome any opportunity from our customer. Whether this is an impact or opportunity to us, we will probably have to position ourselves and ready for that dynamic changes. Yes. Charlie Chan: So specific on semi tariff, right, I think we also went through this discussion last quarter or 2 quarters ago. So do you also hear that next January could be a final implementation of this semi tariff? And secondly, would UMC can get exemption from the semi tariff? Jason Wang: Well, I mean, your guess will be as good as my guess. So I'm not going to guess here. Charlie Chan: I watch TV only. Jason Wang: Yes. So we're going to be cautious about this, and we're closely monitoring the progress and developments. And at the same time, given that we are investing into the U.S., so we're definitely going to present our case. But there's nothing else to update here. But if there's anything, we will definitely recall back. Charlie Chan: Okay. Got you. And second question is about the -- your gross margin sustainability. I know this quarter, next quarter, some puts and takes, right? But just overall, right, next year, it seems like some of your industry peer, may just call it TSMC, kind of hike their wafer price. And recently, we are seeing that the back-end foundry, though it's not like your industry peer, but it's kind of your downstream supply chain, right, also attempt to hike the back-end foundry service price. So what was the UMC's kind of sort of potential wafer price hike into next year? Jason Wang: Well, like Chi-Tung mentioned earlier, margin reflects the result of ASP loading certain variable factors. So let's take the ASP specifically. For the ASP outlook, our 2025 ASP performance has remained firm amid a dynamic business environment, and it has remained stable at a healthy level throughout the year. And so -- and we expect the ASP will remain firm in Q4 2025. And for the 2026 outlook on ASP, we will provide more detail in the upcoming January 2026 conference call, as we are going through some discussion with our customers aligning that. So we probably have more detail to report in the next conference call. Charlie Chan: Okay. And on the cost side, expense side, Jason, you said at some interview that your team want to drive some costs down. But I feel like most of the components whatsoever. Most of what I'm hearing this commodity cost may go up, right? So on the cost side, do you have any preliminary outlook for 2026? Jason Wang: Without getting into specific cost projection or outlook, I think we can probably update you of the view in cost, our view of cost -- about cost. Cost competitiveness is always a mutual goal for us and our suppliers together, so in order to be competitive. So we're closely working with our suppliers. We'll continue to drive towards cost savings in 2026, and that has been going on for many years, but we are continuing to doing that into 2026. But that includes the combination of both internal and external efforts. It's not only working with the supplier, it's also internal efforts. For example, we have already started leveraging some smart manufacturing and AI technologies internally to enhance our fab efficiency and enabling our long-term operational competitiveness. So that's also a major piece of driving our cost goal. So I think there's many of the initiatives that we're deploying, and we working with the supplier -- supply chain is just one of them. Charlie Chan: Okay. Okay. And last one, I will be back to the queue. So I know your company and your team have been running through a lot of strategic or marketing research, right? So recently, we picked up one data point I would like to share with you and also consult your view. Because of the T-glass shortage, right, we're starting to see tightness of BT substrate supply. From your perspective or UMC's perspective, would that kind of constrain your -- some of your customers' demand, for example, the consumer or smartphone SoC demand into 2026? Jason Wang: Well, we really haven't seen that, but we are closely monitoring the entire supply chain resilience. The current market is driven by this AI momentum. So there are various areas demonstrating potential supply concern. But so far, we have not seen any impact to us. But like you said, we all look out there and see if there's going to be any. But meanwhile, we are managing -- from our internal perspective, we are managing our supply resilience point of view. We want to ensure the supply assurance and as well as the -- both from supply and demand -- supply and demand as well as the quality standard and cost. So I think that's always been our initiative internally. So I would just have to say we haven't seen any impact on the recent market dynamic, but it's something always on our radar screen, and we continue monitoring it. Charlie Chan: Yes. How about smartphone or PC demand recovery, if you have a crystal ball? Do you think that 2 major segments of the end demand will significantly recovery next year? Jason Wang: Well, I mean, at least for the Q4 '25, we expect the wafer shipment will remain flat, and the markets reflect pretty healthy inventory level as well. We see slightly communication segment decline in our segment, but the computing, consumer, automotive are slightly increased. So I'm not sure that's affected by that particular supply issue, but it reflects probably more end demand associated. Operator: Next one, Laura Chen, Citi. Chia Yi Chen: My first question is also about the margin outlook. Chi-Tung, you mentioned that the depreciation cost for this year were up about 20% plus year-on-year. But we know that actually in the first half, the depreciation cost increased almost like 30%. So does that mean that depreciation cost year-on-year increase trend to slowing down into Q4? With overall your utilization rate and also ASP seems to be resilient and also higher exposure on 28-nanometer, should we be looking for some of the potential upside of the gross margin? Chi-Tung Liu: Well, other than depreciation, there are other factors. Like Jason mentioned, we will have a clear view on the ASP, which is an important component for the margin equation. But just on depreciation alone, yes, the increased magnitude, we're down to about low teens in the year of 2026 versus 20-something in the 2025. And in the previous quarter, we also mentioned either '26 or '27 should be the peak of the recent depreciation curve. So on that regard, it does provide a good floor for helping our EBITDA margin. Chia Yi Chen: Okay. Great. And also the second question is, I recall that we mentioned about the Interposer business before. We know that the AI demand is surging. So I just want to understand UMC, do you have any updated view on the Interposer strategy? And also, we know that UMC also have wafer-to-wafer technology. So just wondering what's the plan here. And also, do you want to further expand the capacities on Interposer? Jason Wang: Well, the latest development on the advanced packaging space, we will continue preparing our advanced packaging solution for this growing market associated with the energy consumption of cloud AI and the edge AI market. For UMC, we are developing the 2.5D Interposer with DTC, the deep trench capacitor, and discrete DTC to address the power efficiency requirement in all AI, HPC, PC, notebook and smartphone space. And second, UMC is leveraging the scalable 3D wafer-to-wafer packaging stacking and the TSV to enhance the -- enhance our specialty technology offering. We are in the mass production of extremely small form factor for the 5G and 6G RFIC right now by leveraging the wafer-to-wafer stacking technology. Based on the success of the 5G and 6G RFIC that works through the wafer-to-wafer stacking, we are also developing memory-to-memory stacking and memory-to-logic stacking service for the high-bandwidth computing requirements. So our technology really is associated with the center with the DTC capability and the wafer-to-wafer stacking capability. Right now, still within our current capacity size, there's no expansion planned, but there are a lot of customer interests and engagement being developed right now. Chia Yi Chen: Okay. Great. Can you also give us some like idea how is that kind of business opportunity growing into the next few years? Jason Wang: I mean, as we anticipated, the cloud AI and the edge AI market will probably taking out in the next 2 years or so. And so we think preparing those technology capability today will position us well to serve that market when the market comes. I think many customers are engaging in that discussion and exploring the product roadmap at this stage. But in terms of the actual volume and the ramp-up schedule, I would expect it's going to probably be in late 2026 or sometime in 2027. Operator: Next one, Sunny Lin, UBS. Sunny Lin: Congrats on the very good outlook. Very glad to see business stabilizing and improving. So my first question is on the pricing. I understand more specific guidance should be provided in January or in early 2026, but I want to get a bit more color on the latest progress on your engagement with the clients. So in 2024 and 2025, basically, you provided roughly mid-single-digit type of price reset for across the board. And so how should we expect like going to early 2026? Would it be fair to assume that now given the improving supply/demand, even if any price decline should be lower than the magnitude in early 2024 and early 2025? Jason Wang: Well, I mean, this is definitely -- I mean, that's our goal, right? I mean -- but while we are still in discussion and aligning with our customers, I can't really quote that. I have to really see the data before I can comment about it. But throughout the annual discussions and the patterns in January, we'll probably continue engaging in similar discussion. But in terms of the magnitude of it, I think it's kind of too early to guide at this point. Sunny Lin: Got it. Maybe a follow-up on blended ASP. There are still some concerns that there may be some overhang from LTAs expiring in the coming few quarters that could weigh on your blended ASP. And so Jason, could you maybe provide a bit more color on if any impact or that impact is already gone mostly? Jason Wang: I mean, LTA is one of the mechanisms that help us and our customers working other partners, not only based on the ASP, it's also we based on that, providing a mutual commitment for us to put in capacity to support the customer. At the same time, the customer demonstrate some commitment for the business engagement. So LTA will continue serving that purpose. Well, given the market dynamics, we're always working closely with our customers and to support them and gaining market shares without losing the market share and gaining the market shares and also with the market dynamics in terms of commercial needs, so -- but at the same time, we have to balance in terms of CapEx returns. So it is a complicated process and discussion, and we've been doing that for the past 2 years, and we'll continue supporting our customers to march into that direction, finding a win-win solution based on the LTA arrangement. But the future commitment of LTA remains intact, yes. Sunny Lin: Got it. So maybe one question on 2026, just to make sure that I got the right number. So for 2026, Jason earlier, did you mention the target would be to grow business by double digit? Jason Wang: I mentioned about the 22- and 28-nanometer that we expect the momentum will go into 2026, and we expect a double-digit growth year-over-year, yes. For the... Sunny Lin: Got it. And maybe a question on Singapore expansion. So if any like latest update that you could share with us in terms of how quickly the capacities will be ramped in 2026? Jason Wang: We -- I think the milestone has not changed. We project that the 12 IP3 production ramp will start in January 2026, and it will ramp up with a higher volume starting in second half of 2026. And that milestone schedule remains. Sunny Lin: Got it. Maybe last question. So in terms of dividend policy, given the improving cash flow outlook in the coming few years, would the company consider maybe revisiting the dividend policy to change to like absolute cash dividend? Would that be possible? Chi-Tung Liu: It's not impossible, but we always try to strike a good balance between the high percentage payout ratio and absolute dividends. So I think that strategy or that position will continue. Operator: Next one, Gokul Hariharan, JPMorgan. Gokul Hariharan: So just wanted to understand a little bit more on the pricing. I know that you're in pricing negotiations with customers. Could we talk a little bit about 22 and 28? How is the pricing trend there? Do you expect that there is any concession that you may need to make on 22 and 28 pricing or that is going to be reasonably firm? And maybe also the same question on the 8-inch portion of the capacity as well, given some of your competitors are also kind of putting down or kind of exiting some of the 8-inch capacity? Jason Wang: Well, our pricing strategy has been very consistent, and we will work closely with our customers and -- for protecting and gaining market shares. So that remains. That will not change. So in the particular number, the ASP guidance, I think it's better that we have all the picture together and to share with you. But in terms of pricing strategy and positioning, that has not changed. We do believe that the pricing is a combination of our value proposition from technology differentiation, our manufacturing capability, reliable capacity and the diversified manufacturing locations, so on. So we think there's a lot to offer. And along with the mutual commitment with many of the customers, we believe that we will strive to a right balance for the pricing discussion. However, again, from the specific guidance on ASP outlook, I will probably prefer to wait until we finish up. I don't want to mislead you at this point. So -- but -- and that goal is whether it's 22- or 28-nanometer and as well as the 8-inch because each technology node has a different market dynamics, and we will work within that dynamics. Meanwhile, you're talking about if we see anything on the 8-inch opportunity or due to any other, our peers. We don't typically comment about our competitors. We believe our market share increase in 2025 in 8-inch, but not just 8-inch, overall 8-inch and 12-inch legacy nodes. And we believe those nodes remain a sweet spot for a wide range of analog reach products. So we'll continue to strengthen our product portfolio, focus on those spaces. And hopefully, we can increase our market shares. We continue to optimize our existing platform and developing a new solution to better address that market need. This is the area that UMC has built some long-standing relationship and trusted relationship with our customers. So we believe this structural trend will reinforce our position as the preferred foundry partner for customers in this needs. And that will actually help us to sustain our maybe growth in both 8- and 12-inch legacy nodes over the long run. Gokul Hariharan: Got it. Yes, clear on the pricing that we can wait for January. But I think I just wanted to also ask on the semiconductor Section 232 tariffs. How are the discussions with your customers going? And let's say, there is a 15% to 20% tariffs on exports, which needs to be offset with any kind of U.S. investment or U.S. capacity that you have. How does UMC manage that situation? And which are the investments, or if any, that can qualify for that kind of an offset? I mean, for some of your peers, I think that is pretty clear. But I just wanted to understand how UMC is considering the situation. Jason Wang: Well, I kind of touched that earlier. Our -- we have been a very diversified manufacturing -- look, we have a very diversified manufacturing location in the past. And so we have very -- I think we're pretty much very complement to the current market dynamic. The current geographically discussion on diversification, supply chain resilience, I think our past initiatives serve that, and so we'll just continue. We may alter that, making some adjustment about that strategy, but not significantly. For instance, we're including building capacity in Singapore and U.S., and it's very much aligned to that direction. Of course, the tariff situation, whether it is X percentage, we don't know yet for Taiwan, but we know some areas already came out at 15% and which -- that's where we have our manufacturing sites. So customers are in discussion in interest of making sure that they have access to those facilities and to those locations. So we are definitely entertaining that conversation in a manner of growing our business engagement. So we hope that becomes more of an opportunity to us, not just a negative impact. Now, for some area that is not clear yet, and we have to navigate through that, it's our belief that we have very smart people in this industry. And despite how -- which direction it goes, we will navigate through this process and finding a win-win solution of mutual benefits. Gokul Hariharan: Yes, just following up on that, Jason, I think geographical diversification is one aspect, but also the second aspect is U.S. capacity, right? So is your understanding that your 12-nanometer collaboration with Intel kind of counts as U.S. investment and U.S. capacity, given I think the total investment is actually quite small, even though you are actually shouldering a lot of the technology-related task. Jason Wang: Well, I mean, I can't comment about the big or small, but the investment is investment, and we are putting capacity in the U.S. And the starting point of the 12-nanometer only lays a solid foundation for us to explore maybe even other collaboration opportunity as well. So that also -- if there's anything to update, we will update you, but that could also represent even more investment, right? So -- but it's just -- we're not ready to update you anything yet. But even I look at the 12-nanometer today, that is quite significant in terms of investment. Gokul Hariharan: Got it. Maybe one last question on the advanced packaging bit. I think you last time updated, I think, around 6K or so of wafer capacity for 2.5D IC packaging. Is that still where we are in terms of the capacity? And for your 2.5D packaging with deep trench capacitor, what is the application? Is it slightly different application that you're targeting compared to the mainstream market and that's why you're kind of waiting on the capacity expansion while the industry is still like really asking for a lot of capacity? Jason Wang: No, the 2.5D Interposer 6K today stays there. There is no expansion plan beyond that given the technology road map migrating to the DTC and we're developing the DTC capability. And for that, we're serving the AI, HPC, PC, notebook and smartphone space. And so our advanced packaging roadmap will center on the DTC going into, yes, 2026. Gokul Hariharan: And would you say that the 6K is now fully utilized or you still have a lot of slack in that 6K capacity right now? Jason Wang: I mean, as the product is migrating to DTC, that's why we're not expanding the capacity on the 2.5D right now. Gokul Hariharan: Okay. Okay. Fair enough. And this DTC capacity, how significant do you think it is going to become in terms of revenues? Let's say, I think you were expecting end of '26 ramp-up, so let's say, in 2027, is that a fairly significant part of your total portfolio? Or is it still going to be quite small, similar to the Interposer-related revenues that has been more like a single digit -- low single-digit kind of percentage of revenue? Jason Wang: I think it's kind of too early to predict that. A part of the market is associated with the edge AI market and which we have to wait until that has more clarity. And so I think at this point, it's too early to project that. But in terms of technology-wise, I think that's definitely the core of the next generation. So we need to make sure that we have prepared for it. Operator: Next one, Janco Venter, Arete. Janco Venter: I just wanted to follow up on the investment into the U.S. and just get an update on the state of the PDK. And then also, we just want to understand the business model around this engagement on 12-nanometer. Is it revenue share? Is it profit share? And then just secondly, on that, will it be cannibalistic to the 22, 28-nanometer customers as you start migrating to 12-nanometer? Any color that you can add to that to help us just understand this opportunity would be quite helpful. Jason Wang: Sure. From a project standpoint, the -- currently, the 12-nanometer cooperation with Intel is progressing well and remain on track according to the project milestone. And we expect the early PDK will be ready for the first wave of customers in January 2026. And both UMC and Intel are aligning with the customer device spec to facilitate the ramp-up. Overall, the collaboration is proceeding as scheduled, and customer product tape-out is expected at beginning of 2027. So that is the update on the 12-nanometers. The business model itself, we are working collaboratively together and engaging with the customer and the actual business model that we're probably not elaborate to share right now. But once -- I think that will be a -- the business revenue recognition, once it's ready, we'll update that. And the cooperation model is actually very structured and -- but just we'll probably have to report that after we're into production. I think that's the 2 questions you have, right? Did I miss any? Janco Venter: Yes. That makes sense. Yes, that's right. Maybe just one follow-up. And I think you touched on this earlier where you talked about potentially looking at further investments. Now, if we look at -- actually, we were trying to understand if there's scope perhaps to extend this agreement to single-digit nodes because if you look at Intel's business, they fully depreciated 7-nanometer. And it seems like an obvious area to extend the agreement. Is this something that you would potentially be looking at? And does that make strategic sense for UMC? Jason Wang: Well, I mean, the -- yes, the simple answer is yes, right? And -- but we have to starting from -- we have to start it from the 12-nanometer. So we had to make sure that executed well, so we can lay a solid foundation on that. For technology beyond 12-nanometer, we are open to explore the future opportunity through the partnership arrangement that are mutually beneficial. I would say the cooperation with Intel is strengthening UMC's strategic position in U.S. significantly and for the U.S. market and also broaden our addressable market while adhering our disciplined CapEx approach. So we are very committed to this partnership. And so far, the project is actually progressing well. Operator: Next one, Bruce Lu, Goldman Sachs. Zheng Lu: Can you hear me? Jason Wang: Yes. Zheng Lu: Yes. I just wanted to follow up the -- for the U.S. collaboration beyond 12-nanometer. What are the showstopper for us to move beyond 12-nanometer at the current stage? Or do we consider to go backwards to do like relative mature node capacity in U.S.? Jason Wang: I mean, that's an interesting question, right? I mean, the -- I think when we talk about this cooperation with Intel strengthened our positioning in the U.S. market, hopefully, we're not only limited at 12 nanometers and that if we can have a full potential of this position. And we -- so that's why we're actually very open to explore the future opportunities through this. So I don't think there's a -- I won't call any showstopper, but I think as long as it's mutually beneficial, I mean, we will definitely open to explore that. Now, is the exploration limited to the more advanced node or backward? I think we are also open to that. We're not limiting ourselves with that collaboration. Zheng Lu: No, Jason, the question is that it's clearly mutually beneficial, right? So who has the ball? I mean, who doesn't want to move on? Jason Wang: I think, in any of the engagement, not just this, you require the market validation, you need to make sure you're doing your due diligence. So I think I will probably comment that all conversations are open and the due diligence need to be in place before we move forward. So it's not truly a showstopper. It's not going which sport, it is we have to make sure we conduct the appropriate process. Zheng Lu: So in other ways, the prerequisite condition would be that you probably need to deliver 12 nanometers with like decent size of revenue, decent size of customer, then both sides might consider to move it on. Is that the right consideration? Jason Wang: Not -- I mean, I won't say that it is a prerequisite, but that is one of the important considerations. But more importantly is if this collaboration is economically beneficial to both sides. And so I think that the -- once we are more mature and ready, and we definitely will update you, but again, our position on this topic is we are open to that exploration. Zheng Lu: Okay. So when can we expect to see the meaningful revenue contribution from 12-nanometer? Jason Wang: Well, I mean, right now, for the early product tape-out, it is going to be in 2027. And so we're probably going to start seeing some contribution in 2027, but then ramping after that though. Operator: And in the interest of time, we're taking the last question. Last one, Charlie Chan, Morgan Stanley. Charlie Chan: So it's actually wafer-on-wafer related. So, Jason, can you share with us who could be kind of memory partners? I mean, it seems like it requires a lot of so-called customized design interface, et cetera. So are those more Taiwanese partners or you have some global top memory partners for wafer-on-wafer? And secondly, if you can, can you share some potential kind of end applications and the timing for wafer-on-wafer? Jason Wang: On the wafer-to-wafer stacking capabilities, we are in mass production for some of the extremely small form factor devices in the RFIC space. We're talking about that because we believe if you look at the market is going, and we believe this technology will serve more than just a small form factor. It provides the option for the memory to memory, the logic to logic, logic to memory stacking options. So by providing the option to the customer, they say they can explore many different product applications. So at this point, the advanced packaging technology is developing into 2 cornerstones. One is the DTC capability. Another is on the wafer-to-wafer stacking capability. And then we -- once the technology is ready, then we can explore to many different applications. Charlie Chan: On this wafer-on-wafer, do you see kind of advantage or differentiation to industry, for example, TSMC or China's -- I'm not sure, maybe XMC, yes, any sort of differentiation you may have? Jason Wang: Well, I mean, the developing differentiated technology is definitely on mandate. So we continue driving that technology differentiation. But at the same time, you have to make sure that you're part of the ecosystem, where the market is going. So we see this from a market standpoint. From a technology/product migration standpoint, we believe these are 2 very important capability and technology. So we're preparing ourselves to get that ready, and then, we can start exploring different business opportunities. Operator: And ladies and gentlemen, thank you all for your questions. That concludes today's Q&A session. I'll turn it over to UMC Head of IR for closing remarks. Michael Lin: Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact ir@umc.com. Have a good day. Operator: And ladies and gentlemen, that concludes our conference for third quarter 2025. We thank you for your participation in UMC's conference. There will be a webcast replay within 2 hours. Please visit www.umc.com under the Investors, Events section. You may now disconnect. Thank you again. Goodbye.
Raul Sinha: Good morning, and welcome to Santander's Third Quarter 2025 Results Presentation. For the call today, we will be joined by Hector Grisi, our Group CEO; and Jose Garcia-Cantera, our CFO. Hector, over to you. Hector Blas Grisi Checa: Thanks, Raul. Good morning and everyone, and thank you for joining Santander results presentation. We will follow the usual structure. First, I will go over our results with a special focus on the performance of our global businesses. Then Jose, our CFO, will then provide a detailed view of the financials, and then I will wrap up with some final remarks before we open for Q&A. Before we begin, a quick note that all figures in the presentation continue to include Poland until the disposal is completed. Q3 was another record quarter, reflecting the strength of our strategy and the resilience of our business model in a more demanding environment. Our quarterly profit hit a new record at EUR 3.5 billion, making 9 months '25 the best 9-month period ever, driven by strong revenue growth across the global businesses and our solid customer base, which increased by 7 million year-on-year to 178 million as we enhance customer experience by leveraging our global platforms. We achieved this while we continue to invest for the future through ONE Transformation, making excellent progress towards a simpler and more integrated model. This has enabled further efficiency gains and a 70 basis points increase to our RoTE to 16.1%. Our balance sheet remains also solid with a strong capital ratio, which ended the quarter with an all-time high of 13.1% and a robust credit quality. All of this drove a strong shareholder value creation with TNAV plus cash dividend per share growing 15% despite some currency headwinds. We are approaching the end of our '23-'25 strategic plan well on track to meet our targets. Thanks to our profitability and our disciplined capital allocation, which is further improving profitability. Remember that earlier this year, we raised our RoTE target to around 16.5% post-AT1, equivalent to above 17% pre-AT1 from our original Investor Day target range of 15% to 17%. At the same time, we're already operating with a CET1 ratio above 13%, clearly exceeding our original post-Basel III target of above 12% with 88% of RWAs generating returns above our cost of equity. Finally, after our latest inorganic transactions, we decided to accelerate the execution of our EUR 10 billion share buybacks and upgrade our target, so we announced that we expect to distribute at least EUR 10 billion to our shareholders through share buybacks for '25-'26, subject to regulatory approvals. Let's go now into our income statement. Our P&L remained very solid with profit growing double digits year-on-year, once again reflecting the strength and diversification of our model. We delivered strong top line growth with revenue up 4% in constant euros, supported by NII, which increased 2%, but especially by a new record quarter in fees, up 8%, supported by significant customer growth and the network benefits that we are capturing through our global businesses. At the same time, expenses grew below revenue, down 1% in euros, in line with our target, showing the positive effects from our transformation. This performance translated into solid growth in net operating income, again demonstrating the sustainability of our results. Our prudent approach to risk is also evident in our robust credit quality trends with a cost of risk that is consistently improving year-on-year. Overall, as we have shown over time, our results are sustainable and less volatile than peers even in a more challenging environment. We are ahead of our plan executing our transformation, boosting our operational leverage and structurally improving both revenue and cost. Simplification, automation and active spread management have already delivered 259 basis points of efficiencies. Our global businesses added 101 basis points and our in-house and global tech capabilities, another 88 basis points, exceeding the level expected by the end of '25. And there is still more to come. We see further upside as we stay focused on rolling out common platforms across Retail and Consumer while also capturing additional efficiencies from Wealth, CIB and Payments by leveraging our global network. And all this is something that is entirely under our control. All our global businesses delivered strong profit growth while we improved the group's profitability. Customer activity and diversification continue to drive revenue growth. In a less favorable interest rate environment, our CIB, Wealth and Payments businesses, which are more fee driven, are seeing increased revenue with fees up 7%, 19% and 16%, respectively. At the same time, some of our franchises and emerging markets performed better with lower rates. Our Consumer business is a great example with NII up 6% year-on-year. In addition, our customer focus and solid track record in active balance sheet management explained the resilient NII performance in Retail, which excluding Argentina, grew 1% year-on-year. At the same time, we're extracting the potential from our scale. Scale gives us efficiency and also the flexibility to allocate capital quickly, something very few others can replicate. Combined with our strict capital discipline and focus on profitability, this is driving higher RoTE which most of our businesses already above the targets we set for '25. It is this unique combination of customer focus, scale and diversification that enables us to deliver strong and recurring results, putting us in an excellent position to navigate the challenges ahead. In Retail, we are transforming the way we operate to become a digital bank with branches, combining cutting-edge technology with the expertise and proximity of our teams. We continue to digitalize and enhance customer journeys, driving double-digit growth in digital sales. A key milestone was the launch of the new app in Brazil that introduces conversational capabilities that we are now preparing its rollout across more countries. In cost, we are making the most of AI to speed up simplification and automation, which is reducing manual activities and allowing teams to focus more on customer interactions and value-added activities. As a result, dedication of teams to noncommercial activities has dropped by 17% during the last 12 months. We are progressing in the rollout of our global platform, Gravity. Our back-end technology is fully implemented in Spain and Chile, and we expect to deploy it in Mexico in Q4. Retail profit grew high single-digit year-on-year, driven by sound revenue performances across most countries. Costs declined in real terms and credit quality remained solid. In a more demanding environment, NII grew year-on-year, excluding Argentina, reflecting our focus on profitability and the disciplined margin management and fees rose 5%, supported by higher customer activity, our ongoing digitalization and improved customer journeys. We will keep scaling our transformation to boost efficiency and contribute to group's growth. By improving customer experience and simplifying operations, we expect to continue growing our customer base while reducing cost in euros. In Consumer, we continue to advance in our priority to become the preferred choice for our partners and customers by delivering the best solutions and strengthening our cost competitive advantage across our footprint. Deploying global platforms is key to scale our business and to reduce cost to serve. We recently announced the integration of Santander Consumer Finance and Openbank in Europe, a natural step that simplifies our business, reduce cost and improve our product offering. We keep enhancing our value proposition and Openbank is again a great example. In Germany, it now offers a new AI-powered investment broker. In the U.S. and Mexico, Openbank has attracted EUR 6.2 billion in deposits as part of our broader deposit gathering strategy. We continue to expand and consolidate partnerships, offering global best-in-class solutions with top OEMs. Zinia continued to grow, reaching record volumes during Amazon Prime Days and introducing installment payments for Amazon customers in Spain. Profit grew 6% year-on-year in a challenging context of weaker car registrations in Europe, driven by NII growth and solid cost of risk performance, especially in the U.S. We continue to prioritize profitability over volumes, lower funding costs and accelerating transformation while actively managing capital to maximize returns. We expect Consumer to be one of the drivers of the group's profit, supported by NII growth as the business benefits from lower rates and progresses in our strategy to lower funding cost, solid fee income performance as insurance penetration improves and further cost efficiencies as we accelerate our transformation. In CIB, we are building a world-class business to better serve our corporate and institutional clients across our footprint while maintaining our low-risk profile. Number one, we continue to deepen our client relationships and strengthen our position in our core markets, leveraging our centers of expertise and expanded coverage. This is translating into market share gains in the U.S. as we achieve greater relevance in the investment banking space. Number two, our enhanced capabilities are enabling us for significant opportunities across CIB, improving our cross-business value proposition and driving solid growth in our institutional franchise in Global Markets, where revenue rose 27% year-on-year. Even in a more challenging environment, CIB keeps on delivering solid results with profit up 10% year-on-year, supported by solid fee growth across business lines and exceptional performance of Global Markets early in the year. All of this, while we maintain one of the best efficiency ratios in the sector and a RoTE of around 20%, reflecting our strict focus on profitability and capital discipline. We will build on the capabilities developed in recent years to drive revenue growth in CIB across the group, driven by stronger connectivity across countries, products and businesses. In Wealth, we are building the best wealth and insurance manager in Europe and the Americas. Number one, in Private Banking, we remain focused on expanding our fee businesses and consolidating our global position through value-added solutions. We continue developing our new Global Family Office service, which after just 3 months of activity is bringing advisory services to our first clients in Spain who represent a total wealth of more than EUR 500 million. Number two, in asset management, we keep reinforcing distribution and investment capabilities in alternatives and streamlining our liquid product platform. Number three, in Insurance, we are focused in 2 new verticals: Life & Pensions with new products for senior customers in Brazil and annuities from Private Banking and affluent clients in Spain; and P&C, where we expanded our value offering to SMEs with new protection business products in collaborations with Getnet. Number four, collaboration with other businesses is a major growth driver for Wealth. Collaboration revenues have been a strong growth lever with PB and CIB working hand-in-hand from tailored capital market structures for ultra-high net worth individuals to new joint opportunities. In summary, all of this is supporting strong growth and high profitability levels. Profit rose 21% off the back of strong commercial activity and double-digit fee growth across the 3 businesses. Efficiency improved 1.3 percentage points year-on-year and RoTE is close to 70%, confirming wealth position as one of the most efficient and profitable businesses in the group. Finally, Payments, where we hold a unique positions on both sides of the value chain. In merchant acquiring, we're expanding our global platform with a single API to serve all our customers across our footprint and is now live across our 5 countries in Latin America, reinforcing Getnet's positioning in the region. PagoNxt Payments is leveraging the best proprietary technology to deliver account-to-account processing, FX, fraud detection and other value-added services. Volumes processed by our Payments Hub were more than 5x higher than last year. In Cards, where we are amongst the largest issuers globally with 107 million active cards, we continue to expand the business and deliver best-in-class products. As part of our debit to credit strategy to promote the benefits of using credit cards, this quarter, we launched Pay Smarter in 5 of our countries. We also kept strengthening the integration between Cards and Merchant Solutions, expanding our bundling proposition with Getnet in Brazil, which now joins Spain, Chile, Portugal and Argentina. Payments delivered a strong quarter, resulting in double-digit revenue increase year-on-year, both in Cards and PagoNxt with controlled cost, driving profit growth of more than 60% and improving PagoNxt EBITDA margin to 32%, already above our '25 Investor Day target with Getnet being one of the best among peers. Our strong operational and financial performance is driving higher profitability and double-digit value creation for the 10th consecutive quarter. Post-AT1 RoTE reached 16.1%, up nearly 1 percentage point year-on-year, reflecting our disciplined capital allocation strategy. Earnings per share rose 16%, supported by solid profit generation and fewer shares following buybacks. As a result, TNAV plus cash dividend per share increased 15%. We maintain our upgraded target to distribute at least EUR 10 billion to our own shareholders through share buybacks for '25 and '26, subject to regulatory approvals. Since '21 and including the program that is underway, we will have repurchased more than 15% of our outstanding shares, providing a return on investment of approximately 20% to our shareholders. I will leave you now with Jose, who will go into our financial performance in more detail. José Antonio García Cantera: Thank you, Hector, and good morning, everyone. I will go into more detail on the group's P&L and capital performance. Let me first remind you that as we always do, we are presenting growth rates in both current and constant euros. The difference was around 5 percentage points as of September, mainly due to the depreciation of the Brazilian real and the Mexican peso towards the end of last year. As the CEO explained, we are yet again reporting record results this quarter for the sixth consecutive quarter. Revenue grew 4% with a good cost performance in line with our objectives for 2025. Cost of risk improved in the quarter, supported by robust labor markets and our prudent risk management. There are several positives and negatives in the other results line, but the concepts that explain most of the significant drop in this line year-on-year are the write-downs in PagoNxt in the second quarter of last year and the temporary levy on revenue earned in Spain, which this year is being recorded under the tax line. For the last 2 years, we have reported a continuous upward trend in profit, which grew 3% this quarter in constant euros on the back of a resilient NII performance, cost under control and lower loan loss provisions. Total revenue increased 4% to EUR 46 billion, on track to meet our 2025 target, even with less favorable interest rates than initially anticipated. This growth was underpinned by customer activity and more than 7 million new customers. All global businesses contributed to revenue growth. Payments accelerated with revenue up 19% as both PagoNxt and Cards delivered double-digit growth in NII and fees, driven by higher activity. Wealth also maintained the positive trends from the first half with revenue rising 13%, supported by record assets under management and a strong commercial momentum. CIB grew 6% year-on-year, driven especially by Global Markets and our growth initiatives in the U.S. Consumer also had a strong performance, supported by strong net interest income growth across most of our footprint. And finally, in Retail, revenue rose even in a less favorable interest rate context, thanks to our active margin management and our increased focus on fees. The group's net interest income increased 3% year-on-year, excluding Argentina. Although the majority of group's NII comes from Retail and Consumer, this quarter, most of our businesses contributed to the overall growth year-on-year, which was supported by active asset and liability pricing management. This is most evident in Consumer, both in Europe and the U.S. with improving loan yields and a funding structure with a larger share of customer deposits. Also in Retail, especially in the U.K., Chile and Mexico. Strong activity in Cards, particularly in Brazil, higher volumes and lower funding costs related to market activities and CIB on our efforts to adapt the sensitivity of our balance sheet to protect NII on the new cycle of interest rates. A good example of this is Retail, where net interest income increased across most countries in a less favorable context of interest rates. In the quarter, net interest income was impacted by the Argentine peso. Excluding Argentina, NII was flat and net interest margin declined only 4 basis points for similar reasons I just mentioned. This performance is in line with our guidance of NII going slightly up in 2025 in constant euros, excluding Argentina and slightly down in current euros. We believe net interest income is approaching its trough as we move into a more balanced environment with rates in Brazil expected to ease and lower rates in Europe likely to support consumer volumes and funding costs. Net fee income achieved yet another record period as the number of active customers continue to increase and our transformation promotes connectivity across the group, deploys high value-added products and services and delivers the best customer experience. Fees grew high single-digits, above our target for the year and well above inflation and cost. This was supported by positive activity trends, customer growth and a product mix that is shifting towards more value-added products and services. This shift is evident across all global businesses. Retail fees rose 5%, increases across most of our footprint. CIB increased 7%, up from record levels last year, boosted by an excellent first quarter and year-on-year growth across all business lines, particularly in Global Banking in the U.S. Wealth maintained strong momentum across business lines, backed by record assets under management. Double-digit growth in Payments, both in PagoNxt and Cards, supported by higher activity levels. As discussed in previous quarters, this year, Consumer is affected by new insurance regulation in Germany. Nevertheless, we saw a recovery this quarter, supported by our strategic focus on Insurance with rising penetration expected to translate into higher fee generation as activity accelerates. As we advance our transformation, enhancing customer experience and connectivity and continue to attract more customers, we expect a strong and sustainable fee performance. ONE Transformation is key to understanding why we are improving profitability in most of our markets, leveraging the connectivity that our global businesses provide. The improvements are already very evident. Our costs dropped 1% year-on-year in current euros, which translates into better efficiency levels already amongst the best in the industry. In Retail and Consumer, which are the -- which are leading our transformation, costs are evolving very positively, down 1% in real terms, even with pressure on salaries in some countries and the upfront cost of rolling our global platforms. In CIB, Wealth and Payments, where we are investing, costs grew. However, they showed positive operating jaws with a double-digit fee increase, as I have just explained. This excellent performance resulted in a 5% rise in net operating income from already high levels last year, and our efficiency ratio improved to 41.3%, the best we have reported in more than 15 years. Going forward, we expect sustainable improvements in operational leverage as we further implement the structural changes to our model, especially in Retail and Consumer, which represent 70% of our cost base. The risk profile of our balance sheet remains low with robust credit quality across our footprint on the back of low unemployment and easing monetary policies in most countries. Loan loss provisions increased 5% year-on-year, reflecting the decision to reduce NPLs and also some deterioration in Brazil in the context of higher interest rates. Credit quality continued to improve year-on-year as reflected both in the NPL ratio and cost of risk. The NPL ratio was fairly stable at 2.92%. Remember that much of our NPL ratio -- NPL portfolio has collateral, guarantees and provisions that account for more than 80% of its total exposure. Cost of risk improved year-on-year and quarter-on-quarter to 1.13% despite the management actions I just explained. In Retail, cost of risk improved year-on-year across all our main countries and was steady in the quarter. In Consumer, cost of risk also improved both year-on-year and quarter-on-quarter as the excellent trends in the U.S. continued in the third quarter, even with the usual seasonality. U.S. auto has demonstrated to be highly profitable and resilient business through multiple macroeconomic cycles. It continues to perform better than expected even after some normalization of the delinquency rate in line with our expectations with over 90-day delinquency at historically low levels, backed by strong labor markets and resilient used car values. Finally, our lending exposure to private markets is less than 1% of group's lending exposure. We anticipate a stable cost of risk going forward, supported by stable labor markets. Moving on to capital. As you know, we have been working on improving our capital productivity and accelerating our capital generation for some time. Our CET1 ratio increased again to 13.1% and is now above the top end of our 12% to 13% operating range. This quarter, we generated 56 basis points of capital from attributable profit, which enabled us to accumulate capital after allocating some capital to profitable organic risk-weighted asset growth, mostly offset by asset rotation initiatives, compensating capital distribution charges for shareholder remuneration and AT1s and absorbing other charges, including some regulatory headwinds, which, as we discussed last quarter, this year will be lower than initially expected as some of them have been postponed to 2026 and some of the technical notes published by the EBA were more favorable than anticipated. We continue to deploy capital to the most profitable opportunities and leverage our global asset desks, mobilization capabilities to maximize capital productivity. Our disciplined capital allocation delivered a new book RoRWA of 2.8% in the quarter, equivalent to a return on tangible equity of 22%, well above that of our back book. Hector, back to you. Hector Blas Grisi Checa: Thanks, Jose. In conclusion, these are great results. Good business dynamics and our business model supported solid revenue growth with fees rising high single digits while we reduced cost in euros. Cost of risk improved and remains in line with our target of around 1.15% at the end of the year. We grew the CET1 ratio again to 13.1%, exceeding the upper end of our operating range on the back of our strong capital generation, while we profitably grow our business organically and continue to reward our shareholders. Our RoTE improved and is on track to reach our target of around 16.5% in '25 and TNAV plus cash dividend per share keeps growing double digits. In summary, very solid results even in a less favorable environment than we initially anticipated, which makes us confident that we will achieve all our '25 targets. We expect to maintain the good trends supported by our focus on profitable growth as we deepen in our transformation in a context of resilient labor markets. We are building a stronger and more connected Santander to track the full potential of our unique combination of customer focus, scale and diversification. This is exactly what makes us confident that we will keep on growing and creating long-term value across different economic cycles. And the best is yet to come. Now we will be happy to take your questions. Thank you. Raul Sinha: Thank you, Hector. Thank you, Jose. Could we go to the first question, please? Operator: [Operator Instructions] We already have the first question from the line of Ignacio Ulargui from BNP. Ignacio Ulargui: I have 2 questions. I mean, looking to your RoTE target for the year of 16.5% has to be an acceleration into the fourth quarter to get to that level. What would be the main drivers for that? I mean, don't you feel revenue and NII has probably troughed this quarter, we should see a more decisive increase in the quarters to come? Or would be fees what drives that performance? I mean, linked to that, how should we think into 2026 on those lines? I have -- the second question is a bit of a clarification looking to the credit quality in Brazil. There has been a small improvement in the quarter. Provisions have come down. How should we think about cost of risk? And I mean, there has been any kind of release of provisions that you took in 2Q for the extraordinary top-up that you did? Or it's just underlying improvement of credit quality and provisioning? Hector Blas Grisi Checa: Thank you, Ignacio. First of all, let me discuss a little bit about the RoTE of the 16.5% of CET1 target. First of all, I mean, as you have seen, in the first 9 months, we have delivered a record profit with a RoTE of 16.1%. But if you see just in Q3, the underlying RoTE is well above the 16.5%, okay? So it's very important that you see that. Second, we expect a really strong performance in Q4, basically driven by a number of factors. You can see, first of all, we also have seasonality higher fees. We have an increased momentum from the execution of ONE Transformation, and we're reiterating the guidance of around EUR 62 billion in revenue for '25. We see lower cost and the cost of risk around 1.15% that we have discussed and other results of around EUR 3 billion. So I do believe that our strategy, the business model, the diversification, the disciplined approach to capital allocation will deliver a compounding effect that will continue yielding the positive results we're aiming for. So I see that we're going to get around that circa 16.5%. The important thing also to take into account is the disciplined capital allocation that is driving a 15% growth in value creation and higher shareholder remuneration and with the CET1 that you have seen that is strong at levels of around 13.1%, okay? So it is very important for that. I mean, as you were also, I mean, the outlook for '26, as you have seen over the last 2 years, we have shown consistent execution of the strategy, and we have delivered RoTE every year from below the 15% that we were back in '22, okay? As you know and we have discussed, we will provide further details over the next -- for the next 3-year plan, our Investor Day that is going to be in February '26. So wait us for that. But it is important to understand that if you see every single unit of the bank basically showing improvement, first of all, every single business unit, global business is also improving. And as we already said, we're only scratching the surface of the potential with ONE Transformation. As we have discussed previously, and I said back in the Investor Day in the beginning of '23 is that our aim was to become the best bank in every single geography. And up to today, we are best-in-class in 5 of our geographies, but we still have 5 geographies to close the gap with the #1 in that market. So that basically gives you the view that we will continue improving. And then we have, as you know, '26 is also a transition year with the impact from Poland reducing net profit by EUR 700 million and the TSB contribution that is likely to be more material once we make progress on the integration. So also on the current cost base is elevated given the migration towards global platforms, which is resulting in some duplication of cost. But nonetheless, I do see that we have a very promising '26. In terms of -- sorry, Jose, go ahead. José Antonio García Cantera: No, no, cost of risk in Brazil. Hector Blas Grisi Checa: Yes. I also want to talk about cost of risk in Brazil. Look, in the quarter, loan loss provisions fell 9% quarter-on-quarter, okay? 12-month cost of risk remained stable at around 4.71%. Over the last 2 years, we have derisked the balance sheet as we have been explaining to you every single quarter. With a rapid contraction of unsecured and less profitable lines such as personal and payroll loans that remember that I explained to you that we were changing the mix, and that's basically helping us out. However, I mean, we have rates that are the highest in the developed world. I mean, 10% -- 10 points of real rates, which is also a challenging environment for companies, especially agribusiness, corporates. So it's a difficult environment. Hopefully, rates, and we basically believe we will be coming down a little bit during the first quarter. So I do believe that credit quality, volume growth and earnings will be supported by an improving macro, which we have seen. Even with these rates, remember that Brazil is going to grow around 2% the year. And as I said, hopefully, by the end of '27, we see rates falling down to 10.5%. Jose can basically give you more details. José Antonio García Cantera: Just to add, if you look at cost of risk on a quarterly basis, in 2024, cost of risk was 4.5% every quarter. In the first 2 quarters of this year, we had cost of risk of 4.9%. It's back to 4.5% in the third quarter. There's nothing extraordinary, no reversal of provisions or anything. So it's a more normalized asset quality level, the one that we've seen in the third quarter. And we would expect to finish the year within the range that we guided you for, which is somewhere between 4.7% to 4.8% or around 4.8% cost of risk. Operator: Next question from Cecilia Romero from Barclays. Cecilia Romero Reyes: The first one is on capital. You have guided for around 20 basis points of regulatory headwinds, if I'm not mistaken, for the rest of the year, which now obviously looks like it will come in Q4. Is that still the case? Considering Q4 is typically a more intensive risk-weighted asset quarter and that there could be an additional hit from U.K. motor provisions. How comfortable are you with the 13% CET1 target? And then my second one is on corporate actions. For the Santander Bank Polska sale and the TSB acquisition, is everything still on track to be closed by year-end and early 2026, respectively? And is there any changes to capital impacts or any of the financial impacts previously announced? Hector Blas Grisi Checa: Thank you, Cecilia. So in terms of -- I'm going to basically answer you #2. So in terms of Santander Bank Polska, I mean, I review every single week the advance on that one, and I believe that we're right on track to close on Q1. In terms of capital, I will ask Jose basically to give you his overview of what you have asked. José Antonio García Cantera: So the outlook for regulatory and supervisory charges is now better, as I said during the presentation because some charges that we expected this year have been postponed and probably will be lower than we had anticipated. They have been postponed to '26. And also some of the technical notes, model adjustments, et cetera, came in better than expected. So for the year as a whole, I would say that regulatory and supervisory charges will be in the region of 20 to 25 basis points. We have had 16 in the first 9 months of the year. In terms of targets, we believe that we will generate capital in the fourth quarter from the 13.1% that we reported in September. So the -- let's say, the view that we have today on capital is that the ratio will increase in the fourth quarter further. In terms of the capital charges, et cetera, related to the acquisitions, nothing has changed. We think Poland will generate around 90 basis points of capital. We don't know exactly because it depends on the deductions, but it will be around 90 basis points. The acquisition of TSB is around 50, 52 basis points capital charge. And remember that we announced once we closed Poland, a share buyback in the amount of EUR 3.2 billion, so -- which is around 50 basis points. So those are the capital charges from the transactions, and we haven't -- they haven't changed in the last couple of months. So we don't expect them to change materially from the numbers I gave you. Operator: Next question from Francisco Riquel from Alantra. Francisco Riquel: My first question is on NII in Spain, which is 1% up quarter-on-quarter. You were guiding for a decline. You already improved the full year guidance from minus 6%, minus 7% to minus 4%, minus 5%. So I wonder if you can update again on this guidance because I think I feel trends are better than expected and comment also on the margin dynamics. I see the customer spread is down, but NIM is stable. So what should we expect for NII loan growth in Spain in Q4 and in 2026? And then my second question is, I wonder if you can update on the rollout of the Gravity platform. You have recently completed in large markets like Spain and Chile. I wonder what type of efficiency and productivity gains are you capturing already? And what shall we expect on a full year basis? Hector Blas Grisi Checa: Thank you, Francisco. Yes, you have said, I mean, NII in Spain is much better. I think that the Spanish team has done a great job in terms of managing betas. And as Jose explained in his presentation, we have done a pretty good job in that sense. That's why you see NII basically up 1%. We expect, I mean, to continue fourth quarter up low single-digits from flat that we have expected. So -- and we expect to basically have that. For '26, I will basically tell you that, I mean, we have good dynamics. But nevertheless, we expect -- it is important that you wait for the beautiful picture that you have in front of you in terms of the Investor Day, we will give you a little pretty good idea of what we expect. In terms of the rollout with Gravity, I'm glad you asked the question. I think that, look, it's very important. As a matter of fact, we just migrated Mexico this weekend, okay? That's another large market that is being migrated. So to tell you exactly how it works is basically once we migrate a country to Gravity, we start basically shutting down the mainframes. Let me give you an example. Remember that Spain was migrated in April. We had -- used to have 5 mainframes in Spain. 2 already have been shut down. We're still waiting to shut down another 3 more that we will be closed down over the next 18 months. Once we shut down those, that basically decreased costs quite a lot because every time we do that, I mean, actually, we save a lot of money by all the charges that we get from the suppliers in terms of that. So to give you exact numbers, I mean, we can contact you later because I don't have the exact numbers that we will get from that. But I do believe by the end of '26, all the big countries will be migrated, and we will start the migration with the smaller countries. What I can tell you is the results are pretty good. The NPS with the customers is getting better. The response, I don't know what market is and if you're a customer of ours, but hopefully, you are, you're going to see that the speed has become a lot better. It's a lot easier because we don't go back and forward to the mainframe every single time you consult your balance on your current account or anything like that. It's pretty much faster. So I think that the results are there. Spain is getting less cost out of what we have done. Chile, the response has been really, really good. Mexico migration was a success, and we expect to be closing -- I mean, decreasing the amount of capacity. We're using the mainframe right away, and we'll see it over. But you see the results on '26. That's when exactly happens because we will be shutting down the mainframes on those markets. José Antonio García Cantera: Okay. If I may add some details on NII, you asked about the difference between customer margins and NII. I think we are -- as Hector said, we are doing a great job in managing cost of deposits, a lot better than we anticipated. We are growing volumes at a lower cost. So that's one component relative to the initial guidance we gave at the beginning of the year. The other one is obviously all the hedging decisions that we've taken. Right now, we have around EUR 50 billion of Spanish government bonds at an average yield of 3.4% and a duration of 5 years. That's expected to add quite a lot to the NII in the fourth quarter and next year. So on a sequential basis, I think, as I said, we are close to the trough. It's possible that we see a slight decrease quarter-on-quarter, maybe 1 or 2 quarters more, but from very, very close to basically flattish, but basically probably slightly down quarter-on-quarter. So if you look at the year as a whole, you're right. We guided for minus 6%, then minus 4%, and it's going to be flat or slightly down year-on-year. But the outlook for 2026 beyond these 1, 2 quarters where it might be marginally down is quite positive. Operator: Next question from Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: Here is Sofie from Goldman Sachs. So my first question would be around the kind of litigation provisions still to come. You took a provision in the Corporate Centre in the fourth quarter. How much -- or is there any additional details that you could give around this provision? And how much should we expect still to come from U.K. motor and also AXA provisions? Do you have any other litigation provisions that we should expect in any other countries over the next quarter or year? That would be my first question. Then my second question would be if you could maybe talk a little bit more about the net interest income outlook in Brazil. I know interest rates are expected to come down. But in the kind of short term -- short to medium term, what do you expect in terms of volume growth? Could you remind us of your rate sensitivity in Brazil? And how long does it take for lower rates to help the Brazilian net interest income? Hector Blas Grisi Checa: Thank you, Sofie. Okay. I mean, first of all, on this situation of the litigation provisions to come. First of all, on the U.K. AXA situation, we do not expect the net impact of the judgment to be material for the group, okay? In October 22, the court granted Santander permission to appeal and the case will now proceed to the Court of Appeal. Given this is an ongoing matter, we are not able to comment any further. I'm sorry about that. In terms of the U.K. motor finance, in '24, as you know, we took almost a GBP 300 million provision for the U.K. FCA motor finance review. We have noted that the FCA has recently published a consultation into a proposed reduce scheme and Santander U.K. is reviewing the consultation in detail basically to understand the potential implications. We also know that the FCA's proposed approach differs in an important respect from the Supreme Court's ruling and the legal basis for the redress scheme relevant period is not clear, and it remains at the consultation stage. So there is, therefore, a certainty regarding the final scope methodology and the timing of the redress scheme that may ultimately be implemented. So at this point, I think it's very complicated. And the important thing that I can tell you that is not expected to be material for the group and no more than a few points of CET1. So we will provide you further update on the Q4 results, and we reiterate that we're on track for the results and the guidance that we have given you for '25 on all the targets. In terms of NII outlook for Brazil, what I can tell you is interesting to say basically that we need to put Brazil in context. So it's very important to understand that. The loan book in Brazil is only 9% of the total group loans. Diversification is working. The impact of higher rates and inflation in Brazil has been positively offset by the stronger performance in Europe and in other businesses. But Brazil is also -- it's important to say, it is growing by 2% in '25. Labor markets have been resilient, okay, despite the challenging rate environment. And as I said before, interest rates are the highest, I mean, in terms of real rates, which is an important point to take. So what we have done is that we are changing the mix, and we are going to a higher quality business, which means lower margins, but more stable asset quality, which is very important. And I feel comfortable and confident that as monetary policy eases, the business will do even better than we did in the last easing cycle. Also, you got to remember, as you know very well, that we have negative sensitivity to high rates in Brazil. So we expect once the rates start coming down that, that basically will help us out and we will give better margins for us. If we've been that, I don't know, Jose, if you would like to complement. José Antonio García Cantera: Yes. Just some details on that. Interest rate sensitivity today to 100 basis point move in the curve is EUR 75 million upwards and downwards. You know that this is lower than it has been in the last few years. We've been decreasing the overall sensitivity, but more importantly, we've been moving the sensitivity towards -- we've made the sensitivity more sort of homogeneous along the curve. So we no longer depend as much on short-term rates, but we have a spread sensitivity from 0 to 3, 4 years, which we think is the right position to be in front of the lower rates. We expect next year. So we would expect NII to be stable in 2025 with basically stable revenue and with fees up. This basically on loans that are also going to be stable in 2025. So again, no further, I would say, the sensitivity we have when we look at 2025 -- sorry, 2026 and 2027 should contribute positively to NII evolution in Brazil in the next couple of years. Operator: Next question from Alvaro Serrano from Morgan Stanley. Alvaro de Tejada: I kind of have a follow-up on costs and another one on U.S. asset quality. On cost, cost income continues to improve sequentially quarter-on-quarter. My follow-up is, apologies, Hector, I heard you say that Mexico Gravity was implemented this weekend, but I don't -- I missed if you can give us the pipeline of the next few countries over the next few quarters. And as we think about next year's cost in medium term, I noted in the past, you've said you can achieve flat costs in retail in particular. Is this possible in places like Brazil and Mexico? Because in Mexico, sorry, your cost income is not as good as peers. So just wondering if there's an advantage there that we're not taking into account? And the second on costs -- sorry, on cost of risk in the U.S. Jose, I noted your comments saying that stable asset quality performance in the U.S. But if we look at ABS data at an aggregate level, there is a deterioration, it looks like in subprime auto, which you have some exposure to. Can you maybe talk us through why you think you're not seeing that deterioration? Is it because you haven't been growing that much in the segment over the last 2, 3 years? You're not exposed to undocumented where there has been some trouble. Maybe some more color on that stable asset quality performance in the U.S. that you've noted. Hector Blas Grisi Checa: Thank you, Alvaro. So first of all, let me give you a general view on cost on the group, and then we'll get into the details of Gravity and then flat cost in Mexico, Brazil, which, by the way, are pretty good questions. And then I'll address the U.S., which thank you very much. I knew you were coming with that one, so I was prepared, okay? So costs remain very well controlled in the first 9 months of '25, as you have seen, so minus 1% in current, all right? I must tell you that we will reiterate the guidance to deliver lower cost in current euros versus '25 versus '24, okay? Because we see that we're done in absolute terms and the cost growth remains below the revenue growth, which is very important in this group. Remember, always positive jaws, underpinning the confidence in delivering the positive operating leverage that we are creating through ONE Transformation. Remember, ONE Transformation is all about increasing revenues and decreasing cost, and that basically creates the operating leverage that we're working for. Short-term costs are higher as we continue to invest in the global platforms. As I explained to you, I mean, Mexico, even though we had the migration this weekend, I mean, the mainframe is still basically consuming MIPS because we want to keep this in parallel until we stabilize Gravity. Once Gravity is stabilized, we start basically decreasing the amount of MIPS that we consume on the mainframe. By the way, then we start decreasing the cost that we have. So -- and we have the same in many different platforms, Alvaro. So that's why I say that '26 is the most difficult year because that's where we are doing this transformation in which the global platforms are coming in, Gravity, Plard, Payments Hub, et cetera, and we start in parallel running those. By the way, just getting into Mexico, Mexico is the worst one by far because Mexico is the one that we needed to upgrade the most and it's the one that has most dual platforms working on. They have in dual Plard for credit cards, and they have Pampa working at the same time where we're doing the migration. We have Gravity and the mainframe at the same time because we're doing the migration. We have in Payments Hub and transfer working at the same time because we're going to decommission transfer towards the end of the year. So you'll see that Mexico will start basically getting more -- I mean, in the level of our peers. And by the way, our only peers that you are talking about is Banorte and BBVA because the rest are further ahead from us in cost. We're much better. I mean I would say that we are a little better in average but we need to get -- I couldn't agree more. We need to get to our peers, and that's exactly what we're working on. And the same thing is -- I will tell you is Brazil, okay? So Brazil is going to be the same, but I mean, we implement, for example, Brazil just got the new version 24 of the global app that is coming in. It's the first country to do so. We already have 1 million customers migrated, but we need to migrate 60 million customers at the end. So this takes time. But nevertheless, we are also at the same time, because we're doing the simplification and the automation, we've been able to maintain cost. And you were asking precisely about what's going in Retail and Commercial, which is a really good question. How are we basically doing to decrease cost in Retail and Commercial at the same time, we're doing this deployment. It's because in Retail and Commercial, we are doing interesting things in terms of basically concentrate on simplification. You take a look at the number of products that we had 3 years ago, it was over 10,000 products. Just to give you an example, 300 different credit cards in Brazil. We're down to 17 different credit cards in Brazil. Mortgages in Mexico, we have 17 different types of mortgages in Mexico. We're down to 3. So the amount of things are going. The important thing is basically change the legacy on the back of the bank. That's where the big job is being taken on in terms of simplifying all the legacy that we have, and that's a huge amount of cost. Sorry to extend myself, but it's very important that you understand what ONE Transformation is all about. It's not just about the platforms, it's a lot about simplification and automation of processes, which really change exactly what we're doing. So I'm confident that '26, even though it's a tough year in terms of everything that I'm explaining to you, we will be able to maintain costs flat or down in the group because that's exactly where we are concentrated, okay? So it's very important that you get that. I don't know if that basically answers all of your question. If not, please let me know, and I will gladly give you all the details on that. But the thing is, I mean, the amount of money that you save once you're decommissioning, and that's the most important part, the discipline on the commissioning, you really start to see the savings coming on and you have seen it because there was no other way that we could be giving you this number in cost if we were not really doing those commissions and being very disciplined about it. In terms of cost of risk in the U.S., first of all, it's important what I was telling you. We continue to be and to high exposure to prime and near prime. If I'm correct, 38% of our book is prime and near prime, okay? As you say correctly, the amount of origination has come down significantly. We were at the peak about 2 years ago at around EUR 35 billion in origination. We're down to EUR 22 billion, EUR 23 billion. And at the end of the year, it's going to be EUR 24 billion in origination. The origination that we do in subprime and this subprime is very well managed and it's not the same that the other player basically was doing. As you say, we never get into with undocumented customers. So it's a completely different model than the one we have. So what you see is what Jose explained in his presentation that we see that even 30 days and 60 days delinquency is normalizing, 90 days is still below what we expected. So we expect less provisions even in the fourth quarter from the U.S. auto business because of that. So I don't want to give you an exact figure because, I mean, you never know what happens towards the end, but we see nonetheless that labor market is still strong. Manheim is up 2% year-on-year, even though it has decreased a little bit in the past 3, 4 months, but nothing to concern us. And the customers, what's happening after 90 days is that they want to keep their autos because they know that it's going to be much more expensive to go out into the market. So that's why 90-day delinquencies, people are basically coming back to us and renegotiating because they want to keep their autos. So I don't know if that basically answers your question. Jose, I don't know if I left anything out. José Antonio García Cantera: Just again, in terms of cost of risk, the second half tends to be worse than the first half. But when you look -- when you compare quarter-on-quarter '26 against -- sorry, '25 against '24 the numbers are coming in better every single quarter than we had last year. So in the third quarter, last year, cost of risk was 1.85%. It is 1.69% in the third quarter of this year in the U.S. Remember, at the beginning of the year, we guided for cost of risk slightly above 2%. Today, we see cost of risk in the U.S. below 2% in 2025. So actually better than we expected. Again, knowing that there is some seasonality in the second half, but the numbers should be better. And just to give you a bit of more details on what Hector just said, when we look at loans past due over 60 days, and if we look at the last 10 years, this number for non-prime has moved between 4% to 8%. And we are within that range at the moment. So it's not -- by any means, it has been going up recently, but it's within the range that we've seen in the last 10 years. When we look at prime, for instance, over 60 days, it's below 3%. And again, this figure has been moving a bit higher, a bit lower than 2% for the last 10 years. So very much normalized. It's true that in the last couple of quarters, we're seeing some increase in this ratio, but this is not translated into losses because the recovery rates remain very robust. So when we look at actual losses, net loss in prime, it's basically below 3%, which is much better probably that we saw, for instance, during the period of 2010 to 2020 or 2019. And if we look at non-prime, losses are below 7%, which is the best we've seen, excluding the post-COVID period, these are the better numbers, the best numbers that we've seen in many, many years. So net-net, actually very normal behavior is what we see in the U.S. Operator: Next question from Carlos Peixoto from CaixaBank BPI. Carlos Peixoto: First question would actually be regarding first brands in the U.S. So there was the press reports over previously this month regarding some engagement with Jefferies and the possibility of Santander being involved in the refinancing of first brands. I'm just trying to understand here whether there is any relevant exposure? Or do you see this as a risk for the group? The second question would actually be focused on the corporate tax rate. So how do you see -- what should we expect in terms of overall corporate tax rates in the full year or in the fourth quarter? If you prefer for the group as a whole, but focusing as well on Brazil, we had this quarter low tax rate given the interest payments on capital. Should we see a similar effect in the fourth quarter? Or should we see it reverting back to the previous levels now in the first? Hector Blas Grisi Checa: Thank you, Carlos. I must tell you in terms of first grants, as you know, we don't discuss customers. What I can tell you is that whatever we have is not material for the group at all. José Antonio García Cantera: Tax rate. Yes, the tax rate for the group in the first 9 months of the year was 26.6%, which basically it's -- in Spain, it was 37.5%. Excluding Spain, 24.1%. This is a little bit better, not significantly better than what we anticipated. There are 2 reasons for this. In the U.S., tax rate is 10%. Remember that we said that when the EV vehicles, the aid program finalizes and the tax rate would normalize gradually, and we thought that it would normalize faster than it is normalizing. So actually, the tax rate is lower in the U.S. than we thought, slightly lower in Brazil, nothing significant. So for year-end, we would expect the tax rate to be around the same level it is today, 27%. Operator: Next question from Britta Schmidt from Autonomous. Britta Schmidt: A couple of follow-ups on credit, please. In Mexico, I think there's some comments on model updates and higher SME provisions. Can you help us disentangle these 2? What was the impact of the model updates? And what are you seeing in terms of the SME pressure? And do you expect that to continue or get worse? In Brazil, there were also some selected issues in the corporate world. Can you maybe comment whether you've got any exposure here and whether you still feel happy with the provision that you built in the last quarter? And then lastly, Argentina came in quite high as well. Is this only lending or are there also impacts in potentially the bond portfolio? And maybe you can share with us a little bit as to what you expect for Argentina in the coming quarters with regards to results, hyperinflation and also FX developments? Hector Blas Grisi Checa: Thank you, Britta. I will address the questions on Brazil and Argentina and then Jose will tell you a little bit, I mean, what's going on. But let me tell you that in Mexico, I mean, the portfolios are performing really well. We have had some model updates, anything, but nothing that hits capital in that. And SMEs basically, actually, we're growing in the segment because we have really good roll. So I can tell you that we're going to be for that, but Jose will give you better details. In terms of Brazil corporates, I can tell you, we have taken a deeper look on the portfolio because with 10% real rates, corporates suffer in that environment. So we have reviewed the portfolio in detail. We have actually understood and located exactly what the problems are, and we're working on them. But I don't see any significant situations on the portfolio up to this point. All of them are under control and they were taken -- we're really taking care of them. So on the corporate side, -- and we don't have anything material that would be a material impact for the group, at least on the next few months, okay? But -- and I don't foresee it because even the situation, as I said, Brazil is growing 2%. So in that sense, the economy is still growing. Argentina is an interesting story. I actually was in Argentina. I was in Brazil a couple of months ago. And what I can tell you is the situation is complicated. In one sense, it's complicated because, as you know, inflation is at around the levels between 25% to 30%, and that's where the year is going to end. Rates because the government has really, I would say, basically, there is no pesos to lend in Argentina, okay? So the government is squeezing pesos out to really decrease inflation in a strong way. So that basically -- that has basically taken rates to -- real rates to levels that are tremendously high. So what you see in Argentina happening is that the cost of risk is growing tremendously hard. So we've been very cautious in Argentina because of that. I mean, cost of risk in Argentina went almost to the level of 7%. And that's why, I mean, with real rates at this level, it's really impossible to make money with 60 points of real rates. So what we've been doing is being very cautious. We're basically being -- the only lending that we're doing in Argentina is to exporters in dollars. That's the majority thing and energy -- I mean, and energy companies. So we're basically involved in situations in Vaca Muerta, where there is a lot of opportunities and the portfolio is basically going very well. But I must tell you to lend in pesos in Argentina in this market today is hard because of the real rates. So hopefully, let's see what the government does with this victory that they just had. They had a pretty good rally. The peso appreciated a little bit. So hopefully, let's see that they ease up a little bit on the economy, the rates -- real rates start to come down, and we see a much better next few months. But today, we're being very cautious in the way we manage credit in Argentina. Jose? José Antonio García Cantera: Mexico, yes, we've updated the models, the provisioning models and some capital models. The consequence is that without really seeing any significant deterioration in real asset quality, there has been a movement from Stage 2 to Stage 3. So it's around 10% of the Stage 2 loans moved into Stage 3, but it's the consequence of the model, not that the actual deterioration was taking place. In any case, cost of risk in the third quarter is still below 3%. In the third quarter alone, if we look at the last 12 months cost of risk at 2.6%, below 3%. And remember at the beginning of the year that we said cost of risk in Mexico would not go above 3%. It's actually quite well below 3% because the overall performance is pretty good. But in this quarter, in particular, again, it's this technical change from Stage 2 to Stage 3. Operator: Next question from Pablo de la Torre Cuevas from RBC. Pablo de la Torre Cuevas: I just want to get your thoughts on the deposit for the U.K. into the next year. One of your peers talked about muted deposit growth in 2026 and another has spoken of elevated competition in term deposits. So just interested in your thoughts there as deposit growth has been a big driver of top line growth over the last couple of years for U.K. banks. And then if we translate that into U.K. NIM directionally and excluding TSB, would you expect underlying U.K. NIM to grow as much in 2026 as it has been in 2025, driven by that structural hedge repricing? José Antonio García Cantera: So structural hedge right now is EUR 106 billion at 2.7% yield and 2.5 years of duration. So this should have positive contribution to NII next year. Second comment, we expect rates to go down from 4% to 3.5% by year-end next year. It could go down even -- there could be even 3 cuts, but we believe that we give today more probability to 2 cuts. Volumes should be up next year. So overall, we would expect NII to actually increase in the U.K. in 2026, excluding TSB, of course. And we are talking low to mid-single digits increase in NII. Raul Sinha: Thanks very much, Jose. Ben, hopefully, that answers your question, but we can take it offline if you've got any further details on deposits outstanding. Could we have the next question, please? Operator: Next question from Borja Ramirez from Citi. Borja Ramirez Segura: I have 2. Firstly, on capital, I believe it may have been mentioned that in Q4, it's generally more intensive in terms of the SRTs. So I would like to ask if you could provide any details on the capital benefit that we may see in Q4 linked to SRTs? And then my second question would be on other provisions. If I understood well, it was mentioned that other provisions would be around EUR 3 billion for 2025. Given that you have booked EUR 2.5 billion in the 9 months, this seems to imply EUR 0.5 billion for Q4. So I would like to ask if my numbers are correct, of course, if -- what are the assumptions on provisions? José Antonio García Cantera: Thank you, Borja. The first one, yes, the fourth quarter is the most active in risk-weighted asset mobilization initiatives. And as a consequence, we would expect net risk-weighted asset growth to be close to 0 in the fourth quarter. It was slightly positive in the third quarter. We have gross risk-weighted assets up EUR 11 billion and asset mobilization initiatives between EUR 7 billion to EUR 8 billion in the third quarter. So the fourth quarter the net gain from SRTs, which, by the way, is not the only way we are mobilizing capital. In the third quarter, we mobilized as much by asset sales as securitizations and also we had some hedges. So we are using different tools to optimize the capital and increase the capital productivity. So putting all this together against risk-weighted asset growth in the fourth quarter, it should be very, very close to 0. Your second question, when you speak about other provisions, I presume that you're talking about other results, so the line below provisions. And yes, this line should be substantially lower than last year because of the one-offs that we had last year and because the banking tax in Spain last year was accounted for in other results now is in the tax line. And yes, we would expect this line to be a bit higher than EUR 3 billion in the year. EUR 3 billion, EUR 3.2 billion is the reasonable number. In the absence of any substantial one-offs that at this point, we do not envision. But in the absence of substantial one-offs, the answer is yes. And the reason is, excluding these one-offs, what is in this line is the labor cost in Brazil, operational risk. It tends to be a bit higher in the fourth quarter, but not to deviate a lot from, let's say, EUR 3.2 billion for the year, again, excluding one-offs. Operator: Next question from Andrea Filtri from Mediobanca. Andrea Filtri: The first is a bit of a back of the envelope. Your 16.5% RoTE target discounts around EUR 13.6 billion profits in 2025, which would only imply EUR 3.3 billion left for Q4 '25, which would be a deceleration quarter-on-quarter, while your RoTE guidance implies a marked acceleration in Q4. So which of the 2 is right? And second question, more conceptual on insurance and the Danish Compromise. You have made statements prior on the intention to gain Danish Compromise like benefits at Santander. Could you elaborate a little bit how you intend to do that and what sort of benefit you could get? Hector Blas Grisi Checa: Okay, Andrea. First of all, and I know you're very bright, probably brighter than me, but you need to redo your numbers because for me, actually, the numbers shall be going up. So that will be my comment on that one. In terms of -- okay, in terms of Insurance and what we're doing with Danish Compromise, the only thing I could say is we have formally approved -- I mean, sorry, applied with the ECB for enhanced supervision, and that's the only thing that I could discuss at this point. And let's see what the ECB decides. And if they give us enhanced supervision, that will give us basically the trend to see the following path or the following step. Raul Sinha: Yes, Andrea, post-AT1, 16.5% would be slightly higher than the numbers, but we're very happy to give you a call after and take you through the details. We have the next question please? Operator: Next question from Ignacio Cerezo from UBS. Ignacio Cerezo Olmos: First one is if you can give some color on any excess capital above the 13% by the end of the year if that is going to be used for incremental capital return or there's going to be some uses of that capital, thinking of potentially restructuring costs, for example? And then the second one is on the payout mix between cash and buybacks, considering higher share prices and lower profitability of buying back stock, if you think it makes sense conceptually to be moving towards the cash dividend component basically of the payout mix in the future? Hector Blas Grisi Checa: As you know, we have a very strict capital hierarchy, okay? First of all, as we have said, we're going to prioritize organic profitable growth. Second, we're going to follow it by ordinary distribution. Then we do any bolt-on acquisitions that must be complementary and to generate attractive financial returns. And those need to surpass those of any organic investments or buybacks, okay? So I believe that at this point, we feel very comfortable with the capital levels that we have. And the capital allocation framework has been fundamental pillar of the strategy, as you have seen. And we will continue the disciplined and strict capital approach that we have had to capital, all right? So in that sense, then I will ask Jose basically to give you more details on the buyback. José Antonio García Cantera: So this is a very interesting intellectual and financial discussion because you have all types of technical papers written on this matter. But the way we see this, and obviously, this is for the Board to decide, and it will decide in the Board of Directors that will take place in December about the dividend policy for next year. But the way we see that or I see that is that when you are looking at improving profitability going forward and when you are looking at a cost of capital that is at worst stable, probably improving, and then you add growth, high single-digit growth buying back shares is still a very good value proposition. Obviously, the new business is being written at a return on tangible equity, as I said, of 22%. That is the first and most important use of our capital, but there's not an infinite amount of capital that we can put to work at 22%. So once we have covered that bucket, buying back shares, again, when you're looking at improving profitability, stable lower cost of capital and growth in profits is still a very good value proposition for shareholders. Raul Sinha: More details to come next year, not sure. I hope you understand. We've got 2 more questions left. Could we go to the next question, please. Operator: Next question from Fernando Gil de Santivanes from Intesa Sanpaolo. Fernando Gil de Santivañes d´Ornellas: Can you hear me okay? Raul Sinha: Go ahead. Fernando Gil de Santivañes d´Ornellas: Okay. First question, a follow-up in Spain regarding the repricing on rates, are we done in the repricing? And what is the bank risk appetite going forward regarding the actual pricing trends, especially in the loan yields? And the second question is on DCB Europe. I see the NII up 13% year-on-year, 5% Q-on-Q. What is driving these upgrades? And can you comment what is -- what should we expect going forward? Hector Blas Grisi Checa: Look, in terms of Spain, what I tell you, I mean, it's a very competitive market, as you know. We have rates in -- even with the Spanish bond at [ 330 ], we have mortgages down, and we have seen 190s, 175s. I think that the market is being rational in that point. So hopefully, there is some rationality in the months to come, and we see rates at much better levels. And we have been very disciplined and very focused on profitability, and we will continue to do so even if we lose a little bit of market share that you have seen that we have lost a little bit of market share because of that discipline. So we don't believe that mortgages today at 175 makes sense to do in the bank. So we won't do them and exactly when the price and when there is a lot of competition on the high-risk name in the corporate side, et cetera, we're going to maintain our level of risk reward that we believe is the right one. So we will continue, and we will put a lot of discipline in that sense. In terms of what we see in terms of DCB, give me 1 second. But look, I mean, in global DCB, first of all, it is important to say that we are improving the RoTE from 24% to 10.4% post-AT1s in '25. So it's important. Part of the improvement is explained by the lower conduct basically of the charges that we have remember on the Swiss francs, mainly in Poland, but the underlying attributable profit is growing at 6%. So that basically is positive. NII is growing 6% year-on-year. That's well above credit, which is up 2% and is benefiting for the focus on profitability, as we have said. The yields on loans have improved 25 basis points and the cost of deposits has come down by 39 basis points. As you know, in this business, we are sensitive to higher rates, negative sensitivity to higher rates. When rates start to come down, we have much better margins. And also, it's important to say that we have improving credit quality. The cost of risk is down for 2.01%. That's less than 10 basis points versus Q3 '24. And 12 months cost of risk is at 2.06%, down 3 basis points quarter-on-quarter. And we have excellent LPs performance as we have said. Our strategy is to expand the deposit gathering capabilities through Openbank. As you know, it has been a success. We are doing that in Germany. And also, as we have announced, we are merging Openbank and DCB Europe that basically will enable us to basically have much more control, better management and the deposits close to the origination of the assets. So that basically would be a help to have much better margins, much better operation and also much better cost. Raul Sinha: Could we have the last question, please? Operator: Last question from Miruna Chirea from Jefferies. Miruna Chirea: I just had a quick one, please, on Openbank. I was wondering how your progress in Openbank is going in Mexico and in the U.S. If you could give us maybe an update in terms of the balance of deposits that you've raised in those markets since you launched? And then secondly, to this point that you are making now on merging Openbank and Santander Consumer Finance in Europe, could you give us just a bit more color on what kind of synergies could you see there by merging the 2 lines of business and the overall rationale for this? Hector Blas Grisi Checa: Thank you, Miruna. Okay. So Openbank Mexico and the U.S., this is basically -- I'm giving it to you from the back of my mind. If I'm correct, it's EUR 6.5 billion in deposits on the 2 combined, if I remember correctly. And we're talking about 160,000 customers in the U.S. And in Mexico, I don't recall -- I'll give you the exact number. Sorry, basically, I don't have it in front of me. We're trying to find it out for you. Let me -- in the meantime, let me discuss a little bit what's the rationale behind the merger that we're doing with Openbank and DCB. As you know, I mean, we've been operating in parallel. It's one unit, and we have one boss basically managing both of those businesses. At this point, I mean, we had 2 of everything because there were 2 separate institutions. That basically will help us a lot in terms of cost because now we're going to have just one for both of them. So cost systems, et cetera. So a lot of that is going to be a lot of synergies in that sense. But the most important synergy is the amount of deposits that we have in the bank that will be basically used to eliminate or try to eliminate as much the negative sensitivity that we have when rates basically go up. When you have a sustainable deposit base that will basically help you out to match it to the assets and you have a much better planning if you have that. Openbank, as you know, is the largest deposit base of any digital bank in Europe. We believe there's a huge opportunity to continue like that and also will help us to upgrade our operations in Germany, which we have a really good deposit base there, and we would like to increase it and continue basically growing the business as we see fit. So all in all, I think it's going to be a pretty good combination. Yes, in the U.S., it is EUR 5.8 billion in deposits, and we're talking about 162,000 new customers in Openbank. Raul Sinha: Thank you, Miruna. I think that we are out of questions. Thank you, everybody, for your time this morning. This concludes our analyst presentation, and we look forward to speaking to you soon. Have a good day.
Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to Equinor Analyst Call Q3. [Operator Instructions] After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Bård Glad Pedersen, Senior Vice President and Head of Investor Relations. Please go ahead. Bård Pedersen: Thank you very much, operator, and welcome to everybody who has called in for the analyst call for Equinor's third quarter results. Torgrim Reitan, our CFO, is here with me, and he will take you through the results before we open for the Q&A. As usual, we will close this session within 1 hour. So with that, Torgrim, I hand you to take us through the results. Torgrim Reitan: Okay. So thank you, Bård and good morning, and thank you for joining us. Before we get to our results, I have a look at the photo Bacalhau, which came on stream in October. It is the first presold project in Brazil, developed by an international operator. We reserved more than 1 billion barrels and production capacity of 220,000 barrels per day. This will contribute significantly to our international growth. The results and cash flow we report today are driven by strong operational performance. Production is up 7% from third quarter last year. Johan Sverdrup delivered close to 100% regularity and Johan Castberg is producing a plateau with a premium to Brent of around $5. The adjusted operating income was $6.2 billion before tax and net income was negative $0.2 billion, impacted by net impairments, mainly due to lower long-term oil price outlook. Year-to-date, our cash flow from operations after tax has been strong at $14.7 billion. Our adjusted earnings per share was $0.37, impacted by negative results from financial items and a one-off effect related to decommissioning of Titan. Energy markets continue to be volatile. Geopolitical unrest, tariffs and trade tensions continue to impact pricing and trading conditions. We are prepared for this. We have a solid balance sheet, strong production and a robust portfolio. In addition, we take forceful action to manage costs. These efforts are visible in our results. Costs are now stable year-to-date compared to last year, and this is in line with what we had at the Capital Markets update in February. Operating costs for our Renewables business have decreased by around 50% compared to the third quarter last year, and we expect it to be down by 30% on an annual basis. And this is driven by less business development and reduced early phase work. On the NCS, we have stopped 2 early phase electrification projects that were not sufficiently profitable and this reduces costs now and CapEx going forward. By this, we are demonstrating that we can beat inflation and we can keep costs flat even if we are delivering strong production growth. At Bacalhau, we started production from the first producer and ramp-up will continue through 2026. On the NCS, we had 7 commercial discoveries. And I want to highlight Aker BP's important discovery in the Yggdrasil area, where we have a material ownership position. And then let me also mention Smørbukk Midt . It was discovered and put in production during the third quarter, and we expect payback within 6 months. As you know, we participated in Ørsted's rights issue. It was executed at a significant discount and overview of the underlying value in Ørsted supported our participation. The cash flow impact of around $900 million will be in the fourth quarter, impacting our net debt ratio by around 2 percentage points. Following this decision, we will now seek a more active role by nominating a candidate for the Board. We believe a closer industrial and strategic collaboration between Ørsted and Equinor can create value for shareholders in both companies. Then to capital distribution. For the quarter, the Board approved an ordinary cash dividend of $0.37 per share and a fourth and final tranche of the share buyback program for 2025, of up to $1.266 billion, including the state's share. With this, total capital distribution for the year will be around $9 billion. Safety remains our top priority. This quarter, we continue to have strong safety results. However, we had a tragic fatality at Mongstad and you know that safety work needs to continue with full force. Learnings from the accident will be implemented. In the quarter, we produced 2,130,000 barrels per day. This is 7% up from last year, and we are on track to deliver on our guiding 4% production growth for the year. On the NCS, production was even stronger with 9% growth. Johan Castberg, a new field on stream of developments in Brent and strong performance at Johan Sverdrup are important contributors. NCS gas production was impacted by planned maintenance and the prolonged shutdown of Hammerfest LNG. U.S. onshore gas production was up 40%, capturing higher prices and U.S. offshore was up 9% from last year. Internationally, outside the U.S., production was down due to the temporary stop at Peregrino and the divestment in Azerbaijan and Nigeria. We produced around 1.4 terawatt hours of power this quarter, mainly driven by the start-up of new turbines at Dogger Bank A and contributions from onshore renewable assets. As Empire Wind in New York, all 54 monopiles are now installed and the project execution is progressing well. In October, Maersk informed us of an issue concerning its contract for the wind turbine installation vessel that is planned to be used at the Empire Wind in 2026. We are working to solve this quickly. Now over to our financial results. Liquids prices were lower than the same quarter last year, while average gas prices were higher, particularly in the U.S. Adjusted operating income from E&P Norway totaled $5.6 billion before tax and $1.3 billion after tax. These results were impacted by production roles, but also increased depreciations due to new fields coming on stream. Our E&P International results reflect lower production but also lower depreciation. Peregrino and our assets tied to Adura IJV are classified as held for sale. As such, we no longer depreciate that. Our E&P U.S. results are driven by increased production, but these results were impacted by a one-off effect related to decommissioning of the U.S. offshore Titan field of $268 million. It has very limited cash flow effect in the quarter, but we are now booking expected future operating costs related to this. For M&P, we are changing our guiding and expect to deliver average adjusted operating income of around $400 million per quarter. The upside potential is larger than the downside risk to this guiding. The updated guiding is mainly due to changed market conditions. In addition, it reflects that we have previously divested some gas infrastructure. Our renewables results reflect high project activities, but also significantly lower business development and early phase costs. In our reported financial -- yes, in the reported financial results, we have net impairments of $754 million. The main driver for these impairments is lower long-term oil price assumptions. Our E&P International business booked an impairment of $650 million tied to our assets being transferred to the Adura IJV due to lower price assumptions. More than half of the impairment is due to no depreciation on the assets held for sale. In the U.S. offshore assets, we had impairments of $385 million, mainly due to lower price assumptions. In M&P, we have a reversal at Mongstad of $300 million due to higher expected refinery margins. This quarter, cash flow from operations was $9.1 billion, repaid to NCS tax installments totaling $3.9 billion. Next quarter, we will have 3 installments of around NOK 20 billion each. We distributed $5.6 billion to our shareholders, including the state's share of buybacks from last year of $4.3 billion. Organic CapEx was $3.4 billion, and our net cash flow was negative $3.6 billion. We have a solid financial position with more than $22 billion in cash and cash equivalents. Our net debt to capital employed ratio decreased to 12.2% this quarter. At current forward prices, we expect the net debt ratio at the end of the year to be in the lower end of the guided range, 15% to 30%, the same as we have said at earlier quarters. Finally, we maintain our guiding from CMU in February, both in terms of production and CapEx as well as capital distribution. So thank you. And then over to you Bård for the Q&A session. Bård Pedersen: Thank you, Torgrim. [Operator Instructions] We have good list already. So let's get going. And first one on the list is Irene Himona from Bernstein. Irene Himona: So my first question is on the unit depreciation charge in Norway. It's up about 13% from Q2. Can we assume that is the new normal level going forward? And then my second question is on Ørsted. You obviously decided to participate in the rights issue and to turn from a passive to an active shareholder with a Board seat. Can you elaborate a little bit on what it is that you think Ørsted is perhaps not doing very well where your active participation may help them improve. And then what type of industrial cooperation do you envisage that would benefit both sides? Torgrim Reitan: Thank you, Irene. So first of all, the unit depreciation charge on [ E&PN ] is up. So that is driven by new assets onstream this quarter and in particular, Johan Castberg and also smaller developments coming onstream as well. So these will sort of depreciate over time. So you should expect a gradual reduction going forward on that basis. So that's the first one. The second one is related to Ørsted. Yes. So let me give you a little bit of further context around that. We participated in the rights issue. And clearly, that's sort of a recommitment to our shareholding, and we would like to use the opportunity to clarify more around how we think around the ownership position. And we do want to take a more active role as a shareholder with also Board seats in due time. Then important for me to say that the offshore wind industry is leading through its first real downturn. So with a lot of challenges. And we have seen that with Ørsted and we have seen that in the share price development in Ørsted. So in times like that, consolidation is typically what happens. And we also do think that this industry needs consolidation. We do think that a closer collaboration industrially and strategically between Ørsted and ourselves will create shareholder value for our shareholders, I mean Equinor shareholders but also Ørsted's shareholders in a way. And we do believe that's sort of the competence base that we have very well complement Ørsted and being part of the Board with a long-term industrial perspective in a company like this will benefit both parties. Then I do appreciate that there are uncertainties related to what this means. And let me be very clear that in the current environment, we are going to limit sort of capital commitments into Offshore Wind. It is an industry that is challenged. So the assets that we have in our own portfolio, we will continue to develop in Empire Wind, Dogger Bank and Baltic projects. Beyond that, we will be very, very careful with further commitments into Offshore Wind. And the same goes to our holding in Ørsted. So the threshold to commit new significant capital is high for the time being. So I just want to leave that with you because I do appreciate that there are sort of questions to what might happen here. Bård Pedersen: The next question is from Biraj Borkhataria from RBC. Biraj Borkhataria: Just the first one on the MMP guidance. I wonder if you could just dive into a bit more detail around the change in factors there. And also, you've gone from a range of $400 million to $800 million to a single figure. And I was wondering if there's a sort of signal factor in there that either you see fewer opportunistic -- opportunities to trade or if you are just taking less risk given the environment is changing? And then just a follow up on the question before Ørsted, just trying to understand why you didn't consider a Board seat in the first place? Because I recall it just wasn't really part of the discussion at the time around the CMU. So just trying to get the understanding of -- obviously, the environment has changed, policy has changed, but has your investment thesis on that business investment changed? Torgrim Reitan: All right. So thanks, Biraj. So first, on MMP guiding, yes. So we are changing the guiding to around $400 million on a quarterly basis. We're sort of -- we see that the risk is asymmetrical here. So more upside than risk to the downside. It is a change. We used to have $400 million to $800 million, as you might know. I think it's important to remind you what we had before the war in Ukraine, then the guiding was $250 million to $500 million as such. So what we see now is that the market has changed rather a lot. On the gas side, in Europe, the situation has normalized with -- both on the absolute price levels and volatility and also then the volatility globally and sort of the market globally is driven to a large extent by political decisions that actually structures in the market, making it quite harder to trade around and position ourselves around. So the sort of market dynamics that drives this. In addition, sort of we had earlier divested gas transportation assets, that we are sort of -- we don't have anymore. So we take the opportunity to take that out as well. So -- and then why not a range? Because I mean you have seen that even if we had a broad range from $400 million to $800 million earlier, we tended to overshoot quite a bit, actually, even with the range. It just explains that opportunity might be very good, and it might sort of -- we don't want to limit it to -- have it limited by a range. What we want to do is that on the invite to consensus that we send out a few weeks ahead of quarter, we will give an update related to MMP results and specialties to give you a little bit more guiding into it, but for -- on a regular basis on the longer term, I mean, around $400 million is a prudent number. Last point on this that this is not Equinor specific. This is what sort of all of us are currently experiencing. So if you listen to our peers and if you listen to the trading houses, we all see that you need to work much harder for every dollar you can make in the trading environment for the time being. So yes, so that is that one. The second question was related to Ørsted. We do believe that we have something to offer in the Board in Ørsted and it is particularly related to having a long-term industrial owner to -- that the company can rely on through cycles and then through developments. And as a company, we have extensive experience in managing cycles and thinking long term. In addition, we have clearly a lot of competencies related to project developments and the risk management as such. So we do you see that as something that can benefit both parties. Bård Pedersen: Next one on my list Teodor Sveen-Nilsen from Sparebank 1 Markets. Teodor Nilsen: First one, just want to follow up on the Ørsted question recently asked here. I just want to know what has actually changed in what you can offer from the first time you acquired shares until now the recent share issue. So that is the first question. And second question that is on Bacalhau, congrats on first oil there. How should we think around the ramp-up pace to plateau? Torgrim Reitan: Yes. So thanks Teodor, on your first question. Well, in the current situation, it was also important to signal that we were a supportive shareholder in what has sort of happened over the last few months. And then as part of that, being -- taking a Board seat is important. On Bacalhau, yes. So it's Bacalhau started on 15th of October. And it is probably the most complex development that we have done. It is at more than 2,000 meters of water depth and it is massive. So I'm very proud of reporting that it is started. On your question on the ramp-up. I mean, there are 2 drillships on location currently. There will be 19 wells being drilled on Phase 1, 11 producers, but also injectors, both water injectors and gas injectors as such. So this will sort of gradually happen. This is not going to be a ramp-up like you have seen on Johan Castberg. So this is sort of continuous drilling and completion to 2025 and it will continue in 2026 as such. So this -- it's too early to say, give an exact date when it will be on plateau, but things are progressing well. Yes. Bård Pedersen: Next one is Jason Gabelman from TD Cowen. Jason Gabelman: I am going to start also on Ørsted. And it's, I guess, a bit tangentially related to what's going on. But as we think about potential outcomes one of the thoughts in the market is a formation of a joint venture between the 2 parties. And with that, there's a lot of speculation on cash, that would need to be contributed into the joint venture from Equinor standpoint. So the question is really, as you look at your 3 offshore wind projects. How much equity capital have you spent in those projects thus far? And how much is left to be spent on those 3 projects? And then my follow-up is on the global gas market. There's been maybe a surprising amount of LNG projects sanctioned year-to-date. You've seen China demand slowing down, some thoughts on Power of Siberia 2 coming online at some point next decade. Can you just talk about your outlook for the global gas market? And if it's shifted at all just given the developments that we've seen year-to-date in that market. Torgrim Reitan: Thanks, Jason. On Ørsted, the potential outcome here is I don't want to speculate on that, and it's not natural to say much more on that now. But clearly, there are various alternatives. I can give a little bit insight in sort of what is it that the sort of -- we will be looking for in this. We will be looking for in sort of improving the free cash flow for Equinor, that is one driver. The other one is are there ways where we can visualize or make clearer the underlying valuation within the offshore activity that we currently have, are there ways to do that? And the third one is that clearly, we we'll be very careful in -- with significant further capital commitments within Offshore Wind in the current environment. So those are the things which are sort of driving us. When it comes to the 3 projects and remaining equity injections, I can give you a little bit of insight into it. Dogger Bank is well underway and sort of production is gradually being started up. So there are sort of -- there is some more equity that will be injected. But clearly, project financing and the leverage of those projects is in sort of in the [ 70s ] as such. Within Empire Wind, what you will see there is that we have a significant equity injection in 2026, which is close to $2 billion. The year after, we expect to receive investment tax credit for approximately the same amount. So Empire Wind over the next 2 years is pretty cash flow neutral before it is finalized. And then we have the Baltic 2 and 3 projects in Poland with a very high leverage, good projects. So it's fairly limited equity that is needed to fund those. So I just want to leave with you that sort of clearly, there are 3 mega projects underway with limited remaining capital needs associated with them. Okay. Let's see here. That was a long answer, but it was an important question. Then on sort of the global gas market. So first of all, I would like to say that in the short term, this winter, the market seems tighter than many actually things. We are on a storage level around 83%, which is 12 percentage points below last year. So if we see a cold winter, it can really have a significant impact on the market. I would say if you see a normal winter, we might see prices where last year as such. So I would say in the short term, price is very much driven by weather and temperature as such. If you look a little bit further, and that's sort of where you have your question related to more LNG. And yes, there are more LNG coming. This is not new information. This is not a surprise. This is what the whole world has been sort of planning for, for quite a while. And the question is, of course, how fast will this come on stream? And will there be delays? So clearly something to watch. We see still actually a quite healthy demand from Asia, Asia in totality around 3% growth per year, and that sort of will take up a significant part here. What else is to watch is actually U.S. gas prices. And U.S. gas prices has become recently much more a political topic internally, domestically in the U.S. because everyone sees that with all data center and AI will have a significant impact on power prices and power has to come from somewhere and natural gas clearly important so. So utility bills in the households is more and more becoming an election topic as such, and that might put limitations on exports of natural gas. So this is clearly an area we follow very closely. But there's no doubt there is significant amount of LNG coming. And our gas $2 per MBTU, cost and transportation selling into an $11 market, we are very, very robust. And as one maybe last point to mention here that is sort of the sanctioning on Russian LNG -- potential 17 Bcm. That will lead the European markets as well. Thanks, Jason. Bård Pedersen: Next question is from Chris Kuplent from Bank of America. Christopher Kuplent: Just some I guess, rather boring questions, Torgrim about detail. I wonder whether you can help us review what's happened in the 9 months on your net working capital, great results, I guess. And whether you can combine that review with an outlook where you think we're heading? And if I could ask you to do the same, particularly for your Norwegian business, I understand there's a lot of moving parts in terms of assets for sale outside of Norway, but Norway has seen a significant decline in the discount to Brent that you've been able to achieve in Q3. Again, I would love to have your review of that and outlook, if possible. Torgrim Reitan: All right. Thanks, Chris. Yes. So working capital is clearly a very important part of what we manage and manage diligently. So this quarter, working capital is down by $1 billion, 3 points -- the total working capital now is $3.7 billion. So that's that is the reduction during the year, actually done by some $3 billion. So the question you had is what is sort of normal level and what have you. I mean, the reduction we have seen is very much linked to commodity prices and MNP-related reductions. So I won't sort of give any outlook on this, but I would say that given the structures in the markets, the volatility in the markets and the absolute price levels, it is sort of a fair level. I mean, you remember during the energy crisis, we had a massive amount of working capital, and of course, earned a lot of money. But volatility and price levels are not there anymore. So -- but I would say it's a fair level, it's a fair level. Then the second question was sort of a discount to Brent. Yes, I mean, Johan Castberg came on stream during the summer. And Johan Castberg is able to achieve $5 premium to Brent as such, and that clearly has an impact to the discounted Brent overall on the shelf. Bård Pedersen: The next question is from Henri Patricot from UBS. Henri Patricot: Two, please. The first one, I was wondering if you can give us an update on latest thinking on timing of the Peregrino disposal? And then secondly, on Johan Sverdrup, you mentioned here the field continues to produce at a very high level? Or are you thinking about the evolution of that going into 2026? And to what extent do we start to see a decline next year? Torgrim Reitan: All right. Okay. First Peregrino. So Peregrino was shut in during the autumn. It came back on stream on October 17th as such and is currently producing more than 100,000 barrels per day. So we have transacted and we will divest out of our 60% ownership position in the assets, and that will be divested to Prio in Brazil. So there are 2 legs of this transaction. 40% of the 60%, we expect to close during the fourth quarter and the remaining 20% in the first quarter next year. So the headline transaction value was $3.5 billion with an effective date of 1st of January '24, which is quite a while. So there will be a pro et contra settlement since then. So what you should expect is that on that consideration we will receive is a little bit below $3 billion, and that will be split into sort of 2/3 of that in the fourth quarter and 1/3 in the first quarter. Just want to leave with you that this is -- in Brazil is still very important to us. The reason why we did it was twofold. It was attractive opportunity. And also, we are redeploying resources to Bacalhau and Ria in Brazil, sort of high grading the portfolio in Brazil. So the long-term commitment to Brazil is very much intact. Then Johan Sverdrup. Yes. So Johan Sverdrup keeps delivering very well in the quarter, close to 100% regularity, which is a very good achievement in itself. We have worked the asset very, very hard to optimize production and recovery rates. Now we are looking at a recovery rate of 75%, in that asset. It was 65% when we sanctioned it and 65% is still a very, very high number. So what we are currently working on is multilateral wells, a retrofit existing well into multilateral wells, so we have successfully done that. And then water management is very, very important because water management will continue to increase as we produce these wells. And that has also been done in a very good way. And then we sanctioned Phase 3 this summer with the common stream by end of 2027. So in 2025, we were able to maintain the production more or less on the same level as '23 and '24. But we have fast forwarded a lot of production. So this asset will start to decline. So next year, you should expect lower production from Johan Sverdrup than in 2025. But you know what we're doing, this is at core of our competence base. So we will clearly work very hard on maintaining as high production as possible from that asset. Bård Pedersen: [Operator Instructions] And the next question is Michele Della Vigna from Goldman Sachs. Michele Della Vigna: I wanted to come back to your comment about effectively restricting or being very capital efficient on Offshore Wind, given the acceleration in power demand we're seeing globally. I was just wondering, are there some other areas in the power markets where instead you see opportunities and you could look at redeploying some of the capital you're taking away from Offshore Wind at this time of low returns for those developments. Torgrim Reitan: Okay. So, we do believe that there is value to be had within sort of the Power segment. And we have recently established a new business area called exactly Power as such. So what we clearly will be looking for are sort of opportunities that sort of builds on the portfolio we have and clearly -- and the customer base that we have. And we have a big presence related to our gas positions in Europe and in the U.S. So that's sort of the totality, the way we think about it. I have to be very clear that sort of we have no intentions to significantly step up investments into this area. We are facing periods with lower prices. And for us, it will be very important to remain very capital disciplined in anything that we do. And everything we do need to have a significant profitability and returns before we commit any capital to it. Bård Pedersen: Next one, please one question from you to Peter Low from Rothschild & Redburn. Peter Low: Perhaps a question on the cash tax paid in the quarter, which I think was maybe a bit lower than expected. So it looks like you paid 2 NCS installments of $3.9 billion, but the total cash tax paid in the cash flow statement was $3.8 billion. Were you getting refunds in other regions? Or can you perhaps explain that number a little bit? Torgrim Reitan: Yes. Thanks, Peter. So a couple of things. So 2 tax installments in the second quarter, there will be 3 next quarter in Norway. So just be aware of that. It is a timing effect related to falling prices. So we are still paying taxes based on a higher price environment. So you just be aware of that. And also internationally, the reported tax is much higher than paid tax that goes particularly across the U.K. with the EPL and then sort of Rosebank investments being offset against tax and in the U.S. as well. So yes. Bård Pedersen: The next one is as Naisheng Cui from Barclays. Naisheng Cui: Just one follow-up on MMP guidance, please. I think you mentioned in your report that part of the reason you cut MMP guidance is because divestment of gas infrastructure assets. I wonder if you could isolate the impact on that place rather than the market condition change. Torgrim Reitan: Okay, thanks. I can do that's $40 million per year. We did that sort of 1.5 years ago or something like that or 2 years ago. At that point in time, we delivered sort of guiding repeated in the quarter. So we didn't see the need to sort of strip that out. But when we now changed the guiding, we thought it was useful to mention it. Bård Pedersen: Just to be clear, Nash, the $40 million effect is on a quarterly basis. I think you might have said for year, but it's per quarter. Torgrim Reitan: Yes, that's per quarter. Yes. Thanks, Bård. Bård Pedersen: Next one is Paul Redman from BNP Paribas. Paul Redman: And I might be a little bit early, but I just wanted to ask about how you're thinking about the distribution program for next year. We're going into 2026 with quite volatile view on oil prices. difficult view into gas prices, your debt came down this quarter, and I think you're guiding to a reversion of some of that into 4Q. So I just wanted to ask about how we should maybe think about a distribution program for 2026. And then just a confirmation on whether you're going to guide to that the 4Q results or at the Capital Markets Day later in the year? Torgrim Reitan: Okay. Thanks. Thanks, Paul. Yes. All right. So first of all, there's lot of good reasons to be prepared for lower prices and we all know that. Last year, we took down investments by $8 billion for a few years and also cost down. We will continue to push on this to improve free cash flow in the current environment. So this is an ongoing thing. I just want you to be aware of that. So that is so. Secondly, capital distribution will have a priority in our capital allocation model. Cash dividend -- the cash dividend, you should consider that as a bankable. I mean, that will come. On top of that, we will use share buyback and share buyback will be used on a regular basis. It is a natural part of our capital distribution framework as such. So -- and we clearly aim to be competitive when it comes to the overall capital distribution. And to be precise on competitive, I leave with you a couple of things. We know that our peers are using a formulas related to cash flow. You should think about that type of sort of levels as sort of being competitive when it comes to ourselves. I think it's worth mentioning that sort of we have specialties around the Norwegian tax, so percentage points. We always should be a little bit lower for consistency as such. Then your question on sort of what will happen next year as such. We will announce this on the fourth quarter results in February. There are a couple of specialties I would like to draw your attention to. And that is next year, we have a significant investments related to Empire Wind equity, that is around $2 billion. The year after, we will get it back through the investment tax credit. So when we consider capital distribution for 2026, we will look through that. We will take a 2-year perspective when we do consider our capital distribution for the year. So -- and this is why it doesn't make sense to have -- that's why we are not sort of running with the formula because there might be years where we would like to lean on the balance sheet and there are other years where we clearly would like to build a balance sheet as well. But I think that is very important for me to say that those type of effects we will see through and we will see through that we are competitive when it comes to capital distribution. You also mentioned the net debt, and I just want to use the opportunity to say a few words there. We are currently at 12%. We expect to be in the low end of the range by year-end. There are a couple of things I would like to bring with you -- to you. Point one, there are 3 tax installments there will be payment of the rights issue, $900 million in the quarter and there will also be part of the Peregrino transaction funds coming back. But my point is we maintain the guiding for net debt to year-end, even if we have participated in the Ørsted right issue with $900 million, it is driven by strong underlying operations and cash flow and also improvement in net working capital as we talked about earlier. So a long answer, Paul, but an important question. Bård Pedersen: Next one on the list is Martijn Rats from Morgan Stanley. Martijn Rats: Well, only one for me. I wanted to ask about the impairment charge, because it's more of a question of just sort of trying to make sure I interpret this correctly. So the long-term oil price assumption has come down, but it's still $75 a barrel. But that has triggered $750 million of impairments, which sort of suggests that there were projects in your portfolio that had breakevens well above $75 a barrel. And I was wondering if that is the correct interpretation. If your projects have breakevens below $75, but you lower the long-term assumption, it wouldn't trigger an impairment, right? Am I interpreting this correctly? Torgrim Reitan: Martijn, thank you for your question. Well, there are qualifications that needs to be made. So first of all, we have the assets on the U.K. side, which are impaired with $650 million. First of all, I would like to say, this has absolutely nothing to do with a transaction with Shell. This is an isolated effect, and it is driven by lower oil price assumption, as you said. A very important driver for this is that these assets are held for sale in the book. So they haven't been depreciated for -- since the beginning of the year. If they had been depreciated on a normal basis, the impairment would have been significantly lower. The second point on the U.K. portfolio is that part of that asset base is linked to the acquisition we did with Suncor and the Buzzard field, which sits in the balance sheet at sort of acquisition cost as such and that has also had an impact for that asset. There are 2 assets in the Gulf of Mexico also impaired. Those are also mainly driven by price. Those are assets run by -- operated by significant U.S. operators. As such, one of the assets has been a challenging asset operational wise for several years as such. So I mean, it's -- yes, I mean, it is one asset in the U.S. Gulf of Mexico that has been a challenge. The remainder of the asset portfolio is very robust for impairments. So thanks, Martijn. Bård Pedersen: Next one is JPMorgan, Matt Lofting. Matthew Lofting: I just wanted to come back Empire Wind, Torgrim, I think you mentioned in your opening remarks that there was an availability issue that's emerged on in the installation vessel with Maersk. Could you just expand on what's happening there and sort of any risk that, that poses to the future development progress of Empire Wind into next year? Torgrim Reitan: Thanks, Matt. So first of all, I think it's fair to say that Empire Wind has had a demanding year with a stop work order that has been reversed. And I just want to use the opportunity to say that the lost time has been catched up and we are back on track. And I must say that I'm very proud of what our organization has been able to do in a critical year like this. We are 55% complete. All monopiles are in the seabed. So on this issue, this is a dispute within Maersk and Seatrium, which is the yard in Singapore. The vessel is more or less completed and finished and Maersk has sort of canceled the contract as such. So we are close to the situation. We are working to either see to that this solution is resolved or looking for other opportunities. Important for me to say that this is a well-functioning market and there are other opportunities available in the market. So we will manage this -- we'll manage this, not risk-free naturally, but we will give you an update as this progress. Bård Pedersen: We move on to James Carmichael from Berenberg. James Carmichael: Just quickly on the U.K. and Rosebank. I was just wondering what the latest is on that approval process. And then I guess maybe just sort of general thoughts on the U.K. as we maybe get a bit closer to some clarity on the fiscal outlook here. Torgrim Reitan: Okay. All right. Thanks, James. So on Rosebank, as you might may be aware of sort of the permit was sort of taken away due to that Scope 3 emission should have been taken care of in the award. So we have submitted our response recently to the regulator, and they turn around and put it into public constellation right away. That has started, and we expect the consultation to end at the 20th of November. There is no set date for the decision, but clearly, we work very closely with the ministries to get this moving as quickly as possible as such. The second part of your question, what was that, James, about fiscal outlook in the U.K? James Carmichael: Yes. I guess just general thoughts on the U.K., obviously, some uncertainty on the fiscal outlook, we've got some clarity there soon. Yes, just some context around that. Torgrim Reitan: I think it's fair to say that there has been repeatedly tax changes on the U.K. side over years. This is nothing that we appreciate and clearly would advocate for strong and stable fiscal framework to create a basis for investing as such. Yes. Bård Pedersen: Kim Fustier from HSBC is next on my list. Kim Fustier: I noticed that one of your Norwegian competitors has recently expressed some concerns that there may not be enough projects on the NCS within a year or 2 to sustain a healthy domestic supply chain. Obviously, you're also moving away from big greenfield projects to smaller brownfields. So it's kind of an industry-wide issue. Just interested in hearing your views on sort of the outlook for the NCS supply chain and cost inflation. Torgrim Reitan: All right. Thanks Kim. We are currently having a period with very high activity. A bit of that is driven by the tax incentive program put in place during COVID as such and many of these projects are soon coming into production. So it is natural that there will be a lower activity past that asset. So I think our job as a company is to adapt to that and adjust. I think it's -- I just want to use the opportunity to talk about a project that we have established called NCS 2035. And this links very much to what we said at the Capital Markets Day in the winter, maintaining production level on the NCS all the way to 2035. That future will contain more but smaller discoveries. It will take quicker developments, and we have to operate at lower costs. So for instance, we will drill 30 exploration wells per year and that is more than we do currently. And we will put forward 6 to 8 subsea developments per year, which is also more than what we have done currently. So by what we are doing, clearly, we will be a significant contributor to maintaining a high activity level on the Norwegian Continental Shelf and also the industry in Norway. So very optimistic about what we can achieve through different way of working and different way of working with suppliers. Bård Pedersen: We are fast approaching the hour, but let's take one final question, and that is you Steffen Evjen from DNB. Steffen Evjen: So a quick one. Just remind me on the tax credit in the U.S. What's the milestone you have to get that credit paid? Is that first power or COD on the project? Torgrim Reitan: Yes. Yes, it is production start, that is sort of the criteria, and it is first power. That is sort of the ultimate. So that is what we plan for in 2027. Bård Pedersen: Thank you very much. We are now at the hour. I would like to thank you all for calling in and for your questions. As always, the Investor Relations team remain available. So if there's any outstanding questions, please give us a call, and we will do our best to help you. Thank you very much, and have a good rest of the day. Operator: Ladies and gentlemen, that concludes today's call. You may now disconnect. Thank you, and have a great day.
Operator: Welcome, everyone, to UMC's 2025 Third Quarter Earnings Conference Call. [Operator Instructions] For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within 2 hours after the conference has finished. Please visit our website, www.umc.com, under the Investor Relations, Investors, Events section. Now, I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin. Michael Lin: Thank you, and welcome to UMC's conference call for the third quarter of 2025. I'm joined by Mr. Jason Wang, President of UMC; and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the third quarter financial results, followed by our President's key message to address UMC's focus and fourth quarter 2025 guidance. Once our President and CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website, www.umc.com, under the Investors, Financial section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risks that may be beyond the company's control. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC and the ROC security authorities. During this conference, you may view our financial presentations material, which is being broadcast live through the Internet. Now, I would like to introduce UMC's CFO, Mr. Chi-Tung Liu, to discuss UMC's third quarter 2025 financial results. Chi-Tung Liu: Thank you, Michael. I'd like to go through the third quarter 2025 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on Page 4, in third quarter of 2025, consolidated revenue was TWD 59.13 billion, with gross margin at 29.8%. Net income attributable to the stockholder of the parent was TWD 14.98 billion and the earnings per ordinary share were TWD 1.2. Capacity utilization rate climbed to 78% in that quarter with wafer shipment just marked 1 million 12-inch equivalent wafers. On Page 5, on the sequential comparison, third quarter revenue of TWD 59.12 billion increased slightly compared to the previous quarter, mainly due to higher wafer shipment, although the NT dollar exchange rate was an unfavorable factor of around 3%. Gross margin also climbed on back of the better capacity utilization rate to 29.8%. And net income reached nearly TWD 15 billion or an EPS of TWD 1.2 per share in NT dollar terms. On year-over-year comparison, on Page 6, for the first 3 quarters, revenue grew 2.2% year-over-year to TWD 175.7 billion. Gross margin was around 28.4% or nearly TWD 50 billion for the first 3 quarters of 2025. Overall, net income for the first 3 quarters is down to TWD 2.54 per share compared to TWD 3.12 in the previous 3 quarters of 2024. On Page 7, cash still above TWD 100 billion, and total equity of the company is now TWD 361 billion at the end of third quarter of 2025. ASP on Page 8 shows we remain firm for the past 2 quarters. On Page 9, for revenue breakdown, we see -- we can see that the North America represents about 25% of the total revenue in the third quarter, which is 5% higher compared to 20% in the previous quarter. On the contrary, Asia declined by nearly 4 percentage points to 63% in the third quarter of 2025. IDM versus fabless remain unchanged on Page 10 for the third quarter of 2025. On Page 11, we noticed the communication and computers edge up in terms of sales mix when consumers declined by nearly 4 percentage points to 29% in the third quarter. On Page 12, the segment sales breakdown by technology, 22 and 28 still remain our main technology node, when 22 continued to climb in terms of percentage. Total 22 and 28 revenue reached about 35%. For 40-nanometer and 65-nanometer revenue, somewhat unchanged, in about 17% and 18%, respectively. For our quarterly capacity for the third quarter, we see a minor increase coming out of our 12x Xiamen fab with now the monthly capacity is nearly 32,000 wafers per month, and total available capacity will remain flat for the coming quarters. On the last page of my presentation, our annual CapEx is heading to our budget number of $1.8 billion with 90% in 12-inch and 10% in 8-inch. The above is a summary of UMC results for third quarter of 2025. More details are available in the report, which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wang. Jason Wang: Thank you, Chi-Tung. Good evening, everyone. Here, I would like to share UMC's third quarter results. In the third quarter, we observed demand growth across most market segments, which drove a 3.4% increase in wafer shipments and improved utilization rate to 78%. In particular, we benefited from a pickup in sales of smartphones and notebooks, driving replenishment order from customers. Our 22-nanometer technology platform continues to provide us with the differentiation in the market, with 22-nanometer revenue now accounting for more than 10% of the total sales in 2025 alone, we are projecting over 50 product tape-outs, and we expect 22-nanometer contribution will continue to increase in 2026. Aligned with our strategy of providing customers with highly differentiated specialty technologies, we recently announced the readiness of our 55-nanometer BCD platform. In addition to mobile and consumer applications, the new platform is also complemented with the most rigorous automotive standards for automotive and industrial use. Looking ahead to the fourth quarter, we are anticipating wafer shipment to be comparable with third quarter's volumes, wrapping up 2025 with shipment growth in the low teens. UMC continues to deliver competitive process technologies that enable diverse applications, which position the company to benefit from a broad-based market recovery. With the 22-nanometer logic and specialty platform, in particular, we expect to drive growth. Now, let's move on to fourth quarter 2025 guidance. Our wafer shipment will remain flat. ASP in U.S. dollar will remain firm. Gross margin will be approximately in the high 20% range. Capacity utilization rate will be in the mid-70% range. Our 2025 cash-based CapEx budget will remain unchanged at USD 1.8 billion. That concludes my comments. Thank you all for your attention. Now, we are ready for questions. Operator: [Operator Instructions] First, we'll have [indiscernible], Bank of America for questions. Unknown Analyst: My first question is regarding the near-term outlook. Could you discuss more in detail on how you see the business by end market is trending into the current quarter in fourth quarter? It seems the guidance is above seasonal, so just wondering if there's anything driving that. And also just your initial view into first half next year, did you get any feedback from your customers on the potential restocking, or in general, they are still pretty conservative at this stage? Jason Wang: Sure. I mean, while we're going into Q4, we can -- as I said, we wrap up the 2025 shipments to a low teens. It's now that we project the 2025 shipment growth was supported by our differentiated 22-nanometer technology and other specialty offerings across both 12- and 8-inch amid a broad-based market demand recovery. On the 12-inch size, shipment growth was driven by a strong momentum from 22-nanometer logic for ISP, Wi-Fi connectivity as well as the high-end smartphone display driver IC. In addition to 22 and 28, overall 12-inch wafer shipment will outpace our addressable market due to our comprehensive value-added specialty portfolio of nonvolatile memory, RFSOI and BCD. On the 8-inch size, we expect a high single-digit growth in 2025, mainly led by the PMIC and LDDI. So in summary, the strength of 22-nanometer and the specialty process across both 12-inch and 8-inch platform underpin our confidence in achieving a low teens percentage shipment growth in 2025. So for 2025 Q4, we remain -- the shipment outlook remain flat. If we're looking into the early look of 2026, I think we're still going to experience some seasonality, but if I look at the entire year, despite the ongoing global economic geopolitical uncertainty, we believe our 2025 business growth momentum will continue into 2026, where we expect the wafer shipment will increase year-over-year. In addition to some TAM expansion, our 22 eHV -- 22-nanometer eHV platform, which is serving the high-end smartphone OLED display driver application, will be one of the key growth engines. We expect the overall 22- and 28-nanometer revenue to achieve double-digit year-over-year growth in 2026. However, there's still going to be some seasonality that we may have to go through. So Q1 may be one of the challenging quarter for the year. Supported by the strong customer adoption of our 22-nanometer technology, in addition, our technology readiness in RFSOI for smartphone RF front-end device will also fuel our growth in 2026. And besides the growth of the communications segment, we also foresee our enhanced version of PMIC solution, which will also continue to drive recovery in our 8-inch segment. In 2025, we foresee PMIC business will grow in the high single-digit range, and this growth momentum will extend into 2026. Our effort on the enhancing our technology competitiveness, particularly for the PMIC application, have started to yield some tangible results, and that will actually help us with the -- to strengthen our position in this market segment and for 2026 growth. If we look beyond 2026, we'll continue to develop new derivative technology to enhance our differentiated and our competitive -- enhance our competitive position. Furthermore, we are expanding our addressable market into 12-nanometer FinFET, as you know, and as well as some of the advanced packaging space. The UMC portfolio -- technology portfolio is well positioned to serve a growing demand of the power efficiency optimization, high-bandwidth data transfer as well as the improved connectivity. So I think in general, we are relatively confident in 2026, but it's still kind of early to go into the quarterly guidance. Unknown Analyst: Yes. That's pretty intensive. And I think just a quick follow-up to my first question is just when you mentioned the growth momentum could continue into 2026 compared with 2025, are you saying that the wafer shipment could actually still be growing by low teens next year at least? Because you mentioned a lot of growth drivers by applications just now, especially on 22-nanometer, 28-nanometer and also 8-inch. So just wondering whether you are implying that the wafer shipment could grow by another low teens at least for 2026? Jason Wang: I mean, we're not giving the blended -- the wafer shipment at this time. We're probably ready to provide you more clarity into Q1, but 22 and 28 particularly, yes, I think that when we go into 2026, we're still expecting a double-digit year-over-year growth. Unknown Analyst: And then my second question would be on your gross margin trend. I think for the fourth quarter, you guided flat shipment and also pricing. The FX seems to be -- foreign exchange seems to be more favorable at this stage. So why does the gross margin does not go higher than the third quarter? I'm just curious why that is the case. Or should we think about high 70% utilization is going to translate into like high 20 percentage gross margins going forward? Chi-Tung Liu: Gross margin in third quarter is actually, in fact, slightly higher than that of the previous quarter. The gross margin also primarily depends on utilization rate, ASP, product mix, depreciation and foreign exchange. As you know, even though the foreign exchange rate may be on a forecast basis, better than forecast, but still appreciate against U.S. dollars, our key receivable currency, so still in an unfavorable situation, as I mentioned earlier, that almost eat up about 3% of our total revenue. And we do expect the Q4 '25 gross margin still will remain in the bandwidth of high 20 percentage range. Despite the variables such as our depreciation, we will still see quarterly increase. And this year, we are facing 20% plus increase in annual depreciation expenses. So I hope that answers your questions. Unknown Analyst: Yes. And then just a relevant follow-up is in your cost structure. You have been able to manage the other manufacturing cost item quite nicely down in third quarter despite the fact that the labor cost is higher, electricity cost is higher and also the material or even the wafer shipment is slightly higher compared with second quarter. So could you just elaborate in more detail on how should we think about the other manufacturing costs, which I believe should be mostly variable cost? How should we think about that going to trend? Chi-Tung Liu: So part of our employee compensation is bonus, which is based upon profit sharing. So when we have a better quarter-over-quarter profit in the third quarter, we do have to factor in higher bonus, which increased the compensation expenses in the third quarter. Unknown Analyst: But it was still down compared with second quarter. So I was just wondering if there's any reason driving that decline and would that trend continue. Chi-Tung Liu: No, the trend will not continue. It will fluctuate along with our rolling profit recognition. Operator: Next one, Charlie Chan, Morgan Stanley. Charlie Chan: Congratulations for very strong results, especially on the gross margin side. So maybe starting with the so-called geopolitical uncertainty. So, Jason, can you elaborate a little bit what kind of macro uncertainty you see will continue in 2026? And I was asked by one of your customers about -- there seems to be some speculation about semi-tariff may come next January. So any kind of impact -- potential impact to your business or operation? And also another uncertainty, it was a couple of weeks ago, right, the rare earth kind of supply. Does your team run through some analysis about the potential impact if rare earth will be restricted again? Jason Wang: Sure. A couple of things, right? I mean, you mentioned about geopolitical dynamics on the tariffs. So maybe I'll start up on the tariff first. We do understand there are uncertainties and risks from the potential impact of tariffs, and we will remain cautious of those potential business impacts, and we'll be mindful in our business planning going into 2026. At this current point, we haven't seen anything yet, but we are cautious. The -- amidst the uncertainties, we'll also continue to focus on the fundamental of our business. That is the technology differentiation, manufacturing excellence and then customer trust to further strengthen our competitiveness -- competitive position. So I think we still have to go back to the fundamentals. For UMC, to address the geopolitical concerns, I do believe that UMC has a geo-diversified manufacturing site across the globe. And the global semiconductor landscape is evolving. Customer and governments are increasingly emphasizing the geographic diversification and supply chain resilience along with the tariff. But to address the structural changes and align with the customer needs, our strategic initiative, including the capacity buildup in Singapore and the U.S. and are designed to complement our Taiwan facility, will enable us to better support our customers across multiple regions. Over the long term, we are targeting a balanced capacity split between Taiwan and overseas locations, but we welcome any opportunity from our customer. Whether this is an impact or opportunity to us, we will probably have to position ourselves and ready for that dynamic changes. Yes. Charlie Chan: So specific on semi tariff, right, I think we also went through this discussion last quarter or 2 quarters ago. So do you also hear that next January could be a final implementation of this semi tariff? And secondly, would UMC can get exemption from the semi tariff? Jason Wang: Well, I mean, your guess will be as good as my guess. So I'm not going to guess here. Charlie Chan: I watch TV only. Jason Wang: Yes. So we're going to be cautious about this, and we're closely monitoring the progress and developments. And at the same time, given that we are investing into the U.S., so we're definitely going to present our case. But there's nothing else to update here. But if there's anything, we will definitely recall back. Charlie Chan: Okay. Got you. And second question is about the -- your gross margin sustainability. I know this quarter, next quarter, some puts and takes, right? But just overall, right, next year, it seems like some of your industry peer, may just call it TSMC, kind of hike their wafer price. And recently, we are seeing that the back-end foundry, though it's not like your industry peer, but it's kind of your downstream supply chain, right, also attempt to hike the back-end foundry service price. So what was the UMC's kind of sort of potential wafer price hike into next year? Jason Wang: Well, like Chi-Tung mentioned earlier, margin reflects the result of ASP loading certain variable factors. So let's take the ASP specifically. For the ASP outlook, our 2025 ASP performance has remained firm amid a dynamic business environment, and it has remained stable at a healthy level throughout the year. And so -- and we expect the ASP will remain firm in Q4 2025. And for the 2026 outlook on ASP, we will provide more detail in the upcoming January 2026 conference call, as we are going through some discussion with our customers aligning that. So we probably have more detail to report in the next conference call. Charlie Chan: Okay. And on the cost side, expense side, Jason, you said at some interview that your team want to drive some costs down. But I feel like most of the components whatsoever. Most of what I'm hearing this commodity cost may go up, right? So on the cost side, do you have any preliminary outlook for 2026? Jason Wang: Without getting into specific cost projection or outlook, I think we can probably update you of the view in cost, our view of cost -- about cost. Cost competitiveness is always a mutual goal for us and our suppliers together, so in order to be competitive. So we're closely working with our suppliers. We'll continue to drive towards cost savings in 2026, and that has been going on for many years, but we are continuing to doing that into 2026. But that includes the combination of both internal and external efforts. It's not only working with the supplier, it's also internal efforts. For example, we have already started leveraging some smart manufacturing and AI technologies internally to enhance our fab efficiency and enabling our long-term operational competitiveness. So that's also a major piece of driving our cost goal. So I think there's many of the initiatives that we're deploying, and we working with the supplier -- supply chain is just one of them. Charlie Chan: Okay. Okay. And last one, I will be back to the queue. So I know your company and your team have been running through a lot of strategic or marketing research, right? So recently, we picked up one data point I would like to share with you and also consult your view. Because of the T-glass shortage, right, we're starting to see tightness of BT substrate supply. From your perspective or UMC's perspective, would that kind of constrain your -- some of your customers' demand, for example, the consumer or smartphone SoC demand into 2026? Jason Wang: Well, we really haven't seen that, but we are closely monitoring the entire supply chain resilience. The current market is driven by this AI momentum. So there are various areas demonstrating potential supply concern. But so far, we have not seen any impact to us. But like you said, we all look out there and see if there's going to be any. But meanwhile, we are managing -- from our internal perspective, we are managing our supply resilience point of view. We want to ensure the supply assurance and as well as the -- both from supply and demand -- supply and demand as well as the quality standard and cost. So I think that's always been our initiative internally. So I would just have to say we haven't seen any impact on the recent market dynamic, but it's something always on our radar screen, and we continue monitoring it. Charlie Chan: Yes. How about smartphone or PC demand recovery, if you have a crystal ball? Do you think that 2 major segments of the end demand will significantly recovery next year? Jason Wang: Well, I mean, at least for the Q4 '25, we expect the wafer shipment will remain flat, and the markets reflect pretty healthy inventory level as well. We see slightly communication segment decline in our segment, but the computing, consumer, automotive are slightly increased. So I'm not sure that's affected by that particular supply issue, but it reflects probably more end demand associated. Operator: Next one, Laura Chen, Citi. Chia Yi Chen: My first question is also about the margin outlook. Chi-Tung, you mentioned that the depreciation cost for this year were up about 20% plus year-on-year. But we know that actually in the first half, the depreciation cost increased almost like 30%. So does that mean that depreciation cost year-on-year increase trend to slowing down into Q4? With overall your utilization rate and also ASP seems to be resilient and also higher exposure on 28-nanometer, should we be looking for some of the potential upside of the gross margin? Chi-Tung Liu: Well, other than depreciation, there are other factors. Like Jason mentioned, we will have a clear view on the ASP, which is an important component for the margin equation. But just on depreciation alone, yes, the increased magnitude, we're down to about low teens in the year of 2026 versus 20-something in the 2025. And in the previous quarter, we also mentioned either '26 or '27 should be the peak of the recent depreciation curve. So on that regard, it does provide a good floor for helping our EBITDA margin. Chia Yi Chen: Okay. Great. And also the second question is, I recall that we mentioned about the Interposer business before. We know that the AI demand is surging. So I just want to understand UMC, do you have any updated view on the Interposer strategy? And also, we know that UMC also have wafer-to-wafer technology. So just wondering what's the plan here. And also, do you want to further expand the capacities on Interposer? Jason Wang: Well, the latest development on the advanced packaging space, we will continue preparing our advanced packaging solution for this growing market associated with the energy consumption of cloud AI and the edge AI market. For UMC, we are developing the 2.5D Interposer with DTC, the deep trench capacitor, and discrete DTC to address the power efficiency requirement in all AI, HPC, PC, notebook and smartphone space. And second, UMC is leveraging the scalable 3D wafer-to-wafer packaging stacking and the TSV to enhance the -- enhance our specialty technology offering. We are in the mass production of extremely small form factor for the 5G and 6G RFIC right now by leveraging the wafer-to-wafer stacking technology. Based on the success of the 5G and 6G RFIC that works through the wafer-to-wafer stacking, we are also developing memory-to-memory stacking and memory-to-logic stacking service for the high-bandwidth computing requirements. So our technology really is associated with the center with the DTC capability and the wafer-to-wafer stacking capability. Right now, still within our current capacity size, there's no expansion planned, but there are a lot of customer interests and engagement being developed right now. Chia Yi Chen: Okay. Great. Can you also give us some like idea how is that kind of business opportunity growing into the next few years? Jason Wang: I mean, as we anticipated, the cloud AI and the edge AI market will probably taking out in the next 2 years or so. And so we think preparing those technology capability today will position us well to serve that market when the market comes. I think many customers are engaging in that discussion and exploring the product roadmap at this stage. But in terms of the actual volume and the ramp-up schedule, I would expect it's going to probably be in late 2026 or sometime in 2027. Operator: Next one, Sunny Lin, UBS. Sunny Lin: Congrats on the very good outlook. Very glad to see business stabilizing and improving. So my first question is on the pricing. I understand more specific guidance should be provided in January or in early 2026, but I want to get a bit more color on the latest progress on your engagement with the clients. So in 2024 and 2025, basically, you provided roughly mid-single-digit type of price reset for across the board. And so how should we expect like going to early 2026? Would it be fair to assume that now given the improving supply/demand, even if any price decline should be lower than the magnitude in early 2024 and early 2025? Jason Wang: Well, I mean, this is definitely -- I mean, that's our goal, right? I mean -- but while we are still in discussion and aligning with our customers, I can't really quote that. I have to really see the data before I can comment about it. But throughout the annual discussions and the patterns in January, we'll probably continue engaging in similar discussion. But in terms of the magnitude of it, I think it's kind of too early to guide at this point. Sunny Lin: Got it. Maybe a follow-up on blended ASP. There are still some concerns that there may be some overhang from LTAs expiring in the coming few quarters that could weigh on your blended ASP. And so Jason, could you maybe provide a bit more color on if any impact or that impact is already gone mostly? Jason Wang: I mean, LTA is one of the mechanisms that help us and our customers working other partners, not only based on the ASP, it's also we based on that, providing a mutual commitment for us to put in capacity to support the customer. At the same time, the customer demonstrate some commitment for the business engagement. So LTA will continue serving that purpose. Well, given the market dynamics, we're always working closely with our customers and to support them and gaining market shares without losing the market share and gaining the market shares and also with the market dynamics in terms of commercial needs, so -- but at the same time, we have to balance in terms of CapEx returns. So it is a complicated process and discussion, and we've been doing that for the past 2 years, and we'll continue supporting our customers to march into that direction, finding a win-win solution based on the LTA arrangement. But the future commitment of LTA remains intact, yes. Sunny Lin: Got it. So maybe one question on 2026, just to make sure that I got the right number. So for 2026, Jason earlier, did you mention the target would be to grow business by double digit? Jason Wang: I mentioned about the 22- and 28-nanometer that we expect the momentum will go into 2026, and we expect a double-digit growth year-over-year, yes. For the... Sunny Lin: Got it. And maybe a question on Singapore expansion. So if any like latest update that you could share with us in terms of how quickly the capacities will be ramped in 2026? Jason Wang: We -- I think the milestone has not changed. We project that the 12 IP3 production ramp will start in January 2026, and it will ramp up with a higher volume starting in second half of 2026. And that milestone schedule remains. Sunny Lin: Got it. Maybe last question. So in terms of dividend policy, given the improving cash flow outlook in the coming few years, would the company consider maybe revisiting the dividend policy to change to like absolute cash dividend? Would that be possible? Chi-Tung Liu: It's not impossible, but we always try to strike a good balance between the high percentage payout ratio and absolute dividends. So I think that strategy or that position will continue. Operator: Next one, Gokul Hariharan, JPMorgan. Gokul Hariharan: So just wanted to understand a little bit more on the pricing. I know that you're in pricing negotiations with customers. Could we talk a little bit about 22 and 28? How is the pricing trend there? Do you expect that there is any concession that you may need to make on 22 and 28 pricing or that is going to be reasonably firm? And maybe also the same question on the 8-inch portion of the capacity as well, given some of your competitors are also kind of putting down or kind of exiting some of the 8-inch capacity? Jason Wang: Well, our pricing strategy has been very consistent, and we will work closely with our customers and -- for protecting and gaining market shares. So that remains. That will not change. So in the particular number, the ASP guidance, I think it's better that we have all the picture together and to share with you. But in terms of pricing strategy and positioning, that has not changed. We do believe that the pricing is a combination of our value proposition from technology differentiation, our manufacturing capability, reliable capacity and the diversified manufacturing locations, so on. So we think there's a lot to offer. And along with the mutual commitment with many of the customers, we believe that we will strive to a right balance for the pricing discussion. However, again, from the specific guidance on ASP outlook, I will probably prefer to wait until we finish up. I don't want to mislead you at this point. So -- but -- and that goal is whether it's 22- or 28-nanometer and as well as the 8-inch because each technology node has a different market dynamics, and we will work within that dynamics. Meanwhile, you're talking about if we see anything on the 8-inch opportunity or due to any other, our peers. We don't typically comment about our competitors. We believe our market share increase in 2025 in 8-inch, but not just 8-inch, overall 8-inch and 12-inch legacy nodes. And we believe those nodes remain a sweet spot for a wide range of analog reach products. So we'll continue to strengthen our product portfolio, focus on those spaces. And hopefully, we can increase our market shares. We continue to optimize our existing platform and developing a new solution to better address that market need. This is the area that UMC has built some long-standing relationship and trusted relationship with our customers. So we believe this structural trend will reinforce our position as the preferred foundry partner for customers in this needs. And that will actually help us to sustain our maybe growth in both 8- and 12-inch legacy nodes over the long run. Gokul Hariharan: Got it. Yes, clear on the pricing that we can wait for January. But I think I just wanted to also ask on the semiconductor Section 232 tariffs. How are the discussions with your customers going? And let's say, there is a 15% to 20% tariffs on exports, which needs to be offset with any kind of U.S. investment or U.S. capacity that you have. How does UMC manage that situation? And which are the investments, or if any, that can qualify for that kind of an offset? I mean, for some of your peers, I think that is pretty clear. But I just wanted to understand how UMC is considering the situation. Jason Wang: Well, I kind of touched that earlier. Our -- we have been a very diversified manufacturing -- look, we have a very diversified manufacturing location in the past. And so we have very -- I think we're pretty much very complement to the current market dynamic. The current geographically discussion on diversification, supply chain resilience, I think our past initiatives serve that, and so we'll just continue. We may alter that, making some adjustment about that strategy, but not significantly. For instance, we're including building capacity in Singapore and U.S., and it's very much aligned to that direction. Of course, the tariff situation, whether it is X percentage, we don't know yet for Taiwan, but we know some areas already came out at 15% and which -- that's where we have our manufacturing sites. So customers are in discussion in interest of making sure that they have access to those facilities and to those locations. So we are definitely entertaining that conversation in a manner of growing our business engagement. So we hope that becomes more of an opportunity to us, not just a negative impact. Now, for some area that is not clear yet, and we have to navigate through that, it's our belief that we have very smart people in this industry. And despite how -- which direction it goes, we will navigate through this process and finding a win-win solution of mutual benefits. Gokul Hariharan: Yes, just following up on that, Jason, I think geographical diversification is one aspect, but also the second aspect is U.S. capacity, right? So is your understanding that your 12-nanometer collaboration with Intel kind of counts as U.S. investment and U.S. capacity, given I think the total investment is actually quite small, even though you are actually shouldering a lot of the technology-related task. Jason Wang: Well, I mean, I can't comment about the big or small, but the investment is investment, and we are putting capacity in the U.S. And the starting point of the 12-nanometer only lays a solid foundation for us to explore maybe even other collaboration opportunity as well. So that also -- if there's anything to update, we will update you, but that could also represent even more investment, right? So -- but it's just -- we're not ready to update you anything yet. But even I look at the 12-nanometer today, that is quite significant in terms of investment. Gokul Hariharan: Got it. Maybe one last question on the advanced packaging bit. I think you last time updated, I think, around 6K or so of wafer capacity for 2.5D IC packaging. Is that still where we are in terms of the capacity? And for your 2.5D packaging with deep trench capacitor, what is the application? Is it slightly different application that you're targeting compared to the mainstream market and that's why you're kind of waiting on the capacity expansion while the industry is still like really asking for a lot of capacity? Jason Wang: No, the 2.5D Interposer 6K today stays there. There is no expansion plan beyond that given the technology road map migrating to the DTC and we're developing the DTC capability. And for that, we're serving the AI, HPC, PC, notebook and smartphone space. And so our advanced packaging roadmap will center on the DTC going into, yes, 2026. Gokul Hariharan: And would you say that the 6K is now fully utilized or you still have a lot of slack in that 6K capacity right now? Jason Wang: I mean, as the product is migrating to DTC, that's why we're not expanding the capacity on the 2.5D right now. Gokul Hariharan: Okay. Okay. Fair enough. And this DTC capacity, how significant do you think it is going to become in terms of revenues? Let's say, I think you were expecting end of '26 ramp-up, so let's say, in 2027, is that a fairly significant part of your total portfolio? Or is it still going to be quite small, similar to the Interposer-related revenues that has been more like a single digit -- low single-digit kind of percentage of revenue? Jason Wang: I think it's kind of too early to predict that. A part of the market is associated with the edge AI market and which we have to wait until that has more clarity. And so I think at this point, it's too early to project that. But in terms of technology-wise, I think that's definitely the core of the next generation. So we need to make sure that we have prepared for it. Operator: Next one, Janco Venter, Arete. Janco Venter: I just wanted to follow up on the investment into the U.S. and just get an update on the state of the PDK. And then also, we just want to understand the business model around this engagement on 12-nanometer. Is it revenue share? Is it profit share? And then just secondly, on that, will it be cannibalistic to the 22, 28-nanometer customers as you start migrating to 12-nanometer? Any color that you can add to that to help us just understand this opportunity would be quite helpful. Jason Wang: Sure. From a project standpoint, the -- currently, the 12-nanometer cooperation with Intel is progressing well and remain on track according to the project milestone. And we expect the early PDK will be ready for the first wave of customers in January 2026. And both UMC and Intel are aligning with the customer device spec to facilitate the ramp-up. Overall, the collaboration is proceeding as scheduled, and customer product tape-out is expected at beginning of 2027. So that is the update on the 12-nanometers. The business model itself, we are working collaboratively together and engaging with the customer and the actual business model that we're probably not elaborate to share right now. But once -- I think that will be a -- the business revenue recognition, once it's ready, we'll update that. And the cooperation model is actually very structured and -- but just we'll probably have to report that after we're into production. I think that's the 2 questions you have, right? Did I miss any? Janco Venter: Yes. That makes sense. Yes, that's right. Maybe just one follow-up. And I think you touched on this earlier where you talked about potentially looking at further investments. Now, if we look at -- actually, we were trying to understand if there's scope perhaps to extend this agreement to single-digit nodes because if you look at Intel's business, they fully depreciated 7-nanometer. And it seems like an obvious area to extend the agreement. Is this something that you would potentially be looking at? And does that make strategic sense for UMC? Jason Wang: Well, I mean, the -- yes, the simple answer is yes, right? And -- but we have to starting from -- we have to start it from the 12-nanometer. So we had to make sure that executed well, so we can lay a solid foundation on that. For technology beyond 12-nanometer, we are open to explore the future opportunity through the partnership arrangement that are mutually beneficial. I would say the cooperation with Intel is strengthening UMC's strategic position in U.S. significantly and for the U.S. market and also broaden our addressable market while adhering our disciplined CapEx approach. So we are very committed to this partnership. And so far, the project is actually progressing well. Operator: Next one, Bruce Lu, Goldman Sachs. Zheng Lu: Can you hear me? Jason Wang: Yes. Zheng Lu: Yes. I just wanted to follow up the -- for the U.S. collaboration beyond 12-nanometer. What are the showstopper for us to move beyond 12-nanometer at the current stage? Or do we consider to go backwards to do like relative mature node capacity in U.S.? Jason Wang: I mean, that's an interesting question, right? I mean, the -- I think when we talk about this cooperation with Intel strengthened our positioning in the U.S. market, hopefully, we're not only limited at 12 nanometers and that if we can have a full potential of this position. And we -- so that's why we're actually very open to explore the future opportunities through this. So I don't think there's a -- I won't call any showstopper, but I think as long as it's mutually beneficial, I mean, we will definitely open to explore that. Now, is the exploration limited to the more advanced node or backward? I think we are also open to that. We're not limiting ourselves with that collaboration. Zheng Lu: No, Jason, the question is that it's clearly mutually beneficial, right? So who has the ball? I mean, who doesn't want to move on? Jason Wang: I think, in any of the engagement, not just this, you require the market validation, you need to make sure you're doing your due diligence. So I think I will probably comment that all conversations are open and the due diligence need to be in place before we move forward. So it's not truly a showstopper. It's not going which sport, it is we have to make sure we conduct the appropriate process. Zheng Lu: So in other ways, the prerequisite condition would be that you probably need to deliver 12 nanometers with like decent size of revenue, decent size of customer, then both sides might consider to move it on. Is that the right consideration? Jason Wang: Not -- I mean, I won't say that it is a prerequisite, but that is one of the important considerations. But more importantly is if this collaboration is economically beneficial to both sides. And so I think that the -- once we are more mature and ready, and we definitely will update you, but again, our position on this topic is we are open to that exploration. Zheng Lu: Okay. So when can we expect to see the meaningful revenue contribution from 12-nanometer? Jason Wang: Well, I mean, right now, for the early product tape-out, it is going to be in 2027. And so we're probably going to start seeing some contribution in 2027, but then ramping after that though. Operator: And in the interest of time, we're taking the last question. Last one, Charlie Chan, Morgan Stanley. Charlie Chan: So it's actually wafer-on-wafer related. So, Jason, can you share with us who could be kind of memory partners? I mean, it seems like it requires a lot of so-called customized design interface, et cetera. So are those more Taiwanese partners or you have some global top memory partners for wafer-on-wafer? And secondly, if you can, can you share some potential kind of end applications and the timing for wafer-on-wafer? Jason Wang: On the wafer-to-wafer stacking capabilities, we are in mass production for some of the extremely small form factor devices in the RFIC space. We're talking about that because we believe if you look at the market is going, and we believe this technology will serve more than just a small form factor. It provides the option for the memory to memory, the logic to logic, logic to memory stacking options. So by providing the option to the customer, they say they can explore many different product applications. So at this point, the advanced packaging technology is developing into 2 cornerstones. One is the DTC capability. Another is on the wafer-to-wafer stacking capability. And then we -- once the technology is ready, then we can explore to many different applications. Charlie Chan: On this wafer-on-wafer, do you see kind of advantage or differentiation to industry, for example, TSMC or China's -- I'm not sure, maybe XMC, yes, any sort of differentiation you may have? Jason Wang: Well, I mean, the developing differentiated technology is definitely on mandate. So we continue driving that technology differentiation. But at the same time, you have to make sure that you're part of the ecosystem, where the market is going. So we see this from a market standpoint. From a technology/product migration standpoint, we believe these are 2 very important capability and technology. So we're preparing ourselves to get that ready, and then, we can start exploring different business opportunities. Operator: And ladies and gentlemen, thank you all for your questions. That concludes today's Q&A session. I'll turn it over to UMC Head of IR for closing remarks. Michael Lin: Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact ir@umc.com. Have a good day. Operator: And ladies and gentlemen, that concludes our conference for third quarter 2025. We thank you for your participation in UMC's conference. There will be a webcast replay within 2 hours. Please visit www.umc.com under the Investors, Events section. You may now disconnect. Thank you again. Goodbye.
Hong Sung Han: Good afternoon. I am Han Hong Sung, Head of IR at Woori Financial Group. Let me first begin by thanking everyone for taking time to participate in this earnings call for Woori Financial Group. On today's call, we have the group CFO, Lee Sung-Wook; Group CDO, Oak Il-Jin; and the group's Risk Management division, Senior General Manager, Park Jang-Geun on the call. On today's call, the group CFO, Lee Sung-Wook, will give a presentation on the earnings performance. After which, we will have a Q&A session. Please note that the earnings call is being conducted with simultaneous interpretation for our overseas investors. Now let us start our presentation on Woori Financial Group's Earnings for the Third Quarter of 2025. Sung-Wook Lee: Good afternoon. This is Lee Sung-Wook, the CFO of Woori Financial Group. Let me go over the third quarter performance for 2025. I do have a cold, so please understand if my voice is a bit rough, and please turn to Page 3 of the presentation material that has been disclosed on our website. First, let me discuss net income. Woori Financial Group's year-to-date net income as of the third quarter end was up by 5.1% to KRW 2,796.4 billion, which was a Y-o-Y increase, as mentioned before, of 5.1%. Net income in the third quarter alone was KRW 1,244.4 billion, representing a significant increase of KRW 300 billion quarter-on-quarter. Amid uncertain internal and external conditions, including the exchange rate and outcome of tariff negotiations, this net income was the result of balanced growth between our interest and noninterest income and the contribution from the insurance acquisition. In particular, due to continuous efforts to rebalance assets and optimize funding and investments, our NIM improved for the third consecutive quarter. Stronger marketing capabilities from key subsidiaries, such as the credit card and capital business, led to fee income for the quarter to reach an all-time high. And in addition, the newly acquired insurance business contributed, which further have diversified the group's profit structure. In the third quarter, we completed the revaluation of the fair value of Tongyang and ABL's assets and liabilities and included this in the group's performance. So the bargain purchase price and adjustments from consideration together is around KRW 550 billion, while the decline in the CET ratio was only approximately 5 basis points, which enabled us to reconfirm that from a financial standpoint, it was an optimal M&A with almost no negative impact to our capital ratio. Moreover, in addition to the continuous asset rebalancing and active capital ratio management efforts that we have been making, we are now focusing on strengthening the stability of our financial structure by preemptively provisioning reserves for the vulnerable portions of our nonbank business. Based on these stable fundamentals, the group is planning to expand productive financing to support future sustainable growth. Next, let me discuss the group's capital ratios. As of September 2025, the group's preliminary CET ratio is 12.92% showing a 12% basis point increase Q-o-Q and [ 80 point ] increase from the end of last year, far surpassing the 2025 year-end target of 12.5%. In addition to the insurance acquisition, the weaker won against the U.S. dollar led to a 7 basis point decline in the CET1 ratio, but the capital ratio actually increased, proving the sound capital management capabilities of the group. This is the result of concerted efforts to manage risk-weighted assets across all business areas of the group, such as being selective in asset growth and continuously decreasing exchange rate sensitive assets. Going forward, the group will continue this capital management stance and swiftly execute value of plans based on its CET1 ratio. For Woori Financial Group, we relaunched our securities arm last year and also completed the insurance acquisition this year, completing the creation of a comprehensive financial services group, thus focusing on the 3 main pillars of the bank, brokerage and insurance business, we are planning to maximize group synergies. For example, between the bank and securities business, after acquiring the securities license, the group was able to do a KRW 3.9 trillion deal through CIB joint underwriting. And in Wealth Management in just 3 months of acquiring the insurance business, Tongyang Life and ABL's percentage of sales from the Bancassurance channel has grown from 9.8% to 22.5%. Moving forward by balancing growth between bank and nonbank business lines and ranking up synergies across group companies, Woori Financial Group will further strengthen its competitiveness as a comprehensive financial services group and create a business for sustainable growth. Next, let me dive into more details about earnings by business area, and please turn to Page 4. First, let me go over the net operating revenue and NIM. The group's third quarter year-to-date net operating revenue totaled KRW 8,173.4 billion, up by 2.3% Y-o-Y. And in the third quarter alone, it was KRW 2,773.3 billion, which is similar to the previous quarter. As financial market volatility and other internal and external uncertainties continue, margin improvements and selective growth led to solid interest income. In addition, the contributions from the insurance business led to better noninterest income, which has further solidified the group's revenue base. In addition, if we look at Woori Bank's third quarter NIM, it was 1.48%, which is 3 basis points higher Q-o-Q and 8 basis points more than the end of last year. It is the third consecutive quarterly improvement this year. This is the result of active funding cost savings and asset rebalancing efforts where -- which consistently improved our profitability. In the fourth quarter, even if the base cut is -- base rate is cut further, the bank is planning to expand its core deposit base and systematically manage ALM to continue stable NIM trends and maintain a level of 1.5% for the year. Next, let me go over the loan book. As of the third quarter end, the bank's loans totaled KRW 331 trillion, slightly increasing versus the end of June. On the corporate loan side, growth strategy is focused on new growth areas and high-quality corporates, which led to the loan book to remain flat quarter-over-quarter at KRW 178 trillion. On the retail loan side, in light of the government's policy to control total loan growth, the bank was more selective in loan origination, which resulted in loans growing 150% (sic) [ 1.5% ] quarter-over-quarter to KRW 1.5 trillion (sic) [ KRW 150 trillion ]. Looking ahead, Woori Financial, in line with the government's policy direction, will manage total household loan growth within the target level, while also utilizing its corporate finance competitiveness via the Future Co-Growth Project, increasing the flow of capital to more productive areas within the economy. In particular, we will join in efforts by the financial authorities to make capital regulation more reasonable and continue efforts by the group to rebalance assets to secure more capacity on capital ratios. In addition, risk management across all processes, from underwriting to loan management will be strengthened to ensure future growth can continue with any impact on capital ratios and asset quality. Next is on the group's noninterest income. As of the third quarter, the group's cumulative noninterest income amounted to KRW 1,441.5 billion, up 4.6% year-on-year. And on a quarterly basis, it rose 5.3% from the previous quarter to KRW 555.2 billion. Despite a decline in foreign exchange-related gains due to the rise in exchange rates, the group continued to post solid growth in noninterest income, supported by robust fee income and the inclusion of the insurance subsidiaries performance starting this quarter. In particular, core fee income, driven by improvements across all business lines of both the banking and nonbanking segments, including the wealth management business, credit card and lease, was up 7.9% versus previous quarter to KRW 563.7 billion, reaching a record quarterly high. Going forward, Woori Financial Group, through expanding the retail customer base centered on the insurance business and strengthening collaboration between the bank and securities IB segments, will actively pursue new business opportunities to enhance the group's proportion of noninterest income and to achieve balanced growth between banking and nonbanking operations. Next, I will elaborate on expense. Please refer to Page 5. Turning to the group's SG&A expense. As of the third quarter of 2025, the group's cumulative SG&A expense amounted to KRW 3,690.3 billion while third quarter SG&A expense stood at KRW 1,211.2 billion, a slight increase of 3.2% from the previous quarter. Accordingly, the group's cost-to-income ratio was 43.1%. Looking ahead, while we will continue to invest in the group's AX initiatives, enhancing digital competitiveness and strengthening brand value, we will also maintain disciplined cost management at the group level through reducing recurring operating expenses, optimizing channels and workforce and leveraging AI to improve operational efficiency. Next, I will discuss the group's credit cost and asset quality. As of the third quarter of 2025, the group's cumulative credit cost amounted to KRW 1,517.6 billion. Third quarter credit costs totaled KRW 574.3 billion, an increase of 13.1% from the previous quarter. This amount, including KRW 98 billion in provisions associated with completion-guarantee projects booked as part of the group's proactive risk management efforts from the previous quarter, incorporates approximately KRW 150 billion in one-off items. With this, most of the provisioning issues related to completion-guarantee projects appear to have been largely resolved. Excluding these one-off factors, credit costs remain at a similar level to the previous quarter, and the group's credit cost ratio is well managed within the target range at 0.42%. Amid continued uncertainties, such as exchange rate volatility, trade negotiations and concerns over a slowdown in the real economy, the group, through active NPL sales and write-offs and proactive risk management in the nonbanking sector, is conducting more thorough risk management than ever before, maintaining the proportion of prime corporate loans at around 84%, and managing the ratio of loan loss reserves and regulatory reserves to total credit at 1.6%, thereby securing a stable loss absorption capacity. This year, Woori Financial Group will conduct a comprehensive review of the group's risk factors. And after securing sufficient risk management capabilities, will pursue sustainable growth grounded in solid asset quality. I will now move on to capital adequacy and shareholder return policy. Please refer to Page 6. As mentioned earlier, as of the end of September 2025, the group's common equity Tier 1 ratio is expected to be 12.92% on a preliminary basis. Despite factors, such as the insurance subsidiary acquisition and the impact of a stronger exchange rate, the group CET1 ratio improved significantly by approximately 80 basis points versus last year-end, demonstrating the group's strong capital management capability. Woori Financial Group will not remain complacent with this achievement, and aims not only to stably exceed a CET1 ratio of 12.5% by the end of 2025, but despite ongoing uncertainties home and abroad, such as exchange rate volatility and potential regulatory fines, we'll also pursue swift and proactive capital management with the goal of achieving a 13% CET1 ratio ahead of schedule in 2026. Meanwhile, the Board of Directors of Woori Financial Group at its meeting held on October 24, approved a quarterly cash dividend of KRW 200 per share with a record date set for November 10, as previously announced. In this quarter, Woori Financial Group successfully completed the acquisition of an insurance subsidiary, a process that has been underway for over a year. Through this acquisition, we have faithfully upheld our commitment to the market to minimize any negative impact on our capital ratio and to avoid overpaying for the transaction. Now with a diversified business portfolio and enhanced group synergy, we'll begin in earnest, our transition towards becoming a comprehensive financial services group. Furthermore, in connection with the Future Co-Growth Project announced last September, we intend to leverage our corporate finance expertise to support the real economy, focusing on new growth and advanced strategic industries. And through this, we will not only fulfill the essential role of finance, but also establish a sustainable foundation for the group's long-term growth. Since the announcement of the corporate value of initiative, Woori Financial Group has faithfully implemented most of the plans presented to the market. Discussions and deliberations led by the Board of Directors on how to enhance corporate value are ongoing and will continue in the future. Through these efforts, we will focus the group's capabilities on enhancing long-term shareholder value. This concludes Woori Financial Group's Third Quarter of 2025 earnings presentation. Thank you. Unknown Executive: Yes. Thank you for the presentation. And now we will -- before starting the Q&A session, for this year, because there were some factors related to the presentation, including the insurance acquisition, there will be some additional comments related to the performance by the CFO. Sung-Wook Lee: Yes. So if we look at the third quarter this year, if you look at our performance, as you can see, there has been a lot of volatility. So overall, there were some one-off factors. And maybe I did believe that maybe touching upon these first would be appropriate. So of course, there was the inclusion of the insurance business, but also with regards to the preemptive provisioning, there were also some one-off factors there. So in the third quarter in total, if we look at the insurance business, of course, the profit increase is there. But in terms of risk management, there were a lot of efforts that we have made. So please take that into consideration and listen to what I have to say. So first on the insurance acquisition side, because of the bargain acquisition gains after we included the insurance business from July 1, we did the PPA. And as a result of that, there was a KRW 580 billion gain that we had recognized. And of course, for the past -- for the next 1 year, because of the accounting for that, there could be some adjustments to this. However, with regards to the adjustments for consolidation, there was a negative KRW 25 billion that was recognized. So at the end of the day, the bargain gain, in total, was around KRW 556 billion. So in addition to that, on the -- there was also a KRW 33 billion negative impact that was also reflect. And in the third quarter, for the completion-guarantee trust, there was also KRW 98 billion that we have recognized in terms of provisioning. So as a result of that, in total for this year, there was around KRW 200 billion that we have recognized. On the bank side, there are some areas in which there were collateral value decreases. And in light of that, there was some preemptive provisioning that we had did that was around KRW 54 billion. And recently -- there was some press reports about the situation. But with regards to KIKO there was a litigation in 2028, and the final results have came out, and there were some areas in which we lost. So there was a KRW 32 billion additional provision that we have set aside for that purpose. In addition, on the nonoperating side, related to the completion-guarantee trust, there was a significant provision that we have set aside. So therefore, for the goodwill, there were some impairment losses that we have also recognized of around KRW 39 billion. So in total, if you look at the overall impact of this, if you look at the bargain gains that we have enjoyed, and everything above that was on the operating business and others was on a nonoperating basis. So if we look at the net income basis, at the end of the day, there was one-off factors of around KRW 360 billion in total. So with regards to the completion-guarantee trust impact, there may be some small changes going forward, but we don't believe that there will be any significant provisioning that will be required. So I do believe that this is probably a question that you were very curious about. So I thought that it would be good to talk about this first before we went to the Q&A. Operator: [Operator Instructions] So for the first question will be from NH Securities. It will be Jung Jun-Sup. Jun-Sup Jung: There are 2 questions that I would like to ask you. So first would be that in the third quarter, because you did the insurance acquisition was completed, and I would like to know what the next phase is. So in terms of more efficient capital management, rather than being 2 separate entities, we believe that having it together and then also making sure that it would be a full subsidiary of the group as a whole. So with regards to the information that you can share with us, any more details that you could share would be appreciated. Second is that after the acquisition, if you look at the capital ratios, it still looks like their capital ratios are very sound. So even if it's not in the immediate future, but going forward, are there any M&A opportunities that you would be looking at in terms of interest areas? So maybe not in the immediate future, but even down the road, are there any areas that you would be interested in, in terms of M&A opportunities? Sung-Wook Lee: So thank you for your questions and maybe we can answer your questions. Yes. This is the CFO, Lee Sung-Wook. So first, in terms of the insurance, in terms of the merger and also the follow-up after the acquisition, I do think that this is an area that a lot of the investors are interested in. And also in terms of the Tongyang Life shareholders, they're also very interested in that also. So as of now, we did the -- and completed the acquisition as of July 1 for Tongyang and ABL Life. And since then, for the mid- to long-term direction, this is something that we're doing a diagnosis about in terms of the overall business operations. So for Tongyang Life, making it a 100% subsidiary or merging the 2 entities, this is something that we are still reviewing, but we have not made any decisions yet. And in addition, we do believe that it will require a bit more time for us to come to a conclusion. And in addition to that, whether we should make a 100% subsidiary or whether we will merge the 2, if there's any major decisions that are made, of course, we will make sure to disclose to and share to you. And in addition to that, we will look at the laws and regulations to make sure that everything is done according to the due process. Secondly, about your question about the M&A side. I think that this is something that we continue to talk about. But after the brokerage company, insurance company being added on, in terms of our business portfolio, we think that it has been completed. So over the mid to long term, I think that if you look in terms of focusing on strengthening the competitiveness of the companies that we have and also maybe expanding our presence, M&A could be an option. But right now, on the security side and insurance side, because we have been newly added, and we do believe that our overall business portfolio is complete. Right now, if there are any M&As that require capital, I think that being interested in -- rather than being interested in that, I think that we're more interested in strengthening our market competitiveness in the areas in which we're doing business already, particularly on the noninterest income side. So with regards to the nonbank businesses of securities and insurance companies, we want to strengthen that further. So that would be one of the main focus. And in addition to that, we will also continue to conduct our value program and also manage our risk-weighted asset and also conduct and successfully complete our Future Co-Growth Projects. So in the middle, I did talk about this during the presentation, but achieving the CET1 ratio of 13%, this was -- the target year was 2027, but we have accelerated that to 2026. So this is something that we are discussing with our directors. So by doing this and doing -- putting against our best efforts, we think that we can efficiently manage our capital and still also achieve the best outcome for the business. Thank you. Operator: The next question is by Baek Doosan from Korea Investment & Securities. Doosan Baek: Yes. I am Baek Doosan from Korea Investment & Securities. I also have 2 questions. The very first question has to do with the completion-guarantee project. I can see that it has been largely resolved. But in addition to that, I can see that there were still quite hefty preemptive provisioning. So taking that into consideration, I'd like to understand if there's any guidance in terms of the improvement going forward in terms of credit cost? And second, the Future Co-Growth Project that was launched and with regard to the funding, the plans that you have for key industries, this project in itself is a massive project. And therefore, in terms of capital ratio or noninterest income or corporate loans, I think that it will have an impact on all of these numbers. So we'd like to understand what are the plans? What's the forecast you have going forward? Unknown Executive: Yes. Thank you very much for the question. So please bear with us for just a moment as we get ready to answer your question. Jang-Geun Park: I am Park Jang-Geun, Senior General Manager from the Risk Management division. First, let me talk about credit cost. The third quarter credit cost increased by 3 bps to 52 bps. And that was already mentioned. In second quarter, KRW 86 billion for the trust and this quarter, KRW 98 billion, that was the provisioning in terms of managing our assets. And due to the sluggish economy in the sluggish construction sector, with regard to collateral loans at the banking sector, that was a total of KRW 54 billion of provisioning and one-off items amounted to KRW 152 billion. And therefore, the coverage rate also increased to 130%. So if we exclude these one-off items, the credit cost ratio is 42 bp. However, considering that there has been a delay in the rates -- the rate cuts, we believe that the cost -- the normalized credit cost will still be quite high. But we -- as mentioned, the completion-guarantee projects has been mostly resolved. So therefore, there wouldn't be any significant provisioning to follow going forward. And with regard to prime assets, especially in the banks, if we look at the corporate loans, we've been seeing a downturn in terms of new defaults in terms of corporate loans. Ever since 2024, we believe that there will be -- the impact of rate cuts is something that we are continuously monitoring at the Risk Management division. And in the future, with the economic boost, stimulus package with the government and with regards to the rate policy going forward, we believe that in the fourth quarter, credit costs will stabilize. So that is all for me. Sung-Wook Lee: Yes, this is the CFO, Lee Sung-Wook. And so with regards to the Future Co-Growth Projects, this is a very big project. I do think that with regards to capital and also in terms of the capital ratios, there may be some concern about such a situation. But with regards to this, maybe just elaborating a bit will help you out. So from us, we do want to transfer into providing more productive financing. So as of the end of September, we announced our future core growth project, and across the group for the next 5 years, there will be around KRW 80 trillion that we will be supplying and supporting. And so according to this project right now, in terms of the asset growth and the impact of this, this was all taken into consideration before we made the announcement to the market. So for the KRW 80 trillion across the 5 years, if you look at the impact on our risk-weighted assets, it will be around half. And on this, of course, how we can offset it against the capital ratio is probably an issue that you will be focusing on. And this year, if you look at the overall asset rebalancing efforts that we have made for the next 5 years, due to that, this is an effort that we will continue for the next 5 years. And in addition to that, because regulations are being eased at the financial authority side. And in addition to that, we also have a CET1 ratio target of 13%. So the trends that we see in our capital ratio was all taken into consideration before we formulated this plan. In addition to that, on the corporate loan side, we -- during the financial crisis, we have accumulated a loss. There's a very strong underwriting standards and price. So as a result of that, we do think that we can manage our capital ratio properly and still continue growth in this area. So within the year, I think that if you look at the capital ratio trends that we have seen, there has been an 80 basis point increase versus the end of last year. And this is even after the acquisition of the insurance arm. So we do think that we do have a credible trend that we are creating, and this is something that we have fully discussed with the BOD, and we will come up with our business plan accordingly. In addition, going forward, we will continue to also manage our loan balance through asset rebalancing and also manage the retail balancing side. So we're also planning to make other efforts. So for the shareholder value programs, this is something that we will continue to implement without issue and continue to provide total -- better total shareholder return. Operator: The next question is -- will be by Kim Do Ha from Hanwha Investment & Securities. Do Ha Kim: I have a question with regard to the acquisition. So when we had the acquisition ahead of us, you talked about the purchase -- market purchase gains is going to be utilized for a total shareholder return. And I believe that within a limit of 10% -- if it's within that, I've heard that the gains would be utilized for shareholder returns. So right now, we have around KRW 580 billion or so of gains and I would like to understand, would this be included in the shareholder return plan of this year? And I understand that the TSR will be maintained as such because rather than providing a dividend at year-end, after November, it could be in the treasury stock related plans that you may have? Or would it be something that would be utilizing next year? So if you can give us some more information on that, that would be great. And the second question is, around the world, these days, we've been witnessing security issues, hacking issues. So with regard to that, are there any investments being made right now to prevent or any cybersecurity-related prevention methods or plans that you have in place. Unknown Executive: Yes. Thank you very much for those questions. Please wait before we answer your questions. Unknown Executive: Yes. With regard to the bargain purchase gains, it's a total of KRW 580 billion and it's included in the net income. So in the first half, IR last year, based on our corporate value plan, in terms of our TSR, we've mentioned that we're putting our best efforts to have that included. And with regard to the insurance acquisition, the impact it has on the capital ratio, it was quite limited and minimized. But with regard to TSR, year-end, we have -- we want to see the CET1 and the overall financial volatility, and the TSR will be decided as such. And in the market, there are expectations, and we will try to cater to the expectations as much as possible, and we'll do our best to make sure that we can cater to those expectations. Thank you. Il-Jin Oak: I am Oak Il-Jin, CDO. So recently, there were major security-related issues at telcos and financial firms. And that's why there was a company to review across all subsidiaries, and there were no issues identified. Recently, there was, let's say, multi-authentication and security patches, terminal-related security issues. These were the shortcomings and we were able to understand that we were following all of the internal policy when it comes to security. And in addition to that, with regard to personal information and IT security, let's say, accidents. To prevent all this, what we've done was, in August until year-end, with security firm and the company, we will make sure to understand whether there are any loopholes. And for the recent 3 years, the government's investment into security is 11% when it comes to total IT investments. And it's 8.8% for financial funds and insurance firms. In the case of the U.S., it's 10.5% and it's higher than that at 11%. So with regard to information security investments, we will continue on to increase that portion in our investments. Operator: Yes, the next question is from HSBC, Won Jaewoong. Jaewoong Won: Amid a challenging environment, thank you for your strong performance. And there are 2 questions that I would like to ask you. The first question is with regards to an early retirement. So if we look at last year, we actually reflected into the first quarter of this year. So for this year's early retirement, would it be fourth quarter or would it be first quarter of next year? So if there any plans, if you could share that with us, that would be appreciated. So in terms of the CET1 assumptions or in terms of the overall profitability, it would be easier to assume or make the estimates. So if you could share the plans on this, that would be appreciated. And second, with regards to portfolio diversification, you have successfully acquired 2 insurance companies. And I do believe that you will properly manage this business going forward. But as far as I understand, the 2 insurance companies, after being acquired, next year in terms of the profit contribution, it will be 1% of the ROE. So that means that the overall contribution would be about KRW 300 billion. But up into the third quarter, if you look at the net income, right now, it has been around KRW 150 billion. So for ABL, I don't know what the third quarter numbers is. So I'm not 100% accurate, but I do think that it would be around this level. So do you think that it could be larger next year? And in terms of the bargain gains this year, it was around KRW 550 billion. So for next year, in terms of these gains, how much contribution do you think will actually be made on the net income line? So your thoughts on this topic would be appreciated. Unknown Executive: Yes, thank you for your questions. So maybe if you give us a few minutes, we'll answer your question. First, in terms of early retirement, in the case of last year, we actually did it in the first quarter of this year. And the reason why we did it that way is because it's based upon the agreement with the labor union. So therefore, there could be some difference of opinions. And as a result of that, that is why it was -- it took place in the first quarter. So right now, if you look at the discussions with the labor union that are ongoing right now, I think that it is something that we will have to see in terms of how it happens going forward. So it could be in December, it could be in January. But I think that because it needs an agreement, we will have to wait and see how it actually plays out. And with regards to insurance acquisition, as you have just mentioned, in 2025, if you look at most of the companies, their profits were very large. And then this year, also, there are some that are showing strong performance. But in terms of the K-ICS ratio or other product structures, I do think that with regards to the assumptions, there are some changes that are taking place. So this year, as we have continuously talked and mentioned, after the acquisition of the insurance business, the first thing that we have actually done is that we are doing a business investigation to look at how we can fundamentally change the competitiveness of the business in itself and it changes accordingly. So in 2026, we do think that, of course, there will be some profit contribution from the insurance side. But in terms of the K-ICS ratio, but on the capital side, we think that up and strengthening that up will be our top priority to make sure that the burden on the group from that would be minimal as small as possible. And also, we want to stabilize the organization. So in 2024, if you look at right now, there was around KRW 400 billion. And in terms of the percentage, it would be around KRW 300 billion in contribution that we would have seen. But for next year, we think that it would be difficult to reach that level in the net income side. So right now, in terms of priority, it will [ B2B ] the fixed ratio and the other sides. And then thereafter, I think that we could actually look at how we can expand our business going forward. So that have been said, so the ROE, 1%, is something that was based upon 2024. So though we will not go to that ratio, we do think that there will be a contribution that we will be able to see in full fledged manner from next year. Thank you. Operator: Next question will be by Jeong Tae Joon of Mirae Investment Securities. Tae Joon Jeong: Yes. I'm Jeong Tae Joon from Mirae Asset. I also have a question with regard to the insurance arm. So with regard to the profitability and as well as the interest cost and the securities, I can see that this has been reflected all separately in separate items. But in terms of net income and profitability, I'd like to understand what was the contribution in total this quarter? And it's similar to the previous question, where the bargain purchase gain was quite significant, more than expected. So then based on consolidation, it means that it's not as high based on consolidation. And that in terms of the contribution, it may be a bit difficult to book in it's significant absolute terms. But of course, I do know that the management diagnosis is still underway. But I think that if you can please give us a ballpark figure, it would help us better our understanding. Unknown Executive: Yes. Thank you for the question. Please wait. We will soon answer your question. Yes. So with regard to the income from the insurance arm, so we have investment income and insurance income. So all in all, if we combine the 2 companies, it is around KRW 70 billion to KRW 80 billion. And in terms of net income, it's around KRW 50 billion in terms of the contribution from these 2 firms. And in the future, with regard to adjustments from consolidation, that's how it would be booked. So in terms of insurance accounting, as was already mentioned, after the acquisition, within the insurance, there's an accounting that would follow, and there's also an accounting for the holding company because we went through the PPA process. So based on PPA, it will be a dual accounting, a dual booking. So in the future, we're going to run a simulation. And based on that, of course, it will all differ by year, but we believe that it will be around KRW 30 billion to KRW 40 billion annually, a positive, a plus KRW 30 billion to KRW 40 billion. So there could be some volatility or variances throughout the years. But based on our long-term simulation, we believe that there will be a plus KRW 30 billion to KRW 40 billion of contribution that can be booked. Operator: Yes, next question. In terms of the next question will be from Daishin Securities, Park Hye-jin. Hye-jin Park: Yes. And the question that I would like to ask you is that with regards to the [ bargain ] gains, I do think that there cannot help be a lot of questions. So with regards to the preliminary announcement of the PPA, and you said that for the next 1 year, there could be adjustments. So related to that, in terms of the adjustments that could take place, what would that actually be? So if there is an adjustment to that, I would like to understand what it would be in more detail. And the second would be with regards to the margin. So because of the asset rebalancing, I do think that the margins are being well defended. But with regards to the joint growth, you did say that you would continue such a situation. So for next year, in terms of margin, what is the outlook? And also lastly, for the securities side, also, I do think that there is probably some capital gains that you would have to actually conduct. So for those capital increases, what would be the outlook of that? Unknown Executive: Yes. Thank you very much. There are 3 questions that you have provided, and maybe we can answer your questions. Yes. With regards to the bargain gains, I do think that this is an accounting issue. So during the next 1 year, there is the room for adjustments to take place. So right now, for the first 3 years, there will be some refining. And then after that, that will be done. So if there -- we don't think that there will be a lot of fluctuation. But if there is any, then the main area is probably going to be and what we estimate, it would be with regards to some of the fines. So for example, that could be one of the items. But this accounting to the accounting standards, there is some that we have already reflected because we have made some assumptions there. So if that realizes, then we do think that, that would lead to some changes. But we don't think that there will be any big changes in itself. And secondly, with regards to the securities, this year, after being included into the group on August 1 and what we had actually invested into was manpower and also IT. And as a result of that, the SG&A had actually increased by KRW 50 billion. So in actuality, if you look at the net income as a result of that on a Y-o-Y basis, there was a slight increase, but not very significant. So this year, we do think that when we talk about productive financing, of course, we do think that securities arm will have a big role to play. And from next year in terms of the net income contribution also, we think that it will significantly contribute at a much higher level. So right now setting our targets, but we do think that on a Y-o-Y basis, it will be at a much higher level than what is contributing this year. So from next year, we do think that the overall growth level that we will be enjoying will be much larger. And then on the NIM, I think that for this year, there was a 3 basis point increase this year. And the biggest influence there was the asset rebalancing that we have done, some of the asset growth was more prudent. And in addition to that, the CET1 ratio was another area that we put a lot of attention to. So as a result of that, on the funding side, I think that we have a more favorable funding structure, and the funding cost also has gone down, which has led to the improvement in our net interest margin. So going forward, if you look at the NIM outlook, I think that, of course, we do believe that the benchmark rate will fall going forward. But for the NIM, if you look at the long-term rates, it's already something that is already priced into the market. So in the fourth quarter or whatever happens thereafter, even if rates are further cut, we don't think that, that will further decline the long-term rates. But this year was 1.45%. And then 2026, even if there are further rate cuts, we don't believe that the impact will be very large. And in general, we do believe that around 1.4% is something that we can maintain for NIM for the time being. Unknown Executive: Yes. Thank you. I believe that there are no more questions. So let us now respond to the questions that were posted on the website this quarter. From the 13th to the 24th of October, we received questions via our website. And in addition to our performance, AI, TSR, there are many questions across a number of domains. And we will exclude the redundant questions, but -- and 2 questions that were not addressed as of yet. One has to do with the total return on the dividend-related policy and also with regard to AI services. So with regard to the nontaxable dividend, the CFO will respond, and the CDO will respond to the second question. Sung-Wook Lee: Yes. So first, with regard to the nontaxable dividends and during the AGR in March, we've talked about the KRW 3 trillion that has been written back. So from the '25 dividend or retained earnings, that's when we will start to provide the dividend. So based on our corporate value of plan, we will engage in buybacks, cancellations and actively engage in shareholder return. So within -- in 2025, improving the CET1 by 80 bps to improve the TSR was the planned action taken. So we have continued on to engage in buyback and cancellation of treasury stock, and we have put in our best efforts to enhance shareholder return. And going forward, we will continue on to improve the CET1 and engage in our corporate value of plan and putting our best efforts to maximize shareholder return. Thank you. Il-Jin Oak: I'm Oak Il-Jin, CDO. So with regard to the AI services, Woori Financial Group, for our customer and for our employees, for the first time we've launched many services. And already, we -- based on Gen AI, we've actually launched our deposit-related products. And right now, we do have mortgage loans. And also, we have -- we will be expanding our AI advisory when it comes to real estate-related plans and loans. And at last year-end, we launched Woori TPT. And we actually see an accuracy rate of 90% plus for even complex jobs and work. And starting from the second half of this year, our focus, particularly would be on AI agent. So we want to enhance the productivity of our employees by utilizing the AI agent. Internally, when it comes to corporate loans and RM support, especially 5 domains that we have pinpointed in order to introduce the AI agent. It has been already been laid out. And starting from early next year and in the first half of next year, we are going to particularly engage in Phase 1 for work that can apply this immediately. And then moving forward, we're going to engage in a number of innovative product launches when it comes to Gen AI, especially for productive finance, especially for corporate loans, especially auto underwriting and in terms of reducing default amongst, let's say, high default rate borrowers, we are going to make sure that we can provide accurate and timely due diligence and underwriting utilizing AI. So basically, it's about utilizing AI agents to enhance productivity, and we're going to reengineer our work process so that we can make full use of this technology. Thank you. Sung-Wook Lee: Yes, I am the CFO. And with regard to the overall earnings, I would like to share with you the prospects, especially for 2026. But before that, in 2025, what we've done in terms of our business portfolio is the workforce IP system for the securities arm, acquisition of the insurance arm to complete our portfolio. So in terms of overall completeness of our business, we do have the nonbanking, including asset trust where it was about focusing on preemptive provisioning, completing all that. And then also, we have been able to significantly improve CET1 in 2025. So with regard to future growth and to enhance corporate value, I believe that this was a pivotal year in terms of making sure of putting in place the foundation. And we'll make sure to manage our asset quality in the remainder of the year. In terms of 2026 in the case of the nonbanking sector, as was already mentioned, the insurance acquisition impact will kick in, in earnest. In terms of the security side, we'll be seeing increased sales from that side. In the case of the existing nonbanking, it would be about preemptive risk management, which will lead to better performance and earnings. So in terms of the nonbanking operations, we will -- and we expect significant improvement in performance. And in terms of banking sector, this year, we've been getting an aggressive asset rebalancing, and a preemptive risk management foundation has been in place, which will enable a stable revenue. And in terms of the productive finance, we'll be expanding upon that to actively grow upon that. But when it comes to capital ratio as well as asset quality ratio, we're going to make sure that we maintain this stably, so that we achieve the ratio numbers. And with regard to our value of plan and our shareholder return plan, we'll do our best to make sure that we implement the plans that have been laid out. Thank you very much. Operator: Yes. Thank you. And this brings us to the end of Woori Financial Group's Third Quarter of 2025 Earnings Presentation. If you do have any further questions, please call the IR department, and we'll make sure to entertain your questions. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Hong Sung Han: Good afternoon. I am Han Hong Sung, Head of IR at Woori Financial Group. Let me first begin by thanking everyone for taking time to participate in this earnings call for Woori Financial Group. On today's call, we have the group CFO, Lee Sung-Wook; Group CDO, Oak Il-Jin; and the group's Risk Management division, Senior General Manager, Park Jang-Geun on the call. On today's call, the group CFO, Lee Sung-Wook, will give a presentation on the earnings performance. After which, we will have a Q&A session. Please note that the earnings call is being conducted with simultaneous interpretation for our overseas investors. Now let us start our presentation on Woori Financial Group's Earnings for the Third Quarter of 2025. Sung-Wook Lee: Good afternoon. This is Lee Sung-Wook, the CFO of Woori Financial Group. Let me go over the third quarter performance for 2025. I do have a cold, so please understand if my voice is a bit rough, and please turn to Page 3 of the presentation material that has been disclosed on our website. First, let me discuss net income. Woori Financial Group's year-to-date net income as of the third quarter end was up by 5.1% to KRW 2,796.4 billion, which was a Y-o-Y increase, as mentioned before, of 5.1%. Net income in the third quarter alone was KRW 1,244.4 billion, representing a significant increase of KRW 300 billion quarter-on-quarter. Amid uncertain internal and external conditions, including the exchange rate and outcome of tariff negotiations, this net income was the result of balanced growth between our interest and noninterest income and the contribution from the insurance acquisition. In particular, due to continuous efforts to rebalance assets and optimize funding and investments, our NIM improved for the third consecutive quarter. Stronger marketing capabilities from key subsidiaries, such as the credit card and capital business, led to fee income for the quarter to reach an all-time high. And in addition, the newly acquired insurance business contributed, which further have diversified the group's profit structure. In the third quarter, we completed the revaluation of the fair value of Tongyang and ABL's assets and liabilities and included this in the group's performance. So the bargain purchase price and adjustments from consideration together is around KRW 550 billion, while the decline in the CET ratio was only approximately 5 basis points, which enabled us to reconfirm that from a financial standpoint, it was an optimal M&A with almost no negative impact to our capital ratio. Moreover, in addition to the continuous asset rebalancing and active capital ratio management efforts that we have been making, we are now focusing on strengthening the stability of our financial structure by preemptively provisioning reserves for the vulnerable portions of our nonbank business. Based on these stable fundamentals, the group is planning to expand productive financing to support future sustainable growth. Next, let me discuss the group's capital ratios. As of September 2025, the group's preliminary CET ratio is 12.92% showing a 12% basis point increase Q-o-Q and [ 80 point ] increase from the end of last year, far surpassing the 2025 year-end target of 12.5%. In addition to the insurance acquisition, the weaker won against the U.S. dollar led to a 7 basis point decline in the CET1 ratio, but the capital ratio actually increased, proving the sound capital management capabilities of the group. This is the result of concerted efforts to manage risk-weighted assets across all business areas of the group, such as being selective in asset growth and continuously decreasing exchange rate sensitive assets. Going forward, the group will continue this capital management stance and swiftly execute value of plans based on its CET1 ratio. For Woori Financial Group, we relaunched our securities arm last year and also completed the insurance acquisition this year, completing the creation of a comprehensive financial services group, thus focusing on the 3 main pillars of the bank, brokerage and insurance business, we are planning to maximize group synergies. For example, between the bank and securities business, after acquiring the securities license, the group was able to do a KRW 3.9 trillion deal through CIB joint underwriting. And in Wealth Management in just 3 months of acquiring the insurance business, Tongyang Life and ABL's percentage of sales from the Bancassurance channel has grown from 9.8% to 22.5%. Moving forward by balancing growth between bank and nonbank business lines and ranking up synergies across group companies, Woori Financial Group will further strengthen its competitiveness as a comprehensive financial services group and create a business for sustainable growth. Next, let me dive into more details about earnings by business area, and please turn to Page 4. First, let me go over the net operating revenue and NIM. The group's third quarter year-to-date net operating revenue totaled KRW 8,173.4 billion, up by 2.3% Y-o-Y. And in the third quarter alone, it was KRW 2,773.3 billion, which is similar to the previous quarter. As financial market volatility and other internal and external uncertainties continue, margin improvements and selective growth led to solid interest income. In addition, the contributions from the insurance business led to better noninterest income, which has further solidified the group's revenue base. In addition, if we look at Woori Bank's third quarter NIM, it was 1.48%, which is 3 basis points higher Q-o-Q and 8 basis points more than the end of last year. It is the third consecutive quarterly improvement this year. This is the result of active funding cost savings and asset rebalancing efforts where -- which consistently improved our profitability. In the fourth quarter, even if the base cut is -- base rate is cut further, the bank is planning to expand its core deposit base and systematically manage ALM to continue stable NIM trends and maintain a level of 1.5% for the year. Next, let me go over the loan book. As of the third quarter end, the bank's loans totaled KRW 331 trillion, slightly increasing versus the end of June. On the corporate loan side, growth strategy is focused on new growth areas and high-quality corporates, which led to the loan book to remain flat quarter-over-quarter at KRW 178 trillion. On the retail loan side, in light of the government's policy to control total loan growth, the bank was more selective in loan origination, which resulted in loans growing 150% (sic) [ 1.5% ] quarter-over-quarter to KRW 1.5 trillion (sic) [ KRW 150 trillion ]. Looking ahead, Woori Financial, in line with the government's policy direction, will manage total household loan growth within the target level, while also utilizing its corporate finance competitiveness via the Future Co-Growth Project, increasing the flow of capital to more productive areas within the economy. In particular, we will join in efforts by the financial authorities to make capital regulation more reasonable and continue efforts by the group to rebalance assets to secure more capacity on capital ratios. In addition, risk management across all processes, from underwriting to loan management will be strengthened to ensure future growth can continue with any impact on capital ratios and asset quality. Next is on the group's noninterest income. As of the third quarter, the group's cumulative noninterest income amounted to KRW 1,441.5 billion, up 4.6% year-on-year. And on a quarterly basis, it rose 5.3% from the previous quarter to KRW 555.2 billion. Despite a decline in foreign exchange-related gains due to the rise in exchange rates, the group continued to post solid growth in noninterest income, supported by robust fee income and the inclusion of the insurance subsidiaries performance starting this quarter. In particular, core fee income, driven by improvements across all business lines of both the banking and nonbanking segments, including the wealth management business, credit card and lease, was up 7.9% versus previous quarter to KRW 563.7 billion, reaching a record quarterly high. Going forward, Woori Financial Group, through expanding the retail customer base centered on the insurance business and strengthening collaboration between the bank and securities IB segments, will actively pursue new business opportunities to enhance the group's proportion of noninterest income and to achieve balanced growth between banking and nonbanking operations. Next, I will elaborate on expense. Please refer to Page 5. Turning to the group's SG&A expense. As of the third quarter of 2025, the group's cumulative SG&A expense amounted to KRW 3,690.3 billion while third quarter SG&A expense stood at KRW 1,211.2 billion, a slight increase of 3.2% from the previous quarter. Accordingly, the group's cost-to-income ratio was 43.1%. Looking ahead, while we will continue to invest in the group's AX initiatives, enhancing digital competitiveness and strengthening brand value, we will also maintain disciplined cost management at the group level through reducing recurring operating expenses, optimizing channels and workforce and leveraging AI to improve operational efficiency. Next, I will discuss the group's credit cost and asset quality. As of the third quarter of 2025, the group's cumulative credit cost amounted to KRW 1,517.6 billion. Third quarter credit costs totaled KRW 574.3 billion, an increase of 13.1% from the previous quarter. This amount, including KRW 98 billion in provisions associated with completion-guarantee projects booked as part of the group's proactive risk management efforts from the previous quarter, incorporates approximately KRW 150 billion in one-off items. With this, most of the provisioning issues related to completion-guarantee projects appear to have been largely resolved. Excluding these one-off factors, credit costs remain at a similar level to the previous quarter, and the group's credit cost ratio is well managed within the target range at 0.42%. Amid continued uncertainties, such as exchange rate volatility, trade negotiations and concerns over a slowdown in the real economy, the group, through active NPL sales and write-offs and proactive risk management in the nonbanking sector, is conducting more thorough risk management than ever before, maintaining the proportion of prime corporate loans at around 84%, and managing the ratio of loan loss reserves and regulatory reserves to total credit at 1.6%, thereby securing a stable loss absorption capacity. This year, Woori Financial Group will conduct a comprehensive review of the group's risk factors. And after securing sufficient risk management capabilities, will pursue sustainable growth grounded in solid asset quality. I will now move on to capital adequacy and shareholder return policy. Please refer to Page 6. As mentioned earlier, as of the end of September 2025, the group's common equity Tier 1 ratio is expected to be 12.92% on a preliminary basis. Despite factors, such as the insurance subsidiary acquisition and the impact of a stronger exchange rate, the group CET1 ratio improved significantly by approximately 80 basis points versus last year-end, demonstrating the group's strong capital management capability. Woori Financial Group will not remain complacent with this achievement, and aims not only to stably exceed a CET1 ratio of 12.5% by the end of 2025, but despite ongoing uncertainties home and abroad, such as exchange rate volatility and potential regulatory fines, we'll also pursue swift and proactive capital management with the goal of achieving a 13% CET1 ratio ahead of schedule in 2026. Meanwhile, the Board of Directors of Woori Financial Group at its meeting held on October 24, approved a quarterly cash dividend of KRW 200 per share with a record date set for November 10, as previously announced. In this quarter, Woori Financial Group successfully completed the acquisition of an insurance subsidiary, a process that has been underway for over a year. Through this acquisition, we have faithfully upheld our commitment to the market to minimize any negative impact on our capital ratio and to avoid overpaying for the transaction. Now with a diversified business portfolio and enhanced group synergy, we'll begin in earnest, our transition towards becoming a comprehensive financial services group. Furthermore, in connection with the Future Co-Growth Project announced last September, we intend to leverage our corporate finance expertise to support the real economy, focusing on new growth and advanced strategic industries. And through this, we will not only fulfill the essential role of finance, but also establish a sustainable foundation for the group's long-term growth. Since the announcement of the corporate value of initiative, Woori Financial Group has faithfully implemented most of the plans presented to the market. Discussions and deliberations led by the Board of Directors on how to enhance corporate value are ongoing and will continue in the future. Through these efforts, we will focus the group's capabilities on enhancing long-term shareholder value. This concludes Woori Financial Group's Third Quarter of 2025 earnings presentation. Thank you. Unknown Executive: Yes. Thank you for the presentation. And now we will -- before starting the Q&A session, for this year, because there were some factors related to the presentation, including the insurance acquisition, there will be some additional comments related to the performance by the CFO. Sung-Wook Lee: Yes. So if we look at the third quarter this year, if you look at our performance, as you can see, there has been a lot of volatility. So overall, there were some one-off factors. And maybe I did believe that maybe touching upon these first would be appropriate. So of course, there was the inclusion of the insurance business, but also with regards to the preemptive provisioning, there were also some one-off factors there. So in the third quarter in total, if we look at the insurance business, of course, the profit increase is there. But in terms of risk management, there were a lot of efforts that we have made. So please take that into consideration and listen to what I have to say. So first on the insurance acquisition side, because of the bargain acquisition gains after we included the insurance business from July 1, we did the PPA. And as a result of that, there was a KRW 580 billion gain that we had recognized. And of course, for the past -- for the next 1 year, because of the accounting for that, there could be some adjustments to this. However, with regards to the adjustments for consolidation, there was a negative KRW 25 billion that was recognized. So at the end of the day, the bargain gain, in total, was around KRW 556 billion. So in addition to that, on the -- there was also a KRW 33 billion negative impact that was also reflect. And in the third quarter, for the completion-guarantee trust, there was also KRW 98 billion that we have recognized in terms of provisioning. So as a result of that, in total for this year, there was around KRW 200 billion that we have recognized. On the bank side, there are some areas in which there were collateral value decreases. And in light of that, there was some preemptive provisioning that we had did that was around KRW 54 billion. And recently -- there was some press reports about the situation. But with regards to KIKO there was a litigation in 2028, and the final results have came out, and there were some areas in which we lost. So there was a KRW 32 billion additional provision that we have set aside for that purpose. In addition, on the nonoperating side, related to the completion-guarantee trust, there was a significant provision that we have set aside. So therefore, for the goodwill, there were some impairment losses that we have also recognized of around KRW 39 billion. So in total, if you look at the overall impact of this, if you look at the bargain gains that we have enjoyed, and everything above that was on the operating business and others was on a nonoperating basis. So if we look at the net income basis, at the end of the day, there was one-off factors of around KRW 360 billion in total. So with regards to the completion-guarantee trust impact, there may be some small changes going forward, but we don't believe that there will be any significant provisioning that will be required. So I do believe that this is probably a question that you were very curious about. So I thought that it would be good to talk about this first before we went to the Q&A. Operator: [Operator Instructions] So for the first question will be from NH Securities. It will be Jung Jun-Sup. Jun-Sup Jung: There are 2 questions that I would like to ask you. So first would be that in the third quarter, because you did the insurance acquisition was completed, and I would like to know what the next phase is. So in terms of more efficient capital management, rather than being 2 separate entities, we believe that having it together and then also making sure that it would be a full subsidiary of the group as a whole. So with regards to the information that you can share with us, any more details that you could share would be appreciated. Second is that after the acquisition, if you look at the capital ratios, it still looks like their capital ratios are very sound. So even if it's not in the immediate future, but going forward, are there any M&A opportunities that you would be looking at in terms of interest areas? So maybe not in the immediate future, but even down the road, are there any areas that you would be interested in, in terms of M&A opportunities? Sung-Wook Lee: So thank you for your questions and maybe we can answer your questions. Yes. This is the CFO, Lee Sung-Wook. So first, in terms of the insurance, in terms of the merger and also the follow-up after the acquisition, I do think that this is an area that a lot of the investors are interested in. And also in terms of the Tongyang Life shareholders, they're also very interested in that also. So as of now, we did the -- and completed the acquisition as of July 1 for Tongyang and ABL Life. And since then, for the mid- to long-term direction, this is something that we're doing a diagnosis about in terms of the overall business operations. So for Tongyang Life, making it a 100% subsidiary or merging the 2 entities, this is something that we are still reviewing, but we have not made any decisions yet. And in addition, we do believe that it will require a bit more time for us to come to a conclusion. And in addition to that, whether we should make a 100% subsidiary or whether we will merge the 2, if there's any major decisions that are made, of course, we will make sure to disclose to and share to you. And in addition to that, we will look at the laws and regulations to make sure that everything is done according to the due process. Secondly, about your question about the M&A side. I think that this is something that we continue to talk about. But after the brokerage company, insurance company being added on, in terms of our business portfolio, we think that it has been completed. So over the mid to long term, I think that if you look in terms of focusing on strengthening the competitiveness of the companies that we have and also maybe expanding our presence, M&A could be an option. But right now, on the security side and insurance side, because we have been newly added, and we do believe that our overall business portfolio is complete. Right now, if there are any M&As that require capital, I think that being interested in -- rather than being interested in that, I think that we're more interested in strengthening our market competitiveness in the areas in which we're doing business already, particularly on the noninterest income side. So with regards to the nonbank businesses of securities and insurance companies, we want to strengthen that further. So that would be one of the main focus. And in addition to that, we will also continue to conduct our value program and also manage our risk-weighted asset and also conduct and successfully complete our Future Co-Growth Projects. So in the middle, I did talk about this during the presentation, but achieving the CET1 ratio of 13%, this was -- the target year was 2027, but we have accelerated that to 2026. So this is something that we are discussing with our directors. So by doing this and doing -- putting against our best efforts, we think that we can efficiently manage our capital and still also achieve the best outcome for the business. Thank you. Operator: The next question is by Baek Doosan from Korea Investment & Securities. Doosan Baek: Yes. I am Baek Doosan from Korea Investment & Securities. I also have 2 questions. The very first question has to do with the completion-guarantee project. I can see that it has been largely resolved. But in addition to that, I can see that there were still quite hefty preemptive provisioning. So taking that into consideration, I'd like to understand if there's any guidance in terms of the improvement going forward in terms of credit cost? And second, the Future Co-Growth Project that was launched and with regard to the funding, the plans that you have for key industries, this project in itself is a massive project. And therefore, in terms of capital ratio or noninterest income or corporate loans, I think that it will have an impact on all of these numbers. So we'd like to understand what are the plans? What's the forecast you have going forward? Unknown Executive: Yes. Thank you very much for the question. So please bear with us for just a moment as we get ready to answer your question. Jang-Geun Park: I am Park Jang-Geun, Senior General Manager from the Risk Management division. First, let me talk about credit cost. The third quarter credit cost increased by 3 bps to 52 bps. And that was already mentioned. In second quarter, KRW 86 billion for the trust and this quarter, KRW 98 billion, that was the provisioning in terms of managing our assets. And due to the sluggish economy in the sluggish construction sector, with regard to collateral loans at the banking sector, that was a total of KRW 54 billion of provisioning and one-off items amounted to KRW 152 billion. And therefore, the coverage rate also increased to 130%. So if we exclude these one-off items, the credit cost ratio is 42 bp. However, considering that there has been a delay in the rates -- the rate cuts, we believe that the cost -- the normalized credit cost will still be quite high. But we -- as mentioned, the completion-guarantee projects has been mostly resolved. So therefore, there wouldn't be any significant provisioning to follow going forward. And with regard to prime assets, especially in the banks, if we look at the corporate loans, we've been seeing a downturn in terms of new defaults in terms of corporate loans. Ever since 2024, we believe that there will be -- the impact of rate cuts is something that we are continuously monitoring at the Risk Management division. And in the future, with the economic boost, stimulus package with the government and with regards to the rate policy going forward, we believe that in the fourth quarter, credit costs will stabilize. So that is all for me. Sung-Wook Lee: Yes, this is the CFO, Lee Sung-Wook. And so with regards to the Future Co-Growth Projects, this is a very big project. I do think that with regards to capital and also in terms of the capital ratios, there may be some concern about such a situation. But with regards to this, maybe just elaborating a bit will help you out. So from us, we do want to transfer into providing more productive financing. So as of the end of September, we announced our future core growth project, and across the group for the next 5 years, there will be around KRW 80 trillion that we will be supplying and supporting. And so according to this project right now, in terms of the asset growth and the impact of this, this was all taken into consideration before we made the announcement to the market. So for the KRW 80 trillion across the 5 years, if you look at the impact on our risk-weighted assets, it will be around half. And on this, of course, how we can offset it against the capital ratio is probably an issue that you will be focusing on. And this year, if you look at the overall asset rebalancing efforts that we have made for the next 5 years, due to that, this is an effort that we will continue for the next 5 years. And in addition to that, because regulations are being eased at the financial authority side. And in addition to that, we also have a CET1 ratio target of 13%. So the trends that we see in our capital ratio was all taken into consideration before we formulated this plan. In addition to that, on the corporate loan side, we -- during the financial crisis, we have accumulated a loss. There's a very strong underwriting standards and price. So as a result of that, we do think that we can manage our capital ratio properly and still continue growth in this area. So within the year, I think that if you look at the capital ratio trends that we have seen, there has been an 80 basis point increase versus the end of last year. And this is even after the acquisition of the insurance arm. So we do think that we do have a credible trend that we are creating, and this is something that we have fully discussed with the BOD, and we will come up with our business plan accordingly. In addition, going forward, we will continue to also manage our loan balance through asset rebalancing and also manage the retail balancing side. So we're also planning to make other efforts. So for the shareholder value programs, this is something that we will continue to implement without issue and continue to provide total -- better total shareholder return. Operator: The next question is -- will be by Kim Do Ha from Hanwha Investment & Securities. Do Ha Kim: I have a question with regard to the acquisition. So when we had the acquisition ahead of us, you talked about the purchase -- market purchase gains is going to be utilized for a total shareholder return. And I believe that within a limit of 10% -- if it's within that, I've heard that the gains would be utilized for shareholder returns. So right now, we have around KRW 580 billion or so of gains and I would like to understand, would this be included in the shareholder return plan of this year? And I understand that the TSR will be maintained as such because rather than providing a dividend at year-end, after November, it could be in the treasury stock related plans that you may have? Or would it be something that would be utilizing next year? So if you can give us some more information on that, that would be great. And the second question is, around the world, these days, we've been witnessing security issues, hacking issues. So with regard to that, are there any investments being made right now to prevent or any cybersecurity-related prevention methods or plans that you have in place. Unknown Executive: Yes. Thank you very much for those questions. Please wait before we answer your questions. Unknown Executive: Yes. With regard to the bargain purchase gains, it's a total of KRW 580 billion and it's included in the net income. So in the first half, IR last year, based on our corporate value plan, in terms of our TSR, we've mentioned that we're putting our best efforts to have that included. And with regard to the insurance acquisition, the impact it has on the capital ratio, it was quite limited and minimized. But with regard to TSR, year-end, we have -- we want to see the CET1 and the overall financial volatility, and the TSR will be decided as such. And in the market, there are expectations, and we will try to cater to the expectations as much as possible, and we'll do our best to make sure that we can cater to those expectations. Thank you. Il-Jin Oak: I am Oak Il-Jin, CDO. So recently, there were major security-related issues at telcos and financial firms. And that's why there was a company to review across all subsidiaries, and there were no issues identified. Recently, there was, let's say, multi-authentication and security patches, terminal-related security issues. These were the shortcomings and we were able to understand that we were following all of the internal policy when it comes to security. And in addition to that, with regard to personal information and IT security, let's say, accidents. To prevent all this, what we've done was, in August until year-end, with security firm and the company, we will make sure to understand whether there are any loopholes. And for the recent 3 years, the government's investment into security is 11% when it comes to total IT investments. And it's 8.8% for financial funds and insurance firms. In the case of the U.S., it's 10.5% and it's higher than that at 11%. So with regard to information security investments, we will continue on to increase that portion in our investments. Operator: Yes, the next question is from HSBC, Won Jaewoong. Jaewoong Won: Amid a challenging environment, thank you for your strong performance. And there are 2 questions that I would like to ask you. The first question is with regards to an early retirement. So if we look at last year, we actually reflected into the first quarter of this year. So for this year's early retirement, would it be fourth quarter or would it be first quarter of next year? So if there any plans, if you could share that with us, that would be appreciated. So in terms of the CET1 assumptions or in terms of the overall profitability, it would be easier to assume or make the estimates. So if you could share the plans on this, that would be appreciated. And second, with regards to portfolio diversification, you have successfully acquired 2 insurance companies. And I do believe that you will properly manage this business going forward. But as far as I understand, the 2 insurance companies, after being acquired, next year in terms of the profit contribution, it will be 1% of the ROE. So that means that the overall contribution would be about KRW 300 billion. But up into the third quarter, if you look at the net income, right now, it has been around KRW 150 billion. So for ABL, I don't know what the third quarter numbers is. So I'm not 100% accurate, but I do think that it would be around this level. So do you think that it could be larger next year? And in terms of the bargain gains this year, it was around KRW 550 billion. So for next year, in terms of these gains, how much contribution do you think will actually be made on the net income line? So your thoughts on this topic would be appreciated. Unknown Executive: Yes, thank you for your questions. So maybe if you give us a few minutes, we'll answer your question. First, in terms of early retirement, in the case of last year, we actually did it in the first quarter of this year. And the reason why we did it that way is because it's based upon the agreement with the labor union. So therefore, there could be some difference of opinions. And as a result of that, that is why it was -- it took place in the first quarter. So right now, if you look at the discussions with the labor union that are ongoing right now, I think that it is something that we will have to see in terms of how it happens going forward. So it could be in December, it could be in January. But I think that because it needs an agreement, we will have to wait and see how it actually plays out. And with regards to insurance acquisition, as you have just mentioned, in 2025, if you look at most of the companies, their profits were very large. And then this year, also, there are some that are showing strong performance. But in terms of the K-ICS ratio or other product structures, I do think that with regards to the assumptions, there are some changes that are taking place. So this year, as we have continuously talked and mentioned, after the acquisition of the insurance business, the first thing that we have actually done is that we are doing a business investigation to look at how we can fundamentally change the competitiveness of the business in itself and it changes accordingly. So in 2026, we do think that, of course, there will be some profit contribution from the insurance side. But in terms of the K-ICS ratio, but on the capital side, we think that up and strengthening that up will be our top priority to make sure that the burden on the group from that would be minimal as small as possible. And also, we want to stabilize the organization. So in 2024, if you look at right now, there was around KRW 400 billion. And in terms of the percentage, it would be around KRW 300 billion in contribution that we would have seen. But for next year, we think that it would be difficult to reach that level in the net income side. So right now, in terms of priority, it will [ B2B ] the fixed ratio and the other sides. And then thereafter, I think that we could actually look at how we can expand our business going forward. So that have been said, so the ROE, 1%, is something that was based upon 2024. So though we will not go to that ratio, we do think that there will be a contribution that we will be able to see in full fledged manner from next year. Thank you. Operator: Next question will be by Jeong Tae Joon of Mirae Investment Securities. Tae Joon Jeong: Yes. I'm Jeong Tae Joon from Mirae Asset. I also have a question with regard to the insurance arm. So with regard to the profitability and as well as the interest cost and the securities, I can see that this has been reflected all separately in separate items. But in terms of net income and profitability, I'd like to understand what was the contribution in total this quarter? And it's similar to the previous question, where the bargain purchase gain was quite significant, more than expected. So then based on consolidation, it means that it's not as high based on consolidation. And that in terms of the contribution, it may be a bit difficult to book in it's significant absolute terms. But of course, I do know that the management diagnosis is still underway. But I think that if you can please give us a ballpark figure, it would help us better our understanding. Unknown Executive: Yes. Thank you for the question. Please wait. We will soon answer your question. Yes. So with regard to the income from the insurance arm, so we have investment income and insurance income. So all in all, if we combine the 2 companies, it is around KRW 70 billion to KRW 80 billion. And in terms of net income, it's around KRW 50 billion in terms of the contribution from these 2 firms. And in the future, with regard to adjustments from consolidation, that's how it would be booked. So in terms of insurance accounting, as was already mentioned, after the acquisition, within the insurance, there's an accounting that would follow, and there's also an accounting for the holding company because we went through the PPA process. So based on PPA, it will be a dual accounting, a dual booking. So in the future, we're going to run a simulation. And based on that, of course, it will all differ by year, but we believe that it will be around KRW 30 billion to KRW 40 billion annually, a positive, a plus KRW 30 billion to KRW 40 billion. So there could be some volatility or variances throughout the years. But based on our long-term simulation, we believe that there will be a plus KRW 30 billion to KRW 40 billion of contribution that can be booked. Operator: Yes, next question. In terms of the next question will be from Daishin Securities, Park Hye-jin. Hye-jin Park: Yes. And the question that I would like to ask you is that with regards to the [ bargain ] gains, I do think that there cannot help be a lot of questions. So with regards to the preliminary announcement of the PPA, and you said that for the next 1 year, there could be adjustments. So related to that, in terms of the adjustments that could take place, what would that actually be? So if there is an adjustment to that, I would like to understand what it would be in more detail. And the second would be with regards to the margin. So because of the asset rebalancing, I do think that the margins are being well defended. But with regards to the joint growth, you did say that you would continue such a situation. So for next year, in terms of margin, what is the outlook? And also lastly, for the securities side, also, I do think that there is probably some capital gains that you would have to actually conduct. So for those capital increases, what would be the outlook of that? Unknown Executive: Yes. Thank you very much. There are 3 questions that you have provided, and maybe we can answer your questions. Yes. With regards to the bargain gains, I do think that this is an accounting issue. So during the next 1 year, there is the room for adjustments to take place. So right now, for the first 3 years, there will be some refining. And then after that, that will be done. So if there -- we don't think that there will be a lot of fluctuation. But if there is any, then the main area is probably going to be and what we estimate, it would be with regards to some of the fines. So for example, that could be one of the items. But this accounting to the accounting standards, there is some that we have already reflected because we have made some assumptions there. So if that realizes, then we do think that, that would lead to some changes. But we don't think that there will be any big changes in itself. And secondly, with regards to the securities, this year, after being included into the group on August 1 and what we had actually invested into was manpower and also IT. And as a result of that, the SG&A had actually increased by KRW 50 billion. So in actuality, if you look at the net income as a result of that on a Y-o-Y basis, there was a slight increase, but not very significant. So this year, we do think that when we talk about productive financing, of course, we do think that securities arm will have a big role to play. And from next year in terms of the net income contribution also, we think that it will significantly contribute at a much higher level. So right now setting our targets, but we do think that on a Y-o-Y basis, it will be at a much higher level than what is contributing this year. So from next year, we do think that the overall growth level that we will be enjoying will be much larger. And then on the NIM, I think that for this year, there was a 3 basis point increase this year. And the biggest influence there was the asset rebalancing that we have done, some of the asset growth was more prudent. And in addition to that, the CET1 ratio was another area that we put a lot of attention to. So as a result of that, on the funding side, I think that we have a more favorable funding structure, and the funding cost also has gone down, which has led to the improvement in our net interest margin. So going forward, if you look at the NIM outlook, I think that, of course, we do believe that the benchmark rate will fall going forward. But for the NIM, if you look at the long-term rates, it's already something that is already priced into the market. So in the fourth quarter or whatever happens thereafter, even if rates are further cut, we don't think that, that will further decline the long-term rates. But this year was 1.45%. And then 2026, even if there are further rate cuts, we don't believe that the impact will be very large. And in general, we do believe that around 1.4% is something that we can maintain for NIM for the time being. Unknown Executive: Yes. Thank you. I believe that there are no more questions. So let us now respond to the questions that were posted on the website this quarter. From the 13th to the 24th of October, we received questions via our website. And in addition to our performance, AI, TSR, there are many questions across a number of domains. And we will exclude the redundant questions, but -- and 2 questions that were not addressed as of yet. One has to do with the total return on the dividend-related policy and also with regard to AI services. So with regard to the nontaxable dividend, the CFO will respond, and the CDO will respond to the second question. Sung-Wook Lee: Yes. So first, with regard to the nontaxable dividends and during the AGR in March, we've talked about the KRW 3 trillion that has been written back. So from the '25 dividend or retained earnings, that's when we will start to provide the dividend. So based on our corporate value of plan, we will engage in buybacks, cancellations and actively engage in shareholder return. So within -- in 2025, improving the CET1 by 80 bps to improve the TSR was the planned action taken. So we have continued on to engage in buyback and cancellation of treasury stock, and we have put in our best efforts to enhance shareholder return. And going forward, we will continue on to improve the CET1 and engage in our corporate value of plan and putting our best efforts to maximize shareholder return. Thank you. Il-Jin Oak: I'm Oak Il-Jin, CDO. So with regard to the AI services, Woori Financial Group, for our customer and for our employees, for the first time we've launched many services. And already, we -- based on Gen AI, we've actually launched our deposit-related products. And right now, we do have mortgage loans. And also, we have -- we will be expanding our AI advisory when it comes to real estate-related plans and loans. And at last year-end, we launched Woori TPT. And we actually see an accuracy rate of 90% plus for even complex jobs and work. And starting from the second half of this year, our focus, particularly would be on AI agent. So we want to enhance the productivity of our employees by utilizing the AI agent. Internally, when it comes to corporate loans and RM support, especially 5 domains that we have pinpointed in order to introduce the AI agent. It has been already been laid out. And starting from early next year and in the first half of next year, we are going to particularly engage in Phase 1 for work that can apply this immediately. And then moving forward, we're going to engage in a number of innovative product launches when it comes to Gen AI, especially for productive finance, especially for corporate loans, especially auto underwriting and in terms of reducing default amongst, let's say, high default rate borrowers, we are going to make sure that we can provide accurate and timely due diligence and underwriting utilizing AI. So basically, it's about utilizing AI agents to enhance productivity, and we're going to reengineer our work process so that we can make full use of this technology. Thank you. Sung-Wook Lee: Yes, I am the CFO. And with regard to the overall earnings, I would like to share with you the prospects, especially for 2026. But before that, in 2025, what we've done in terms of our business portfolio is the workforce IP system for the securities arm, acquisition of the insurance arm to complete our portfolio. So in terms of overall completeness of our business, we do have the nonbanking, including asset trust where it was about focusing on preemptive provisioning, completing all that. And then also, we have been able to significantly improve CET1 in 2025. So with regard to future growth and to enhance corporate value, I believe that this was a pivotal year in terms of making sure of putting in place the foundation. And we'll make sure to manage our asset quality in the remainder of the year. In terms of 2026 in the case of the nonbanking sector, as was already mentioned, the insurance acquisition impact will kick in, in earnest. In terms of the security side, we'll be seeing increased sales from that side. In the case of the existing nonbanking, it would be about preemptive risk management, which will lead to better performance and earnings. So in terms of the nonbanking operations, we will -- and we expect significant improvement in performance. And in terms of banking sector, this year, we've been getting an aggressive asset rebalancing, and a preemptive risk management foundation has been in place, which will enable a stable revenue. And in terms of the productive finance, we'll be expanding upon that to actively grow upon that. But when it comes to capital ratio as well as asset quality ratio, we're going to make sure that we maintain this stably, so that we achieve the ratio numbers. And with regard to our value of plan and our shareholder return plan, we'll do our best to make sure that we implement the plans that have been laid out. Thank you very much. Operator: Yes. Thank you. And this brings us to the end of Woori Financial Group's Third Quarter of 2025 Earnings Presentation. If you do have any further questions, please call the IR department, and we'll make sure to entertain your questions. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Good day, and thank you for standing by. Welcome to the Third Quarter 2025 OGE Energy Corp. Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jason Bailey. Please go ahead. Jason Bailey: Thank you, Kevin, and good morning, everyone, and welcome to our call. With me today, I have Sean Trauschke, our Chairman, President and CEO; and Chuck Walworth, our CFO. In terms of the call today, we will first hear from Sean, followed by an explanation from Chuck of financial results. And finally, as always, we will answer your questions. I'd like to remind you that this call -- this conference is being webcast, and you may follow along at oge.com. In addition, the conference call and accompanying slides will be archived following the call on that same website. Before we begin the presentation, I'd like to direct your attention to the safe harbor statement regarding forward-looking statements. This is an SEC requirement for financial statements and simply states that we cannot guarantee forward-looking financial results, but this is our best estimate to date. I will now turn the call over to Sean for his opening remarks. Sean? R. Trauschke: Thank you, Jason. Good morning, everyone, and thank you for joining us today. It's certainly great to be with you. We again delivered strong results in the third quarter, and we remain on track to deliver on our commitments. This morning, we reported consolidated earnings of $1.14 per share, including electric company earnings of $1.20 per share and a loss at the holding company of $0.06. Our solid performance is driven by continued operational excellence, laser-like focus on the customer and constructive regulatory outcomes. As we head into the remaining 2 months of 2025, we remain confident in our plans to deliver in the top half of our earnings guidance range. As you know, on the regulatory front, we have a preapproval request in Oklahoma and expect an order in a few weeks. This will allow us to move forward with building 450 megawatts of natural gas generation, which should be operational by 2029. As a reminder, we have approximately 550 megawatts of combustion turbines under construction now, which will be operational next year on time and on budget. When Horseshoe Lake Units 13 and 14 come into service in 2029, we will have added approximately 2,000 megawatts over an 11-year period, and we anticipate more to come. When filing the preapproval case, we indicated that this was the first step of many. In the filing, we updated our integrated resource plan, which showed we are still solving for our customers' future generation needs. We are now negotiating with existing bidders from the remaining from the last RFP, and we anticipate issuing more RFPs in future filings to address our customers' needs. We notified Oklahoma customers this week that they will see a decrease in their monthly bill with a reduction in the fuel cost adjustment beginning November 1. The average residential customer bill will be approximately $6.75 lower per month. Our customers benefit from OG&E having some of the lowest rates in the nation. We understand the competitive advantage our low rates offer, and it's one reason our demand has grown so consistently year-over-year. We do everything we can to ensure our rates remain low in the future so that we can sustain the growth of the company and the communities we serve. While the electric power industry is entering an exciting new era, OG&E is uniquely positioned at the forefront. We've been experiencing load growth that far surpasses national trends and data center load will certainly be incremental to our already strong load growth. At the heart of that growth for OG&E is affordability. It's not a new concept to us. It's key to our community success and central to our planning as we move ahead. Over the past decade, we've delivered a 6% EPS CAGR, which is great news for our investors. Equally important for our customers, it's worth highlighting that our nonfuel rates have increased at less than half the rate of inflation during this time. In a period when the cost of living continues to rise, we focused on what we can control, helping our customers and communities manage costs while supporting growth and reliability. As we build on our strong growth and performance, we experienced growing interest in our service area from data centers. Negotiations and conversations are progressing, and we hope to have something to share in the near future. Turning to economic development. We continue to see diversified business growth, including commercial and industrial. And just a couple of weeks ago, we celebrated the grand opening of a major expansion project for plastics manufacturer, which added 4.5 megawatts of load and created hundreds of jobs in Shawnee, Oklahoma. Our economies remain strong with unemployment in Oklahoma and Arkansas continuing to outpace the national average. For the 48th straight month, Oklahoma City unemployment rate is below 4% and Oklahoma's overall job growth is driven by gains in education, health care and construction. The Council for Community and Economic Research ranked Oklahoma City as the most affordable among large cities in the U.S., a competitive advantage for continued growth. And our rates are a factor in keeping Oklahoma and Arkansas consistently ranked high for affordability. As I close, I want to emphasize that the business is doing very well. We've just completed another strong quarter, and I'm excited about the future. We remain confident in our ability to deliver on our commitments while continuing to grow the business. And as I mentioned, we have many positive updates to share in the quarters ahead. Thank you. I'll now turn the call over to Chuck. Chuck? Charles Walworth: Thank you, Sean, and thank you, Jason, and good morning, everyone. We're 3 quarters through the year, and our steady execution positions us to deliver results in the top half of our 2025 earnings guidance range. It's our execution that will lead us to continued long-term success. I'm excited to review our financial performance with you today. Starting on Slide 5. For the third quarter, consolidated net income was $231 million or $1.14 per diluted share compared to $219 million or $1.09 per share last year. In our core business, the electric company achieved net income of $243 million or $1.20 per diluted share compared to $225 million or $1.20 per share last year. The main driver of the year-over-year increase in net income was increased recovery of capital investments. Milder weather this summer compared to last year and higher O&M and income taxes partially offset the increase. The holding company reported a loss of $12 million or $0.06 per diluted share compared to a loss of $6 million or $0.03 per share last year. The change was primarily attributed to higher income -- interest expense, partially offset by an income tax benefit. Let's turn our attention to our 2025 financial plan update on Slide 6. Year-over-year customer growth continued its healthy multiyear pace and was just under 1% in the third quarter. Our weather-normalized load growth was historically strong once again at 6.5% through the third quarter compared to the same period last year. We expect total retail normalized load growth of approximately 7.5% in 2025. Our execution keeps us firmly on plan to deliver on our consolidated earnings commitment. We continue to expect to be in the top half of 2025's earnings guidance range. Sean discussed how our local economies and communities are strong and our intentional efforts around economic and business development provide important support for growth. In each quarterly update, we highlight how our sustainable business model works by attracting new customers to our service area with low rates and reliable electric service, helping our communities to grow and prosper. We've updated our capital plan to include the Fort Smith to Muskogee transmission line, which will address reliability and capacity issues in the Fort Smith, Arkansas area. This $250 million project is planned to go into service in 3 phases in 2027, '28 and '29. This higher voltage line will be primarily recovered through our FERC formula rate, and we have received approval to utilize CWIP recovery during construction of the project. The updated capital plan is included in the appendix. Our financial position remains strong. Our balance sheet is one of the strongest in the industry and is an important competitive advantage, one we are committed to maintaining. We have requested CWIP recovery on Horseshoe Lake Units 13 and 14. The use of CWIP has important dual customer benefits; first, by reducing the long-term cost to customers; and second, by supporting the balance sheet during the construction phase of projects. As I close, let's review our guiding financial objectives. As we grow the company, we will maintain our competitive low rate advantage by focusing on our cost structure, minimize the time between investments and the return and recovery and grow the company by maintaining a highly credible total return proposition for our shareholders. We've made great progress so far this year. Our steady execution keeps us on track to deliver in the top half of this year's guidance range. Our load growth remains historically strong. We've reached a settlement with a number of parties in the Oklahoma preapproval request. If approved, we will move our planned Oklahoma rate review from the end of this year to the second half of next year, and we will continue to assess the timing of the next rate review in Arkansas. We've updated our capital plan for the Fort Smith to Muskogee transmission line. Additional updates to our capital and financing plans will follow a determination in the preapproval case. And finally, our results keep us as confident as ever in our ability to achieve a consolidated earnings growth rate of 5% to 7% based on the midpoint of our 2025 guidance. The strength of the current year's plan allows us to focus on the future, address our customers' expectations of a safe and reliable system and to deliver power at some of the lowest rates in the nation. As always, the foundation of our success is grounded on the dedication of our employees and their ability to get the job done. That concludes our prepared remarks, and we'll now open the line for your questions. Operator: [Operator Instructions] Our first question comes from Shahriar Pourreza with Wells Fargo. Constantine Lednev: It's actually Constantine here for Shar. That's great to be back. Maybe starting off on the CapEx needs. We have the $250 million update today. And as we're building to the fourth quarter update, kind of with the pre-approval settlement out there and another 800 megawatts in the IRP, how quickly do you think those elements start rolling into plan? And is there kind of any acceleration in the RFP process that you're seeing kind of to address some of those needs? R. Trauschke: Yes. Thanks, Constantine. This is Sean. I like that characterization there of rolling. I think that's how we're thinking about it. We're anticipating this approval for -- under the preapproval in a couple of weeks here, and then we're going to layer that in there. And then we're probably going to make some additional filings, as I mentioned in my remarks, with -- coming out of the last RFP. We'll make that filing. When we get approval for that, we'll layer that in there. We'll probably commence a new RFP to kind of continue down that road. And so I think your characterization of rolling, I think you should just consider it a continuous flow of updates. Constantine Lednev: Okay. So versus kind of the fourth quarter that we've typically seen, we should expect more periodic updates, right? R. Trauschke: Yes. You'll see -- I mean, you'll see the normal update in the fourth quarter that should improve the approval of the last filing and it include the customary updates we always do. And then in addition to that, these generation adds, we'll add those as we receive approval. Constantine Lednev: Okay. Perfect. And in terms of the new regulatory constructs kind of that are in place now, how significant is the impact on that ROE lag, if you can quantify it at all? And do you anticipate including some of these benefits in '26 planning assumptions? Charles Walworth: Yes. Constantine, it's -- I think we've always had a really good track record on minimizing lag on earned ROE. So this is obviously just accretive to that. You can see some of those impacts as disclosed in our 10-Q today in terms of some of those benefits, and we'll definitely lay that out whenever we come up with guidance for next year. Constantine Lednev: And just the last one related to kind of that '26 update, kind of given the ramp schedules for that C&I load, do you see the '26 load growth being higher than your planning assumptions as you roll into that year? Charles Walworth: We'll bring you a full update in February. But clearly, we don't see any changes in the fundamentals that are driving the results that we see in our service area. But we'll address that fully in our February call. Constantine Lednev: Right, okay. And year-to-date has been healthy, so... Operator: Next question comes from Julien Dumoulin-Smith with Jefferies. Brian Russo: It's Brian Russo, on for Julien. Just it's nice to see you add the SPP project to the CapEx. Could you maybe talk about the upcoming 2025 SPP ITP plan? I think there are expectations that it could be nearly double the 2024 plan. And I was just curious, it seems as if Oklahoma is one of the faster-growing states in SPP. So I'm just wondering what your competitive position is there to pursue more projects like the one you just added to CapEx. Charles Walworth: Yes. Brian, this is Chuck. It's obviously something that we're very closely involved with our team at the SVP in that process. Yes, you're right. I think that they're looking at a pretty robust plan, but there's still a couple of milestones, a couple of SPP Board meetings that, that's got to go through before we really have something that we can give you a firm idea as to what the opportunity set really looks like. So it's an exciting area, I think, but more to come. Brian Russo: Okay. Great. And then I think as part of the pre-approval settlement filing, you plan to file a large load tariff with your next rate case. I was just curious, I assume that the contract negotiations are still going on with the Google Stillwater project. R. Trauschke: Yes. I think that was the requirement in the settlement to file that large load tariff. But to the extent that we've finalized an agreement before then, we'll file it then. Brian Russo: Okay. Great. And then lastly, is the new load growth outlook of 7.5% for 2025, is that now at the low end of your prior range? Just wondering what's driving that. Charles Walworth: Yes. So you're right. But as we've said kind of all along, some of these loads that we have are a little chunky and the timing can kind of -- it's really hard to nail it down, whether it's the start of this quarter, the beginning of next quarter. And so we've got a little bit of timing going on there. We have one customer in particular that's coming in about a quarter later than anticipated. So just really mainly a timing issue. Operator: Our next question comes from Stephen D’Ambrisi with RBC Capital Markets. My apologies -- I apologize. Stephen D’Ambrisi: That's all good. That's all good. R. Trauschke: We're going to enjoy that one for a while. Stephen D’Ambrisi: I know you will, Sean. I know -- it couldn't happen on a better call. I'm not going to lie... Charles Walworth: Welcome back. Good to hear from you. Stephen D’Ambrisi: Good to hear from you too. Appreciate you guys let me on. Yes. So just quickly, a follow-up on how you guys are going to meet the 850-megawatt shortfall or capacity need that you have by 2030. Just when I'm thinking about where -- I think you have some of the RFP results still outstanding, but they feel like they might be a little stale now at this point. And I know you're ongoing -- you have discussions ongoing. But do you think it's likely that you can get material capacity out of the prior RFPs? Or do we have to run new RFPs to really make up most of that capacity deficit? And then just like how long does that take to run a new RFP? Like what's the timing around announcements there? R. Trauschke: Yes. So great question. And so the answer to your first question, yes, we do believe we have some capacity opportunities in the current RFP. And yes, we will file a new RFP to kind of meet this need. And this -- that 800 megawatts you referenced there, that largely depends on the ramp rate of "this customer X" that we disclosed in the IRP. And so that's kind of a give or take number 2 in terms of how quickly or how slowly, you get to that number in 2030. But nevertheless, I think it's an answer of yes to both those questions. Yes, we're going to get some out of that last RFP. And yes, we're going to file a new RFP. And I would expect that the second RFP to move along at a quicker pace. We've kind of got it nailed down now, and I think everybody understands the rules. Stephen D’Ambrisi: Okay. That makes a lot of sense to me. And then just on the -- you covered the sales growth well. I kind of figured that it was timing. But just like -- just looking at where you're at year-to-date, I think sales growth is 6.5% year-to-date and you're still guiding to 7.5%. So I mean that implies a significant acceleration right into the fourth quarter. And then just, I guess, how does that set us up for sales growth into 2026, right? Because effectively, you're delaying customer. So all things equal, it should drive higher sales growth year-over-year into the back -- into next year? Charles Walworth: Yes, Steve, I think your points are right. I mean we've seen this chunky growth before and how that can impact any particular quarter on an outsized manner. And obviously, you can kind of do your own math as to how that plays in the future years. But again, we'll be prepared to thoroughly discuss that with you at the next call. Stephen D’Ambrisi: Okay. That's all I had. I hope you guys get a kick out of that. I'm glad that it's going to be kept forever on the Internet. So love that... Operator: [Operator Instructions] Our next question comes from Chris Hark with Mizuho. Chris Hark: I just had a question regarding the dividend growth rate. Should we be expecting that to be in line with the EPS CAGR? Charles Walworth: Yes, Chris. So we've been very intentional about the dividend growth rate really in relation to the opportunity set that we've had for investments. So the past several years, we have kind of bifurcated the rates of those 2 with the dividend growing a little lower, and we're basically targeting growing into a 65% to 70% payout ratio. And so we're well on our way to getting to that target. And once we get to that target, we'll kind of reassess where we are versus, again, the opportunities that we have out there and make that capital allocation decision at that time. Chris Hark: Okay. Awesome. And then next question I had was really just around the cadence of rate filings. So if you push that back to second half of '26, should we be expecting that kind of similar time of year for the next 2 years through the 2-year period off the forecast period? Charles Walworth: Yes. I guess I would say that really nothing has changed. Our philosophy maintains to be the same as it was. But clearly, this was part of the give and take of the negotiations for settlement agreement. So yes, we -- if approved, we would shift that forward per the terms of the settlement agreement. But I think going forward from that, we would still be operating under the same philosophy that we have been. Operator: Our next question comes from Aditya Gandhi with Wolfe Research. Aditya Gandhi: Can You hear me? Just maybe starting with the CapEx increase to your plan, the $250 million. Chuck, you've been clear that any capital increases will have an equity component to it and recognize that you'll sort of communicate your financing plans with the Q4 update. But are you willing to share sort of a rough rule of thumb for this $250 million? Should we assume it's 50-50, lesser than that? Just any color there? Charles Walworth: Yes. Aditya, I think the plan remains the same. We thought it was only right to go ahead and roll this project in now since it's signed up. But with the -- really the biggest of the increase still pending out there, we're going to hold and get approval on that, and then we'll give you that clarity that we've been describing all along. Aditya Gandhi: Got it. And then maybe just one on the data center front. Sean, you mentioned in your prepared remarks that you sort of hope to share updates soon or sort of in the coming quarters. Can you maybe give us more color on sort of what stage of discussions you're in? Is it reasonable to say that the discussions are at advanced stages now? And then can you just remind us how any potential announcement you make on the data center front would interplay with a special contract or data center tariff filing at the commission? And then how you sort of serve the capacity needs associated with any potential data center customer? R. Trauschke: Yes. There's a lot in there. I think it's fair to characterize that we are in very serious negotiations. And I think my prepared remarks were optimistic that we would be in a position to announce something soon. In terms of the filing, yes, there would be some sort of announcement, and we would certainly follow that up with some sort of filing with the commission for approval of all that. So I think that's normal and customary. In terms of your question about the capacity, how we'll fill that need. In our last IRP, we did provision for that and been thinking about that. Again, a lot of that goes back to kind of how the counterparty contemplates a ramp rate and what they're thinking in terms of that, in terms of meeting that capacity obligation, but I feel confident we're going to be able to meet that. Operator: [Operator Instructions] Our next question comes from Nicholas Campanella with Barclays. Nicholas Campanella: I just have one question. If you roll in the pre-approval generation and data center and the possible data center deal, how would that really increase your long-term EPS CAGR? Or are you just more confident in the 5% to 7% range? Charles Walworth: Yes, I think all along, we've been looking at our 5% to 7% is in solid shape regardless of this deal or any other deal. And our philosophy really is that we take a good look at where we are every year before we put guidance out. And kind of like this year, we might choose to alter the trend line from the previous year, so to speak, and address it in that manner. So I think that's really more indicative of the philosophy that we have and the way that we've treated it in the past. So hopefully, that gives you a little color as to how we're thinking about it. Operator: And I'm not showing any further questions at this time. I'd like to turn the call back over to Sean for any further remarks. R. Trauschke: Okay. Thank you, Kevin. Well, thank you all for joining us today. I hope everyone has a great day and look forward to seeing everyone soon. Jason Bailey: Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect and have a wonderful day.
Operator: Good morning. My name is Carrie, and I will be your conference operator today. Welcome to the New Gold Third Quarter 2025 Earnings Call and Webcast. [Operator Instructions] Please be advised that today's conference call and webcast is being recorded. [Operator Instructions] I would now like to hand the conference over to Ankit Shah, Executive Vice President and Chief Strategy Officer. Please go ahead. Ankit Shah: Thank you, operator, and good morning, everyone. We appreciate you joining us today for New Gold's Third Quarter 2025 Earnings Conference Call and Webcast. On the line today, we have Patrick Godin, President and CEO; Keith Murphy, CFO; Travis Murphy, Vice President, Operations; and Jean-Francois Ravenelle, Vice President, Geology. In addition, we have Luke Buchanan, Vice President, Technical Services, available to assist during the Q&A portion of the call. Should you wish to follow along with the webcast, please sign in from our homepage at newgold.com. Before we begin the presentation, I'd like to direct your attention to our cautionary language related to forward-looking statements found on Slide 2 of the presentation. Today's commentary includes forward-looking statements relating to New Gold. In this respect, we refer you to our detailed cautionary note regarding forward-looking statements in the presentation. You are cautioned that actual results and future events could differ materially from those expressed or implied in forward-looking statements. Slide 2 provides additional information and should be reviewed. We also refer you to the section entitled Risk Factors in New Gold's latest AIF, MD&A and other filings available on SEDAR+, which set out certain material factors that could cause actual results to differ. In addition, at the conclusion of the presentation, there are a number of end notes that provide important information and should be reviewed in conjunction with the material presented. The third quarter was an impressive one for New Gold, and Slide 4 highlights some of the key quarterly accomplishments. We had an excellent quarter operationally with both production and costs making big improvements compared to the second quarter. This was highlighted by Rainy River's record quarterly production of over 100,000 ounces of gold, a 63% increase over the second quarter. At New Afton, B3 continued to overperform during the third quarter, while C-Zone remains on track to ramp up to full production in 2026. We remain well positioned to deliver on our 2025 guidance objectives we outlined at the start of the year. Importantly, these impressive quarterly results were achieved while maintaining focus on safe production with a low total recordable injury frequency rate of 0.61, down from 0.82 in the second quarter and continuing the downward trend over the last 3 years. During the quarter, New Afton surpassed 1 million hours and Rainy River surpassed 1.5 million hours worked without a lost time injury, marking a significant safety milestone at both sites. On a consolidated basis, the company produced approximately 115,200 ounces of gold and 12 million pounds of copper in the quarter. All-in sustaining costs reduced from the second quarter by $425 an ounce to $966 per ounce. With an average realized gold price of $3,458 per ounce, this represents an impressive all-in sustaining cost margin of $2,492 per ounce. We expect all-in sustaining costs to reduce further through the fourth quarter. The company generated more than $300 million in cash flow from operations and achieved a record quarterly free cash flow of $205 million, highlighted by Rainy River's quarterly record of $183 million in free cash flow. The balance sheet was further strengthened in the quarter as we repaid a total of $260 million in debt, including the $150 million drawn on the credit facility earlier this year as part of the New Afton buyback, and this was repaid 1 quarter ahead of plan. The company continued to advance initiatives aligned with our 3-year production growth and accomplished several key milestones during the quarter. At New Afton, C-Zone cave construction is approximately 79% complete, supporting the progressive increase in processing rates towards the target of 16,000 tonnes per day by early 2026. At Rainy River, the focus remained on increasing underground development and production rates, which Travis will speak to shortly. Lastly, our exploration initiatives made significant progress as outlined in our September news release, highlighted by the significant growth in New Afton's K-Zone and the ongoing exploration activities at Rainy River to offset mining depletion. In summary, we had a strong quarter, and we built on the results from the first half of the year, all on maintaining focus on generating meaningful value for our shareholders. With that, I will now turn the call over to Travis. Travis Murphy: Thank you, Ankit. I'm on Slide 6, which has our operating highlights. As Ankit noted, Q3 delivered strong production and costs. Production totaled approximately 115,200 gold ounces and 12 million pounds of copper. This increase in gold production compared to Q3 2024 was driven by planned higher feed grade at Rainy River, partially offset by lower planned feed grade at New Afton. Consolidated all-in sustaining costs for the quarter were $966 per gold ounce on a byproduct basis, 19% lower than Q3 2024 and a substantial improvement over the first 2 quarters of 2025. Costs are expected to continue to trend down in the fourth quarter. At New Afton, the B3 cave continued to overdeliver compared to the plan set out at the beginning of the year. As a result, New Afton achieved an all-in sustaining cost of negative $595 per ounce after considering copper credits. Rainy River delivered a strong quarter, a record quarter as the mill processed higher-grade open pit ore. All-in sustaining costs were $143 per ounce in the quarter, a substantial 39% improvement compared to the second quarter. Costs should continue to trend lower in the fourth quarter with lower sustaining capital. Our total capital expenditures for the quarter were approximately $76 million with $19 million spent on sustaining capital and $56 million on growth capital. At New Afton, sustaining capital is primarily related to mobile equipment, while growth capital is primarily related to construction and growth mine development, tailings and machinery and equipment. At Rainy River, sustaining capital is primarily related to open pit stripping and the tailings dam raise, while growth capital is related to underground development and machinery and equipment. Turning to the assets, starting with New Afton on Slide 7. New Afton delivered another quarter on plan. B3 contributed approximately 4,300 tonnes per day during the quarter. The additional tonnage from B3 above and beyond the previously planned April exhaustion continues to provide excellent shareholder value as it comes with no additional capital. We expect the B3 cave will now exhaust in the middle of the fourth quarter as the current contribution has reduced down to around 1,500 tonnes per day. Annual copper and gold production is expected to be in line with the guidance profile previously provided. During the third quarter, New Afton generated over $30 million in free cash flow while continuing to complete the construction of the C-Zone block cave. Through the first 9 months of 2025, New Afton has generated $115 million in free cash flow. In terms of development, C-Zone cave construction continues to advance on schedule with cave construction progress at 79% complete as of the end of September. C-Zone remains on track to ramp up to full processing capacity of approximately 16,000 tonnes per day beginning in 2026. Now turning to Rainy River on Slide 8. Gold production in the third quarter was 100,300 ounces of gold at an all-in sustaining cost of $1,043 per gold ounce sold, an increase -- a 63% increase in gold production and a 39% decrease in AISC compared to the second quarter. This excellent performance was driven by processing higher grade open pit material in addition to processing and pouring the 5,900 ounces of gold in circuit as discussed at the end of the second quarter. The mill continued to perform well with quarterly throughput averaging over 25,100 tonnes per day. Following the impressive third quarter results, Rainy River gold production is now expected to be above the midpoint of guidance of 265,000 to 295,000 ounces of gold. As a result of the strong Q3 results, Rainy River generated a quarterly record $183 million in free cash flow. As Ankit mentioned, progress was made during the quarter in advancing underground operations with a focus on increasing underground development and production rates. We undertook a number of key initiatives during the quarter, specifically designed to improve recruitment and retention of our people and contractors. These include camp facility upgrades and travel improvements. They also included contract modifications to incentivize and reward optimized development rates. While this has led to an increase in cash costs and certain growth capital items related to the underground, it is a significant step forward in securing the production growth expected in the coming years. We are seeing improvements in the continued ramp-up in daily underground development rates, which we expect to build on through the fourth quarter. To sum up, we made excellent progress in the third quarter and remain on track to deliver our 2025 production and cost goals as well as longer-term objectives. And with that, I'll turn it over to Keith. Keith? Keith Murphy: Thanks, Travis. The financial results can be found on Slide 10. Third quarter revenue was $463 million, higher than the prior year quarter due to higher gold and copper prices and sales volumes. Cash generated from operations before working capital adjustments was $296 million or $0.37 per share for the quarter, higher than the prior year period, primarily due to higher revenues. New Gold generated record quarterly free cash flow of $205 million as higher revenue was only partially offset by higher capital expenditures as key growth projects were advanced. The company recorded net earnings of approximately $142 million or $0.18 per share during the third quarter. The increase in earnings for the quarter and year-to-date is primarily due to increase in revenues, partially offset by higher share-based payments due to the increase in the company's share price. Year-to-date, this has also impacted our consolidated all-in sustaining costs by approximately $75 per gold ounce. After adjusting for certain other charges, net earnings was $199 million or $0.25 per share in Q3. Our Q3 adjusted earnings include adjustments related to other gains and losses and nonrecurring items. Turning to our balance sheet on Slide 11. At the end of Q3, we had cash on hand of $123 million and a liquidity position of $500 million. In July, we redeemed the remaining $111 million of the 2027 senior notes paid for with cash on hand. During the quarter, we also repaid the full $150 million, which was drawn on the credit facility to fund the New Afton buyback transaction announced back in April. This was 1 quarter ahead of plan. To sum up, we remain in a very healthy financial position with a significant free cash flow profile ahead of us. With that, I'll turn the call to Jean-Francois to discuss exploration. Jean-Francois Ravenelle: Thanks, Keith. I'd like to touch on our exploration successes that were released during the quarter. Exploration at New Afton continues to be at an all-time high. We currently have 9 drills turning at K-Zone as we work to define and grow the deposit. We recently increased our exploration budget by $5 million, as previously announced, bringing us to a full year budget of $22 million for approximately 63,000 meters of drilling. We also reported 2 significant exploration highlights at New Afton. First, in addition to confirming the width and the continuity of previously reported mineralization at K-Zone, we have discovered additional mineralization in the footwall of the zone, which has more than doubled the known extent of the system. The system now reaches an impressive 600 meters in strike length and 900 meters in vertical extent with the horizontal thickness locally reaching up to 180 meters. Secondly, exploration drilling conducted from surface intersected C-Zone grade copper gold mineralization located 550 meters to the east of the current K-Zone footprint. As shown on Slide 13, Borehole 596E intersected 1.1% copper equivalent over 55 meters of core length, demonstrating the high potential for further growth in the eastern sector of the mine. We are continuing to work towards the maiden resource at K-Zone for end of year. Following that, we will work towards completing a feasibility study for the first half of 2027. Moving on to Rainy River on Slide 14. The exploration strategy at Rainy River remains focused on sustaining the recent success in mineral reserve replacement. At the Northwest Trend open pit zone, which is located immediately west of the Phase 5 pushback, our drilling programs are expected to grow and upgrade the existing pit-constrained resource to the indicated category. Engineering studies are currently underway to evaluate potential mineral reserves. At Underground Main, exploration drilling focused on converting inferred resources to indicated resources while growing the existing ore zones down plunge and along strike, targeting the highest grade ore zones that can provide additional mining flexibility and further improve the production profile. Concurrently, engineering studies are advancing to support conversion of underground resources to mineral reserves. Looking forward, the next phases of drilling to be conducted in 2026 and 2027 will benefit from future underground platforms, which are expected to accelerate resource and reserve development over that period and beyond. In addition to growing the surface and underground footprints, we own a significant land package that has remained largely underexplored. This year, we plan to invest approximately $2 million to initiate the identification of additional exploration opportunities over our 31,000 hectare land package. With that, I'll turn the call to Pat for closing remarks. Patrick Godin: Thank you, Jean-Francois. As I have said previously, we expect continued and significant growth in gold and copper production over the next 2 years. Third quarter performance was an excellent indication of our potential production and free cash flow generation in the years ahead. As production volume increase, the unit cost per ounces of gold is projected to decrease subsequently. As a result, we continue to expect to generate significant free cash flow over the next 2 years. We have left the pricing for this figure unchanged since the start of the year. It shows that we generate approximately $1.8 billion of free cash flow over that period. For 2025, we expect to beat the high end of this projection and with rising production and current spot price, the 2026 and 2027 free cash flow generation substantially above those outlined in this figure. In closing, the third quarter was really positive for New Gold as we continue to deliver on our stated strategic goals. We will continue to build on these goals from here. This includes delivering on 2025 production and cost guidance with the same attention to health and safety. Our continuous improvement with our total reportable incident frequency rate performance is a direct indicator of the support from all my teammates from the courage -- for the courage to care culture. At New Afton, we will ramp up C-Zone and continue our aggressive exploration program at K-Zone with the goal of releasing a maiden resources in early '26. At Rainy River, we will continue to ramp up the underground mine and advance Phase 5 open pit development, and we will continue our exploration efforts targeting offsetting mining depletion. New Gold offers a compelling investment opportunity with increasing production and significant free cash flow generation combined with our safe, well-established mining jurisdiction, increasingly compelling exploration upside and exposure to what we view our preferred metal in gold and copper. We are confident in our ability to deliver additional upside from here. We'll continue to build from here, both operationally as well as with project and exploration catalysts, which are expected to create meaningful value for our shareholders and provide increased financial flexibility and optionality for New Gold moving forward. This completes our presentation. I will now turn it back to the operator for the Q&A portion of the call. Operator: [Operator Instructions] Your first question will come from Anita Soni with CIBC. Anita Soni: A couple of questions. So firstly, on the New Afton C-Zone and B-Zone. Can you give us a breakout of how much came from the C and the B in terms of tonnes? Patrick Godin: From tonnage, the B-Zone contributed 4,300 tonnes per day over the quarter and C-Zone contributed the remainder of the tonnage there, Anita. Anita Soni: Okay. All right. And would it be possible to also find out what the grades were for those? Patrick Godin: What are the grade for each... Travis Murphy: Yes. The grade for each... Patrick Godin: So can we get back to you on this? What we have is the combined rate. Anita Soni: Yes. Okay. I would appreciate a call back on that one. And then just secondly, I wanted to say, so that's an impressive free cash flow generation this quarter. And I think on Slide 16, you have $2.2 billion for 2025 to 2027 and using a conservative gold price at $3,250 considering we're somewhat over that at spot. I think the question would be beyond paying down debt, what are your plans from a capital allocation standpoint with that free cash flow? Ankit Shah: Anita, it's Ankit. I think we've previously said we take a very disciplined approach on capital allocation. You're right, we generated good free cash flow this quarter and paid down debt. We also increased our exploration budget on the strong results on the back end of our September release. I think we -- from a capital allocation perspective, we have a pretty clear methodology. We want to maintain a strong balance sheet. Beyond that, we want to invest in exploration and also on organic opportunities because we see that adds the most value. And then after that, we'll evaluate capital return to shareholders, all while balancing our evaluation on inorganic opportunities. Anita Soni: And then... Ankit Shah: Right now, we're -- sorry, continue. I can say on the capital return front, we're currently evaluating options with our Board right now. We want to ensure we maintain financial flexibility and capitalize on the right opportunity as they come up. And from an M&A perspective, I think we've shown a very prudent and disciplined approach. We think we've done -- we did our best deal of the year so far with consolidating New Afton. But we'll continue to take a measured approach on M&A with the goal of increasing value on a per share basis. Anita Soni: Okay. So yes, so my follow-up was going to be on would a special dividend, share buyback or a more structured dividend be the preferred route, and it sounds like it's something that's more flexible, so probably one of the former 2 options. Ankit Shah: Yes. So we're actually -- as I just said, we're reviewing options with our Board right now as we go through our budget process this quarter, and we'll be able to provide a better update as we roll out our plans for 2026. Anita Soni: Okay. And then finally, just on exploration. So on the K-Zone, could you just -- so this extension looks pretty good. Could you just sort of remind me like what that would translate to once diluted like on -- I know you're going to be putting out a resource update early in the new year, but I just wanted to try to get an idea in context of what C-Zone grades. Are you seeing them going to end up being similar or end up being higher than the current C-Zone grades that you have? Jeff LaMarsh: Anita, Jeff here. So yes. So on the K-Zone, it still have a lot of drilling to do this year, about 10,000 to 15,000 meters. And like you say, we still have to do our work, update our models to really know the total size and grade of that will be and placement of concerning shapes as well. So it's still early to say. Anita Soni: Okay. Congratulations on a solid quarter all around from exploration to paying down debt and to delivering on the ops. Operator: Your next question will come from Jeremy Hoy with Canaccord Genuity. Jeremy Hoy: I need to address the first one on capital allocation. So maybe I'll focus a little bit more on some of the upside opportunities in existing operations. K-Zone, I think, pretty excited about what we could see there. Good to hear we've got a study coming early 2027. Rainy River definitely looks like we're going to see more gold there. But just wondering the tailings management was a key part of potentially extending mine life there rather than just displacing the stockpiles in the production plan. Can you give us an update on how you're thinking about that and what the likely solutions to tailings management are there? Patrick Godin: So thank you, Jeremy. First, you're clearly -- by your question, you explained why we are prudent in terms of returning capital to shareholders. It's our intent to return capital to shareholders. The question is not if we're going to do, the question is what we're going to return. And for that, we need to assess exactly first, what is going to be our long-term plan. So we are drilling. So we invest drastically in exploration during the last 2 years. We -- it's our intent to continue to invest because we create a lot of value for shareholders, and we believe in our 2 assets, and we see a potential in our 2 assets. So -- and for that, I think we need to assess the full potential of K-Zone. We're not there. So it's a nice problem. So we did not fix the boundaries of K-Zone no matter if we drill a significant amount of meters this year. And it's -- and also, we have Northwest trend -- and we're looking to the possibilities. We have to do a pushback. It's going to be another pit extension or a pit satellite. So -- and we want to size our investment before to determine what we're going to return. So that's the first approach. In terms of the tailings storage facility, again, if we have a satellite pit like Northwest trend, it's becoming not only a source of ore, but it's an opportunity to store tailings storage. So it's in our game plan here, we try as much as we can to stay away because the TMA actually, we still have room to play in this, but we are close to the full capacity in the current design that we have. And with Northwest trend, I think for now, we're not seeing a need to have further significant investment in the TMA. So it's improving the return of the mining of the satellite pit. So -- so for now, we're not seeing additional investment in the TMA with the plan that was presented to you and to the shareholders in February last year. And with the addition of Northwest trend, we're not seeing additional investment in the TMA too. Jeremy Hoy: That's really helpful. Also on Rainy River, you mentioned some of the things you've done to, I guess, probably improve retention rates, the flights camp, incentivization, et cetera. Can you give us an idea of what turnover is now and what you're targeting with these improvements? Patrick Godin: Yes. Maybe I can help Travis on this. In Ontario, actually, we have a shortfall of miners. So as you know, mainly of [ red sees, ] trade person, so mechanics or quality miners. And so we have more people who are getting retired and people who are joining our industry. So we want to make sure to be attractive to support our development. So for that, we have -- we plan to attract more local people. We're not in a region where we are -- it's not a mining camp Rainy River. So we maximize as much as we can in the hiring of local people because it's where we're creating value for the local communities. But we have a certain limit. And so we had to increase our -- increase and improve our capacity and the quality of the infrastructure. So we did that. It represents -- it's a pro because it's helping us to be -- to attract. Also, we have to improve our facility at site to retain people. And also, we work really hard with the contractor to provide an attractive incentives to retain high-quality performer to achieve the plan that we want to do. So it's mainly what we did. So we capitalize in infrastructures. We improved the quality of our infrastructures. And also we implement incentives in the contract to retain quality miners. Jeremy Hoy: Really nice to see the free cash flow thesis playing out. Operator: Your next question will come from Eric Winmill with Scotiabank. Eric Winmill: Nice to see the free cash flow in the Q3. I think some of my questions have already been answered, but maybe just one here on Rainy River. You're into the higher grade now. I'm just wondering what we should expect for the balance of this year. And based on the photos, it looks like that secondary open pit egress has been completed. So yes, just wondering any guidance for the -- for Q4 would be helpful. Travis Murphy: Sure. It's Travis here. Thanks, Eric. Yes, generally, we're seeing a continued trend in Rainy River open pit Phase 4 from what Q3 is, and it's going to continue on into Q4. So we're not seeing any real changes in our trajectory there. Phase 4 is working out very well for us. Eric Winmill: Okay. Great. Appreciate it. And then just on New Afton here in terms of K-Zone. So you're drilling, I think you said about 66,000 meters this year. Wondering if all that will make its way into the resource for next year. And I know still early days, but any thoughts in terms of development here? Are you thinking about this as more of a traditional underground as opposed to a block cave or sublevel cave? Any detail would be appreciated. Patrick Godin: I think here is it's preliminary. So first, we'll -- the problem that we have with K-Zone is to determine the size of the animal, if I can say that because we're still open and we still have drilling to do. And so for sure, what we like is we can when Luke needs with Jean-Francois to complete the feasibility study with the team, we have multiple factors that will determine if it's a cave shape or not. And also, we have to deal with how deep is the ore body, too. So I can say to you that it's premature at this stage to confirm that it's going to be a cave or a more selective mining method. But we are -- for that, we need to size it. And I can say to you, Eric, that next year, we'll need to continue to drill to determine what we have on hand because the limits are not -- and we have 2 objectives. It's always the 2 objectives that Jean-Francois is having, is to advance the resource to produce reserves and also to look what's next. We at New Gold, we were not necessarily good to develop this arrow of projects to get to reserves because we were limited in our capacity to invest in exploration. Now that we are and we demonstrate to shareholders that we're creating value with this, we want to be one step forward in advance. So we -- our objective and our dream was as a team to bring New Afton beyond 2040. I think it was trending well, but we need -- we have work to do to confirm the feasibility of that. But we are already thinking beyond 2040, can we push that to 2050. And it's what we're looking now. But it's premature for now to say what mining method we're going to have here. Eric Winmill: Okay. Great. I really appreciate that. And obviously, the second part, you do expect all of the drilling for this year will make its way into the resource? Or are you seeing a lot of backlogs on the labs and getting the assays back? Jean-Francois Ravenelle: Yes, that's right. We will drill all the way to the holidays basically in December. And we will include all of the drilling and the assays that we can in January when we update our models and define the resource. Operator: [Operator Instructions] Your next question will come from [ Mohammed Sasaidi ] with National Bank Capital Markets. Unknown Analyst: Congrats on a great quarter and the free cash flow -- positive free cash flow in the quarter. So most of my questions have been answered, but just maybe on New Afton, given the good performance from the B3 cave as it exhausted, how should we think about the grades coming into 2026? Could we see maybe a little bit lower grade on the tech report there? Or could you help me maybe provide some color on that one? Jean-Francois Ravenelle: Yes. I think in 2026, as we add that great performance from B3 throughout the year. We are now focusing on transitioning across to continuing that ramp-up of C-Zone. As we have previously disclosed, the grades at the start of the cave will be a little bit lower as you continue to advance that healthy cave growth. So we should see that transitioning up in line with our plan. Unknown Analyst: Right. And then still, you asked with the positive progress at K-Zone and the additional exploration efforts that will continue to do in 2026, how should we think about the CapEx there versus the tech report? Patrick Godin: I think we're done on the CapEx for the tech report. We'll get back -- we can get back to you on this. But actually, we're not -- we're seeing not some extras. I think we're trending in the same. Operator: And there are no further questions at this time. I'll turn the call back over to Ankit for any closing remarks. Ankit Shah: Great. Thank you very much, and thank you to everybody who joined today. As always, should you have any additional questions, please do not hesitate to reach out to us by phone or e-mail. Have a great day. Operator: Thank you for your participation. This does conclude today's conference. You may now disconnect.
Operator: Greetings, and welcome to the Oshkosh Corporation Third Quarter 2025 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Senior Vice President, Investor Relations for Oshkosh. Please proceed. Patrick Davidson: Good morning, and thanks for joining us. Earlier today, we published our third quarter 2025 results. A copy of that release is available on our website at oshkoshcorp.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to Slide 2 of that presentation. Our remarks that follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC as well as matters noted at our Investor Day in June 2025. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. Our presenters today include John Pfeifer, President and Chief Executive Officer; and Matt Field, Executive Vice President and Chief Financial Officer. Please turn to Slide 3, and I'll turn it over to you, John. John Pfeifer: Thanks, Pat, and good morning, everyone. We continue to successfully navigate a dynamic external environment with resilience and a strong sense of purpose to serve our everyday heroes with high-quality products that are safe, intuitive and productive. We do this with a strong mission of service for our everyday heroes like firefighters in our communities. We proudly sponsored the 13th annual 9/11 Memorial Stair Climb in Green Bay where more than 2,000 people raised over $120,000 for the National Fallen Firefighters Foundation and honored the brave firefighters that lost their lives on 9/11. We also demonstrated our commitment to our communities as over 1,200 volunteers came together for OshKosh's eighth annual Feed the Body, Feed the Soul event. These volunteers packs 224,000 pounds of rice in just 12 hours to support individuals and families facing food insecurity across Eastern Wisconsin. Turning to our financial results on Slide 4. We delivered an adjusted operating margin of 10.2% on revenue of $2.7 billion in our third quarter. This led to adjusted earnings per share of $3.20, an increase of 9.2% over the prior year. These results reflect solid performance across each of our segments. Despite lower revenue, we maintained a double-digit adjusted operating income margin year-over-year, reflecting continued strong performance in our vocational segment, improved returns in our Transport segment and a resilient double-digit margin in our Access segment. Our adjusted EPS grew compared with last year, reflecting our operating performance and taxes. While I am pleased with the resilience demonstrated in our third quarter results, we are updating our outlook for the full year to reflect the demand environment we have been seeing starting mostly in the third quarter. We are revising our 2025 adjusted EPS guidance to a range of $10.50 to $11, which reflects slightly lower revenue expectations for both Access and Transport segments. I want to emphasize that end market activity in our Access segment is healthy, but we are seeing customers be more cautious in the near term regarding new equipment purchases as a result of tariffs in the current economic environment. Matt will provide additional details on segment performance and our outlook later in the call. Please turn to Slide 6 for Q3 highlights. In September, we continued to demonstrate how Oshkosh is shaping the future of airports by showcasing our advanced technologies at the International Airport Ground Service Equipment Expo. And in Washington, D.C. at the AUSA Defense Conference just two weeks ago, we introduced our Family of Multi-mission Autonomous Vehicles, FMAV. Autonomy was a key focus at both events. At the GSE Expo, we displayed our full range of ground support equipment and showcase the flexible autonomous robot that can serve multiple roles on the tarmac. We also launched the new Tempest-si Deicer designed to easily navigate congested ramps while providing improved visibility and more intuitive controls for operators. At AUSA, OshKosh featured three production-ready variants from the autonomous vehicle portfolio, that's FMAV, highlighting our ability to deliver autonomous payload agnostic platforms. Please turn to Slide 7. As I mentioned earlier, access equipment end market activity remains healthy as we see in equipment utilization percentages. That said, customers are being cautious with CapEx spending. I'm proud of our team's execution, delivering double-digit adjusted operating margins despite this environment. While overall demand in the current environment is lower than in 2024, construction activity for data centers and infrastructure has continued to drive demand. We believe that additional long-term tailwinds related to lower interest rates, project deferrals, aged equipment and manufacturing reshoring will support a broader pickup in construction activity. In the near term, the team remains resilient and is working to mitigate the impacts of tariffs across our business. As we have discussed previously, we are aggressively pursuing cost levers to offset the impact of tariffs. We are also having initial discussions with customers regarding the impact of tariffs on pricing with the expectation that we will raise prices in 2026 to keep pace with input costs. Our success is driven by designing and building world-class products to meet the needs of our customers. This quarter, we introduced our new AG619 mid-sized ag telehandler aimed at the heart of the market, which we revealed at the World Dairy Expo last month. And in Europe, we launched the innovative LiftPod, providing low-level access for commercial customers needing a safe, portable and stowable solution to support a wide range of projects at height. Turning to Slide 8. In the Vocational segment, we continue to advance initiatives that support increased production of fire trucks. This is a multiyear process as we seek to improve production efficiency by addressing bottlenecks associated with building highly customized, complex trucks. At the same time, we continue to support firefighters with our stock pumpers and Build My Pierce product offerings, which improved lead times by simplifying configurations. In recent quarters, we've seen an increase in the mix of orders for Build My Pierce pumpers, which should further support our efforts to streamline production and reduce lead times. We finished the quarter with strong orders for vocational as the segment recorded $1.1 billion in the quarter, led by orders for Pierce fire trucks and our AeroTech products. Of course, we remain focused on increasing throughput, and we expect to bring the backlog down over the next few years as we discussed at our Investor Day in June. Finally, for the segment, I want to recognize the team that supports our McNeilus Volterra ZSL refuse collection vehicle, which won the coolest thing made in Tennessee 2025. This product is a game changer for the refuse collection industry as the first fully integrated electric vehicle designed with the operator in mind to deliver world-class ergonomics, purpose-built performance and a zero emission quiet driving experience in neighborhoods. Please turn to Slide 9. As I previously mentioned, we showcased autonomy at the AUSA Defense Conference. Earlier this month, we announced an order from the United States Army valued at $89 million for the modernized PLS A2 autonomy-ready heavy tactical truck designed for load handling, another example of innovation that is already available in our products today, not years in the future. We continue to advance core programs to support U.S. and international customers, including building FHTVs under our previously announced contract extension. We have also monetized JLTV related technology through a onetime license of select operational software IP to the Department of Defense that occurred during the quarter. This further demonstrates our commitment to our government customers by providing cutting-edge technologies to support mission-critical requirements and fleet sustainment. Lastly, we continue to ramp production of the NGDV this quarter and are targeting line rates that support our annual production goals. As with any new product launch in a new assembly plant, challenges are to be expected, and we've seen this across the vehicle industry worldwide and the team continues to work with urgency to ramp production while maintaining quality. We now have over 4 million miles driven by postal workers, and we remain excited about the rollout of this much-needed productivity-enhancing vehicle. With that, I'll hand it over to Matt to walk through our detailed financial results. Matthew Field: Thanks, John. Please turn to Slide 10. Consolidated sales for the third quarter were nearly $2.7 billion, a decrease of $53 million or 2% from the same quarter last year, primarily due to lower sales volume in the access segment partially offset by higher vocational and transport sales volume and improved pricing. Adjusted operating income was $274 million, down slightly from the prior year, primarily reflecting lower volume. Adjusted operating income margin of 10.2% was roughly in line with last year on slightly lower sales. Adjusted earnings per share was $3.20 in the third quarter, $0.27 higher than last year. Adjusted EPS was favorably impacted by about $0.30 due to lower tax expense resulting from the resolution of a multiyear U.S. federal income tax audit. During the quarter, we again stepped up share repurchases, repurchasing approximately 666,000 shares of our stock for $91 million, bringing year-to-date share repurchases to $159 million. Share repurchases during the previous 12 months benefited adjusted EPS by $0.05 compared to the third quarter of 2024. Free cash flow for the quarter was strong at $464 million compared to $272 million in the third quarter of 2024, primarily reflecting working capital changes, including customer advances and inventory. Turning to our segment results on Slide 11. The Access segment delivered resilient adjusted operating income margins of 11% on sales of $1.1 billion. Sales were $254 million or nearly 19% lower than last year, which reflected weaker market conditions in North America and higher discounts. Our Vocational segment continue to deliver strong sales growth through higher volumes and improved pricing as we deliver our backlog, achieving an adjusted operating income margin of 15.6% on $968 million in sales. Sales grew $154 million or nearly 19% from last year, led by improved throughput from municipal fire apparatus and robust growth in airport products. Revenue in Airport Products was up 17% compared to the last year, demonstrating our strong Jet Bridge and RF businesses. The nearly 200 basis point increase in adjusted operating income margin for the segment primarily reflected improved price cost dynamics. Transport segment sales increased $48 million to $588 million. Delivery vehicle revenue grew by $114 million to $146 million and now represents approximately 1/4 of transport segment revenue. Delivery revenue grew 37% sequentially compared to the second quarter of 2025. As expected, defense vehicle revenue was lower compared with last year due to the wind down of the domestic JLTV program. This was partially offset by higher international sales of tactical wheeled vehicles and onetime revenue from the license of JLTV related intellectual property to the U.S. government for $25 million. The transport segment delivered an improved operating income margin of 6.2% compared to 2.1% last year, reflecting the software IP license, improved pricing on new contracts and favorable mix offset by higher warranty costs. The onetime licensing agreement, which was contemplated in our guidance last quarter, represented a roughly 400 basis point improvement in operating income margin. Please turn to Slide 12. Turning to our outlook for the remainder of 2025. The macro backdrop and end market activity have remained broadly resilient. Access customer orders, however, reflect a more judicious approach to spending, as you heard from John. Our team continues to execute well amidst a dynamic government policy and international trade environment. As John mentioned, we are updating our 2025 full year adjusted EPS guidance to be in the range of $10.50 to $11 on revenues of approximately $10.3 billion to $10.4 billion. As you can see on this slide, we have further moderated our expected adjusted operating income margin in the Access segment to reflect our sales outlook and in the Transport segment for our present expectations for NGDV production. Our cash flow outlook of $450 million to $550 million, up $50 million from our previous outlook, reflects lower capital expenditures as we maintain rigorous spending controls. We also plan to continue with share repurchases through the balance of the year at a modestly higher pace than we did in the third quarter. With that, I'll turn it back to John for some closing comments. John Pfeifer: Thanks, Matt. It's clear that 2025 has proven to be a dynamic year, including the tariff landscape and sustained higher interest rates. Our updated outlook reflects the impact of these conditions on our customers and in turn, on the demand for our products, notably in the Access segment. Even so, our team has shown strong focus and agility by managing through these conditions while delivering solid results. This performance reinforces our confidence in managing the near-term while supporting our long-term growth objectives. Earlier this year at our Investor Day, we shared our vision to roughly double adjusted EPS to a range of $18 to $22 per share by 2028. Each quarter represents a step toward that goal and we're encouraged by the steps our teams are making today to lay the groundwork for nearly doubling EPS by then. We appreciate your continued confidence in Oshkosh and look forward to updating you as we advance our strategy and create long-term value for shareholders, customers and team members. I'll turn it back to you now, Pat, for the Q&A. Patrick Davidson: Thanks, John. I'd like to remind everyone to please limit your questions to one plus a follow-up. Please stay disciplined on your follow-up question. And after that, we'll ask that you rejoin the queue if you have additional questions. Operator, please begin the Q&A session. Operator: Our first question comes from Mig Dobre with Baird. Mircea Dobre: Maybe we can start with Access a little bit. And I'm sort of curious your perspective here as you're talking to your customers, obviously, not only for business covering Q4 but into 2026, you hinted at the fact that prices are going to go up which makes sense given tariffs and whatnot. What is your sense for where demand seems to be shaken out because we have seen some that are increasing CapEx at least optically, it looks like there is some signs of stabilization in that industry. I'm curious if that sort of gels with what you're hearing or your salespeople are hearing is they're contemplating in 2026. And maybe more broadly, what should investors be thinking, just as a general framework for the segment next year? It look to me like production is likely to be down in the first half of '26, but perhaps you think about it differently. John Pfeifer: Well, I'll answer that, Mig, it's John. So thanks for your question. We're not guiding today, but I can give you some context on what we see ahead for sure. We'll guide -- we're in discussions with all of our customers about what 2026 looks like. So we'll have a lot better clarity for you when we get through the fourth quarter, but I'll give you context. First of all, we don't know if at this point in time, if production is going to be down in the first half of 2026. I honestly don't know that. What I will tell you is that we feel -- when we look at the market going forward, we all customers are not the same. This is a vast customer base. We've got thousands of independent rental customers, and we've got a group of big national rental customers and you've heard some positive things from the big national rental customers of ours. There is still a bit of hesitancy in the very near term. When I talk about the very near term, I'm talking about Q3, Q4 in terms of with the current environment, how much equipment do I want to take in the here and now. But when we look forward to '26, and we see what's going on in the market, we talk about long-term demand drivers a lot. You hear about mega projects. Constantly, those are real and they are ongoing and they do drive a lot of equipment. But we're starting to also see some free up in terms of the commercial construction activity. So there's been -- [ nonres ] has had a lot of commercial construction kind of on hold or pause. Some of -- a lot of those projects are starting to get cleared through the -- into the planning phase. That's a very positive sign for the market going forward. So we'll get through this year, which has been one of the most dynamic years that anybody in business has ever experienced. We'll manage it really well. We'll continue to deliver strong margins even through this dynamic period of 2025. And as we get into 2026, we'll give you some guidance in January. And we think that the market long term looks very, very healthy as we've been saying for a while. Mircea Dobre: Understood. My follow-up, maybe to put a finer point on the tariffs, give us a sense here for how the tariff picture has changed for you, maybe quantify the cost. And then as you think about next year, and again, I'm not asking for guidance, I'm just asking for your strategy, how do you think you'll be able to mitigate these tariffs, if any at all? Matthew Field: So tariffs for this year, it's kind of $30 million to $40 million is what we see for the full year. Most of that being in the fourth quarter. So we would estimate that to be about $20 million to $30 million in the fourth quarter. Obviously, as you look into 2026, you'd project a full year impact as that -- as those are implemented and feathered in. What you don't see in the fourth quarter is the pricing John talked about and you highlighted in your questions. So there be some pricing that would occur in 2026 against that. So that's how I think about tariffs for next year and how are they kind of feathered in this year. Operator: The next question comes from Stephen Volkmann with Jefferies. Stephen Volkmann: So the follow-on, just to Mig's question, actually, is it reasonable to think that you can offset this tariff headwind during 2026? Is that sort of the plan? Or will it take longer? Matthew Field: Steve, so as we've talked about on prior calls, our approach to tariffs is really multifaceted. First, it's negotiating the supply chain. Second, it's what we call tariff engineering, and that can come in many forms, and that could be sourcing, it could be how we import. It could be the classification as we run into and other classifications. We look strongly at each part we bring in and make sure it's classified in the right way so that we get the right tariff treatment. And then only then do we start talking about pricing. So it would be preliminary for me to speculate on how much would be offset next year. But certainly, the goal is we mitigate as much as we can on the cost side and then we look at what pricing we need to discuss with our customers. John, is there anything you want to add? John Pfeifer: I just want to make a point to say that we do, do a lot. We've got a lot of really great work happening with our teams, supply chain first and foremost. There's engineering manufacturing teams. We do a lot of work to offset the impact of tariffs, and we've had a lot of success doing that. Our MO when we look at tariffs is we want to absolutely minimize the impact of tariffs on our customers. That's our first goal, minimize the impact to the customer. And we'll -- we've been pretty good at doing that. Now you can't mitigate everything. So that's why I said in my prepared remarks that there'll be some price increase in 2026. We believe that the landscape will be calmed down enough to be able to assess what any price increase needs to be. But our MO is to get through this without impacting customers very much. Stephen Volkmann: Got it. And then if my math is right, I think you're sort of implied to incremental margins for vocational in the fourth quarter, like 40%, which is obviously impressive, especially with tariffs. How should we think about that going forward? Is that a reasonable assumption for a while? Or is that something special? Matthew Field: So yes. So fourth quarter, the math would imply exactly as you said, about a 40% incremental. For the year, our guidance is about 33% actually. So it's really impacted this year as higher production throughput, higher volume. We've had a good mix with strong sales in airport products. Again, it'd be preliminary for me to speculate what the incrementals are. Our 2028 guidance, which we provided in June will be a little lighter than that on an annualized basis, but certainly strong results out of vocational. Thanks for highlighting. Operator: The next question comes from Jamie Cook with Truist Securities. Jamie Cook: I guess just two questions. One, John, as you think about the competitive landscape within access equipment, in some of the market share movement you've seen between you and your peers. Do you feel like with Section 232 and tariffs, like are you in a position to gain share just based on your manufacturing footprint relative to some of your peers? And then my second question, if you could just quantify or talk through more some of the discounting that you noticed in the access market, quantify it and to what degree, given the tariff situation, does this ease, I guess? John Pfeifer: Yes. Sure. So I'll -- thanks, Jamie, for the question. In the Access equipment world, what we're doing is we're executing what we call a local-for-local strategy. Now we've always been predominantly a footprint of U.S. manufacturing for U.S. sales in the U.S. in our Access business. So that's good. We started with a strong position. We're continuing to execute that and do more and more of that in the U.S. but also in Europe. It's that overarching strategy allows us to manage the tariff landscape as best we can and minimize the cost that we incur. So yes, we think that, that helps us a lot versus the competitive environment, particularly against competitors that are outside the United States for sure. But JLG is the leading brand in the industry. We've got fantastic innovations that continue to come to market. our intent is to continue to focus on our customers, how can we drive improvement for them. And that ultimately is what drives long-term share. And that's what we're intently focused on. So that's what I can tell you about that. Matthew Field: So -- and Jamie, just adding to your second question and your follow on. So the team practices very disciplined pricing. You've seen that in prior cycles, you've seen it in prior quarters. That's also supported by a strong service network. And that, in the end results in a very strong residual on our JLG equipment, and that's important for rental customers. And so what you saw in the third quarter is about a 3%, 4% all-in discount level, which we think is very reasonable given the external environment we have. Obviously, we've not gotten into pricing for tariffs in the third quarter with the limited impact, and that will really be a factor in 2026 versus 2025. Operator: The next question comes from Tami Zakaria with JPMorgan. Tami Zakaria: Good morning. Thank you so much. question from me on the warranty costs, which seems to be an item headwind in the quarter. Are you able to elaborate on that? What's driving it? And how to think about it for the rest of the year? Matthew Field: Tami, so that's really a onetime item we had in the third quarter as we're working through the units that we've built, specifically in the defense sector for vehicles in the kind of supply chain shortages, '21 '22, where we identified issues that we need to repair as we built with kind of interim parts and so forth. So we took that charge in the third quarter. We think that's behind us. John Pfeifer: Yes, Tami, I want to just emphasize, that's a core defense product. It's not the postal vehicle. It's core defense. We are a quality-focused company. We're known in the Department of Defense for quality. When we see that we have an issue, we wrap it up and we address it as quickly as we can with the customer. Again, as Matt said, this is not an ongoing issue to expect going forward. Tami Zakaria: Understood. That's very helpful. And one question on Access. I remember, I think earlier in the year, you talked about taking some pricing -- doing some price investments. Did that -- is that still the case? Do you expect that to continue through the rest of the year? Or anything changed there? John Pfeifer: Can you clarify that, Tami, I'm not sure if I got exactly what you were referring to. Tami Zakaria: So my question is on Access pricing, aerials pricing for the year. The way it's playing out, do you expect positive pricing this year as some of these tariffs have come in? Or are you going back to your customers and giving some discount? Any comments on pricing and how that's trending in the Access segment would be helpful. John Pfeifer: Okay. I'm sorry, I got it. Go ahead, Matt. Matthew Field: Yes. Thanks for the clarification. So as I just mentioned, this year, really, given the weakness we see in external demand, we've seen a negative pricing environment in access. Obviously, with tariffs hitting in the latter part of this year and mostly next year, we would talk about a different pricing environment into 2026. Operator: The next question comes from Mike Shlisky with D.A. Davidson. Michael Shlisky: In Access, it seems like a lot of the client taking -- just digging a little bit deeper into the numbers, a lot of the clients in third quarter came from telehandlers, it was down like, I think, a little over 40% on the sales line. And you're actually expending capacity there. Could you maybe just take the Access discussion one step deeper and just tell us a little bit about how that's going, what's happening there compared to the core aerials? John Pfeifer: Yes. The difference is Cat. We've talked about it for a few quarters that we've had a long-term agreement with Cat. That agreement is no longer in place, and that's the primary reason you see the change in telehandlers. JLG telehandlers including the Skytrack models, they're doing great, they're not losing share there. And then you look at the aerials, we're in a situation where the market is down because of nonresidential private construction being down, but this is -- it's a temporary phenomenon. And long term, we see very strong health in the market, and we're really pleased with how we're able to perform with resilience during -- you see in Q3, for example, our revenue and access equipment is down nearly 19%, and we're at healthy double-digit margins. That's exactly the way we expect to operate, and that's what we're doing. And we'll continue through this and the market will grow as we go forward. Michael Shlisky: Great. And then just talking about peers real quick. Have you seen any impact over the last few weeks at peers from the federal government shutdown, especially any local effects on fire fighter assistance grants or other state owned government systems that the federal government provides to fire departments? Matthew Field: Mike, it's Matt. So in terms of federal government shutdown in the near term, we've not really seen a material impact. If it extends much longer or significantly longer, I guess, we may have some contracts affected as we do sell directly to the government in some cases, think about our products and so forth. So there would be some knock-on effects if this extends for an extended period of time. Not huge numbers, but certainly something that I would watch for. Operator: The next question comes from Kyle Menges with Citigroup. Kyle Menges: I think NGDV sales of $146 million in the quarter was a little bit below your expectation. And it sounds like fourth quarter is going to be a little lower than initially expected. So just curious what's driving that? What have been some of the challenges in increasing capacity? And then I don't want to put words in your mouth, but I got the sense from the prepared remarks, perhaps a walk back of the earlier guidance to get to annualized full run rate production of, I think, 16,000 to 20,000 units by year-end. Like is that still feasible in your mind? Yes, I would just love to hear an update on that. John Pfeifer: Yes, I'll start with the 16,000 to 20,000 units as an annualized number. And so let me start from the top. I'm going to start with talking about the product, the NGDV or the new postal vehicles, an amazing product, the feedback that we continue to receive with now over 4 million miles driven in delivery operations by postal carriers is really positive. As I said on the call in my prepared remarks, this is a brand-new plant with a brand-new product and highly automated processes, it's a fantastic plant. We have made progress, you can see the revenue growing there, but not to date at the pace that we want it to be at. So we're working really hard. We've got great people in place that are working on continuing to drive production increases until we get to full rate production. We expect to grow revenue sequentially and believe we will exit 2025 in a good position to support our plans for the United States Postal Service and a really strong 2026. So that's kind of the state of the program but -- for you. Kyle Menges: Got it. And just curious, I guess, when you would expect maybe now to hit that full annualized run rate production? And then my follow-up was just going to be on the lower CapEx guide, it looks like you brought it down $50 million. So curious what drove that. John Pfeifer: Yes. So I'll start by the full rate production. We continue to target full rate production by the end of this year. I want to say that's not without challenges, of course, as I just mentioned previously, we have constant communication with the United States Postal Service to the highest levels. We're doing everything we can, but our plans are to get to full rate production by the end of the year. Matt, do you want to talk about the $0.50? Matthew Field: Yes. The reduction in CapEx reflects twofold. One, stricter spending controls in this environment, but then two, just timing of spending. Operator: Our next question comes from Angel Castillo with Morgan Stanley. Angel Castillo Malpica: Just wanted to go back to some of the discussion around Access. Could you just clarify, I guess, is the greater cautiousness that you talked about from your customers reflecting itself purely in just kind of the low ordering or the low book-to-bill this quarter? Or are you seeing any kind of order cancellations or delivery push out here? And just if you could add a little bit more color as part of that, kind of how the behavior maybe differs between the nationals and independents? John Pfeifer: Yes. So first, Angel, thanks for the question. We had a 0.6 book-to-bill. That's a normal book-to-bill for a third quarter, if you look historically. That said, the market has been a little bit softer compared to last year, as I already mentioned. I want to emphasize that end market demand in this -- here is healthy. The equipment utilization is healthy in the market. Used market is healthy. That's all really good signs. What we're seeing in the dynamic market with continuously shifting tariffs, prolonged higher interest rates, that's caused a lot of customers to say, hey, the market is healthy, but I just -- in the very near term, I'm just going to kind of hold back on my CapEx until I get a little bit more clarity as to how this is going to evolve, see the Fed continue to drop rates, things like that. That's really what we feel is happening in the market. Angel Castillo Malpica: That's helpful. And maybe just related to that, I know it's still early for fiscal year '26 and a lot of moving pieces here, but given just your ongoing kind of discussions with customers, whether on kind of the near-term environment for next year, can you just talk about the magnitude of the price increases that are currently being discussed for next year? And whether that kicks in kind of January 1? And just kind of overall discussion of that -- those negotiations because I guess, if I'm not mistaken, on the discounting part, it seems like discounting may have stepped up from 2% to 3% to 3% to 4%. So if you could just kind of help us understand perhaps the trajectory of that versus the kind of increases expected in Jan 1? John Pfeifer: Yes, I'd be preliminary to talk about pricing for 2026. On a quarterly basis, it's really what you see there is some seasonality in how we go to market. Operator: The next question comes from Tim Thein with Raymond James. Timothy Thein: Great. Just a lot of dialogue here on Access, but maybe I'll ask another one. Just with respect to your expectations, John, for order activity here in the fourth quarter and specifically maybe the composition, I would imagine more of your NRCs are the ones that take up the order slots in the fourth quarter that are booking orders rather. But maybe just any kind of guardrails as to how you're thinking and maybe how the initial discussions have shaped up just with respect to how we should be thinking about order activity. Obviously, that will be important as to how we think about '26. So maybe I'll start with that one. And then part B of the question is just on the vocational segment. And just on fire & emergency, obviously, that's a big part of the nice margin improvement that you have lined up into that 2028 target as you talked earlier about more stock units in the Build My Pierce. Does that have any implications that we should think about from a product mix standpoint? So that's two long questions. John Pfeifer: Yes. So one on access, one on the fire industry and our fire truck business, Pierce. To start on access. I mean you kind of hit the nail on the head, Tim. The reason that we went from an $11 guide to a -- $10.50 to $11 guide is primarily orders in the fourth quarter for Access. And when I say orders in the fourth quarter for Access, I'm talking about orders in the fourth quarter for delivery in the fourth quarter. And right now, it's in terms of how much equipment our customers, I'm talking from the thousands of independents to the big guys are going to take in the fourth quarter, but that's why there's a bit of a range there from $10.50 to $11. If it's as we expect, we'll be around $11. If it's -- they're not going to take quite as much equipment in the fourth quarter, then it could come down a little bit. With regard -- hey, I want to continue to emphasize how well our people at Access Equipment and JLG are performing in this very dynamic market. We're performing extremely well. We'll continue to do that in this environment. But again, we see nice growth on the horizon ahead of us as we've talked about through the year. On our Pierce business, the fire truck business, we're continuing to get improved output. We'll continue to get improved output as we go forward the next few years. That will continue to draw the backlog down. The Build my Pierce and more of the off-the-shelf fire trucks are great products. We don't see a specific margin differential between whether or not we're shipping Build My Pierce units or we're building our fully customized units. Operator: The next question comes from Steve Barger with KeyBanc. Christian Zyla: This is actually Christian Zyla on for Steve Barger. Just as a follow-up, maybe to Tim's first question on Access. I heard your comments about the near-term uncertainty your customers are facing. Just historically, 4Q was a big sequential order quarter for Access as your customers plan for next year. So do you still see a normal step-up in 4Q? Or is that more of a 1Q event now? And then is your access backlog split evenly? Or does this skew one way between bigger nationals or the smaller independents? Matthew Field: Christian, it's Matt. So the way to think about Q4 is you're right. Traditionally, the book-to-bill will be higher. Honestly, I think it would be presumptive of me to assume that, that's the same as you end up with price negotiations. Some of that might set to January versus December. But honestly, it's too early to make a call like that. So traditionally, I would say it's higher, how it's going to shape up this year is unclear. Christian Zyla: Got it. Okay. And then just switching gears to your defense related business. It seems like the industry is wanting more transport type vehicles. Is that what you're seeing as well? It may be a pitch for the CTT program. What differentiates your portfolio capabilities versus the other bidders in that program? John Pfeifer: Yes. Thanks for the question. Sure. I mean what's really differentiating us in this market today is our technological capability as well as our quality. We've got a really strong quality and service reputation, so they know what they get when we supply them with tactical-wheeled vehicles. But going forward, as I talked in my prepared remarks, it's a lot about things like autonomous functionality or full autonomy and that's why you see a lot of our products moving that way with the technology that we have. And that's kind of what we see as the future of this. And it's why we stand out in that industry is that reliability and the technological performance and capabilities of our vehicles that get better and better as we go forward. Operator: Our next question comes from David Raso with Evercore. David Raso: Of the defense revenue cut by $200 million, how much of that was the postal truck? Matthew Field: It was all on the delivery side, David. John Pfeifer: All of it, yes. David Raso: And when it comes to that, is that the ramp-up of the BEV truck that's giving you a little bit of struggle to ramp up? Or is it the ICE truck as well? John Pfeifer: It's unrelated to ICE and BEV, David. The vehicles are produced on the same line. It's just continuing to dial in all of the autonomous functionality of this manufacturing plant and its normal ramp-up challenges that we're addressing and we will get to full rate production. But it's not related to ICE and BEV. David Raso: I mean just so I know how much of this you feel is under your control because 35% to 40% of the EBIT cut actually came from defense. And that program is hugely significant next year for driving defense profits to say, take a little pressure off of Access, so it's not immaterial. I think most people feel Vocational, that backlog should carry you, but that interplay between transport, defense and Access is not immaterial. So can you be a little clearer on when do you feel you'll have the ability to ramp that -- I was looking for revenues getting close to $300 million a quarter at some point not too far in the future. So I apologize to push a little bit, but just a little more clarity. It's very important for '26. Matthew Field: That's fine, David. So just on the OI, remember the warranty charge we took in the third quarter, which is about $13 million, that's flowing into OI for the full year. We did fully expect the licensing, which was in our guidance, the warranty however, it would flow through to OI. So you shouldn't look at the top line change in revenue as the full impact on to OI. David Raso: Okay. The licensing was in the guide. Matthew Field: Yes. We were expecting that, that was under negotiation when we set up our guidance for the year previously. John Pfeifer: And David, I will just say your expectation for quarterly revenue on the delivery side is in line with ours. Operator: Thank you. At this time, I would like to turn the call back over to Mr. Pat Davidson for closing comments. Patrick Davidson: Thank you, and thanks for joining us today. We will be meeting with investors at several conferences during the fourth quarter in Chicago, Florida and New York. We'd be happy to connect in an early January, we'll be showcasing our technology at the annual CES show in Las Vegas. We encourage you to stop by our booth and learn about technology that supports airports, job sites and neighborhoods of the future. Take care, everyone, and have a great rest of the day. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator: Welcome to Amarin Corporation's conference call to discuss its third quarter 2025 financial results. I would like to turn the conference call over to Bob Burrows, Investor Relations for Amarin. Unknown Executive: Good morning. Again, I'm Bob Burrows, Amarin's Investor Relations contact. For those that don't know me, for nearly 30 years, I've served as an in-house Investor Relations Officer at various public companies, and I've been a consultant for the Amarin team since August of 2024. Thank you for your time and attention this morning as we discuss Amarin's third quarter of 2025 financial results. Joining me with prepared comments are Aaron Berg, President and Chief Executive Officer; and Pete Fishman, Chief Financial Officer. Other members of the senior management team will be available as needed during the Q&A session that will follow these prepared comments. Turning to today's agenda. Aaron will provide a state of the company, and Pete will walk through the numbers. In terms of important housekeeping, please take note of the following. Today's press release and related quarterly report on Form 10-Q are all available on the Investor Relations portion of the company website. An archive of this call will be posted on the Investor Relations portion of the company website shortly after the call. And finally, please be aware, during this call, we may make certain statements related to our business that are deemed forward-looking statements under federal securities laws. These statements are not guarantees of future performance, but rather are subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward-looking statements. Additionally, we assume no obligation to update these statements as circumstances change. For a discussion of the material risks and important factors that could affect our actual results, please refer to our SEC filings, which are available either on our company website or the Securities and Exchange Commission's EDGAR system. And with that, I'd like to turn the call over to Amarin's President and CEO, Aaron Berg. Aaron? Aaron Berg: Thank you, Bob. Good morning, everyone, and thank you for joining us. My comments today will focus on 3 themes: what we've done to get to this point, how the business is operating today and most importantly, where we're going and why it's compelling as an opportunity for all our stakeholders. First, a recap of the series of critical strategic steps we've taken to solidify our core business and position us for the future. With the announced partnership with Recordati in June of this year, we transitioned to a fully partnered commercial model across international ex U.S. markets. We're now focused on leveraging a global syndicate of 7 reputable and well-established partners with significant geographic expertise covering a total of close to 100 markets worldwide. What's particularly exciting is the fact that we're still early in the life cycle in many countries, especially key European markets where VASCEPA benefits from extended patent protection until 2039, and there remains significant untapped potential for high-risk cardiovascular disease patients. Critically, the long-term partnership for the European business enables us to capitalize on the capabilities and synergies of Recordati in Europe to efficiently generate revenue and build on the great foundation our team built over the past several years. This was the right step at an opportune time with a very strong partner and the culmination of a series of strategic moves that have solidified our business foundation while also enabling the potential for a more accelerated expansion of the product to more patients. All of this has been done in direct alignment with our mission of doing all we can to reduce the cardiovascular disease burden for patients and communities around the world. In concert with partnering the European business, we took the painful but necessary step to implement an organizational restructuring that has resulted in rightsizing our operating footprint globally. As discussed previously, we look to realize aggregate OpEx savings of $70 million over the next year, the impact of which has begun to flow through in this latest reporting period, and we're now better positioned for the next phase of growth and value creation. As of today, the European transition with Recordati has progressed exceptionally well. During the quarter, the Amarin and Recordati teams completed the knowledge transfer and established working connections with all in-market country teams, resulting in what has been a very smooth handoff. We anticipate Recordati to be fully managing European commercialization and promotion in all launch countries by the end of 2025. Overall, since the signing of the Recordati partnership, momentum has been sustained throughout the commercial transition as both volume and demand continue to grow across all commercialized European markets. We remain extremely confident in Recordati's ability over time to accelerate the depth and reach of VASCEPA for patients across Europe who are at risk for cardiovascular event. And we look forward to providing a further update on this front when we report year-end 2025 results in early 2026. Pivoting to the opportunities across the rest of the world markets. We're continuing to actively support our partners' ongoing initiatives to expand patient access in these key additional growth geographies. Our partners are focused on driving patient uptake by highlighting the tremendous value and potential for VASCEPA in their respective markets and continue to make progress in commercialization and regulatory processes locally. Overall, success of our partners in both Europe and rest of the world is fundamental to our global strategy of making VASCEPA available to the millions of patients in need of cardiovascular risk reduction today. All our partners are leveraging their established infrastructure, capabilities, people and passion to drive growth in our core franchise and to maximize its global reach. The pieces are now firmly in place, and we're excited by what the future will bring as these initiatives continue to progress. Turning to the U.S. business. We continue to manage and maintain this important commercial arm of the company. Through the end of the quarter, VASCEPA stood at greater than 50% share of the IPE market, a remarkable achievement 5 years since the first generic product was introduced. In addition, we retained the major exclusive accounts. And as of July 1, we regained exclusive status with a large national pharmacy benefit manager. As expected, this shift positively impacted volumes with minimal revenue impact. Based on the current market dynamics and feedback from key accounts, we're confident we will retain our major exclusives at least through the end of 2025. Since our exclusive accounts deliver the majority of our U.S. product sales, we continue to work with payers to keep VASCEPA affordable and provide patient access to the sole branded product within a diverse competitive market. Overall, we have consistently and aggressively pursued a strategy to remain competitive. We'll continue to take the right steps to manage the VASCEPA brand moving forward, always with patients at the center of our strategy. Our focus remains on maximizing both the clinical impact of VASCEPA for cardiovascular risk reduction and the financial strength of the U.S. business. From a scientific perspective, we continue to demonstrate our commitment to advancing cardiovascular care through a sustained and consistent presence at major medical meetings. This quarter, we not only supported partners in their own efforts around medical meetings, but also marked our strongest presence ever at the European Society of Cardiology 2025 Conference. At ESC 2025, we had 5 accepted abstracts presented and importantly, VAZKEPA was again included in the 2025 ESC EAS dyslipidemia guideline focused update, which reaffirmed high-dose Icosapent ethyl as a Class IIa recommended therapy for high-risk or very high-risk patients based on the landmark REDUCE-IT results. These insights are a direct result of our sustained commitment to generate meaningful data that informs clinical practice and supports our mission to address residual cardiovascular risk, a persistent threat to millions of patients worldwide. Cardiovascular disease remains the leading cause of death globally and far too many high-risk patients remain vulnerable despite being treated with standard of care therapies. Given this reality, it's well understood that addressing cardiovascular disease is a complex challenge, one that many stakeholders across the health care ecosystem are working to solve. And as a result, the science related to heart disease is continually evolving. As a case in point and as we commented on Monday of this week, we're deeply appreciative of the FDA's recent action to revise the labeling of fenofibrates prompted by the HealthyWomen's Citizens petition. These drugs have been used for decades under the belief they reduce major cardiovascular events, leaving patients thinking they're receiving appropriate care. Yet multiple large cardiovascular outcome trials have shown that fibrates and another related fibrate compound failed to reduce those events even in high-risk patients on background statin therapy. The updated labeling now includes a clear statement on the lack of cardiovascular benefit, relevant safety data and a refined indication as follows: "Fenofibrate did not reduce cardiovascular disease morbidity or mortality in 2 large randomized controlled trials of patients with type 2 diabetes mellitus. Risk for rhabdomyolysis is increased when fibrates are co-administered with a statin, avoid concomitant use unless the benefit of further alterations in triglyceride levels is likely to outweigh the increased risk of this drug combination. Fenofibrates are now indicated for the reduction in elevated LDL-C in adults with primary hyperlipidemia when use of recommended LDL-C lowering therapy is not possible." This FDA action is crucial because fibrates remain widely prescribed with more than half of fibrate patients also on statins. The FDA concurs that there is no scientific justification for suggesting that statin-treated patients may benefit from the addition of fenofibrate. The FDA also supports updating fenofibrate labeling to reflect findings from the prominent cardiovascular outcomes trial, which evaluated another fibrate compound. This revision marks a critical step toward lasting reform in prescribing practices and a renewed opportunity to ensure patients receive the care they require by shifting clinical practice away from treatments that lack cardiovascular benefit and toward effective and safe therapies backed by robust outcomes data. As we've long advocated, cardiovascular risk reduction must be rooted in proven outcomes, not solely on improving biomarkers such as reducing triglycerides in patients with elevated triglycerides. The FDA's decision reinforces this principle, helping to correct long-standing misperceptions and guiding health care providers, payers and patients toward evidence-based care that truly provides cardiovascular protection. Our data continues to validate the role of VASCEPA in reducing major adverse cardiovascular events across diverse patient subgroups. These findings not only strengthen the scientific foundation, but also underscore the urgency of delivering proven therapy to those who need protection now. With that, let me finish with where this all leads and what we see for the company going forward. Looking ahead, we see significant untapped potential for the company. With patients at the core of our mission, VASCEPA stands as a globally differentiated and complementary asset, clinically proven to reduce cardiovascular risk and uniquely positioned to unlock significant value across underpenetrated markets. The partnership with Recordati initiated an entirely new phase for the company as we've now transitioned to a fully partnered commercial model across all international markets. Our syndicate of 7 partners across the globe are rapidly pursuing the expansion of the market for VASCEPA. We've continued to efficiently generate VASCEPA revenue in the U.S., successfully defended the brand in the U.S. via competitive pricing and expect that market to remain a significant contributor of cash and profit to the company moving forward. VASCEPA continues to garner strong support globally within the scientific community, particularly among key opinion leaders, clinicians and other influencers around the safety, efficacy and unique mechanism of action of IPE and EPA. And we're just getting started on realizing the full benefit of our newly rightsized operating footprint, including expanded operating margins and an accelerated path to positive free cash flow over the next year. In summary, we're confident in the strategic actions we've already taken, optimistic about the potential and future of our global business and actively working to identify value-building opportunities that capitalize on and leverage all our strengths. As always, we look forward to reporting on our future progress. And with that, I'll now turn the call over to Pete to take us through a review of the numbers. Pete? Peter Fishman: Thank you, Aaron. At the end of the third quarter of 2025, our business continues to demonstrate financial discipline with operating margin and cash flow trends positioned for steady improvement. The third quarter marked the first full quarter following the Recordati partnership agreement as we transition to a fully partnered model outside of the U.S. The results offer early indications that the strategic decisions implemented have positioned the company to enhance shareholder value, and we are optimistic about the path forward. I will now turn to the financial results for the most recent reporting period. Total net revenue was $49.7 million, an increase of $7.4 million or 17% versus the prior year period, primarily reflecting the impact of higher U.S. sales. Net product revenue was $48.6 million, an increase of $6.7 million or 16%. For the U.S. business, net product revenue was $40.9 million, an increase of $10.3 million or 34%, primarily driven by an increase in net selling price from a change in customer mix and an increase in volume by regaining exclusive status with a large PBM during the quarter. As of Q3 2025, we maintained a majority share of over 50% of the IPE market, further validating the resilience of our VASCEPA franchise now 5 years post generic entry, a track record we will continue to manage primarily through our commitment to competitive pricing. For the Europe business, as Aaron mentioned earlier, the transition of our commercialization operations to Recordati is progressing and remains on track for completion by year-end. Q3 2025 was the first reporting period with the Recordati licensing agreement in full effect. Product revenue was $4.1 million, consistent with the prior year period. Current period product revenue includes $1.7 million in supply shipments to Recordati and reflects the shift in our European business model. We are pleased by the continued end-market demand growth across all launch geographies, particularly as we navigate this transition phase with Recordati. It's important to note that by moving to a partnering model, consistent with our Rest of World business, product revenue will be variable quarter-to-quarter, reflecting the current scale of operations as well as the impact of launch timing, in-market demand and the structure of individual partnership agreements. For the Rest of World business, product revenue was $3.6 million, a decline from the prior year, but consistent with the second quarter of 2025. Licensing and royalty revenue was $1.1 million, an increase of $0.7 million, reflecting our partners continuing to drive in-market demand. We are encouraged by the potential of these international markets and remain committed to collaborating closely with our partners to unlock the full potential and reach of these evolving markets, while we continue to efficiently compete on volume and price in the U.S. We look forward to sharing continued progress in the quarters ahead. Turning to expenses. During Q3 2025, we began to realize the savings as part of our global restructuring that was announced in conjunction with the Recordati partnership. Specifically, SG&A was $19.7 million, a reduction of $17.2 million or 47% over the prior year period. This begins to give an indication of our rightsized operating footprint. R&D expense was $4.2 million, in line with our ongoing commitment to global regulatory support and the science underlying our global branded product franchise. We expect these cost savings to continue to flow through the income statement in future quarters. Restructuring expense was $9.4 million, bringing our total cost to date to $32.2 million, of which $17.2 million has been paid as of September 30, 2025. We expect these costs to trend lower going forward as we complete the operational transition. As a result, operating loss was $11.1 million, which is $14.1 million or 56% lower than Q3 2024, a clear indication of a path to more efficient and cost-appropriate operations. In addition, Q3 2025 operating margin was negative 22%, a substantial improvement from the negative 60% margin in the prior year period. Now turning to the balance sheet. We ended the quarter with $286.6 million in cash and investments, no debt and working capital of $446 million, supporting our confidence in the current stability of our capital structure as we move forward with our new business model in Europe. We remain focused on prudent cash deployment to support growth opportunities and drive shareholder value. To wrap up, our Q3 2025 results reflect the combination of elements, the first full quarter under the terms of the Recordati agreement, a new norm in terms of ongoing OpEx levels and the continued resilience of our U.S. business. These factors, along with growing in-market momentum across our international markets have positioned the company on solid financial footing, both now and for the future. We remain sufficiently capitalized to finance our operations while we continue to take steps to progress on an accelerated path to positive free cash flow, which we anticipate achieving in 2026. I'll now turn it over to the operator to begin the question-and-answer session. Operator? Operator: [Operator Instructions] Your first question for today is from Jessica Fye with JPMorgan. Jessica Fye: Two from us, or maybe 3. First, how should we think about the U.S. net price trajectory for the back half of '25 and ideally into '26, if you can comment there? Second, any framework for how we should think about future milestone payments from Recordati? Can you talk about what could trigger those payments? And then lastly, thinking about gross margin over time, I'm curious how you would advise us to think about the trajectory over the next few years in light of what seems like it could be a mix shift within product sales from U.S. sales towards a higher proportion of like supply sales to partners, if that makes sense. Aaron Berg: Sure. Thanks, Jess. Thanks for joining us. Thanks for the questions. I'll address the milestone question first, then I'll turn it over to Pete Fishman to talk about the net price trajectory as well as gross margin over time. As far as the milestones, the structure of the deal is based on sales performance. So as we -- they start off at $100 million in sales and as it goes up from there as Recordati surpasses that, then that's where we trigger the milestone payments. So they're focused on VASCEPA as a priority. They are moving very, very quickly. It will take some time for the growth, but we're confident. It's a long-term partnership. So we have confidence in their ability to drive sales and hopefully achieve those milestones. Pete, do you want to touch on the net price as well as the gross margin? Peter Fishman: Sure. Thanks, Aaron. On the U.S. side for the net price, as we look to the remainder of 2025, we do anticipate that it will be relatively consistent from what you've seen over the last few quarters of this year. As we look into 2026, we're still in early negotiations or conversations with the payers on our -- for our exclusives to determine what our rebate percentages will be. But if you look historically, you have seen a bit of a decline in the beginning of the year going into the next year based off of those contracts and agreements with our exclusives. In terms of the gross margin percentage, you're right. As we move to more of a partnered model, you're going to see a decline in the gross margin percentages going forward. That said, with a decline in our operating expenses moving forward, too, based off of this model, when we look at operating margin moving forward, we will start to see the benefit from these partnership agreements and lower operating expense. Operator: Your next question is from Mazi Alimohamed with Leerink. Mazahir Alimohamed: It's Mazi on for Roanna Ruiz. Just 2 from us. I guess, first, so Europe sales dipped slightly this quarter because of the transition to Recordati, makes sense. But could you outline the cadence of expected royalties or milestones from Recordati going forward and whether the -- I guess you just answered that. So really -- so most -- on this question, with the 4Q '25, does that mark like the trough of European contribution as the transition normalizes? And then a second question for me is, with the recent fenofibrate update, like how do we think about the split or kind of the use of fenofibrate in the U.S. versus rest of world? And how do you think about this update kind of impacting rest of world practices where there may be more fenofibrate use? Could this be like an added tailwind in those markets? Aaron Berg: Sure. Thanks, Mazi. Thanks for joining us, and thanks for the questions. As far as the trough, can you just clarify the European question? When you say Q4 and the trough, what -- can you provide a little bit more clarity on that so we answer it the right way? Mazahir Alimohamed: Sure. I guess I was getting at like do we think that in terms of the transition period and then some of the costs or the added kind of added expenses that would come with the transition period, do we expect that kind of that's now going to be at the end of the year? And then starting '26 and onwards, we expect that all the kind of issues or costs that were associated with that would be over and now we would just be moving forward is kind of what I meant with that first part, if that makes sense. Aaron Berg: Yes. Okay. So Pete, do you want to talk about the restructuring costs we had in Q3 and then into Q4? Peter Fishman: Yes. Sure. So as you've seen over the last couple of quarters, we have had the restructuring costs. It has trended downwards. We do anticipate additional charges within Q4 at a lower level and then moving into next year, seeing those restructuring charges and continuing to see that benefit on operating side of the expense side. As a reminder, what we talked about in our initial release, our restructuring charges in the range of $30 million to $37 million, and we are within that range and expect by the end of the year to remain within that range. And as we also look forward, the transition completing, you'll start to see that normalization of revenue more in line with our typical partnership model of rest of world with that variability on the supply side, but continued royalty stream as well. Aaron Berg: Regarding the question on fenofibrate, first, I'll talk about the U.S. and why it matters and then how that works or what our perspective is versus ex U.S. So the issue in the U.S. is fibrates are used extensively in combination with statins for reducing cardiovascular risk reduction and have been used as such for decades. There are more prescriptions written for fibrates in combination with statins than total IPE, that's VASCEPA plus generics combined. Yet the data continues to show that there is not a reduction in -- there's not a reduction in cardiovascular events when you add fibrates to statins. Yet there is an increase in the risks and certainly on the safety side, as noted in the label. FDA has reacted to that. And science continually evolves. It's good to see FDA step up and acknowledge that because there are a lot of patients at risk when it comes to that. So how that will work out for the U.S. and whether or not that drives the IPE category depends on whether or not there is change by providers and change by payers. They are cheap drugs, and there's a lot of apathy around it. It's a habit that's been instilled, but the science has evolved. And hopefully, all of those stakeholders will respond to how the science has evolved and they can do better for patients and patients need to have better therapies. And frankly, one of those therapies is VASCEPA because we have the cardiovascular outcomes and the FDA indication as such. In terms of the rest of the world, there's -- Europe and rest of the world, there's extensive fibrate use everywhere. There are some countries where it's more than others. They're used primarily to -- with the hope that they prevent cardiovascular events. Even though they're triglyceride-lowering drugs, which is why they're a direct competitor to IPE, to VASCEPA, VAZKEPA in Europe, bottom line is they're used in a way that really should change given that the science has evolved. And the hope is that while the label change from FDA is U.S.-centric, that the science has recognized the rationale for changing that is not a U.S. issue, that's a global issue. The fibrates don't work to reduce cardiovascular events anywhere. And hopefully, that's something that will make a difference in the business. If there's change, then -- and those patients that have elevated triglycerides that are on statins have controlled LDLs or fit the REDUCE-IT criteria, fit our label, fit our reimbursement in these countries, then the option should be VASCEPA. And hopefully, the providers and the payers where reimbursement is and for that matter, where we have regulatory activity going on for future approvals, hopefully, they all respond to that, and we see the benefit for years to come. Operator: Your next question for today is from Paul Choi with Goldman Sachs. Unknown Analyst: This is Daniel on for Paul. So we're curious about like why is the rest of the world revenue declining by half compared to 3Q 2024? If you could provide some colors on that. Aaron Berg: Pete, do you want to comment on that? Peter Fishman: Sure. So as we've talked about in the past, the rest of world revenue in this partnership model is based off of supply shipments to our partners. There is going to be variability within that based off of the end market demand, the timing of the launches and other factors. And leading into last year, there was additional supply purchases as a result of launch in end market with our different partners. We've seen kind of more of a steady state where there hasn't been any of those larger launches in this quarter, and we expect that variability to continue as we look forward in each of these markets. Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Aaron Berg for closing remarks. Aaron Berg: Thank you. Thank you to everyone for joining us today. Thank you for the questions, and enjoy the rest of your day. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Unknown Executive: [Audio Gap] 9 months of 2025, client deposits totaled PLN 221 billion, and client funds including investment funds reached PLN 249 billion. The gross loan portfolio stood at PLN 165 billion and total assets amounted to PLN 317 billion. On Slide 8, we are presenting core financial results. Like I said, net profit PLN 4,892 million. Net interest income, PLN 9,549 million. Net fee and commission, PLN 2.2 billion, up 5%. Total income, PLN 12 billion, up 6% year-on-year. For Q3 alone, it was nearly PLN 4 billion. Our capital position remains solid. Return on equity, 21.6%, excellent liquidity, LCR of over 203%. On Slide 10 and 12, we'll present the new features we've introduced to our offering. Just yesterday, we became one of the first to offer the Samsung Pay digital wallet. We are continuously committed to providing a wide range of payment solutions, and we remain a leader in the area with 1.3 million active cards in digital wallets. So very impressive. Same applies to the number of transactions. For SMEs, we've enabled multicurrency support on business cards. We've also introduced improvements to the Smart Loan process. Let's move on to Slide 13. Business data for first quarter. In retail banking, 4.8 million personal accounts we maintain at the moment, that's up 2% year-on-year. In quarter 3 alone, we opened 113,000 accounts. In cash loans, we issued PLN 9.3 billion in cash loans. In Q3 alone, this amounted to PLN 3.3 billion, 9% more year-on-year. And this marks a record-breaking quarter for cash loans, which we're very pleased about. For mortgages, this has been the best period for 5 quarters. In Q3, sales was PLN 3.1 billion. So similarly to previous quarters, most bulk of sales was based on fixed interest rate and the share of those loans in the total PLN portfolio is 48.6%. In the SME segment, over the first 9 months of the year, we issued PLN 3.9 billion in loans with PLN 1.3 billion in Q3 alone. We're advancing digital processes and the volume of SME loans issued entirely online has increased to leading continuously good results, PLN 3.5 billion, a 17% increase year-on-year. In Q3, this amounted to PLN 1.2 billion. Our e-loan, ePozyczka product is selling increasingly well, and it is now available to start-ups, too. In Business and Corporate banking, loan volumes increased by 8% year-on-year, FX income by 11%. Client activity in remote channels is growing, digital plus mobile customers. Now Corporate and Investment banking, revenues from capital markets rose by 56% treasury transactions up 15% year-on-year. Now moving on. Slide 15, the activity I mentioned previously. This, of course, is driving the size of our balance sheet. As of the end of September, the gross loan book was PLN 165 billion. On Slide 25 in the appendix, we show the sustained strong level of new loan sales across segments. As you can see, we see significant growth. And again, we're very pleased about, especially in corporate banking, 8% year-on-year and quarter-to-quarter, up 2%. Slide 16, client funds, PLN 249.5 billion. Deposits, PLN 221 billion, slight decline in deposits from individual clients, but term deposits, on the other hand, an increase in balance. The drop in current accounts was triggered by the drop in savings accounts. Corporate deposits at 2% increase, term deposits up nearly 8%. Deposits from the public sector increased by as much as 5% this quarter, and term deposits and current account balance also increased. Investment funds reached 23% increase year-on-year and 8% quarter-on-quarter. Now profit and loss account. Net interest income and NIM, that's Slide 17. The net interest income was PLN 9.5 billion, which is 5% better year-on-year. In quarter 3 alone, the growth was by 0.5%. Year-on-year, interest income increased by 6%, while -- and let me highlight that net interest income in quarter 3 is the highest this year and it's nearly as high as the record high quarter in 2024. And that's despite the interest rate cuts. Our NIM was 4.88% on continued operations. So the decline was really marginal. And let me highlight that was despite the interest rate cut. Slide 18, that's net fees and commissions. On a year-to-date basis, they total PLN 2.2 billion, which is 5% up on the last year. In quarter 3 alone, net fees and commissions was 3% higher than a year ago. We saw really nice growth in asset management fees by 18%, insurance fees, FX fees and brokerage fees. Quarter-on-quarter, FX fees increased, insurance fees increased and the asset management fees. Just like in previous quarter, let me highlight that this is the follow-up on this bigger number of transactions done by our clients. We have not changed our prices at all. Slide 19 outlines income. Total income, PLN 12 billion, as I've already said, growing by 6% year-on-year. Let me highlight that in the first 3 quarters, the gains on financial operations were much better than a year ago. In quarter 2, let me remind you, thanks to conducive market landscape, we earned outstanding results under the trading and valuation. Of course, this was driven primarily by FX transactions and trading. In quarter 3, the gains and losses on financial operations position actually normalized. Slide 20, very important for us, operating costs. After 3 quarters, this is PLN 3.6 billion, growing by 8% year-on-year. As you might remember from previous presentations, this is driven by higher contribution to the banking guarantee fund. Excluding regulatory costs, total costs increased 5% compared to the previous year, of course, driven by inflation, pay increases and cost of services. Compared to the previous quarter, the cost in total increased by 2%. Administrative costs without the regulatory costs grew by 4% year-on-year, but compared to the previous quarter, they declined by 7%. Staff costs, they increased by 5% year-on-year and 7% compared to the previous quarter. But this is clearly impacted by accruals for performance-driven bonuses and the focus we have for our performance this year. So the pace of growth in cost year-on-year for 3 quarters remained low at 3%. So as you can see, the pace of growth in cost is close to the growth in inflation, and we keep it under strict control. Loan loss provisions, the net balance for -- of the loan loss provisions for expected credit losses was PLN 439.5 million, much lower than the last year, but this was driven, first of all, the high comparative base. Last year, you might remember, we expanded the criteria for classifying exposures to Stage 2 and the impact of that was PLN 125 million. But the other reason for that is the sound and stable quality of our loan book. The cost of credit risk, 33 basis points, is one of the lowest historical results in the bank. Other key risk indicators like the share of NPLs at 4% remain at a good level. We also can see the stable levels of past due payments and new entries to the NPL. In quarter 3, we did not record any one-off major events. And as you can see on the next slide, we sold nonperforming debt worth nearly PLN 400 million, while the gain on that was PLN 98 million. Slide 22, banking tax and regulatory costs. As I said, in quarter 3, the regulatory and tax levies totaled as much as PLN 730 million. After 3 quarters, our PBT was PLN 6.4 billion, while the tax and regulatory levies totaled PLN 2.5 billion. Summing up our performance after 3 quarters at Slide 23. You can see here all the key lines and figures. I will not repeat it. Let me just highlight the effective tax rate. In nominal terms, the corporate income tax is 19%. But we have many lines in our P&L without the tax shield. So the effective tax rate is now 23.2%. So summing up, I'm happy with business performance. We can see the -- how active our clients are. Sometimes, you can see even record high sales volumes. We have really good quality of our portfolio. We have a high number of transactions and the growing number of transactions made by our clients, mobile transactions in digital channels. So all of that bodes well. We are really looking forward here to the results of rankings by Newsweek and Forbes to be announced today. So we are always curious how we benchmark against other business. And Agnieszka, over to you to the questions-and-answers portion. Unknown Executive: We've got the questions ready. Thanks, Agnieszka. I tried to group the questions. So let's start from the question. It refers to the Polish government recently proposing changes to the bank's corporate income tax. What is your current estimated impact from these changes on the bottom line? What do you think about it? Do you have any strategies you could implement to alleviate this impact? Unknown Executive: Well, let me take this question. In reference to what I have already said, banks are the biggest CIT payers. Every [indiscernible] PLN is paid by banks. Last year, out of 10 top payers, the 10 top payers included 6 banks, and the top 3 payers are banks only, including ourselves. So in my opinion, banks significantly contribute to the state budget. It's slightly surprising to us to make this sector the only one to contribute more, the sector that is contributing most really. So there are many opinions about it, some lawyers say there is a significant constitutional concern. The additional CIT rate should not solely rely on one sector. We contribute to the defense and military expenses. Maybe we'll have a separate conference about it, but also other social initiatives, education. We pay our taxes in Poland. We don't do any optimization abroad, we pay taxes here. So it should be stressed out that we share our profit with the state and with the Polish investors, including the pension fund. Let me remind you that over 23% of bank shares are held by [ office ], that's over 40 million future retirees. And if you look at the stock data, that means return on assets or yield. The banking sector is not the most profitable. The Association of Polish Bank did a research on that. There are 12 more profitable industry compared to the banking sector. We are -- our sector ranks only 13th in terms of profitability. And yet, we already paid the highest taxes in the country. So something very important that the nominal tax rate versus the effective tax rate, there is a difference. We pay more in terms of the effective rate. The nominal rate is 19%. So that would be an increase of 60% [ EBITDA, ] what impact this would have on our P&L. That's the comment I have when it comes to CIT. Unknown Executive: Okay. We have a few questions regarding net interest income and the volumes. What is your current outlook on -- into 2025 and 2026? What is the sensitivity to rate cuts? Unknown Executive: So we assume, it will go down to 4% beginning of 2026. So there will be 2 cuts of 25 basis points. We don't quote cuts in November, but if it's cuts then, of course, well, we forecast it will go to 4% in total, the market prices it in deeper -- but we assume 2 cuts in total sensitivity, no major changes. I said the same thing last quarter. Without SCB [ 257 ] sensitivity, if we have a cut of 100 basis points in the 12-month horizon. We presented on Slide 20. You can look at our NII, rates went down 100 percentage points, and our income is higher. So the bigger size of balance sheet neutralizes those effects. And we are nearing the easing -- the end of the easing cycle. What else? Expectations with regards to the growth in loans. We are optimistic. And so our CEO said, we are growing retail mortgages. We expect the trend to continue also in the business segment. And growing the business segment was 9%. So we think that in 2026, we will see growth in investments and the growth in loans to businesses will be solid. Unknown Executive: And there's also question in English, when do we expect big cuts for loan volumes? Unknown Executive: Well, we started the pickup in 2024. So we are not complaining about the lack of growth. In quarter 3, we can see the effect. But this is a one-off seasonal development. Sometimes, we have things coming into the portfolio and getting out especially in CIB. But for CIB, all other segments show solid growth. That's about -- referring to this section of questions. In referring to costs, there are 2 questions. A general one and a detailed one. Wojciech, the outlook for the growth in cost in 2026. Wojciech Skalski: Just to remind you, and by way of a disclaimer, our bank does not publish official forecast. We can just treat it as some guidance. And as we follow the strict cost discipline, and nothing changes here. We know how to keep it in place. When it comes to our fixed cost overhead, we can say that if we take a look at the inflation outlook for the next year, that will be the indicator of the growth, the band of changes, but we shouldn't forget that there will be costs related to the change of the owner, but we are not ready yet to give any result figures. But I think that our next meeting, we will be able to tell you more. But that will be a separate category of cost for us because there will be nonrecurring. Looking at the detailed questions, let's read it out. What part of cost represented the cost of IT employees. But that depends how you define it, IT people. I try to take a look at that, and people who deal with technology in the common understanding, who works in the unit called the digital transformation division. But there are also people supporting operations in the bank, and we wouldn't treat that as IT. That's roughly 15% of our staff costs. But at the same time, we should remember about 2 things. People with IT skills work not only in this division, but also in others. So we are not capturing that so that we could give you a detailed analysis. But the other thing is also that the bank supported itself when we need short-term or especially support by contractors, IT specialists. When spending on this type of technological solution is that the total development is capitalized and then it's amortized totally, so its impact on cost -- so of those costs are quite wide ranging. But roughly, we can say, 15%. These are the people who work in the IT division. Unknown Executive: Thank you, Wojciech. And the section about foreign currency mortgages. But we can actually boil down the answer to answering future risks and the expectations of provisions. Now once again, we have Michal Gajewski. Michal Gajewski: Let me answer that. First of all, we believe that our provisions are adequate. The coverage ratio is 154% on average. We are reviewing parameters in our models, and we will have such a review in quarter 4. All the time, we keep supporting the settlement program. At the end of September, we signed more than 11,000 settlements because we think that this solution is the best for clients and for us as a bank. And that will be my comment to it. Unknown Executive: A couple of credit risk. What do you think will be the normalized cost? Unknown Executive: I don't know what you mean in terms of normalized, in what horizon. But we can -- but to give you some guidance for the future, we do not expect major changes here, either in the profile of cost of risk, and that's been mentioned in the presentation. And in the months to come, it should stabilize. You might remember that in our strategy, we had KPIs and the cost of credit risk across the cycle was from 70 to 90 bps, and that was given for consolidated data with SCB. And on Slide 24, as I said last quarter, the difference was in the order of 10, 15 bps. So you should really adjust that bank by this. But at the moment, we are at this point of the cycle with such macro outlook now and for the next year that we cannot see any dangerous signals. So when it comes to credit risk, we are optimistic and we expect stabilization. Unknown Executive: There are a few detailed questions about deposits, hedges and NII. Let me start with a few questions referring to a decline in current deposits, that 4% in retail. What is the reason, the outflow? Is there any impact on that triggered by the owners change? But when it comes to the decline in current deposits, our CEO mentioned that, and it is stated directly in the presentation and in our report. And you have the figures there, current deposits in Poland include savings account and the decline in current deposits in quarter 3 was driven by the decline in balances and savings accounts because in quarter 2, we have special offers. When it comes to the current account just for daily banking, we can see positive transfer. So this was a one-off driven by savings accounts. And the explanation of that is on the presentation and the report. Corporate deposits, they increase. And there is a question about it, while interest expense declined at the same time on those deposit, how does it happen? The deposits are growing because the good relationships we have with our clients, and the interest expense declines because our -- because interest rates are cut because the beta, that is the percentage to -- but the extent of percentage share, we reflect the interest rate cut. So we reflect this interest rate cut in repricing our term deposits. So that's several percent, so that's beta. And that is the reason for the decline in our interest expense on deposits. And moving on to the next question about strategy. We will continue the strategy for term deposits, where for current deposits including savings accounts, we assume they will be growing. So our deposit strategy remains unchanged. So just one more detailed question about hedges. Is there anything exceptional happening in quarter 3? Not really. And I think, maybe as I do not understand the question. So if you have any doubts, please contact Agnieszka to discuss, and we will get that clarified. But our strategy assumes that at this point, some hedging positions for swapping the floating to fixed rates, and we are renewing them and rolling at lower rates. But otherwise, our strategy remains unchanged. And each quarter, the share of fixed rate loans and total loans keeps growing, which is the effect on the one hand of our hedging strategy, and on the other hand, this is the follow-up of the percentage of loans represented by fixed rate loans in the total sales. So we haven't changed our approach. More questions. I think we've got 3 left. Will there be a wider marketing campaign in the fourth quarter to support the loan volumes? No, the volumes are going up. They're beating the market. So I don't think we need any action to boost production. All right. Now legal risks linked to unauthorized transactions. There is a similar question whether the bank will take action to verify whether the potential change in terms of the CIT rate is not in breach of the constitution. Well, here, we're talking to the Association of Polish Banks about it. That's the forum where we discuss it. No decisions have been taken yet in that respect. Unauthorized transaction, maybe let's take that separately. We're not -- we don't have provisions in the third quarter for lawsuit, potential lawsuit in that respect. Nothing like this happened. We don't have any development in that respect to change our perspective regarding the legal risk versus the previous quarter. That's the end of this question. Lower credit fees, what was it driven by? The line includes the brokerage costs. We have a higher retail lending book, and it stimulated also the -- our network of brokers. And those costs, of course, encumber that line in our financials, hence, generating the drop. Any other questions, Agnieszka? Agnieszka Dowzycka: No, we've exhausted the list. Unknown Executive: If you have any questions after this call, of course, we'll be happy to take them. Send them to my office. Thank you very much. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Ladies and gentlemen, good afternoon, and welcome to the Teradyne Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to Amy McAndrews, VP of Corporate Relations for Teradyne. Please go ahead. Amy McAndrews: Thank you, operator. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Greg Smith; and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for the third quarter of 2025 and our outlook for the fourth quarter of 2025. The press release containing our third quarter results was issued last evening. The slides as well as a copy of this earnings script are available on the Investor page of the Teradyne website. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risks that could cause Teradyne's results to differ materially from management's current expectations. We caution listeners not to place undue reliance on any forward-looking statements included in this presentation. We encourage you to review the safe harbor statement contained in the slides accompanying this presentation as well as the risk factors described in our annual report on Form 10-K for the fiscal year ended December 31, 2024, on file with the SEC. Additionally, these forward-looking statements are made only as of today, and we do not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances, except to the extent required by law. During today's call, we will refer to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measures were available on the Investor page of our website. Looking ahead between now and our next earnings call, Teradyne expects to participate in the UBS Technology Investor Conference. Our quiet period will begin at the close of business on December 24, 2025. Following Greg and Sanjay's comments this morning, we'll open up the call for questions. This call is scheduled for 1 hour. Greg? Gregory Smith: Thanks, Amy. Good morning, everyone, and thanks for joining us. Today, I'll discuss our third quarter results, talk a bit about what is driving the business in Q4 and provide a general update on conditions across our businesses. Sanjay will then provide more detail on our third quarter results and fourth quarter guidance. As you saw in the earnings release, we grew sequential revenue 18% and non-GAAP EPS by 49% in the third quarter. This growth was driven by AI demand in semiconductor tests. Our other test businesses delivered on plan in the quarter. In Robotics, we continue a slow crawl up from our Q1 revenue trough in a challenging environment. The huge investments in cloud AI build-out drove our Q3 performance to the high end of our guidance range as our customers ramped production of a wide range of AI accelerator, networking, memory and power devices. An example of this AI strength is in compute, where our view of the second half of 2025 revenue is more than 50% higher than our expectations just 3 months ago. Some of this increase comes from us responding to customer pulling requests and some is demand increases. As design, process and packaging technologies for AI compute rapidly advanced, we expect that our growth will continue. Our UltraFLEXplus system has been architected from the ground up for high-performance processors and networking devices, which have demanding power, pin count and test data requirements. As AI devices become more complex, the UltraFLEXplus architectural advantages become more valuable to potential customers by enabling fast test development times and high-efficiency volume production. Our focused investment in R&D is also yielding new differentiated capabilities for compute tests, some of which have been already been announced in Q3. In memory, our Q3 memory test sales more than doubled from Q2 to $128 million, with the majority of those shipments supporting AI applications. In Q3, 75% of our memory revenue was driven by DRAM, nearly all of it from final test of DRAM and HBM performance test. 25% of revenue was from flash mainly for cloud SSD, another segment being driven by AI data centers. Our Magnum 7H product is differentiated in HBM performance test because it is a multi-generational product. It can cover the test needs of HBM3E and HBM4, and it provides upgrade headroom for HBM4E and HBM5. The Magnum 7H also supports HBM singulated stack performance test. In Q2, we won a design in for this insertion. And in Q3, we began volume shipments. So at this point, Teradyne participates in all major test insertions for HBM, memory die wafer sort, post stack wafer test and singulated stack test. Our results in memory test this year are especially satisfying in light of the composition and size of the memory TAM for 2025. Our best guess is that the total memory TAM for 2025 will be down low double digits, and the weakest part of this market is flash, our traditional strongest segment. Despite this, we expect our memory revenue will sustain at 2024 levels. AI-driven applications for power ICs were a bright spot in the auto industrial market segment. The Eagle Test platform has a leading position in the test of high-performance power conversion devices for data center applications. Volumes of these devices are forecast to grow over 50% between now and 2027. We expect the demand for VIP compute and networking to continue to grow significantly, and we have been investing in R&D, applications, sales, support and manufacturing capacity for this expansion. This includes investments to win new VIP and merchant GPU customers. We're making good progress on new design and opportunities and are cautiously optimistic about our potential success. But I would like to make it clear that our Q3 results and our Q4 guidance do not include any revenue from these types of new opportunities. For the deployed fleet of UltraFLEX and UltraFLEXplus testers, we see higher utilization and fewer system upgrades than in past quarters, which we believe means that customers are exhausting their inventory of underutilized systems. As a result, we now expect a more direct connection between inflection in end market demand and new system sales. Looking beyond AI and Semi Test, conditions in mobile and auto industrial remained somewhat weak. Now in our Integrated Systems division, our Q3 shipments were above plan as SLT customers accelerated deliveries for mobile processors and compute applications. We also saw increases in orders for both HDD and SLT systems. Now recall, lead times are generally measured in quarters for this business, so most of that order strength will translate into revenue in 2026 and beyond. In Robotics, we are growing slowly from our trough quarter in Q1 2025. If you go down 1 level of detail, we continue to see persistent weakness in our core indirect distribution channel as we expand our large customer and OEM channels. An important element of our robotics strategy is to establish UR cobots as the preferred platform for AI-driven work cell applications and to deliver superior performance for our AMRs by leveraging AI features. In the third quarter, over 8% of robotics sales were for AI-related products, up from 6% in Q2. Another element of our robotics strategy is to deliver value-added service to our installed base of over 100,000 robots. Service represented 14% of sales in Q3, up from 12% in Q2. As we noted in our July call, our Semi Test business has evolved to where the largest demand driver is AI data center investments rather than consumer end markets. We have aligned our R&D and go-to-market investments to capture the tremendous opportunities in test driven by this AI related demand. Our investments are focused on extending our product performance advantages with innovative R&D, while also expanding our engineering teams to help customers develop and ramp production of these fantastically complex devices on Teradyne platforms. Sanjay will describe how these investments translate into OpEx, but as we're seeing, the returns are well worth the investment. Looking at Q4, we expect AI-related demand for compute, networking and memory to be the primary engine of our growth, which reflects both industry trends and the result of our investments to align with those trends. Looking to the future, the long-term themes that we've highlighted in the past, AI, verticalization and electrification remain firmly intact. As we enter 2026, we expect AI and verticalization will be the primary growth drivers. We've said before that the AI market is both highly concentrated and highly dynamic. The timing of any one project can affect the delivery schedule for hundreds of testers. This can swing quarterly results significantly. So with that understanding, let me offer a few high-level comments about how we're looking at 2026. At the company level, 2026 looks stronger today than it did 6 months ago, and all indications suggest solid growth from 2025. We anticipate that business conditions for mobile, auto industrial and robotics will improve, but the timing and the intensity of that recovery is uncertain. But the real story in 2026 is AI and the investments that we have made to develop differentiated solutions in that space will drive our growth plan. I'd like to share a few specific examples. Massive investments in building data centers are translating into strong demand for UltraFLEXplus in VIP, compute, merchant compute and networking. In the memory market, AI will drive growth in HBM, DRAM and flash for SSD applications served by Magnum. Accelerated big growth in HDD is driving the demand for more HDD test. The deployment of AI-capable processors for mobile, client computing and cloud AI is driving the demand for more system-level test. We plan to give you a more detailed view as part of our model update in the January call. Now before I hand the call over to Sanjay, I would like to say a few words about the CFO transition that we announced last night. Michelle Turner will be our Chief Financial Officer effective November 3, 2025. She brings 30 years of financial and strategic leadership experience in the technology and manufacturing sectors, and she has a strong track record of driving growth, disciplined capital allocation and operational efficiency. She is looking forward to getting to know all of you in the upcoming quarter. I'm excited to welcome Michelle to the Teradyne team. Now Sanjay has been Teradyne's CFO since 2019, and he has offered to stay on as an executive adviser to operations as we expand capacity in 2026. I want to thank Sanjay for his excellent leadership and contributions over the past 6 years, and I'm grateful that we will have the benefit of this guidance. With that, I'll turn the call over to Sanjay. Sanjay Mehta: Thank you, Greg. Good morning, everyone. Today, I'll cover the financial summary of Q3 and provide our Q4 outlook. Now to Q3. Third quarter sales were $769 million and non-GAAP EPS was $0.85, both near the high end of our guidance ranges. Non-GAAP gross margin was 58.5%, above our guidance range due to favorable mix. Non-GAAP operating expenses were $293 million, up sequentially and year-over-year on higher R&D, sales and marketing investments tied to AI as well as increases in our variable compensation. Non-GAAP operating profit was 20.4%. Turning to our revenue breakdown in Q3. Semi Test revenue for the quarter was $606 million, with SoC revenue contributing $440 million, which was up 11% sequentially and 12% year-over-year. Memory revenue was $128 million, up 110% sequentially and down 15% year-over-year. Strength in SoC was driven by AI compute and AI-related power test. Memory revenue more than doubled from Q2 on HBM and AI-related LPDDR demand. IST revenue was $38 million, up 9% sequentially, 46% year-over-year driven by strength in SLT shipments. In product test, Q3 revenue was $88 million, up 4% sequentially and 10% year-over-year, driven by growth in defense and aerospace. Now to Robotics. Revenue was $75 million, flat quarter-on-quarter and down year-over-year. In the quarter, UR contributed $62 million and MiR contributed $13 million of revenue. As we noted in July, volume shipments to our large e-commerce customers are not expected to have a material impact on robotics revenue in 2025. Some other financial information in Q3. We had 2 customers that directly or indirectly, which drove more than 10% of our revenue in the third quarter. The tax rate, excluding discrete items for the quarter was 16% on a GAAP and non-GAAP basis. Our free cash flow was $2 million. Our net income was offset by our net working capital increases tied to accounts receivable and inventory, which reduced our free cash flow. Receivables growth was tied to increased sales, which were weighted to the second half of the quarter. Inventory growth was tied to the ramp in compute and memory driven by upcoming AI demand. CapEx of $47 million was reasonably consistent with Q2. We repurchased $244 million (sic) [ $246 million ] of shares in the quarter and paid $19 million in dividends. Through the end of the third quarter, we've returned $575 million or approximately 2.5x our free cash flow through dividends and buybacks to shareholders during the year. We ended the quarter with $427 million in cash and marketable securities. Now a little more detail on OpEx and our balance sheet strategy to help you with your modeling. In the second half of 2025, we're continuing to lean into R&D and go-to-market investments for AI opportunities that we expect will drive revenue in 2026 and beyond. OpEx in the second half of 2025 is also increasing tied to our variable compensation linked to increasing financial performance. At the midpoint of our Q4 guidance, we'll have full year revenue growth of 9% and OpEx growth of 7%. Long term, we target OpEx growth at approximately half the rate of our revenue growth. In 2026 and longer term, as AI revenue blossomed, we expect to meet our OpEx target. Regarding the balance sheet, we expect to keep our cash and marketable securities at roughly $400 million while also continuing our balanced capital allocation strategy. In 2025, we saw an opportunity to accelerate buybacks in the short term to further enable shareholder value. At the operational level, we expect to exercise our credit lines more frequently as we did in Q3 and expect to in Q4. From a modeling perspective, this means the interest and other line of the P&L will reflect higher interest expense. You should expect to see a couple of million dollars of net interest expense per quarter while we utilize our revolver. Now turning to our outlook for Q4. Before discussing the details of Q4 guidance, I'd like to remind you of some of the commentary from our July call. Specifically, we noted that we had large projects expected to ramp, which straddled Q3, Q4 or Q4, Q1. As we move through the second half of 2025, we saw projects accelerate into Q3 and are now seeing projects accelerate into Q4. These projects are AI-driven. In Q3, we were able to meet early ramp demands. In Q4, we are seeing demand ramp significantly. We continue to expedite our supply chain, and we are accelerating production capacity growth at factories in multiple geographies to meet the demand. Now the details. Q4 sales are expected to be between $920 million and $1 billion. Fourth quarter gross margins are estimated at 57% to 58%. This includes some onetime supply costs in the quarter to meet accelerated demand. Turning to OpEx. Q4 OpEx is expected to run at 31% to 33% of fourth quarter sales. The non-GAAP operating profit rate at the midpoint of our fourth quarter guidance is 25.5%. The Q4 GAAP and non-GAAP tax rate is expected to be 14.5%. Q4 non-GAAP EPS is expected to be in the range of $1.20 to $1.46 on 157 million diluted shares. GAAP EPS is expected to be in the range of $1.12 to $1.39. Summing up on Q3 results and Q4 guidance. AI is growing across the economy, driving exceptionally strong semiconductor test demand in the second half of 2025. This is evident in our Q3 sales, profit performance and our outlook for Q4. The acceleration of test demand in Q4 reflects customers' drive to pull AI projects in from Q1. We're optimistic about the AI-related market 2026, but we also know shipments can be lumpy. Now to my final remarks. After 6-plus years at Teradyne, it's clear that Teradyne is well positioned for significant growth over the midterm. Many environmental challenges have occurred during my tenure such as significant government regulations, COVID, tariffs, CEO transition, along with the strategic pivot of investments to AI in 2022. Through all of these opportunities, we have strengthened the company's infrastructure and processes. Our operational resilience is significantly stronger as we have derisked our supply chain, started the journey of multiple factories and multiple geographies to enable significant growth rooted in AI, strong management leads our diversified portfolio enabled through our variable business model, which has consistently delivered tremendous free cash flow through all of the changes and volatility we've experienced. Our balance sheet is strong with firepower to enable strategic investments, continue to deliver a balanced capital allocation and strong returns for our shareholders. I've had the opportunity to make New England my home and built many lasting relationships here internally and externally. I've enjoyed working with our shareholders and all of you in the investment community. With that, I'll turn the call back to the operator to open up the line for questions and soon hand the keys over to Michelle. Operator? Operator: We will now be taking questions from Teradyne's research analysts. [Operator Instructions] We'll take our first question from C.J. Muse with Cantor Fitzgerald. Christopher Muse: Sanjay, big congrats to you. I guess when you look at -- so short-term question, long-term question. So short term, roughly $150 million upside versus consensus for December. And I would be curious if you could kind of share how much of that upside is versus what you thought maybe 3 months ago is driven by HBM, VIP, networking, SLT or perhaps other? Gregory Smith: So CJ, it's Greg. When you look at Q4 it's really all in compute and memory is where the upside is coming from. If you look across the rest of the company, it's kind of not too different quarter-on-quarter, maybe a little bit stronger in our product test division, a little bit stronger in robotics. But the real story is in compute and memory. And I'd say it's kind of 2/3, 1/3 in terms of the like compute is kind of 2/3 of it, memory is about 1/3 of it, and HBM is really strongly represented in that memory up. Christopher Muse: Very helpful. And then I guess, longer-term question on the compute side. I would be curious, as you think about high-performance compute, leapfrogging mobility reports suggest that NVIDIA is going to be the lead customer for -- with Feynman A16. How are you thinking about compute intensity? How are you thinking about increased test insertions? And really, how are you thinking about kind of test time in a world where compute is driving leading edge? Gregory Smith: So the -- we're pretty bullish about it in general, that as the die sizes get bigger and the performance required from the devices sort of gets -- the performance goes up, the test intensity also has to go up. The other thing that makes us pretty optimistic in terms of sort of how this will affect the TAM for compute devices is that chiplet-based designs are becoming more and more of a thing. And when you get to the later stages of building up these complex multi-chip packages, the cost of -- sort of the cost of scrap really, really escalates. So that drives this sort of shift left adding tests intensity upstream. And then there's also the downstream effect, which is these chips are going into data centers. And as NVIDIA likes to say, they're being used as if they're like 1 gigantic GPU. And so like 10,000, 50,000, 100,000 nodes have to work perfectly for an entire training run. So there are tolerance for latent defects coming out in the middle of those kinds of training runs is very, very low. So those sort of environmental factors really make us think that the test intensity for the compute segment is going to continue to grow over the next few years. The other thing that's happened in compute is that because it's now the primary driver for the semiconductor industry that many of the strategies that we've seen in the mobile space for years and years around things like dual sourcing, are becoming much more important to the producers in this space, like the strategy that you need when you're a small portion of your capital equipment providers, overall shipments is different when you actually dominate those shipments. You start to feel a little bit more vulnerable. And so customers in this space are increasingly turning to this notion of dual sourcing their supply chain at every step. And since we're coming from a lower share position trying to gain share, that dual sourcing is actually a very good thing for us. Christopher Muse: Thank you, Greg. Appreciate it. Operator: We'll take our next question from Mehdi Hosseini with SIG. Mehdi Hosseini: Greg I want to double click on these structural changes that are happening at various test insertion. And I want to focus on wafer level test. How do you see your activity and design wins manifesting into increased penetration in this specific segment. And with the burn in on a wafer level be part of the those design wins? And I have a follow-up. Gregory Smith: Yes. So we definitely believe that SLT is a critical part for this sort of late-stage, ensuring that there aren't latent defects going into the data centers. So we think that there's positive effect there. The other thing is that there are new technologies that are coming along, like CoWoP where more complex modules are being built up and they need to go through a relatively extensive system test and burn-in. So we believe that -- so we look at this as sort of a contiguous market between burn-in and SLT because the burn-in is generally done with the devices fully operating, not in a sort of -- in the test state. Mehdi Hosseini: Okay. Maybe we could take this offline because there's so much technology. But when I look at your commentary that in your prepared remarks, none of the design wins have been embedded in your guide. I want to go back to your 2028 EPS target of $7 to $9.50. I imagine these design wins weren't factored in when you provided that target earlier this year. Would that be a fair statement? And how would you think about those targets in addition to the design wins that you highlighted in your prepared remarks? Gregory Smith: Yes. So we'll update everyone in January in terms of our long-term model. The thing that I -- like as we're thinking about it, the thing that is apparent to us is that the long-term destination is not all that different, but the composition of the market is. So we believe that we're well positioned to achieve the long-term model that we have published prior, but we believe that the composition of that business is going to be much more heavily dependent on the things that are being driven by the data center build-out. And that's across compute, networking, memory, even power that, that is far more important in the mix than the way we were looking at the long term before. Operator: We'll move next to Timothy Arcuri with UBS. Timothy Arcuri: Greg, so I assume Semi Test is up something like $200 million in the guidance for December. So I'm just wondering if you can give us a sense. I know that this stuff is all pretty lumpy. But can you give us a sense like it seems like it's maybe evenly split between memory and SSD. Is that a fair just general number to kind of think about in terms of the composition of the growth in calendar Q4? Gregory Smith: Yes. So -- the -- it's not quite -- it's not half and half. It's more 2/3 compute and networking and 1/3 memory in the up. Timothy Arcuri: Okay. Okay. Great. And then, Sanjay, can you talk a little bit about revenue shaping next year? I know memory tends to be pretty lumpy. I mean, in particular, memory. And I know that there's this big stuff shipping in Q4. So can you just maybe give us a little bit of a sense on Q1? I mean, is it -- should we expect it to be down a little bit? And how do you see next year from a loading point of view? Sanjay Mehta: Sure. I think in Greg's prepared remarks, we talked about the key drivers. And in my prepared -- key drivers going into 2026. And overall, we thought that the revenue would be up relative to 2025 tied to those drivers. And in my remarks, as well as Greg's, we talked about the acceleration of key projects that straddled Q3, Q4 and Q4, Q1 and the ones in kind of Q1 kind of accelerating into Q4. And so overall, we do see demand accelerating. I will share that from a seasonality, maybe if that's what you're getting to, is that the revenue mix has changed as we've noted in the second half, really tied to Semi Test driven by AI tied to compute and memory revenue. Historically, our business has been driven by the mobile launches where we've had significant demand in kind of Q2 and Q3. Business is no longer driven by that. If it comes in, sure, we'll have tailwinds on that front. It's more driven by compute projects. And those are lumpy, and they're really tied to customer launches. So I think overall, what you'll see is a little different shaping in the way of seasonality for our business going forward. And we'll give you an update in the call in January. Operator: We'll take our next question from Krish Sankar with TD Cowen. Unknown Analyst: This is Steven calling on behalf of Krish. Greg, first question for you related to the VIP customer demand as well as you mentioned of merchant GPU opportunities in the future. I guess first thing is in terms of the VIP customers, how much more expansion do you see in terms of the customer base from the larger CSPs and similarly for Tier 2 CSPs. Is there a direct relationship that you have also with those customers potentially? Or is that more of a foundry type relationship? And similar question for merchant GPUs, is that direct or more of a foundry type of testing relationship? Gregory Smith: So in terms of the VIP customer base, it is incredibly concentrated that there are a lot of design starts. There are a lot of chips that are being developed, but the vast majority of the tester demand in the VIP space is really being driven by 2 customers. And that's how that market is playing out right now. What seems to be happening is that each of the hyperscalers has their own chip development program, and they benchmark that against what they can do with merchant silicon. And if the merchant silicon provides a better sort of tokens per watt, then they don't tend to ramp their internal silicon to the same extent. So like right now, we see that market as concentrated and it's going to expand -- that base is going to expand pretty slowly because it's a very competitive environment. The thing that we see with VIPs is as those VIPs are growing there, the actual specifier, the chip developer, the hyperscaler itself is exerting more control over the whole supply chain. They are moving from aggregator to aggregator. They are forming different partnerships and they're taking more control over their supply chain. So sort of the way that people look at it in terms of the aggregator, the design partner as the one influencing the decisions, I think that, that is something that will fade over time, and we've seen it that occur in some of the VIP customers. In the merchant space, it is all at the specifier, not at the foundry. So the merchant GPU or CPU player is the one that is going to decide on the test platform. They're the ones that are going to control the test programs and all the test IP. So our efforts around gaining share in merchant GPUs is directed at the specifier themselves, not at anyone in the supply chain. Unknown Analyst: Great. And just for my quick follow-up, for hard disk drives, just some of the strength that you mentioned there from the cloud demand, I was just curious like for System Test, like are you expecting strong double-digit growth in that segment for Q4 as well? Or could it be higher than that? Gregory Smith: So the process of adding capacity in HDD is -- it takes time. The manufacturing process for HDD is a complex one, highly automated. It's heavily capital-intensive, and so we're definitely seeing an uptick in the orders associated with that. There's a lot of optimism in the space, but we would expect that to have a greater effect in 2026, then we would expect to see anything in 2025. 2025, I think, SLT is -- we're not expecting to see significant growth in the IST Group in Q4. Operator: We'll move next to Shane Brett with Morgan Stanley. Shane Brett: Let me ask a question in a bit more of a direct way. As of this moment, do you sort of expect SoC test to accelerate from this really strong December quarter into the first half where do you really kind of bake in a bit of seasonal decline or kind of a bit of conservatism into the March quarter? Sanjay Mehta: I'll just reiterate some comments and maybe, Greg, if you want to add to it. The second half of the year of '25, we talked about straddling and we talked about the projects accelerating, and we're seeing that continue to accelerate. Of course, there's projects in the pipeline in Q1 and Q2 of 2026. It's just going to depend on how those projects go. Generally, we're seeing projects accelerate though. Gregory Smith: Yes. I think as we talked about, there are things that are perched between quarters. The thing that I will say is Q4 was sort of a new high watermark for us in terms of capacity and shipping against our memory test and our SoC products. We expect demand to continue to be robust going into 2026. But like as an analyst, it would probably be a mistake to like look at the growth from Q3 to Q4 and draw a line straight up from there because there -- it's -- we're at a relatively high level, and we expect continued strength, but it is really lumpy and the timing continues to be uncertain, even between Q1 and Q2 of next year. Shane Brett: Got it. That's helpful. And for my follow-up, it's on memory. At a conference intra-quarter, you mentioned that on a go-forward basis, DRAM and NAND will grow, but NAND will grow faster because of how low it is right now. Just how low has NAND been this year relative to prior years? And what sort of growth are you expecting for the NAND portion of memory going forward? Sanjay Mehta: Yes. It's Sanjay. So NAND is really low -- really from a percentage standpoint. I think it's really going to tie to the growth driven in the mobile industry. And if we see that growth, then it will -- then it should take off. But right now, it's at a really low point. And where we see it -- where we see DRAM is strengthening, obviously, in the HBM environment. Gregory Smith: Yes. So our -- in the quarter, our business was 75% DRAM, 25% flash. And if you look at the results for our competitors, even more dominated by their DRAM shipments. Going into 2026, if there is -- so there's a couple of things going on in flash in 2026. There's likely to be a protocol shift in the mobile market, and that will drive some tester capacity purchase just to support those new standards. And then there's the X factor around SSD capacity required for AI data centers. And right now, I think that there's -- there are like rumblings in the end market that there's going to be demand increase for SSD. We haven't seen that translated in terms of increased forecast, but we're optimistic that, that market should be a bit stronger in '26 than it was in '25. Sanjay Mehta: And maybe just to add to my comments for a little bit more color. If you go back to 2020 or 2021, the DRAM and flash mix was more like 50-50 in rough numbers. But the flash view of TAM looking backwards was more than double than what it is now. And so it's really contracted. It's a much smaller component of the memory TAM. Operator: We'll move next to Jim Schneider with Goldman Sachs. James Schneider: I was wondering if you could maybe kind of return to your expectations for mobile SoC heading into next year, realizing that Q2 and Q3 are seasonally stronger quarters. Do you have any sense about what you might expect sort of directionally in terms of improvement next year? And maybe just remind us of the relative sort of either test time or content increase you expect moving to the N2 generation? Gregory Smith: Jim, so mobile SoC has been at a pretty low level for the past couple of years. Looking forward to next year, we don't know. I think the honest answer is we don't know exactly how big it would be. We're optimistic that it should be bigger than it is this year, but we're unsure of the magnitude of that. And let me tell you the why. So there are 3 factors in terms of how big the mobile TAM is really going to be. One is the complexity of the part. And with N2 and with new packaging technologies like WMCM, we expect that the test intensity per part is going to be higher, like double digits kind of higher. The next factor is like yield. For new technologies, sometimes yield is lower. We do not count on that because there's been sort of a pattern of execution at very high yields for these kinds of products. So we are not expecting that to be a particular tailwind. The one that's really the most important factor right now is in unit volume that if there is a significant upward inflection in handset sales, people are refreshing phones because new phones are doing something interesting, then that not only drives the whole mobile processor space, but it also drives RF and PMIC and everything else. So I think the big X factor for us is whether we see an inflection in unit sales in 2026. If we do, it could be a strong year. If we don't, it would probably be just a modest improvement from where it is. James Schneider: That's helpful, Greg. And then maybe from a sort of financial perspective, obviously, 2026 is saving up to be a relatively solid growth year for you, but maybe you can remind us of the OpEx leverage you expect to get in the model, in other words, for every dollar of revenue increase or every 10% of revenue increase, how much OpEx increase would you expect to flow through? Sanjay Mehta: It's Sanjay. So as I said in my prepared remarks, our growth in OpEx was a little bit higher relative to the leverage we wanted to have -- we have in our overall earnings model, and that's going to happen from year-to-year. But in 2026, and our operating principle is basically for every dollar of revenue, we want to have of growth, we'd see roughly 50% of that in OpEx growth. So kind of like a ensuring that we are driving OpEx leverage. We expect to be at roughly that rule going into next year or being at that target roughly in 2026. Operator: We'll take our next question from Samik Chatterjee with JPMorgan. Samik Chatterjee: Sanjay, congrats on the retirement. And Michelle, congrats on the role as well. Maybe for the first one, Greg, I'm curious, I mean, you're calling out the memory increase overall in 4Q. And clearly, it looks like a step-up for next year as well. How much of the improvement here is related to market share that you talked about market share wins that you talked about earlier in the year relative to sort of general industry purchasing patterns being better. And when you look at the overall portfolio, what are the end markets you would expect to sort of gain share and which are the areas you would sort of highlight as share opportunities as you look to 2026? And then I have a quick follow-up. Gregory Smith: Yes. So the way that we look at the memory market is primarily -- think of it as like a 2x2 grid. We think of DRAM and we think of flash memory and then the other axis is wafer sort and then final or performance test. And if you look at like within each segment, our share is like very high like flash final test and DRAM final test, HBM performance test. We have healthy share in the final test section of the grid. Our share overall in the wafer sort, excluding HBM performance test is significantly lower. And so when the market is dominated by purchases for final test, our share tends to go up. And when the market is dominated by capacity adds for wafer sort, our share tends to go down. Looking into 2026, we're expecting that it's going to be an expansion year for memory in general. And so we think it's going to be a good year for us, but we also think that there's going to be a significant expansion in the SAM for the wafer sort part of the market. So I don't know if we're going to see significant share increase but I'm pretty sure we're going to see revenue growth. Samik Chatterjee: Okay. Great. And then a quick one for Sanjay here, Sanjay, and I apologize if this has been addressed before, I jumped on a bit late. But the gross margin guide for 4Q relative to where you ended 3Q, given the volume leverage that you should ideally see a bit more sort of muted. Can you just walk through the gross margin driver for the fourth quarter? Sanjay Mehta: Sure. So obviously, volumes are going up, and that's a tailwind. And we're -- at the midpoint, our guide is 57.5% and the headwind is really driven by 2 factors. First, we are investing in factory expansion in multiple geographies. That's a bit of a headwind. But I think the larger headwind is really tied to the significant acceleration tied to projects and end market demand. And to meet our customer delivery requirements, we've gone out and we've sourced some -- think of it as onetime kind of supply that's had kind of onetime, a little bit of elevated cost tied to meeting kind of customer requirements. And so that's what's occurring in Q4. So 2 headwinds offsetting the volume tailwind is really the expansion of the factory and some supply chain kind of cost increase that's somewhat transitory or onetime. Operator: We'll move next to Brian Chin with Stifel. Brian Chin: Sanjay, definitely wish you the best. For the first question, on the AI accelerator part of the business, can you give us a sense of how significantly weighted that was the second half and maybe 4Q this year. And obviously, a lot of networking strength this year in SoC. For the full year, is AI accelerated revenue significantly above what you expected entering the year? Gregory Smith: That's -- it's an interesting question because our view of the year changed pretty dramatically between January and March. So in January, we were pretty optimistic about how 2025 would come out. By March, we were far more pessimistic because there was a lot of uncertainty in the market by the -- but leaving the year, like looking at it from the -- towards the end of 2025, I would say that our -- like sort of maybe this is at a higher level than you asked the question, but definitely significantly higher revenue in compute, both VIP compute and networking have worked out to be stronger than we expected coming into the year. I would say that mobile is weaker than we expected coming into the year and auto and industrial is a little bit weaker as well. But the up in the compute space is the thing that really kind of brought us back up to that level. Memory, I think, has strengthened from our perspective at the beginning of the year, but not as significantly as the growth in the compute space. Brian Chin: Okay. Great. And then for maybe just kind of a clarification and a question. In Industrial Robotics, do you expect Q4 to ship some positive seasonality Q-on-Q? Or could you even approach flat on a year-over-year basis? I know there's definitely some headwinds for the year and probably into the back half of the year. And then kind of maybe not that tied to it, but just very curious on the Titan SLT, just for any given accelerated shift, is it common to just win that insertion kind of towards the back end of that test queue? Or is it more common do you think to win multiple subsequent insertions as well? Gregory Smith: So in terms of SLT, once you have been designed in for a particular AI accelerator, then our -- the Titan system for these AI accelerators was designed with sort of significant upgradability. So going from part generation to part generation as long as it fits within the general power envelope that we can provide, and there's some headroom there, then you're able to do change kits and upgrades. So there is an incumbency advantage in SLT. Kind of it's similar to the incumbency advantage that you have in ATE, not quite as strong, but pretty strong. Sanjay Mehta: And then on the robotics front. Gregory Smith: Sure. Sanjay Mehta: Yes. So there is some seasonality that we are expecting. We do expect an increase from Q4 to Q3 and what we view as a weaker kind of automation market. And as you know, we're still working through the strategic shift to large accounts and OEMs, but we do expect a seasonal uplift. Gregory Smith: One comment on robotics is that we've seen through this year that our ability to predict our revenue is somewhat limited. We are -- it's a very high turns business. We see demand shifting and demand responding to sort of current events depending on where you are. So we're trying to be as cautious as we can in terms of predicting growth. We do expect that Q4 would be stronger, but we're not predicting a gigantic hockey stick or anything like that. Operator: We'll move next to Vedvati Shrotre with Evercore. Vedvati Shrotre: The first one I have is a follow-up to the HBM questions you had. So on HBM, you talked about a new test insertion, like a singulated die test and you're shipping volumes in 3Q. So I wanted to understand if that is the norm now? Has that increased the TAM? And are all suppliers expected to do this? [indiscernible] factors? Gregory Smith: Yes. So right now, only one major manufacturer is routinely doing this singulated stack testing. And I wouldn't say that it is even pervasive across all memory types. We're not sure. If there is a significant improvement in downstream yield, the device that the HBM gets put into, if yield of that device goes up and HBM-related faults go down as causes of problems downstream, then that will proliferate across multiple manufacturers. But right now, it's really only 1 of the 3 major HBM manufacturers is doing that for a high volume of devices. Vedvati Shrotre: Understood. Okay. And then my follow-up was on SoC. Have you -- can you provide any color on how much compute is as a part of SoC in second half '25? And then even as we think about 2028, I think your -- during the Analyst Day, the idea was the composition would be 1/3 mobility, 1/3 compute and 1/3 auto industrial market. So do you have an update to that now that compute is a strong driver? Gregory Smith: So do you want to take the compute second half? Sanjay Mehta: Sure. Look, I won't break out the specific numbers, it is a significant component, just as we've talked about. And in the second -- in mobile was more first half dominated tied to supply chain shift. And think of the second half of our business is very strongly driven by compute really tied to VIPs and networking. So a very significant component. Gregory Smith: So I did a quick math and like. So this is trying to understand AI driven. So it includes all of the memory-driven stuff and the SoC compute stuff. Just like from Q3 to Q4, like 50% of our total revenue in Q3 was coming from AI-driven stuff in those segments. It's up to like 60% in Q4. So this is -- it's a very different composition of business in 2025 and especially the second half of 2025 from where we were before. We'll update you in January in terms of what our long-term model is. But it's safe to assume that, that model is going to have a much heavier weight on the compute and the compute part of the market and the AI-driven parts of the memory market. Operator: We'll move next to David Duley with Steelhead Securities. David Duley: I guess, first, I had a clarification. You talked about strength in AI in Q4 coming from networking and hyperscalers and HBM. I'm assuming that you have not won any business on stand-alone GPUs yet, and that is not included in any of the guidance statements. Gregory Smith: Yes, that's correct. Look, we're making good progress, but we have not included that in our guide and there wasn't revenue for that in Q3. David Duley: Okay. And then as my follow-on, do you think you could update us on the size of the SoC TAM and then perhaps some of the major pieces like the high-performance computing piece? And then just one last question is, as far as your HBM4 ramp going into Q4 -- excuse me, HBM ramp going into Q4, is that mainly driven by HBM4 ramping up? Or is it driven by new test insertions or is it driven by something else? Gregory Smith: So let me take the second one first. So the HBM ramp that we're seeing in Q4 is probably half and half between new test insertion and additional capacity for -- and it's really like new test insertion singulated stack test. Additional capacity is for stack die wafer level test. So both of those are increasing, but it's all around capacity adds for HBM4 or like it's all driven by HBM4. Now we are not providing an update to the SoC TAM mainly because the SoC TAM is all over the place. And for both Teradyne and our competition, there is a lot of dynamic action between Q4 and Q1, that's going to have a significant impact on the ultimate size of the market and especially the size of the high-performance compute market. So we're going to stick with our overall guide, and we're going to watch how that turns out. Operator: This concludes the Q&A portion of today's conference. I would now like to turn the call back over to Greg Smith for closing remarks. Gregory Smith: Thank you, operator. I'd like to offer a quick final thought. I mentioned in closing the July call that AI was having a profound and positive impact on Teradyne's business. I'm encouraged by how quickly we're seeing returns on our investments to pivot to AI. AI is the dominant driver of our business for the foreseeable future and will continue to align ourselves to the outsized opportunities that it offers. We've made great strides so far in 2025 and while our progress is not expected to be entirely linear, we're more excited than ever about our prospects for continued profitable growth in the years ahead. Thanks for joining us today, and I look forward to updating you on our progress in January. Thank you. Operator: This concludes today's Teradyne third quarter 2025 earnings call and webcast. You may disconnect your line at this time. Have a wonderful day. .
Operator: Welcome to Community Healthcare Trust's 2025 Third Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2025 third quarter financial results. It will also discuss progress made in various aspects of its business. Following the remarks, the phone lines will be open for a question-and-answer session. The company's earnings release was distributed last evening and has also been posted on its website, www.chct.reit. The company wants to emphasize that some of the information that may be discussed on this call will be based on information as of today, October 29, 2025, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the company's disclosures regarding forward-looking statements in its earnings release as well as its risk factors and MD&A in its SEC filings. The company undertakes no obligation to update forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. During this call, the company will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in its earnings release, which is posted on its website. All participants are advised that this conference call is being recorded for playback purposes. An archive of the call will be made available on the company's Investor Relations website for approximately 30 days and is the property of the company. The call may not be recorded or otherwise reproduced or distributed without the company's prior written permission. Now I would like to turn the call over to Dave Dupuy, CEO of Community Healthcare Trust. David Dupuy: Great. Thank you, Danielle, and good morning. Thank you for joining us today for our 2025 third quarter conference call. On the call with me today is Bill Monroe, our Chief Financial Officer; Leigh Ann Stach, our Chief Accounting Officer; and Mark Kearns, our Senior Vice President of Asset Management. Our earnings announcement and supplemental data report were released last night and furnished on Form 8-K, along with our quarterly report on Form 10-Q. In addition, an updated investor presentation was posted to our website last night. During the third quarter, the geriatric behavioral hospital operator, a tenant in 6 of the company's properties, paid rent of approximately $200,000. On July 17, 2025, this tenant signed a letter of intent for the sale of the operations of all 6 of its hospitals to an experienced behavioral healthcare operator and is under exclusivity with that buyer. Among other terms and conditions of the sale, the buyer would sign new or amended leases for the 6 geriatric psych hospitals owned by CHCT. The buyer continues to perform legal and business due diligence on the transaction. And while we can't provide certainty that the transaction will close, we will share more information as we move through the process. As it relates to our core business, we had a busy third quarter from an operations perspective and continue to be selective from an acquisition standpoint. Our occupancy decreased from 90.7% to 90.1% during the quarter. However, our leasing team is very busy with a number of new leases signed so far in October. Based on leasing activity across the portfolio, we would expect our leased occupancy to increase by 50 to 100 basis points by year-end. Our weighted average lease term increased slightly from 6.6 to 6.7 years. We have 3 properties that are undergoing redevelopment or significant renovations with long-term tenants in place when the renovations and redevelopment are complete. During the third quarter, we acquired 1 inpatient rehab facility after completion of construction for a purchase price of $26.5 million. We entered into a new lease with a lease expiration in 2040 and anticipated annual return of approximately 9.4%. Also, we have signed definitive purchase and sale agreements for 6 properties to be acquired after completion and occupancy for an aggregate expected investment of $146 million. The expected return on these investments should range from 9.1% to 9.75%. We expect to close on one of these properties in the fourth quarter with the remaining 5 properties closing throughout 2026 and 2027. As it relates to our capital recycling program, we had one disposition in the third quarter, providing approximately $700,000 of proceeds and generating a small loss on the sale. In addition, we have 2 other dispositions in our program that we expect to close in the fourth quarter with anticipated net proceeds of $6.1 million. Also as part of this program, we expect to close on the sale of an inpatient rehab hospital in the fourth quarter with an expected gain of approximately $11.5 million and net proceeds expected to fund our fourth quarter acquisition through a 1031 like-kind exchange. The indicative cap rate associated with the property sale is in the high 7% range. We have other properties with similar expected cap rate ranges both in market and under review as part of our capital recycling program. We would anticipate utilizing a similar 1031 like-kind exchange to accretively reinvest proceeds to fund our pipeline on a leverage-neutral basis. We did not issue any shares under our ATM last quarter. However, we anticipate having sufficient capital from selected asset sales coupled with our revolver capacity to fund near-term acquisitions. Going forward, we will evaluate the best uses of our capital all while maintaining modest leverage levels. To finish up, we declared our dividend for the third quarter and raised it to $0.475 per common share. This equates to an annualized dividend of $1.90 per share, and we are proud to have raised our dividend every quarter since our IPO. That takes care of the items I wanted to cover, so I will hand things off to Bill to discuss the numbers. William Monroe: Thank you, Dave. I will now provide more details on our third quarter financial performance. I'm pleased to report total revenue grew from $29.6 million in the third quarter of 2024 to $31.1 million in the third quarter of 2025, representing 4.9% annual growth over the same period last year. When compared to our $29.1 million of total revenue in the second quarter of 2025, we need to consider that the second quarter was negatively impacted by the reversal of $1.7 million of interest receivables from the geriatric behavioral hospital tenant that Dave discussed earlier. Normalizing the second quarter for this, we achieved 1.1% total revenue growth quarter-over-quarter. Moving to expenses. Property operating expenses increased by approximately $300,000 quarter-over-quarter to $5.9 million for the third quarter of 2025. This quarter-over-quarter increase in the third quarter is typical with a seasonal increase in utility expenses during the summer compared to the milder temperatures in the second quarter. On a year-over-year basis, property operating expenses decreased by approximately $50,000. Total general and administrative expense was $4.7 million in the third quarter of 2025, which was flat quarter-over-quarter once you exclude the $5.9 million of severance and transition-related payments incurred within the second quarter's $10.6 million of G&A expense. On a year-over-year basis, G&A expense decreased by approximately $300,000 in the third quarter of 2025. Interest expense increased by approximately $500,000 quarter-over-quarter to $7.1 million in the third quarter of 2025 due to increased borrowings under our revolving credit facility early in the third quarter to fund the $26.5 million property acquisition as well as 1 extra day of interest in the third quarter compared to the second quarter. We benefited late in the quarter from the FOMC's 25 basis point reduction to the federal funds rate in mid-September, but the full benefit of that cut will be realized in our fourth quarter financials based on the approximately $180 million of floating rate exposure we have within our revolver borrowings. If there are any additional rate cuts by the FOMC later today or during their December meeting, we expect those cuts will reduce our interest expense further. Moving to funds from operations. FFO in the third quarter of 2025 was $13.5 million, a 5.7% increase year-over-year compared to the $12.8 million of FFO in the third quarter 2024. On the diluted common share basis, FFO increased from $0.48 in the third quarter of 2024 to $0.50 in the third quarter of 2025. Adjusted funds from operations, or AFFO, which adjusts for straight-line rent and stock-based compensation, totaled $15.1 million in the third quarter of 2025, a 3.1% increase year-over-year compared to the $14.6 million of AFFO in the third quarter of 2024. AFFO on a diluted common share basis was $0.56 in the third quarter of 2025 or $0.01 higher than the $0.55 of AFFO in the third quarter of 2024. I'll note that our third quarter 2025 AFFO dividend payout ratio remains strong at 85%. That concludes our prepared remarks. Danielle, we are now ready to begin the question-and-answer session. Operator: [Operator Instructions] The first question comes from Alexander Goldfarb from Piper Sandler. Alexander Goldfarb: Two questions, Dave. Just the first one, the acquisition pipeline -- well, I guess they're related. The first one is just on the acquisition pipeline, and we'll discuss the funding part on my second question. But it's the same now that it was in the second quarter. Obviously, you guys are balancing the stock where the stock is and your funding needs. But as you look at the opportunity set, would you say it's growing, meaning that if you had a more competitive equity source, that pipeline would have increased quarter-to-quarter? Or is the opportunity set basically this unchanged in which case, even if you had a better cost of capital, that acquisition pipeline would not have changed? David Dupuy: Yes. What I would say is if we are being highly selective -- and hey, Alex, good to talk to you. I appreciate the question. We're being highly selective. We know we have this pipeline of very good quality assets at great returns. We want to make sure that we have the ability to pay for those acquisitions that are coming up over the upcoming quarters. And we don't want to issue shares at these depressed levels. And so that's why we're doing the capital recycling to pay for them. But yes, I would say we are seeing opportunities that are generally attractive in this market in that 9% to 10% cap rate range that if our currency was different, if our share price was different, we'd be looking to make those acquisitions and they would be very attractive relative to risk return. So yes, we're being highly selective. We're very focused on making sure we get this pipeline of high-quality assets paid for and do that on a -- without increasing our leverage. So yes, you're reading that right. Alexander Goldfarb: Okay. And then just a second question when it goes to funding. If you're doing asset sales, I get it that it sounds like there's maybe 150 bps, maybe 200 bps of positive spread between what you're selling and what you're buying. But if you're basically trading one asset for another and taking on additional debt to help fund, isn't that raising leverage just by taking on more debt because you're swapping one asset for another and then you're incrementally taking on more debt, your leverage is naturally going to rise. So my question is, is there a limit to how much debt you'll take on as long as you're still in this current depressed equity situation? Or your view is you're fine running leverage higher than normal with the hope that once the geriatric situation is resolved, hopefully you have a better currency? David Dupuy: We really feel like based on the pipeline of opportunities from a capital recycling that we have that we are not going to increase leverage over the upcoming quarters. And so yes, we did not have any capital recycling to do ahead of the current acquisition that we did in the third quarter. But future acquisitions, we are very focused on matching up dispositions with acquisitions that are accretive to the company. And so we do not expect to meaningfully increase leverage. But Bill, I don't know if you want to jump in. William Monroe: Yes, Alex, just to clarify, the property that we have under held for sale, and we'll recognize $11.5 million capital gain. That will -- we expect that will fully pay for the next acquisition such that there will not be any incremental debt associated with that next acquisition. It will be completely paid for with the proceeds of this larger upcoming disposition. Operator: [Operator Instructions] The next question comes from Rob Stevenson from Janney. Robert Stevenson: In terms of the behavioral health tenants, so $200,000 paid in the quarter, can you remind us what that tenant was previously paying per quarter before they hit the wall? William Monroe: Yes, they were paying in rent approximately $800,000 per quarter. Robert Stevenson: Okay. That's helpful. And then what's the expectations for our timing in terms of the closing there of the acquisition if it occurs? Is that something that occurs before year-end, if it happens, given the deal was signed in July? Or could that stretch into 2026 from your understanding at this point? David Dupuy: We're very -- we'd love for it -- and hey, Rob, good to talk to you. But we'd love for it to close by year-end. Some of the due diligence process has taken a little bit longer than we would have expected. So it's probably more realistic to expect something to close in the first quarter. So yes, I think there's still a chance that it gets done by the end of the fourth quarter, but it's probably more likely to happen in the first quarter. But we certainly would love to provide additional detail as soon as we have that. Robert Stevenson: Okay. And to what extent are you guys actively pursuing Plan B, just in case the deal falls through? David Dupuy: Yes. You should expect that we are going down multiple paths simultaneously as we always have. And so yes, we're looking at multiple plans, multiple ways that we can move forward with the goal of ultimately getting paid more rent associated with those tenants. And so -- and look, I think all of this is upside, right, relative to our performance. The portfolio has been stable. We're growing. I think we're certainly motivated to get this resolved as soon as possible. And we think that it will, but yes, we are looking at all options. Robert Stevenson: Okay. And then last one on this topic. When you sit there and think about where they are in their life cycle, et cetera, what's the likelihood today of getting back any of the unpaid interest or rents, back rents going forward? Or is a similar couple of hundred thousand in the fourth quarter and a new lease with the buyer of these assets the best-case scenario for you guys today? David Dupuy: I would call that, that's probably consistent with where we're head is. And part of the reason we did the additional note write-off that we did because we did not deem that it was likely to be collected. So I think we're operating under that expectation, but we're certainly very focused on to the extent we do have the ability to get any back rent or back interest, we will. But we do not put a high likelihood on that. Robert Stevenson: Okay. And then just switching topics here. The 3 properties that are under redevelopment. How material is that? And then when do those leases expected to kick in and impact earnings? David Dupuy: Yes. So I think one is very significant and at least that was signed a while ago for a behavioral health care facility. That's a large investment by us with a very recognizable operator. My guess is that lease won't commence until sometime after midyear next year, but that's a meaningful one. We don't provide specifics as to what those numbers are but wouldn't start seeing any tailwind associated with the rent until after -- probably after second quarter. The other one is probably a late 2026 opportunity as well. And then there's one smaller one that will happen first part of 2026. Again, that should start contributing additional rent. But these are -- they vary in terms of their impact, and we haven't provided details relative to that. But we just -- it's just an example of how we're reinvesting in buildings and with strong tenants based on signed leases, so anyway. Robert Stevenson: Okay. Just trying to figure out just what type of earnings tailwind because it sounds like you said that you're expecting to see 50 to 100 basis points increase in occupancy in the near term plus this. Just wanted to figure out when that was going to start all hitting in terms of the earnings. David Dupuy: Yes. As far as the 50 to 100 basis points, we're seeing great leasing activity across the portfolio. There's always a delay between signing leases and having those leases commence. And so -- but I think it sort of speaks to the strong activity we're seeing across the portfolio, and I think it will be a tailwind for 2026 in terms of our ability to grow. Operator: The next question comes from Jim Kammert from Evercore. James Kammert: Obviously, I think the capital recycling shift is well received. And I was just curious, how are you sort of identifying which assets you would like or most likely to dispose? Is that a geographic concentration, tenant concentration? Just trying to understand the mix or how you're lighting upon the candidates. David Dupuy: Jim, thanks for the question. Yes. So as you sort of hit on, you would think about it around tenant concentration, weighted average lease term, size profile, markets. We're looking at all of those sort of criteria as we evaluate what we want to do from a capital recycling perspective. Obviously, with the key components associated with that of paying for this pipeline in a way that's accretive. So those are all the areas that we're focused on. And what I'd also remind everybody of is we sort of looked at our capital recycling program in 2 buckets. One is the bucket of smaller properties that are noncore that aren't going to drive a substantial amount of proceeds but they are going to get us focused on our better buildings and better markets. And so you're seeing a few of those sales occur and those sales are -- we expect to conclude in the -- at the end of the fourth quarter. And then the larger opportunities where we can have a very accretive cap rate sale to then reinvest in new very attractive buildings. So yes, you're thinking about it in the right way. We're looking at tenant concentration, WALT, size profile, et cetera, as we look to sort of push forward with our capital recycling. James Kammert: That's helpful. And a derivative question then I'll be done is you mentioned that one of the large transactions pending is a 1031, but I'm just trying to assess the depth of buyer interest. You're not restricting your capital recycling to just 1031 exchanges. I mean there is a depth of buyers presumably for stand up just traditional sales as well. William Monroe: Yes. Good question, Jim. The 1031 is more on our side than on the potential buyer side as far as we don't want -- we're deferring that capital gain associated with that sale by putting it into a 1031. And then we have within our acquisition pipeline and other properties that we have identified that will then be the replacement property as part of that 1031 transaction. But no, we're going to a very wide set of potential buyers to make sure that we're maximizing proceeds to us. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Dupuy for closing remarks. David Dupuy: Thanks, Danielle, and thank you, everybody, for dialing in. Of course, call if you have any questions, I hope everyone has a good rest of the day. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the ESAB Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. I'd now like to turn the call over to Mark Barbalato, Vice President of Investor Relations. You may begin. Mark Barbalato: Thanks, operator. Welcome to ESAB's Third Quarter 2025 Earnings Call. This morning, I'm joined by our President and CEO, Shyam Kambeyanda; and CFO, Kevin Johnson. Please keep in mind that some of the statements we are making are forward-looking and are subject to risks, including those set forth in today's SEC filings and today's earnings release. Actual results may differ, and we do not assume any obligation or intend to update these forward-looking statements, except as required by law. With respect to any non-GAAP financial measures mentioned during the call today, the accompanying reconciliation information related to those measures can be found in our earnings press release and today's slide presentation. With that, I'd like to turn the call over to our President and CEO, Shyam Kambeyanda. Shyam Kambeyanda: Thank you, Mark, and good morning, everyone. ESAB delivered another solid quarter and returned to positive organic growth. We executed EBX with discipline in a dynamic environment, closed the acquisition of EWM earlier than anticipated, advancing our shift into equipment and furthering our compounder journey. As a result, we're raising our full year guidance. Let me take a moment to thank all of our associates as all of this would not have been accomplished without their passion and commitment to achieving our shared vision for ESAB. During the third quarter, sales rose 8% to $687 million, more importantly, organic sales increased 2% year-over-year, reflecting solid sequential improvement in the Americas and continued strength in EMEA and APAC, driven by our high-growth markets. Adjusted EBITDA increased 7% to $133 million, reflecting strong execution on margin, some additional tariff impact in the Americas as well as continued investment in sales and AI initiatives. All accelerating our mix into equipment and gas control. The recently closed EWM acquisition brings high-level talent, unmatched technology and highly accretive gross margins to ESAB. Our transition team are using our proven EBX integration process, and we're collaborating on growth, cross-selling opportunities as well as margin expansion initiatives. That said, there's more work to be done on our compounded journey, but I'm pleased to say that our pipeline is rich, and I'm confident in our ability to execute on our strategy and deliver long-term shareholder value. Turning to Slide 4. Let me give you a few examples of our team living our purpose and values of shaping the world we imagine. First, let me talk about our Remake This Town initiative, that just launched in Chicago with Doorways 2 Destiny, a citywide installation of 16 steel doors each stands over 10 feet tall and weighs roughly 3,000 pounds, and doubles as a job connector through the My Chicago and My Future apps, linking youth to apprenticeships, to internships and jobs in real time. In partnership with BUILD Chicago and Chicago YMCA, the doors appeared at YMCAs, schools, galleries and community centers. Welder underground led installations, and local artists transform the doors into public art. Youth engaged through welding demos, hands-on stations, collaborative art making and resource pop-ups. The mobile welding studio bus turned the streets into open-air classrooms and local welders joined following an online call to action. This tour directly addresses well the shortage, we convert curiosity into careers through paid internship pathways, industry certifications, mentorship from experienced craftsman and craftswomen, young people meet employers start with summer opportunities and progress into long, well-paid careers in skilled trades. We're expanding the pipeline globally with partners such as Vilnius Tech, Riga Tech and Burnley College, where students learn on ESAB equipment and on credentials that travel. ESAB is committed to building strong skills, strong wages and strong communities. This is a fantastic initiative. I'm really proud of our teams, their creativity and engagement. Transitioning back to our numbers and turning to Slide 5. In the Americas, total sales increased, and organic growth was positive year-over-year, with a clear sequential improvement from Q2 as expected. The U.S. delivered mid-single-digit growth and equipment, and automation grew mid-single digits across the region. This momentum is notable given that Q3 is typically our seasonal trough due to summer shutdowns. Mexico remained stable, and South America performed in line with expectations. Moving to Slide 6 to discuss EMEA and APAC. Our unparalleled global footprint continues to show its strength. EMEA and APAC delivered volume growth of 4%, supported by strong execution in high-growth markets and high single-digit growth in equipment and automation. We're seeing renewed investment and activity in Europe, and we expect developing market GDP over the next 5 years to outpace developed markets by roughly 2x. ESAB is well positioned to capture that differential. Turning to Slide 7. As mentioned before, we completed the acquisition of EWM, a premier provider of advanced arc welding and robotic solutions. EWM adds React technology that I've mentioned before, and innovation that can deliver 100% faster well speeds and 2x times the deposition rates and roughly 35% lower heat input versus traditional short arc processes. Customers see higher productivity, lower fume and improved quality. The impact is visible on the shop floor. EWM React is changing workflows. Combined with ESAB consumables, torches and our InduSuite digital overlay, we deliver an end-to-end ecosystem that is hard to match. The teams are executing our EBX playbook for integration and advancing EBX driven margin initiatives that we expect to see positive impact from in 2026. On that positive note, let me hand it to Kevin, who will take you through the financial details. Kevin Johnson: Thanks, Shyam, and good morning. Let's turn to Slide #8 to discuss our financial performance. We are pleased to have completed the EWM acquisition ahead of schedule, which contributed approximately 2 points of growth and roughly $1 million in adjusted EBITDA within our Q3 results. Our ESAB and EWM teams have begun the integration process as part of our commitment to strengthening our collective equipment and automation portfolios, enabling us to provide our customers with an unparalleled solution. Turning to our results. We experienced a return to organic growth as expected, with a 2% increase in organic sales. We continue to benefit from robust market demand in our high-growth markets within EMEA and APAC and delivered mid-single-digit growth in our U.S. business, while our other regions performed as expected. Total sales increased by 800 basis points year-over-year, supported by organic growth, contributions from acquisitions, including EWM and favorable currency movements. The adjusted EBITDA margin was reduced by about 20 basis points due to the impact of EWM, while our [ base ] business delivered expected profitability supported by EBX and our strong global execution. Turning to Slide #9 to discuss our Americas segment. Organic sales in the Americas rose mainly from strong U.S. equipment and automation growth as well as price discipline. Acquisitions added 300 basis points, offsetting FX. Adjusted EBITDA margin was 19.6%, which included ongoing investment for long-term growth and a drag driven by price/cost dynamics related to tariffs. We have launched several EBX cost and restructuring initiatives in Q4 and expect strong margin improvement in 2026 as volumes improve. Moving to Slide #10 to discuss our performance in EMEA and APAC. Sales grew 14% year-over-year to $395 million, driven by growth in Asia, India and the Middle East as well as our recent acquisitions, including EWM. Organic sales were up 3%, with volume increasing 4%. Adjusted EBITDA margin expanded to 19.3%, rising 40 basis points year-over-year. Excluding EWM, it would have been 19.7%, an 80-basis point gain. Our global teams continued to execute strongly with optimism for further strong growth in 2026. Moving to Slide #11 to discuss our cash flow. Free cash flow conversion exceeded 100% this quarter, driven by a strong team performance. We successfully expanded and extended our credit facilities early in Q4, increasing ESAB's long-term financial flexibility. We aim to use our seasonally strong Q4 cash flow to reduce net leverage to 1 to 2x and position ESAB for accelerated M&A activity in 2026. Turning to Slide #12 to discuss our 2025 guidance. Based on our year-to-date performance and the successful completion of the EWM acquisition, we have raised our full year guidance. We expect total sales of $2.71 billion to $2.73 billion, reflecting around 1-point of organic growth, a modest FX improvement on the EWM acquisition. Adjusted EBITDA is now $535 million to $540 million, including approximately $3 million from EWM. We will be investing in EWM over the next year to drive synergies for our white paper, and we expect a better than 10% ROIC within 3 years. Adjusted EPS has been tightened to between $5.20 and $5.30 reflecting improved profit offset by increased interest expense due to EWM. Additionally, free cash flow has been changed to around 95% because of EWM. ESAB continues to accelerate investments to drive both organic growth and M&A as we focus on delivering long-term shareholder value. With that, let me hand back to Shyam on Slide 13 to wrap up. Shyam Kambeyanda: Thank you, Kevin. Our path is consistent and proven. Our global footprint is an advantage, about 80% of our manufacturing is in region for region, which reduces tariff impact, shortened lead times and support share gains. EBX discipline continues to drive pricing, supply chain performance and productivity. We continue to have a robust list of productivity and transformational projects. And this year, we're integrating AI into EBX to raise the bar. We're shifting our mix towards equipment and gas control, building a higher margin, less cyclical enterprise aimed at 22-plus EBITDA margins by 2028 or sooner. We've have closed 4 acquisitions this year Bavaria, Delta P, Aktiv and EWM, expanding proprietary consumables, medical gas and welding equipment. The funnel remains healthy and discipline. Our third quarter performance shows resilience and strength of our enterprise. We returned to organic growth, closed EWM early, raised our guidance and have had a solid start to Q4. We're accelerating EBX, integrating EWM and using strong cash flow and a flexible balance sheet to advance our compounder journey. ESAB is built to perform, adapt and win. With that, operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Bryan Blair from Oppenheimer. Bryan Blair: Sequential improvement in Americas, this is obviously good to see. There was obviously some consternation last quarter regarding deferred automation shipments and then selling into Mexico. To what extent did your team catch up on that $15 million or so in combined revenue during Q3? And are there any lingering risks or concerns on either front? Shyam Kambeyanda: Bryan, the way to think about it is there was a bit of catch-up, but not much. Really, it was good execution from our teams, a lot more focus on some commercial excellence within the teams. Mexico stabilized. We continue to sort of drive some of our sales initiatives, and we talked about equipment and automation doing well. We did catch up to a little bit of that automation pushout, but not all of it. We think that sort of kind of feeds in into Q4 and a little bit into Q1. So all in all, we felt really good about the print that we had in the Americas. Overall, as you know, South America performed as expected. Mexico performed as expected. We obviously had some momentum in the U.S. market. And so feeling really good about the team, our execution plans and our start to Q4. Bryan Blair: I appreciate the color. The strategic fit of EWM seems quite powerful. It's nice that your team can begin integration a little earlier than anticipated. That in mind. How should we think about the year 1 deal model? I suspect cross-selling will be a solid lever at least over time. We know gross profit is very strong. It does seem like there's some relatively heavy-handed work to be done on SG&A structure. Just curious how we should think about those moving parts through the first year and perhaps the first couple of years? Shyam Kambeyanda: Yes. I'll let Kevin talk about the modeling piece. But let me just talk about EWM as a business. Really strong gross margins, better than 45%. So really thrilled about the gross margin percentage within the business. Really excited about the reception we received at Essen plus some customers globally. In almost every geographic region, our sales teams are now pulling on the product line, which is excellent to see. The third thing that I would say to you is and a lesson that we have learned over time is that we have to invest in the front end early to drive some of the growth pieces, and that's what we're doing. And you heard in our commentary, we're talking about growth initiatives and growth incentives that we're going to put in place to drive equipment sales and accelerate that mix. I'll let Kevin talk about the modeling piece. Kevin Johnson: Yes, Bryan, as I mentioned on the call, our expectation this year for EWM is around $3 million of profit. And obviously, again, as I mentioned, we are making some investments in that business, and we'll continue to make those investments over the next 12 months as we drive the business to its 10% ROIC target by year 3. But what I can say, we've been under the [Technical Difficulty] for about a month, and we're actually seeing some tremendous opportunities, both on the top line and also synergies right across the business, both not only in SG&A, but also within gross profit. So I think when we come to give our guidance in the first quarter, I think we'll be in a better position to build all of those in to our model and provide those to you in Q1 next year. Shyam Kambeyanda: But a really exciting addition to us, Bryan. I think an appropriate time as well. I think a good inflection point in Europe. So really excited about what that business brings to us, not just in Europe but globally. Operator: Your next question comes from the line of Tami Zakaria from JPMorgan. Tami Zakaria: Great results. Question on the Americas segment. EBITDA margin moved down about 100 basis points. Was this according to your expectation. If so, what's driving it? And is there any tariff headwind to call out there? Shyam Kambeyanda: Yes. The short answer is we did expect some of it. The couple of contributors were the first thing that we mentioned in the earlier piece is that we are investing in some sales and growth initiatives in the region that we believe will benefit us as we go into 2026. And then the second part of it is that we did see some tariff-based impact come at us late in the quarter that we will offset by making sure that we appropriately move the manufacturing to the regions, which happens in late Q1 or possibly early Q1 for us. So very confident about setting up the business in the Americas for margin expansion into 2026. And feeling good about the restructuring initiatives also that we have started that will accelerate that margin journey for us in the Americas. Tami Zakaria: Understood. That's very helpful. And one question on M&A. I think you did Bavaria and then EWM, both seem to be Europe-based. Are you consciously expanding footprint, particularly in Europe because you see more growth in the region? Or you remain agnostic, and you don't mind spending in the Americas or Asia? Shyam Kambeyanda: Yes, we're agnostic. I think what we're looking for are the best assets at the best financial principles that we have for the business. Both these businesses actually give us extensions into other geographic regions. Bavaria has the ability to supply into the North American market, the Middle East and Asia. EWM actually had made some nice inroads into North America. We're finding some additional opportunities in the Middle East and Asia for the EWM product line. And so these 2 businesses obviously strengthen our footprint in Europe but create opportunities and avenues for growth in North America, in particular, and also in the other geographic regions. Operator: Your next question comes from the line of Mig Dobre from Baird. Mircea Dobre: If we can go back to the margin discussion in Americas, I think I heard Kevin or maybe it was you, Shyam, saying that 2026, we should be seeing much, much stronger margins in this segment. I realize you're not providing '26 -- detail '26 guidance, but it would be helpful for us to understand why margins get better in '26? What's sort of within your control and maybe some of the restructuring that you're doing as opposed to just kind of a broader call on end market reacceleration? Shyam Kambeyanda: Yes. I think they were sort of twofold. We are not calling out the specific restructuring activities, Mig, as you can imagine. But we are -- some of the projects are already underway, and we expect that to complete sometime in early first quarter. The second aspect, obviously, is that we get to better comparables as we move into 2026. And the third aspect for us is as we sort of shift some of the supply chains to where they need to be appropriately, we feel we get another boost. So sort of 3 things happening. Pricing that will occur as we start the year, the tariff-based movements that we're making to sort of ensure our manufacturing is in the right spot, and then the restructuring that we're doing that all of it, which we feel will sort of come to fruition somewhere in that early first quarter, giving us really solid momentum for margin expansion in 2026. And we've always said this, Mig. We're very comfortable getting to that 22% plus EBITDA number by 2028. And you've seen in our historical pieces, we sort of have a couple of years where we're settling in and sort of creating momentum and then the following year, we sort of accelerate and build out, this would be no different than that. Mircea Dobre: Okay. Understood. Maybe in your EMEA and APAC segment, others pointed out, you are increasing your exposure to Europe, maybe with some of the deals that you have done. But as we're looking at 2025, right, it does seem that there's quite a bit of bifurcation between what you've experienced in Middle East and India versus what's been going on in Europe. So I guess it would be helpful maybe delineating the European region versus some of the other ones in this segment. And as a general framework for 2026, how do you think about Europe relative to these other regions? I mean can we count on actual volume acceleration in '26 if Europe picks up? Or are there some other factors that we need to keep in mind here? Shyam Kambeyanda: Yes, really detailed question, Mig. So let me sort of address all of it. So the first piece is we continue to see strong orders and strength in our high-growth markets. In fact, the entire team was here last week, and we got to interact with 2 of the regional presidents, especially from the Middle East and Asia and really strong momentum, and we expect that momentum to stay. The second piece of your question around Europe, we've actually done really well in Europe. And we get some data that's based off the European Welding Association. And I can tell you, our numbers are significantly better than what we think is happening in that industry, which sort of points towards significant share gain in the European market by our teams. And it's on the back of equipment and automation, we talked about high single-digit growth in equipment. And that's really where something that I've spoken to you about in the past, where we're winning over customers in Europe and the rest of the world with our equipment product line, which we believe eventually makes its way to the markets that we're most focused on, which is in the Americas. So we continue to have that particular momentum. The third part of your question, we are seeing orders and momentum increase in Europe based on defense, based on some infrastructure movements and energy investments in Europe. We expect that to accelerate as we go into 2026. So the overall picture for us in 2026 is, we still feel very good about this flywheel where Asia, Middle East continues its momentum forward and Europe gives an additional [ boy ] to that already strong marketplace that we have, giving us possibly some really good tailwind. Now we'll finish out the quarter and give you guidance as we get into 2026. But as we sit here, we feel that we're very well positioned to sort of take capitalize and win on that acceleration. Mircea Dobre: No, that's super helpful. And if I may squeeze one last one. When we're talking about EWM, can you talk a little bit about their legacy distribution and how that compares to your footprint? And how easy or maybe not easy, is it to take that product and be able to just kind of put it through your global distribution network? Shyam Kambeyanda: Yes. So I'll start with the conversation in Europe. Very rarely do I get an applause when I'm in a town hall very early in my commentary. And when we announced the EWM acquisition with our team in Europe, I can't tell you the excitement that existed in the team. The second part of it on distribution, it actually is very complementary. And as a result, we are actually seeing opportunities for us to move our products, especially consumables and torches into their distribution channel and sort of pick-up sales for ESAB on that particular front. And in terms of reception of their product lines, when we looked at the acquisition, the product lines were very complementary as well. We had a really strong light industrial line. They complemented the gaps that we had on the heavy industrial line. And as a result, when you look at our lineup today, Mig, it's incredible. And I'll also tell you, there is a U.S. customer that's been after us since FABTECH to kind of figure out how we can get that line into North America. And so really excited about the avenues that's opened up and the opportunities that we have in front of us. It's going to come down to execution like anything else, Mig, but that challenge will take on as a team. Operator: Your next question comes from the line of Nathan Jones from Stifel. Nathan Jones: I'll start with asking for a bit more color on your comment that you're off to a pretty good start in 4Q. If you could just expand on that and talk about what you're seeing to date in the fourth quarter? Shyam Kambeyanda: Yes. I think, Nathan, the way we look at our fourth quarter is we finished at about a 2% core growth rate in the third quarter. We're expecting that to be a little better in Q4 and October started off on that run rate. And that's really what I'm talking about is that our core growth improves from where we were in Q3, and we feel good about that as we sit here today. All in all, I think as you look at ESAB and you sort of project out, comparables get better. Our teams are focused on execution. I talked about the investments that we're making. One of the things that I do want to stress with the entire community that's on the call, we've always said to all of you that we are an [ AND ] business. We want to go out and do the productivity things for ESAB, but we also want to go ahead and invest in our business in terms of growth in our initiatives, and we're doing both of that. And we feel that, that returns the best -- that's the best return for our shareholders over the long term, and we're committed to that. And we're taking the opportunity here as we finish out 2025 to invest in the business, and take some productivity and cost out, we feel that, that sets us up well for '26. Nathan Jones: I guess a follow-up on price/cost in Americas. Obviously, it seems that's where the tariff impact is. You talked about getting some costs later in the quarter. Did you get to price/cost neutral on a dollar basis in the third quarter? Is there any color you can give us on what the drag was to margins in the third quarter and then your expectations for the fourth quarter on price cost? And I'll leave it there. Shyam Kambeyanda: Yes. It was a slight drag in the quarter on price/cost. Really, it came about towards the end when copper tariffs came in. And there were some products that we sort of build in the U.S. and ship out to other regions where we actually have manufacturing capacity. Nathan, so what we are going to be doing is moving that manufacturing capacity to the region that the products are sold in and take away that drag that we saw in the third quarter. In addition to that, we talked about doing some additional restructuring, which is actually already underway that we expect to finish out in the early part of Q1, creating that really nice tailwind on margin expansion for '26. Nathan Jones: And just to clarify, drag on margins or drag on dollars? Shyam Kambeyanda: It was a bid on dollars. So that's really causing the drag as well. So price cost slightly off of neutral. Operator: Your next question comes from the line of Neal Burk from UBS. Neal Burk: Good to see solid growth in equipment and automation. Can you just talk about what you're seeing in consumables? Shyam Kambeyanda: Yes. The way to think about our consumables business, we continue to do well. It's just that we sort of saw our new products, our new product introductions. We've introduced actually an engine-driven welder. Our Edge product line continues to do really well. We've introduced a Fabricator line and some new LIPs in other geographies that have sort of really caught the attention in the marketplace. And we've been focused for a while to get our channel to pick up and customers to pick up our equipment, and we're seeing success. In fact, I would submit that in some of the regions, we're really out there taking some significant share from the competition. On the consumable side, we're steady. And we feel that we're still doing better than market on the consumables side, but slightly lower sort of growth performance in that particular front. But we're excited about what's coming at us for 2026 and how Q4 has started. So nothing there that causes us any sense of alarm or concern but really excited about the entire portfolio now coming to work. And I mentioned that briefly, we're really working on workflow solutions, and I won't mention this -- I won't mention the customer, in particular. But we actually went into a large U.S. customer and provided a full workflow solution that had our equipment porches, filler metal and our digital solution set. And for the first time, we're certified for that customer globally. And so we're picking up a few orders on that particular front. And so really driving the full workflow solution set, which I think is going to benefit both our consumable business and our Equipment business going forward. Neal Burk: And just a follow-up. If my math is right on last quarter on this Mexico and automation headwind. I thought the headwind implied about like a 20% decline in revenues in those businesses in the Americas. And this quarter, it seems like it's -- it's more like maybe a mid-single-digit decline. I guess, is that math like roughly, correct? And I guess, like going forward, I mean, it looks like you're going to exit this year growing at around 3% to 4% in aggregate. So I mean, absent anything dramatically changing kind of the absence of the negative in those 2 businesses in Mexico and automation, is that like a good starting point for next year? Like any kind of like major puts and takes on the growth rate exiting the year and entering 2026? Kevin Johnson: I mean, Mexico, as Shyam mentioned, it's been pretty stable on what we saw in the second quarter. But yes, we are down in terms of volumes, and that's really the countermeasure to the fact that the U.S. grew in that mid-single-digit territory, which was a nice bounce back to what we saw in the second quarter. I think what you'll see as we step into 2026 is that our comps against Mexico will get significantly easier if that's what you're getting at. So we would expect that there will be some tailwinds on volumes as we step into 2026, particularly from Q2 onwards when the tariffs impacted us. Shyam Kambeyanda: But we can sort of talk offline, Neal, on some of the numbers. It does look a little off, but we can discuss those numbers on our separate call. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Mark Barbalato for closing remarks. Mark Barbalato: Thank you for joining us today, and we look forward to speaking to you next quarter. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Hello, and welcome to CVS Health's Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I would now like to pass to Larry McGrath, Chief Strategy Officer. Larry, please proceed. Larry McGrath: Good morning, and welcome to the CVS Health Third Quarter 2025 Earnings Call and Webcast. I'm Larry McGrath, Chief Strategy Officer. I'm joined this morning by David Joyner, President and Chief Executive Officer; and Brian Newman, Chief Financial Officer. Following our prepared remarks, we'll host a question-and-answer session that will include additional members of the leadership team. Our press release and slide presentation have been posted to our website, along with our Form 10-Q filed this morning with the SEC. Today's call is also being broadcast on our website, where it will be archived for 1 year. During this call, we'll make certain forward-looking statements. Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our most recent annual report on Form 10-K, our quarterly report on Form 10-Q filed this morning and our recent filings on Form 8-K, including this morning's earnings press release. During this call, we will use non-GAAP measures when talking about the company's financial performance and financial condition. And you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to the Investor Relations portion of our website. With that, I'd like to turn the call over to David. David? J. Joyner: Thank you, Larry, and good morning, everyone. This morning, we are pleased to report another quarter of solid results, once again reflecting the power of our diversified business and progress on becoming the most trusted health care company in America. In the third quarter, we delivered adjusted operating income of $3.5 billion and adjusted earnings per share of $1.60. In addition, for the third consecutive quarter, we are increasing our full year 2025 adjusted earnings per share guidance to a range of $6.55 to $6.65, up from our previous range of $6.30 to $6.40. Over the past 12 months, we have been intensely focused on executing against our commitments to our customers, partners, colleagues and shareholders. We are building momentum across the enterprise and feel a growing excitement about the opportunities ahead for CVS Health. We are incredibly proud of what we have accomplished so far this year. While we are encouraged by our progress, we maintain a disciplined and cautious outlook as we position our business for another year of strong performance in 2026. This transformation is clearly visible within our Aetna business where after a challenging 2024, there is renewed bigger and optimism about the future. Steve, Katrina and the broader Aetna team are well on the path to ensuring this business is best-in-class. The Aetna team continues to drive impactful and exceptional results. Aetna is once again the industry leader amongst national payers for 2026 Medicare Advantage Stars Ratings, even with CMS recently announcing that cut points for stars continue to become more challenging. Based on the current membership, we expect over 81% of our Medicare Advantage members will be in plans rated 4 stars or higher with over 63% of them in 4.5 star plans, nearly double the industry average. This result is not just a point of pride, but another proof point that our ability to effectively collaborate across the enterprise allows us to deliver exceptional quality and service, drive down the cost of care and remove friction from the health care system. We are still in the early stages of the 2026 annual enrollment period, but we remain confident that our thoughtful approach to our geographic footprint, benefit design and pricing positions us well for another year of recovery. In my first year as CEO, I have pushed our team to act with urgency and focus as we execute on opportunities to improve our business. This means making thoughtful and difficult decisions, such as exiting our individual exchange business or taking advantage of market opportunities like our acquisition of the Rite Aid assets. In a similar way, as we outlined last quarter, we are moving with urgency to address pressures in Health Care Delivery. During the quarter, we recorded a $5.7 billion goodwill impairment within Health Care Delivery. I want to be clear that this business' performance in the quarter was in line with our most recent expectations. However, our decision during the quarter to temper Oak Street Health Clinic growth over the next few years was the primary reason for recording this charge. Despite this update, value-based care remains a critical component of our strategy. The reasons to believe in this business have not changed, but the marketplace is evolving and we are adapting our strategy to get financial performance back in line with our expectations. We understand the challenges at Oak Street Health and have taken actions to improve performance in both the near and long term. We continue to strengthen our Health Care Delivery business through investments in technology, a new leadership team and a fair and equitable contracts with our payer clients. Turning to Pharmacy Services. We're incredibly proud of the meaningful impact we've had on drug cost in this country. As you've seen with our recently announced IVF initiative with the administration, we are strong supporters of President Trump's focus on lowering brand prices in America. This is important for our patients, our customers and for our business model. By tackling branded pharmas and equitable pricing strategies that have left Americans carrying the financial weight of global drug innovation, the government is helping to relieve a long-standing burden on U.S. consumers and businesses. We believe that over time, the administration's actions can create a new lower ceiling price in the U.S. in which PBMs will continue to negotiate and further reduce costs for their customers and consumers. This has been our job for more than 3 decades, and we have been tremendously successful at achieving durable results. We believe these actions are good for us, for our customers and for consumers, and we are encouraged to see the impact they may create for the industry. As the leading health care consumer company, we've been working diligently for years to lead with greater transparency and savings for consumers at the pharmacy counter. We were at the forefront of this transition with more than 25 million members who benefit at the pharmacy counter from our lowest net cost through point-of-sale rebates. This includes our Aetna fully insured commercial members who we transitioned in 2019 and the benefit design we offer our own colleagues. Two years ago, we continued our innovation leadership when we introduced our new TrueCost model, which guarantees a net cost for each individual drug, delivering drug pricing transparency for our clients and consumers. We are encouraged by recent announcements that others are following us on this path. We know that this is the transition that consumers want and is also important for the future of our business. We're incredibly encouraged by the path Caremark is on. However, we acknowledge there are near-term market dynamics from a few of our client contracts that have resulted in a revision to our guidance and will impact our near-term growth rate. While incorporating this, as Brian will discuss later, we continue to expect meaningful growth in enterprise earnings next year. We are working diligently to recontract over the next few years and resolve this issue. Importantly, clients, including the most sophisticated buyers of pharmacy benefit services, continue to see the tremendous value we provide, as evidenced by another strong selling season. We have achieved new client wins of nearly $6 billion and are closing out another selling season with retention in the high 90s. I am incredibly bullish about the road ahead and believe we will continue to lead this industry given our unique advantages and insights. Turning to PCW. Our leadership is clear in the retail pharmacy market as we work towards a more sustainable and transparent future. Our deliberate strategic decisions, intentional investments, best-in-class drug purchasing and superior customer service have meaningfully improved our differentiated position in the market. Once again this quarter, CVS Pharmacy delivered solid performance, including pharmacy share gains. This is a testament to the strength and scalability of our model as well as the commitment of our engaged colleagues. We play a critical role in improving the health of millions of Americans by providing convenient health services, including vaccinations. Our 9,000 pharmacies are the front door to our enterprise. They are a differentiator for our business and a force multiplier towards improving the health of the communities that we serve. For CVS Health, being the most trusted health care company in America means improving health, simplifying care and delivering a quality experience every day. We do not take this responsibility lightly and it is this team's firm belief that we must drive the evolution of health care forward in the U.S. We have unique capabilities to achieve all of those goals. The strength of our diversified businesses continue to set us apart, enabling us to deliver strong results even in this dynamic environment. The progress we've made this year is fueling momentum and our disciplined execution positions us for another year of strong performance in 2026. We are working to simplify health care and are bullish about the opportunities we see to lower the cost of care and drive innovation. Our future is bright because of the work of our more than 300,000 colleagues who take care of their friends, families and neighbors and communities across our country. We look forward to sharing more on our longer-term plans at our Investor Day on December 9. With that, I'd like to hand the call over to Brian. Brian? Brian Newman: Thank you, David, and good morning. I will cover 4 key topics in my remarks. First, an update on our third quarter results. Then I'll discuss cash flow and the balance sheet. After that, I will provide an update on our revised financial outlook for the remainder of 2025. And finally, I'll wrap up with a brief discussion on high-level headwinds and tailwinds as we look ahead to 2026. As David mentioned, we are pleased to report another quarter of solid performance and to deliver a third quarter in a row where we beat and raised expectations as we continue to focus on building a track record of consistent success. We improved our full year outlook for revenue, adjusted EPS and cash flow from operations and are building positive momentum as we close out the year. Let me start with highlights on our enterprise results in the quarter. Third quarter revenues achieved a new record of nearly $103 billion, an increase of approximately 8% over the prior year quarter driven by revenue growth across all segments. Adjusted operating income of approximately $3.5 billion, increased approximately 36% from the prior year quarter, primarily driven by an improvement in our Health Care Benefits segment. We delivered adjusted EPS of $1.60, an increase of nearly 47% from the prior year quarter. Finally, we generated year-to-date cash flow from operations of approximately $7.2 billion. Turning now to each of our segments. In Health Care Benefits, we generated nearly $36 billion of revenue in the quarter, an increase of over 9% from the prior year. This increase is primarily driven by our government business, largely related to the impact of the Inflation Reduction Act on the Medicare Part D program. We ended the quarter with medical membership of approximately 26.7 million, which was flat sequentially and decreased approximately 445,000 members from the prior year quarter. This year-over-year decrease is primarily driven by declines in our individual exchange and Medicare product lines, partially offset by growth in our commercial fee-based membership. Adjusted operating income in the quarter was approximately $314 million, a substantial increase from the adjusted operating loss recorded in the prior year quarter. Our medical benefit ratio was 92.8%, a decrease of 240 basis points from the prior year quarter results of 95.2%. The change was driven by the favorable year-over-year impact of premium deficiency reserves, higher favorable prior period development and improved underlying performance in our government business. These increases were partially offset by changes in the seasonality of the Medicare Part D program due to the impact of the IRA and the impact of higher acuity in the individual exchange product line. Our medical benefit ratio this quarter was impacted by approximately 100 basis points due to provider liabilities for matters dating as far back as 2018 and worsening individual exchange risk adjustment expectations based on the Wakely data. Each of these 2 items were roughly equivalent. Medical cost trends in the quarter remained elevated across all products, but were modestly favorable relative to our expectations, primarily driven by our individual MA book. Days claim payable at the end of the quarter was approximately 42.5 days, an increase of approximately 1.6 days sequentially, primarily driven by the partial release of premium deficiency reserves established in the first half of 2025 as well as an additional day in the third quarter compared to the second quarter. We remain confident in the adequacy of our reserves. Shifting now to our Health Services segment. During the quarter, we generated revenues of over $49 billion, an increase of over 11% year-over-year. This increase was primarily driven by pharmacy drug mix and brand inflation, partially offset by continued pharmacy client price improvements. Adjusted operating income in the quarter of approximately $2.1 billion decreased 7% from the prior year quarter, primarily driven by continued pharmacy client price improvements, partially offset by improved purchasing economics. Performance in our Health Care Delivery business during the quarter was broadly in line with our expectations. Total revenues grew approximately 25% compared to the same quarter last year, excluding the impact of our exit from our CVS Accountable Care business earlier this year. This increase was primarily driven by patient growth at Oak Street and increased volumes at Signify. During the quarter, we made certain strategic changes in our Health Care Delivery business, including the decision to reduce the number of new Oak Street clinics we expect to open over the next several years. These changes necessitated a quantitative assessment of the carrying value of goodwill in our Health Care Delivery reporting unit, which resulted in a goodwill impairment charge of approximately $5.7 billion during the quarter. We are focused on improving financial performance in our Health Care Delivery business. As discussed last quarter, we have and continue to take actions at Oak Street to enhance our operations. During the quarter, we completed a comprehensive review of our Oak Street clinic footprint. As David mentioned, this is core to our approach of evaluating each of our businesses, identifying strengths and making decisions to drive improved execution and performance. Following our review, we made the difficult decision to close underperforming clinics where we do not see a reasonable path to sustainable margins. To be clear, we view value-based care as a critical component to our Medicare strategy and expect the actions we are taking to support improved financial performance beginning next year. Our Pharmacy & Consumer Wellness segment delivered another strong quarter. We generated revenues of over $36 billion, an increase of nearly 12% versus the prior year quarter, primarily driven by pharmacy drug mix and increased prescription volume, partially offset by continued pharmacy reimbursement pressure. Revenues in the quarter increased over 14% on a same-store basis. Our retail pharmacy script share grew to approximately 28.9% as our emphasis on operational excellence and superior customer experiences enables us to benefit from pharmacy market disruption. Same-store pharmacy sales in the quarter grew nearly 17% compared to the prior year, driven by pharmacy drug mix and a nearly 9% increase in same-store prescription volumes. Same-store front store sales increased 150 basis points versus the prior year quarter. Adjusted operating income decreased approximately 7% from the prior year to approximately $1.5 billion. This decrease was primarily driven by continued pharmacy reimbursement pressure and increased investments in colleagues and capabilities. These items were partially offset by increased prescription volume. Shifting now to cash flow and the balance sheet. We generated cash flows from operations of approximately $7.2 billion year-to-date through the third quarter. We have distributed approximately $2.6 billion in dividends to our shareholders year-to-date, and we ended the quarter with approximately $2.3 billion of cash at the parent and unrestricted subsidiaries. We continue to meaningfully improve our leverage ratio, supported by our strong year-to-date performance and expect to make further improvement next year as we grow enterprise earnings driven by margin recovery in our Aetna business. Shifting now to our revised outlook for 2025. We are increasing our full year 2025 guidance for adjusted EPS to a range of $6.55 to $6.65, an increase of $0.25. This update reflects our third quarter performance and our revised expectations for the remainder of the year, which continue to maintain a prudent outlook on medical cost trends and macro factors. We now expect full year total revenues of at least $397 billion, an increase of nearly $6 billion driven by increases across all segments. In our Health Care Benefits segment, we now expect full year adjusted operating income of approximately $2.72 billion at the low end of our guidance range, an increase of approximately $300 million reflecting our performance in the third quarter and improved expectations for the remainder of the year. We continue to project our full year 2025 medical benefit ratio at the low end of our Health Care Benefits adjusted operating income guidance range to be approximately 91%. This outlook continues to maintain a thoughtful and prudent view on medical cost trends through the remainder of the year. In our Health Services segment, we now expect full year adjusted operating income of at least $7.1 billion, a decrease of approximately $240 million from our prior guidance. This update reflects our latest expectations for performance that David highlighted in his remarks. Importantly, we continue to make progress evolving our contracting and pricing models to respond and adapt to market dynamics. We are confident we're on the path to lead the evolution with our new TrueCost model, which guarantees a net cost of each individual drug, driving drug pricing transparency for our clients and members. The outlook for our Health Care Delivery business remains largely unchanged. Lastly, in our Pharmacy & Consumer Wellness segment, we now expect full year adjusted operating income of at least $5.95 billion, an increase of approximately $270 million from our prior guidance. This increase reflects our performance in the third quarter and our revised expectations for the remainder of the year, while continuing to maintain a prudent outlook for the rest of the immunization season and potential impacts to the consumer environment. In aggregate, we now expect full year enterprise adjusted operating income to be in the range of $14.14 billion to $14.31 billion. We are also increasing our expectations for full year cash flow from operations to be in a range of $7.5 billion to $8 billion. Additionally, we now expect our full year adjusted effective tax rate to be 25.3%, an improvement of 40 basis points. You can find additional details on the components of our 2025 guidance on our Investor Relations website. Before we open the call up to Q&A, I also want to provide an update on some of the key headwinds and tailwinds for 2026. Consistent with past practice, we expect to provide formal 2026 guidance at our Investor Day in December. Beginning with our Health Care Benefits business, we expect another year of meaningful margin improvement at Aetna. This includes another year of progress in our Medicare Advantage business, supported by our disciplined approach to plan design and footprint in individual as well as repricing opportunities in our group business. We also expect a tailwind from our exit of the individual exchange business. Although our conversations with our Medicaid state partners continue to progress and this business has performed in line with our expectations this year, we are taking a cautious outlook in light of the broader pressures across the industry. In our Health Services segment, we expect improvement in our Health Care Delivery business, primarily driven by Oak Street Health. In our Caremark business, we expect modestly lower growth as we continue our work to transition our contracts towards drug level pricing over the next few years. Altogether, we expect the segment to deliver low single-digit adjusted operating income growth next year. And in our Pharmacy & Consumer Wellness segment, we are encouraged by our strong performance this year and expect this momentum to continue into next year. While challenges, including reimbursement pressure and the impact of shifting consumer dynamics remain in this business, we currently expect the trajectory to improve relative to our long-term expectation of a 5% decline. I would also remind everyone that consistent with past practice, the impact of prior year reserve development and other out-of-period items should be removed when considering an appropriate baseline for bridging to 2026. As of the end of the quarter, these items contributed approximately $0.45 to our year-to-date results. Altogether and after adjusting for these items, we currently expect a reasonable starting point for our 2026 adjusted EPS guidance to reflect mid-teens growth. We will provide formal guidance at our Investor Day on December 9. Overall, we are encouraged by the year-to-date performance of our diversified enterprise and are confident we are taking the right steps to position us for both near- and long-term success. We recognize the importance of establishing credible commitments and expect to continue this philosophy as we establish future financial targets. With that, we'll now open the call to your questions. Operator? Operator: [Operator Instructions] Our first question will come from Lisa Gill with JPMorgan. Lisa Gill: I really want to start with some of the comments you made on the PBM side. So first, the $240 million that you talked about, as we shift more towards transparency, towards TrueCost, should we anticipate -- and again, this kind of goes to Brian's comments around '26 as well, should we anticipate as we see shifts in these contracts that we're going to continue to see headwinds as we make that initial shift? So that would be the first part of the question. Secondly, how do we think about future PBM economics around a TrueCost model, not only for you as the PBM, but we also get questions around the plan sponsor. So as we know, many plan sponsors use rebates to offset premiums, et cetera, so how does that future look on the plan sponsor side as well as your economics on the PBM side? J. Joyner: Yes. Lisa, great question and something that obviously we're prepared to address both today as well as where we see the marketplace evolving. But let me first start with, I think if you look at the headwinds that we're seeing specifically within the PBM, this does reinforce the strength of a diversified company. So this is the third consecutive quarter where we both exceeded and raised guidance. It highlights the focus and the commitment that we've made around building trust and credibility. So I think that is what I want to make sure is known that there's performance again across the broader enterprise. A couple of things as it relates to the PBM and specifically to your question about the future. Over the course of my 30-year career, Caremark has consistently driven innovation and been able to adapt to the changing market. The drive is not just changing the way in which our teams are working, but we've talked over the last couple of years about changing the PBM model. And part of this is the TrueCost transition to what I believe will be the pricing model of the future. So I remain confident that Caremark will deliver both on the strong earnings and cash flow for the foreseeable future. And I think it's going to be reinforced in what we've said about the selling season. Even in light of some of the challenges around the industry, we delivered $6 billion of new wins and had a high retention rate in the 90s. So I'm going to let Brian speak to some of the financials and some of the pressures, then I'll have Prem speak more broadly to the last question about where this is going from a PBM model. Brian? Brian Newman: Thanks, David. And Lisa, thanks for the question. I think if we take a step back, I think it's actually important to provide some context on the historical industry practices. Historically, the norm in the industry was to use an aggregate market basket-based approach to structure guarantees. And I think as we highlighted in our prepared remarks, throughout the year, we've observed a combination in mix of drugs, in utilization patterns that differed from our prior forecast. And given the market basket structure underlying the client guarantees, those dynamics are putting pressure on the contracts David actually mentioned in his prepared remarks. So we've been closely monitoring the trends. And I think we realize -- while we realize the impact that the market basket had on guarantees on a subset of our contracts, we actually believe we had a credible and achievable pathway to mitigate the rapidly emerging challenges. So as we closed the quarter, we realized the mitigations that we had identified. They didn't materialize as quickly or have the impact we had initially anticipated. And that's really the driver as a result that drove us to modestly miss our expectations in the third quarter. So we've also revised our expectations for the full year. That's captured in the guide I gave. And as I mentioned in my prepared remarks, it will have an impact on the near-term growth outlook as we recontract over the next couple of years. Prem, maybe you can talk more about the value Caremark delivers and the evolving model. Prem Shah: Yes. Lisa, thanks for the question. And just to answer directly on the future PBM economics, as you know, the PBM industry has been and will continue to be an extremely competitive space where we deliver tremendous value to our customers and deploy that value to them. If you think about our -- from my perspective, what Caremark has done over the course of the last many decades is we continue to focus on our clients' biggest problems, which is high cost of branded drugs. As we've said, 10% of drugs drive 88% of our pharmacy costs in this country. And we're going to continue to lead and be a leader in this space. You saw this 18 months ago, we launched Cordavis. We went after the largest specialty drug in the country. We delivered our clients over $1 billion in savings and we've interchanged and moved all the product to a lower cost, 81% lower WACC price than the originator, and we delivered $1 billion of savings. You saw it earlier this year with our addressing GLP-1s. GLP-1s are approximately 15% of our clients' cost. We were able to narrow our formulary in the weight loss category and our clients benefited from lower cost. And I would argue, the market benefited from the fact that we moved against one of the products. And we saw the list -- or sorry, we saw the net prices of the entire category come down. This is what PBMs do every single day. They create this competition. This is what they've done for the last 3 decades and will continue to do that. As it relates to the value and how the economics kind of pass through from us and our clients and how that plays out in the marketplace, at the end of the day, the problem in this country still is health care is unaffordable. And what you're describing is really kind of the spread of which is a member out-of-pocket or a planned premium. And from our perspective, what we're doing with TrueCost, which we launched 2 years ago, was very deliberate, and it was driving greater transparency and making sure that consumers and clients had the benefit of that transparency while, again, maintaining our ability to create the competition and lower the net cost of drugs. As David said in his prepared remarks, we have over 25 million customers and consumers that are in our point-of-sale rebate program. Aetna has launched point-of-sale rebates as far back as 2019. So this is something that we have been really focused on where we get the consumers the lowest possible price at the counter because we know medicines in this country help lower the cost of overall health care expenditures and it's critically important. And lastly, I'll say, as all the things have been happening with the administration, we're excited to play an active role in making medicine more affordable in this country. We think we will continue to play that role. And we love the fact that they are going after the inequity across countries that you've seen and the price disparities that exist. So more to come, but I would say the PBM business continues to be a very competitive space, continues to have durable margins and continue to be a very necessary component of how we deliver care and lower cost in this country. J. Joyner: And maybe just one final comment. I think it's important to note that we saw this trend several years back, which is part of what we're trying to do within retail moving to CostVantage and where the PBM was driving towards TrueCost. So we saw where the marketplace is going. We led the market. We're in the middle of that transition to the model of the future. And again, I think the near-term headwinds is not an implication on the long-term viability of the PBM model. Thanks, Lisa. Operator: Our next question comes from Justin Lake with Wolfe Research. Justin Lake: I wanted to ask about the PCW business. It looks like 3Q was ahead of your expectations and you have about 3% growth assumed for the fourth quarter. I was hoping you could share some of the drivers around your confidence in that fourth quarter growth, particularly the headwind from vaccine -- lower vaccine volumes to OI and then the benefit of the 600-store file buy you got from Rite Aid for the fourth quarter and how that EBIT impacts into 2026. J. Joyner: All right. Thanks, Justin. I appreciate the question on PCW. So Prem, do you want to talk specifically about the growth rate? Prem Shah: Yes. Justin, thanks for the question. And as you recall from a few analyst days ago, we were very deliberate with our strategy and purposeful with how we were going to kind of get this business back to something better than minus 5%. But -- so a couple of things. One, I'm incredibly proud of the leadership team and the strong execution that we've delivered. We have the right strategy and we're focused on it, and it's a foundation of just health care engagement. It's one of the things we really believe. So we have over 9,000 community pharmacy destinations where we know we can service patients and members in a much better way to create differentiated services. At this point, I'm proud to say we are the best running pharmacy in the country. And it's operating nationally at scale. It has extremely strong consumer engagement and really good clinical expertise that we're delivering into the marketplace. And it's a very, very strong deliverer of trust for our consumers and we can then continue to create value in other parts of our enterprise. When you think about what's driving that, first, from a business perspective, we were very deliberate in our investments in technology and taking care of our colleagues. We have over 200,000 colleagues in 9,000 of these stores that continue to deliver best-in-class service. And then secondly, we were focused on how we can engage and better engage consumers in a differentiated way. So all in all, it's going really well. As it relates to the quarter, we delivered a strong quarter despite some of the persistent reimbursement pressures that we faced. If you look at the script growth, we had top line growth about 11.7%. And our pharmacy market share is now at 28.9%. Rite Aid was one of the drivers that was in that as we kind of moved that business into our operating model. But just remember, the strong foundation, the strong service enabled us to really be able to do that in a much more effective way. And then if you think about the immunization piece, we continue to be a trusted choice and a convenient option for those choosing to get vaccinated. The market demand is down year-over-year, but we've been able to offset that with a market share growth in our channel. We've seen approximately 400 basis points of market share growth inside of CVS. Secondly, if you think about our front store, we still have strong momentum. We're posting another positive comp for the second quarter in a row and improved from last year. We grew our customer base 2.6% versus last year. We increased trips 2.7% versus last year. And our retail market share on the front store has gained by 2 basis points versus last year. So we're continuing to focus on delivering the value being where consumers want us to be in the front store by driving loyalty and improving our value proposition. And I'd just say, all in all, we're incredibly proud of the results, incredibly proud of the leadership team and the focus that we have here, but we still have work to do to stabilize this business over time. And Brian, I'll hand it over to you for a couple more comments. Brian Newman: Yes. No, just, Justin, in terms of the outlook, the strong performance Prem talked about in the quarter, we lifted our guide for the segment and it's now sitting at a growth of 3% for the year. And I'd remind you, that's an 8% swing from our initial expectations of down 5%. So we're seeing that business improve, and we'll talk more about it come December 9 at Investor Day. J. Joyner: Yes. Maybe just closing out on the PCW conversation, this is a business that we've been investing in over the last several years. I think some of this has come to fruition in terms of the investments we've made in becoming best-in-class. So we've talked about this in the opening comments that the 9,000 stores is our front door to the enterprise. And when this business runs well, it does become the force multiplier to improving health and our focus on serving the community. So really excited about the performance, and we'll share obviously more, as Brian said, on Investor Day about the future direction of this business. Operator: Our next question comes from Stephen Baxter with Wells Fargo. We'll take our next question from Elizabeth Anderson with Evercore. Elizabeth Anderson: I believe you can hear me. I had a question in terms of the 100 basis points of provider liabilities that you called out. Can you give us a little bit more detail on exactly what those are? And is this a onetime item? Do we expect this to continue for a couple of quarters? Just any additional color there would be helpful because, obviously, with that, it shows that your MBR was much more in line than maybe it looked like from the first glance. J. Joyner: Yes. Elizabeth, thanks for the question. And you're correct in that assumption. So Brian, do you want to speak to the... Brian Newman: Yes. The -- I guess I'd lift it up from an HCB perspective, Elizabeth. We're really pleased with the performance in the third quarter. As you think specifically about the third quarter MBR, some of the noise I called out in my prepared remarks, we had about 100 basis points of impact, 2 things, provider liabilities. Those are from -- dating as far back as 2018 for kind of a 3-, 4-year period. And then a combination of that, that was roughly 50 basis points of the 100. And then worsening expectations for the individual exchange risk adjustment. We got the latest Wakely data that informed that. So those 2 factors really took a 92.8% as we printed. And if you back that up to get to a 91.8% roughly, it would say that the core outperformance on the MBR in the quarter was driven on an adjusted basis by individual MA. So that's how we think about the two drivers specifically to your question. Operator: We'll now take our question from Stephen Baxter with Wells Fargo. Stephen Baxter: Sorry for the difficulties there. Just to kind of come back to that point a little bit. I think with the first couple of quarters of the year, you sized in each quarter that, I guess, on a continuing basis, there was around $500 million core upside that you weren't taking through into the guidance. Wondering if there's an equivalent amount, if you think about kind of excluding the items that you called out around the exchanges and around the out-of-period settlements that you'd cite for Q3? And I guess how do we reconcile that versus the raise that you made? And I guess just one clarification as we're getting a lot of questions on it. This mid-teens EPS growth that you're framing for 2026, is that after taking the $0.45 out of the baseline? Or is that off of this year's guidance as you currently revised it? Brian Newman: Yes. To take your last question, Stephen, you take the midpoint of the guide, which is $6.60, back off the $0.45 and then you can grow mid-teens off of that. And the way we got to the $0.45, I think going into the quarter, we had about a combination of net both positives and negatives. If you take some of the out-of-period risk adjustments and revenue adjustments net of the upside, we'd be about $900 million coming out of the first half of the year. You take the $150 million of the provider settlements, that's how we get to $750 million roughly or the $0.45 as we adjusted, which I just walked you through. Operator: Our next question comes from Michael Cherny with Leerink Partners. Michael Cherny: I know Lisa had asked about the PBM headwinds that you had been discussing. I want to talk a little bit more about the PBM tailwinds. Beyond Cordavis, what are you seeing broadly from a specialty growth perspective? And can you talk about some of the strategic advancements you're making to continue to benefit from what has obviously been an extremely strong overall market growth? Brian Newman: Prem, do you want to take that? Prem Shah: Sure. Thanks for the question, Michael. Just a couple of things. So from a tailwind perspective, as we've said, we see a tremendous opportunity to continue to lower cost for our customers. And as you know, when we can lower cost for our customers, the PBM industry typically benefits from that as well. So a couple of things. One is if you think about the biosimilar pipeline, it still remains. There's $100 billion of biosimilars going -- biosimilar by the end of this decade or early 2030, 2031 time frame. So we continue to look at ways in which we can enable and drive down costs for our customers as it relates to biosimilars. We believe that there still is our ability to benefit from other specialty drugs as well in the generic pipeline that are going generic that will be an opportunity for us to deliver value for our customers. And let me just take a couple of seconds to talk about our CVS Specialty Pharmacy business. It continues to be a leading asset in the specialty pharmacy arena. It's a leader and a key overall performance driver of Caremark, and we expect it will continue to be helping to support the members that they serve. Remember, these 1% or 2% of the population that utilize specialty pharmacy benefits typically drive 50%, 60% of all of health care expenditure. And so our business continues to perform really well. And we have a strong track record of continuing to gain access of new limited distribution drugs in that space. We continue to build technology that makes it seamless to transition patients from branded products to biosimilars. And lastly, our operating platforms, a tremendous amount of credit goes to our leadership in this business is driving to a much more tech-driven AI native platform that's driving and really taking a lot of the work out a lot of operations and something that was one of the most complex parts of health care, which is effectively trying to drive these medications into the patients' homes. And so we continue really proud of those points as it relates to that. We also see opportunities in the PBM for what I would say is efficiencies and optimization over time, where we see the opportunity to leverage technology and other things to also play a role. And lastly, I think the PBM sales season is great evidence that we continue to focus on our customers. We're winning net new customers and delivering the value that they're asking for us. So we had over $6 billion of net new sales for 2026. So continue to be excited about this industry. It remains to be highly competitive as it always has been. And we continue to remain to be a leader in driving that competition and driving affordability for our customers and creating innovative solutions that they can deliver into the marketplace. So... J. Joyner: Thanks, Prem. Maybe just one additional comment on the PBM because there's obviously emerging models that we're seeing around the DTC. So 2 things I would point out. One is we were the first large provider to join the NovoCare program for GLP-1s. So that's again our push into lowering the cost of these obesity products in the direct-to-consumer market. And then the most recent announcement we made with the administration with respect to the IVF therapy, again, our specialty pharmacy playing essential or critical role in the rollout of that program as we serve consumers and our customers. Operator: Our next question comes from Eric Percher with Nephron Research. Eric Percher: I'd like to return to Caremark and ask you to clarify the extent to which you're seeing pressure from adoption of TrueCost versus change in mix. If it's TrueCost, how much of that was CVS? I'd expect you were ahead of that versus others or independents that you're enabling. And then if more change in mix, are you seeing that changes to GLP-1 formulary or biosimilar private label is having an impact on rebate guarantees? Prem Shah: Yes, Eric. Thanks for the question. First off, let me be clear, this is not from TrueCost. The TrueCost model is not what's driving this. As you know, in the legacy PBM models, in the PBM marketplace, we predict and try to drive rebate guarantees, which is a way in which we derive the value for our customers. In that case, we had probably 3 primary drivers of some of the pressure. One, the slower growth of GLP-1s that we're seeing in the back half, primarily driven from we expected a little bit more of the compounding volumes to come back into the benefit, which we're not seeing. Secondly, we had a couple of products on the autoimmune category not related to Cordavis, but drivers of a couple of products that we're driving that. So one is in the autoimmune category and one is in the HIV category. So this is not from TrueCost. It is something we're working with our clients actively adjusting our guarantees appropriately as we move forward, but create a little bit of pressure in the short term. Operator: Our next question comes from Andrew Mok with Barclays. Andrew Mok: I wanted to ask about the recontracting efforts at Oak Street and understand the room for improvement there. So first, can you share the pretax operating losses of that business today? And to the extent you had problematic external membership this year, did you see the needed changes made to benefits for the 2026 plan year? And if not, can you help us understand what contracting changes you're making, including how much risk is shifting back to your Medicare Advantage partners? Brian Newman: Thanks very much. I'll let Prem talk to the business and the evolution. We don't share the pretax loss, but I think we've been very focused on the Oak Street business. Once again, the impairment we took was at the HCD level. But we took a look at clinic growth and really by slowing the clinic growth, the terminal values, what drove the impairment charge. And we believe we're getting the Oak Street business in particular on the path to profitability. Prem, do you want to give a little color on the business? Prem Shah: Yes, sure. And thanks for the question. First off, just to be really clear, the performance in this quarter was in line with our expectations that we kind of -- as we adjusted the guidance from prior. So performance is in line. If you think about value-based care, and David mentioned this in the prepared remarks, it's still a critical component of our strategy. We recognize the significant impact it can have on the health care system, the importance to patients on experience and outcomes and costs. So there's 3 or 4 things that we're really focused on in Oak Street Health. Let me just talk specifically to the payer contracts. One, we won't comment on any specific contracts, but we're focused on ensuring that we have alignment with our payers on ensuring the sustainability of these agreements and having fair and equitable terms for the value that we provide. So we're continuing to work on that with our payers and continue to drive that forward. But the 2 other areas I think that are really critical is we are really proud of our clinical model that we have. We continue to enhance our technology and our operations to drive an enhanced model in which we'll ultimately lower cost and improve quality of our members. And lastly, on the center footprint, listen, at the end of the day, the world has changed in value-based care. So we're being very prudent and we've slowed the number of clinic growth that we had. And we're focused on growing membership inside of our clinics. And so from our perspective, those things are all the components that are driving. And we expect the Oak Street business to improve year-over-year. And lastly, as it relates to V28, it's in line with our expectations of the impact of that as we think about that business. Operator: Our next question comes from George Hill with Deutsche Bank. George Hill: David and Brian, my question is kind of focused on the retail pharmacy business. And you talked about how 2026 is going to show an improvement from the long-term guide. I guess I would ask if you can comment, how far are we away from like the long-term guidance of down 5% not being the case anymore? And given the PBMs are paying pharmacies more money and CostVantage is taking root across different payer segments, does earnings growth starts to look more like script growth in that segment? I'll stop there. J. Joyner: Yes. When we -- thanks, George, for the question. Maybe just high level, when we announced CostVantage, that was a long-term goal, which we are the largest purchaser in the country today. We believe we have the best cost of goods in the market. And as we perform better, the payers will get the benefit of that. And so that is, we are now going into year 2 of that in '26. So as we get to Investor Day, we'll have more clarity about how that business will be performing. But ultimately, we do see better alignment with the payers in terms of how the actual cost of goods align with the actual reimbursement for the services we're providing. And so, Prem, do you want to give any other color? Prem Shah: Yes. So George, remember, those 3 primary headwinds in the retail business, if you go back when we started CostVantage -- sorry, 3 tailwinds that were offsetting one big headwind, which was reimbursement pressure. So the 3 tailwinds were we would always drive incremental volume into our stores, right, script growth. We would have productivity initiatives that drove and lowered the cost of our cost basis of delivering those scripts. And lastly, there was cost of goods improvement. And all that netted out to a somewhat tailwind -- or a headwind that we're trying to cover. If you think about what CostVantage was doing and, as we mentioned, it was going to take a multiyear journey to get us to a place in which reimbursement erosion equaled our cost of goods improvement. We're making good progress towards that, but we still have reimbursement pressure in the underlying business that we continue to focus on. So just from a CostVantage perspective, as we said at the beginning, 2025 was a transitional year. We're proud that we moved all of our commercial and third-party discount card programs into our CostVantage program. We're making good progress in Medicare on transitioning to cost-based pricing models across our full look of business. We're more than 60% complete and targeting 100% of our eligible book by the start of 2026. If you compare our Medicare negotiations to our commercial negotiations, we're ahead of where we were last year. So we feel pretty good about where we are. And lastly, if you think about the impact of CostVantage, at this point, it's performing in line with our expectations. As I said, it's going to be a multiyear journey to get that back. And we're addressing one of the major pain points that existed in retail pharmacy, which was cross-subsidization of branded and generic drugs. J. Joyner: Yes. And George, maybe one final comment. Your thesis is right, which is our growth should be tied to script growth. And as we get CostVantage rollout across our payers, that will become part of the growth. The second part is the services we're going to provide inside the pharmacy. So if you look at the stars performance within Aetna, a lot of this was driven because of the collective enterprise effort and the services and the specific programs that have been delivered and launched within retail to engage and drive better performance around adherence and the other quality measures. So that is the next frontier, and this is how we're going to collectively drive the value across the enterprise. Operator: Our next question comes from Kevin Caliendo with UBS. Kevin Caliendo: I want to ask a little bit about what's embedded in your '26 comments for the Health Care Benefits around MA margin expansion. Can you get to be profitable next year? And also enrollment, I know enrollment is not over yet, but your sense of where your enrollment goes in individual MA next year. Brian Newman: Thanks for the question. As we think about the guide, which we'll really get into in December at Investor Day, but in HCB, which you asked about, I would say we expect another year of meaningful margin improvement. It will include progress in MA. I think that reflects our disciplined approach to the plan design and footprint. We have repricing opportunities in group with, I think, about half the book repricing as of January. As you think more broadly about HCB, we'd expect a tailwind from our exit of the IFP business next year. And while we're seeing good progress in Medicaid in terms of rate advocacy discussions, we are taking a cautious outlook in light of the broader pressures that are across the industry. Steve, do you want to provide a little bit more color? Steven Nelson: Sure. Thanks. Look, when we entered this year from the Aetna perspective and all of CVS together, we're focused on a couple of objectives. One is to return the business to target margins; second, to regain leadership position overall in the industry. And within those objectives, we rallied around 3 very specific priorities: to be exceptional to fundamentals, make sure that we are distinctive and we could offer distinct capabilities to our customers and build a really strong culture with top talent. And so we've been executing with discipline and rigor and urgency around those 3 priorities. And as you can see by the performance, and as Brian highlighted and David in his opening remarks, the plan is working. And so we are really encouraged by the progress across all of our businesses at Aetna. And we believe this momentum will carry into not only the fourth quarter, but 2026. So we're going to lean into that momentum. Having said that, we're obviously respectful of the high trend environment, and it's a first year of a multiyear recovery. So really encouraged by the progress. And maybe I'll just -- a couple of comments on Medicare and open enrollment as you asked. Look, obviously, early days, but it's going according to our expectations in line with those objectives of returning and continuing on the path to returning to target margins on this business. We made really great progress. It actually is a little bit ahead in terms of favorability, in terms of trends and the individual Medicare Advantage business in the third quarter. And so we're going to take that momentum. And the early signs in AEP is that we're on track to continue that momentum and keep the business on track to returning to target margin. With respect to just sort of overall competitive positioning, we like our position. Again, early days. We do have the ability and we've developed capabilities as we did last year during the AEP to continue to make adjustments and be nimble as we need to dial up and down products, geographies, other kinds of mechanisms that we have just to make sure that we continue on track in a really disciplined and rational approach. So so far, so good. And I would just say, we expect to exit AEP roughly flat in our individual Medicare Advantage membership. So very encouraged so far, early signs. Look forward to providing more color at our Investor Day. J. Joyner: Yes. Steve, great quarter, and congrats to you and your team. So this will conclude the earnings call for this quarter. So before I end the call, I just want to thank our dedicated colleagues across CVS Health for the work you do every day. The trust we earn comes directly from the commitment to caring for our customers. I'm very encouraged about the progress we continue to make and look forward to providing you additional updates at our Investor Day on December 9. Thank you for joining the call. Operator: Thank you for joining CVS Health's Third Quarter 2025 Earnings Call. This concludes today's conference call. You may now disconnect.
Operator: Greetings, and welcome to the SiteOne Landscape Supply, Inc. 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, John Guthrie. You may begin. John Guthrie: Thank you and good morning, everyone. We issued our third quarter 2025 earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. I am joined today by Doug Black, our Chairman and Chief Executive Officer; Scott Salmon, Executive Vice President, Strategy and Development; and Eric Elema, Vice President, Finance and Corporate Controller. Before we begin, I would like to remind everyone that today's press release, slide presentation and the statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the slide presentation. I would now like to turn the call over to Doug Black. Doug Black: Thanks, John. Good morning, and thank you for joining us today. We were pleased to achieve solid results during the third quarter with 4% net sales growth, including 3% organic daily sales growth and 11% growth in adjusted EBITDA compared to the prior year period, despite the continued softness in our end markets. Our teams are executing our initiatives well, yielding excellent SG&A leverage, good gross margin improvement and meaningful market share gains. We also benefited from a more favorable price/cost environment, yielding a 1% improvement in pricing for the quarter. Finally, we added three excellent companies to SiteOne during the quarter and one more in October, expanding our full product line capability in those local markets. Overall, with strong teams, a winning strategy and excellent execution of our commercial and operational initiatives, we are delivering solid performance and growth in 2025 despite softer end markets. Heading into 2026, we are confident in our ability to drive continued performance and growth in the coming years. I will start today's call with a brief review of our unique market position and our strategy, followed by some highlights from the quarter. John Guthrie will then walk you through our third quarter financial results in more detail and provide an update on our balance sheet and liquidity position. Scott Salmon will discuss our acquisition strategy, and then I will come back to address our latest outlook before taking your question. As shown on Slide 4 of the earnings presentation, we have a strong footprint of more than 680 branches and 4 distribution centers across 45 U.S. states and 6 Canadian provinces. We are the clear industry leader, over 3x the size of our nearest competitor and larger than 2 through 10 combined. Yet we estimate that we only have about an 18% share of the very fragmented $25 billion wholesale landscape products distribution market. Accordingly, our long-term opportunity to grow and gain market share remains significant. We have a balanced mix of business with 65% focused on maintenance, repair and upgrade; 21% focused on new residential construction; and 14% on new commercial and recreational construction. As the only national full product line wholesale distributor in the market, we also have an excellent balance across our product lines as well as geographically. Our strategy to fill in our product lines across the U.S. and Canada, both organically and through acquisition, further strengthens this balance over time. Overall, we believe our end market mix, broad product portfolio and geographic coverage offer us multiple avenues to grow and create value for our customers and suppliers, while providing important resilience in softer markets like the markets we are experiencing today. Turning to Slide 5. Our strategy is to leverage the scale, resources, functional talent and capabilities that we have as the largest company in our industry, all in support of our talented, experienced and entrepreneurial local teams to consistently deliver superior value to our customers and suppliers. We've come a long way in building SiteOne and putting the teams and systems in place to fully execute our strategy at a high level across each of our product lines. In the current challenging market environment, we are making good progress in leveraging our capabilities to drive tangible results with consistent market share gains, improved SG&A leverage and steady gross margin improvement. Through our commercial and operational initiatives, we believe that we are delivering industry-leading value for our customers and suppliers, and solid performance improvement and growth for our shareholders this year. Importantly, we are gaining momentum for continued success in the years to come. These initiatives are complemented by our acquisition strategy, which fills in our product portfolio, moves us into new geographic markets and adds terrific new talent to SiteOne. Taken all together, we believe our strategy creates superior value for our shareholders through organic growth, acquisition growth and adjusted EBITDA margin expansion. On Slide 6, you can see our strong track record of performance and growth over the last 8 years. From an adjusted EBITDA margin perspective, we benefited from extraordinary price realization due to rapid inflation in commodity products during 2021 and 2022. In 2023 and 2024, we experienced significant headwinds as those commodity prices came down. In 2024, we also experienced further adjusted EBITDA dilution from the acquisition of Pioneer, a large turnaround opportunity with great strategic fit, and from our other focused branches which resulted from the post-COVID market headwinds. In 2025, our pricing has transitioned from negative 1% in the first quarter to flat in the second quarter to up 1% in the third quarter as commodity deflation continues to dissipate. We expect to exit 2025 with pricing up 1% to 2%, setting us up for more normal inflation and price realization in 2026. Furthermore, we are achieving excellent progress with Pioneer and our other focus branches in 2025 and expect to continue achieving improvements over the next several years as we bring their performance up to the SiteOne average. In summary, we believe we are positioned to drive strong adjusted EBITDA margin improvement in 2025 and in the coming years as we execute our initiatives and as the market headwinds turn to tailwinds. Since the beginning of 2014, we have completed over 100 acquisitions, adding more than $2 billion in acquired revenue to SiteOne, which demonstrates the strength and durability of our acquisition strategy. These companies expand our product line capabilities and strengthen SiteOne with excellent talent and new ideas for performance and growth. Given the fragmented nature of our industry and our current market share, we believe that we have a significant opportunity to continue growing through acquisitions for many years to come. Slide 7 shows the long runway that we have ahead in filling in our product portfolio, which we aim to do primarily through acquisition, especially in the nursery, hardscapes and landscape supplies categories. We are well connected with the best companies in our industry and expect to continue filling in these markets systematically over the next decade. I will now discuss some of our third quarter highlights as shown on Slide 8. We achieved 4% net sales growth in the third quarter with 3% organic daily sales growth and 1% growth due to acquisitions compared to the prior year. Organic sales volume grew 2% during the third quarter, reflecting continued share gains, partially offset by end market softness in new residential construction and repair and upgrade. Pricing was up 1% in the third quarter, marking a meaningful improvement versus the prior year period. As expected, the growth in maintenance-related demand remained steady in Q3, and we achieved 3% organic daily sales growth with our agronomic products. The residential new construction end market was down during the quarter, especially in Texas, Florida, Arizona and California. The repair and upgrade market continued to be soft, but we believe this market is beginning to stabilize versus prior year, while commercial demand also remained stable. Accordingly, with the benefit of market share gains and more favorable weather, we achieved 3% organic daily sales growth with our landscaping products. Overall, we believe that we are consistently outperforming the market through our commercial initiatives, which in combination with the recovery in pricing, should allow us to achieve positive organic daily sales growth for the remainder of this year, even in a down market. Gross profit increased 6% and gross margin improved by 70 basis points to 34.7% due to higher price realization and gains from our initiatives. This outcome was higher than expected as our teams executed well and as the deflation in grass seed and PVC pipe was more than offset by stronger pricing and other products, which had a positive impact on gross margin. Our SG&A as a percentage of net sales decreased 50 basis points to 28.4% compared to the prior year period. For the base business, on an adjusted basis, SG&A as a percent of net sales decreased approximately 60 basis points versus last year, demonstrating our strong cost control and execution of our key initiatives, including continued improvement with our focus branch. We remain highly focused on achieving SG&A leverage through our initiatives, while benefiting from the impact of positive pricing on organic daily sales growth. Adjusted EBITDA for the quarter increased 11% to $127.5 million, and adjusted EBITDA margin improved 60 basis points to 10.1% due to higher net sales, improved gross margin and increased SG&A leverage. With pricing continuing to normalize and with our commercial and operational initiatives yielding stronger results, we are pleased to resume adjusted EBITDA margin expansion this year and expect to drive continued improvement in the coming years. In terms of initiatives, we are executing specific actions to improve our customer excellence, accelerate organic growth, expand gross margin and increase SG&A leverage. For gross margin improvement, we continue to increase sales with our small customers faster than our company average, drive growth in our private label brands and improve inbound freight costs through our transportation management system. These initiatives not only improve our gross margin, but also add to our organic growth as we gain market share in the small customer segment as well as across product lines with our competitive private label brands like Pro-Trade, Solstice Stone and Portfolio. Collectively, these three brands grew by 50% in the quarter and nearly 40% year-to-date. To further drive organic growth, we are leveraging our increased percentage of bilingual branches and executing Hispanic marketing programs to create awareness among this important customer segment. We are also making great progress with our sales force productivity as we leverage our CRM and establish more disciplined revenue-generating habits and processes among our inside sales associates and over 600 outside sales associates. This year, our outside sales force is covering approximately 10% more revenue than in 2024 with no additional headcount, which has allowed us to achieve higher organic sales growth at a lower cost. Our digital initiative with siteone.com is also helping us to drive organic daily sales growth, as our results have shown that customers who are engaged with us digitally grow significantly faster than those who are not. Year-to-date, we have grown digital sales by over 125% while adding thousands of new regular users of siteone.com, helping customers to be more efficient and helping us to increase market share while making our associates more productive, a true win-win-win. Through siteone.com and our other digital tools, we are accelerating organic growth, and we believe we are outperforming the market. With the benefit of DispatchTrack, which allows us to more closely manage our customer delivery, we are now able to improve both associate and equipment efficiency for delivery while more consistently pricing this service. We believe that we can significantly lower our net delivery expenses while improving the experience for our customers. So far this year, we have reduced our net delivery expense by approximately 30 basis points on delivered sales, which represent approximately 1/3 of our total sales. This is a major initiative, and we expect to make significant progress this year and in the next 2 to 3 years. Last year, we mentioned that we are intensely managing our underperforming branches or focused branches to ensure that they have the right teams, the right support and are executing our best practices to bring their performance up to or above the SiteOne average. As a part of these aggressive efforts, we consolidated or closed 22 locations in 2024 to strengthen our operations and better serve our customers at a reduced cost. Through the third quarter, we improved the adjusted EBITDA margin of our focused branches by over 200 basis points, and we expect to gain a meaningful adjusted EBITDA margin lift for SiteOne in the coming years as we improve the performance of these branches. To support further progress in 2026 in the face of potentially soft markets, we are planning to consolidate or close an additional 15 to 20 branches and serve existing customers from nearby branches at a lower cost. We will provide further detail on this later in the call. Taken all together, we are gaining momentum with our commercial and operational initiatives, which are improving our capability to drive organic growth, increase gross margin and achieve operating leverage. On the acquisition front, as I mentioned, we added four excellent companies to our family during the quarter and in October, and we have added six companies and approximately $40 million in trailing 12-month sales to SiteOne so far in 2025. As we have mentioned earlier in the year, most of our more advanced discussions are with smaller companies this year. And so we expect 2025 will be a lighter than normal year in terms of acquired revenue, even as we aggressively cultivate key targets for future years. In our fragmented industry, we still have plenty of high-quality targets, and we remain well positioned to grow consistently through acquisition for many years with an experienced acquisition team, broad and deep relationships with the best companies, a strong balance sheet and an exceptional reputation for being a great long-term home for companies in our industry. In summary, our teams are doing a good job of managing through the near-term market environment, leveraging our many opportunities for improvement, prudently adding new companies to SiteOne through acquisition and building our company for the long term. Now John will walk you through the quarter in more detail. John? John Guthrie: Thanks, Doug. I'll begin on Slide 9 with some highlights from our third quarter results. There were 63 selling days in the third quarter, the same as the prior year period. Organic daily sales increased 3% in the third quarter compared to the prior year period, driven by our sales initiatives and improved pricing. Overall, we saw 2% growth in volume and 1% growth from pricing. Pricing has improved from 3% deflation in Q3 2024 to 1% deflation in Q1 2025 to 1% growth this quarter. Price increases, due in part to tariffs, have now more than offset the price decreases we were experiencing with certain commodity products. We have positive pricing in almost all categories, while commodity products like grass seed and PVC pipe, which were down approximately 13% and 10%, respectively, this quarter, are becoming less of a headwind. Our outlook for price contribution for the fourth quarter is between 1% and 2%. And for the full year, pricing should end up flat to up approximately 1%. Organic daily sales for agronomic products, which include fertilizer, control products, ice melt and equipment, increased 3% for the third quarter due to solid demand in the maintenance end market and market share gains. Organic daily sales for landscaping products, which include irrigation, nursery, hardscapes, outdoor lighting and landscape accessories, increased 3% for the third quarter due to our sales initiatives, improved pricing and more favorable weather. Geographically, seven out of our nine regions achieved positive organic daily sales growth in the third quarter. Consistent with last quarter, we continue to see weaker sales in the Sunbelt states like Texas due to softness in the new residential construction end market. Acquisition sales, which reflects sales attributable to acquisitions completed in 2024 and 2025, contributed approximately $13 million or 1% to net sales growth. Gross profit increased 6% to approximately $437 million for the third quarter compared to approximately $411 million for the prior year period. Gross margin for the third quarter expanded 70 basis points to 34.7% due to improved price realization and benefits from our commercial initiatives like private label and small customer growth. Selling, general and administrative expenses, or SG&A, increased 2% to approximately $357 million for the third quarter. SG&A as a percentage of net sales decreased 50 basis points for the quarter to 28.4%. The SG&A leverage improvement reflects our actions to increase productivity and better align operating costs with the current market demand. For the third quarter, we recorded income tax expense of approximately $16 million, which is consistent with the prior year period. The effective tax rate was 20.4% for the third quarter compared to 26.2% for the prior year period. The decrease in the effective tax rate was primarily due to an increase in the amount of excess tax benefits from stock-based compensation. We continue to expect the 2025 fiscal year effective tax rate will be between 25% and 26%, excluding discrete items such as excess tax benefits. Net income attributable to SiteOne for the third quarter increased 33% to $59 million due to net sales growth, improved gross margin and SG&A leverage. Our weighted average diluted share count was approximately 45 million at the end of the third quarter compared to 45.6 million for the prior year period. We did not make any share repurchases during the quarter, but post quarter, we repurchased approximately 161,000 shares for $20 million under a 10b5-1 Plan. Year-to-date, we have repurchased approximately 656,000 shares for a total of approximately $78 million at an average price of approximately $118 per share. These repurchases reflect our continued commitment to disciplined capital allocation and returning value to our shareholders. Adjusted EBITDA increased 11% to $127.5 million for the third quarter compared to $114.8 million for the prior year period. Adjusted EBITDA margin improved approximately 60 basis points to 10.1%. Adjusted EBITDA includes adjusted EBITDA attributable to noncontrolling interest of $1 million for the third quarter of 2025 compared to $0.8 million for the third quarter of 2024. Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on Slide 10. Working capital at the end of the third quarter was approximately $1.06 billion compared to approximately $992 million at the end of the same period prior year. The increase in working capital was primarily due to higher inventory purchases ahead of tariffs and growth in accounts receivable due to increased sales. Net cash provided by operating activities was approximately $129 million for the third quarter compared to approximately $116 million for the prior year period. The increase in operating cash flow is primarily due to the improvement in net income. We made cash investments of approximately $16 million for the third quarter compared to approximately $21 million for the same period prior year. The decrease reflects lower acquisition investment compared to the same period prior year. Capital expenditures of approximately $10 million were flat compared to the same period last year. Net debt at the end of the quarter was approximately $423 million compared to approximately $449 million at the end of the third quarter of last year. Leverage declined to 1x trailing 12-month adjusted EBITDA from 1.2x a year ago. As a reminder, our target year-end net debt to adjusted EBITDA leverage range is 1 to 2x. At the end of the quarter, we had available liquidity of approximately $685 million, which consisted of approximately $107 million in cash on hand and approximately $578 million in available capacity under our ABL facility. Our priority from a balance sheet and funding perspective is to maintain our financial strength and flexibility so we can execute our growth strategy in all market environments. Before I turn the call over to Scott, I'd like to take a moment to share that this will be my final earnings call as CFO. As previously announced, I will be retiring at the end of the year. It's been a true privilege to serve SiteOne over the past 20-plus years, and I'm incredibly proud of the company we built and the progress we've made together. I'm also pleased to welcome Eric Elema, our incoming CFO, who will be stepping into the role beginning in January. Eric has been a key leader and partner in building our finance organization and has played an integral role in shaping the strategy and driving execution at SiteOne. I'll now turn it over to Eric to briefly introduce himself. Eric Elema: Thanks, John. I want to start by thanking you for your leadership and mentorship. You've built a best-in-class finance organization and have set a strong foundation for continued success. I'm honored to step into the CFO role and excited to continue supporting our teams in executing our strategy. From a financial and operational standpoint, nothing is changing. We remain focused on disciplined execution, driving performance and growth and delivering value for our stakeholders. I look forward to working closely with Doug and the leadership team as well as all our associates in the next chapter. I will now turn the call over to Scott for an update on our acquisition strategy. Scott Salmon: Thanks, Eric, and thank you, John, for your leadership and contributions to SiteOne. It's been a pleasure working alongside you. I'll now provide an update on our acquisition strategy. As shown on Slide 11, we acquired three companies in the third quarter and one more post quarter, bringing the total to six acquisitions year-to-date with a combined trailing 12-month net sales of approximately $40 million. Since 2014, we have acquired 104 companies with approximately $2 billion in trailing 12-month net sales added to SiteOne. Turning to Slides 12 through 15, you will find information on our most recent acquisitions. On July 24, we acquired Grove Nursery, a single location wholesale distributor of nursery products in Northwest Minneapolis, Minnesota. The addition of Grove Nursery now enables us to provide a full range of products to our customers in the Twin Cities. Also on July 24, we acquired Nashville Nursery, a single location wholesale nursery in Northwest Nashville, Tennessee. Joining forces with Nashville Nursery further strengthens our position as the leading wholesale distributor of nursery products in the Central Tennessee. On September 19, we acquired Autumn Ridge Stone, a single location hardscapes distributor in Holland, Michigan, expanding the range of products we provide to our customers in Western Michigan. And lastly, on October 1, we acquired Red's Home & Garden, a single location hardscape and nursery distributor in Wilkesboro, North Carolina. The addition of Red's allows us to better service our many customers in Western Carolina. Summarizing on Slide 16, our acquisition strategy continues to provide a significant growth opportunity for SiteOne by adding excellent talent and moving us forward toward our goal of providing a full line of landscape products and services to our customers in all major U.S. and Canadian markets. As we've noted throughout the year, acquired revenue is expected to be lower in 2025, reflecting a more modest contribution from recent acquisitions. We have a large pipeline of potential acquisitions, and we are actively building relationships with many other companies. We have significant runway to grow and create value through our acquisitions in the years to come. As always, I want to thank the entire SiteOne team for their passion and commitment to making SiteOne a great place to work and for welcoming the newly acquired teams when they joined the SiteOne family. I will now turn the call back to Doug. Doug Black: Thanks, Scott. Before we wrap up, I'd like to take a moment to thank John for his outstanding leadership and many contributions to SiteOne over the years. John has been a terrific partner and trusted colleague from the day I joined the company back in 2014. Over the years, he's been instrumental in building our strong company, executing our strategy and achieving excellent performance and growth. We wish him all the best in his well-earned retirement. I'd like to also congratulate Eric Elema on his appointment as CFO. Eric is a proven leader with deep knowledge of our business, and I look forward to working with him in his new role as we continue to execute our strategy and drive long-term value. Now turning to our current outlook for the rest of the year on Slide 17. With continued market uncertainty, elevated interest rates and weak consumer confidence, we believe that the softness in new residential construction and repair and upgrade demand will continue, more than offsetting growth in maintenance demand. With the benefit of positive price growth and our commercial initiatives driving market share gains, we expect to achieve positive organic daily sales growth during the remainder of the year. In terms of our individual end markets, we have seen a decline in new residential demand this year, especially in the high-growth markets across the Sunbelt. Accordingly, we expect the demand for landscaping products for new residential construction, which comprised 21% of our sales to be down during the remainder of 2025. Continued elevated interest rates, housing affordability challenges and lower consumer confidence are constraining demand, and we expect this end market to remain weak until some of these factors improve. The new commercial construction end market, which represents 14% of our sales, has remained resilient in 2025 so far, and we believe it will be flat for the remainder of the year. Bidding activity from our project services teams continues to be slightly positive. But with the ABI index remaining below 50, there is uncertainty in new commercial construction future demand. The repair and upgrade end market, which represents 30% of our sales, has been down this year. But in talking with our customers and monitoring our volume in specific products, we believe demand has begun to stabilize in the last few months. We expect this market to remain soft during the remainder of the year, but would be optimistic that we may have reached a foundation for future growth in repair and upgrade demand. Lastly, in the maintenance end market, which represents 35% of our sales, we have continued to achieve solid sales volume growth. We expect the maintenance end market to continue growing steadily in 2025. Taken all together, we expect our end markets to be slightly down for the remainder of the year. Despite this backdrop, we expect sales volume to be slightly positive in the fourth quarter with the benefit of our commercial initiatives. Coupled with modest price inflation, we expect low single-digit organic daily sales growth during the remainder of the year. With strong actions taken to reduce SG&A and continued focus on branch improvement, sales productivity and delivery efficiency, we expect to continue achieving improved operating leverage during the remainder of the year. We expect solid adjusted EBITDA margin expansion for the full year 2025. In terms of acquisitions, as mentioned earlier, we expect to add more excellent companies to the SiteOne family during the remainder of the year, though we expect to add less revenue for the full year 2025 compared to 2024 due to the smaller average acquisition size. As mentioned earlier, to proactively address the potential for continued soft market conditions and to further optimize our footprint and cost structure, we plan to consolidate or close 15 to 20 branches in the fourth quarter and incur a charge to adjusted EBITDA of approximately $4 million to $6 million. We expect to retain most of the sales from these branches. With all of these factors in mind and including the fourth quarter charge, we expect our full year adjusted EBITDA for fiscal 2025 to be in the range of $405 million to $415 million. This range does not factor in any contribution from unannounced acquisitions. In closing, I would like to sincerely thank all our SiteOne associates who continue to amaze me with their passion, commitment, teamwork and selfless service. We have a tremendous team, and it is an honor to be joined with them as we deliver increasing value for all our stakeholders. I would like to also thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of David Manthey with Baird. David Manthey: First question, a simple one, just on the charge that you mentioned. Why are you not excluding that from adjusted EBITDA guidance? It seems like a nonrecurring item, just optically wondering why that's not being factored out. John Guthrie: We've always had relatively strict guidelines with regards to our adjusted EBITDA, and this is consistent with them. All of our adjustments primarily reflect acquisitions and the adjustments within the first year. So that's been our policy. We provide the information, so you and the investors can make those adjustments themselves. David Manthey: Yes. I appreciate it. That's great. And then the next line of questioning on pricing. If you could talk to us about the price you realized in agronomics versus landscape products. And then thinking about the fourth quarter and seasonality, the mix of the business, for example, grass seed, obviously lower in the fourth quarter than the third. How should we think about price realization as it relates to mix as we go into the season, the off-season? And then any thoughts about 2026 as that's going to evolve? John Guthrie: Sure. Price for the quarter, landscape products was up 1% and agronomic products was flat. I mean, it was actually down slightly, but round it -- we would round it flat. Going into the fourth quarter, grass seed, which is the largest component, still with negative price will be a smaller component of the business. And so we expect price in the fourth quarter to be between 1% and 2%. And then going into next year as kind of the deflationary items continue to diminish, we would think it would be kind of more of a normal pricing year with -- historically, we're around 2%. 1% to 3% would probably be a good range right now. But I think we would probably say we're at the midpoint of that range would be our outlook today. David Manthey: Perfect. John, congrats, all the best. Thank you. And Eric, we look forward to working with you. Eric Elema: Thank you. Operator: Our next question comes from the line of Ryan Merkel with William Blair. Ryan Merkel: My congrats to John and Eric as well. I wanted to start off on the fourth quarter, the outlook for low single-digit organic. Are you seeing this in October, is the first part of the question. And then the second part is you mentioned repair and upgrade stabilizing a bit. I'm wondering if you could provide a little more color there because that's a bigger ticket item usually, and I'm just surprised that you'd be seeing the stabilization now. Doug Black: Yes. So the comment on the growth first. We are seeing positive organic sales growth in October. Keep in mind that the fourth quarter is a tougher comp. Last year, we had 4% volume growth in the fourth quarter, which was quite strong. And the fourth quarter is highly impacted by weather. So -- but we are seeing that positive growth so far in October. In terms of the repair and upgrade market and talking with our customers and monitoring our product lines that are tied to that like hardscapes, lighting, we've seen that kind of stabilize. The performance there has been stronger. I think our customers, clearly, remodel is down this year, but I think it seems to have settled. We hope it's a bottom, if you will. Don't know that for sure. But certainly, the numbers there and discussions with customers, they don't have long backlogs, but they seem to be settled into a rhythm of work. So more to come later, but the numbers that we see and the conversations that we're having, we would -- we're more optimistic now than we would have been 3 months ago. Ryan Merkel: Okay. That's good to hear. And then on fourth quarter, on in-line sales with the Street, the EBITDA is coming in a few million dollars below, and that's if I back out the branch closures. So how should we think about gross margin and SG&A in 4Q? Just trying to square why EBITDA is a little below. And I realize fourth quarter with the weather can be, right, it's a small quarter. So I appreciate being conservative. John Guthrie: Yes. I think in the fourth quarter, our guidance does not quite have as strong an outperformance year-over-year on gross margin as we achieved in Q3. We still expect to achieve good SG&A leverage, and that to be the primary driver of performance is what's built into our guide. Operator: Our next question comes from the line of Damian Karas with UBS. Damian Karas: Yes. I was going to say that, obviously, the market environment for housing and homeowner spend isn't great right now. I'm just curious if you've been seeing any change in competitor behavior just given some of the demand softness out there. Doug Black: We operate in competitive markets, and I wouldn't say we're seeing anything unusual. Obviously, when things are softer, people -- things naturally get more competitive. Those are typically around the larger customers and around the commercial side of the business. But -- and so we've seen that, but we've been seeing that for the last couple of years. So nothing more than usual. And we have strong teams and with our initiatives and capabilities like siteone.com and our delivery capabilities and the way we're private label and going after small customers, we're able to combat that competitive activity and still, we believe, gain market share. Damian Karas: That makes sense. And then I wanted to kind of throw a little bit of a hypothetical your way, thinking about some of the additional store closures and footprint optimization that you're doing. If you were to see a comeback in housing and the demand environment sooner rather than later, would you still be in a position to fully serve the market? I recognize that's not an expected turn of events at the current moment, but just any thoughts on how you might need to respond to such a scenario? Doug Black: Right. That's actually a great question. Yes, we would be able to fully serve, let's say, a strong market with our current network. We have ample capacity. And of course, as things ramp up, we can add associates at the front line and our branches, et cetera. We have our DCs, and we have the capability to feed the system, if you will. And so the network optimization that we're doing with the store closures wouldn't prevent us from servicing a stronger market. We don't expect that to be the case. If it was, it would be a pleasant surprise. But we would be more than capable of serving that. And obviously, that would accelerate our SG&A leverage and our EBITDA expansion that we're planning for next year, but we're planning within a soft market. Operator: Our next question comes from the line of Keith Hughes with Truist Securities. Julian Nirmal: This is Julian Nirmal on for Keith Hughes. I think you talked a little bit about how inflation is going to look like for the rest of the year. Any outlook on what input inflation look like in commodities? John Guthrie: I mean, I think that's carried through in our guide for inflation for the year. We're not seeing fertilizers and stuff like that. We're not seeing necessarily kind of major swings. So all that really is embedded in the guide that we've given. Julian Nirmal: And then going back to the focus initiatives, I know you talked about you want to close 15 to 20 branches in '26. Do you have any idea of what the cadence of that would look like and kind of how that would contribute to margins going through the year? Doug Black: Well, if you take our focus branches in total, which represents about 20% of our revenue, as we mentioned, the EBITDA margin -- adjusted EBITDA margin for those sets of branches are up 200 -- over 200 basis points this year. And we would expect to continue that improvement trend. They're not up to the average, and there's a ways to go before they get up to the average. And so we would expect that improvement trend to continue into next year. And the new sets of closures and consolidations are really just part of making sure that we can make those improvements next year without a lot of help from the market, if you will. Operator: Our next question comes from the line of Andrew Carter with Stifel. W. Andrew Carter: Question I have is around the margin targets you've said before. I know you've put out there a double-digit near-term kind of margin. If we're in a soft volume environment for '26 and '27, do you have the internal levers to get there, whether it be focused branches, whatever, independent of volume meaningfully accelerating? Doug Black: Yes. Of course, the short answer is, yes, we have a lot of self-help capacity with our focused branches, with the productivity with our sales force, with the delivery productivity that we've mentioned. And then on the gross margin side with our private label growth, which we're driving quite successfully with small customer growth, et cetera. And so given that, we do need a base if there was a big falloff next year or whatever, obviously, that would interrupt that. But as long as we have a solid market, a stable market, call it, soft, stable, then we have the opportunity to continue to expand our adjusted EBITDA. Obviously, the stronger the market, the quicker we can make gains. But we do have the capacity to continue the gains that we're seeing this year on into the next year, next couple of years in a continued soft market conditions. W. Andrew Carter: Second question on the M&A landscape. You said that this is going to be a softer year, which you've done six to date. Do you see that meaningfully picking up in '26 given your pipeline? Are you going to be more focused going forward on the smaller guys? And I know you've said Pioneer was kind of uncharacteristic. Would you be willing to do something like that again given kind of the challenges ahead? I'll stop there. Doug Black: Yes. So we are having a lighter year revenue-wise this year with acquisitions. But if you look at the course of acquisitions, the size moves around. Every once in a while, we'll do a larger one like a Pioneer or a Devil Mountain and then you have the midsized acquisitions and then you have more small ones, right? And so we -- sellers sell when they're ready to sell, not when we're ready to buy. And so we're out there talking to all the companies that we would like to join. And any 1 year, you could have it be up, you could have it be down, et cetera. Given how it's falling this year, we would expect next year to be higher than this year just because of the law of averages. If you look at the 10-year period, $2 billion, that's a pretty good gauge of where we'll be going forward. In terms of would we do a Pioneer, I'll call it a fixer-upper. We don't look to do those. And I wouldn't know of anything in our pipeline, Scott, you can correct me that we have any more Pioneer. We had tracked Pioneer for a long time, so we kind of knew it was coming. But we much prefer to buy well-run companies. And I believe our target set going forward would be -- I mean, would be all well-run companies. Scott, could you confirm that? Eric Elema: Yes. To the extent we can know the performance of the companies, I would agree. We're not searching or tracking a larger turnaround or anything like that. Operator: Our next question comes from the line of Matthew Bouley with Barclays. Elizabeth Langan: You have Elizabeth Langan on for Matt today. I just wanted to start off asking on SG&A. Obviously, you've made some improvement into this quarter. I was wondering if you could dig into that a little bit and maybe speak on how you're tracking with your SG&A initiatives, and if you expect a similar magnitude of improvement through the end of this year and into 2026? John Guthrie: We expect -- we're still tracking. We would expect to continue the trend we've seen for the rest of the year. So obviously, we're -- in Q4, we are taking the charge, but we had a similar magnitude charge last year. So we would expect to continue to achieve the SG&A leverage in Q4. It's our plan to be without -- we're not giving guidance today on SG&A, but -- for '26. But certainly, that's -- SG&A leverage is foundational to what we're doing going forward. Elizabeth Langan: Okay. And then I had another question on the commercial end markets. Could you speak to what you're seeing in those end markets? And then also if you're seeing any regions that are having relatively lighter or more outsized demand on the bidding side? Doug Black: In terms of commercial, we're seeing that continue to be stable. It has been all year. We look at -- we have a project services group that puts together takeoffs for customers for commercial work. And so they're looking at all the commercial jobs coming down the pipeline. Their activity in terms of bidding is slightly up. And so that -- we take that as a positive. When we talk to our customers, the backlogs are less than they would have been a year ago, but they're seeing continued work coming down the pipe. So we would -- it's been stable. We think it will continue to be stable, flattish. And no, we don't see any outsized growth in any particular regions. It just seems to be kind of flat, stable going forward. Operator: Our next question comes from the line of Mike Dahl with RBC Capital Markets. Christopher Kalata: This is Chris on for Mike. Just shifting back over to pricing and your initial expectation of a more normal plus 2 price environment. I was hoping you maybe give some initial kind of puts and takes in terms of the drivers there, based on what you're seeing in commodity pricing, how you expect commodity pricing to play out relative to noncommodity? And should we think about -- given the easy first half comp, should we think about kind of trending towards the higher end of that 1% to 3% range and then settling out to something more normal, just the evolution of that based on where you see things today? John Guthrie: I think it will accelerate as we go just primarily because the grass seed probably won't -- that will be an overhang in the first half on the commodity side. The rest of the products are in pretty good shape from a commodity standpoint. Most of the PVC pipe prices decreases were, frankly, in 2024. And so that's been relatively stable in 2025. So -- and then we'll have -- really the uncertainty is we'll have to see what the price increases are coming from our suppliers in the first quarter of next year. Right now, kind of we're hearing low single-digit type numbers coming from those suppliers, but that's a little bit uncertain at this point, and we'll get greater visibility of that over the next 3 months. Christopher Kalata: Got it. Appreciate that. And just drilling in deeper into the SG&A outlook, I realize you guys aren't providing guidance, but just trying to get a better sense of magnitude of potential leverage next year given actions to date. Should we think about taking volume out of the equation and just the pricing expectation and the actions you're doing around branch closures that we could see kind of a similar magnitude of SG&A leverage as we've seen in the last couple of quarters looking to next year? John Guthrie: We're really in our planning process right now. That's our goal is to achieve it next year. I think it's a little premature to give too much guidance in Q4 since we're really having those discussions right now. Operator: Our next question comes from the line of Charles Perron-Piché with Goldman Sachs. Charles Perron-Piché: First, congrats on retirement to John and Eric, congrats on the new role. Maybe I could start with capital allocation. Maybe for John or Eric, if anything you have to add. Your leverage is now at the low end of the 1 to 2x range as of September. It's good to see that you guys were active on share repurchases in October. Against that, I guess, should the M&A market remains softer for longer, would you consider a higher focus on shareholder return going forward? John Guthrie: Yes, I think that's fair. Our guidance is to invest in the business first with acquisitions. Obviously, we will have some acquisitions in the fourth quarter. But in so much as we are at the bottom of our leverage range and that certainly lends itself to doing increased share repurchases. Charles Perron-Piché: Okay. And then second, just following up on pricing. I think in your prepared remarks, you talked about the benefits of commercial initiatives on pricing this quarter. Can you expand on that notion? And if you expect to see further mix benefits to results going forward on top of like-for-like pricing? John Guthrie: The benefit of commercial is really not -- I think that's two separate things. We benefited from stronger pricing. And then also, we also benefit from our commercial initiatives with regards to gross margin. So we're also -- some of the outperformance in what we've seen with regards to gross margin has been as a result of our private label and small customer initiatives. they're both contributing to our overall performance in addition to the price benefit. So those were the two drivers that we talked about that kind of helped us from a gross margin perspective this quarter. Operator: Our next question comes from the line of Jeffrey Stevenson with Loop Capital Markets. Jeffrey Stevenson: John, congrats on your retirement. So slight successful internal initiatives continue to drive 2% to 3% above-market growth and offset choppy end market demand this year. I just wondered how sustainable is the growth you're seeing in areas such as private label and small customers over the coming years? And do you expect share gains to continue to track above pre-pandemic levels? Doug Black: Yes. We've got quite a bit of runway with those two in particular. We're still significantly lower market share with the smaller customers than we are with our larger customers. And so we've got quite a bit of catch-up there that will take the next probably 3 to 5 years. And so that's a long-term play in terms of private label, same thing. We're at about 15% private label. We'd like to be 25%, 30% long term. And so we're continuing to drive initiatives. We mentioned the growth in the quarter. We intend -- we're already teeing up our forecast for next year, but we intend to keep pace and keep that percentage of our total sales growing as we move forward. And then the other initiatives is just our customer excellence initiatives, the work with our sales force and our CRM. We're -- we aim to be an above-market grower for many years to come. And so we are looking to keep pace, including adding adjacent product lines like pest control and erosion control and there's high growth in synthetic turf. So plenty of opportunities to outperform the market, not just this year, but in many years to come. Jeffrey Stevenson: Got it. And then pricing came in better than expected in the third quarter versus kind of original flattish expectation. And I wondered what the primary variance with your results compared with prior expectations? Was it tariff-related price increases, grass seed declines maybe not as severe as expected? Any more color there would be helpful. John Guthrie: I think we went into the quarter thinking probably that it was going to be a more competitive pricing than -- especially with grass seed and some of the other products relative to what it actually was from that standpoint. So it held up just a little bit better from that perspective. And so that was -- it was a pleasant surprise from that perspective, but that was the primary driver. Doug Black: And we are talking small -- we thought it would be flat and it was up 1%. John Guthrie: Yes. It should be relative. We didn't really put in a lot of price increases. It's more of the bids and quotes where things ended up. And it was -- we're probably within rounding, but it was slightly stronger than we thought. Operator: This now concludes our question-and-answer session. I would now like to turn the floor back over to management for closing comments. Doug Black: Okay. Well, thank you, everyone, for joining us today. We very much appreciate your interest in SiteOne, and we look forward to speaking to you again at the end of next quarter. A big thank you to our amazing associates for the great job that they do for us, also to our customers for allowing us to be their partner and our suppliers for supporting us. And then a final thank you to John, who's been such a terrific partner for these years. And congratulations to Eric. We're excited about our future, and we look forward to talking to you at the beginning of next year. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Welcome to Hayward Holdings Third Quarter 2025 Earnings Call. My name is Donna, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Kevin Maczka, Vice President, Investor Relations and FP&A. Mr. Maczka, you may begin. Kevin Maczka: Thank you, and good morning, everyone. We issued our third quarter 2025 earnings press release this morning, which has been posted to the Investor Relations section of the website at investor.hayward.com. There, you can also find the earnings slide presentation referenced during this call. I'm joined today by Kevin Holleran, President and Chief Executive Officer; and Eifion Jones, Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind everyone that during this call, the company may make certain statements that are considered forward-looking in nature, including management's outlook for 2025 and future periods. Such statements are subject to a variety of risks and uncertainties, including those discussed in our most recent Forms 10-K and 10-Q filed with the Securities and Exchange Commission that could cause actual results to differ materially. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, the company will discuss non-GAAP measures. Reconciliations of historical non-GAAP measures discussed on this call to the comparable GAAP measures can be found in our earnings release and the appendix to the slide presentation. All comparisons will be made on a year-over-year basis unless otherwise indicated. I will now turn the call over to Kevin Holleran. Kevin Holleran: Thank you, Kevin, and good morning, everyone. It's my pleasure to welcome all of you to Hayward's third quarter earnings call. I'll begin on Slide 4 of our earnings presentation with today's key messages. I'm pleased to report third quarter results ahead of expectations, marking another quarter of strong execution by our global team. Our performance reflects the resiliency of our aftermarket model and continued traction in our strategic initiatives. Net sales increased 7% with growth across both our North America and Europe and Rest of World segments and adjusted EBITDA increased 16%. We delivered further solid margin expansion, driven by increased operational efficiencies, tariff mitigation actions and disciplined cost management. Gross profit margin increased 150 basis points to 51.2% and adjusted EBITDA margin increased 170 basis points to 24.2%. Cash flow generation was also strong, enabling us to further strengthen the balance sheet and reduce net leverage to 1.8x, the lowest level in nearly 4 years. This provides enhanced financial flexibility as we execute our growth plans and fund our capital deployment priorities. During the quarter, we continued advancing key strategic initiatives to position for profitable growth. This included expanding our customer relationships, developing innovative new products to further our technology leadership position and leveraging our operational excellence capabilities. At the same time, our teams are aggressively executing tariff mitigation action plans to support margins and deliver on our commitments to shareholders and customers. We've made great progress, and I'm confident in our team's ability to navigate this dynamic environment. As a result of our strong year-to-date performance and solid participation in our early buy programs with increased orders, we're raising our full year guidance. We now expect net sales to increase approximately 4% to 5.5% compared to our prior guidance of 2% to 5%. We now expect adjusted EBITDA to increase 5% to 7% to a range of $292 million to $297 million compared to our prior guidance of $280 million to $290 million. Turning now to Slide 5, highlighting the results of the third quarter. Net sales increased 7% to $244 million, driven by a 5% increase in net price and a 2% increase in volume. By segment, net sales increased 7% in North America and 11% in Europe and Rest of World. As I mentioned, gross profit margin expanded 150 basis points to 51.2%. Adjusted EBITDA increased 16% to $59 million, and adjusted EBITDA margin increased 170 basis points to 24.2%. This is a strong result in a seasonally lower sales quarter as we continue to make targeted investments in the business to drive future growth.Finally, adjusted diluted earnings per share increased 27% to $0.14. Turning now to Slide 6 for a business update. Starting with the demand environment, we are encouraged by recent trends. We had a solid finish to the 2025 pool season as our primary U.S. channel partners communicated improved out-the-door sales growth rates for Hayward products in the third quarter with stronger growth as the quarter progressed. This reflects the strength and stability of our aftermarket model as approximately 85% of our sales are aligned with serving the aftermarket needs of the existing installed base. Consistent with the trends in prior quarters, nondiscretionary aftermarket maintenance demand remains resilient. We also see continued adoption of our technology solutions to automate and control pools. Homeowners are adding technology to improve the pool ambience and experience rather than defeaturing to reduce cost as evidenced by the average value per pool pad continues to increase. As a result, we saw a double-digit growth in this critical product category of omni controls during the quarter, nearly twice the overall Hayward growth rate. The early buy programs are nearing completion in North America and International markets, and we are pleased with the progress to date. Incoming orders are trending in line with expectations. We anticipate solid customer participation and increased orders relative to the prior year. Importantly, we are working closely with our channel partners to maintain appropriate levels of Hayward inventory on hand relative to current demand levels and forward expectations. The pool industry has always been very disciplined on price. We increased pricing this year as needed to combat tariffs and other inflation, and we continue to expect positive net price realization of mid-single digits in 2025. We are progressing with our value-based pricing and SKU rationalization initiatives to optimize our price structure and enable our products to be priced appropriately relative to the exceptional value provided to pool owners. We expect these initiatives to yield further positive results going forward. The tariff environment remains uncertain. Our team is aggressively executing our mitigation action plans to offset the increased costs and we are making great progress. As previously communicated, we are accelerating our lean initiatives and significantly reducing our exposure, lowering direct sourcing from China into the U.S. as a percentage of cost of goods sold from approximately 10% to 3% by year-end. We intend to achieve this target regardless of any further tariff negotiation as it derisks our supply chain and limits exposure to geopolitical uncertainty. Our teams are responding to the current enacted tariffs while monitoring the ongoing media reports, and we remain agile and ready to take further action as needed. We continue to make investments to drive future growth. On the product side, we are investing in advanced engineering and product development to continue bringing innovative new products to market. We previously introduced you to OmniX, an industry-first automation platform providing a cost-effective way to accelerate technology adoption in the installed base and increase average equipment content per pool pad. While early in the rollout, we are pleased with the continued dealer response to the new OmniX enabled variable speed pump and we will launch other product categories with embedded OmniX control capabilities in the coming quarters. We are ramping up our targeted sales and marketing strategies to further increase our presence in high-value yet underpenetrated regions. This is already translating into wins with important dealers converting to Hayward. We're also improving the customer experience with the continued rollout of the Hayward Hub training and support centers and hosting premier industry events. In the second quarter, Hayward sponsored the prestigious 2025 Pool & Spa Network Top 50 Builder Award event. And in the third quarter, we hosted our 25th PACE Conference to educate and inspire our industry's most accomplished pool professionals. As we continue to invest in the industry and build upon our customer-first approach, we are seeing greater engagement and traction with dealers. As a technology leader in the industry, we are implementing AI tools to drive value for our customers. Our new AI agents are progressively fielding inbound customer service calls with no on-hold wait times resolving approximately 80% of these calls without the need for human intervention and even proposing enhancements to our training programs. Hayward has a long-standing commitment to continuous improvement throughout the entire organization, and this is a great example of an early success in customer experience. With that, I'd like to turn the call over to Eifion to discuss our financial results in more detail. Eifion Jones: Thank you, Kevin, and good morning. I'll start on Slide 7. As Kevin stated, we are very pleased with our third quarter financial performance. Net sales increased 7% and exceeded expectations. We delivered strong growth and adjusted EBITDA margin expansion to 51% and 24%, respectively and further reduced net leverage to 1.8x. Looking at the results in more detail, the net sales increase of 7% to $244 million was driven by a 5% positive net price realization and 2% higher volumes. Gross profit in the third quarter increased 11% to $125 million. Gross profit margin increased 150 basis points to 51.2%. By segment, gross margin increased 50 basis points in North America with Europe and Rest of World increasing 750 basis points year-over-year and 300 basis points sequentially. Adjusted EBITDA increased 16% to $59 million in the third quarter, and adjusted EBITDA margin increased 170 basis points to 24.2%. We are delivering this level of margin expansion while strategically reinvesting in the business to drive future growth with targeted initiatives in sales and marketing, advanced engineering and customer service. Our effective tax rate was approximately 23% in the third quarter and 24% year-to-date. Adjusted diluted EPS increased 27% to $0.14. Turning to Slide 8 for a review of our reportable segment results for the third quarter. North America net sales increased 7% to $208 million. Net price realization increased 7% and volume was stable. Net sales increased 6% in the U.S. and 21% in Canada. As previously mentioned, we are encouraged by the recent demand trends for Hayward products, and demand as reported by our primary U.S. channel partners increased late in the season, resulting in a solid third quarter performance. The performance in Canada also continues to improve, as we saw strong order growth during the quarter. Gross profit margin increased 50 basis points to a robust 52.8% and adjusted segment income margin was 29.6%. Turning to Europe and Rest of World. Net sales for the quarter increased 11% to $36 million, a 1% reduction in net price realization was more than offset by 8% higher volume and 3% favorable foreign currency translation. The reduction in net price was largely due to an increased mix of discounted early buy shipments relative to the prior year period. Net sales increased 15% in Europe and 6% in Rest of World. We took steps in recent quarters to improve the performance in Europe and Rest of World and are pleased to see continued margin progression in the quarter. Gross profit margin increased 750 basis points to 41.9%, and increased 300 basis points sequentially from 38.9% in the second quarter. This sequential increase was primarily related to the timing of a cumulative tariff refund during the third quarter. Adjusted segment income margins increased to 18.5% from 8.4% a year ago. Turning to Slide 9 for a review of our balance sheet and cash flow highlights. We are pleased with the quality of our balance sheet and the significant reduction in net leverage during the quarter and over the last 2 years. Net debt to adjusted EBITDA improved to 1.8x compared to 2.1x at the end of the second quarter and 2.8x in the year ago period. Reduced leverage provides additional flexibility as we execute our strategic growth plans. Total liquidity at the end of the third quarter was $552 million, including $448 million in cash and cash equivalents, short-term investments and availability under our credit facilities of $104 million. We have no near-term maturities on our debt as the term debt and the undrawn ABL mature in 2028. Our borrowing rate benefits from $600 million in debt currently tied to fixed interest rate swap agreements maturing in 2026 through 2028, limiting our cash interest rate on our term facilities to 6% in the quarter. Our average interest rate earned on global cash deposits for the quarter was 4.3%. Our business has strong and seasonal free cash flow generation characteristics, driven by high-quality earnings. The company typically has strong cash generation in the second and third quarters, while using cash in the first and fourth quarters. Year-to-date cash flow from operations was $283 million, compared to $276 million in the year ago period. CapEx of $21 million year-to-date was modestly higher than the prior year period, reflecting strategic growth investments and project timing. Consequently, year-to-date free cash flow was $262 million. Given our outlook, we increased free cash flow guidance for the full year by $20 million from approximately $150 million to approximately $170 million. This increase reflects improved profitability, CapEx, project timing and working capital management. Turning now to capital allocation on Slide 10. We maintain a disciplined and balanced approach to capital allocation, emphasizing strategic growth investments and manufacturing asset investments for tariff mitigation, maximizing long-term shareholder returns while maintaining prudent financial leverage. We continue to pursue additional acquisition opportunities in residential pool, commercial pool and flow control to augment our organic growth plans in addition to potential share repurchases. During the third quarter, Hayward's Board of Directors authorized through purchase of up to $450 million in shares over 3 years to replace a similar expired authorization. Turning now to Slide 11 for the full year 2025 outlook. We are increasing our guidance for net sales and adjusted EBITDA. For the fiscal year 2025, Hayward now expect net sales to increase approximately 4% to 5.5% or $1.095 to $1.110 billion, with adjusted EBITDA increasing approximately 5% to 7% or $292 million to $297 million. We continue to expect solid execution across the organization, positive price realization and continued product technology adoption. Relative to our prior guidance at the midpoint, this represents $17.5 million increase in net sales and a $9.5 million increase in adjusted EBITDA. Our guidance does not contemplate potential new tariffs effective on or after October 29. If that does materialize, we will respond accordingly with further mitigation actions. As a reminder, fourth quarter 2024 net sales benefited from incremental demand related to the 2 major hurricanes that impacted the Southeastern United States. We continue to expect solid cash flow in 2025 with a conversion of greater than 100% of net income. We increased our free cash flow guidance for the full year to approximately $170 million. We are confident in our ability to successfully execute in a dynamic environment and remain very positive about the long-term growth outlook for the pool industry, particularly the strength of the aftermarket. And with that, I'll now turn the call back to Kevin. Kevin Holleran: Thanks, Eifion. I'll pick back up on Slide 12. Before we close, let me reiterate how appreciative I am of the team's performance. Hayward delivered another strong quarter, exceeding expectations. Net sales increased 7% and margins continue to expand as we effectively countermeasure the tariff headwinds. We delevered the balance sheet to under 2x while investing in the business to drive future growth, and we increased our guidance for full year net sales, adjusted EBITDA and free cash flow. As the macroeconomic and tariff environment continues to evolve, we are excited about the fundamentals that drive our business and confident in our ability to execute our growth strategies and create shareholder value. And with that, we're now ready to open the line for questions. Operator: [Operator Instructions] Our first question today is coming from Ryan Merkel of William Blair. Ryan Merkel: Nice quarter. Wanted to start off on demand. Just talk about how the season progress since July? And then where did you see the upside in the third quarter? Kevin Holleran: Yes. As you know, Q3, from a shipping standpoint for Hayward, is one of our lower seasonal quarters but it's an important one for the industry from a sales-out standpoint as you're in the heat of the summer and closing out the seasonal year by the end of September. We felt really good about the sales-out demand as reported back to us or communicated by our largest channel partners. We saw progressively stronger sales-out for Hayward product as the quarter progressed really culminating with a really strong September. The other positive that comes with that is -- with that sales-out is it's really positioning channel inventory levels properly as we close out the season to then turn to early buy and what that demand signals for our factories and for the business. I would say that that weather -- warm weather really did help extend the season, which is always welcomed by the industry, and that certainly played out in many regions around the globe. From a product standpoint, in the quarter, we continue to see nice progression with the reception to OmniX. But then as I said in the prepared remarks, controls and lighting and even filtration, had strong performance in the quarter. Outside of the U.S., I'd really like to highlight Canada. Canada had a really strong quarter, up over 20%, which is welcome. We had a nice strong bounce back in all of 2024, particularly in the third quarter. So we didn't have an easy comp here comparing off a plus 17% in prior year, making the 20% growth even more impressive. Up there, we did see a relatively wet spring and then responded with strong seasonal flow orders, which was great. And there is some easing around the macro up there, particularly around some improved or lower mortgage rates. Continuing on that theme of International, Europe was up kind of low teens, which is also great with some improved supply chain capabilities. And because we struggled a bit with some early buy shipments last year, we actually started to ship some of the 2025 early buy into the channel kind of late third quarter this year. But Rest of World, was up mid-single digits, particularly Asia, up over 20% and Australia was high-single digits. So this quarter, in particular, we really did see nice balanced growth across a wide array of our markets. So now our attention obviously turns to early buy. As I mentioned in the prepared remarks, which is progressing nicely. So yes, it was a good quarter from a demand standpoint, a nice progression as the quarter played out. Ryan Merkel: That's great color. Yes, on the early buy, which is my second question, you called it solid and it's tracking expectations. How do we think about those comments relative to the market being flat? And what was the reception to your 6% to 7% price increase that you announced? Kevin Holleran: Yes. Well, as is customary with early buy, there is a discount off of that announced price increase by participating in early buy to go along with extended payment terms. The whole program allows us to more level load our factories and have the product on the shelf for when the new season breaks here in 2026. I would say, in general, we don't want to be passing the magnitude of the price increases on -- which has been multiple in a row here due to inflation and tariff headwinds. I would say that in general, I'd say, the whole population has inflation fatigue and our industry is really no different there. As it pertains to the tariffs, which I'm sure we'll talk more about here, what we've passed along in the early spring, which took effect really in the May time frame was really dollar for dollar offset to the tariff impact. And we took it upon ourselves internally through our tariff mitigation plans to claw back the structural margin from that. So I would say that we're as anxious as anyone to get back to more inflationary times and to maybe put more certainty around what the tariff environment will look like. And the sooner that happens for our industry, the more welcome that will be. Operator: Our next question is coming from Saree Boroditsky of Jefferies. Saree Boroditsky: Maybe just moving on those pricing commentaries, I think one of the key distributors recently talked about innovation and new products is making the recent price increases a little bit more palatable. Maybe you could talk about some of your investments in new products and how much of your sales are coming from this? And how is it helping the volumes versus price? Kevin Holleran: Yes. So as we've spoken about in prior calls, we had some very targeted investments in SG&A and operating expense in 2025, and that really continued a more recent trend. One of those targeted areas is around engineering, new product development, advanced engineering with some new technology and innovation, trying to bring some new technology to our industry. We continue to work on that, and that will continue to be an area of very targeted investment. I think technology matters and I think that innovation will ultimately dictate winners and losers in our industry like most. I mentioned OmniX, we're really proud of what that whole ecosystem brings to the aftermarket. That's an enormous opportunity for our industry to really start automating the more aged pools in the installed base that were built when automation and controls didn't exist. So our approach is to bring this ecosystem one piece at a time as break fix occurs. We have the initial product out, but there's more coming in the upcoming quarters to help automate and bring optionality and functionality and ambience to the installed base. Saree Boroditsky: Appreciate that. And then maybe just taking a step back on this theme. Maybe have you seen any trade-offs from price versus volume? And how do you think about that going forward as new pool construction, especially has just gotten so much more expensive? Eifion Jones: It's Eifion. We haven't necessarily seen any trade-off occurring at this time. We do know that many consumers, particularly at the entry level in the marketplace remain on the sidelines for the new pool and maybe some of the remodel business. But we continue to see in our product sales profile, continued adoption of technology throughout the aftermarket installed base and that also is reflective in the gross profit margin profiles that we're experiencing within the business. But certainly, at the entry level, I'm quite sure that people are waiting for interest rates to break the ability to move homes into that next level before they put the pool in. But we haven't necessarily seen larger-scale trade-offs across the aftermarket. Again, we see quite good adoption of new technology, great adoption in our controls category and we're continuing to invest behind that capability. Operator: Our next question is coming from Andrew Carter of Stifel. W. Andrew Carter: First question I wanted to ask about given the renewed focus on private label that's out there, have you been seeing anything incremental in terms of either the positioning by the distributors, the demand from your contractors, and I know it's kind of -- it's been mentioned that it's kind of a lower commodity side? What exposure do you have? And I get the price is high, but -- and in this environment, wouldn't it be a lot more difficult to do a private label program given the tariffs, et cetera? Kevin Holleran: Yes. I mean you used the term private label. I think that the way we look at it is maybe around some exclusive distribution rights. It's maybe the same thing. But I would say our industry has attracted lower-priced offshore competitors frequently. I mean it's consistently occurred over the -- over Hayward's history here. And while the recent inflationary environment and the tariffs impact in the U.S. market has perhaps opened the door further, we believe that while there could be a price delta there as the loyal dealer base of totally Hayward partners will continue to appreciate the value proposition of what Hayward offers them in the marketplace. When one of these Hayward dealers walks into a channel partner, they're asking for product by name. They're asking for a TriStar 900, not just a variable speed pump for the job that they're working on. So by no means am I dismissing the risk or the concern because I think it makes us sharper. But we continue to feel confident in our investments in innovation, as we just spoke about with Saree's question around new product development, the fact that we have a complete product line and can supply the entire pool pad to the trade. Our national coverage of Hayward authorized service centers and the technical resources for the trade to call upon, we proudly support the U.S. market with over 90% of the products sold in the U.S. are built in one of our 4 U.S. manufacturing facilities in Rhode Island, North Carolina, Tennessee and Georgia. So we think -- we take pride in that. We think it's smart to shorten the supply chain to be able to satisfy the market. And I think our reputation for quality and service and dependability that's been built over our 100-year history means more than just the lower price, and I expect that to continue to serve us well. W. Andrew Carter: Second question, shifting gears. Number one, why the raise in the cash flow guidance for the year of $20 million? And then just level set expectations, I believe that you have higher CapEx over the next couple of years around your supply chain efforts. Could you speak to that? And at this point, you're going to have a balance sheet probably likely below 2x over the next couple of years based on the estimates. What are your capital allocation priorities? And would you be aggressive on share repurchase? Eifion Jones: Andrew, it's Eifion again. Coming back to the cash flow increase of approximately $20 million, half of that is attributable to the increase in the midpoint of EBITDA, going from the midpoint $285 million down to a midpoint of $295 million. We had some project timing around CapEx, which will move some of the CapEx spend that we have planned for this year into next year. And finally, working capital improvements. And we've seen some modest but welcomed working capital days on hand reduction in our inventory, and that will be accretive to the cash flow in the year. Could you just repeat to me the second part of your question, Andrew? W. Andrew Carter: Yes, the next couple of years thinking about what your priorities are going to be, stepped up CapEx spend that you might be doing? And then just kind of with this improved balance sheet, where your capital allocation priorities lie? Eifion Jones: Yes. Okay. Got it. So as we've previously talked about, we will be stepping up CapEx into the business. Historically, it's been around 2% to 2.5%, maybe up to 3% at times of revenue. I believe over the next several years, it will be all of that 3%, if not slightly more, as we continue to invest in automating our manufacturing and supply chain capabilities. We've already had some great success this year doing that. So a call out to several of our plants, including our Nashville facility, which has made some interesting automation investments, but that will be the thematic going forward over the next several years. We are completing our ERP implementation. We've had some expenditures there this year and last year, and that will be a continuation into '26 and to '27. But the main focus of the organization right now is to take our facility capability up to the next level in terms of throughput, facilitated by automation and new technology platforms like AI and machine learning. In terms of the capital allocation priorities, it remains the same. We'll continue to do the organic CapEx I just mentioned. We continue to look at M&A. We nurture a pipeline of opportunities. We have the optionality now to focus on residential pool, commercial pool and our spill flow control business. For accretive M&A opportunities, we did initiate a share repurchase program authorization. Again, we have the opportunity to be opportunistic and maybe programmatic at some point. The nice thing about this business, which will now begin to very clearly demonstrate, it has great cash flow characteristics, which gives us this optionality across that capital allocation spectrum. Operator: The next question is coming from Mike Halloran of Baird. Michael Pesendorfer: It's Pez on for Mike. I just want to follow up on the capital allocation side and maybe dial in a little bit on the funnel. How are you thinking about the opportunities in both residential and commercial pool? I noticed that you threw flow control in there. I know that's a part of the business that doesn't get a lot of love. Maybe talk about how you're thinking about the makeup of the funnel, the actionability of the funnel. And to Andrew's point, obviously, the leverage is continuing to progress nicely. So any color on the M&A opportunities where you're spending most of your time? And what you're seeing from a valuation perspective would be helpful. Kevin Holleran: Yes. So in terms of a funnel, I mean, obviously, with the deleverage that's occurred over the last several quarters. it puts us in a different position. That said, while ChlorKing, which is now anniversaried and a little over a year old, which is about a fantastic shot in the arm for our commercial business. We haven't announced anything, but we certainly have been working in the background to accelerate and work on some diligence with some opportunities that really hit the 2 key platforms that you mentioned as around residential. I think we've been pretty open in saying that we have aspirations for commercial to become a growth platform for us, and we continue to look both organically as well as inorganically add some opportunities there. We did mention in the prepared remarks, our industrial flow control business. It doesn't get a lot of attention, but it's a fantastic business that provides great access to distribution and some nice growing end markets. We're relatively niche in the products that we offer today but we're progressively spending time as a leadership team looking at what that might be able to be for us. So that's getting increased attention from a strategy standpoint, again, both organically as well as inorganically. We're looking across all those platforms from a product technology standpoint, what that can bring to us, does it provide a regional diversity and growth for us and looking always to capitalize and leverage our distribution, relationships and partnerships and go-to-market strategies. So that's -- those are several of the elements that we look and assess opportunities across customers. Michael Pesendorfer: Got it. And then not to stick on a smaller part of the business, but maybe now that we're a year out of the ChlorKing acquisition, maybe talk about the success that you've seen in being able to expand ChlorKing's reach within your distribution channels and being able to bring that up to scale a little bit? And then on the flip side, maybe talk about what type of successes you've seen in pushing legacy Hayward product through that commercial market. Kevin Holleran: Yes. There's been success across all those elements as we have a fantastic leader over that business that joined us from ChlorKing with those resources with the acquisition, we melded our existing commercial team into one organization. And we're seeing cross-selling opportunities across both types of commercial tools. We talk about Class A and Class B, which is really just the size or the size of the commercial body. We had a pretty complete product line along Class B legacy Hayward did, which are the smaller bodies of water. But really where we weren't represented was Class A, which would be larger than 100,000 gallons which is really a sweet spot where ChlorKing participates. So with that acquisition and that integration, it brought relationships with the architects and the engineering firms and some of the specialized distribution that serves the large commercial market. So we're really pleased with the amount of cross-selling and collaboration that's occurring across now the broader commercial market where we were before ChlorKing really only participating and growing in the Class B side of the market. Operator: Our next question is coming from Jeff Hammond of KeyBanc Capital Markets. Jeffrey Hammond: Just on -- I got on a little late, so I don't know if you touched on this, but last year, there was a lot of storms and I think your fourth quarter benefited from some kind of repair work, and I'm just wondering how you're contemplating that comp given a quiet hurricane season? Kevin Holleran: That certainly presents what we see as a bit of a headwind for Q4. I mean it was a big fourth quarter, as you mentioned last year. I think we were up kind of high teens as a business in the fourth quarter. And it was certainly aided by a couple of unfortunate weather events that impacted the Southeast with Helene and with Hurricane Milton. So we're not expecting that to repeat and I think at that point, I don't think -- I know that that's factored into the guidance that we gave in our press release and our prepared remarks this morning. So what we did talk about, I'm not sure when you joined around early buy, we have had nice participation and nice response to our early buy program. It's really closing out here in a few days in the U.S. at the end of October, and it extends a little further for other international markets. But as we're talking this morning, we feel good about the participation, really what that -- what that says about channels, enthusiasm and position heading into the new year as well as what the dealer sentiment is because our programs get taken to the dealer base out there and that's what's culminated and aggregated into the early buy orders that we received from our channel partners. So I'll stop there. Eifion, do you have anything to add around Q4? Eifion Jones: Yes. No. I mean I think you captured it all, Kevin. I'd just add. We expect a modest improvement in the North American early buy program to ship out in Q4. That will be slightly offset by a timing movement of early buy shipments in Europe. Jeff, you may have not heard it earlier, we shipped a little bit more early buy in Europe in Q3 was we'll do less year-over-year in Q4. So net for total Hayward early buy will be a slight positive. And then as Kevin mentioned, in Q4, we don't expect to ship that hurricane-related business that benefited 2024. So on a net basis, volume, we expect to be slightly down in Q4 versus last year. Upside to the guidance would be an extension in the season at the low end of our guidance for Q4 would at this point, pretty much reflect on the negative weather impacts. Jeffrey Hammond: Okay. And then as we go through the different pieces, it seems like aftermarket holding up fine. Just maybe touch on what you're seeing on that repair replace dynamic that came up over the last couple of quarters. And then new pool I get it kind of not going down, but maybe just expand on what you're seeing on upgrade remodel, if that's still kind of the biggest question mark or any signs of improvement there? Kevin Holleran: Yes. As you say, the aftermarket is proving to be resilient. A question was asked earlier, are we seeing -- I think it was by Saree, whether we were seeing any kind of trade down. Frankly, our guide contemplates maybe a little bit of mix in the aftermarket, but not much because it's holding up fine. On the new construction side, I'd say that the permit count has moderated, which is welcomed as the year has progressed here, but still net through, call it, 3 quarters is still down. The trend continues that what is being built is at higher value year-on-year which I think says something about the features that folks are putting on and the fact that maybe the mid to upper end is holding up better than more of the entry-level pool. I would say, anecdotally, what we hear from our builders and our remodelers is that there's still lots of pent-up demand on the remodel side. The installed base continues to age, and it's moving sideways a bit. I think there's stabilization around the remodel bus I think with a little bit of back grow improvement around interest rates, around existing home sales, all of that will have a very positive impact on the pool industry, both from a new construction as well as a refurb and remodel. I will close by saying last quarter, there was some follow-up questions around parts and what that may signal for a desire to repair versus replace. We -- third quarter -- on a year-to-date basis, I think we're up about high-single digits on parts sales. Some of that is explained obviously by pricing. Third quarter was not necessarily a strong year-over-year quarter for part sales. So I think that this broad-based question or even concern around repair versus remodeling. Our data does not necessarily show that there's widespread repairing going on and deferral of the equipment replacement. Operator: Our next question is coming from Brian Lee of Goldman Sachs. Brian Lee: I just had 2 hopefully quick questions. I know a lot of ground has been covered. And sorry if you already covered this. But first question was just around the strong increase in margins in the international markets, if you could kind of provide some color around what drove that and how sustainable that is? And then the second question, it looks like net pricing in North America has kind of ticked up a little bit from the beginning of the year, even from last quarter to this quarter in terms of net price realization. As we think about kind of the trend you're seeing into year-end, the early buy season, et cetera, do you think '26 ends up being more of a normal kind of low-single-digit price year? Or are we going to see some of the factors from this year spill over into next where we're probably still going to be elevated, maybe more mid-single digits than the historical low? Just trying to get a sense of where kind of that pricing paradigm is heading to in '26. Eifion Jones: Let me tackle the Europe margins and then maybe between Kevin and I will talk a little bit about the price. But in terms of the European margins or ERW margins, more specifically, we did see an improvement year-over-year of 750 bps, approximately 300 bps sequentially. Year-over-year, I would say it reflects the non-repeat of some discrete inventory items that we have in Q3 of '24. So it's good to see that noise behind us. We've stabilized those facility -- facilities that we have in Spain that we've talked about this in previous calls. We've improved the management team there, both locally, supplemented with some expats or capabilities moving into that organization. And sequentially now throughout the year, we've been able to post margin improvements in our European business, which has affected positively the overall ERW segment. What I would say is in Q3 this year, we did have a couple of onetime benefits including a tariff refund, which is a cumulative tariff refund, so that probably benefited the Q3 margins this year by approximately 100 bps and then we had a couple of other onetimes that additionally contributed an additional 100 basis points. But even if you discount those elements, we still had good sequential margin improvement which again reflects the stabilization of our production capabilities in country in Spain, and we feel good about the progress that we have made. In terms of the pricing, net pricing realization did take a step up, obviously, year-over-year in Q3 this year, consequential primarily to the seasonal price that was enacted at the end of last year, plus the midterm pricing that we put in this year to protect against tariffs. That rolled through in its fullness in Q3. We've got a partial benefit in Q2. We had a full benefit in Q3. We have announced further pricing for 2026 of mid- to high-single digits in the U.S., much less elsewhere. Obviously, a lot of that is discounted through the early buy programs. But as we step into 2026, we'd expect to carry of that. But we're not specifically guiding yet on 2026, but we certainly would expect slightly higher than normal, let's call it, mid-single-digit pricing next year. We don't get how many line of sight into end of year inflation next year. So we're not willing to commit to what next year's Q4 seasonal price increases would be. But we're hoping we get back to a normal inflationary environment where we can get to that normal pricing dynamic. Operator: The next question is coming from Nigel Coe of Wolfe Research. Nigel Coe: Eifion, I just wanted to follow up on your -- I think you said 100 basis points benefits in the quarter from tariff refunds. Just a bit more color there. I mean, are you winning some exemptions on some of the imports? And is this a one-timer? Or would you expect this to continue in '26, recognizing that you are rebalancing away from China? And then maybe just give us an update on where you are with that supply chain realignment. Eifion Jones: Yes. An element of our ERW business is exported from the United States. And to the extent we are importing products into the U.S. manufacturing of those products and then reexporting them to service LatAm, Asia and the Middle East, we're then eligible for a duty clawback on any tariffs we had paid on that initial inbound into the States. So we've now taken a more aggressive position towards our duty refund time lines, given the pain we're feeling or have felt on the tariff charge coming into the business. It's not necessarily a onetime benefit, but it did take a pop in Q3 because it was a cumulative tariff refund. So a bit of catch-up in the quarter. We will continue to apply for the eligible tariff refunds that we are entitled to and we will continue to do that. We have a long practice of doing that in the United States and that we're now getting more details in those applications. In terms of the progression of our tariff mitigation programs, we're well progress, Nigel. We've said that the North American business, we're going to reduce our China exposure from 10% to 3%, we're well progressed. The team is doing a fantastic job getting after that mitigation. We're winning some success more so than we originally thought. So the actual cost to recalibrate the supply chain is coming in a little bit less than we had anticipated, which is a little bit of a tail to our margin. But yes, we're well progressed and very pleased with what we've been able to do there. Kevin Holleran: Yes. I mean our global supply chain and operations team deserves props here. We, I think, laid out a very structured, thoughtful approach to that was really 4 work streams ranging from supplier negotiations in the impacted regions to some strategic inventory buy ahead to defer impact in 2025. That obviously has a shelf life to it, some footprint and supply chain, reshoring or movement and then, as I mentioned earlier, are some pricing actions in the U.S., which was -- protecting dollar for dollar, but we internally felt we needed to, through our own actions in the future, protect the structural gross margins through internal actions. So proud of the progress, more work to be done, but well progressed on this movement from 10% exposure to 3%. As I said, irrespective of future negotiations, we're going to forge ahead. We believe that shrinking the supply chain or shortening the supply chain is the right approach and continuing to be more reliant on our U.S. facilities for U.S. sales. Nigel Coe: Okay. That's great color. And then a quick crack at the early buy. You sound like you're quite pleased with the program. If you could maybe just put a finer point on that. Are you seeing sort of flattish participation? Are we seeing some smallest growth here? And then when you think about going back in time, is there a coalition between sort of early buy strength and what actually transpires in the following year? Or is it just a reflection of other things? I mean, is there any -- if we see a strong early buy, does it tend to call it with a strong following year? Kevin Holleran: Yes. I don't know, maybe by asking the question, we can actually ask our BI team to look at that correlation. I don't have any general impressions to that question, but it's a good one, and we'll see if we could tackle that, Nigel and maybe I'll follow up with you. As for early buy when we laid out our expectations internally, there was in terms of goal setting or objectives, setting an ambition for some modest volume in addition to the year-over-year price. So that is in what we laid out with our internal targets. So when I say that we feel good about the progress and the participation and where we are with a few days left in it, that would reflect -- my comments would reflect some participation from a volume standpoint. Operator: Thank you. At this time, I would like to turn the floor back over to Mr. Holleran for closing comments. Kevin Holleran: Thank you, Donna. In closing, I'd like to sincerely thank our dedicated employees and valued partners around the world. The hard work, passion and unwavering commitment are the driving force behind our success and it's much appreciated. Please contact our team if you have any follow-up questions, and we look forward to talking to you again on the fourth quarter earnings call. Thanks for your interest in Hayward. Donna, you can now close the call. Thank you. Operator: Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.