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Philip Ludwig: Welcome, everyone, joining us today for the Melexis Third Quarter 2025 Earnings Call. I am Philip Ludwig, Investor Relations Director, and I'm joined by today's speakers, CEO, Marc Biron; and CFO, Karen Van Griensven. We will start with brief remarks on the business and financials before taking your questions, starting with Marc Biron. Marc, the floor is yours. Marc Biron: Thank you, Philip. Hello, everyone, and welcome to this earnings call. In the third quarter of 2025, we delivered sales of EUR 215.3 million, landing just above the top end of our guidance. This confirms another quarter of sequential growth and demonstrate that the recovery, while very gradual, continues. The quarter-to-quarter sales growth was driven mainly by Europe, while Asia Pacific and the Americas were broadly stable. Asia Pacific continues to be our largest region with around 60% of the total sales. Within our product portfolio, the sales of our motor driver were strong during Q3, especially in automotive HVAC application as well as in thermal management for EV powertrains. Our pressure sensors also performed well, particularly for internal combustion engine such as fuel management and after-treatment system to reduce emissions. We launched an additional 3 new products during Q3 for a total of 9 products since the beginning of the year. This included a new magnetic sensor for small motor applications such as automotive seats and windows. We have also launched an upgraded sensor, measuring current voltage and temperature and enabling a more precise measurement in safety critical applications like automotive batteries and DC fast charging. The third launch was a motor driver for smart fans used for server cooling, which is a very demanded application linked to the AI trend. With a busy Q4 ahead, we remain well on track to approach the record number of product launches achieved in 2024. We have recorded new design wins in the third quarter, including the 2 largest design wins so far for this year. One of them was for a motor driver, especially designed for the 48-volt architecture of EV vehicle. This is a unique product, and we expect strong growth for 48-volt architecture, which has many advantages in terms of cost, in terms of electrical power density, not only in EVs, but also in robotics. Overall, we are booking clear progress on our strategy. The number of product launch is on track and will be similar to the record of 2024 with 19 or 20 product launches. We continue to expand our product portfolio with the ambition to address new customer needs in fast-growing applications driven by the electrification, the premiumization and the automotive trends. The opportunities outside of automotive are still very strong. For example, in robotics, we have provided our first tactile sensing solution to our customer. Last but not least, we continue to have strong traction in Asia, both in automotive and outside automotive. We will go in more detail on our strategic progress at our Capital Market Day on November 5. I will now hand it over to our CFO, Karen Van Griensven, to provide a detailed financial overview and outlook. Karen Van Griensven: Thank you, Marc, and hello, everybody. So the sales for the third quarter of 2025 were EUR 215.3 million, a decrease of 13% compared to the same quarter of the previous year and an increase of 2% compared to the previous quarter. The euro-U.S. dollar exchange rate evolution had a negative effect of 2% on sales compared to the same quarter of last year and a negative impact of 1% on sales compared to the previous quarter. The gross result was EUR 83.4 million or 38.8% of sales, a decrease of 23% compared to the same quarter of last year and an increase of 1% compared to the previous quarter. R&D expenses were 12.8% of sales. G&A was at 6.1% of sales and selling was at 2.3% of sales. The operating result was EUR 37.8 million or 17.6% of sales, a decrease of 41% compared to the same quarter of last year and an increase of 6% compared to the previous quarter. The net result was EUR 27.5 million or EUR 0.68 per share, a decrease of 46% compared to EUR 51.2 million or EUR 1.27 per share in the third quarter of 2024 and a decrease of 27% compared to the previous quarter. Moving to the outlook. Melexis expects sales in the fourth quarter of 2025 to be in the range of EUR 215 million to EUR 220 million. And for the full year 2025, Melexis expects sales to be in the range of EUR 840 million to EUR 845 million, with a gross profit margin around 39% and an operating margin around 16%, all taking into account a euro-U.S. dollar exchange rate of EUR 1.17 for the remainder of the year. And for the full year 2025, Melexis now expects CapEx to be around EUR 35 million, previously around EUR 40 million. So this concludes our remarks. We can now take your questions. So operator, please go ahead. Philip Ludwig: Thank you, Marc and Karen. Philip again. To reiterate, please ask one question with one follow-up at a time and if you have more questions, you can rejoin the queue. Operator, can you please give the instructions? Operator: [Operator Instructions] The first question comes from Francois-Xavier Bouvignies from UBS. Francois-Xavier Bouvignies: My first question maybe is on your top line. If I understand correctly, if you look at peers, visibility is still fairly low. So can you provide a bit more like color on what you see as much as you can into the start of '26? I mean, do you see in line with seasonality a good proxy at this stage? Or do you think the recovery can continue and you can have above seasonal trend into early '26? Marc Biron: Yes. Thank you for the question. As we have already mentioned in the previous quarter, and as you mentioned it, indeed, the visibility is quite limited. We have received a lot of short-term orders, even order within the quarter. And for all these reasons, indeed, the visibility is not -- it's less than in the past, I would say. Yes, we are also now in the middle of the annual price negotiation with our customers. And in those annual price negotiations, there is also the forecast discussion. And I think it's really too early. For all these reasons, it's too early to give a helpful view on '26 and even early '26. Francois-Xavier Bouvignies: Got it. And maybe on the gross margin side, I mean, I can see your inventories are -- on your balance sheet are all-time high. So I was wondering, how should we think about the gross margin directionally, I mean, from here? Because it seems that you keep your loading quite high. So you still produce a lot of inventories. So should we expect the gross margin to flatten from here as it recovers? So you have to sell inventories first and the loading not increasing much. I mean it seems that your inventories is quite high. So I was wondering how you want to manage it and what's the impact on the gross margin? Karen Van Griensven: Yes, the gross margin, as we mentioned before, it has quite some effects. That are, I mean, amongst others, the euro-U.S. dollar, which is specific for '25 and which will probably -- I mean, if the dollar is stable, will have limited impact next year. So that could have a positive effect moving forward. The same is true for cost of yield. Cost of yield today also in Q3 was still quite high. But we expect as from Q4 that we will see gradual improvement of the cost of yield also of the gross margin. So expectations are that over the next quarters, we will see a gradual improvement of the gross margin despite that inventories are so high. Does that answer your question? Francois-Xavier Bouvignies: Sorry, Karen. The cost of yield, what do you mean by that? I mean you mean the loading or why your yield would be below -- why yield would be below usual right now? Karen Van Griensven: It's higher than usual now, and it will go back to the more usual amount. So the yield is the way -- it has to do with... Francois-Xavier Bouvignies: I understand that, but why is it more. Karen Van Griensven: Why is it? Francois-Xavier Bouvignies: More than usual. Why... Karen Van Griensven: It has to do with the ramp-up -- that's already for more than a year. So it has to do with ramp-up issues that we had in one of the fabs and because it's a new process, new technology, and it often comes with, yes, ramp-up issues. But these ramp-up issues have been solved. That's why we will now expect better gross margins due to that effect. Francois-Xavier Bouvignies: And how much is it drag? Karen Van Griensven: How much -- yes, it has an impact, a negative impact of at least 2% today. Operator: The next question comes from Ruben Devos from Kepler Cheuvreux. Ruben Devos: I had a question regarding the design win for the motor driver on the 48-volt EV architecture. I was curious what's the step-up in Melexis content versus the 12-volt baseline? And when do you expect sort of sales to be visible here? Marc Biron: The 48-volt architecture is a kind of modern, let's say, new architecture that has been developed by some OEM. Yes, OEM specialized on the EV car. The advantage of this 48-volt architecture is that you can provide power without consuming too much current. And all the goal is to reduce the current consumption of the battery to keep the range high, but having more power in order to move some equipment that need power, then this 48-volt architecture is more and more used by the OEM. As a consequence for the IC manufacturer is that you need to develop specific IC that can, let's say, withstand this 48-volt. Yes, and Melexis, we have started to develop this product some years ago a bit in advance because we are close to the customer. Then it's -- as I mentioned, it's a unique product on the market. And then, yes, we have received our first design win in Q3 for such application directly from an OEM. And to answer your question, yes, what will be the outlook? Yes, it really depends on the speed of the adoption of those 48-volt architecture. But now we have in the making more and more products that are compatible with this architecture. Ruben Devos: Okay. And second question regards the China EV market specifically. So I think you've had a series of quarters where performance was better than in the other regions. I think now also in Q3, it was down, but still better than, for instance, North America. But just wondering around the latest ordering behavior, let's say, the sort of -- is there any change in tone from China, specifically the divergence between Chinese OEMs and what the Western platforms are doing? Marc Biron: Yes. Q3 was a bit lower, but we see already that in Q4, the order from China are back to, let's say, previous level. Then there was indeed a small dip in Q3. Is it linked to inventory correction? I don't know. I'm just assuming -- I don't know exactly what is the root cause. But yes, in Q4, it is back to the regular trend, let's say. Ruben Devos: Okay. And any visibility on early '26 or it's too soon to say anything about that? Marc Biron: Yes, it will be too soon indeed. As I answered before, it's too soon. In general, I would say the funnel of opportunity and the design win are still very strong in China. If we take the top 10 of our design wins in Q3, yes, 6 out of the 10 are coming from China. It's just to show that China is still very strong. Operator: The next question comes from Marc Hesselink from ING. Marc Hesselink: My first question is actually on the testing you're currently doing with the Chinese foundry. I think you intend to start the production there at the beginning of next year. So I just want to know any update that you can see, also maybe related to that yield that if you have some early indications how that's going? Marc Biron: Yes. Small correction, we intend to start the production during summer next year. You mentioned early next year. I would like that it's early next year, but yes, you are a bit too optimistic. It will be summer. Yes, it's for a current sensor that we have developed specifically for this market. We have now the first wafers and the development has been done. The design has been done. We have received the first wafers 2 weeks ago from the fab. Yes, we are now in the process to evaluate the product. It's too early to give any indication. But yes, the chip exists and the chip is working. We are now busy to evaluate the performance. Marc Hesselink: Okay. My second question is on cost, both OpEx and CapEx. Pretty good cost control over the quarter, both lower than expected, also lowering the CapEx guidance for the full year. Can you maybe explain a bit what's behind it? Is -- this is a reaction on maybe a bit longer gross margin pressure? Or is it simply you don't need to do those investments at this stage? Just why it's moving? What did you exactly do to have this good cost control? And what do you expect going forward? Karen Van Griensven: The cost control, given the uncertainties today, we are just putting control on our costs to make sure they don't increase in the current environment. Also over the next quarters, we want to continue that behavior. On the CapEx, yes, it has to do with the product mix. There are many elements that are at play. The product mix has an impact on the CapEx we need. But in general, yes, we see that the pickup is rather slow. It's pretty -- we have an increase quarter-on-quarter, but it is very slow today. So that, for sure, also has an impact on the current CapEx visibility. Marc Biron: And perhaps to complement, Karen, we could say that indeed, we pay attention to the CapEx. But for all the innovation aspect, all the development aspect, we don't reduce at all the CapEx. We are still up to speed on the development. Operator: The next question comes from Janardan Menon from Jefferies. Janardan Menon: I just want to ask a question on the non-automotive side. You seem to be doing quite a lot in terms of drivers for fan coolers, robotics, et cetera, on that side. The proportion between automotive and non-automotive has been roughly flattish at about 88-12 for some time now. When you look at 2026, do you see a possibility where your non-automotive will start growing faster than your automotive? Is that something you can say at this point based on your design wins, et cetera? And in that context, the tactile sensor for the robot, the design win you've got, what kind of -- are you shipping something there? And when can we expect some volume there? Marc Biron: Yes. On the first question on the overall revenue, let's say, from non-automotive for '26, I think we need to be patient. In the funnel of opportunity, in the design win, we really see that the non-automotive is more dynamic. I mean the increase is deeper or steeper in the non-automotive than in automotive. And we really see in the funnel much more dynamic for the non-automotive. Now we need time to convert this in real sales. It means I don't anticipate, I would say, in 2026 that it will become very, very visible even if -- yes, we are working on it. I'll give the example of the funnel of opportunity. I can give also the example of the product launch. We will launch probably 19 products in 2025 (sic) [ 2026 ]. And out of the 19, 9 will be for non-automotive. And we are really -- the machine is running full speed for the non-automotive product. We should be a bit patient for the conversions effects. Coming on your second question about -- sorry, coming on your second question about the Tactaxis. We will explain more in detail during the Capital Market Day next week. But for the Tactaxis, we have decided to not provide only a chip, but we are -- we want really to provide what we call the solution, which is more of a module. We will give more detail during the Capital Market Day. And we have indeed shipped the first module to our customers and now the customers are evaluating not only the chip, but really the module. But it's a big step for us. Janardan Menon: Understood. And just a clarification, if I may. The 2% of gross margin improvement from yield improvement, over what period do you recognize the full 2% or 200 basis points? Karen Van Griensven: It will take a few quarters, but we will probably see already an effect in Q4. It's because we need to go through our inventory before we see the full results. That's why it is gradual. Marc Biron: But we see it already in our test. I mean in our test results, we see that the problem has been solved, let's say. Operator: The next question comes from Craig Mcdowell from JPMorgan. Craig Mcdowell: First one on your auto business. We heard from a large peer that their conversations with OEMs and Tier 1 suppliers suggest that content growth and mix will be far less positive in '26 than in prior years. I understand you're going through sort of planning and budgeting and pricing negotiations, but it would be grateful to hear your perspective on content growth into '26 and what's showing up in your order books. Marc Biron: Again, I think it's too early to give comments on '26. We will give outlook for '26 in early '26. We see that -- yes, there is a bit of 2 different dynamics in Europe and in China. The European customer -- I would say, 1 year ago, the European customers were very cautious, okay? We see also that the Tier 1 and the OEM are reducing the headcount. And we see the consequence that they postpone new platform, they delay the innovation. I think since some months, this trend has been reduced, and we see a new dynamic, let's say, in the -- with our European customer. We speak about new platform, about innovation again, but it's quite moderate. If you compare with China, where in China, there is a lot of traction, let's say, for modern car, modern platform, a lot of premiumization feature in the car. There is a bit of 2 dynamics, I would say. It's why in our decision, in our budget, we want also to make sure we concentrate enough on the China market. Yes, in terms of content, because your question was about the content. Yes, I think long term, I think it's clear that the semiconductor content is increasing in the car. It's also clear that this rate of increase depends on the type of application. I do believe that it will increase more in China than in Europe for the reason I mentioned before. Operator: The next question comes from Robert Sanders from Deutsche Bank. Robert Sanders: Two questions, if I may. Firstly, in terms of the OEMs, they started recommencing R&D on ICE platforms. Is that a good thing for you given the innovation is coming back to sort of your legacy sockets? Or is that a kind of potential risk given that you might lose those sockets? Just interested what that means for your margins and content in ICE powertrains. And the second question would just be in China. Clearly, you've got quite capable competitors like NOVOSENSE in China. Given that the China EV market is kind of suffering from very severe excess inventory at the moment, is that a problem for your pricing discussions next year? I would expect that pricing pressure would intensify. Have you seen that so far in your discussions for next year? Marc Biron: Yes. The first question about the combustion engine. At the end, for Melexis, we have the same number of content in a combustion engine and in an [ electric ] engine. If the end customer selects an EV or a combustion engine car in terms of chip content, it's the same for Melexis. What is important for Melexis is that this -- if we come back on the combustion engine, the combustion engine is put on a modern platform because in those modern platform, there are much more comfort feature, safety feature, what we call premiumization, meaning that ICE or EV is the same for us. What is important if the OEM, let's say, reuse their ICE engine, it's important they put this on the new platform, which is the case because now when you buy a new car, you like to have, let's say, enough premiumization feature. And what we see what the OEMs are doing in Europe, indeed, they refresh their ICE engine, but they put it in a modern platform. Robert Sanders: And on the pricing erosion question? Marc Biron: Yes, sorry. Yes, on the pricing erosion, for sure, we like to go to China because there is a lot of content in the car, but there is also a lot of competition in China. You mentioned NOVOSENSE. Yes, it's a very serious competitor. And yes, 2, 3 years ago, the discussion with the customer were about number of chips, how many chips can you supply? It was the discussion 3 years ago, okay? Now the price or the cost is also part of the discussion. And yes, we have cost discussion with the customer. It's also why we are working on the diversification of our supply chain. It's also why we are working on our internal cost because indeed, we need to improve our cost base in order to be able to have market price with good margin in China. Robert Sanders: But would you say last year, BYD was asking for 10% price cuts from their suppliers. Would you say that's about par for next year? Or do you think it's worse because of the margin pressure they're facing? Marc Biron: I would say the price expectation from our customer last year -- I mean, the price reduction expectation of last year are similar to this year. But of course, they expect a lot and then all the negotiation starts, and we are able to reduce those expectations. It's why a bit as last year, I think, yes, we expect a price reduction, low middle single digit as last year, I would say. It's also important because you mentioned BYD, which is a very big customer. And of course, with this kind of customer, we have price reduction. But it's important to realize that we have a long, long, long tail of small customers. And with those small customers, we don't really discuss price. We have -- yes, I cannot give like that, let's say, the volume or the revenue taken by the top 20 customers. But yes, we have a very long tail of smaller customers when we don't discuss price. I mean that those price discussions at corporate level have a lower impact, let's say. Operator: [Operator Instructions] The next question comes from Michael Roeg from Degroof Petercam. Michael Roeg: I have 2 follow-up questions on inventories. One of the first analysts indeed mentioned that inventories were at record levels. And this is despite the fact that the scrap was above average, low yields, low gross margins. Now if your gross margin recovers because your yields improve, is there a risk that your inventories will grow even more than they already did in the last year? That's the first question. And the second question is, is your entire inventory immediately commercially available? Or is part of it stored in die banks? That's it. And then a follow-up afterwards. Karen Van Griensven: Our inventory is indeed at historical high levels. But we do not expect from here that it will further increase and the yield has limited impact on this, rather the contrary because it will mean that it goes hand-in-hand with better lead times as well, meaning that you need -- the need for inventory reduces. The second question was about die banks, I think. Marc Biron: Yes. I think indeed, the inventory is spread all over the supply chain, then we have part of the inventory is ready to ship because it need to go to be able to react quickly, but we have -- we keep as small as possible, let's say, the inventory ready to ship. And the rest of the inventory is across the supply chain at wafer level before the assembly, after the assembly. So the big part of the inventory is unfinished. Michael Roeg: Okay. But then coming back to those inventories, if you have better yields, then more finished product will end up in your inventories. I also heard that cycle times will be shortening. That means even faster ending up to the inventory. So that means that you must be selling out faster than today to get your inventories down. Marc Biron: No, because we will order new wafers according to the new yield. And indeed, if the yield is 2% higher, as Karen mentioned, we will order 2% wafers in such a way that we can keep inventory under control. Michael Roeg: Okay. Clear. That's clear. Then another quick follow-up question about China. You mentioned you have a very long tail of smaller customers in presumably automotive in China. There have been a lot of news articles about excess capacity among Chinese car manufacturers and the risks associated with that and that the government wants normal price behaviors and stuff like that. What is your -- how you say, counterparty risk with respect to these smaller customers? Do you have a debtor insurance so that -- suppose that one or more would go bankrupt that you still get paid? Yes. What's the situation on that? Karen Van Griensven: Yes, we -- in most cases, we have a distributor in between. So we deal with the distributor. We do not have an insurance, a debt insurance, but we monitor this very, very closely. And in cases where we are not confident in the repayment capacity, we ask for a prepayment as well. So -- and this happens quite a lot in China. That's how we monitor the situation there. Michael Roeg: So would you say that the risk of a smaller end customer lies with your distribution partner? Or has it happened that they try to pass part of it on to you as well in a situation like that? Karen Van Griensven: The risk is with the distributor. But, of course, we need -- I mean, the risk for us is on the financial stability of our distributor, of course. That's why we monitor that very closely. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing remarks. Marc Biron: Thank you, operator. In summary, after 9 months in 2026, Melexis continue to see sales trends improving. We continue adding innovative new products to our portfolio, and we concentrate resources to our faster-growing market. I would like also to highlight the Capital Markets Day that we will hold on November 5, next week. Thank you for joining our call, and goodbye. Operator: Thank you for joining today's call. You may now disconnect.
Anssi Tammilehto: Good noon, everybody. Welcome to discuss Neste's Q3 results that were published this morning. My name is Anssi Tammilehto. I'm SVP for Strategy, M&A and Investor Relations at Neste. Here with me, we have our President and CEO, Heikki Malinen; and our CFO, Eeva Sipila. We are referring to the presentation that was launched into our website early this morning. And the key highlights of the presentation include, for example, our Q3 financial performance and the status of our financial targets, including the performance improvement program and leverage, and they are actually progressing well. We are also talking about key regulatory developments and also key opportunities and uncertainties in the market. We are also having time for discussion with you all, and that's, of course, last but not least. And as always, please pay attention to the disclaimer as we will be making forward-looking statements in this call. And with these remarks, I would like to hand over to our President and CEO, Heikki. Heikki Malinen: Thank you very much. And good evening to you folks in Asia, and good morning to you in the U.S. Welcome to Neste's webcast. Nice to see you here again. Q3 in brief, let me state that it's actually now 1 year and -- 1 year and 2 weeks roughly, that I've been working for Neste in this role as CEO. It's been a very busy 1 year. I wanted to just take a few minutes and just reflect on this past year. Obviously, I've had a chance to travel globally widely the company; meet our customers, our suppliers; understand the business; see how our refineries are performing. And I think overall, I really -- the more I -- longer I work here and the more I understand the company, I have come to a conclusion that Neste really is a rough diamond. We have a lot of potential to develop the company further. We have a great group of people here, and as I talked to the Neste folks, I really feel that there's good momentum inside the company and a strong commitment by our staff globally to move this company further. So maybe that sort of more as a context. We will be discussing Q3 results here today. For me, personally, I'm actually pleased with the results. We're obviously not at the level of overall performance we want to be, but the direction of travel into Q3 is good. And if I look at what we have accomplished here, our refineries have been performing well. I'll talk about safety in a moment. Sales has picked up. There's even some positive -- actually good momentum in the market and our performance improvement program is on schedule, maybe even a bit ahead of schedule. So these are also positive things that we're adding them up all together and even our fossil traditional Porvoo Oil products business did well. So it's a good basis to move into the -- into then '26. Well, let's take a look at first safety because safety really is the fundamental of everything that we do. It's a license to operate unless we take good care of safety. We have no right to be making these products. On the left-hand side, you can see the data for our people safety, the total recordable in the incident frequency rate. It is heading gradually down. These numbers, just a reminder, since 2023, they include Mahoney, which is our UCO collection business in the United States, which is a very different type of activity. But in any case, we need to bring that number down much more, and the team here has very clear plans on how to do that. On the right-hand side, you can see our process safety figures for this year. So far, 2025 was actually gone, if I can say quite well. Of course, the trend has really fallen. We've had a number of months where we actually had no major incidences in the company on process side. I think it's too early to say how much of a trend this is. But anyway, the direction of travel is good. And the discussion at least in Neste about process safety is continuous. And we have now, in Q3, launched with a 5-year roadmap journey to further improve our process safety and our ambition is to significantly bring that down even more. But as always, these take time, and it doesn't happen overnight. But anyway, we are systematically moving forward. We have some major initiatives underway. You will hear more from Eeva about the performance improvement program. I just want to say it's on track. You'll see the curves in the moment, maybe we're slightly ahead of schedule. But even having said that, what's interesting and important to understand is the direction of travel towards the EUR 350 million, I think we can confirm that. And then the more we do work around this program, the more evident it becomes that there is -- as I said, there are opportunities within the company to perform even better. And that for me as CEO, is of course, a very important piece of information. We have been driving down our costs, fixed costs, variable costs and the refinery performance is rising. In the middle, you see then the Rotterdam capacity project. It is a significant undertaking. At the moment, having just recently visited the site, and I'm again going in some weeks' time back to Rotterdam. It is very busy. We have approximately 2,300 people from many, many different countries and nationalities working on the site, and the work continues. But it's a big undertaking. And what I want to say separately is that we've also had very good performance on safety with all the folks on the site, it's very critical that we don't have any accidents and the team has done, and I'd say a really good job in working towards that goal every single day. And then on the right-hand side, operational achievements. Actually, I think there are many, but we wanted to just highlight maybe two. One was that on subside, we had record high SAF sales volume. We are clearly -- the market is picking up, even though the mandates are still somewhat were clearly below our hope in Europe, 2% vis-a-vis 6%. And then as you can see, the market has become stronger and Neste has been successfully able to leverage the tailwind. I want to highlight a couple of numbers from the third quarter over 1 million tons of renewable products sales volume of which SAF was about 244 produced tons. So year-to-date, we have produced about 741 tons of SAF. So the journey has clearly started. Our comparable sales margin in RP rose clearly to almost $500 per ton. What was also very positive and helped our result was that the total refining margin for Oil Products exceeded $15 per barrel. And that, of course, then helped the results. EBITDA EUR 531 million, heading in the right direction. Cash, I'll let Eeva talk about cash in a moment. But of course, that's something we monitor very carefully as we do when it comes to the 40% leverage ceiling if I want to use that word. My final slide here before I hand it over to Eeva, and then I'll come back later, it's about the performance improvement program. This is -- for me, this is sort of more than just the performance program. It is very much a journey that will ultimately then move us into what I've called inside the company, a journey of continuous improvement, continuous development. While we're doing this program, we're also building more systematic methods on performance management. We've reviewed all of our KPIs, and we continue to do that because, of course, you get what you measure. We have very systematic cadence on performance reviews. This whole approach, we've really pushed that forward harder, and we will continue to do that, bring it down deeper and deeper into the organization. So I see this is an important part of moving forward with this program. We also track our various activities in this program very carefully. I personally participate in biweekly reviews of all the initiatives that we approved before they even get included in this calculation. So I think I have a good understanding of where the program is going, and I'm happy to say that I really like what I see. I see -- I really like what I'm seeing in the teams. So good work and big thanks to the team Neste on this one. So we are heading well towards EUR 350 million, and so far, EUR 229 million annualized run rate improvement by the end of Q3. And with those words, I give it over to Eeva. So Eeva, please take it from here. Eeva Sipila: Thank you, Heikki, and good afternoon to everyone on my behalf as well. I'll start with the familiar reference margin of renewable diesel. And just as a reminder. So at least do note this is a gross margin. So it deducts only the feedstock cost and is hence different from the sales margin, we'll discuss later on. But indeed, I think this trend line shows very well the strength and recovery we've seen in the European markets in the quarter. Then just to break down by segment are EUR 531 million of comparable EBITDA, so EUR 266 million coming from Renewable Products, EUR 232 million from Oil Products and then EUR 34 million for Marketing & Services. And I'll maybe comment the segments a bit more in detail in that -- very shortly. As Heikki already said, so the performance improvement program is obviously an important part of our EUR 531 million result. We're very pleased with the run rate of EUR 229 million achieved at the end of Q3. And then this gives a year-to-date impact in our figures of EUR 84 million. Now a few points on the EUR 229 million. So if we break it into cost reduction versus more margin volume optimization, it's roughly 80-20 split. And maybe also good to remind you that there is an element of lease costs here, especially on the logistics side, which then are actually not visible in the EBITDA rather in decreased depreciation as we have fewer leases. So roughly a bit more than 10% of the 229 is related to that. Overall, the bigger categories are really around logistics, transportation in all forms and fashion, the optimization there and the lower discretionary spend across everything we do. Moving then to the business segment commentary. So Renewable Products. We're very pleased with the reliability of the operations. We almost reached a similar sales volume, as you see from the left-hand side pillars as we did in Q2, and then the sales margin continued to tick up. If we move to the right-hand side and look at the sort of comparison between our Q3 results versus Q2, you see that the big change really comes from the sales margin area. And naturally, the diesel price has supported as it had a positive impact on our margins to actually both of the two segments and also OP, but important here as well, we continue to see some headwind in the feedstock cost. But then we also had a more one-off positive, which comes from the SAF BTC, so the -- now expired tax credit program in the U.S. which was in place for SAF until September. And we actually booked the full EUR 27 million benefit of those credits in Q3 and that it may be worthwhile noting. On the CFPC side, the continuing tax credit system, we continued on a similar path as in Q2. So looking EUR 27 million in there as well. Then moving into the Oil Products side. So Here, the diesel crack clearly contributed a much better market environment than in Q2, but also, we had a better raw material or crude feed cost level in our Q3 and that supported the $15 per barrel margin as well. Overall, as Heikki already mentioned, so we're pleased with good utilization rate, very stable utilization across the quarters as you see well from the left-hand side. And then really on the right-hand side, maybe in sort of additional point to note is indeed the utilization of 91 and also some fixed cost improvement in the figures. Finally, on Marketing & Services, we had a good season, the Q2 driving season, supporting the results, but the team continues, it's very good and diligent work on the fixed cost side and supporting then the result. Moving then to cash flow and profitability. So the CapEx continues at a very -- under sort of very tight control. We have upgraded now our annual guidance to a level that we expect the CapEx this year to be around EUR 1 billion, so slightly down from the earlier range. And this is really, really thanks to sort of a lot of good discipline across the segments. Now we knew going into Q3 that we'll have a tougher quarter when it comes to cash flow due to the upcoming maintenance or now already started maintenance -- ongoing maintenance, should I say, in Rotterdam and upcoming maintenance in Singapore which meant that we had to build inventories during Q3 to be able to serve our customers during the Q4 period, and that obviously had some headwind on our working capital. But I'm very happy that the total outcome was minus EUR 50 million for the quarter because this is the -- also the year-to-date number, and this obviously gives us confidence that we can deliver positive cash flow for the full year as we work to deliver those built up inventories to our customers in the coming months. So as said, a slight headwind on the cash flow visible also in the leverage, but we're well below our 40% target and we're happy with that performance. So with that, I think Heikki it's back to you. Heikki Malinen: Thank you, Eeva. So a few words about topical matters and then the outlook. So as always, we need to discuss briefly what's happening on regulation. I think overall, our view is that the recent news and decisions are supporting the long-term renewables demand outlook whether you can say it's enough to say there's a long-term secular growth, not completely sure, but at least momentum is building. Here in Europe was, of course, extremely important are the decisions related to implementation of RED III. And the Netherlands, Germany, Italy, France, all moving forward, waiting eagerly to see what happens with Germany. The preliminary information was that they are looking to increase the volumes potentially quite substantially, but still waiting for that decision, hopefully, by the end of the fourth quarter, we will know then which way the direction is in Germany. And then, of course, will the implementation start in '26 or '27. But anyway, it seems to be heading in the right direction, so but still need to be patient here some weeks. On aviation, nothing really major to say other than that, maybe in Asia, South Korea, Singapore, of course, Japan has announced SAF mandates and then Indonesia is also looking at it. So gradually also those countries which have been maybe less advanced in moving forward with these mandates are starting to consider them and discuss them. So that's also a positive when it comes to SAF sales. On the U.S. side, the summer was very busy with the Big Beautiful Bill. A lot of major decisions were made now with the U.S. government in the shutdown, we're waiting to see how the implementation then progresses. But as I said in the -- at the end of Q2, I think if I look at all of these regulatory changes in the U.S. I think for Neste, it's still sort of net positive, some things that are clearly positive, some are negative, but overall, net-net, more on the positive side. And I think that's the main news on regulation and I sit waiting then for Germany and their decisions. The market, let's see. So in terms of opportunities and uncertainties, well, already discussed the German part. On the feedstock side, I think what's worth mentioning is that with the various changes in tariffs, we've now started to see some clear decline in animal prices -- animal fat prices, particularly in Asia, Australia. So that is sort of impacting -- that's a potential a bit of a tailwind for our business. However one needs to always remember that some countries accept animal fats, in their renewable fuels and others don't, so we always need to match the feedstocks with the actual market requirements. But we're very good at that. On the crude oil slate, we, of course, use a lot of crude oil in Porvoo refinery. As part of the performance improvement program, we really started to work systematically and try to see how can we diversify the crude oil slate even further. And we've done in an accelerated fashion, a lot of research here on the various technical limits by crude oil type and have actually been able to identify ways, how can we modify them and also then expand the number of crude oil options we have at our disposal. So I'm very pleased with the results. There are actually quite a number of options we have to expand the crude oil supply. And that, of course, gives us then hopefully, some options to negotiate more favorable arrangements for the company. We already talked about the performance improvement program and the potential even more beyond. On the uncertainties, regulatory matters, of course, still uncertain geopolitics is still around. The whole question about what will happen to Russian refineries, Russian oil, global oil markets. I think the forecast -- the variance between the forecast is very broad. So it's very difficult to make any accurate predictions about that. And maybe the last thing I want to mention briefly is China. China exports. So in the last weeks, we have seen news that China is considering permitting the export of SAF out of their country and remains now then to be seen how much and into what markets that Chinese SAF ultimately goes. So we are keeping a close eye on that as well as we head into 2026. The market outlook pretty much as we have communicated, I would say earlier. And when it comes to the guidance, that guidance is also unchanged. So I wanted to accelerate here to make sure we have plenty of time for Q&A. So maybe with those words, I hand it over to the operator. Thank you very much. Operator: [Operator Instructions] The next question comes from Alejandro Vigil [ Garcia ] from Santander. Alejandro Vigil: Congratulations for the strong results. The first question is about the flow of products export/import in the Renewable Products division because as you mentioned before, now we could see China exporting SAF. And I'm also interested in your thoughts about the different regions, the U.S., Europe and Asia in terms of capacity and balance of export/imports. And the second question is about, what you mentioned about Germany, which is the potential volume upside coming from this RED III implementation in Germany? . Heikki Malinen: Thank you very much. So thank you, Alejandro for the questions. Yes, of course, the thing with these products, once you put them on a vessel, you can ship them in many directions. I think maybe the three things as far as Neste is concerned, so as we already discussed in the spring, so our exports from Singapore to the U.S. have been pretty much constrained. Nothing really has changed there. So as the incentives have gone away, so also our exports have been significantly diminished. That is the case still today. And unless the regulation changes, that will probably be the case also for the near midterm. Then we feel like to --know where is that volume going? Volume has been coming to Europe. The European market has been able to absorb the Singapore refinery volume, and we've had actually reasonably good sales here in this market. Regarding China, it is not easy to get a good sense for what's actually happening there. So of course, we have to also rely on different sources here. But our sense still is that, of course, they have domestic UCO, quite substantial amounts of that. We've seen that UCO prices in that region have not declined as much as one would have expected. So someone is buying that and producing. And now we will then have to wait and see how much tonnage actually comes out of China, and where does it ultimately land? So I think that we will probably be able to report more in the Q4 results once we see that situation evolving. Regarding Germany, yes, this is a very exciting news. I mean the numbers in terms of incremental demand have ranged anywhere from 1 million to 2 million tons. So I mean, whether it's on the low end or on the high end, I mean, it's still positive. And hopefully, the other European countries will then follow up. But Germany, of course, is the biggest market, and that's why it is so critical that, that decision would be positive. Hopefully -- we're hopeful. Operator: The next question comes from Derrick Whitfield from Texas Capital. Derrick Whitfield: Congrats on your results for the quarter. I have two questions for you. First, regarding the short-term market tightness you're referencing on Slide 10. Could you elaborate on this dynamic as we're generally seeing the drivers as being more secular versus short term in nature? And then second, if you could elaborate on the trends you're seeing across the global waste feedstock markets. While you're referencing higher feedstock costs on Slide 13, Tallow and UCO spreads appear to be a bit more favorable for you for the quarter and seemingly have the potential to remain favorable as U.S. regulatory and tariff policy have taken U.S. producers out of the market. Heikki Malinen: Yes, it's a very big question. The short-term demand versus secular demand. I mean, ultimately, the whole matter of having -- moving to clean fuels, especially in SAF, I mean, there's no option. So I mean, logically, you would say that's really the direction of travel for us, of course, at Neste and that's more of a supply issue. It is the fact that we are moving forward with Rotterdam, second-line construction, the more I look at it, the more convinced I am that even though it's a quite formidable task, it is still the right thing to do. And if everything goes well, we should be well positioned as we head into the latter part of this decade. If this RED III implementation goes in a positive way, that, of course, will then give quite a substantial boost in diesel. And don't forget, Neste has the ability to move its capacity fairly flexibly from SAF to RD. So -- and we will take advantage of that flexibility depending on how the market ebbs and flows. Regarding feedstocks, yes, I have to say that it is clear that regulatory decisions on your side of the continent has -- have impacted that some of the buyers seem to have disappeared or at least procuded their procurement from Europe and from Asia. So hopefully, that will ultimately bring some price levels down. But I would say, so far, it's been more of an Asian phenomenon and maybe Australian phenomenon on the animal fat. UCO prices, of course, have, as I said earlier have been holding fairly well. And then I would say in the U.S., we saw this movement up in feedstock prices, but maybe the uncertainty around the implementation of these regulatory decisions is maybe taking a bit the air out. But let's see once the decisions are clear, whether there's another momentum move upward. So Neste is one of the largest buyers of these feedstock, if not the largest buyer, and I think we have a good global setup. We have a good team. We're able to optimize that constantly. We can also trade internally inside the system, but also trade with third-party if we want. So I think we're well positioned for that. I think that's about all the key things I can share with you now. Thank you, Derrick. Operator: The next question comes from Henri Patricot from UBS. Henri Patricot: Two questions, please, both on the Renewable Products margin. The first one, I wanted to check if you can give us some indications as we think about the fourth quarter margins to what extent you're able to capture what seems to be very good spot margins in Europe? Or are you quite constrained because of the maintenance? And then I wanted to also check on the -- on SAF. We've seen quite an increase in SAF prices. Are you able to give us some color on your margins on that side of the business. Have you seen as well an improvement in the SAF margins in the third quarter and in the fourth quarter as demand seems to have picked up? Eeva Sipila: Thanks, Henri. So I would say that we were somewhat constrained in the Q3 as well on taking advantage of really the spot market prices. I think they were relatively high. But obviously, we're very pleased that we were able to utilize even smaller pockets to end up to the $480 that we did. Now going into Q4. So I think the big impact you need to take into consideration is really the maintenance ongoing Rotterdam and coming up in Singapore. And if you look at sort of a year back when we had similar maintenance, be it in Q3, Q4, it is roughly $100 per ton impact. So don't forget that. Otherwise, obviously, we are very much now selling what we have produced to inventory. If all goes well, we will push -- we will hope to be sort of ramping up well and having a bit more still volume to push out really to take into -- take the benefits of the current market, obviously, we are focused on that. But I think we have sort of more limiting factors. And then obviously, please do remember that now in Q3, we had the BTC one-off that will not reappear in Q4 as that sort of legislation. This has now ceased or expired. What comes then to SAF prices. I think the -- indeed, the market turned out to be a bit better than it looked in -- during the summertime when there was a period where one had to consider that whether it makes sense to produce SAF or just focus on renewable diesel, the end outcome was better. I think maybe partly also due to just sort of a bit of lack of product and very, very low exports into the European market, and that helps strengthen the market, and then we obviously took advantage. And like Heikki said, so we are very flexible between the renewable diesel and SAF, and we'll continue to sort of focus on that flexibility really to be to Q4 or '26 for that matter. Operator: The next question comes from Matthew Blair from TPH. Matthew Blair: Could you provide an update on your Martinez refinery? Is this plant EBITDA positive? Or -- are you actually seeing any export opportunities out of California into more attractive markets? And any sort of commentary on the feedstock slate. It looks like veg oils might be a little bit more attractive at certain points during the quarter than some of the low CI feeds. And then on the Oil Products side, could you expand a little bit more on the opportunities on the crude slate. It sounds like you're able to implement a little bit more flexibility. Do you have any examples of crude that you've been switching to and switching away from? Heikki Malinen: Thank you, Matthew. So if I take a stab and then Eeva can continue. So obviously, our Martinez is important. Don't forget, we have a joint venture. Marathon is the operating partner, and we, of course, are actively contributing, but they are the operating partner. So they run the operations day-to-day. I think overall, the refinery is now -- has been running quite well. I would call it from Neste angle that we've come out of the project phase and we're now moving into the more continuous operating phase. And having just some time ago, visited Martinez, so I really feel that they have a really good team on location in California running this. But still, it's early days in this journey of making these renewable fuels even for that team. On the export opportunities, I think the -- I think this is a general comment that with all the different regimes globally, the cost of feedstocks, I don't sort of at least at the moment, I think it's very much focusing on domestic sales. That is kind of where the opportunity aligns at least in the short to medium term. On the feedstock side, I think it's been quite volatile recently, both of the partners supply feedstocks. And then, of course, the refinery can buy whoever they want. So this is -- I don't really -- I can't comment on what the actual substance of the feedstock mixes due to the structure of the joint venture. On the Oil Products side, yes, the crude slate is really interesting because, of course, we buy a lot of it. We have -- our primary sources, the North Sea, has been. And we know we've had a good relationship, getting feedstocks out of there. But -- I'm sorry, a crude out of there. But of course, in the spirit of trying to make more money and improve our performance, we have to look at options. And the only thing I can say is over the last three quarters, our engineers and chemists in Porvoo have really looked at a very, very broad set of options. And out of that, they're now narrowed it down to let's say, a shorter list, but there are some very interesting things, and we're testing them in production level mode to see how they perform. But anyway, the options are evident, and we will continue to work. I think we'll be able to report more as we head into 2026. But I'm very pleased with the work they've done on this crude side. Operator: The next question comes from Peter Low from Rothschild. Peter Low: The first was just on perhaps your term contract negotiations for 2026. I think those usually take place around this time of year. Can you comment at all on how those negotiations are progressing? And whether the current tightness in the spot market confers on your degree of pricing power? And then the second question was on the outstanding BTC, which you recognized as a contingent asset in the first quarter, but I don't think you booked in the underlying results. I think that was EUR 30 million to EUR 40 million, as you said at the time. Can you give us any update on when do you expect you might be able to formally recognize that? Heikki Malinen: So if I -- thanks, Peter. Thanks for your two questions. If I take the first one and then Eeva will take the second. Yes, this is indeed the time of the year when it is a term contract time, so to speak. I think last year, we said that for 2025, I think we said about 2/3 of the volume had been termed -- yes, about 2/3. I think, of course, the market has changed quite a lot. We also have the SAF market is now active with the mandates. What I would like to say here is that we will always term some volume, but I think at the moment, we're a little bit monitoring the situation. We're in no rush to make any decisions here. Let's see how the weeks now move forward. We will term some, but I will then report to you probably in Q4 how these things ended. But at the moment, we're in no rush. Eeva Sipila: And regarding, Peter, the Q1 CFPC credit. So we're working on a deal to monetize all of the '25 credits and targeting to be successful during the fourth quarter, and that would then probably be the trigger for us to recognize the Q1 as well. Operator: The next question comes from Adnan Dhanani from RBC. Adnan Dhanani: Two for me, please. First, as it relates to your operated production facilities, utilization rates have been around the 80% mark in recent quarters. How do you see that evolving in the coming quarters? And are there any hurdles there to materially increasing it beyond that 80%? And then secondly, on the opportunity you mentioned from the lower animal fat prices. Can you just provide some color on the current split you have in your operated refineries between UCO and animal fats? And where that could go to take advantage of that opportunity? Heikki Malinen: So the first one, Eeva, on utilization, I think 80% has been sort of a good number for modeling, would you not agree? Eeva Sipila: Yes. Yes. I would say, Adnan, that whilst, of course, it's not necessarily an indication that we're satisfied with the 80%, but just realistically thinking of where we are. I would use that as the right -- as the number also going forward into '26. Now we have identified quite some bottlenecks in our processes, which we are working on to improve the number, but some of them are also tied to maintenance and CapEx, and hence, the sort of progress will not be sort of massive in -- going into '26. So that's a good number for you to use. Heikki Malinen: I would agree. And I think Neste has a -- might if I look at the last decade, Neste actually has quite a good history in debottlenecking these lines, both Singapore Line 1 and Rotterdam Line 1, both have been able to get beyond the nameplate capacity. So we are constantly working -- I mean, under the performance improvement program, we're very systematically turning every corner in those refineries to see how can we get more tonnage. But as Eeva said, a number of these things, they require some investments, not massive, but some money and some of these investments, you can only do when you have a bigger turnaround. So that really creates the delay. But I'm actually very pleased also with the work the engineers are doing. Then on the animal fat, the blending -- I don't want to go into the detail of the blends. It is a bit sensitive. And obviously, UCO plays a big role as does animal fat. What I can say to you, though, is that Neste has invested a lot in pretreatment technology. We have heat treatment. We have pretreatment technologies. We're able to clean up a lot of the bad stuff, if I may use that term from the feed. So it doesn't go into the refinery. And constantly, we're trying to optimize within the technical limits to get as much of the cheap stuff or cheaper stuff in there as we can. But I want to still mention that in some European countries, for example, animal fats are not really allowed. And that does, to some degree, restrict the potential. But I'm pleased anyway with the direction of travel on animal fat prices. That is a good thing. Operator: The next question comes from Artem Beletski from SEB. Artem Beletski: So I would like to ask two relating to European regulation. And the first one is relating to RED III implementation. So you have been discussing about Germany and the impact on the demand for next year. But maybe could you talk about some other markets which are also doing RED III transposition and increasing targets in 2026? What are interesting opportunities you see there? And the second question is relating to some discussions out there when it comes to product certification and some actions or plans to make more strict approach in some markets like Germany or Netherlands. How much is this actually visible when it comes to our customers' behavior? And maybe what comes to preferring U.S. supplier on European market? Heikki Malinen: So thank you very much. So of course, for us, what's very important is what happens here in the Nordics, both Finland and Sweden, very -- Sweden, very critical. Remember, Sweden actually dropped the mandate quite a lot here some years ago. We believe we're going to see gradual movement of the percentages as we head into '27 and '28 and even towards '30. So it's gradual because, of course, people are worried about inflation and so forth. But I think that's all positive. In Central Europe, of course, Germany is just a very big thing. Other markets, we are looking closely at is, Italy is interesting. The Netherlands. And then small markets like Portugal, but volume-wise, Portugal, Spain, are small. I would say, Italy, Germany, Netherlands and then Nordics are critical. And I think overall direction at the moment looks positive. On product certification, this is a really critical thing because -- this is, of course, a trust-based system. The value of the certificates, the biocredits fundamentally related to the fact that the feedstock you procure and use is really the stuff it's supposed to be, and that you have very good tracking. And Neste spends a lot of time and money to make sure that we track with our business partners resources and that we are using the right feedstocks. I can't comment on other industry players. Only to say that I do think that at least the savvy customers are aware of the importance of this, and then they've recognized, that Neste is a reliable partner. I think that's what I would -- that's all I would say. And I think the German legislation, if it goes forward, we'll sort of further heighten the importance that the feedstock needs to be the right kind and from a reliable source or acceptable source if I use that word. So that would be good for us as well. Operator: The next question comes from Nash Cui from Barclays. . Naisheng Cui: Two questions from me, please. The first one is on the Q4 margin impact. I think you provided a very helpful comment earlier talking about $100 per ton impact from similar maintenance previously but we are having two major maintenance this quarter, including Singapore for half of December, I think. So I wonder, could we see more impact over there because there are two plants of in Q4. Then my next question is on inventory. So I wonder if you have built enough inventory to sustain a run rate sale about 1 million to 1.1 million ton in Q4? Eeva Sipila: Sure. Thanks, Nash. So you're right to highlight that there is indeed two breaks. But obviously, the Rotterdam is the sizable because it's full for the quarter, and it's really the start of the Singapore shutdown that impacts this quarter, a bigger bulk actually goes into Q1. So I think the reference is not sort of -- is a pretty good one. Of course, it depends on also how the maintenance breaks go. And a part of this industry is such that when you stop and you open certain things, you sometimes do have surprises. So obviously, the syndication is assuming that we don't have big surprises. And more importantly, that we have very organized and speedy ramp-up in Rotterdam. So it is not meant to be sort of exact guidance, but I just thought it's helpful because it indeed the magnitude is such that if you ignore it, your models will probably lead you to a too high number. Then when it comes to the inventory, I think we are well provided with what we produced into inventory to serve our customers as per our customer promises. It's more than a question of really on our ramp-up time in Rotterdam that the faster we are, we may have some excess to sell in the quarter. And if we then have any issues, we might miss that opportunity to really tap on the spot market. Naisheng Cui: I just wonder if we put margin aside, is there any color you can give on the absolute cost side of this on the two maintenance? Can you say on EBITDA? What is the absolute cost? . Eeva Sipila: Well, we haven't really given such numbers, this per ton is what I think is -- gives you a helpful indication of the impact in the quarter. Operator: The next question comes from Alice Winograd from Morgan Stanley. Alice Bergier Winograd: Two questions from me please. First, looking to 2026, what do you think are the key building blocks of supply growth and demand growth for HVO, for instance, you mentioned Germany, adding some 1 million or 2 million tons in demand. And what else is on your radar that you can maybe quantify from a fundamental perspective? And the second question is on FX. I believe you printed EUR 109 million of FX this quarter? And when do you expect to see the current spot rates to fully show in the P&L because there's quite a gap there? Heikki Malinen: Do you want to take the FX first? Eeva Sipila: Yes, sure. So indeed, the bigger FX move started or the appreciation of the euro started more -- during the quarter, so to say. So the -- as we are hedged, it comes with a delay. We'll start to -- now that levels are obviously kind of, I would say, stabilized at least to some extent to these current levels. So that will start coming through in the Q4. We typically don't have a super long hedging when it comes to FX, but obviously, some going also into next year. Heikki Malinen: Yes, of course, 2026, that goes into the department of forecasting, which has not been easy in this business. I think on a very high level, I think three things. Of course, the macro situation. Europe, as you know, has been overall quite weak here for a number of years on macro. Some minor signs of improvement as we head into next year, but still very early to say. I think the big thing is really regulation because that, of course, will create instant demand. And then when you look at the overall level of how the market is behaving, now looking more at the fossil diesel because that, of course, impacts then the renewables market as well. What is happening with this whole Ukraine-Russia matter? How are these refined products being moved around? That may also have some impact. Inventory levels have been overall quite low here. As we came out of the summer, that's also been supported. So maybe that will a little bit boost as you head into the new year. But for me, really the big thing is what's going to happen in the coming years. And I think it's very much about RED III. Operator: The next question comes from Matt Lofting from JPMorgan. Matthew Lofting: Two, if I could, please. First, Slide 10 in your deck shows the improvement through recent months in the gross renewable diesel margin. It sounds like you're sort of saying at least to this point that feedstock costs have been relatively sort of high or stable. So I just wondered if you could disaggregate roughly sort of how much of the improvement in the gross margin you think is indexed to the strength in fossil fuel diesel market versus being driven by underlying improvement in the renewable fuels market? And then secondly, I noticed that you mentioned listed trade policy, unpredictability in your list of uncertainties. To this point in the year, sort of what have you seen from that perspective in terms of any impact on the business and the market. Just wondering how much of a, let's say, base case versus sort of tail risk you see there? Heikki Malinen: Do you want to do the feedstock,? I'll come to trade. Eeva Sipila: Yes, it was Matt -- your question on the unpredictably really around the feedstock, did I get it right? Matthew Lofting: Yes, yes. Eeva Sipila: Yes. So well, I think considering how volatile the feedstock market has been this year and I think it's prudent to sort of assume that there's some unpredictability into that. Now of course, as the year draws to a close, what we have and now either at the production facilities or close by, obviously, it starts to be more predictable. The -- but it's really these sort of trade barriers that have now been a sort of big area of causing this sort of unpredictability. And I think now the animal fat, where the price has decreased, which is in our favor, is a prime example because it really comes mainly from the fact that we see less U.S. buying and less buyers, hence, around whereas then the UCO has been moving a lot less because actually, the sort of the Chinese buyers have been picking up if there was anything sort of left unpicked from U.S. But as we've all seen, these trade topics change on a daily basis. They're dynamic to say the least. So many things can happen. And then, of course, when it comes to our inventory valuations and those type of things, then the sort of it matters what the prices are at the year-end. And hence, we want to sort of highlight that as a real uncertainty. But I don't think I can really provide any more clarity unfortunately, on the topic. Heikki Malinen: Maybe to your question about trade policy. I mean, of course, there's a lot of stuff, but if I raise two uncertainties. One is regarding the U.S. importation of foreign feedstocks in the RIN 50. Obviously, I think not all industry participants are necessarily of the view that, that is the right thing. So the debate, I think, we didn't have visibility on the debate, how will that ultimately then end? Will it go forward as proposed or will it change? But as I said, my understanding is there are different views on what is the right way forward. So we'll just have to see. And then I think from the European standpoint, Neste, we, of course -- as I referred to the Chinese SAF, the European Commission at the moment is monitoring the SAF situation. And then we'll have to see in '26 or '27, depending on now what happens, what will happen on -- as you know, on renewable diesel, we have antidumping duties. But on SAF at the moment, it's monitoring is what's being done. So that will be some uncertainty. That's worth understanding and noting. Operator: The next question comes from Paul Redmond from BNP Paribas. Paul Redman: My question was just about in preparation for Q4, you have been building inventories. I just wanted to confirm where the focus of that build was. Was it on sustainable aviation fuel or renewable diesel? And then secondly, just a question about CapEx. You reduced your CapEx. If we could just get some insight on what the key drivers are of that? Is it phasing or a true reduction in CapEx? And you were forecasting to a similar spend in 2026. Should we think there's any change there? Eeva Sipila: Yes, I can certainly start with the CapEx. So I would say that Obviously, when the guidance was given, it was very sort of quickly after Heikki started, and we've done a lot of work on reviewing really the amount of CapEx spend that it drives and fulfills our return requirements. And hence, there's been a real reduction of scope in -- but then what comes to the bigger bulk of the CapEx, obviously, related to Rotterdam that has moved, and we expect that to sort of be the bulk of next year as well. So there's really no -- I wouldn't -- we're not expecting a change to the earlier view on next year. But of course, the more you work on, there's always areas of cost efficiency that can be applied and tighter and better procurement, and we're obviously trying to sort of make sure the organization is really alert on all of those topics. But yes -- and then on the Q4 preparation. Well, we obviously know our commitments and have balanced both. So there is an inventory on both RD and SAF. But of course, volume-wise, the RD is much bigger. Heikki Malinen: Maybe if I can just build on that. I remember our conversation after Q1 and after Q4 of last year was very much about, okay, so how will the SAF procurement actually take place in Europe in 2025? And this is the first year when we have the mandate. And coming into this year, we really didn't know exactly, is there going to be seasonality around the summer. Will there be buying later in the year? Or will there be buying equal amounts through the year? So it's been a bit difficult also to plan the inventory when we don't really exactly have any data on the buying behavior and the buying profile. But as we have this year's data and next year's, then we'll probably become also smarter on how do we sort of build our own inventories as the market develops. So just more as a context, remembering those discussions in the spring of this year. Operator: The next question comes from [ Matti Carola ] from OP Corporate Bank. Unknown Analyst: First one regarding the performance improvement program. Could you a little bit elaborate the impact on the variable cost and how much is visible already in the sales margin you have right now? So I mean, the big part is, of course, big part of the headcount reduction, but if you could give a color about this impact on sales margin. Then the second one is about the SAF next year. How do you see SAF market going as the Netherlands opt in this is done and also the U.S. reduction is a little bit killing the exports from Singapore. So do you see potential for RD -- or how do you see the market? Heikki Malinen: You do the first one? Eeva Sipila: Yes, I can comment on the performance improvement. So -- well, the headcount is important, it for regulatory reasons, obviously, it comes a bit in phases that there's still people have certain tenures that we need to respect and hence, not all the savings are in. So actually, I would say that the biggest impact in the P&L is really around the overall procurement, spending less and spending more wisely. And that's by far the biggest. Then the logistics side is important, but part of those savings obviously land into reduced leases and hence in the depreciation role, but still significant also in the P&L. Heikki Malinen: That's your question, I'm trying to recall exactly the wording on the Dutch opt in clause, whether that actually -- I mean, that has, of course, been favorable for SAF, but now if it is going away it could be not exactly sure how much -- yes, I'm not exactly sure how much of a hit that will really mean. On the U.S. side, of course, the fact that you have this equalization from the incentives regarding SAF and RD, of course, that, of course, then reduces in some ways the attractiveness, if I may use our competitiveness coming out of Singapore. So that will be sort of a net negative, I would say. Operator: The next question comes from Christopher Kuplent from BofA. Christopher Kuplent: I've got really only ones remaining on Rotterdam. Could you tell us how much of the project CapEx is still left to be spent? And slightly related to that, what that will do to your depreciation charges running through the RP line? I mean, we're sort of at EUR 140 million, EUR 150 million per quarter right now. Where is that going to pan out once Rotterdam is fully ramped up into '27? Eeva Sipila: Sure. So Christopher, what we are expecting in Rotterdam as CapEx next year is around EUR 700 million. And then now the '27 number on top of my head is obviously a lot lower because there's -- by that time, everything will be built up, but there are some tails 100-ish, if I remember right, in '27. So then that all kind of adds to the depreciation. Obviously, there is a relatively long depreciation time for -- because the asset will be around for decades. So the imminent increases is, of course, visible but based on that, if we can come back to a more exact number, but that would be the number to use on top of what you're seeing today. Christopher Kuplent: Okay. And just to confirm, you're not fully depreciating the asset until it's ramped up, right? So even the CapEx spend to date is not in your quarterly charge yet? Eeva Sipila: Correct. We have the -- what we call sort of comparability in use. So as it is a site in progress, so to say, asset under construction. So yes, that's very true. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Heikki Malinen: Once again, it was a pleasure to spend this hour with you. Summary, I wanted to touch on the four key points. As I've said, I think we're making really good progress on the performance improvement program. You see the numbers. We will continue to report on that, actually see there is more potential. And I think that we will continue to work on this going forward. Regulatory developments very much focused now in Germany. Let's keep our thumbs up, if I can use that word. There is positive momentum in the market. Let's see how much that holds into '26. And then on the balance sheet, which we maybe didn't have to discuss this much this time. So we are below the 40% leverage number. And that, of course, is something we've aspired to do with the help of these initiatives. So with those words, let me thank you, on Eeva's and on my behalf and wish you all well. And to the Americans, Happy Halloween. And we will then see you again in February. Take care.
Maggie O'Donnell: Good afternoon, everyone, and thanks for joining Adyen's Q3 2025 Business Update Call. My name is Maggie O'Donnell, and I'm part of the Investor Relations team, and I'm happy to be joined today by Ethan, our CFO. In today's call, we'll discuss Adyen's financial and business updates from the quarter, followed by a Q&A segment. [Operator Instructions] With that, let's get started. Ethan, what were your key takeaways from this quarter? Ethan Tandowsky: Sure. Thanks, Maggie. In the third quarter, we delivered strong revenue growth of 23% year-over-year on a constant currency basis. We're continuing to see diversified growth across pillars as we expand share of wallet with our existing base. This quarter was especially characterized by consistent growth across regions and was also supported by the timing of settlements during the quarter as compared to last year. This quarter, our team grew by 86 FTEs, primarily in commercial roles in North America and in tech roles across our tech hubs. Overall, it was a strong quarter, in line with our expectations. Maggie O'Donnell: Great. Thanks, Ethan. Can you also just give us an update on the performance across pillars? Ethan Tandowsky: Yes, happy to. I'll start with Digital. Digital net revenue was up 10% year-over-year, driven by continued momentum in the content and subscriptions and delivery and mobility verticals. We continue to see a headwind from APAC headquartered merchants focused on online retail, but noted a slight improvement throughout the quarter. As we turn to Unified Commerce, we see that net revenue for the pillar was up 32% year-over-year. This is driven by strength across retail and successful execution of our strategy to expand share of wallet across channels. And finally, platforms. Net revenue was up 50% year-over-year, reflecting continued momentum in the SaaS segment. As we've mentioned before, our relationship with platforms typically starts with embedding payments, and we now have 31 of our platforms processing over EUR 1 billion annually with us. Amongst our platforms, the number of underlying business customers reached 212,000, up from 126,000 this time last year. This growing number of business customers, we see as an important indicator of our momentum towards the next phase of our growth. In short, Q3 was a quarter of solid broad-based growth across each of the 3 pillars. Maggie O'Donnell: Great. Thanks for the summary. Now let's talk about the outlook for the rest of this year. Is there anything in particular you'd want to highlight? Ethan Tandowsky: Yes. So similarly to what we shared in August, we continue to expect full year net revenue growth to be similar to H1 on a constant currency basis. Furthermore, we also continue to expect EBITDA margin expansion for the year. As we get closer to the end of the period covered by our financial objectives, we're also refining our net revenue expectations. We expect annual net revenue growth to be between the low 20s and mid-20s in 2026. Maggie O'Donnell: Great. Thanks. Before we go to Q&A, I'm sure most investors are wondering what we're planning to share at the Investor Day on November 11. Can you give a sense of the agenda for the day and what they can expect? Ethan Tandowsky: Yes, of course. First off, I'd say we're very much looking forward to hosting you all at our upcoming Investor Day, which will take place here in Amsterdam on November 11. Typically, we host these days every couple of years to talk about our long-term strategy and how we plan to execute it to capture the market opportunity in front of us. You can expect us to talk about our core strengths and how we leverage them to set us apart in our space. Ultimately, how we see our long-term opportunity. This includes how we think about our tech infrastructure, innovation and topics such as Agentic commerce. Of course, we'll also connect that back to our business model by giving a sense of how we view the opportunity ahead. We're looking forward to a great event, and I'm personally really excited to see you all. Maggie O'Donnell: Great. Thank you, Ethan. For those interested in attending the Investor Day in person, formal registration has closed, but we do have a few spots left. So please reach out to Isaac and me at ir@adyen.com if you're interested in attending. We also will be live streaming the full event on our website at investors.adyen.com. We'll now transition to the Q&A segment of today's call. We'll get to as many questions as we can with the time remaining. Following the call, the IR team will, of course, be available to respond to any outstanding questions. Maggie O'Donnell: All right. Let's take a look at the questions we've received so far. Our first question comes from Fred Boulan at Bank of America. Frederic Boulan: Hope you can hear me well. Maggie O'Donnell: Yes, we can hear you great. Frederic Boulan: If you can discuss maybe any specific factors that have driven the underlying revenue acceleration we've seen in Q3 versus Q2? Anything in particular you want to call out for the rest of the year beyond the kind of unwind of the settlement days? And then maybe as a follow-up on that, looking at 2026 and the new guide that you've provided, should we assume a base case is now for a bit of an acceleration, if I look at the midpoint of the guide or it's a bit early to talk about that? Ethan Tandowsky: Yes, sure. So first, if I talk through our growth in Q3, I think what is strong here is that our growth was really driven across quite a diversified set of customers, right? You see strength in each of the 3 pillars this quarter. What we've also seen is quite consistent growth across the regions. And so I think we're seeing strength in being able to expand our relationship with our existing customers across a really well-diversified set of our customer base. The other thing, of course, that you touched on is that we had some benefit from settlement days in this quarter. That was about 1% support to our growth in the third quarter, and we expect to have a similar sized headwind in Q4 given the timing of settlement days next quarter. In terms of our guidance for next year, we set that guidance back in November 2023. And we've been quite open in sharing how we look and get insights into our revenues, that's around a 6- to 12-month type of view that we get around our revenue growth. That's because we're in constant conversations with our customers, and that's typically how they think about their own planning, their own road maps, their own priorities. And as we start to get more and more visibility into what next year looks like, we wanted to refine our view and share that information with you all. We don't still have complete and total visibility on those expectations. So we're still working through that over the coming months. And as we get more and more visibility, we'll give that view, but we're confident that we can deliver within the range that we've shared today. Maggie O'Donnell: The next question comes from Hannes Leitner from Jefferies. Hannes Leitner: I have also a question on -- you mentioned that Digital saw some attrition towards Unified Commerce pillar. Maybe you can elaborate on that? And then within Unified Commerce, you talked about luxury segment outgrowing the group performance in H1. Maybe you can talk about that trend, how that continued and how long you think that will continue to grow? Ethan Tandowsky: Yes, sure. So I would much more call it expansion than attrition. I think our strategy is about how do we grow -- land our customers and then expand with them. That can be across regions, that can be across sales channels like in this case, that can even be around expanding to more brands. It really depends on the business. In this case, this is about adding an in-person payment sales channel to existing e-commerce businesses. And that's a move that is -- that we see basically quarter after quarter as it is part of our strategy and part of how we can help our customers to solve for complexity. We called it out this quarter because we saw a more visible move in our Digital volumes to Unified Commerce. But this is just playing out our strategy as we always have. On your second question around Unified Commerce and how luxury is growing. I gave that example back in August because I wanted to share that the growth of our existing customer base is split between growth in share of wallet and their own growth. And at that time, luxury was quite publicly not seeing strong market volume growth, but it was still for us an industry or vertical that was growing faster on our platform than the overall platform was growing, and that was due to share of wallet gains. So we continue to see strength in that vertical. But it wasn't to explain all of our growth in Unified Commerce. I think what we've seen over past years is that we've actually really diversified across many more verticals. We call out entertainment, we call out hospitality. So while we are seeing strength in retail, we're also seeing our customer base get much more diversified. And I think that's the story of how we're growing so far this year. Maggie O'Donnell: The next question comes from Justin Forsythe at UBS. Justin Forsythe: Just one question here. So I wanted to come back on the largest cohort comments for 2025, new merchant cohort that is that you made at the 1H. Maybe you can just confirm whether that's still in play based on the last 3 months progression? And also talk a little bit about where you're having success. I know you just mentioned and why. I assume, again, within that comment as well, you wouldn't be counting then any existing partners like LVMH or Shopify or Toast within that, so therefore, aren't part of the 2025 cohort. And could we potentially be, given how strong this cohort is performing at a high single-digit contribution versus the building block suggested contribution of mid-single digits? And is there anything that's providing incremental opportunity, say, like the Worldpay Global Payments pending merger or any other broader macro shifts in the payments universe? Ethan Tandowsky: Thanks, Justin. So indeed, the comment that we shared is if you look at the 2025 cohort and compared it to the 2024 cohort that this cohort was growing faster than the overall platform was growing. We continue to see that through the third quarter. These are indeed all new customers. So these are customers who we are working with for the first time that are included there. Otherwise, it would indeed be expansion with our existing base. In terms of how it's shifted, I think maybe the only thing that I would call out is that if you look over the past couple of years, we've seen our pipeline move more to platforms than it was previously. So a bigger proportion of the pipeline is now coming from platforms than in previous years. Other than that, it's the same things that are differentiating ourselves -- that have been differentiating ourselves over the past years. It's how do we drive the best payments performance, right? Uplift is a big part of that story, a combination of auth rates and fraud and authentication and payments costs. It's, again, the platforms play. It's connecting sales channels across online and in-store. So it's very much iterations on top of the differentiation that we've been driving over past years. And that's the story of what we're seeing today. I think your question around what to expect for the building blocks going forward, I think it very much has -- it should have a similar impact in the next year. I think still mid-single digits is the right way to think about it. But of course, we see pretty consistent ramping from year 1 to year 2. So if this is a faster-growing cohort, it should have some larger impact in 2026, but the biggest part of our growth next year will come from our existing base still. Maggie O'Donnell: The next question comes from Mohammed Moawalla from Goldman Sachs. Sorry, that's my mistake. The next question comes from Adam Wood at Morgan Stanley. Adam Wood: Maybe first of all, just to come back on the 2026 outlook. I guess if we look at the run rate today, you've got some exceptional headwinds in the business, the large merchant, the Chinese merchants and eBay. And I think you'd probably be a good few points ahead of what you've reported if we were to ex those out. Is that a big part of why you'd still see mid-20s as a realistic outcome for next year? And are there any other things you'd highlight to give us comfort that, that's still a realistic scenario? And then maybe just secondly, as we look at the guide or the implied guidance for the fourth quarter, it does imply some decel. Obviously, the settlement headwind is part of that. Is there a desire to flag that there'll be deceleration in the fourth quarter? Or is it just a feeling that your guidance is specific enough already and there's no kind of clear signaling implied in that? Ethan Tandowsky: So yes, thinking about 2026, first and foremost, I think it is easy to isolate and pick out one customer or another. When we've shared this guidance, it's been a reflection of the broad customer base that we have, right? So when we take our current information about how we expect to grow with all of our customers across the platform, across all of our pillars, across all of our regions, again, a much more diversified base as we go year-by-year. This guidance range is a reflection of how we expect to grow with the width of them. And so of course, you can pick out and isolate specific topics. But for us, it's really about the overall growth of our customer base on the platform. And when we're in discussions with them and when we're trying to understand the opportunity size that we have going into next year, the visibility that we start to get puts us in the range that we shared today. In terms of what we're sharing for Q4, I think the main thing that we are sharing which is different between Q3 and Q4 is the impact of settlement days. Again, that was a 1% support to our growth this quarter, and we think that's a 1% or so headwind to our growth next quarter. We wanted to be sure that, that was understood. On an annual basis, this has very little impact. But given where we are quarter-by-quarter, we wanted to share that. And that's ultimately what we're sharing for our guidance through the rest of the year. Maggie O'Donnell: The next question comes from Adam Frisch at Evercore. Adam Frisch: On the continued execution. I wanted to ask specifically about -- there are aspects to your growth algorithm that are specific to Adyen, obviously, the growth with your existing base and so forth. But I also wanted to ask you to specifically call out anything you're seeing in markets in Europe being particularly weaker, stronger, any view on the consumer? There's been a lot of mixed data points around there and the fact that you guys are growing so well, maybe you have a different view. So if you could just separate the Adyen-specific stuff from what you're seeing in the overall market would be very helpful. Ethan Tandowsky: Yes. Thanks, Adam. I think the challenge is that they are mixed in our view of growth, right? So our growth with our existing customers is that combination of how fast they are growing with how fast we are gaining proportion of their share, what we call share of wallet. We haven't flagged anything specific that we've been seeing related to changes in behavior here. So I don't really have additional insights to share. Maggie O'Donnell: The next question comes from Jason Kupferberg from Wells Fargo. Jason Kupferberg: I just wanted to circle back on one of the prior questions about Q4, make sure we have the numbers right here. So we did 23% in Q3, would have been 22% without the settlement tailwind. And then I think the implied growth for Q4, if the second half is going to be the same as the first half is 19%, which would be 20% if you add back the benefit of settlement. So it does seem if our numbers are right, like there's a little bit of a modest slowdown embedded in there. So I don't know if this is more just rounding, but I just want to make sure we're synced up properly for Q4. Are you putting some cushion in there for macro or tariffs or any other items? Ethan Tandowsky: Yes. So I think what we've tried to share is a view on the year, right? And of course, we're getting now closer to the end of the year. So that time frame gets shorter and shorter, but we've never been trying to guide to every specific quarter. It is our expectation that Q4 will not be at the same growth rate as Q3 given that settlement day impact. Q4 was also a very strong quarter for us last year. So the comparables are strong that we're comparing ourselves to. We still think that we're in a strong position to grow, but these are the factors ultimately in play, which lead us to continue with the expectation we shared back in August, which is that our growth for the full year should be broadly in line with the H1 constant currency growth. Maggie O'Donnell: The next question comes from Darrin Peller at Wolfe. Darrin Peller: Just 2-part question. One is first on Agentic. I know we'll get a lot more at the Investor Day, which we're looking forward to. But maybe any quick preview on some of the initial ideas or plans or partnerships you see already and what your opinion is in terms of momentum on it in the next, let's call it, 2 to 3 quarters from Adyen's perspective? And then the second part would be around hiring. I just -- we keep seeing -- we continue to see the healthy pace of hiring. Ethan, is this the run rate that we should expect sort of normalize for the company going forward in terms of, call it, the annualized rate we're seeing this quarter? How do you want us to think about that? Ethan Tandowsky: Yes, sure. I think first on Agentic commerce, we're really excited about the potential to help customers meet their own customers where they want to engage in commerce. And this is certainly an area that we think over time will develop and be an important piece for our customer base. At the moment, what we're doing is we're working with other industry leaders, think about a Google or an OpenAI or Visa or Mastercard, working together to make sure that we develop standards, which will truly work for merchants that will support them in their growth and their relationship with their own customer base. So we're absolutely engaged and actively working together with others in this space to make sure that we deliver a really unique and differentiated solution for our customer base. Again, here, a lot of the challenges that we're really already strong at, things like authentication, things like managing fraud, things like multiple payment methods. Those are things that we are -- that are core strengths of ours and that we think we can apply in this realm as well. Of course, you mentioned it. We will share more at our Investor Day, but I think that's how I'd summarize our position today. In terms of hiring, yes, we did 86 net new FTEs this quarter. I think the last 2 quarters, we did about 110 each. That type of level is something that we would expect to continue. I have no reason to think that we need to scale that significantly up or significantly down over the next coming while. So as of now, that's our plan. And if that would change, I would, of course, let you know, but that's our expectation going forward. Maggie O'Donnell: The next question comes from Harshita Rawat at Bernstein. Harshita Rawat: I want to ask about Uplift, and I appreciate you're going to discuss it in more detail at the Investor Day. So you've enabled it for all of your customers. What's the uptake been? I know you talked a little bit about it last quarter, the conversion boost you're seeing? And also, how should we think about wallet share gains as it relates to Uplift, especially as we look into next year? Ethan Tandowsky: Yes. So Uplift is a really important way that we package our differentiation to our customers. It continues to be that. So the same updates we gave in H1 hold true through Q3. For instance, when we look at our new customers that we onboard, we still see around 2/3 of them or so using Protect from day 1, so our fraud tooling. But ultimately, this combination of solving for authorization of solving for lowering payments costs, solving for better authentication flows and reduction of fraud, those can be applied no matter the priorities of customers, right? If they want to focus fully on how do they drive revenue Uplift or if they want to manage payments costs more carefully, those are optimizations that they can control and tweaks that they can make. And Uplift really helps make -- helps them quantify the impacts and make it easier for them to ultimately take up these products. And so it's a really important part of our commercial conversations and how we help bring more share of wallet to the platform. It continues to progress well in Q3, similar to what we shared in H1. Maggie O'Donnell: The next question comes from Alex Faure for at Exane BNP Paribas. Alex, can you hear us? Alexandre Faure: Can you hear me now? Maggie O'Donnell: Yes, we can. Alexandre Faure: A couple of questions maybe. As we go into the CMD, I just wanted to sort of look back to what you guided to in November 2023 and sort of this acceleration in the high 20s you're expecting for 2026 and you're now guiding more to, I don't know, low to mid-20s. So I know you called out some tariff impact, obviously, but you also helped us size that impact. So it doesn't quite take us to high 20s. So what do you think didn't go according to plan to get to high 20s in 2026 eventually? So that would be my first question. Second question is going back to the Agent commerce discussion, I heard what you say in sort of engaging with other industry leaders in OpenAI and Google and so on. When you look at all the different protocols and frameworks that have been issued so far this year, and you think of the work it requires on Adyen side to integrate with some of those, does it sound like a significant work? Is it a matter of weeks, a matter of months, a matter of quarters? How should we think about that? Ethan Tandowsky: Yes, sure. So I think if you think back to November 2023, as you mentioned, right, we were giving a 3-year view. Now we wanted to share a wider range at that time, given that we were giving a longer time frame, right? So we were talking about that 3-year view. And a lot of things happen over multiple years to understand what your growth looks like in any given year, right? Even the priorities of your own customers, what is in play in 1 year may look different than what's in play in the next year. And that's just based on their road maps, their own prioritization. We're always looking to help our customers where they have the pain points where they are focused, and that can look different in any given year. So I wouldn't necessarily frame it in the sense of like, hey, what went wrong or what went differently, mostly frame it in, we get closer towards this 2026 year, towards the end of this kind of guidance time frame, and that gives us more visibility and that more visibility is what we are trying to share here by refining the financial objective. To your second question on Agentic commerce, it is not real significant work for us to implement. And I think that's the benefit of building everything on our single platform and taking that end-to-end ownership. We have so many of the building blocks which are going to be required in this new Agentic world, and that positions us really well to be able to move quickly. So I think in large part, we have a lot of the building blocks, which will be at play here. It's much more about figuring out the solution, which truly will help merchants and allow them to give -- have the right experience and the consumers to have the right experience. Of course, there's going to be some work that goes into it, but that's not the biggest piece. I think we largely have the building blocks in play, which is a great position to be in. Maggie O'Donnell: Great. The next question comes from Pavan Daswani from Citi. Pavan Daswani: Can you hear me? Maggie O'Donnell: Yes, we can hear you. Pavan Daswani: So my question would be on the de minimis tariff impact and the previously guided 2 percentage point drag in H2. Could you maybe give us an update of how did that trend in Q3 for the online APAC headquarter merchants? And was there any incremental disruption in late August with the de minimis expansion? Ethan Tandowsky: Yes. For the subset of customers that we talked about in the first half, we saw a slight improvement during the quarter. Also keep in mind that in the first half, this was largely an impact that we saw at the end of that first half. So we did see some slight improvement throughout the quarter, but nothing that really meaningfully changed our results that's worth commenting on. In terms of other impacted merchants also beyond it, we haven't seen material or meaningful movements related to this throughout the course of the third quarter. Maggie O'Donnell: The next question comes from Sven Merkt at Barclays. Sven Merkt: Can you give us maybe a bit more detail on the point of sales volumes growth? It slowed sequentially in both Unified Commerce and Platforms. Can you just comment what is the driver here, especially as you called out that there's been an increased migration from Digital to Unified Commerce? Ethan Tandowsky: Yes, there's nothing specific that I would call out related to this. I think in any given period, right, it is a short-term period. You do see different volumes moving between pillars, but also between the sales channel, also between regions, right? So I wouldn't focus too much on a single quarter results. I think in general, what we've seen is strong growth across each of our pillars, across each of our regions. It is quite a diversified mix, which is driving the growth that we see in the third quarter. And for me, that's the strength of the position that we're in. Maggie O'Donnell: The next question comes from Sandeep Deshpande from JPMorgan. Sandeep Deshpande: I have 2 quick questions on your revenue line. I mean you've got some new initiatives like issuing as well as lending, et cetera. Where are we at this point? Has anything changed in the third quarter in terms of progress on these pillars, these next-generation pillars that you are working on? And then secondly, looking into '26, I mean, in the past, Adyen would announce some big new customers and they would have a significant impact on your sales growth in future years. With your TPV now so much bigger than it was in the past, are there any customers that are targeted and can make a big difference to Adyen in '26 or beyond? Or are we now at the point that most of your growth -- more and more of your growth is going to come from existing footprint gains at existing customers. But clearly, this is something that you will probably talk at the Capital Markets Day, but is that way we are going towards as such? Ethan Tandowsky: Yes. So let's start with embedded financial products. Of course, it's a topic we will cover in more detail at Investor Day. But in relation to Q3, I think we still see strong traction in issuing. That's one that we talked about also in H1. And I think in general, the way to think about EFP is that it's a really important piece of the products we deliver, especially to our platform customers. And it's a big reason why we're able to grow the platforms pillar in the way that we have been at the 50% or so level that we saw in Q3 as well. In terms of if there are still big customers to win, which ultimately will drive our growth, I think there's a couple of points I'd make. One is I've said it a few times on the call, but we are getting more and more diversified. So there are more and more customers on the platform, which are helping to drive our growth. I don't look at it necessarily on an individual customer by individual customer basis. If you again compare it or take a look at the 2025 cohort we're seeing on the new sales side. So again, completely new businesses to the Adyen platform, we're seeing that scale up quite nicely. So there still is a lot of potential for us to add new business to the new customers to our platform. And we're very much focused on still driving that because while it has little impact in any given year you add them, it does drive your growth over future years, and it's very much also a signal to our positioning in the market, the strength of the differentiation we have. And so it's, of course, something we spend a lot of time on and that we see strength in today. Maggie O'Donnell: The next question comes from Sanjay Sakhrani from KBW. Sanjay Sakhrani: Kind of I wanted to ask the 2026 question a little bit differently. I guess when we think about that range that you guys have provided, how have you built that range up? And then when we think about some of the variables that could land you within that range, bottom or lower, like what are they? Because as discussed earlier, you've had some puts and takes over the guidance period that you provided before. Ethan Tandowsky: Yes. So the biggest driver of our growth for 2026 is going to be the existing customer base. And the 2 biggest factors are how fast they grow and how much share of wallet we gain in that year. Now we're starting to get some better insight into the specific opportunities that we see with our customer base for 2026 as they go through their own planning process, their own prioritization exercise, and they talk through what types of opportunities they'll be focused on. We also start to get better insights into how they think about their own growth for next year as well. But ultimately, those are going to be the 2 biggest factors that will drive our growth. And while we're not at the point that we have full visibility with them because we're still going through that exercise, we did feel like it was helpful to refine again the range at which we see 2026 playing out. And I think if you look at that range, you see that we'll be in a position to gain significant market share also through the course of next year. We're well positioned to be able to gain much more share of wallet with our customer base. And I think that ultimately is the strength of the differentiation that we have and that we're bringing to market. Maggie O'Donnell: The next question comes from Bryan Bergin at TD Cowen. Bryan Bergin: A bit of a follow-up there on wallet share. So just can you share updated views on your wallet share penetration across certain client cohorts that you've talked about in the past? The runway for further penetration in that wallet share? And does macro volatility enable situations where you can actually pursue and win greater wallet share in certain types of clients? Ethan Tandowsky: Yes. So of course, this is part of what we addressed at the Investor Day a couple of years ago, thinking about where we are per pillar by wallet share. I think the reality is that we're still very much in the same position that we still have most of the wallet share still to win with our existing base. Now that's not true for every customer. There are customers we do 100% or the vast majority of payments for them. But if you look at our platform overall, especially because we've been continuously adding new customers to the platform over past years, we're still in the position where the majority of volumes within our customer base is to win, and that's what we're very much focused on. Maggie O'Donnell: The next question comes from Fahed Kunwar at Redburn. Fahed Kunwar: Just a quick question on Digital, specifically. I thought the acceleration or the inflection in Digital is quite interesting. We've had a couple of quarters where you've disclosed net revenues where it's been decelerating. I appreciate there's been some noise, but it does feel like we had kind of that 7% core number last quarter, probably 9%, 10% ex de minimis and leap year and -- FX, sorry. We probably jumped up to kind of 12%, 13% now. Could I understand -- and that 12%, 13% is with volume boom in Digital to Unified Commerce, so really, really strong performance. Could I understand what's been happening in Digital? Like why has it inflected as much as it has? And going forward, can we expect further acceleration in Digital revenues? Because my understanding is Unified Commerce and Platforms is probably where the juice is coming from, but any color on that would be great. Ethan Tandowsky: Yes. I would just say that we remain really, really focused on winning in Digital. It's the biggest part of our volumes. It's the biggest part of our customer base. A lot of the products that we've been rolling out have a huge impact on Digital customers, right? Think about the Uplift suite, this combination of authorization and payments costs and fraud, that's really, really prevalent in the Digital pillar. And I think our global capabilities, our abilities to work with the largest enterprise and really optimize for their payments needs is the thing that's been really important to differentiating ourselves. Now that's always been the case, but rolling out products like Uplift help us ensure that we continue to stay differentiated that we can continue to help our customer base, and that's ultimately where you see us continuing to gain share. Maggie O'Donnell: Thanks for your question. The last question -- I guess that is the last question. Thank you guys so much for joining us today. We appreciate you taking the time. For any further questions, please don't hesitate to reach out to the IR team. Have a great day. Ethan Tandowsky: Thanks, everyone.
Anssi Tammilehto: Good noon, everybody. Welcome to discuss Neste's Q3 results that were published this morning. My name is Anssi Tammilehto. I'm SVP for Strategy, M&A and Investor Relations at Neste. Here with me, we have our President and CEO, Heikki Malinen; and our CFO, Eeva Sipila. We are referring to the presentation that was launched into our website early this morning. And the key highlights of the presentation include, for example, our Q3 financial performance and the status of our financial targets, including the performance improvement program and leverage, and they are actually progressing well. We are also talking about key regulatory developments and also key opportunities and uncertainties in the market. We are also having time for discussion with you all, and that's, of course, last but not least. And as always, please pay attention to the disclaimer as we will be making forward-looking statements in this call. And with these remarks, I would like to hand over to our President and CEO, Heikki. Heikki Malinen: Thank you very much. And good evening to you folks in Asia, and good morning to you in the U.S. Welcome to Neste's webcast. Nice to see you here again. Q3 in brief, let me state that it's actually now 1 year and -- 1 year and 2 weeks roughly, that I've been working for Neste in this role as CEO. It's been a very busy 1 year. I wanted to just take a few minutes and just reflect on this past year. Obviously, I've had a chance to travel globally widely the company; meet our customers, our suppliers; understand the business; see how our refineries are performing. And I think overall, I really -- the more I -- longer I work here and the more I understand the company, I have come to a conclusion that Neste really is a rough diamond. We have a lot of potential to develop the company further. We have a great group of people here, and as I talked to the Neste folks, I really feel that there's good momentum inside the company and a strong commitment by our staff globally to move this company further. So maybe that sort of more as a context. We will be discussing Q3 results here today. For me, personally, I'm actually pleased with the results. We're obviously not at the level of overall performance we want to be, but the direction of travel into Q3 is good. And if I look at what we have accomplished here, our refineries have been performing well. I'll talk about safety in a moment. Sales has picked up. There's even some positive -- actually good momentum in the market and our performance improvement program is on schedule, maybe even a bit ahead of schedule. So these are also positive things that we're adding them up all together and even our fossil traditional Porvoo Oil products business did well. So it's a good basis to move into the -- into then '26. Well, let's take a look at first safety because safety really is the fundamental of everything that we do. It's a license to operate unless we take good care of safety. We have no right to be making these products. On the left-hand side, you can see the data for our people safety, the total recordable in the incident frequency rate. It is heading gradually down. These numbers, just a reminder, since 2023, they include Mahoney, which is our UCO collection business in the United States, which is a very different type of activity. But in any case, we need to bring that number down much more, and the team here has very clear plans on how to do that. On the right-hand side, you can see our process safety figures for this year. So far, 2025 was actually gone, if I can say quite well. Of course, the trend has really fallen. We've had a number of months where we actually had no major incidences in the company on process side. I think it's too early to say how much of a trend this is. But anyway, the direction of travel is good. And the discussion at least in Neste about process safety is continuous. And we have now, in Q3, launched with a 5-year roadmap journey to further improve our process safety and our ambition is to significantly bring that down even more. But as always, these take time, and it doesn't happen overnight. But anyway, we are systematically moving forward. We have some major initiatives underway. You will hear more from Eeva about the performance improvement program. I just want to say it's on track. You'll see the curves in the moment, maybe we're slightly ahead of schedule. But even having said that, what's interesting and important to understand is the direction of travel towards the EUR 350 million, I think we can confirm that. And then the more we do work around this program, the more evident it becomes that there is -- as I said, there are opportunities within the company to perform even better. And that for me as CEO, is of course, a very important piece of information. We have been driving down our costs, fixed costs, variable costs and the refinery performance is rising. In the middle, you see then the Rotterdam capacity project. It is a significant undertaking. At the moment, having just recently visited the site, and I'm again going in some weeks' time back to Rotterdam. It is very busy. We have approximately 2,300 people from many, many different countries and nationalities working on the site, and the work continues. But it's a big undertaking. And what I want to say separately is that we've also had very good performance on safety with all the folks on the site, it's very critical that we don't have any accidents and the team has done, and I'd say a really good job in working towards that goal every single day. And then on the right-hand side, operational achievements. Actually, I think there are many, but we wanted to just highlight maybe two. One was that on subside, we had record high SAF sales volume. We are clearly -- the market is picking up, even though the mandates are still somewhat were clearly below our hope in Europe, 2% vis-a-vis 6%. And then as you can see, the market has become stronger and Neste has been successfully able to leverage the tailwind. I want to highlight a couple of numbers from the third quarter over 1 million tons of renewable products sales volume of which SAF was about 244 produced tons. So year-to-date, we have produced about 741 tons of SAF. So the journey has clearly started. Our comparable sales margin in RP rose clearly to almost $500 per ton. What was also very positive and helped our result was that the total refining margin for Oil Products exceeded $15 per barrel. And that, of course, then helped the results. EBITDA EUR 531 million, heading in the right direction. Cash, I'll let Eeva talk about cash in a moment. But of course, that's something we monitor very carefully as we do when it comes to the 40% leverage ceiling if I want to use that word. My final slide here before I hand it over to Eeva, and then I'll come back later, it's about the performance improvement program. This is -- for me, this is sort of more than just the performance program. It is very much a journey that will ultimately then move us into what I've called inside the company, a journey of continuous improvement, continuous development. While we're doing this program, we're also building more systematic methods on performance management. We've reviewed all of our KPIs, and we continue to do that because, of course, you get what you measure. We have very systematic cadence on performance reviews. This whole approach, we've really pushed that forward harder, and we will continue to do that, bring it down deeper and deeper into the organization. So I see this is an important part of moving forward with this program. We also track our various activities in this program very carefully. I personally participate in biweekly reviews of all the initiatives that we approved before they even get included in this calculation. So I think I have a good understanding of where the program is going, and I'm happy to say that I really like what I see. I see -- I really like what I'm seeing in the teams. So good work and big thanks to the team Neste on this one. So we are heading well towards EUR 350 million, and so far, EUR 229 million annualized run rate improvement by the end of Q3. And with those words, I give it over to Eeva. So Eeva, please take it from here. Eeva Sipila: Thank you, Heikki, and good afternoon to everyone on my behalf as well. I'll start with the familiar reference margin of renewable diesel. And just as a reminder. So at least do note this is a gross margin. So it deducts only the feedstock cost and is hence different from the sales margin, we'll discuss later on. But indeed, I think this trend line shows very well the strength and recovery we've seen in the European markets in the quarter. Then just to break down by segment are EUR 531 million of comparable EBITDA, so EUR 266 million coming from Renewable Products, EUR 232 million from Oil Products and then EUR 34 million for Marketing & Services. And I'll maybe comment the segments a bit more in detail in that -- very shortly. As Heikki already said, so the performance improvement program is obviously an important part of our EUR 531 million result. We're very pleased with the run rate of EUR 229 million achieved at the end of Q3. And then this gives a year-to-date impact in our figures of EUR 84 million. Now a few points on the EUR 229 million. So if we break it into cost reduction versus more margin volume optimization, it's roughly 80-20 split. And maybe also good to remind you that there is an element of lease costs here, especially on the logistics side, which then are actually not visible in the EBITDA rather in decreased depreciation as we have fewer leases. So roughly a bit more than 10% of the 229 is related to that. Overall, the bigger categories are really around logistics, transportation in all forms and fashion, the optimization there and the lower discretionary spend across everything we do. Moving then to the business segment commentary. So Renewable Products. We're very pleased with the reliability of the operations. We almost reached a similar sales volume, as you see from the left-hand side pillars as we did in Q2, and then the sales margin continued to tick up. If we move to the right-hand side and look at the sort of comparison between our Q3 results versus Q2, you see that the big change really comes from the sales margin area. And naturally, the diesel price has supported as it had a positive impact on our margins to actually both of the two segments and also OP, but important here as well, we continue to see some headwind in the feedstock cost. But then we also had a more one-off positive, which comes from the SAF BTC, so the -- now expired tax credit program in the U.S. which was in place for SAF until September. And we actually booked the full EUR 27 million benefit of those credits in Q3 and that it may be worthwhile noting. On the CFPC side, the continuing tax credit system, we continued on a similar path as in Q2. So looking EUR 27 million in there as well. Then moving into the Oil Products side. So Here, the diesel crack clearly contributed a much better market environment than in Q2, but also, we had a better raw material or crude feed cost level in our Q3 and that supported the $15 per barrel margin as well. Overall, as Heikki already mentioned, so we're pleased with good utilization rate, very stable utilization across the quarters as you see well from the left-hand side. And then really on the right-hand side, maybe in sort of additional point to note is indeed the utilization of 91 and also some fixed cost improvement in the figures. Finally, on Marketing & Services, we had a good season, the Q2 driving season, supporting the results, but the team continues, it's very good and diligent work on the fixed cost side and supporting then the result. Moving then to cash flow and profitability. So the CapEx continues at a very -- under sort of very tight control. We have upgraded now our annual guidance to a level that we expect the CapEx this year to be around EUR 1 billion, so slightly down from the earlier range. And this is really, really thanks to sort of a lot of good discipline across the segments. Now we knew going into Q3 that we'll have a tougher quarter when it comes to cash flow due to the upcoming maintenance or now already started maintenance -- ongoing maintenance, should I say, in Rotterdam and upcoming maintenance in Singapore which meant that we had to build inventories during Q3 to be able to serve our customers during the Q4 period, and that obviously had some headwind on our working capital. But I'm very happy that the total outcome was minus EUR 50 million for the quarter because this is the -- also the year-to-date number, and this obviously gives us confidence that we can deliver positive cash flow for the full year as we work to deliver those built up inventories to our customers in the coming months. So as said, a slight headwind on the cash flow visible also in the leverage, but we're well below our 40% target and we're happy with that performance. So with that, I think Heikki it's back to you. Heikki Malinen: Thank you, Eeva. So a few words about topical matters and then the outlook. So as always, we need to discuss briefly what's happening on regulation. I think overall, our view is that the recent news and decisions are supporting the long-term renewables demand outlook whether you can say it's enough to say there's a long-term secular growth, not completely sure, but at least momentum is building. Here in Europe was, of course, extremely important are the decisions related to implementation of RED III. And the Netherlands, Germany, Italy, France, all moving forward, waiting eagerly to see what happens with Germany. The preliminary information was that they are looking to increase the volumes potentially quite substantially, but still waiting for that decision, hopefully, by the end of the fourth quarter, we will know then which way the direction is in Germany. And then, of course, will the implementation start in '26 or '27. But anyway, it seems to be heading in the right direction, so but still need to be patient here some weeks. On aviation, nothing really major to say other than that, maybe in Asia, South Korea, Singapore, of course, Japan has announced SAF mandates and then Indonesia is also looking at it. So gradually also those countries which have been maybe less advanced in moving forward with these mandates are starting to consider them and discuss them. So that's also a positive when it comes to SAF sales. On the U.S. side, the summer was very busy with the Big Beautiful Bill. A lot of major decisions were made now with the U.S. government in the shutdown, we're waiting to see how the implementation then progresses. But as I said in the -- at the end of Q2, I think if I look at all of these regulatory changes in the U.S. I think for Neste, it's still sort of net positive, some things that are clearly positive, some are negative, but overall, net-net, more on the positive side. And I think that's the main news on regulation and I sit waiting then for Germany and their decisions. The market, let's see. So in terms of opportunities and uncertainties, well, already discussed the German part. On the feedstock side, I think what's worth mentioning is that with the various changes in tariffs, we've now started to see some clear decline in animal prices -- animal fat prices, particularly in Asia, Australia. So that is sort of impacting -- that's a potential a bit of a tailwind for our business. However one needs to always remember that some countries accept animal fats, in their renewable fuels and others don't, so we always need to match the feedstocks with the actual market requirements. But we're very good at that. On the crude oil slate, we, of course, use a lot of crude oil in Porvoo refinery. As part of the performance improvement program, we really started to work systematically and try to see how can we diversify the crude oil slate even further. And we've done in an accelerated fashion, a lot of research here on the various technical limits by crude oil type and have actually been able to identify ways, how can we modify them and also then expand the number of crude oil options we have at our disposal. So I'm very pleased with the results. There are actually quite a number of options we have to expand the crude oil supply. And that, of course, gives us then hopefully, some options to negotiate more favorable arrangements for the company. We already talked about the performance improvement program and the potential even more beyond. On the uncertainties, regulatory matters, of course, still uncertain geopolitics is still around. The whole question about what will happen to Russian refineries, Russian oil, global oil markets. I think the forecast -- the variance between the forecast is very broad. So it's very difficult to make any accurate predictions about that. And maybe the last thing I want to mention briefly is China. China exports. So in the last weeks, we have seen news that China is considering permitting the export of SAF out of their country and remains now then to be seen how much and into what markets that Chinese SAF ultimately goes. So we are keeping a close eye on that as well as we head into 2026. The market outlook pretty much as we have communicated, I would say earlier. And when it comes to the guidance, that guidance is also unchanged. So I wanted to accelerate here to make sure we have plenty of time for Q&A. So maybe with those words, I hand it over to the operator. Thank you very much. Operator: [Operator Instructions] The next question comes from Alejandro Vigil [ Garcia ] from Santander. Alejandro Vigil: Congratulations for the strong results. The first question is about the flow of products export/import in the Renewable Products division because as you mentioned before, now we could see China exporting SAF. And I'm also interested in your thoughts about the different regions, the U.S., Europe and Asia in terms of capacity and balance of export/imports. And the second question is about, what you mentioned about Germany, which is the potential volume upside coming from this RED III implementation in Germany? . Heikki Malinen: Thank you very much. So thank you, Alejandro for the questions. Yes, of course, the thing with these products, once you put them on a vessel, you can ship them in many directions. I think maybe the three things as far as Neste is concerned, so as we already discussed in the spring, so our exports from Singapore to the U.S. have been pretty much constrained. Nothing really has changed there. So as the incentives have gone away, so also our exports have been significantly diminished. That is the case still today. And unless the regulation changes, that will probably be the case also for the near midterm. Then we feel like to --know where is that volume going? Volume has been coming to Europe. The European market has been able to absorb the Singapore refinery volume, and we've had actually reasonably good sales here in this market. Regarding China, it is not easy to get a good sense for what's actually happening there. So of course, we have to also rely on different sources here. But our sense still is that, of course, they have domestic UCO, quite substantial amounts of that. We've seen that UCO prices in that region have not declined as much as one would have expected. So someone is buying that and producing. And now we will then have to wait and see how much tonnage actually comes out of China, and where does it ultimately land? So I think that we will probably be able to report more in the Q4 results once we see that situation evolving. Regarding Germany, yes, this is a very exciting news. I mean the numbers in terms of incremental demand have ranged anywhere from 1 million to 2 million tons. So I mean, whether it's on the low end or on the high end, I mean, it's still positive. And hopefully, the other European countries will then follow up. But Germany, of course, is the biggest market, and that's why it is so critical that, that decision would be positive. Hopefully -- we're hopeful. Operator: The next question comes from Derrick Whitfield from Texas Capital. Derrick Whitfield: Congrats on your results for the quarter. I have two questions for you. First, regarding the short-term market tightness you're referencing on Slide 10. Could you elaborate on this dynamic as we're generally seeing the drivers as being more secular versus short term in nature? And then second, if you could elaborate on the trends you're seeing across the global waste feedstock markets. While you're referencing higher feedstock costs on Slide 13, Tallow and UCO spreads appear to be a bit more favorable for you for the quarter and seemingly have the potential to remain favorable as U.S. regulatory and tariff policy have taken U.S. producers out of the market. Heikki Malinen: Yes, it's a very big question. The short-term demand versus secular demand. I mean, ultimately, the whole matter of having -- moving to clean fuels, especially in SAF, I mean, there's no option. So I mean, logically, you would say that's really the direction of travel for us, of course, at Neste and that's more of a supply issue. It is the fact that we are moving forward with Rotterdam, second-line construction, the more I look at it, the more convinced I am that even though it's a quite formidable task, it is still the right thing to do. And if everything goes well, we should be well positioned as we head into the latter part of this decade. If this RED III implementation goes in a positive way, that, of course, will then give quite a substantial boost in diesel. And don't forget, Neste has the ability to move its capacity fairly flexibly from SAF to RD. So -- and we will take advantage of that flexibility depending on how the market ebbs and flows. Regarding feedstocks, yes, I have to say that it is clear that regulatory decisions on your side of the continent has -- have impacted that some of the buyers seem to have disappeared or at least procuded their procurement from Europe and from Asia. So hopefully, that will ultimately bring some price levels down. But I would say, so far, it's been more of an Asian phenomenon and maybe Australian phenomenon on the animal fat. UCO prices, of course, have, as I said earlier have been holding fairly well. And then I would say in the U.S., we saw this movement up in feedstock prices, but maybe the uncertainty around the implementation of these regulatory decisions is maybe taking a bit the air out. But let's see once the decisions are clear, whether there's another momentum move upward. So Neste is one of the largest buyers of these feedstock, if not the largest buyer, and I think we have a good global setup. We have a good team. We're able to optimize that constantly. We can also trade internally inside the system, but also trade with third-party if we want. So I think we're well positioned for that. I think that's about all the key things I can share with you now. Thank you, Derrick. Operator: The next question comes from Henri Patricot from UBS. Henri Patricot: Two questions, please, both on the Renewable Products margin. The first one, I wanted to check if you can give us some indications as we think about the fourth quarter margins to what extent you're able to capture what seems to be very good spot margins in Europe? Or are you quite constrained because of the maintenance? And then I wanted to also check on the -- on SAF. We've seen quite an increase in SAF prices. Are you able to give us some color on your margins on that side of the business. Have you seen as well an improvement in the SAF margins in the third quarter and in the fourth quarter as demand seems to have picked up? Eeva Sipila: Thanks, Henri. So I would say that we were somewhat constrained in the Q3 as well on taking advantage of really the spot market prices. I think they were relatively high. But obviously, we're very pleased that we were able to utilize even smaller pockets to end up to the $480 that we did. Now going into Q4. So I think the big impact you need to take into consideration is really the maintenance ongoing Rotterdam and coming up in Singapore. And if you look at sort of a year back when we had similar maintenance, be it in Q3, Q4, it is roughly $100 per ton impact. So don't forget that. Otherwise, obviously, we are very much now selling what we have produced to inventory. If all goes well, we will push -- we will hope to be sort of ramping up well and having a bit more still volume to push out really to take into -- take the benefits of the current market, obviously, we are focused on that. But I think we have sort of more limiting factors. And then obviously, please do remember that now in Q3, we had the BTC one-off that will not reappear in Q4 as that sort of legislation. This has now ceased or expired. What comes then to SAF prices. I think the -- indeed, the market turned out to be a bit better than it looked in -- during the summertime when there was a period where one had to consider that whether it makes sense to produce SAF or just focus on renewable diesel, the end outcome was better. I think maybe partly also due to just sort of a bit of lack of product and very, very low exports into the European market, and that helps strengthen the market, and then we obviously took advantage. And like Heikki said, so we are very flexible between the renewable diesel and SAF, and we'll continue to sort of focus on that flexibility really to be to Q4 or '26 for that matter. Operator: The next question comes from Matthew Blair from TPH. Matthew Blair: Could you provide an update on your Martinez refinery? Is this plant EBITDA positive? Or -- are you actually seeing any export opportunities out of California into more attractive markets? And any sort of commentary on the feedstock slate. It looks like veg oils might be a little bit more attractive at certain points during the quarter than some of the low CI feeds. And then on the Oil Products side, could you expand a little bit more on the opportunities on the crude slate. It sounds like you're able to implement a little bit more flexibility. Do you have any examples of crude that you've been switching to and switching away from? Heikki Malinen: Thank you, Matthew. So if I take a stab and then Eeva can continue. So obviously, our Martinez is important. Don't forget, we have a joint venture. Marathon is the operating partner, and we, of course, are actively contributing, but they are the operating partner. So they run the operations day-to-day. I think overall, the refinery is now -- has been running quite well. I would call it from Neste angle that we've come out of the project phase and we're now moving into the more continuous operating phase. And having just some time ago, visited Martinez, so I really feel that they have a really good team on location in California running this. But still, it's early days in this journey of making these renewable fuels even for that team. On the export opportunities, I think the -- I think this is a general comment that with all the different regimes globally, the cost of feedstocks, I don't sort of at least at the moment, I think it's very much focusing on domestic sales. That is kind of where the opportunity aligns at least in the short to medium term. On the feedstock side, I think it's been quite volatile recently, both of the partners supply feedstocks. And then, of course, the refinery can buy whoever they want. So this is -- I don't really -- I can't comment on what the actual substance of the feedstock mixes due to the structure of the joint venture. On the Oil Products side, yes, the crude slate is really interesting because, of course, we buy a lot of it. We have -- our primary sources, the North Sea, has been. And we know we've had a good relationship, getting feedstocks out of there. But -- I'm sorry, a crude out of there. But of course, in the spirit of trying to make more money and improve our performance, we have to look at options. And the only thing I can say is over the last three quarters, our engineers and chemists in Porvoo have really looked at a very, very broad set of options. And out of that, they're now narrowed it down to let's say, a shorter list, but there are some very interesting things, and we're testing them in production level mode to see how they perform. But anyway, the options are evident, and we will continue to work. I think we'll be able to report more as we head into 2026. But I'm very pleased with the work they've done on this crude side. Operator: The next question comes from Peter Low from Rothschild. Peter Low: The first was just on perhaps your term contract negotiations for 2026. I think those usually take place around this time of year. Can you comment at all on how those negotiations are progressing? And whether the current tightness in the spot market confers on your degree of pricing power? And then the second question was on the outstanding BTC, which you recognized as a contingent asset in the first quarter, but I don't think you booked in the underlying results. I think that was EUR 30 million to EUR 40 million, as you said at the time. Can you give us any update on when do you expect you might be able to formally recognize that? Heikki Malinen: So if I -- thanks, Peter. Thanks for your two questions. If I take the first one and then Eeva will take the second. Yes, this is indeed the time of the year when it is a term contract time, so to speak. I think last year, we said that for 2025, I think we said about 2/3 of the volume had been termed -- yes, about 2/3. I think, of course, the market has changed quite a lot. We also have the SAF market is now active with the mandates. What I would like to say here is that we will always term some volume, but I think at the moment, we're a little bit monitoring the situation. We're in no rush to make any decisions here. Let's see how the weeks now move forward. We will term some, but I will then report to you probably in Q4 how these things ended. But at the moment, we're in no rush. Eeva Sipila: And regarding, Peter, the Q1 CFPC credit. So we're working on a deal to monetize all of the '25 credits and targeting to be successful during the fourth quarter, and that would then probably be the trigger for us to recognize the Q1 as well. Operator: The next question comes from Adnan Dhanani from RBC. Adnan Dhanani: Two for me, please. First, as it relates to your operated production facilities, utilization rates have been around the 80% mark in recent quarters. How do you see that evolving in the coming quarters? And are there any hurdles there to materially increasing it beyond that 80%? And then secondly, on the opportunity you mentioned from the lower animal fat prices. Can you just provide some color on the current split you have in your operated refineries between UCO and animal fats? And where that could go to take advantage of that opportunity? Heikki Malinen: So the first one, Eeva, on utilization, I think 80% has been sort of a good number for modeling, would you not agree? Eeva Sipila: Yes. Yes. I would say, Adnan, that whilst, of course, it's not necessarily an indication that we're satisfied with the 80%, but just realistically thinking of where we are. I would use that as the right -- as the number also going forward into '26. Now we have identified quite some bottlenecks in our processes, which we are working on to improve the number, but some of them are also tied to maintenance and CapEx, and hence, the sort of progress will not be sort of massive in -- going into '26. So that's a good number for you to use. Heikki Malinen: I would agree. And I think Neste has a -- might if I look at the last decade, Neste actually has quite a good history in debottlenecking these lines, both Singapore Line 1 and Rotterdam Line 1, both have been able to get beyond the nameplate capacity. So we are constantly working -- I mean, under the performance improvement program, we're very systematically turning every corner in those refineries to see how can we get more tonnage. But as Eeva said, a number of these things, they require some investments, not massive, but some money and some of these investments, you can only do when you have a bigger turnaround. So that really creates the delay. But I'm actually very pleased also with the work the engineers are doing. Then on the animal fat, the blending -- I don't want to go into the detail of the blends. It is a bit sensitive. And obviously, UCO plays a big role as does animal fat. What I can say to you, though, is that Neste has invested a lot in pretreatment technology. We have heat treatment. We have pretreatment technologies. We're able to clean up a lot of the bad stuff, if I may use that term from the feed. So it doesn't go into the refinery. And constantly, we're trying to optimize within the technical limits to get as much of the cheap stuff or cheaper stuff in there as we can. But I want to still mention that in some European countries, for example, animal fats are not really allowed. And that does, to some degree, restrict the potential. But I'm pleased anyway with the direction of travel on animal fat prices. That is a good thing. Operator: The next question comes from Artem Beletski from SEB. Artem Beletski: So I would like to ask two relating to European regulation. And the first one is relating to RED III implementation. So you have been discussing about Germany and the impact on the demand for next year. But maybe could you talk about some other markets which are also doing RED III transposition and increasing targets in 2026? What are interesting opportunities you see there? And the second question is relating to some discussions out there when it comes to product certification and some actions or plans to make more strict approach in some markets like Germany or Netherlands. How much is this actually visible when it comes to our customers' behavior? And maybe what comes to preferring U.S. supplier on European market? Heikki Malinen: So thank you very much. So of course, for us, what's very important is what happens here in the Nordics, both Finland and Sweden, very -- Sweden, very critical. Remember, Sweden actually dropped the mandate quite a lot here some years ago. We believe we're going to see gradual movement of the percentages as we head into '27 and '28 and even towards '30. So it's gradual because, of course, people are worried about inflation and so forth. But I think that's all positive. In Central Europe, of course, Germany is just a very big thing. Other markets, we are looking closely at is, Italy is interesting. The Netherlands. And then small markets like Portugal, but volume-wise, Portugal, Spain, are small. I would say, Italy, Germany, Netherlands and then Nordics are critical. And I think overall direction at the moment looks positive. On product certification, this is a really critical thing because -- this is, of course, a trust-based system. The value of the certificates, the biocredits fundamentally related to the fact that the feedstock you procure and use is really the stuff it's supposed to be, and that you have very good tracking. And Neste spends a lot of time and money to make sure that we track with our business partners resources and that we are using the right feedstocks. I can't comment on other industry players. Only to say that I do think that at least the savvy customers are aware of the importance of this, and then they've recognized, that Neste is a reliable partner. I think that's what I would -- that's all I would say. And I think the German legislation, if it goes forward, we'll sort of further heighten the importance that the feedstock needs to be the right kind and from a reliable source or acceptable source if I use that word. So that would be good for us as well. Operator: The next question comes from Nash Cui from Barclays. . Naisheng Cui: Two questions from me, please. The first one is on the Q4 margin impact. I think you provided a very helpful comment earlier talking about $100 per ton impact from similar maintenance previously but we are having two major maintenance this quarter, including Singapore for half of December, I think. So I wonder, could we see more impact over there because there are two plants of in Q4. Then my next question is on inventory. So I wonder if you have built enough inventory to sustain a run rate sale about 1 million to 1.1 million ton in Q4? Eeva Sipila: Sure. Thanks, Nash. So you're right to highlight that there is indeed two breaks. But obviously, the Rotterdam is the sizable because it's full for the quarter, and it's really the start of the Singapore shutdown that impacts this quarter, a bigger bulk actually goes into Q1. So I think the reference is not sort of -- is a pretty good one. Of course, it depends on also how the maintenance breaks go. And a part of this industry is such that when you stop and you open certain things, you sometimes do have surprises. So obviously, the syndication is assuming that we don't have big surprises. And more importantly, that we have very organized and speedy ramp-up in Rotterdam. So it is not meant to be sort of exact guidance, but I just thought it's helpful because it indeed the magnitude is such that if you ignore it, your models will probably lead you to a too high number. Then when it comes to the inventory, I think we are well provided with what we produced into inventory to serve our customers as per our customer promises. It's more than a question of really on our ramp-up time in Rotterdam that the faster we are, we may have some excess to sell in the quarter. And if we then have any issues, we might miss that opportunity to really tap on the spot market. Naisheng Cui: I just wonder if we put margin aside, is there any color you can give on the absolute cost side of this on the two maintenance? Can you say on EBITDA? What is the absolute cost? . Eeva Sipila: Well, we haven't really given such numbers, this per ton is what I think is -- gives you a helpful indication of the impact in the quarter. Operator: The next question comes from Alice Winograd from Morgan Stanley. Alice Bergier Winograd: Two questions from me please. First, looking to 2026, what do you think are the key building blocks of supply growth and demand growth for HVO, for instance, you mentioned Germany, adding some 1 million or 2 million tons in demand. And what else is on your radar that you can maybe quantify from a fundamental perspective? And the second question is on FX. I believe you printed EUR 109 million of FX this quarter? And when do you expect to see the current spot rates to fully show in the P&L because there's quite a gap there? Heikki Malinen: Do you want to take the FX first? Eeva Sipila: Yes, sure. So indeed, the bigger FX move started or the appreciation of the euro started more -- during the quarter, so to say. So the -- as we are hedged, it comes with a delay. We'll start to -- now that levels are obviously kind of, I would say, stabilized at least to some extent to these current levels. So that will start coming through in the Q4. We typically don't have a super long hedging when it comes to FX, but obviously, some going also into next year. Heikki Malinen: Yes, of course, 2026, that goes into the department of forecasting, which has not been easy in this business. I think on a very high level, I think three things. Of course, the macro situation. Europe, as you know, has been overall quite weak here for a number of years on macro. Some minor signs of improvement as we head into next year, but still very early to say. I think the big thing is really regulation because that, of course, will create instant demand. And then when you look at the overall level of how the market is behaving, now looking more at the fossil diesel because that, of course, impacts then the renewables market as well. What is happening with this whole Ukraine-Russia matter? How are these refined products being moved around? That may also have some impact. Inventory levels have been overall quite low here. As we came out of the summer, that's also been supported. So maybe that will a little bit boost as you head into the new year. But for me, really the big thing is what's going to happen in the coming years. And I think it's very much about RED III. Operator: The next question comes from Matt Lofting from JPMorgan. Matthew Lofting: Two, if I could, please. First, Slide 10 in your deck shows the improvement through recent months in the gross renewable diesel margin. It sounds like you're sort of saying at least to this point that feedstock costs have been relatively sort of high or stable. So I just wondered if you could disaggregate roughly sort of how much of the improvement in the gross margin you think is indexed to the strength in fossil fuel diesel market versus being driven by underlying improvement in the renewable fuels market? And then secondly, I noticed that you mentioned listed trade policy, unpredictability in your list of uncertainties. To this point in the year, sort of what have you seen from that perspective in terms of any impact on the business and the market. Just wondering how much of a, let's say, base case versus sort of tail risk you see there? Heikki Malinen: Do you want to do the feedstock,? I'll come to trade. Eeva Sipila: Yes, it was Matt -- your question on the unpredictably really around the feedstock, did I get it right? Matthew Lofting: Yes, yes. Eeva Sipila: Yes. So well, I think considering how volatile the feedstock market has been this year and I think it's prudent to sort of assume that there's some unpredictability into that. Now of course, as the year draws to a close, what we have and now either at the production facilities or close by, obviously, it starts to be more predictable. The -- but it's really these sort of trade barriers that have now been a sort of big area of causing this sort of unpredictability. And I think now the animal fat, where the price has decreased, which is in our favor, is a prime example because it really comes mainly from the fact that we see less U.S. buying and less buyers, hence, around whereas then the UCO has been moving a lot less because actually, the sort of the Chinese buyers have been picking up if there was anything sort of left unpicked from U.S. But as we've all seen, these trade topics change on a daily basis. They're dynamic to say the least. So many things can happen. And then, of course, when it comes to our inventory valuations and those type of things, then the sort of it matters what the prices are at the year-end. And hence, we want to sort of highlight that as a real uncertainty. But I don't think I can really provide any more clarity unfortunately, on the topic. Heikki Malinen: Maybe to your question about trade policy. I mean, of course, there's a lot of stuff, but if I raise two uncertainties. One is regarding the U.S. importation of foreign feedstocks in the RIN 50. Obviously, I think not all industry participants are necessarily of the view that, that is the right thing. So the debate, I think, we didn't have visibility on the debate, how will that ultimately then end? Will it go forward as proposed or will it change? But as I said, my understanding is there are different views on what is the right way forward. So we'll just have to see. And then I think from the European standpoint, Neste, we, of course -- as I referred to the Chinese SAF, the European Commission at the moment is monitoring the SAF situation. And then we'll have to see in '26 or '27, depending on now what happens, what will happen on -- as you know, on renewable diesel, we have antidumping duties. But on SAF at the moment, it's monitoring is what's being done. So that will be some uncertainty. That's worth understanding and noting. Operator: The next question comes from Paul Redmond from BNP Paribas. Paul Redman: My question was just about in preparation for Q4, you have been building inventories. I just wanted to confirm where the focus of that build was. Was it on sustainable aviation fuel or renewable diesel? And then secondly, just a question about CapEx. You reduced your CapEx. If we could just get some insight on what the key drivers are of that? Is it phasing or a true reduction in CapEx? And you were forecasting to a similar spend in 2026. Should we think there's any change there? Eeva Sipila: Yes, I can certainly start with the CapEx. So I would say that Obviously, when the guidance was given, it was very sort of quickly after Heikki started, and we've done a lot of work on reviewing really the amount of CapEx spend that it drives and fulfills our return requirements. And hence, there's been a real reduction of scope in -- but then what comes to the bigger bulk of the CapEx, obviously, related to Rotterdam that has moved, and we expect that to sort of be the bulk of next year as well. So there's really no -- I wouldn't -- we're not expecting a change to the earlier view on next year. But of course, the more you work on, there's always areas of cost efficiency that can be applied and tighter and better procurement, and we're obviously trying to sort of make sure the organization is really alert on all of those topics. But yes -- and then on the Q4 preparation. Well, we obviously know our commitments and have balanced both. So there is an inventory on both RD and SAF. But of course, volume-wise, the RD is much bigger. Heikki Malinen: Maybe if I can just build on that. I remember our conversation after Q1 and after Q4 of last year was very much about, okay, so how will the SAF procurement actually take place in Europe in 2025? And this is the first year when we have the mandate. And coming into this year, we really didn't know exactly, is there going to be seasonality around the summer. Will there be buying later in the year? Or will there be buying equal amounts through the year? So it's been a bit difficult also to plan the inventory when we don't really exactly have any data on the buying behavior and the buying profile. But as we have this year's data and next year's, then we'll probably become also smarter on how do we sort of build our own inventories as the market develops. So just more as a context, remembering those discussions in the spring of this year. Operator: The next question comes from [ Matti Carola ] from OP Corporate Bank. Unknown Analyst: First one regarding the performance improvement program. Could you a little bit elaborate the impact on the variable cost and how much is visible already in the sales margin you have right now? So I mean, the big part is, of course, big part of the headcount reduction, but if you could give a color about this impact on sales margin. Then the second one is about the SAF next year. How do you see SAF market going as the Netherlands opt in this is done and also the U.S. reduction is a little bit killing the exports from Singapore. So do you see potential for RD -- or how do you see the market? Heikki Malinen: You do the first one? Eeva Sipila: Yes, I can comment on the performance improvement. So -- well, the headcount is important, it for regulatory reasons, obviously, it comes a bit in phases that there's still people have certain tenures that we need to respect and hence, not all the savings are in. So actually, I would say that the biggest impact in the P&L is really around the overall procurement, spending less and spending more wisely. And that's by far the biggest. Then the logistics side is important, but part of those savings obviously land into reduced leases and hence in the depreciation role, but still significant also in the P&L. Heikki Malinen: That's your question, I'm trying to recall exactly the wording on the Dutch opt in clause, whether that actually -- I mean, that has, of course, been favorable for SAF, but now if it is going away it could be not exactly sure how much -- yes, I'm not exactly sure how much of a hit that will really mean. On the U.S. side, of course, the fact that you have this equalization from the incentives regarding SAF and RD, of course, that, of course, then reduces in some ways the attractiveness, if I may use our competitiveness coming out of Singapore. So that will be sort of a net negative, I would say. Operator: The next question comes from Christopher Kuplent from BofA. Christopher Kuplent: I've got really only ones remaining on Rotterdam. Could you tell us how much of the project CapEx is still left to be spent? And slightly related to that, what that will do to your depreciation charges running through the RP line? I mean, we're sort of at EUR 140 million, EUR 150 million per quarter right now. Where is that going to pan out once Rotterdam is fully ramped up into '27? Eeva Sipila: Sure. So Christopher, what we are expecting in Rotterdam as CapEx next year is around EUR 700 million. And then now the '27 number on top of my head is obviously a lot lower because there's -- by that time, everything will be built up, but there are some tails 100-ish, if I remember right, in '27. So then that all kind of adds to the depreciation. Obviously, there is a relatively long depreciation time for -- because the asset will be around for decades. So the imminent increases is, of course, visible but based on that, if we can come back to a more exact number, but that would be the number to use on top of what you're seeing today. Christopher Kuplent: Okay. And just to confirm, you're not fully depreciating the asset until it's ramped up, right? So even the CapEx spend to date is not in your quarterly charge yet? Eeva Sipila: Correct. We have the -- what we call sort of comparability in use. So as it is a site in progress, so to say, asset under construction. So yes, that's very true. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Heikki Malinen: Once again, it was a pleasure to spend this hour with you. Summary, I wanted to touch on the four key points. As I've said, I think we're making really good progress on the performance improvement program. You see the numbers. We will continue to report on that, actually see there is more potential. And I think that we will continue to work on this going forward. Regulatory developments very much focused now in Germany. Let's keep our thumbs up, if I can use that word. There is positive momentum in the market. Let's see how much that holds into '26. And then on the balance sheet, which we maybe didn't have to discuss this much this time. So we are below the 40% leverage number. And that, of course, is something we've aspired to do with the help of these initiatives. So with those words, let me thank you, on Eeva's and on my behalf and wish you all well. And to the Americans, Happy Halloween. And we will then see you again in February. Take care.
Salvador Villasenor Barragan: Good morning, everyone. I'm Salvador Villasenor, Head of Investor Relations at Walmex. And I want to thank you for joining once again to our live Q&A session following our third quarter results, which were published yesterday evening. As always, we will make every effort to answer as many questions as we can in the 45 minutes we have scheduled for this call. [Operator Instructions] I will now hand over to our recently appointed CEO and President of Walmart de Mexico y Centroamerica, Cristian Barrientos, who will present the team and give his initial remarks before going into the first question. Please, Cristian, go ahead. Cristian Barrientos: Thank you, Savor, and good morning, everyone, and thank you for joining us today. We're hosting this live Q&A from Costa Rica right after our Board meeting yesterday. I am here with Paulo Garcia, our CFO; with Javier Andrade, our recently appointed CMO for Mexico; and Cristina Ronski, our CEO for Walmart Central America. Before we begin, I would like to share a few reflections from my first 90 days since rejoining Walmex now as the CEO. Over the past 3 months, I have spent time visiting many of our stores and distribution centers across both Mexico and Central America, and I have seen at firsthand how we are delivering our purpose. It's been energizing to see the evolution of the business since I left the region almost 3 years ago. Even more exciting are the opportunities that I see going forward. I'm convinced that with our renewed focus on the execution of our fundamentals, the strength of our people and the newly appointed leadership team, we are very well positioned to take Walmex to the next level. So now we are open to your questions. Operator: The first question is from Mr. Alejandro Fuchs from Itau BBA. Alejandro Fuchs: My question would be for Cristian, maybe on Bodega, I wanted to discuss a little bit some of the performance of this quarter, looking at same store sales per format, right? It seems that it's falling a little bit behind Sam's and supercenter in the context of kind of easy comps, right? So I wanted to get your thoughts on these first ones that you just discussed in Mexico. Coming back, having had a lot of experience with the brand for so many years. What are some of the strategies that you're thinking for Bodega maybe to grow a little bit faster its semester sales. And maybe you can share a little bit of the early strategy, maybe early findings that you're seeing at Bodega and how do you see it performing for the future? Cristian Barrientos: No, Thank you very much. And as we mentioned, Bodega performed in the quarter, a little bit behind Sam's. But we are seeing a really strong business in the 3 formats. We are seeing in this quarter evolution in terms of the relative performance against different banners, and we are seeing more than 20 weeks gaining share in Bodega. So we're confident that with the value proposition that we had in place are performing well. We have been improving. And as I mentioned in the webcast, we are very focused in things that we can control, means EDLP, availability and the evolution on demand. We see a ton of opportunities in all our business and particularly in Bodega, trying to create access to low-income customers to the -- to the prices that we can deliver for them. So we can accomplish our purpose to save them money and live better. So we're very confident with the future of Bodega and with our 3 banners that we have. I don't know if you have more to add there, Paulo. Paulo Garcia: No, I think it's okay. As you said, Cristian, I think it's -- we talk extensively about that, it's pushing the 3 priorities. Alejandro, it's about the pricing, the new investments. It's about actually availability, making the product available to the customer and accelerating e-commerce. And with that, I think we will continue gaining the trust and the preference from our customers. Operator: Our next question is from Mr. Ben Theurer from Barclays. Benjamin Theurer: I wanted to follow up a little bit on kind of like Alejandro's question, but more broader in terms of like the traffic versus ticket performance. And then at the same time, we've obviously seen a little bit of a weaker opening versus a year ago and particularly in Mexico. And I wanted to understand how you're thinking about the need or the opportunities to open stores if at the existing, you have like traffic pressure to a certain degree. I remember we got the announcement earlier this year during your Capital Markets Day about the commitment to open a lot of new stores over the next coming, I think it was 5 years or until the end of the decade. So as we think about it, the need to open stores, while at the same time, we're seeing at the existing stores traffic decline. With what you've seen over the last 90 days, and it might be early on, but do you think there's a need to potentially revisit what's out there in terms of like openings just to avoid cannibalization? And how should we think about the pace of openings throughout the fourth quarter and ultimately, those stores coming online that might be already under construction? Paulo Garcia: Yes, Ben, a very good question that you're putting on the table. So at the moment, we don't see a need, Ben, to review our ambition in terms of store openings. I think we talked about 1,500 stores in the next 5 years. So we still stick to that. Yes, you already alluded to the fact that we didn't open probably as much as we were expecting in Q3, and there was a little bit of slowdown in that openings, but we have a pipeline, a huge pipeline now for the Q4, a little bit like we tend to do it at the end of the year. But to go directly to your question, at the moment, we don't see necessarily a need to review the store openings in light of potential cannibalization. As to what relates to traffic and ticket, what we are seeing at the moment, maybe I'll hand over to Javier to just give you a little bit more details in terms of how we're seeing traffic and ticket and a little bit the evolution of some of the categories. Javier Andrade: Yes. Basically, Ben, regarding traffic, what we see is a reflection mainly of the customer backdrop that we're seeing in the retail, but we see a positive trend in the last quarters, and we feel very optimistic about Q4 and what's coming for us for seasonal. We've seen a lot of engagement of the consumers regarding seasonalities and everything that's about to come in on Buen Fin and Fin Irresistible. And the other thing, even though we see inflation in some categories. We're also investing in price, we can give access to the consumer even though we see inflation in some categories, we're also investing in price so we can give access to the consumers to better prices and help them save money and live better. So we want to grow even faster instead of just following inflation. And as I said, we're optimistic about what's coming for Q4. Operator: Our next question is from Mr. Froylan Mendez from JPMorgan. Fernando Froylan Mendez Solther: Can you hear me. Well, I guess I'll take the question, but I cannot hear your answer. I don't know why. We had some improvement this quarter, but this is something that you mentioned that there is room to further increase. I would like to know what are the steps being taken? And what was... Paulo Garcia: I think we need to move to the next one. Let's move to the next one. Sorry. Froylan, we are moving to the next one. If you come back and you can hear us, we'll come back to you. Operator: Our next question is from Ms. Irma Sgarz from Goldman Sachs. Irma Sgarz: Welcome to the new appointments on the leadership team. I was excited to see the positions filled and good luck with your new responsibilities. Just 2 quick questions on the gross margin. I understand that the pressure that you posted in the third quarter came specifically also related to the inventory reductions that you are aiming for. So I was wondering if you could just point out if that was concentrated in specific categories or specific formats if that was perhaps more sort of general merchandise related rather than sort of the consumables side and perhaps concentrated in certain formats and how you see that need to adjust your inventories going forward? Or if that's sort of more concentrated and behind you from what your comments on the guidance for the fourth quarter, it sounds like it sounds like it's behind you. And then the second question is just on the private label. I'm curious, just Cristian and Javier, maybe to hear your thoughts about where you feel sort of when you take an assessment of where you're doing well so far and what you still need to be doing on the private label side, especially given that, if I may say, it feels like consumer attitudes are changing towards private label in Mexico and they have been changing over the last couple of years. And where do you feel -- you did call out general merchandise. I think you had in some categories, higher penetration. But on the consumables side, I'm curious like sort of how you're thinking about the strategy there. Paulo Garcia: Thanks, Irma. Thanks for your question. As usual, spot on, by the way, on the first question and what you just said is spot on, on all you said. So as you know, we've been talking about that we wanted to address our inventories. You probably have seen the improvements that we've done in inventories of almost 3.5 days, days on hand, and we still see an opportunity going forward. In terms of what it relates to investments to If you say, expedite some of this more and healthy inventory that we have, I think it's probably most of it behind us. And as you said, it's mostly in general merchandise and because the general merchandise tends to impact a little bit more a banner like Walmart, but at the end of the day, it tends to grow across all the banners. I'll now pass on the second question to Javier on the private brands and Cristian can also build. Javier Andrade: Yes. Okay. So thank you for your question, Irma. As you said, I see a huge opportunity in private label now. Even though we're performing good and we increased 100 basis points this quarter in penetration. I see a big opportunity in terms of surety of supply that we're working with the global sourcing team, and we're also trying to leverage as much we can from other markets. In groceries, consumables and even fresh, we are improving our capacity to bring in products for the customers and give access to them to better qualities and best prices. And for us, private label is going to be important because it's a huge component of the EDLP approach that we have for the future in the company. So you will see more to come in terms of private label. But basically, we're going to make sure that we have the best assortment possible for each of our business formats and making sure that we cover all the needs that every customer has in our different businesses and also in our different channels. So we're focusing on improving as much as we can all our processes, and we will leverage as much we can with global sourcing and other operations in Mexico. We're also working here with suppliers, specifically to drive efficiencies that we can translate those efficiencies into better costs and better price for the customer with local suppliers. So overall, private label is going to be important, and we're going to be speeding to develop our private brand to the maximum potential that we can. Cristian Barrientos: If I may add, Irma, the private label points. As you saw in the webcast, we just hiring [ Prativa ] from international to lead Sam's U.S. -- Sam's Mexico, sorry. And Prativa has a ton of experience before managing private labels in the U.S. So we are seeing a tremendous opportunity to work together between China and the U.S. trying to improve our penetration in Member's Mark in Sam's also. So it's a complement that Javier mentioned before in self-service. So we are taking advantage of the global brand that we are and bringing talent to Mexico to help us or to work together in terms of the business of Sam's some and also with some knowledge about private brands. So we're very confident for the future and the opportunity that we have to improve more our private brands program. Operator: Our next question is from Mr. Ulises Argote from Santander. Ulises Argote Bolio: Congrats, Cristian and the recently appointed leadership team. Actually, we had 2. So the first one for Cristian. Maybe I wanted to get your sense. Obviously, you were a long-term participant here in the Mexico market, then you went to Chile and now coming back. So I wanted to get your thoughts there. What are your kind of recent impressions on the current state of the market. Any relevant change that you're seeing there in competitive dynamics. Any relevant opportunities that might be worth tackling kind of on an initial basis. And then the second one for Paulo. Maybe if we could just get a little bit more details on the one-off that you mentioned yesterday impacting the net income. Any color that you could add there would be really helpful. Cristian Barrientos: Thank you very much for your question. And as you mentioned, I moved in these 7 countries in the last 14 -- 13, 14 years. And my first reaction, if I can compare both countries, it's incredible how similar the situation that we are looking today in Mexico were with the situation that I founded in 2023 when I landed in Chile because both countries were growing 0%. And we saw in Chile and also here in Mexico, the huge opportunity that we have to focus on the fundamentals with the idea when the -- let me say, the economy will recover, we will take advantage of -- we will be better prepared to capitalize all the sales that we're looking for. And that's happened in Chile. We moved from 0% and the retail -- the economy grew to 2% and the business there took advantage of that. So we are looking something similar here in Mexico, focusing on the things that we can control, and that is why we set very clear our priorities to go back, let's say, to these fundamentals as EDLP, availability and of course, the e-com acceleration that we have a huge opportunities, both in Mexico and Central America. So we're very optimistic for the future, and we are focused on these 3 priorities to take advantage in the coming -- in the next year. Paulo Garcia: Just on the second question, Ulises. So I already alluded to the fact that it's a nonrecurring item. So in a business of this size, once in a while, some of these topics pop up. I think I also wanted to give a little bit more reassurance to the market in terms of what we expect going forward. Obviously always the change in laws and regulations that we cannot control the tax effective rate. But actually, we see that hovering more around the 25%. And I think that's probably what is meaningful at this stage for you guys. Operator: Our next question is from Mr. Bob Ford from Bank of America. Cristian Barrientos: Bob, are you there? Operator: Our next question is from Alvaro Garcia from BTG Pactual. Alvaro Garcia: Congrats, Cristian, on the new role. I noticed in the release that used that you mentioned SG&A should sort of gravitate back to high single-digit growth in line with sales, and I found that a slight change relative to sort of the comments at Walmex, which were you should expect SG&A to continue to grow above sales. So I was wondering if maybe you could expand on that comment. Was that specific to this coming fourth quarter or for the full year or medium term? Any color on that would be helpful. Paulo Garcia: Yes. Thanks for the question, Alvaro. So I think what we said is twofold. One is, as we said it in the beginning of the year in terms of the guidance, we do expect to have for this year, high single-digit growth in terms of SG&A, which is much different than what we have said in the past. And for that means we continue to invest behind in the business. We always shed clarity on that token, but also driving efficiencies. And actually, these days also more midterm efficiencies also fueled by AI. I think in terms of also what we said it was that we do expect that SG&A to grow more closer to sales. That's our expectation there, Alvaro. So that's also what we want to see going forward. Alvaro Garcia: Great. And then just one. Maybe for you Paulo, could be for Cristian on gross margin. This Is a business that over the last 10 years has seen a 300 basis point increase in gross margin, which by Walmart standards, I think, is pretty darn high. So in the context of really doubling down on EDLP and really being true to that purpose, how do you feel about gross margin investment over the medium term? Paulo Garcia: Yes. I'll say and then Cristian can immediately jump and chip on that. You clearly see that -- so we have been investing behind pricing behind and we find our customers to help them save money better, as we said it. We do want to continue to invest more. We want always to invest, have the lowest prices in the market. As part of that investment, private brands penetration increase is also a part of that and a more EDLP approach, Javier can allude to the fact that we can do that in a better way than we've done in the past. I think we want to have the right P&L shape, Alvaro. So of course, we want to invest behind our customers. It's also important to know, and you know it very well and a few others as well, the shaping of P&L is also somewhat changing as we have the new contributions from the new businesses. That is helping our gross margin. We have easily around always 20 to 30 basis points in our gross margin as a positive effect that we want to invest behind our customers. And to do that, we need to, of course, continue to work on SG&A efficiencies to get it closer to sales, certainly keep it high single digit. I think if we do that and we sweat more the investments we do in terms of gross margin, we will be putting more money in the pocket of our customers. Cristian Barrientos: And also, if I may add, Paulo, around ecosystem, ecosystem is helping us to improve our profit, where we separate internally gross profit through commercial margin. And we have seen a more stable commercial margin. And also, we are working on managing the approach in our Tier 1, Tier 2, Tier 3 connect with the EDLP approach. And we have seen, as Paulo mentioned, opportunities or better participation on margin in private brands and also managing -- better managing our Tier 3 to improve maybe our mix in the total box, and that is why we are seeing a more stable margin. But we -- as I mentioned before, we strongly believe in the EDLP, and we will be focused on EDLP, trying to maintain as stable as we can our flow of merchandising and connect with our purpose. Operator: Our next question is from Mr. Antonio Hernandez from Actinver. Antonio Hernandez: Congrats on your results and the new appointments. Just wanted to follow up on Ulises' previous question regarding more than the macro environment, are you seeing anything more specifically on how consumer environment or the consumer's mindset has shifted or changed from your previous stage here in Mexico and Central America or more specifically in Mexico. Are you seeing any type of difference from back there to right now. And maybe also on the competitive environment competition. Cristian Barrientos: Well, to be very honest, only 90 days. And my first reaction is I had the privilege to travel in these 3 years that I landed in Chile to Mexico. And I see a more advanced or a more advanced market in terms of the -- how open we are to take, let me say, some technologies and connect with the e-commerce side. And that is why we put the e-com acceleration as a key priority. We are taking advantage of the brand that we are and bringing, as you saw in our webcast, single hallway to provide to our customer a less friction experience, connecting on-demand with 1P, with 3P, and we are seeing a very good adoption for customer. So if I may say something, it's going to be around technology. I've seen in my first 90 days, customer more open to receive these kind of technologies, open to give us, let me say, their cell phones and allow us to build this beneficial program. And with that, we can use data and be more precise in terms of selecting the assortment, in terms of price elasticity. So I'm seeing a more advanced customer, let me say, and very open to receive this kind of new technologies and reduce friction for them? Operator: Our next question is from Mr. Renata Cabral from Citi. Renata Fonseca Cabral Sturani: Congrats Cristian for the new position. My question is about the One Hallway that the company delivered this quarter. So if you can give some color for us on the main milestones that you are seeing now in terms of store coverage or plug in more vendors from the U.S., for instance, in terms of overall opportunities. Of course, we always look at what Walmart U.S. did, but we understand that there are some differences in terms of the market, maybe other opportunities as well. So if you can give us some color of what you see ahead for this One Hallway would be really helpful. Javier Andrade: Yes. Thank you, Renata, for your question. I'm very excited about sharing some ideas and thoughts about One Hallway. Let me start by saying that we are focusing very strongly in on-demand first just to make sure that we are protecting our core with groceries, consumables and fresh. And with One Hallway, we have now the opportunity to simplify the access and the experience for the customer where they will see all the opportunities in items and experiences in just one place in our digital platforms. And as you said, similarities between U.S. and Mexico are bigger than what we expected at the beginning. And basically, when we started the shift to One Hallway, we leverage all the technology from the U.S., the search engine and the technology. And what we're seeing now is interesting because we were expecting kind of a downside of the business during the transition. And with all the learnings that we have from the U.S., we were able to have a better transition in Mexico. We're seeing more loyal customers to our platforms. We're seeing more bigger baskets, if I may say, the customers are now purchasing groceries, consumables and GM, not necessarily just from on-demand, also from extended assortment, and we're working. And we recently shared inside the company that one of the core strategy is going to be cross-border. So marketplace is going to have a huge acceleration in the upcoming weeks and months. So what I can say is that we feel very confident that we're going to be leading the omnichannel experience for the customer, for every customer in Mexico, and we will give them access to the digital economy also through the ecosystem. So we are closing the loop, and we're going to be expecting growth and sustainable growth for the future with One Hallway. Renata Fonseca Cabral Sturani: Super good. Just a quick follow-up. For us, it's clear the potential for top line growth for 2026. In terms of margins, do you think that in 2026, that will be also accretive or that will take some time? Paulo Garcia: I think do you refer to the margins here in e-commerce in the marketplace, Renata? Renata Fonseca Cabral Sturani: Yes. Paulo Garcia: So I've always alluded to the fact you guys know if that if you think about our on-demand business, it's a profitable business already. We always said that our extended assortment business of 1P and 3P in a different stage, it's pretty much a business of critical mass. So critical mass here is important. So we are in that journey. So we actually see a lot of value creation can be created in the future as we go through that journey in improving the volumes that we pass through the 1P and in particular, marketplace. Operator: Our next question is from Mr. Andrew Ruben from Morgan Stanley. Andrew Ruben: Just one quick follow-up on the e-commerce side. For Marketplace, we saw [ celebrace ] grew 30%, but there was a 30% decrease in SKUs. So just trying to understand the strategy and what drove the divergence. And then just a second item, there was a quick mention of tariffs within the release or the conference call. So I just wanted to clarify, is that more of a general statement on macro uncertainty? Or are there specific ways that the tariff backdrop has been impacting business. Paulo Garcia: Yes. If I can just start on the second one. I think it's more just a general statement, Andrew, the way you put it. I think we're just seeing that was a little bit the uncertainty around tariffs, but also a little bit the uncertainty around the TMEC agreement. What it does at the moment is just it's hampering a little bit the investment in Mexico or the big investments. So that ultimately, hampering the investment leads to less job creation that you used to do it in the past. I think that creates a bit of uncertainty and therefore, impacts the consumption. I think that's the statement. I think if you think about tariffs as such and direct impact to our business, we're not seeing necessarily a meaningful impact of tariffs in our business. To the first question. Javier Andrade: Yes. And basically, to your question about SKUs and sellers, it was temporary because of the transition we were doing in technology, but we expect to recover very fast in terms of SKUs and sellers. And we're working closely with the U.S. to expedite this. So we know that it's important for us to have the right value proposition in every category. So it was just temporary. Operator: Our next question is from Mr. Froylan Mendez from JPMorgan. Fernando Froylan Mendez Solther: I want to ask -- I'm sorry, if they already asked, I couldn't hear most of the call, but on working capital, we saw an improvement in this specific quarter. Can you give us some color on what changed? And what are your expectations in the mid and long term on your working capital cycle. I guess, it's for an additional improvement, but more color on how sustainable is this quarterly improvement? If it had more to do with your pricing strategy or just the temporary and the type of SKUs that were sold during the quarter, what are different from the previous ones? More color on that would be highly appreciated. Paulo Garcia: Thank you for the question. So we've alluded in the past quarters that we were actually attacking our working capital. We are not necessarily entirely happy with the performance that we had on inventory days. You have that quarter 2 was already a better performance than the previous quarters. And this quarter, in particular, a reduction -- a significant reduction 3.5 days versus where we were a year ago. I think you can expect us continue to tackle inventory, continue to improve. I think ultimately, if we have less inventory in the store, it leads to more productivity. If it leads to more productivity, leads to money that we have at hand to be able to invest behind prices and therefore, put the spinning wheel to work and for to get more growth, you should expect that to continue to happen consistently in the coming months and not just necessarily a one-off. You do also -- there were concerns also in the past, Froylan, about our DPO and the fact that was increasing. That has to do, of course, we had to reduce purchases in the past to address inventory, now gets to a more stable level. If you remember, I said that in the prior quarter, and I think that's what you can expect going forward. Fernando Froylan Mendez Solther: Excellent. And if I may, just on your comments on what to expect into the fourth quarter, you said that between the second and third quarter, does that mean you are reiterating your top line guidance into the year? And when you say that SG&A should grow in the same level as top line. Should, we not expect then EBITDA margin expansion, but let's say, a stable gross margin for this year? Paulo Garcia: I said 3 things for the quarter, Froylan, and just to allude to the things we said. One, we did said one thing on guidance for the Q4 on growth indeed, and we expect growth to be along the lines of what we saw in Q2 and Q3. And if that's true, then you can do the math versus what we previously had said overall for the full year. I think we are focusing on what we can control and what we have the line of sight. We have line of sight. The good -- as Javier was alluding to for the peak season, and we expect along the lines of what we did in Q2 and Q3. On SG&A, as you've seen in this quarter, we grew only around 5%. As you know, there will be phasing. Sometimes you invest more, sometimes you invest less, so you create more efficiencies, but we stick to our objective to continue delivering the high single-digit growth. And then -- and when you think more in the mid and long term, we definitely want to see SG&A more in line with sales in order to deliver the near-term stabilization of the margins that we promised. That's the second. And the third one that we said for the -- I said it for this particular quarter, Q4, is that we expect a sequential improvement in terms of profit delivery. We always said that Q3 was going to be better than H1, and it was. And we expect a Q4 that will be better than Q3. Operator: Our next question is from Mr. Bob Ford from Bank of America. Robert Ford: Congratulations on the new role, Cristian. Just curious how you're thinking about evolving trends in small box retail in Mexico, maybe historically why Walmex has not really leaned into proximity in the past and how we should think about Express or other proximity formats moving forward? And then also in the footnotes of the results for the last couple of quarters, there's been a note about transfer pricing and tax risk. And I was just hoping you could expand upon that, particularly in the context of this little hiccup on tax expense. Cristian Barrientos: Yes. So first, if you -- on the proximity. Paulo Garcia: Yes. So let me start with the second question, and Cristian can talk a little bit more about how he thinks about proximity risks, and I can build on that. So Bob, so this is what we saw in the quarter. It's just a one-off that we saw it. It doesn't relate with the footnotes that you're alluding to in terms of the transfer price risk or any anything that will be linked to that, Bob. Cristian Barrientos: And in terms of proximity, if I may answer your question, we changed brands in 3 or 4 years ago. And we -- personally, I truly believe that we have a huge opportunity to continue to expand our business in -- Supermarket business. We have a ton of experience here in Central America. We have more than 100 stores here. We have almost 100 stores in Mexico also, but with a different size. So in the middle class that is very big in Mexico, we are seeing a lot of white spaces. That is why we changed the brand. We have a strong -- or, let me say, a better presence in Mexico City, but we have a huge opportunity to grow this supermarket business in regions in Mexico. We recently opened 2 stores with very good performance, and we have planned to continue to open this one because we have seen a lot of white spaces in the region. So we're very confident with these kind of stores or business because of the experience that we have in Walmart. Operator: That was the last question. I will now hand over to Mr. Salvador Villasenor for final comments. Salvador Villasenor Barragan: Thank you very much. We would just like to thank everyone for joining us once again and looking forward for our fourth quarter results and talking to you soon. Operator: Walmex would like to thank you for participating in today's video conference. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Gildan Activewear's 2025 Q3 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jessy Hayem, Senior Vice President, Head of Investor Relations and Global Communications. Please go ahead. Jessy Hayem: Thank you, Jeannie. Good morning, everyone, and thank you for joining us. Earlier today, we issued a press release announcing our results for the third quarter while updating our full year guidance for 2025. We also issued our interim shareholder report containing management's discussion and analysis and consolidated financial statements. These documents are expected to be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission today, and they'll also be available on our corporate website. Now joining me on the call today are Glenn Chamandy, our President and CEO; Luca Barile, Executive Vice President, CFO; and Chuck Ward, Executive Vice President, Chief Operating Officer. This morning, we'll take you through the results for the quarter, and then a question-and-answer session will follow. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements, which involve unknown and known risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the U.S. Securities and Exchange Commission, and Canadian securities regulatory authorities. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS measures are provided in today's earnings release as well as our MD&A. And now I'll turn it over to Glenn. Glenn Chamandy: Thank you, Jessy, and good morning, everyone. We're pleased with our third quarter results as we continue to drive profitable growth, especially in a macroeconomic backdrop, which remains fluid. We saw strong net sales growth of 5.4% in Activewear and adjusted operating margins of 23.2%, which allowed us to deliver record adjusted diluted EPS of $1 this quarter, an increase of 17.6% versus the same period last year. These are record-setting third quarter results, which once again showcased the effectiveness of our Gildan sustainable growth strategy in driving strong financial performance. Our sales in the distributor channel remain healthy, and we're seeing sustained momentum in our national account customers, which is supported by strong overall competitive positioning. We continue to drive growth in key categories. We're very pleased that our innovation pipeline continues to create excitement, and we have now introduced new brand offerings such as ALLPRO and Champion. Furthermore, our Comfort Colors brand continues to perform very well. This year, the brand is actually celebrating its 50th anniversary. A great milestone for Comfort Colors whose pigment dyed shirts are redefining comfort and style. They're crafted from 100% rings spun cotton, grown and harvested in the U.S. using a pigment pure technology, which helps to reduce water and energy and shortens processing time. So as we turn the page to another successful quarter of execution, we are narrowing our adjusted diluted EPS guidance to a range of $3.45 to $3.51, and also updating our full year adjusted operating margins, CapEx, free cash flow guidance. Luca will detail this in a moment. We believe that this is an exciting pivotal moment for Gildan, and we're enthusiastic about the next phase of our growth journey. We're delivering constant execution of our strategic priorities. We're capitalizing on the largest innovation pipeline in the company's history. And now we're focused on planning the integration of the proposed acquisition of HanesBrands, which will broaden our portfolio of retail presence as we look to drive meaningful run rate synergies of at least $200 million by leveraging our best-in-class large-scale, low-cost vertically integrated manufacturing network. We continue to expect the transaction to close late this year or early 2026. As you can expect, we have put in place an integration team that have begun planning for this combination. At this point, there is no further commentary that we'll be positioned to provide for the proposed transaction. In conclusion, we continue to execute from a position of strength. We have a solid foundation. We're focusing on our GSG strategy with our strong competitive positioning, all of which is putting us in a great position to execute on the eventual combination with HanesBrands and ultimately drive long-term shareholder value. I look forward to answering your questions after our formal remarks, and now I'll turn it over to Luca for a financial review. Luca Barile: Thank you, Glenn. Good morning, everyone, and thank you for joining us today to discuss our third quarter results. Let me start with the specifics of the quarter, then turn to our 2025 outlook and guidance. First, the quarterly results. We reported third quarter sales of $911 million, up 2.2% year-over-year, in line with previously provided guidance of low single-digit growth. The 5.4% increase in Activewear sales was driven by favorable product mix and higher net prices. As Glenn mentioned, we continue to drive growth in key categories and are experiencing robust demand for Comfort Colors while supplementing our portfolio with the addition of ALLPRO and Champion. Sales to North American distributors were solid, complemented by sustained momentum at our national account customers, driven by our strong overall competitive positioning. Sales in the hosiery and underwear category were down 22% versus last year, which reflect, as expected, a timing shift of shipments into the fourth quarter and to a lesser extent, unfavorable mix as the category experienced continued broader market weakness during the quarter. Turning to international markets. Sales were down by $4 million or down 6.1% year-over-year, primarily reflecting ongoing demand softness across markets. We don't typically spend time on our year-to-date results, but just a brief comment that on a year-to-date basis, our consolidated revenue growth is at mid-single digits, excluding the impact of the exit of the Under Armour business in 2024, setting us up well for the full year. Shifting to margins for the quarter. Our gross margin was 33.7%, a 250 basis point improvement over the prior year, primarily due to lower manufacturing costs and favorable pricing, which reflect price increases implemented to offset the initial impact from tariffs. To a lesser extent, we also benefited from lower raw material costs. SG&A expenses were $95 million versus $84 million last year. Excluding charges related to the proxy contest and leadership changes and related matters, which were almost entirely incurred in the prior year, adjusted SG&A were still $95 million or 10.4% of sales compared to $78 million or 8.8% of sales in the same quarter last year, reflecting higher variable compensation and IT-related general and administrative expenses. As we bring these elements together and adjusting for restructuring and acquisition-related costs primarily related to the proposed HanesBrands acquisition as well as the costs related to the proxy contest and leadership changes and related matters, which were almost all entirely incurred in the prior year. We generated adjusted operating income of $212 million, up $12 million, representing a record 23.2% of net sales. This reflects an 80 basis point improvement year-over-year, which came in ahead of guidance we provided. Net financial expenses of $44 million were up $13 million over the prior year due primarily to fees related to the committed financing that we obtained for the proposed HanesBrands acquisition and due to generally higher borrowing levels. Furthermore, in connection with the proposed acquisition, as you may have seen, we announced on September 23, a private placement offering of USD 1.2 billion aggregate principal amount of senior unsecured notes across 2 series. The proceeds from this offering will be used to fund the proposed acquisition of HanesBrands, refinance its debt and cover related transaction costs. Taking into account all these factors and adjusting for restructuring and other costs and the financing fees in connection with the proposed HanesBrands acquisition, we generated record adjusted diluted EPS of $1, up 17.6% compared to $0.85 in the comparable period. Now turning to cash flow and balance sheet items for the first 9 months of 2025. Operating cash flow was $270 million compared to $291 million last year, primarily reflecting higher working capital investments. After accounting for CapEx of $82 million, we generated approximately $189 million in free cash flow in the first 9 months of 2025, of which $200 million was generated in the third quarter. During the first 9 months of the year, we returned $286 million in capital to shareholders, including $102 million in dividends and repurchased about 3.8 million shares under our NCIB program. Finally, we ended this quarter with net debt of about $1.7 billion and at a leverage ratio of 2x net debt to trailing 12 months adjusted EBITDA, at the midpoint of our targeted range of 1.5x to 2.5x. Now turning to our strategy and outlook. As Glenn highlighted earlier, we are pleased with the team's continued execution as we approach the end of a very solid year. We continue to tap into the largest innovation pipeline in the company's history with more product launches to come in 2025 and into 2026. Now turning to the outlook. We remain focused on operational agility and committed to executing on our GSG strategy in order to drive strong financial performance as we navigate a fluid macroeconomic environment. We are updating our 2025 guidance as follows and expect revenue growth for the full year to be up mid-single digits, in line with previous guidance. Full year adjusted operating margin to increase approximately 70 basis points compared to previous guidance of up approximately 50 basis points. Our CapEx to come in at approximately 4% of sales compared to previous guidance of 5% of sales. Adjusted diluted EPS to be in the range of $3.45 to $3.51, which is up approximately 15% and 17% year-over-year compared to our previous guidance of $3.40 to $3.56; and free cash flow to now approximately $400 million compared to our previous guidance of above $450 million. The assumptions underpinning this outlook are the following: Firstly, we continue to reflect the impact of tariffs currently in place in conjunction with mitigation initiatives available to us, including pricing and our ability to leverage our flexible business model as a low-cost, vertically integrated manufacturer. The higher tariffs are also embedded in our inventory costs. Furthermore, the outlook continues to reflect growth in key product categories, driven by recently introduced innovation, the favorable impact from new program launches and market share gains and the various incentives from jurisdictions where we operate. We've assumed no share repurchases for the remainder of 2025, as indicated at the time of the announcement of the proposed HanesBrands acquisition. We've taken into account acquisition-related costs incurred thus far, and we anticipate that our adjusted effective tax rate for 2025 will remain at a similar level to what we saw for the full year in 2024. Finally, we've assumed no meaningful deterioration from the current market conditions, including the pricing and inflationary environment and the absence of a significant shift in labor conditions or the competitive environment. So in summary, we are pleased with the quarter, and we remain confident in our ability to deliver continued strong financial performance as we look ahead and get ready to welcome HanesBrands. Thank you. And now I'll turn it over to Jessy. Jessy Hayem: Thank you, Luca. This concludes our prepared remarks, and now we'll begin taking your questions. [Operator Instructions] Jeannie, can you please begin the Q&A session? Operator: Thank you. [Operator Instructions] And your first question comes from Paul Lejuez with Citigroup. Paul Lejuez: A couple of questions. One, can you just talk a little bit more about the weakness in the underwear business, where you think that market share might be going? Maybe you can quantify how much was the shift versus overall market weakness? And what's your view on when that business stabilizes? And then second, just curious what you're seeing at point of sale overall. Maybe if you could talk to pockets of strength and weakness at point of sale. Chuck Ward: Paul, it's Chuck. Thank you for the questions. A couple of quick things, I guess, first on the underwear and innerwear business. What we're seeing, the innerwear business was impacted by a few things for the quarter. There continues to be some delays in some floor sets by a large retailer. So we're continuing to face that a bit. Also, some of it is retailers managing inventory investments and balances due to the impacts if you think of what they now have impacts of tariffs in their inventory and some cautiousness overall, we did see during Q3, the retailers starting to manage inventory a little tighter. And also, we had talked previously about some ongoing product and program resets that are happening within the space with some customers. So all those things kind of drove the quarter results that you see here. I think as we think about it going forward, we expect to see a return in the innerwear of growth in Q4. So we expect Q4 to be back to a growth perspective. Overall, on POS and what we're seeing in the market, I mean, what we're seeing is a stable market. We have seen it stabilized over the year. We think that we'll continue to see that through Q4 as well. And so -- and I think if you think about categories and how they're performing, I mean, we're seeing strong performance, obviously, with our Comfort Colors brand. We're continuing to see very large growth and net fleece has performed well. Glenn mentioned in his comments some about some new Activewear programs and national account growth that we're seeing as well. So we're capitalizing on those things as we go. And then obviously, we feel good about our brand portfolio and where we are to address the market going forward. Paul Lejuez: When you say stable market, are you saying stable to last year, like POS is flat to last year or stable at a low single-digit or mid-single-digit rate? Chuck Ward: Yes. More in line with Q2, what we were talking about in Q2, the market has kind of been stable at that same rate going forward. Operator: Your next question comes from the line of Chris Li with Desjardins. Christopher Li: Just maybe a first question on your guidance update. On your free cash flow guidance, you are guiding a little bit lower despite lower CapEx. It looks like it's mostly coming from higher working capital investment. Can you please elaborate a little bit of what's driving the change in the guidance for this year? Luca Barile: Yes, sure. Thank you, Chris, for your question. So look, from a free cash flow perspective, we're actually -- so a few things. One, very good free cash flow performance in the quarter. We generated $200 million, which is right in line with our own internal expectations. And the revision to the guidance from a free cash flow perspective, there's a few things that drive that. One is the, just taking into account the transaction costs incurred to date with the proposed HanesBrands acquisition. The second is there's a bit of timing with respect to working capital. I'd reiterate that our view on working capital as a percentage of sales is really to be around 37% to 38%. We'll get there as we move into 2026. And right now, there's also some tariff costs that are incurred in our inventory. So that's really the main drivers. From a cash flow generation perspective that we're still generating healthy elements of free cash flow. That's really driven by the fact that we have really strong margin performance coming through, and that's expected to continue into next year. Christopher Li: Great. Okay. That's very helpful. And then maybe just another one on the guidance update. The operating margin expected to increase by 70 basis points this year. As you look out into next year, what are some of the key puts and takes? And maybe directionally speaking, do you think 70 basis point improvement again next year is achievable? Luca Barile: Well, starting with the guidance for this year, the one thing that we're very pleased with, and that is -- it starts with the performance that we've seen sort of quarter-over-quarter and specifically in the third quarter is strong margin performance. And the strong margin performance comes from -- is twofold. One, from strong gross margin performance, but also really good cost control around SG&A. And the reason why we've upped the guidance there in terms of up to 70 basis points improvement year-over-year versus the 50 that we previously guided to is because the elements that we control that have been driving the margin expansion are things that are foundational to the way the company is running today and will continue to run. Those things are really embedded in the ramp-up of Bangladesh, right? Our investment in Bangladesh and the cost differential that that's bringing us is contributing to that margin. That's expected to continue. The investments we made into our yarn operations, optimization of our yarn footprint and those costs are coming through. Those will continue. The optimization of our Central American capacity and quite frankly, overall, our network overall, that's coming through. So there are elements that when you take a look at the gross margin in the third quarter, we do have some impact from favorable pricing. There's a little bit of timing versus Q4. But the way to think about the margin, it's strong and it's sustained, and it's driven by things that we control and that are foundational to the business model. So that's what I would -- how I would think about heading into next year. Operator: Your next question comes from the line of Jay Sole with UBS. Jay Sole: Two-part question for me. First is just on the fleece business. Glenn, if you can just talk about how the fleece business trended maybe in September, if the weather is a little bit warmer and maybe what you've seen in October as the weather has gotten a little cooler and just how inventory in that business is looking overall and how demand is looking? And then secondly, with all the tariffs now, it's been a couple of quarters since April 2. What kind of conversations are you having with companies? What kind of opportunity do you see maybe to capture some new business from companies maybe looking to move some of their production out of Asia, maybe to your factories with your company, whether it's in Bangladesh or Central America? Glenn Chamandy: Okay. Well, I would say, look, fleece is still performing well for us. We're in a good position with fleece this year. It's really early. I mean the season really only starts kicking off, like we ship a lot of our fleece in the end of Q2, Q3 basically. And then the season really sell-through period is -- starts now and moves into the fall and winter really. So I think we're -- it's early days in terms of weather. But so far, the sales are meeting our expectations, I would say, in terms of fleece so far for this year. Regarding tariffs, I would say to you that, look, there's a lot of uncertainty in the market today. And I think that we're seeing a lot of people looking to reorient their supply chain. But at the same time, there's a little bit of I would say, hesitation because people don't understand are tariffs off, the tariffs are on. They're making a deal, they're not making a deal. They're going to court, they're not going to court. So shifting your supply chain is never something you want to do in a knee-jerk type of reaction. So -- and even ourselves, to be honest with you, there's ways for us in our own manufacturing to further optimize, I would say, our supply chain relative to the way we're set up, but we're sort of waiting to see how all of these things materialize. So overall, I would say that there's definitely going to be a rethink in terms of how people are trying to reorient into their supply chain. And there's also going to be specific areas where I think the opportunity is going to allow us to look at other product categories. So for example, if you look at the 100% polyester product category, that's an area where the tariffs are the highest and duties are the highest. So -- and that's an area that we have -- our Rio Nance 6 facility, for example, has got a lot of capabilities of producing polyester. So -- and there's been trade legislation changes in that category. So we think that, that's something that we can capitalize on, and that's probably one of the areas where we have actually the lowest market penetration. So we're working quickly now on building product innovation, things that we're doing to look at that category. And one of our brands, which is ALLPRO, I mean it's really focusing on all polyester type products and as well as a lot of the big brands that are looking maybe potentially nearshore, those are -- that's a category which is really important to them. So overall, look, we think there's going to be an opportunity. I think it still has to come to fruition, I would say, as we move into the future. But I think we're well positioned with our manufacturing footprint to take advantage of any type of opportunity. Operator: Your next question comes from the line of Vishal Shreedhar with National Bank. Vishal Shreedhar: Luca, when you mentioned that the market was stable, my understanding was that the market was -- I'm talking about the wholesale market was under pressure, at least for the last several quarters. So were you talking on a volume basis or on a sales basis? And are you including national accounts in that as well when you're saying it's stable? Glenn Chamandy: When we look at the market, we look at the whole market in styrene, and I would say to you that the Q3 was similar to Q2. And what we said in Q2, it was down low single digits basically. So we're seeing the same type of comps as we move into Q3. So it hasn't really improved and hasn't gotten any worse. So it's more stable relative to Q2, but still negative year-over-year. Obviously, we're doing well in the market because of our soft cotton technology, our Comfort Colors, our AA basically is continuing to grow, our launch of our ALLPRO and Champion, and remember that 3/4 of our sales growth this year in 2025 was projected coming from new programs. Our fleece is in retail, a big major program we had is doing very well. So all those things are driving the sales growth for us to have our mid-single-digit growth for the full year, which we're on track for. But I would say that the market, it was down probably low to mid in Q1. We said low in Q2, and it's probably in the same level Q3, and we're expecting that type of scenario in Q4 in our assumption. Vishal Shreedhar: Okay. And that's on a sales basis, right, not on a unit basis? Glenn Chamandy: Yes. Yes. Vishal Shreedhar: Okay. Okay. And with respect to the gross margin, and I know you chatted to this a little bit earlier, but it improved quite a bit sequentially. Is that mainly related to the manufacturing initiatives? Or was there pricing in there as well? Luca Barile: Yes, Vishal. So again, the gross margin was strong in the quarter. It's a combination of things. But really what's driving the foundation of the margin at the end of the day is the contribution of the lower manufacturing costs. There is some impact from pricing, but really the lower manufacturing cost is what's foundational. And that is what's going to carry forward not only into the fourth quarter, but that's foundational to the business as we move into next year. Glenn Chamandy: Yes. And then, maybe just add one thing to that, I would say is that, look at the fundamentals of our strategy of optimizing our manufacturing and scaling and generating scale in our operations is going to continue as we move into 2026 because we've expanded in Central America, like we said this year, which we've added another 10% capacity in our facilities in our 4 walls at a limited CapEx and the CapEx is coming even below our expectations. So as we leverage that CapEx as we move into 2026, obviously, that's going to continue to help us with additional cost reductions and margin expansion as we continue to optimize our facilities. And we're actually in the process now of looking to expand within our Bangladesh facility within the 4 walls of that as well. And we believe that we actually can expand that facility by probably another 50% as we look at the 4 walls of that building by utilizing some space that we have within our park and allowing us to drive additional capacity. So these are all the things that's built into Gildan DNA is looking at ways really to optimize our manufacturing, particularly as we look at our overall planning as we move into 2026 and bringing on Hanes and as far as we continue to plan our integration strategy. So scale is going to be a key driver of continued margin expansion, and we think we're well positioned to continue to grow our margins as we move forward and lower our costs. Operator: Your next question comes from the line of Brian Morrison with TD Cowen. Brian Morrison: Glenn, I wanted to follow up with that what you just talked about. So how much capacity you talked about the increase in Bangladesh and in Honduras throughput. How much available capacity in dollars is within your existing infrastructure? It sounds like there's another $200 million to $250 million in Bangladesh 1, and what is your view for a go-ahead for a second facility at Bangladesh? I know you already have some of the pieces already in place there. Glenn Chamandy: Well, I think -- 2 things. One, look, we'll articulate some of our plans as we move into Q1 and report because we'll have good visibility on our total integration plan with HBI. So I think that will sort of give you a little bit of context. But the increased capacity that we can get out of Bangladesh right now doesn't preclude us from putting up the second facility. So we still have that optionality. What we're going to do is we have space available to us in Bangladesh, where we can add additional knitting equipment, and we're putting in some more dyeing and finishing equipment in the facility and the existing facility will allow us to get the first level of expansion. And then we'll also, obviously, as we move forward, evaluate Phase 2. Phase 2 would be a much bigger, longer project. It's going to take 12 to 18 months to develop. So that's something that will be down the road. But trying to get incremental capacity and also looking to optimize our cost structure and reduce the amount of capital we've got to spend. That's our first priority as we bring on HBI. So with all of that and looking at the ecosystem of what they're doing, the products, the mix and all the different things, we're building, I think, a cohesive integration plan that ultimately is going to continue to lower our costs and bring us scale, which is what we called out before. But more importantly, we think that there's a lot of room in terms of the margin improvement and operating margin improvement on the other side because we don't -- we believe that Hanes should be operating in the same type of operating margins as Gildan does today. So that's our long-term goal, let's say, for example, as we drive into the future. So everything being equal, I think we're in a very good position. We're very comfortable with our positioning, and we're going to continue to leverage our best-in-class vertically integrated large-scale manufacturing as we build our plans into '26, '27 and '28. Brian Morrison: And Glenn, to follow up, how long would it take you to expand Bangladesh 1? And have tariffs on Bangladesh made you alter any of your logistics or supply chain in order to optimize your cost structure? Glenn Chamandy: I would say, look at the -- even with tariffs, Bangladesh is very competitive. And what we said before is that it had a 25% cost advantage relative to what we're doing in Central America and the products that we're producing. So the tariff impact with U.S. cotton obviously is a lot lower than that. And then as we continue to scale the thing up and lower our cost, therefore, they will be offsetting some of that tariff cost even further. So that's all part of the strategy, how we're going to continue to drive efficiencies in our system. So look, we think that we're in a good place. We're going to continue -- we feel comfortable, and you can see it's flowing through in our operating margin expansion this year. And all we're saying to you is that, look, we've got further room to continue to expand our manufacturing footprint, reduce our costs and make us more competitive and continue to innovate our products. And don't forget, one of the things that you could take into account is that even though that we've seen margin expansion, don't preclude us that the fact that we've reinvested significantly in our product and innovation because the things that we're doing in our soft cotton technology, for example, have -- we're putting more value into these garments, so more cost in terms of a like-for-like type thing. But the fact is, is because we're optimizing, we're offsetting those costs with lower manufacturing costs, which is improving our operating margin. So it's a win-win scenario in our ecosystem. And by bringing in, I think, as we move forward into '26 and taking in the big volume that we have from Hanes, that's only going to continue to allow us to scale up even further, and we're really excited about the opportunity. Operator: Your next question comes from the line of Stephen MacLeod with BMO Capital Markets. Stephen MacLeod: Just a couple of questions. Just looking at the imprintables channel in Q3, and you sort of called it out as being similar to Q2. Can you talk a little bit about sort of what you're seeing within each segment of that market, fashion basics, basics and fleece? Glenn Chamandy: Well, I would say to you that, look, our soft cotton technology continues to drive our basic strategy. Comfort Colors is doing really well again, similar to last year. AA is actually coming back. We're seeing good growth in AA. And we have our new brands, ALLPRO, Champion and all the new programs we have. So it's -- we're doing well in a bad market, I mean that's the truth of the situation. The market conditions, like we said, are down low single digits, and we're doing well. So I think that we're well positioned and good -- hopefully, we'll see a big improvement in market conditions in 2026. And with the momentum we have, I think we'll be -- we'll see a good strong 2026. Stephen MacLeod: Okay. That's great. And then just turning to the cotton cost environment. Obviously, it's been very benign over the last sort of year or so. And I'm just curious, how much does that play into your gross margin outlook? And do you see incremental upside from this sort of more benign cotton cost environment? Glenn Chamandy: No, I would say that, look, it's sort of going sideways right now. So there'll be no impact one way or the other on margins. Luca Barile: Yes. And I would say -- just to complement that, I would say that, look, if you look at the -- starting with the Q3, the strong margin performance, it really was driven by lower manufacturing costs. There was a little bit of lower raw material costs that did come through. And we do have visibility of that as we move forward. But the real driver of the sustained margin moving forward is from the manufacturing cost. Operator: Your next question comes from the line of Martin Landry with Stifel. Martin Landry: Glenn, I want to come back on the market dynamic. You're saying that the market has been weak in Q1, Q2 and Q3, and you also expect the market to be down in Q4. I'm just trying to understand why is the importable market down? The economy is doing well. GDP is growing nicely. So what explains the fact that the industry is in decline? Glenn Chamandy: Well, I would say that there's different things overall when we look at the market. Our GLB customers are basically -- you can follow them. I mean, they're not performing as they were in previous years. So that's one. We're seeing large retailers managing inventory a little bit on maybe the national account side. You have corporate promotional products, companies worried about tariffs and spending money basically in -- which is affecting potentially some of the printwear market. The travel, the tourism sort of it, I think that part is still going good. People are still moving around and spending. So there's different pockets of things, I would say, that are affecting the market. And it's hard to say really because there's so many different avenues of market growth, let's say, for example, or market consumption really at the end of the day. So we really don't have a total handle on it, to be perfectly honest with you. But we just -- we get the results, obviously, and it's a little bit here, a little bit there, and it all adds up to -- maybe, Chuck, you want to add into that? Chuck Ward: Yes. No, I think, Martin, again, I think to be clear, that's the market overall. As Glenn said, it's all the -- it's not just in imprintables. It's across the whole market we're talking about the way it looks at that, and we talked about inventory and retailers and so forth. I mean when you're talking about the imprintables market, Martin, we feel great about our positioning. When we look at our brand portfolio, what we have and the ability to address the market. Glenn's talked about our soft cotton technology, things we've done there that's really driving our basics category. Plasma print, which we've talked about, which has been testing with DTG printers is going great. It's going to be launched in Q4. It looks good. We're expanding the Gildan line and with the new Hammer Max heavyweight that kind of takes on the workwear, streetwear side. He talked about Comfort Colors, it's our fastest-growing brand. We've doubled our manufacturing capacity with that. And we're seeing a lot of organic marketing coming out of that, like CNBC had an article recently, New York Times had one. GQ had something. We're just getting a lot of organic marketing through that brand. And we're capitalizing on that brand strength and going to expand it into premium bags and hats. We're doing a women's fleece collection. So Glenn talked about AA. And really, when you think about it, Martin, one of the things if you look back at our investor presentations and what's on our website, we had said that we really participated in the core of the imprintables market, which is about 60% of that market. And we've said we really don't play in the 40% overall. But now we're looking -- for example, I just talked about Comfort Colors going into hats and bags. We hadn't historically played in hats, outerwear, teamwear, bags, accessories. And we're working to now try to reach into that 40%. We're investing in innovation in our polyester fibers and the imprintability of poly and poly yarns to maybe benefit going forward, as Glenn was talking about bringing in poly product. And so that brings me to ALLPRO, where that's hitting new white space categories with performance and corporate ID, uniforming markets, outerwear, some outerwear jackets in that. Champion, obviously, going off the heritage of the Champion brand with authentic sports team colors or fanwear, teamwear, coaches jacket, shorts, different things. So I would say we feel very good about our ability to address the imprintables market and as we go forward and again, to play in areas maybe we hadn't played in the past. Glenn Chamandy: So just to summarize that despite there could be some negativity in the market, we're well positioned for growth regardless. And despite the market being down, we're still seeing mid-single-digit growth from all these factors that Chuck just mentioned. And hopefully, as we move into 2026, we'll see some positive momentum in the market, which will even accelerate our growth further. Martin Landry: Okay. That's great color. And just to be clear, you said, Chuck, that you're entering into hats. Are you entering into other categories like bags and workwear or just hats? Chuck Ward: No, no, hats. We're doing hats. We're going to do some bags. Things like our Hammer Max will probably play a little bit in workwear, as I mentioned. We're going to do some outerwear jackets things in ALLPRO, and Champion has coaches jackets. So yes, we're playing in areas that if you go back to that investor presentation in areas where we said we didn't play in the past, we're reaching into. Operator: Your next question comes from the line of Paul Kearney with Barclays. Paul Kearney: First one is just looking at inventories, can you comment on levels in the quarter? How much of the increase was from the higher tariff costs? And where do you expect to end Q4? And then I have a quick follow-up. Luca Barile: Yes. Thanks for your question. So we're comfortable with where inventories are. The inventory levels are slightly higher, and there's a few reasons for that. One, yes, there are some costs related to tariffs that are in our inventory, but it's better -- it's more that we're really well positioned from an in-stock level. And if you remember that when we have really good in-stocks, that drives really good availability, and that's what's really important from the market's perspective of our customers. So as I did comment earlier, look, we've got a strong focus on working capital, a strong focus on generating cash flow. Our target is to bring that working capital down towards the 37%, 38% as we're in 2026. We'll be slightly higher than that as we end Q4, but we're well positioned, and we're in control of our working capital. So it's -- I would think of it as good inventory. Paul Kearney: Okay. And that was great color on the innovation and the growth outlook for the Activewear for next year. I guess my follow-up is I'm curious, after the HanesBrands acquisition, is there anything that we should be considering for the organic outlook for the Gildan business as you kind of roll in those brands and those customers? How should we think about the hosiery and underwear part of the business or any kind of shifts as you combine the businesses? Luca Barile: Well, I think what's really important is if we take this kind of step by step is we look at what we're putting out in terms of guidance for this year, right? So when we take a look at the top line, we're reconfirming our guidance there on the top line of revenue up mid-single digit, right? We've seen this year a very strong performance, which is really fueling that top line growth. So revenue up mid-single digits, right? Then when we take a look at the margin profile, we're calling up our operating margin guidance to 70 basis points year-over-year. Just as a reminder, 2024 was at 21.3%. And then this all feeds into an adjusted EPS guidance range that we've tightened right at $3.45 to $3.51, which is up 15% to 17%. As you think of the go forward, right, in terms of the proposed acquisition, what we've gone out to the market with, right, is a view that net sales are going to accrete over the next 3 years at a rate of 3% to 5% CAGR, right? So that's the way you have to think of the top line. In terms of how much we're going to continue to invest in the business is 3% to 4% of that top line into CapEx, which is going to be really important, we're going to be doing this within a leverage framework of always with our target between 1.5x to 2.5x. It's really important to us to maintain that. If you notice where we are right now, we're actually at the midpoint of our range going into the closing of the transaction. And then from an EPS perspective, really jumping up to the low 20% range off the midpoint of what we're guiding to in terms of 2025. So that's the profile of how you have to think about the coming together of the 2 entities. And then the first year, what we've articulated as well is that the EPS will be meaningfully higher than that average of the 20% over the next 3 years. So hopefully, that's helpful, but that's the way you should be thinking about the coming together of the 2 entities. Operator: Your next question comes from the line of Luke Hannan with Canaccord. Luke Hannan: Thanks for the commentary thus far. I wanted to follow up on the topic of there being delays in floor sets by large retailers. I know it was mentioned in the past that you have a large fleece program that's either already in place with your large retailer customers or set to. Has the timing of that been impacted at all by the fact that retailers are being a little bit more diligent in managing inventory? Chuck Ward: No, Luke, that has set and on the floor, it is doing well. It's performing well. Early reads on it are very good. They definitely wouldn't want to miss that fleece season. So, no, it's been placed in on the floor. It was more in the innerwear categories. Luca Barile: And I would just add -- Luke, I would just add that, again, from a growth perspective this year, 75% of our growth is coming from new programs. That includes the T-shirt and fleece, meaningful programs within our national accounts. And so that plays into that piece right there. Luke Hannan: And then for my follow-up, I wanted to ask on that same sort of topic or dynamic of customers being a little bit more diligent in managing inventory, it sounds like distributors overall seem to be okay with their inventory balances. What's your view on why that sort of dynamic wouldn't impact distributors, but retailers seem to be a little bit more impacted? Chuck Ward: Well, I think when you look at it, again, distributors have always known that availability is their #1 purchase criteria. So they have to have the product available. And so -- and they found as they do that, they have a better chance of servicing the market. So there's been an appetite to make sure they're well balanced and well stocked to service it. And again, I think when you look at the retailers, I think they're a lot wider in what they're dealing with. It's not just innerwear that we talked about or Activewear we talked about, it could be everything else in the store and fashion goods, electronics, everything across the store that they're running into, and they're really uncertain about tariffs and so forth going forward. So I think they look at it probably a little differently than the distributors have to look at their supply chains. Operator: Your next question comes from the line of John Zamparo with Scotiabank. John Zamparo: I wanted to come back to the free cash flow guide, but related to the CapEx. Apologies if I missed it, what is the nature of that update? Are you deferring projects? Or are some areas of spending no longer as compelling as they were prior? And if it's the former, is that based on the supply chain uncertainty from some customers that you referenced? Luca Barile: No. So 2 things. Starting with the CapEx guide, right? So going from 5% to 4% of net sales, I mean, still that's a healthy number, number one. One thing that we do not move off of, I think it's important to understand is how we reinvest in the maintenance of our assets. So always think about almost around 2/3 of what we spend in CapEx goes through maintenance and reinvesting into our assets to make sure that we maintain our competitive advantage. That doesn't move. And there is a little bit of shift in terms of timing of projects, which is effectively the difference between the 5% and the 4%. So that's the way I would think of the CapEx. And again, you touched upon free cash flow. I think, again, free cash flow is very important to us, and we're comfortable in terms of our free cash flow generation. The difference in the guide, again, comes down to we've reflected the transaction costs incurred to date. There's a bit of timing of working capital where we have a little bit of tariff cost that's in our inventories, but we're comfortable where we are, and we're comfortable that where we're going. There's nothing really major. It's timing. John Zamparo: Okay. Understood. And then I wanted to ask about the competitive landscape, and I wonder if you've seen any meaningful change in that over the last quarter or so. Do you think your competitors are behaving rationally? Are they also passing on costs as you'd expect? Glenn Chamandy: I'd say overall, the whole market has passed on costs associated with tariff. I mean that's pretty consistent across all categories, all markets, all channels. I would say that in the printwear market, we're continuing to win. Our strength, like Chuck mentioned, in all the brand portfolio, the technology, the innovation, that's all a function of the capital that we've been spending and leveraging our large-scale low-cost manufacturing. And so it takes a long time to put that in place, and then we're really capitalizing it in this type of market where our competitors, we think, are weak, undercapitalized and don't have really the brand strength, the innovation, the manufacturing to really grow their businesses. So we're continuing to lead and widen the gap against the competitive landscape in most of the cases where we operate. Operator: Your next question comes from the line of Chris Li with Desjardins. Christopher Li: Glenn, I want to follow up your last answer to your last question. I just want to confirm, so have you seen a widening of your price gap versus your competitors given your low-cost advantage? And is that also allowing you to gain more market shares? Glenn Chamandy: No. We've taken price equal to whatever tariff impact, and we did it in stages, too. So we didn't really go out and price at one time. So we slowly took prices up to cover the impact of tariffs, so they would be aligned. And basically, the market had to follow because everybody has that same type of cost. So I would say to you that the pricing, I would say, relationship before and after tariffs is probably pretty consistent in the market, and everybody had to react to the tariff cost and everybody really reacts to our pricing because we're the price leader. Christopher Li: Okay. That's helpful. And maybe, Luca, just a follow-up for you. Just on the SG&A expense, sorry if you answered this already. It was a bit higher than what we were expecting in Q3. You noted there's some increase in variable compensation. Are you able to kind of break out for us just how much of that was from variable comp? And then maybe a follow-up to that is, as you look out for next year, your SG&A rate, should we be kind of anchoring around 10% of sales for next year? Is that still a good soft target? Luca Barile: Yes. Thanks for your question. So look, in the quarter, I mean, slightly higher. I think there's 2 things. The drivers are some higher variable comp, but there was also some IT-related expenses that were more onetime in nature. The way you have to think about the target for SG&A and specifically for this year, right, we've given the operating margin guidance of 70 basis points higher year-over-year. And when you look at the composition of the gross margin and the SG&A, our SG&A is always targeted to be around 10% of sales. So there's a couple of onetimers here in the quarter, but we're comfortable with that target. And then with your question with respect to next year, I would point you towards the guidance that we've given in terms of the 2 companies coming together, the combination, which really yields really strong adjusted diluted EPS CAGR over the next 3 years with the first year being meaningfully higher than that low 20% range. So 10% is what we're looking at for this year in terms of what we can control on our end. Operator: Your next question comes from the line of Ryland Conrad with RBC. Ryland Conrad: Just on the 3 quarters of expected growth from new programs this year. Just curious how long of line of sight or how much visibility you have on incremental program wins in national accounts into 2026? Chuck Ward: Yes, Ryland, thanks for the question. We have similar -- as we've mentioned, we have similar line of sight on our growth for next year. So similar percentages that we're looking at, as we said, for this year of growth that we see and have line of sight for next year. Ryland Conrad: Okay. Great. And just on Comfort Colors, I guess, could you talk a bit about the performance year-to-date and just the underlying drivers there? And then on the plans to expand that brand into additional product categories, like is there anything that you could share additionally there on that front, whether it be kind of timing or just expectations on how that will benefit the brand? Chuck Ward: Sure. I mean, again, the brand is -- again, it's our fastest-growing brand with double-digit growth. It's been very strong all year long. We haven't seen it falter at all. It just keeps growing. I mentioned we doubled our manufacturing capacity for that brand, and we're going to invest additional in 2026 to grow that capacity more. And so that's the reason we think it has brand strength to move outside of just where we have been, which is tees and fleece. We're adding more women's collections, which will be very strong. We're going to go into caps and bags, as I mentioned. Again, I think that will be well received because then people can -- when they're putting this product out in the printwear, could go to fraternity stores, resorts, see it in bars where they're putting the things, they want to sell a hat and a T-shirt. They don't -- we're actually seeing it picked up quite a bit in band merch. And when people go to a concert, they may pick up a shirt, but they also want a hat. So we're trying to put out things that will go well with the core product and a lot of it will move together. Glenn Chamandy: And just to reference, even though there's hats and bags, these are all going to be cotton-based. They're going to be basically dyed in the same process as we make the T-shirts. So it's going to give an nostalgic look in terms of the pigment type technology that we use on all of the Comfort Colors products that we sell. So it's really going to be enlightening and stay consistent with the brand's heritage and focus. Operator: There are no further questions at this time. I will now turn the call back over to Jessy Hayem for closing remarks. Jessy Hayem: Thank you, everyone, for joining us today and attending our call, and we look forward to speaking with you soon. Have a great day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Smurfit Westrock 2025 Q3 Results Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Ciaran Potts, Smurfit Westrock Group VP, Investor Relations. Please go ahead. Ciaran Potts: Thank you, Sarah. As a reminder, statements in today's earnings release and presentation and the comments made by management during this call may be considered forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our SEC filings. The company undertakes no obligation to revise any forward-looking statements. Today's remarks also refer to certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in today's release and in the appendix to the presentation, which are available at investors.smurfitwestrock.com. I'll now hand you over to Tony Smurfit, CEO of Smurfit Westrock. Anthony P. J. Smurfit: Thank you very much, Ciaran, for the introduction. Today, I'm joined by Ken Bowles, our Executive Vice President and Group CFO, and we appreciate all of you taking the time to be with us. I am very happy to say that we have again delivered on guidance in what is a challenging environment with an adjusted EBITDA margin number of USD 1.3 billion and an adjusted EBITDA margin of 16.3%. The quarter was characterized by some challenging months, specifically July in our North American region and August in Europe. Nonetheless, we were able to come through with the numbers we predicted and planned. Since our combination, our North American business has shown great improvement over the course of the last 16 months on both the commercial and operational front, that's reflected by an improved adjusted EBITDA margin of 17.2% for the quarter. As you will have heard us say, as we got to understand the legacy Westrock business, we have taken strong actions to remove uneconomic volume within our portfolio of businesses. This, of course, has resulted in a loss of volume as we transition and reposition our business. While there will be a time adjustment to this reposition, we believe we are clearly on the right track as we are already seeing quality customer wins. In addition to changing our customer portfolio, we're also continuing to rightsize the business by closing down inefficient or loss-making operations including the recently announced closure of a corrugated facility in California in addition to the 8 previously announced closures. In paper, we have already announced approximately 500,000 tons of capacity closure in both containerboard and consumer board grades. These footprint optimizations will be a continuing feature as we develop and grow our business. Turning now to EMEA and APAC. Our adjusted EBITDA margin of 14.8% is highly creditable given the environment that exists in the European sphere. We believe it clearly demonstrates the power of the integrated model, which is producing this resilient margin in an environment of paper overcapacity. Our mills continue to run optimally, while at the same time, our converting business are capitalizing on their outstanding leadership position in innovation. We believe this, combined with our insights into sustainability and the significant pending regulations from the European Union should give our customers confidence to help them in navigating this environment. In our LatAm business, with an excellent EBITDA margin of over 21% due to our strong market position principally -- these are principally in Brazil and our Central Cluster. Our sequential margin showed a small fall in the last quarter as a result of some operational issues in one of our larger mills in our Central Cluster, which is now being resolved. The region still has significant growth opportunities for us to develop in the years ahead. Turning now to the group and regional highlights. What I'm very happy with is the initial potential of the combination as evident in our cash flow performance in the quarter, with operating cash delivered USD 1.1 billion and an adjusted free cash flow of approximately USD 850 million -- USD 580 million. One of the things that especially pleases me about this number is that we're really only starting to get going on working capital optimization as we continue to focus on operating excellence. I'm also very happy to have the people in the new Smurfit Westrock have come together and adapted to the culture of the company and its values of loyalty, integrity and respect and safety adoption by everyone in the workplace. The group has also been working effectively on the synergy program, which Ken will speak on further, which is exceeding our expectations, especially when one looks at the commercial improvements that we can see across the businesses. Finally, in the group, not only in North America, but also in Latin America and Europe, we continue to optimize our asset base with the recent closure of a facility in Brazil and the transfer of equipment to other operating units, together with constant trimming of our assets in our European sphere. In terms of the regions, as I've mentioned, we continue to make excellent progress across our North American system. For example, in corrugated, our loss-making units have declined by almost 50% in a 1-year period with today, over 70% of our corrugated operations solidly profitable. And we expect significantly more progress to occur as we replace and swap out uneconomical volume. In our consumer business, this business is very well positioned with substantial investments and restructuring already done. With strong positions in SBS and CUK, we're actively working to transfer customers from CRB to these grades and have already switched about $100 million worth of business. We do, however, believe in offering all 3 substrates to our customer mix. Our first Global Innovation Summit was held in Virginia in September. And the rollout of our Experience Centers in our North American region, while in its infancy, is now happening. In EMEA and APAC, our integrated model is really proving the success of our business. Our mills are well utilized, and our outstanding position and innovative offering is retaining and developing customers. One of the great opportunities for us has been the effective integration of our consumer operations into our European business. We have a vastly greater customer base to introduce to our consumer operations into Europe, and moving these businesses back to local sales and manufacturing accountability has already started to see some significant benefits. And finally, during the quarter, the rationalization of 2 of our German converting plants has been agreed. This will significantly strengthen our leading German position as we await the inevitable upturn. Turning to Latin America. I'm increasingly excited about our Brazilian operations. The legacy Smurfit and legacy Westrock businesses are a perfect fit with one concentrated on recycled containerboard and the other on virgin kraftliner. Our converting businesses have quickly adopted our value over volume focus, which is already showing significant improvements. In our Colombian business, we experienced significant growth of 8% due to our commercial offering and the market developing as a growing exporter of fruits and vegetables. Across the region, we're capitalizing on many of the growth and development opportunities we have. For example, in Chile and Peru, where our volumes grew by 15% and 25%, respectively, during the third quarter. I'd like to give you a sense of the excitement that exists and is building in -- within Smurfit Westrock company today. We're a stronger and better company through the adoption of the owner-operator model. Everyone across our world is now responsible for their own P&Ls. This has unleashed a tremendous enthusiasm and internal competition to do better and lends itself perfectly into having a performance-led culture where everybody is responsible for what they do. I'm especially pleased that we have now initiated global and regional leadership programs, whereby over 300 managers will have started our group programs. In Smurfit Westrock, people are at the heart of everything we do, and we ensure that they have the tools to succeed in their job and to realize their potential. And our synergy programs and optimize asset base, together with our innovation offering and transfer of best practice will, we believe, contribute to superior performance in the future. I'll now hand you over to Ken, who will take you through the financials. Ken Bowles: Thank you, Tony. Good morning, everyone, and thank you again for taking the time to join us. On Slide 8, you'll see the business again delivered another strong performance in the third quarter, with net sales of $8 billion, adjusted EBITDA in line with our stated guidance of $1.3 billion, a very solid adjusted EBITDA margin for the group of over 16% and a strong adjusted free cash flow of $579 million. The performance reflects the strength and resilience provided by a diversified geographic footprint and product portfolio, particularly in the challenging macroeconomic environment, and of course, the commitment and dedication of our people to delivering for all our customers. Turning now to the reported performance of our 3 segments. And starting with North America, where our operations delivered net sales of $4.7 billion, adjusted EBITDA of $810 million and adjusted EBITDA margin of 17.2%, an excellent outcome. In the region, we saw continued margin improvement, predominantly due to higher selling prices, our operating model in action and the benefits of our synergy program, alongside input cost relief on recovered fiber, which combined to more than offset lower volumes and headwinds and items such as energy, labor and mill downtime. Corrugated box pricing was higher compared to the prior year, while box volumes were 7.5% lower on an absolute basis and an 8.7% on a same-day basis. An outcome very much in line with our ongoing value over volume strategy, which we estimate accounts for about 2/3 of that volume performance. Third-party paper sales were 1% lower, while consumer packaging shipments were down 5.8%. With shipments in our smaller Mexican operations being lower than our U.S. business, which saw volumes down 3.7%. Our differentiated, innovative and sustainable approach to packaging continues to resonate with customers, which, coupled with the empowerment of our people to drop uneconomic business and the implementation of our owner-operator model is driving continuous business improvement across the region. Looking now at EMEA and APAC segment, where we delivered net sales of $2.8 billion, adjusted EBITDA of $419 million and adjusted EBITDA margin of 14.8%. Despite the challenging market backdrop, our operations remained resilient with adjusted EBITDA moderately ahead of the prior year. This performance reflects the skill of our local teams in managing a highly volatile cost environment and underscores the effectiveness of our integrated operating model, where we have consistently delivered an operating rate in our containerboard mills in the mid-90s. Higher corrugated box prices year-on-year alongside lower recovered fiber costs and a net currency translation benefit were partly offset by headwinds on energy and labor and lower third-party paper prices, while corrugated box volumes remained flat on both an absolute and same-day basis. We believe we are the market leader in Europe with strong market positions and a proven operating model, supported by our best-in-class asset base, which allows our people to continue to deliver high-quality sustainable packaging solutions for all our customers. This position is supported by our approach to innovation, where we have a large data set and bespoke applications that place the customer at the center of that conversation. Our LatAm segment again remained very strong in the quarter with net sales of $0.5 billion, adjusted EBITDA of $116 million and adjusted EBITDA margin of over 21%. Corrugated box volumes were flat year-on-year or 1% higher on a same-day basis, with the demand picture in the region showing a marked improvement with strong demand growth in Argentina, Colombia and Chile, amongst others. All while our value over volume strategy continues to deliver strong results in Brazil as we have now largely phased out unprofitable legacy contracts with volumes, with volumes there moving into a more neutral position. The region successfully implemented pricing initiatives to offset higher operating costs [ and delivered ] another consistently strong performance with a small step down in EBITDA margin year-on-year due to a now resolved issue in one of our operations during the quarter. As the only pan-regional player, we believe that Latin America continues to be a region of high-growth potential for Smurfit Westrock, both organic and inorganic, and one where we are well positioned to drive long-term success. Slide 10 outlines our proven capital allocation framework. I don't propose to go through each of these [ frameworks ] today, but I would note that in February, we plan to provide detail on how we see capital allocation underpinning the achievement of our long-term business goals. What is new is that our CapEx target for 2026 will be between $2.4 billion and $2.5 billion, broadly in line with the current year. We continue to invest ahead of depreciation and so this level remains accretive to earnings as we invest behind identified growth, efficiency, sustainability and cost takeout opportunities. The core tenet of our capital allocation framework is that it must be flexible and agile. This was our approach at Smurfit Kappa and continues to be our approach at Smurfit Westrock. It is a proven track record of delivery, and we are already seeing the benefits of it since forming Smurfit Westrock a little over a year ago. Our approach to allocating capital is disciplined and rigorous and requires that all internal projects are benchmarked against all of the capital allocation alternatives and is, therefore, always returns focused. On our synergy program, I'm pleased to confirm we are delivering as planned and on track to deliver $400 million of full run rate savings exiting this year. And finally for me, as noted in the release, the year-to-date has been characterized by a challenging demand backdrop, and as a result, we expect to take additional economic downtime in the fourth quarter to optimize our system. If you recall, we set out our guidance for the year in April. And given the impact from the above, we are now marginally adjusting that guidance range to where we now expect to deliver full year adjusted EBITDA of between $4.9 billion to $5.1 billion. And with that, I'll pass you back to Tony for some concluding remarks. Anthony P. J. Smurfit: Thank you, Ken. I hope you get a sense from my earlier commentary and Ken's performance summary that we believe that Smurfit Westrock is very well positioned for continued performance as well and the economic growth as it revives, I would say the company has never been in better position. Throughout the company, all of the people that are aligned with this approach, and we can already see the tangible benefits of this as many loss-making operations move into profit and thankfully, with much more to come. Reflecting the generally well-invested asset base, our capital spend for full year '26 is expected to be in a $2.4 billion to $2.5 billion range. We believe this level enables us to accelerate cost takeout, increase operating efficiency and capitalize in high-growth areas. In parallel, we recently announced restructuring initiatives, which also allow us to continue to optimize our asset base. As a more general point, our philosophy has generally been to buy and not build. As we have typically acquired at a fraction of the replacement cost is invariably cheaper with an enhanced returns profile. On acquisition, our objective is always to optimize through measured capital allocation decisions. We will discuss this further in February, and Ken has already touched on this. The delivery of our synergy program, together with our ongoing capacity rationalization remains a constant focus. With a significant headcount reduction of over 4,500 people and an unrelenting focus on the owner-operator model, we believe our performance to date is an indication of our potential. We remain confident that our footprint remains unrivaled with strong and leading market positions in the majority of the markets and grades of paper in which we operate. There is no question in our minds that since Smurfit Kappa and Westrock combined, we are building a stronger and better business with management aligned with shareholders and developing our performance-led culture. Over the last 16 months, we have taken significant steps to build this better business, and we are increasingly confident in the future prospects. While for sure, the current economic outlook is somewhat muted, our view is that the steps we are taking, investments we're making, the alignment we have with shareholders and the culture we're building within Smurfit Westrock positions us to go from strength to strength as economies improve. We end full year '25 and enter '26 as a better and stronger Smurfit Westrock. To that end, in February '26, we will be setting out our longer-term targets, which are a bottom-up approach from all of our businesses, which will be designated to identify prospects for this company as we look forward into the future. So thank you for your attention, and I look forward to taking any questions that you may have. Thank you, operator. Over to you. Operator: We will now go ahead with the first question. This is from Mike Roxland of Truist Securities. Michael Roxland: Congrats on all of the progress. Tony, you mentioned obviously, weakness in the European market from both demand and price, is there anything you could do to expedite cost takeout? You mentioned, obviously, continuing to trim assets in Europe, rationalizing the 2 German plants. But given the weakness that persists there right now, can you expedite cost takeout to try to get things rightsized faster? Anthony P. J. Smurfit: Yes. I think -- Mike, thanks for the question. I would say that we have done a really good job over 15 years of optimizing our capacity in Europe. Obviously, there's always little things to be done, but we're running our system pretty well full in Europe with the exception of August and probably December, where we'll take some downtime because those months typically are months where the corrugated box plants close for holidays. So our system is pretty well optimized. Obviously, we continue to look at it. We're basically a low-cost producer in the European market. And when you look at our returns and you look at some of the other competitors' returns that have been publicly available. And obviously, we get a sense of how some of the private guys are doing. We're far exceeding the returns in Europe. And -- so unfortunately, it is a question you've already seen a number of mill closures around the place. I think we're going to see more, and I think that the pain is very, very real, and you can see even some public companies with negative EBITDA margins in the containerboard business in a very significant way. So I think the old saying, the worse it gets, the better it will get, well, it's pretty bad right now. And I think when it turns, it will turn very sharply. And so that's what we are waiting for. Obviously, as I said, that doesn't mean we're sitting on our hands doing nothing. We're continuing to close a few facilities here and there, not very big ones, but we've done a number of stuff. And we have a very, very active cost takeout program across all of the business to mitigate all of the wage inflation that we've had over the last number of years. But -- so cost reduction programs do not stop. They're continual, and we continue to look at our asset base and will trim if necessary. Michael Roxland: Got it. And then just 2 quick follow-ups. Any color you can provide in terms of how demand trended in both North America and Europe in September and what you've seen thus far in October and any outlook for November? And then just quickly on consumer because it was interesting, you mentioned transferring $100 million of CRB business to SBS and CUK. Can you just help us frame the logic behind those moves? Is it just a matter of wanting to run SBS more efficiently at a higher rate? And is there any margin uplift associated with that shift? Anthony P. J. Smurfit: Yes. Taking your second question first. I mean, basically, as the SBS price has trended downwards. Because SBS, you can run with a stiffer sheet and you can use a lower grammage, it's basically become competitive with CRB. And there are positive qualities to SBS versus CRB in the sense of brightness and transportation costs, so -- and runnability on printing machines. So I'm not saying that CRB is all bad. It's not. There are certain customers that will really want CRB. There are certain customers that really want SBS, and there are certain customers who want CUK. And clearly, where the positioning is right now, it's just advantageous for our customers to look at SBS and so we've taken that opportunity as well as some of the CRB issues where, again, you've got some opportunities to -- especially in the freezer for frozen products to move into CUK, which is something we're actively promoting. And I think, as I said, we've $100 million or so already transferred in the last 4, 5 months, and I think more to come. On the first question, Mike, just remind me what was it? Michael Roxland: Demand trends. Anthony P. J. Smurfit: Demand trends. I don't -- I could say that we were expecting to see an uptick in October, and we did not see it. Now you have to remember, Mike, one of the things that has happened is that we took on, as in legacy WestRock took on business in the latter half and first half of last year that we were running in the second half of last year. And a lot of that business that was taken on was not necessarily very economic for us. So we have been addressing that during the first half of this year. And inevitably, that's when we tend to see that exiting again. Some of it will come back as we are a good supplier. We're very reliable and high quality and high service supplier. So we expect some of it to return at prices as we've seen already in Brazil, for example. We expect some of it to return at a certain point in the future at the prices that make it economic for us. And if it doesn't, well, so be it, we'll go out and get some other business. But when you lose big chunks of business, Mike, it tends to go and get 10 chunks of smaller business, it tends to take you a little bit longer, and that's what we're seeing. But we have a huge pipeline of business in our system. We won't land at all. But certainly, our people are very comfortable and confident that we're going to get it. And as I said in my script, we're already seeing some very significant customer wins in high-quality names at levels that are going to be good for us to run that. Operator: Next question is from Phil Ng from Jefferies. Philip Ng: So Tony, you mentioned you're going to be taking some economic downtime in the fourth quarter. Curious what markets, is this North America? Is this Europe? How should we quantify the EBITDA impact? And appreciating you're walking away from -- you're taking a value-over-volume approach. But as we kind of think about how that translates, how should we think about that spread of your volumes versus the market overall, call it, the next 12 months? Anthony P. J. Smurfit: Yes. With regard to -- I'll let Ken take the downtime question. But with regard to -- we're sort of figuring out that -- we believe that the market is down somewhere around 3% or 4%, and we're probably down -- 5% of our loss of volume is due to our own decision making. That's the sort of number that we -- it's not going to be 100% accurate in that. It could be 3%. It could be 4% market down, but you saw one of our larger peers was down 3% in the quarter, and one would have said that they're probably winning some business in the marketplace. So therefore, taking that as a trend then I would say that the market is probably down a little bit more than that 3%. Ken Bowles: Yes. Philip, I think to take the second part of that question first, I think the simplest way to quantify the EBITDA impact is broadly, if you think about where our guidance was, [ where we're bringing to, ] call it, somewhere between $60 million to $70 million is the incremental impact of downtime in the fourth quarter versus what we previously would have said. I think, look, if we think about operating it in Europe and us in the mid-90s, unlikely to see any material -- for the remainder of the year, any material incremental downtime in Europe. So predominantly, it's going to be across the North American region because Latin America, we don't really see any downtime there either. Philip Ng: Ken, do you expect your inventory to be in a pretty good spot as you exit this year in North America? Ken Bowles: It's getting there, Philip. It's -- supply chains in North America is different than Europe in the sense that they're very, very long. So it takes a while to kind of get back to what you might like as kind of optimal inventory. The working capital as a percentage of sales for the group is probably around 16%, which is kind of higher than we'd like it to be. At Smurfit Kappa, we were down in kind of 8% and 9%. Don't expect us to get there over time, but certainly, somewhere in the middle there that the right answer is. You have to remember, as a third-party seller, Westrock over the years had grown into a number of different grades and a number of different widths of paper. So part of the optimization here is kind of bringing it back to not quite Henry Ford. We're getting it back to a place where it's a reasonable set of grades and flute sizes and widths that we feel are optimal for not only the paper system, but the corrugated system and a need for our customers. So it's all part of -- it all really comes back to helping our customers understand what their boxes need rather than just supplying what they think they might want. So I don't think we'll exit this year in perfect shape, Philip, but I think as we kind of move through '26, it gets incrementally better as we kind of understand the supply chains a bit better and rationalize kind of external board grades. Anthony P. J. Smurfit: Philip, if I can just add on to that, I'm really very excited about as we optimize our supply chain system and work through our board grade combinations that together with the corrugated businesses in our system, that this is going to present a big opportunity for us. But it needs careful thought and planning because as Ken has just rightly said, the distances in America are very big, and we've got to make sure that we get that right, but there's a lot of opportunity there for us to reduce stock. Philip Ng: Got it. And sorry, one last one for me. Tony, I thought your comment about pivoting some of your CRB and CUK business to SBS was fascinating. That sounds like a pretty attractive value prop for your customers. You gave us the CapEx guidance for '26 as well. Embedded in that, is there any mill conversions that you're possibly thinking in SBS? Or you feel pretty good about some of the opportunities you see in front of you on the SBS side, you're going to largely keep your footprint intact at this point? Anthony P. J. Smurfit: If you -- if I could just ask you to hold off until February for that because we'll give you a full answer then because clearly, we're working through some different strategies in relation to that, and then we'll give you a better -- once we've organized that, we'll tell you about that. But basically, we have some very, very good assets that we will continue to look at. And obviously, there's some that we will continue to evaluate and give you a better answer to those in February. Operator: Next question is from Gabe Hajde from Wells Fargo Securities. Gabe Hajde: I wanted to ask about the guidance, the CapEx guidance for '26 and maybe a little bit differently. I'm just curious if the organization for the year, if there's anything strategically that you guys are focused more on cash flow for 2026 versus EBITDA. Sometimes that drives different operating behavior. I'll just stop there. Ken Bowles: Gabe, no, not necessarily. I think it's more a case of the reality is that Smurfit Westrock should be -- and if you look at this quarter, particularly, a strong free cash flow generator irrespective of the CapEx cycle. I think what we've always done, though, is be very disciplined about when we place capital into the system and indeed adopting a kind of portfolio approach where you don't have, a, too many big programs in any particular year, any big systems that are taking all the impact in a particular year and no region that kind of has that impact. But I think it's fair to say that when we went through the cycle this year and to Tony's earlier point to Phil, building towards February, when we look at the capital requirements for '26, the reality is that all we feel we need to keep the system going and improving and growing is somewhere between $2.4 billion and $2.5 billion. And that ultimately means that we don't end up with any kind of big build for CapEx going into '27 , for example. But it's a normal phased approach. So no, there's never a case of trying to, if you like, try and get to a free cash flow number at the expense of EBITDA, that never is. I think it actually becomes more of a virtuous circle, which is you place capital into the system, we expect the returns out which should drive return on capital employed in one sense and also drive EBITDA. And then that capital goes back into the system. I sort of -- I look backwards, look forward a little bit here, Gabe, in the sense that as Smurfit Kappa, we place extra capital in the system, increase ROCE, increase the dividend, delevered and grew. So I think it's a model, if you like, from an owner-operator perspective and a philosophical perspective, that's worked in the past. So no, it's not that we take that kind of that choice. It's actually that's the capital we think the business needs to kind of drive and grow. Anthony P. J. Smurfit: Yes. And I'll just add to that, Gabe, that the whole philosophy of our company is to remain agile, as Ken as said, we adapt to the situation that's around us. And one of the key tenets of our business is never to overinvest and have too much investment going forward that we can't back out of, so to speak, so that we're in a position to be able to flex if we need to because that's what really hurts companies, if you can't pivot depending on the environment, either positively or negatively. And so that's been the hallmark of the success of Smurfit Group, Smurfit Kappa and now hopefully in the future, Smurfit Westrock. Gabe Hajde: I wanted to switch gears to Europe. You guys provided a little bit of color as to the -- I know the number kind of jumps off the page where you're underperforming the market. But over in Europe, I think up a little bit, 0.2% is pretty impressive. You talked about the mills running mid-90s. Can you provide a little bit of color in the markets whether it's geographic or end-use markets where you guys are doing particularly well? And then I guess, maybe a little bit on the margin side. Obviously, prices kind of came up quite a bit in the spring and early summer and have come down, basically kind of given back a lot of that. How should we think about that flowing through? Is that hitting Q4? Or is that really more of an H1 '26 event? Anthony P. J. Smurfit: Just on the markets, in general, I would say that the -- there's no real change to what we've said previously that Germany continues to be a laggard, some of the other markets in the U.K. The Benelux tend to be basically flat with some positive movements in Eastern Europe and in Iberian Peninsula, which is growing strongly. So in general, there's no real change into how the markets are operating. We sometimes flatter to deceive in Germany where things get really good for a couple of weeks and then go back to the norm. So I think we haven't seen any material positivity in the German market yet. But inevitably, that will happen. And as I mentioned in my script, we're about to close 2 facilities with improved facilities in the incoming plants that are receiving capital. So when Germany does turn around, we'll be even better positioned than we were before to take advantage of that. With regard to... Ken Bowles: On pricing, actually, third quarter in Europe, we saw prices tick up by about another 0.5%. So not quite done there yet on pricing. I suppose, ultimately, without a crystal ball and forecasting, I think where pricing goes from here depends on -- really depends on the same question we've had all day, which is where does demand go. Because ultimately that will feed into what happens with paper prices. But irrespective of that, it's very much a kind of second quarter, third quarter question on '26 anyway based on where we sit now. But I think it's fair to say that both regions have done really well in terms of pricing given the backdrop, I think particularly Europe in terms of price increases received and held, if you like, even through the third quarter. But I think it's demand dependent really in terms of where it goes from here. Anthony P. J. Smurfit: I think as well, Gabe, if you look at where the paper price is at the moment, it's uneconomic for at least 75% of the business, I would say. And I think that we're lucky that we're very integrated. We've got our own customer. Our paper mills have our own customer, which is ourselves. And we're able to run basically full, but most of the others, demand is relatively weak. And unless you're in the top quartile, you're not making any cash at this moment in time. And I would say you've seen that from the results of a number of players in the marketplace. And inevitably, that will change. The question is, is it first quarter? Is it second quarter? Is it third quarter? And how much hurt will be in the market before then? Operator: Next question is from George Staphos from Bank of America Securities. George Staphos: Congratulations on the progress. Tony and Ken, I guess, I have 2 questions for you. First of all, regarding the North American converting operations in corrugated. I think you had mentioned that 70% of the business now is at -- and I forget exactly how you termed it, but better or acceptably profitable levels. If you could talk a bit more about what that means, recognizing that the margin in North America is maybe one of the proof points there. Can you help us quantify how you're determining the 70%, if that's the right ratio? And what else needs to occur to move the ball further, recognize you made a lot of performance already -- progress already? Secondly, on the boxboard side, you made a couple of interesting comments about ultimately, in essence, the customer is going to choose a substrate that makes most sense. Each of them, whether it's CUK, SBS, CRB has -- have their own unique aspects. The fact that you're being able to move the SBS to a customer, when in theory, they would have already been in a grade that -- using your discussion point, they already would have liked to have been in, i.e., CRB. What's causing the move to SBS? Is it just purely where price is right now? Or what else are you reminding people of in terms of SBS' performance versus the other grades? Anthony P. J. Smurfit: Okay. Let me take the second one first, and I'll come back to the North American corrugated. Basically, on the 2, we've seen the SBS piece is more about brightness. There's a brighter sheet. Caliper, you can get the same performance from a slightly lower caliper. And then I would say, printability, stroke, machine efficiency on the customers' lines, which -- the 3 reasons why we've been able to sell SBS versus CRB. Of course, there will be some customers, George, as I said in my thing that will want CRB because it's a fully recycled sheet. And that's fine, too and -- if people want that. But we are selling SBS, and it's competitive with where SBS price has gone. It's basically competitive now with CRB. And so therefore, we're comfortable to sell it to customers, and we make good money at it at these current prices because, as I say, the caliper is lower. And we have basically our 2 SBS mills in the United States, are very good mills in Demopolis and Covington. So -- and then the CUK has got some unique properties for the freezer and strength for the freezer and again, a caliper issue that can help make it competitive against the CRB sheet. So -- but that's -- again, some customers will prefer CRB and we can offer them that too. So what we've been doing is because, obviously, we have got very, very good SBS mills and very good CUK mills that were -- we would offer them that. And as you know, we've closed the CRB mill. So we have open capacity to be able to sell SBS versus CRB. And that's been a big positive win for us, George, as we look forward, and it's going to be something that's going to continue, I would say. With regard to our North American corrugated business, I mean, I think this is where you really see the owner-operator model in action. We have empowered our people to basically act locally, get involved in local markets again, think about their local customers and to think about profitability. And a lot of business was taken on in legacy Westrock under the basis of a combined profitability. That is not the way we think. We think that's the road to [ predation, ] that's road to death in our business where you have 2 sets of capital needs and 1 profitability. And that's the way that we have, I suppose, continued to survive in Smurfit -- legacy Smurfit, legacy Smurfit Kappa is that we treat capital as a very important thing. And if you want to make a capital investment, you better be able to justify it. And if you got 2 operations with 1 profit that masks where you're making the money, then you're not making the right capital decisions. So what we've done is we've spent the first 6 months of our tenure as a combination, making sure that the P&Ls were done correctly, that the balance sheets of each plant were put into the right order. And then we've told our managers, this is -- you're now profitable for -- you're now responsible for your profitability. And of course, when you tell them that and they see customers with negative 30% or 40% margins based upon a fair paper price transfer, they're going to do something about it, and we expect them to do something about it. And if they don't do something about it, they won't be with us, frankly. So the reality is we are actively moving both at a national level and at a local level to make sure that accounts where you've got terrible margins are not run on our expensive valuable beautiful machines in our converting plants. And that's a process that's ongoing. It's one of the reasons why, as I mentioned to an earlier question, a lot of business was taken on prior to us coming on board, which was not economic, frankly. And we've had to address that, and that's gone away again. And sometimes it's gone back to the same homes it came from, which is quite -- kind of interesting. But so that's how we've -- pardon me. George Staphos: No, please go ahead, sorry. Anthony P. J. Smurfit: Sorry, George. So that's how we've moved very quickly from people understanding their profitability to changing a lot of the plants. So we've gone from -- we've cut our loss makers by 50%. And as we continue to address this, and there will be some plants that will make it. But inevitably, I'd say the vast majority will get to profitability in the next couple of years. George Staphos: Tony, just a quickie and feel free to punt to February, if you'd like. On boxboard, recognizing it's not the majority of your business, clearly. If there's some rollback in tariffs, how might that change your overall view of the attractiveness of SBS? Has -- said differently, has one of the things that's changed in the calculation, your ability to move more SBS been the fact that maybe some of the folding boxboard that was coming to the market has been, I wouldn't say, tariffed out, but certainly has more cost coming into the market. How should we think about that? Anthony P. J. Smurfit: Thank you. I don't think tariff really comes into our thinking here. I think Obviously, the price comes into our thinking because the price of SBS has come down a bit. So therefore, it's more competitive as a grade versus other substrates. And obviously, FBB against SBS with the tariff is making it more challenging. But I still think that the FBB is going to be sold in the United States irrespective because the price -- there's a lot of capacity in FBB specifically in Europe, and they're going to come anyway, I think, to the U.S. with all the added costs that's with it. So I think it's up to us to sell SBS. I think one of the things that for everyone here to understand that SBS is a myriad of different grades. I mean you've got cup stock, you've got plate stock, you've got lottery cards, you've got cereal boxes, you've got freezer box. There like -- there's very, very many different grades of SBS that are sold at different price points, that are sold at different quantities to different customers. And so our hope and belief is that we can continue to develop newer grades into SBS that will allow us to earn a material return going forward. And there's no evidence to say that, that should be otherwise. We've been getting new customers in lottery cards, for example, which is -- it's only 15,000, 20,000 tonnes, but every little bit helps, as they say, over here. And these are good grades of highly profitable business for us to develop in the years ahead. Operator: Next question is from Charlie Muir-Sands from BNP Paribas Exane. Charlie Muir-Sands: Just a couple, please. Firstly, on the revised guidance, it obviously implies a fairly wide range of potential outcomes on Q4. Just wondered if you could elaborate on the main outstanding uncertainties for the range. And then previously, you've been sort of talking about beyond the operational synergies, the $400 million, you talked about at least another $400 million of opportunities. I just wondered if you had any kind of updates on that. And then finally, you mentioned that one-off operational issue in Latin America. I just wondered if you could quantify that given it was relevant enough to call out again. Ken Bowles: Charlie, I'll take those. Start with the last one first. It was a kind of a continuous digester issue in [Technical Difficulty] in Colombia, which probably cost about $10 million in the quarter, but it's $6 million now. So that's the big impact there. In terms of the guidance range, it really, I think the more it has on the years gone past, December tends to be the swing factor here in terms of why we've kept a slightly -- and I wouldn't say the range is wider. I think we just moved down the midpoint a bit to take account of the downtime piece. But really, it's going to come down to where you see December -- sorry, where we see December. And as kind of Tony alluded earlier on, as we're kind of exiting into the quarter, we're not necessarily seeing a much improved demand backdrop. But equally, in our natural sense, we haven't given up hope and a sense of optimism that things won't get better even before the end of the year. So I don't think we can be that negative on the outlook. So really, it's around where does December sit in that conversation. In terms of the bit in the middle, I think George actually pointed to part of this answer in his question, which is when you look at the margin performance in North America, given everything that they've been dealing with in terms of where volume is, the incremental downtime, the headwinds, the performance of the margin in North America probably tells you that a chunk of that additional operational commercial improvement is coming through in the numbers already. Where that goes to, that's the kind of how long is the piece of string to kind of answer because look, it really depends on how many programs we can get at. It sort of goes back to Tony's point earlier on about the owner-operator model and really putting empowerment in the hands of every single GM or mill manager to drive their own business for the best returns, their cost takeout, their improvement programs, their delivery on CapEx. So yes, we're still, I mean, very comfortable, if not more comfortable with the well in excess of where the synergies ended. But I think it's fair to say we are beginning -- without being able to quantify it exactly, we are beginning to see the benefits of that coming through simply in the margin performance in North America alone and particularly in the corrugated division. Charlie Muir-Sands: Great. And you've obviously given us the 2026 CapEx and elaborated on the rationale for it qualitatively. But just in terms of the returns that you're targeting beyond maintenance or onetime depreciation, what kind of thresholds are you typically setting for the investments you want to make in the business? Ken Bowles: As a blend, Charlie, look, it won't be any different than we've had before. It sort of goes back to that portfolio approach of trying to drive the incremental return and return on capital forward. So generally, no more than the old system, we would expect that entire portfolio to kind of be in that sort of 20% IRR range, delivering kind of mid-teens, at least in terms of where ROCE sits as a result. That is, of course, dependent on what those projects do, particularly cost takeout. You're obviously going to get higher returns from sustainability, energy back-end projects. You might get lower returns in the early years, but history has shown us that as those projects embed and move forward, you have much better returns as they move out. So not pinning it necessary to a target return in individual projects. But as a portfolio, it has to drive forward in terms of where ROCE is because ultimately, that goes back to my comment earlier on, this is about capital in and cash flow out. So not a dissimilar profile to what we would see -- you would have seen previously in terms of how we characterize the deployment of capital and allocating capital in a kind of Smurfit context. Operator: The next question is from Lewis Roxburgh from Goodbody. Lewis Roxburgh: Just my first question is on cost. You mentioned in the last quarter, you expected some relief on OCC pricing. So I just wondered to see if that was playing out as expected and if you're getting any other relief from the other buckets like energy or that might just spill into next year? And then just in terms of CapEx, I just wondered some more detail how much of that spend might be related to the legacy Westrock assets versus other projects as well and whether this is sort of the new normal or further increases might be needed to tie into those realization synergies? Anthony P. J. Smurfit: I'll take the second piece, Lewis, and then I'll let Ken take the first piece. Basically, the CapEx number is slightly skewed towards the legacy Westrock assets because we are a very well-invested base in Europe and Latin America. So what we're doing is we're putting a little bit more capital into some of the box plants to improve the quality and service aspects to improve the corrugators. So all the things that we have done over the last 10 years in Smurfit Kappa, we're now implementing over the course of years, not just next year but the years going forward to continue to improve the legacy Westrock business and make it better -- even better than it is. So there's a slight skewing towards legacy Westrock, but not massively material because, as I say, we're in very good shape. In Europe, we invested for growth, and we've got very good assets in our European business. And while there's always growth opportunities like in Spain, like in Eastern Europe and specifically plant by plant. I think that as a whole, the European business is very well invested. And what we'll do over the next 3 to 5 years is continue to develop out our Westrock asset base -- legacy Westrock asset base. Ken Bowles: Lewis, I'll just take some of the bigger cost buckets and just -- alongside fiber because it's probably useful to kind of round some of them out for yourself and your colleagues. In terms of fiber, I think at the half year, we probably said that, that was going to be a tailwind of about [ 100. ] We probably see that in the about -- as you sit here today, somewhere between 130, 140 of a tailwind. Energy, I think at the half year, we might have said about 250 of a headwind. Probably coming in now, we probably see that about the 180 space. Labor, similarly, we probably thought about 200, probably down around the kind of 180 space as well now. Downtime is probably going the other way in that, in a sense where we would have thought downtime was probably going to be 150. It's probably anywhere between 180 and 200 at this space given what we now see for the fourth quarter. So they are really the big cost buckets in terms of the incremental changes that we would have said Q2 versus where we see the year panning out. Operator: Next question is from Anthony Pettinari from Citi. Anthony Pettinari: On the full year EBITDA bridge, maybe Ken, just filling in on the pricing side. Can you give us an update on where you maybe thought pricing would shake out midyear versus where you are and where you might end up with the full year guide? Ken Bowles: Yes. I think it's pricing broadly, we would have thought to plug that in there. I think we probably see pricing coming out somewhere between, call it, 830, 840 versus where it would have been about 900 at the half year. So a small call off probably because of the fourth quarter and where demand is going, maybe a little bit of price weakness there, but not materially down versus what we would have thought. Anthony Pettinari: And would that -- would North America be 700 or 750? Or -- between North American and Europe, how would that breakdown? Ken Bowles: I'll defer that, to read the segmental bridge [ to you guys when ] you get into the trenches with them later on. I think if that's okay, I just have to [ take them ] with me here. Anthony Pettinari: Yes, no problem, no problem. And I guess maybe just one follow-up. You mentioned energy projects, and I mean from other industrial companies and paper companies, we've heard a lot about cost inflation and particularly electricity with demand from AI and data centers. Can you just give us kind of a quick recap of where you are with kind of current energy projects, especially in North America and not to steal any thunder from February, but just how you think about the opportunity in energy at your mills going forward? Ken Bowles: [ Well, where do we start? ] Anthony P. J. Smurfit: Well, we just approved a large energy project in our Covington mill, which will actually move away from coal to natural gas. And that's going to be the IRR on that is depending on where you think the price of the commodity is a minimum of 20% and a maximum of 80% -- sorry, not even a maximum. It's not the maximum is not capped, but realistically, a 50% return for the mill. So I guess what we will be doing, Anthony, is just taking every energy project as it comes and what kind of return we can get on it. Specifically, the only one that we've approved since we've come in is that one. We use gas primarily in most of our facilities. We do a little bit of coal where we have to, and obviously, in other places where we can remove it, we will be. We have a large biomass project in Colombia, which is going to be coming on stream next year, biomass boiler, which is a considerable saving for us in energy. So we're -- we continue to look at energy projects. But with regard to how these AI data centers are affecting us, I haven't heard that they're driving any major cost increases for our mill systems where our mill systems are located. Ken Bowles: I think kraft systems by their nature tend to be fairly well served from a power plant, back-end perspective anyway in that sense. And so not necessarily totally insulated, but generally CO2 positive. But great source of their own energy from a kind of a turbine perspective. In addition to what Tony said, we have a kind of progressive program. We electrified some boilers in Europe over the years. We continue to invest towards the reduction in CO2. I mean, the added benefit from the project Tony talked about there in Covington is it reduces our group CO2 by 1.2%. So very important, if you like, as you look forward to where our customers need to be on scope through emissions and things like that. So there's always benefits above and beyond the pure EBITDA benefit we find to energy projects, and it sort of goes back to what we're trying to get to in terms of low-cost producer and where those mill sits, which allows us to kind of be at the forefront of where we do that. So generally, it's always going to be a progression towards either less reliance on some fossils and something else and more sustainable renewable fuels. But the system in and of itself is fairly well set as we start off. Operator: And the last question today is from Mark Weintraub from Seaport Research Partners. Mark Weintraub: A few quick follow-ups. First off, so with other box shipments in North America, do you have a sense as to when you think you might be inflecting more positively versus the industry? How long is the process of sort of the shedding underappreciated business likely going to persist? Anthony P. J. Smurfit: Maybe overappreciated business. We've given them boxes for nothing, Mark. So yes, I would say that -- I would hope that from the third quarter on next year, you'll start to see some positive movements. We're still -- we still have some businesses that are very poor piece of business that are under contract that will run out during the first and second quarter of next year. And then obviously, we'll have to go out and replace those or we'll retain them. We'll see how the customer reacts to our discussions with them at that time. But if I look at the amount of backlog and pipeline that we have for new business, it's colossal in the sense that I feel very comfortable that we're going to start landing a lot of that business. And we already have landed a lot of that business, frankly, but it just takes a little while to qualify and then get into the plant. So -- when I -- so I would say the third quarter of next year, you'll start to see us inflecting versus this year with better quality business in all of our facilities. Mark Weintraub: And then what's your strategy? What have you been doing vis-a-vis outside sales of containerboard in North America into either export or domestic channels? Anthony P. J. Smurfit: Yes. It's -- the export market, as you know, is weak and a lot of the capacity closures that have been announced in the industry have been geared towards the export market, specifically down into the South American market specifically. And so one of the things that I found out is that these people down in these countries have pretty big inventories. And I think we need some time for those inventories to shake out before we see movements in export prices to the positive because the export price is clearly too low for it to be viable for people to survive. We are selling some into the export market, but clearly, we don't want to sell too much into the export market at that price that's there. But I would say it will be like a eureka moment. At some point, things will change, and people will -- the price will move up very sharply in the export market because it's too low at the moment. But all of the capacity that's come out of the market isn't really affecting it at this time because the stock levels of most customers down there are very, very high. Mark Weintraub: And in the domestic channel, I mean, historically, the legacy Westrock business had sold a fair bit to independents, et cetera. Has that continued? Or has there been some change in that regard? Anthony P. J. Smurfit: We do have outside customers, and they're important outside customers, and they're generally long-term outside customers, people that we served for a long period of time, and we continue to do that. And there's been no real change on that as I can see it. Mark Weintraub: Great. And one last quick one, just to squeeze in. So with the SBS from CRB, et cetera, I assume the customers are running that on the same machinery. And so is it pretty easy to switch back and forth between the grades depending on the variables at play? Anthony P. J. Smurfit: Yes. I mean, basically, yes. I mean you might need a technician to run a lower caliper product on the board just to adjust the machine slightly, but there's no real big -- one of the things that we have heard from our customers is that our -- the SBS runs better than the CRB. But I'm sure if you talk to somebody who runs CRB, they're going to say the opposite, but that's what -- that's what our people tell us from the customer. But I'm sure you can get someone else to say exactly the contrary. But I believe that to be the case because it's a cleaner sheet. Operator: Thank you. I will now hand the conference back to Tony for closing comments. Anthony P. J. Smurfit: Thank you very much, operator. I want to thank you all for joining us today. We remain very excited about the future of the Smurfit Westrock business. We're enthused about a lot of the changes that are happening -- that have happened and that are already happening. And we look forward to the future with great enthusiasm. So thank you all for joining us, and I look forward to seeing many of you in the months ahead. Thank you all. Operator: Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect. Speakers, please stand by.
Dominik Prokop: Good morning. My name is Dominik Prokop. I am the Head of Investor Relations. Welcome to this conference presenting Alior Bank's Q3 2025 results. In the first part, the results and the trends will be presented by Alior Board members, Piotr Zabski, CEO, who will present the main trends and discuss the business performance; VP Marcin Ciszewski, who will speak about risk; and VP Zdzislaw Wojtera, speaking about financial results. Right after the presentations, we will move right into your questions. Before I hand over to our CEO, Piotr, I urge and encourage all of you to ask your questions even during the presentations. Just like every quarter, this will allow us to smoothly segue into the Q&A. Thank you, and over to Piotr. Piotr Zabski: Good morning, and welcome to yet another presentation of our quarterly results. Yesterday, the Supervisory Board approved our results and it is our pleasure to present them today, to present our Q3 performance and the results year-to-date. Before I move to the highlights, I'd like to first talk about our strategy that we announced and published in March. In the third quarter, we continued to pursue our strategy, and in summary, we came close to saying that we are well on track implementing the strategy. The strategy is based on 3 pillars: growth, scale, stabilization of results and operational excellence, which you will see in our numbers. Operations, just a few highlights and facts I'd like to draw your attention to. This year, year-to-date, our revenues reached PLN 4.5 -- more than PLN 4.5 billion, including NII at PLN 3.87 billion year-on-year, stable with lower rates, of course. Our net fee and commission income grew. That's the other leg of stabilizing our results. So that has materialized. In Q3 alone, we have a drop in NII due to the lower rates, but we have made up for it by growing our net fee and commission income, which is our strategic objective. Hence, the net profit in Q3 amounted to PLN 563 million and year-to-date PLN 1.679 billion. And we have achieved all that with a very good return on equity, close to 19%, well in line with our strategy. My comment over that period of time, we also recognized 50% of last year's profit in our equity, and so we are even more proud of our ROE as equity is growing. Speaking of risk, we have very good readings, PLN 124 million cost of risk and the ratio is 0.72, less than 0.8 that is our target, down 0.2 percentage points year-on-year. NPL stood at 6.29%, down 0.81 percentage points in the past 12 months. So we are well on track, in line with the trajectory of eliminating the problems that burdened us over the past few years. I've mentioned equity. Our capital position is solid with a big surplus. Our ratios, Tier 1 and TCR, remain very strong, well above the regulatory minimums. And that surplus allows us to continue with our strategy of growth. Speaking of growth, just a few highlights, a few facts. As you may recall, our strategy relies on relationships, growing the number of relationship customers who are the future of this bank. That number grew by 100,000 year-on-year, the number of relationship customers, the biggest growth we have seen in this regard over the years. 1.68 million -- sorry, we have 1.68 million customers, 98,000 more than at the end of Q3 2024. And the number of mobile app users was 1.59 million, 15% up year-on-year. Our deposit portfolio grew 8% year-on-year to more than PLN 80 billion and our assets grew, especially mortgages. We are proud to say this, the increase was 111% year-on-year to PLN 1.3 billion of new mortgages in Q3. The share of our portfolio of mortgage loans in the portfolio is now more than 30%, which ensures some stability in our portfolio. This is a long-term, well-secured portfolio at good margins, so it is a stable factor working for us in the coming periods. Another success we are proud of regarding liquidity, we issued MRL bonds that Marcin will discuss in more detail at a very good margin, 1.5%, with a lot of demand. So something -- that's something we are also very proud of. The next slide presents more details of our activity across the bank. Assets grew 7% year-on-year, and we are very close to a special mark, PLN 97.7 billion -- very close to the mark of PLN 100 billion. We'd like to get there next quarter. The volume of deposits was growing faster than loans, specifically up 8%. That's more than PLN 80 billion. Performing loans grew 6% to PLN 63 billion. At the bottom of the screen, you can see 2 lines with some readings for Q3. The top - there's the top line and then year-to-date in the bottom line. Cost-to-income ratio was very strong. Our costs increased affecting the portfolio due to inflation. And I think Zdzislaw will focus on that later on. But as you can see, the growth of this indicator is lower than the growth in costs. NIM and net interest margin. The interest rate cuts are materialized here. ROE, very high, as I said, both in Q3 and year-to-date. Cost of risk, very low as well in both terms, in Q3 and year-to-date, better than we expected, in line with our strategy. And the NPL and capital ratios are very strong. Most importantly, in a downtrend this continues. Let me now move on to our main 2 business lines. First, retail. That's the top left-hand side of the slide. These are the assets of our retail customers that grew 12% year-on-year. We are very happy to see that growth. Basically, every line has improved year-on-year. On the right-hand side, you can see the gross loans to retail customers by real estate loans in yellow and other mainly consumer loans up 6% overall. In the bottom part of the screen, you can see the breakdown of that figure. We are happy with the growth of non-mortgage consumer loans, up 21% year-on-year. The sales have stabilized over the past few quarters, but we have maintained the dynamic growth. So growing scale is part of our strategy, and we are very much doing that. Last but not least, in the bottom right-hand corner, you can see the efforts we've made to sell mortgages, which grew by more than 200%, 2.1x bigger. That is our production and sales year-on-year. The sales grew to PLN 1.3 billion in Q3. So our market share is much bigger than our overall share in the banking industry. Customer relationships and relationship customers, part of our strategy. The number of relationship customers grew by more than 100,000 or close to 100,000, 1.68 million, the best numbers we've seen ever in this regard. Relationships are very important for us to stabilize our performance and the other -- to prop up the second pillar of our strategy. Our customers are using the mobile app more and more, the number of mobile app users has been growing. More of that later. But I'm happy to say that customers who do not hold accounts with us but only have installment loans or cash loans, they have a reason to use our mobile app. That number grew by more than 200,000 customers year-on-year. The relationship customers, about 50% of them are using the app. That's 5% more than last year. And we also see a 5 percentage point increase in the number of end-to-end customers, that is people who start their relationship with us in the mobile app and they only use mobile banking. Now very briefly about our mobile app. That's one of the key factors of our performance. Mobility is a key focus for us. We want the bank to be available, the entire bank and only bank in the app. We have improved that. We have improved our ratings and we have a very good NPS, very good customer ratings, even before what you can see in the bottom of the screen. In Q4, we will present a new version of our app, which we are building on the new technology provided by Kotlin, a multi-platform with new processes which rely on state-of-the-art technologies. We are working with Xiaomi and that's supported by the latest CRM. As a result, we have launched a number of new functionalities, BLIK prepayments for installment customers, for instance, those customers who do not have an account but have an installment loan are now actively banking over the mobile app, and they are using a number of other functionalities as well. And that's even before we have presented our new app. This is happening in Q4. Now let me move on to our business customers. We see stabilization in the performance and in the portfolio. The portfolio is stable, even though new sales would suggest that the portfolio should be now growing. At the bottom of the screen, the yellow bars, you can see the total credit limit granted, up 34% year-on-year, which has not yet fully produced complete results. On the right, at the top, you can see that we are phasing out the loans in the nonperforming portfolio. So this works both ways. But we are very happy to see that new sales are growing, and these will soon outweigh the termination of bad loans. So the portfolio should start to grow. What we see in some of the segments, maybe not in micro because this segment has been stagnant over the year and is now only starting to bounce back. But I'm speaking of the small and medium enterprise segment. The new sales there are growing by a double-digit number year-on-year, so a solid growth in new sales. Not across all segments yet, but in the segments where we want to be a bigger player. That's where we are being very, very active. So the portfolio mix that we are -- that we have now and our target portfolio mix are very different. So the results are not really comparable year-on-year. As far as business customers are concerned, obviously, deposit assets, there's an increase of 5% there. They keep banking online even though there's been a very recent launch of a business app. We've now been having a campaign about that for the past few days. I'll talk about it later. What we are very happy about is the activity in the leasing sector, lease and loans portfolio. That's a good start for our business customers. The portfolio grew by 8%, by 3% in the last quarter. The lease and loans market has seen some stagnation this year. So the 8% growth is really very satisfying. On the right-hand side, you see the growth in the new business. There's been a growth of 21% year-on-year. We are very strong in a few areas, especially vehicles up to 3.5 tonnes or machines and equipment. So we have a considerable share in those market segments. A few words about this part of the strategy. We want to leverage our brand. We want to refresh it. And we, therefore, continue further activities in that area. There is a new look in our cards. There is an [ e- Kantor ] business. As you can see, a slightly reversed banking model for business customers where we give them the possibility to conduct the company in the mobile app with our banking in the background. Obviously, there's a new model of functioning. I invite everyone to visit it. You can manage both your warehouse and your invoices directly from the app, and it is all combined with the actual account. We also want to follow the route of trying to reach new segments of customers. That is why in the last column on the right, you can see that we have joined the Inside Seaside festival as the main partner. We want to be visible there at the events of that particular festival. And another aspect of our strategy, we want to refresh our target group. We want to expand into younger people. That is why we have a dedicated offer to that group. We've started collaborating with Anita Lipnicka and the PRO8L3M music band. We have issued a new video with a piece of music dedicated to that group. And there's been a good pickup in that target audience, a growing interest in Alior Bank. So we find this direction of development to be a good fit, and we will be reaching into new segments in that particular way. So that is all as far as business results are concerned. I will hand over to Marcin to tell you more about credit risk. Marcin Ciszewski: Good afternoon, everyone. I will begin with the capital ratios. Our position is very secure. As has been mentioned by Piotr, there's a big margin quite above regulatory requirement, PLN 4.9 billion is the amount. The Finance Committee has given access. And at the end of September, there was an introduction of a new buffer, the capital buffer. Nevertheless, at the end of the quarter, the liquidity ratio is 17.5%. We also grow our liquidity, MREL. In the fourth quarter, we have placed another position of our bonds to the tune of PLN 450 million, senior preferred it's called, and the margin of those bonds goes down. It is 1.5 percentage points above the 6-month WIBOR. With considerable oversubscription at the end of the quarter, the ratio was 20.75%. The liquidity ratios are above the regulatory minimums. As regards LCR, it was 214% and NSFR at the level of 146%. Moving on to the credit risk. Let me start with the nonperforming loans ratio, which at the end of the quarter was 6.29%. In that particular quarter, we did not really sell any new loan NPL packages, but we did identify a default at a big customer in the mining and steel works industry. But that is a one-off event, which had an impact on the NPL and CoR level. But we have managed to bring that into order, and we still maintain the strategy where the cost of risk should not go above 0.8%. And after clearing the field from these negative events, it would be at the level of 0.7%. We maintain our strategic assumption, where by the end of next year the NPL ratio should go down below 5%. Moving on to the next slide. We can see some important information at the business slide, there's a growth there. There was that one-off negative event. But in case of the retail customers, it is quite flat, but a slight increase compared to the previous quarter. At the end of the second quarter, we sold an important package of loans, which did not happen in the third quarter. In the fourth quarter, there will be another package sold and a revenue will be credited, which will impact both NPL and the cost of risk ratios. Thank you very much. I now hand over to Zdzislaw. Zdzislaw Wojtera: Good afternoon. Let me tell you about the financial results. Let us begin with our income. The objective was to stabilize the revenues this year, especially in the environment of decreasing interest rates, 125 points dropped in 1 half of the year. Comparing year-on-year results, we are at the same level of revenue. Also, in quarter-on-quarter terms, they are very similar results. If we look at the net profit, there are a few one-offs that need to be taken into account and which represent the differences between the quarters. Let us look at the second quarter or the first half compared to the third quarter. As Marcin mentioned, in the second quarter, we had a one-off, which was the sale of the NPL loan package, which increased our profit for the second quarter. If we compare the years, the third quarter of '24 and the third quarter in this year, we were still before the principle of spreading out the cost over the quarter. So the cost in the third quarter were very low. And then in the fourth quarter, we had to report more costs, considerably higher costs, which resulted in the result of the third quarter of last year to be quite high. So these are the ones which explain the difference. In other conditions, we still deliver considerable result above PLN 500 million in each quarter. In the next slide, we see the breakdown of our income statement. The first yellow column is the quarter, then the second yellow column is the cumulative result, one through third quarter. And the first position, we will discuss them in the subsequent slides because we dedicated additional slides to these specific positions. If we look at the costs of activities, which we keep to control very well -- and there is a dedicated slide to that, so I will discuss those in detail later. Two important bits of information for you is the fact that when we use the conservative approach, we have created PLN 47 million of additional reserves for mortgages in currencies and additional PLN 19 million for the so-called pre-credit cost. We keep observing a growing increase of new cases in the third quarter, and so we had to react. But this is our very conservative approach. Nothing that could raise any concern is happening in terms of currency loans. This is a margin of our activities really. And so the currency loans is a very small part of our activities. So there are 2 events which we included in the third quarter which impacted the net result, PLN 563 million, which translated into a very good profit of 19% in quarterly terms and over 19% in cumulative terms. Cost-to-income ratio is also very good considering the scale of our activities. 36.9% in quarterly terms is a very good result. The next slide is addressed to the interest income. I talked in the part about revenues. This is obviously a very important part of it. Especially at the lower part, you can see that between the second and third quarters, we had a slight increase. Looking at 3 quarters of this year, there's been a stabilization of the result. And we expect that in subsequent quarters, we will observe a gradual improvement in the result according to our strategy. So on the one hand, there will be a low interest rate environment and potential further decreases of the interest rates, but the volume of our income, profits and commission and margin will help us improve the interest result and the profit. If we look at the commissions, the interest margin, we started with 6.20% and ended up at 5.61% for this current quarter. Two important constituent parts are important, the drop in interest rates, of course, but also the change in the structure of sale, where the important part of our balance sheet are the mortgage loans, which have a lower margin and income but can allow us to plan a stable income stream for the subsequent years. And these 2 elements impact the result, where you can see the drop in interest margin. What can we expect in the next quarter? Well, there will be further drop, about 10 basis points. So that is what we can expect as far as the next quarter is concerned. However, the interest result should be at a comparable level and will subsequently improve. And one final point on the loan-to-deposit ratio. You can see that our lending picks up, steps up, and so the curve is now turning north from 78% up to 80%, which shows that our loans are simply growing faster ever than before. NFC, the net fee and commission income. As we said when presenting our strategy, this item is of special importance for us. We want to grow it. And we cannot grow it unless we work over time. This cannot be done overnight. We have to offer better quality to our customers. And step by step, we can see results. NFC grew 5% quarter-on-quarter and 10% year-on-year, with a significant increase in Q3 alone. In FX transactions of our customers, the summer, the holidays, travels helped to boost FX income. And then we have another important line, sales of insurance in the group. That's good news. What are we anticipating in the next quarter? It may be difficult to copy the Q3 numbers one-to-one, but I think we will balance somewhere between Q2 and Q3 numbers with positive growth over the year. And my final slide talks about our operating expenses. I've already mentioned that if you look at the numbers starting in Q1, net of the BFG contribution, our operating costs or management costs, general expenses would be PLN 540 million, then PLN 550 million, PLN 565 million. And we expect that the total operating expenses net of the BFG charge should be up 6%, 7% year-on-year in 2025, which proves that we keep costs well under control and our cost/income ratio remains strong at 37.9% on a normalized basis net of the credit holidays. And that's a very good and solid result looking at the scale of our activity. In Q3, we saw a very positive contribution to the net profit -- in Q3 2024 to be specific. This is when our costs were still relatively low. Then in Q4, we booked very high costs with a significant increase. This is why that line is not straight. Now we expect to keep the costs stable quarter-on-quarter in a transparent way, and we are well on track. So it will be much easier to anticipate Alior Bank's costs quarter after quarter. Thank you, and over to Piotr. Piotr Zabski: Well, to summarize, let me go back to the strategy once again. As I said, our 3 pillars to grow scale. And you can see that we are growing. Our assets are growing and so are our liabilities. Our lending and new sales are growing. The portfolios are improving. So we are growing scale. Especially proud to say that our number of customers has been growing. We attract new customers. They recognize our efforts. We are refreshing our target group. It's going to be younger. We get results. Our customers are banking with us using mobile and digital solutions. The second pillar, stabilize our revenue. We are very proud with the increase in the share of NFC in our income mix. We are growing sales of insurance, for instance, that stabilizes our figures. And that's quite an impressive result I'm sure. Third pillar is operational excellence, and it's also bringing results. The cost-to-income ratio is very strong. The increase in costs is well below the market average. We have fully implemented the agile model -- business model, and we work in tribes to provide even better solutions and better performance for our customers, especially digital solutions, as we said in our strategy. After Q3, our bank is thriving, we are well on track with the strategy. And that's all for me. Thank you very much for listening to this presentation, and we open the floor for your questions. Dominik Prokop: Excellent. Moving on to your questions. What provisions for the CHF portfolio are you expecting in Q4 2025 and in 2026? Unknown Executive: Well, as you know, it all depends on how fast new cases are opened. I'm sure in Q4, we can expect a slightly higher number, maybe similar to what we reported in Q3. But we expect that in the coming quarters, these numbers will definitely be lower. If I may comment. Our CHF portfolio is disproportionately lower than those of other banks. So this is a fractional number really. Dominik Prokop: Another question. What were the reasons for the positive impact at PLN 14.8 million in your CIT in Q3 2025 in other items of the income tax? Unknown Executive: Well, as you remember, in the last year, we said we were closing down our activity, our branches in Romania. And this year, we started to clear the losses from the windup of that branch. So that is the positive impact. Dominik Prokop: Next question. What is the scale of the impact of the proposed CIT adjustments that are expected in Q4 in deferred assets? Unknown Executive: Yes. This is perhaps not that intuitive to some of the market participants. A higher tax rate expected next year means that the banks will be disclosing some additional impact on the net profit this year. I don't want to speculate. At Alior Bank and in all other banks subject to the new tax, the impact will be positive this year, which is paradoxical I know. But we've heard very different comments on this draft law. There may be an alternative draft proposed. So we don't want to disclose any numbers, but that would be the impact of the new tax strategy. We would have to look into it and present a positive result this year, which will be relatively high. Dominik Prokop: The next question. What is the WFD, the long-term ratio at the end of Q3? Unknown Executive: It's fairly stable at the bank, 40.54%. Dominik Prokop: Thank you very much long-term financing ratio. Next question, the increase in the corporate loans portfolio in Q3, was it affected by any one-offs? Unknown Executive: I think we are well on track of growth. As you may recall, our strategy says we want to shift the focus, and we are interested in micro -- in the micro segment. This year, the micro segment has been stagnant with no growth at all, very little growth in small enterprises and double-digit growth year-on-year in large customers. Well, I must say that Alior Bank is playing in this market in proportion to its size. We are not a leader or a trendsetter, but we are focusing on different segments than we used to. And so the growth you have seen may not be very impressive. But the segments we want to be a strong player in are now producing double-digit growth. Dominik Prokop: Next question. Why did your bancassurance income grow quarter-on-quarter in Q3 2025? Unknown Executive: That was partly due to a higher cost of provisions against insurance repayments that we set up in Q2 and partly due to better penetration of insurance that is bundled with products we sell. Dominik Prokop: What NIM are you expecting in Q4 2025? How will NIM perform in the next quarters? Unknown Executive: As I said, we are expecting a drop of 10 basis points or a dozen basis points in Q4. The annual average NIM next year is expected to reach 30, 40 -- sorry, to drop 30, 40 basis points. Dominik Prokop: Why was -- were your NPLs growing so slow in Q3? Unknown Executive: As I said during the presentation, one customer, a large customer was defaulted. They defaulted in Q3 as a one-off. But we maintain our expectation for the NPLs to go down for the entire loan portfolio by the end of next year to less than 5%. Dominik Prokop: Next question. Why did the number of relationship customers grow year-on-year, 40,000? Was it new mortgage customers or customers using installment loans? What products can you offer to the new 40,000 customers? Unknown Executive: Well, our definition of a relationship customer is quite broad, customer who banks with us day after day. An installment customer has a single relationship with us, an installment loan. So that's not covered by the definition and not covered by the growth. So we are looking at the number of customers who are actually banking with us. And there is no good answer to that question really. We are playing a number of different instruments like an orchestra, and all these instruments play together. We are refreshing our brand. We are entering new segments, launching new products, launching new campaigns, reaching out to new customers, communicating with them in new ways, improving our mobile app. We are now working differently with distribution, production. So all of that is now starting to contribute to the performance. Of course, we are continuously working to develop new products, simplify our processes, improve the time period, time to cash, and many other ratios. So it's a set of many different factors which we started to develop as we joined the bank and that we have addressed in the strategy. Dominik Prokop: Next question. Any of your strategic objectives to grow the loan portfolio, grow your NFC or your net profit, is any of those more difficult for you to achieve 6 months after you presented your strategy? Unknown Executive: Yes. I think after 3 quarters, we are in a different place and depending on the segment. So the situation differs segment to segment. We have great achievements in selling mortgages, better than expected really. In other segments, we are growing less fast than expected. But again, in most of them above the market average. So it depends. And as I said before, our loans may not be growing as fast as we would like them to. Our mortgages are growing faster than we expected. Installment loans are well on track. Business customers, we are changing our trajectory and reaching out to new segments. So in those segments where we want to grow, we can see sales grow by double-digit figures. It will definitely be difficult to improve the net fee and commission income now that interest income is falling, NIM is falling. It will be difficult to grow the margins. We need to regroup. We need to reorganize our processes and products and build up the customer base of relationship clients who are not only producing NIM, NII, but also NFC. In all these segments, we can see some challenges. As of now, I think we have addressed challenges across many different strategic initiatives, that we have defined now a tactical plan. We have aligned the bank with the objective of delivering solutions very fast. The agile business model we applied in Q3 was implemented. 100 teams in several tribes are working to develop even better solution for our customers. So we have seen some deviation from plan, but I think we are managing them quite well. Let me also mention leasing, which is also delivering double-digit growth year-on-year. Dominik Prokop: Thank you very much. This is all the questions asked. I want to thank everyone for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Hello, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aena Third Quarter 2025 Results Presentation. [Operator Instructions] I would now like to turn the conference over to Carlos Gallego, Head of Investor Relations. Please go ahead. Carlos Gallego: Good afternoon, everyone, and welcome to our 9 months 2025 results presentation. This is Carlos Gallego speaking, Head of IR. It's a real pleasure being with all of you today. Our Chairman and CEO, Maurici Lucena, will host the call together with Ignacio Castejón, CFO; and myself. As usual, we are going to cover the main topics explained in the results presentation, and we will finish with a Q&A session. [Operator Instructions] without further ado, I give the floor to Maurici Lucena. Thank you. Maurici Betriu: Thank you very much, Carlos. Good afternoon, everybody, and thank you for joining us to our 9 months 2025 results presentation. As usual, I will try to go through the key highlights of the period. Then I will give the floor to our CFO, Ignacio Castejón. And as always, we will conclude the conference call with a Q&A session. I will start with traffic as usual. As you can see in the information we have conveyed this morning to the market, traffic volume across the Aena Group grew by 4.1% year-on-year. In Spain, the increase was 3.9%. And I would like to stress clearly that we do confirm our 2025 traffic guidance of 3.4% year-on-year. So this increase in the first 9 months of the current year have confirmed our guidance, in other words. And if I jump to our international activity, in Luton, the increase in the 9 first year -- first months of the year, excuse me, was 4.8%. In Brazil, in the -- or BOAB, as we call it in Spanish, concession, the increase was 5.5%. And in Aena's ANB, the increase was 5.3% in traffic volume. If I move to our financial performance, total revenue in the first 9 months of 2025 reached almost EUR 4.8 billion, EBITDA EUR 2.9 billion, and the EBITDA margin stood at 60.2%. If we exclude the impact of the IFRIC 12, the EBITDA margin would be 61.9%. And net profit reached almost EUR 1.6 billion. And in this sense, I would like to highlight that the commercial activity really performed very well. Sales grew by 8.7%. And I would like to remind you that the tenders awarded in the first 9 months of the current year in specialty shops, they guaranteed minimum annual guaranteed rents in 2025 and 2026 that are 33% and 40% higher than in 2024. And in the case of food and beverage, the growth rates are 19% and 20%, respectively. You know as well that Aena has launched the tender for 98% of the food and beverage business in Barcelona. And I would like to say that we are very optimistic on the results -- on the eventual results of this tender. And I now move to the real estate business. Total revenue grew by 13.7%. And as you well know, we have launched simultaneously the tender process for the first hotel developments in Madrid and Barcelona airports, and we are also optimistic on the results. And finally, the contribution of the international EBITDA to the consolidated figure was in this first 9 months, EUR 307 million, which represents an increase of 23.3%. However, you know that I don't usually join you for the financial results presentation of the first 9 months of the year. And actually, the reason why I have joined you today is because I wanted to be crystal clear on 3 elements that are very important for Aena and for our financial results presentation and are important messages that I would like to convey to our shareholders, to analysts and in general, to investors. So I would like to make a few comments. Firstly, on the ownership of Aena's assets of Aena's Airports. Secondly, on DORA III and what we expect in principle of DORA III. And thirdly, on dividends and the way forward, let's say. So I will start with ownership. And you know that in the last months, there have been too many, I would say, statements made by some political representatives from some regions in Spain regarding airports owned by Aena. We were convinced a few weeks ago that the moment had come to issue -- I think it was a very clear communication to the market through De la Comisión Nacional del Mercado de Valores, the CNMV. And within this communication, we stated that Aena has been undertaking a very intense advocacy activity, at least since the summer of 2024. I'm completely convinced that the current legal and constitutional framework, and because this is also very important, Aena's shareholder structure, the combination of private and state-owned shareholder structure, both this constitutional framework and our shareholder structure provide a very strong protection to the airport system and specifically to Aena, to our company. And I think that this preservation of the current model is especially important when we have announced, as you know, a very strong volume or very high volume of investment in the coming years. You know that we are going to embark on a period of major investments contained within DORA III. And you know that this investment that we announced a few weeks ago will culminate in the modernization and the expansion of many Spanish airports, which aside from Aena are essential to Spain's economic development in the coming decades. So that's why we are so convinced that this investment is good, both for Aena and both for our country or the country where Aena was born and where Aena has its main activity. So in other words, I would like to paraphrase a very well-known central banker. And I would like to state that the Aena is ready to do whatever it takes to preserve its model and its net asset value. And believe me, the combination of the constitutional framework, our shareholder structure and our determination will be enough. This is my conviction, and I would like to convey it very clearly to the market. Now I move to the second important point, DORA III. You know that on September 18, we announced our CapEx proposal for the third DORA -- for DORA III with a total amount of almost EUR 13 billion, of which almost EUR 10 billion corresponds to the regulated activity. You know that the aim of the investment related to DORA III in Spain is to add significant capacity, deliver better service and comply with regulatory requirements in Spain. And again, I would like to say very clearly that the top management team of Aena that I lead since 2018, I think, that deserves very much credit when I say clearly that we expect a technically reasonable WACC for DORA III. In other words, I think that the investment proposed by Aena will be technically very well -- or not very well, reasonably remunerated. This is what I would like to stress in this message because I've read many things. And at present, I'm completely convinced that the WACC will be reasonable. We don't ask for anything else than reasonability in the building of the WACC for DORA III investment by Aena. And thirdly, and finally, concerning dividends, you know that our current payout is 80% of the net profit. And again, I would like to be crystal clear. At this moment, when I look to the future at this moment in time and with the information that I have in front of me, I don't see reasons to change our current dividend policy. This is the end of my brief presentation. I now will give the floor to our CFO, Ignacio Castejón. And of course, I am at your disposal to answer any questions at the Q&A session. Thank you very much. Ignacio Hernandez: Thank you very much, Maurici. Hello, everyone. Good afternoon. This is Ignacio speaking. I'll try to be brief so that we have time afterwards for our Q&A session. On traffic, I would like just to share and highlight the important growth -- strong growth of the international traffic in our Spanish platform. International traffic grew by circa 6%, 5.7%, in particular, while the domestic traffic remained flat, as all of you know. In this regard, I would like to also to remark the important and the positive performance of the long-haul markets. You know that this is a market that is still smaller than our European and our Spanish market. But looking at the growth rates that we are delivering for Africa, Middle East, Far East and LatAm, I'm convinced that this is an important trend and a market that we will keep working on them. The company recently confirmed the capacity that we are seeing as of today for the winter schedule that happened last week with the information that we have now. And this is around 3.5% growth compared to the latest information that we have for the real seats delivered in 2024. I'm going to move directly for the purpose of being conscious of time to cost because I have read some comments on cost this morning. When I look -- and I'm referring to Slide 7, total operating expenses of the group grew at around 10%. And basically, this has been affected because the accounting rules that are applicable in Brazil, IFRIC 12. If we were excluding the increase in our cost related to IFRIC 12, that 10% would be around 5%, 5.5%, if I am accurate. And when we look at the Spanish network that I also read some comments this morning, the total operating expenses are growing at 6.6%, reaching EUR 1.5 billion. Let's have a short discussion on this item. Mainly the increase is explained by a couple of things, 10.9% rise in personnel costs, basically is the result of higher payrolls, additional headcounts, the improvement of the variable retribution schemes in the company and a number of other things. This is something that is just the result of our collective agreement, our collective scheme and also adding more people so that we are prepare for DORA III and also reacting to the increase in activity that we have seen in the last 24 months of the company. When we look at other operating expenses that are amounting EUR 996.7 million, I would like to share with all of you 3 things. This is for the first 9 months of the year. And I was also having a look at some of your views about the third quarter, and I think it's important that we address your comments. As you know, the third quarter of the year is the most active and the most intense quarter that this company had from a traffic standpoint. Secondly, as we have been sharing with all of you, we are seeing a trend in many of the contracts that we are awarding to our suppliers and providers. That is a trend that is confirming that the most of our costs related to security, maintenance, cleaning, PRM services are going up. They are not going down. And this is basically as a consequence of inflation trends, as a consequence of new salary rules applicable in Spain being impacting many of these costs, also new regulations applicable to Aena and also to our subcontractors. So there is a trend there that is basically impacting us and is impacting the whole sector and many activities in the country. And finally, there are a couple of things that are affecting the comparison of this quarter with the performance of the other operating costs that we saw in the first 6 months of this year. Many of you were stating this morning -- or some of you, sorry, that the increase in cost in this third quarter was higher than the trend in the first 6 months. Well, there have been a couple of things explaining why -- or there are a couple of things explaining why that has happened. In the first 6 months of 2024, we recorded a significant provision because of the Chapter 11 of one of the real estate company that we have operations with. And therefore, the cost increases that we have that year, so in 2024 was material in the first 6 months of 2024. So when we compare the first 6 months of 2025, the comparison was a very light increase. The provision, if I remember well, that we marked at that moment in time was circa EUR 15 million. On top of that, there have been some costs that in the past we incurred in the first 6 months of the year -- in the first part of the year that in 2023 -- 2025, sorry, are happening on the second part of this year. For example, advertising, that's something that we will incur in the last 6 months of the current year. Let's move to commercial that I think is where we have a very good news, I think as usual in the last quarters that we are sharing with you. And I would like -- the Chairman and CEO have already highlighted the significant growth in sales. I would like to share with all of you more than data that you already have in the presentation. The reasons why we think we are delivering this performance, there are a number of reasons. I think, first of all, the progress in the remodeling works, refurbishment works in most of the units awarded to our tenants. Secondly, we are adding commercial surface. We are adding more and more space, for example, in duty-free. When we awarded the last contract -- the current contract of duty-free, we said that we were going to increase the space for this activity, and that's happening. We have added around 10,000 square meters to this business line. The works are progressing. Madrid and Barcelona, we are almost done. We are introducing new business concepts. So as we discussed in the results presentation back in July, we have more and more hybrid concepts where in the duty-free areas, you can have F&B experiences and you can buy other products. We are introducing new brands that are fitting more and more with the passenger profile. We are, of course, taking into account and enjoying the consequences of having better conditions in our contracts that the Chairman was referring to the awards of the first 9 months of the year. So MAGs are going up, and that's resulting into better performance. And let me finish just with the strong performance that we are seeing in the mobility-related services. So car rental activities. We have the new contract, but also we are seeing more and more transactions at a higher average transaction value in the car rental business. And finally, the VIP activities that the company has been devoting a lot of work and activity is performing extremely well with a delivery of around 30% of growth, mainly explained by the increase in prices. We are adding services. And of course, we are attracting more and more passengers. The growth rate in passengers -- in users, sorry, is much higher than the growth rate that we are seeing in the traffic through our facilities. And let me finish on the international front. The Chairman has referred to the growth in the international EBITDA contributed to the whole group. I would like to basically highlight on Luton. I would like to share with all of you that in the third week of September, the Luton team successfully delivered the parking lot -- the construction for the parking that had a fire a couple of years ago was properly delivered and that facility is already up and running, and therefore, we are collecting revenues. And secondly, the insurance related to this fire, we managed to deliver a settlement -- we managed to reach a settlement with the insurance provider. And therefore, we shouldn't expect any kind of claim or litigation in this matter. That has been settled, and we have received what we were expecting to receive. And on Brazil, I would like to highlight the strong operational improvement that we are seeing in local currency. When we look at the growth in EBITDA in our Brazilian assets, the Recife portfolio and the Congonhas portfolio, we are seeing growth in Brazilian reais of around 20% of our EBITDA in those 2 assets, which are very good news and confirm our views that we would be able to attract traffic growth, but also perform positively on the OpEx front and increase the commercial performance in these 2 assets. On Congonhas, I would like to highlight with all of you that the construction activities have already -- are progressing materially. That's why you are seeing in the slide that you have in front of you that CapEx for the first 9 months is around EUR 150 million. The goal and our obligation according to the contract signed in that country is that by mid of 2028, we should have done all the CapEx activities in that airport. And without further delay, I would like to stop there so that we have all the necessary time for your Q&A. Operator: [Operator Instructions] Our first question comes from the line of Cristian Nedelcu with UBS. Cristian Nedelcu: It's a 2-part question, if you allow me. A lot of investors are trying to understand a little bit better this incremental CapEx of EUR 3 billion to EUR 4 billion that you've announced a couple of months ago, but trying to understand if it's good or not so you're spending that, what type of returns you can get on the nonregulated side. Could you give us a bit more granularity? There are some information on Slide 11. Can you tell us a bit more how much of this CapEx is for growth? How much is for maintenance, security or other? Could you talk about any metrics incremental retail space or any other metrics that will allow us to better judge the return on capital employed you'll get in this asset? And the second part, if you allow me, you've shown in your slides a lot of the projects in this CapEx plan -- are in planning mode. So from the perspective of the time line, how much CapEx do you think you'll spend in '27, '28? Is it fair to assume that CapEx is more back-end loaded? Maurici Betriu: This is Maurici Lucena. I would just like to make a very brief introduction to your first question. And then I will give the floor to Ignacio Castejon to our CFO. I was honestly very surprised when the day we announced our CapEx proposal, which, of course, is a proposal because we have -- you know that we have a period which is defined by law in which we have to discuss our proposal with airlines. We need also reports from the CNMC, we can marginally modify specific aspects of our proposal, then there's the profile of the airport charges and so on. So -- and eventually, it is the government, which in its role as a regulator decides what the final DORA III investment will be, but I was a little bit surprised or very surprised by the market reaction by the decrease of our share price, the day we announced this because as a professional economist, when I think about what is Aena's business from the regulatory perspective, it is almost everything about the wrap, and of course, if we were another company, I could understand some of the, I don't know, of the doubts, but I think that our track record, our delivery, it has been very good in the last decade. I say the last decade because it is in -- it was in 2015 when we went public, and we became a listed company. And I think that we are a reliable company. So I think that, of course, there are risks when I know, when you project such a high amount of CapEx, but this will be good for the company. This will increase our RAP, will improve our airports, will improve our -- the quality of the services we offer to our customers, to our clients. And in the end, this will be -- how would you say that -- it will -- sorry, because the words came in Spanish, and I wanted to be very precise. This, in the end, the increase of the RAP with such a hike volume of investment will generate value for the company without doubt. So this would be my first, but I would say, important reflection. And I now give the floor to Ignacio. Ignacio Hernandez: Thank you very much, Maurici. And thank you very much for your don't know, super question or 100 questions in one question, Cristian. I think as the Chairman was explaining, we are at a very early stage of the consultation process. It has just started. I think this is the second or the third week of the consolidation process. The teams internally have been working very hard in order to have this proposal. And of course, we have a massive amount of internal information that is being discussed. The nature of the consultation process in Spain, as all of you know, is confidential. And therefore, we cannot go now publicly, assuming that we were interested in doing so and start setting all that information. Having said all that, because I will not be able to address all your queries, unfortunately, Cristian. But what I can say with you, trying to react to some of your points on the schedule, I think, this is going to be partially back ended. It's difficult for any company launching so many projects for that value being able to deliver from day 1, proportionally that amount of CapEx. So please assume that in the first years of DORA #3, the CapEx that we'll be able to execute will be lower than the CapEx that hopefully we'll be able to deliver in the second part of DORA #3. That's basically -- is a result of the of physical preparation, design, permits, et cetera, and also being up and running in a number of those projects that are in some regards, are not 100% controllable by the company. You were also raising the point on nonregulated investments, that is basically around circa EUR 3 billion. I would like to highlight a couple of things, Cristian, in this regard. I think the first one is around 2/3 of this amount is just the result of the mechanical cost allocation, in this case, CapEx allocation that is applicable to this company when we execute CapEx. So if this company is executing CapEx related to a terminal, part of that building will be allocated to regulated CapEx and part of that building will be allocated to nonregulated CapEx. So it's not that we can entertain a discussion about, are we investing in exotic extraordinary nonregulated activities that are not growth or will not deliver revenue. It's not -- it's our scope, it's our day-to-day activities, but every time that this company invests one penny in a building that is providing regulated activities given that, that building will also be providing partially some nonregulated activities, we have to allocate part of that investment to nonregulated assets. And rounding up, that is around 2/3. If we look at the other 1/3, that is 100% nonregulated activities, Cristian, I would say that no surprises here. This is going to be mainly new car park buildings, that are given that we are expanding the terminals and hopefully, there will be more traffic based on our numbers in our facilities in the next decade, there will be a need for new car park. And that's basically explaining a significant part of the 100% nonregulated investments. And this is what is behind the EUR 3 billion figure that we sell with the market in mid-September. You were also asking on a breakdown about what is behind the EUR 13 billion. I think the company has been disclosing figures related to the main projects that we are willing to start in the next DORA III. I'm referring to Madrid, I'm referring to Barcelona, I'm referring to some airports of the Canary Islands, and also other ones in the Mediterranean Coast. So I would say that around 50% of the total number of the EUR 13 billion refers to these big initiatives, transformational initiatives. The other 50% refers more to infrastructure, technology, safety and security, sustainability, innovation, planning, recurring maintenance, et cetera. So that's the kind of breakdown that I'm happy to share with all of you at this moment in time. I hope that I have been able to address your question. And I would like to finish just with another comment following up on the statements from the Chairman and also other statements related to DORA III that I have heard, and I think you were alluding as well in your question, Cristian. This company this year, next year, the very first year of DORA III, from a cash flow standpoint, is not materially changing. I think we are going to have a need to raise debt in order to invest in all this CapEx mainly in the last years of DORA III. So I would like to share this message with you in order to reduce the level that I have seen in some of you about the uncertainty or materially changing in the company, in the credit profile of the company or in the cash flow quality of the company. 2025, you are seeing the figures today as of September. I don't -- we should expect that 2026, very similar to 2025. I'm not giving you guidance. We are not providing guidance today of 2026, but it's the last year of the current DORA and you have all the information on DORA II in front of you. And as I was saying at the beginning of my answer, DORA #3, the CapEx is a bit back-ended. And if you look at our debt maturity profile, there are no material debt repayments coming in the next year and especially in the first years of DORA III. So the questions related to, can the company afford these CapEx investments, the Chairman has already confirmed the point on capital allocation with respect to dividends. And I also would like to share with all of you as CFO, that we see that this company will remain having a strong credit rating in the next years despite this proposal of DORA III, that is on the table, and we are willing to deliver. And sorry for my long answer, Cristian, but given your total and big question, I thought that was necessarily a long answer. Operator: Your next question comes from the line of Tobias Prohme with Bernstein. Tobias Prohme: I also have a question regarding CapEx. I guess some investors and the staff had also worried that CapEx will be higher for longer spilling into DORA IV as well given that not all of the projects can be finalized in DORA III. When you look at Slide 12 and the projects in planning stage and the pre-project stage, and then combine that with comments of the Spanish Minister of Transport, that construction for Barcelona won't start before 2032. Can you maybe comment or give us a little bit more color on your capital expectation for DORA IV. Maybe some comments on: a, what do you think for Barcelona and the Barcelona comment? And then b, sort of which other projects are likely to require CapEx beyond DORA III that is not captured in your current proposed CapEx? Ignacio Hernandez: Thank you very much for your question, Tobias. This is Ignacio speaking. I'll be very straightforward Tobias. We have just started the consultation process for DORA #3. So start talking today in the results presentation for the 9 months of 2025, about DORA #4, I think would be a wrong approach from the company. And that's message #1. And with respect to my message, the other message that I wanted to share with all of you, some of our projects in our DORA III, of course, are longer from a construction standpoint than the 5-year period of DORA #3. So there will be some of our projects that will be totally completed in DORA #4. That's a consequence of the size and the importance of these projects that will allow the company to provide capacity for the next 20 to 25 years of traffic growth in Spain. Thank you, Tobias. Operator: Your next question comes from the line of Elodie Rall with JPMorgan. Elodie Rall: We talked a lot about the CapEx and that you think they are good CapEx, and you've mentioned that the WACC will be reasonable. Could you give us maybe a bit of color about what kind of tariff increase this will all translate into in the next door. I think you said in the past that you would aim to get something around low single-digit tariff increase that you view that as a good outcome. Is that something that you are still comfortable into pushing forward to? And for next year, tariffs was obviously already announced -- how secure is that? And when will we have the final confirmation? Ignacio Hernandez: Thank you very much, Elodie. This is Ignacio speaking. I think as you know, the process, we will not have our proposal being discuss and hopefully approved by our Board until March of next year and will be subject to further approvals coming from the cabinet and regulators after summer of next year. So any indication from my side could be premature. Having said all that, I think we see reasons why there might be a tariff increase in the next years. If we look at the CapEx investments that we were discussing in the -- previously, this is a significant investment. Two, if we look at OpEx, OpEx of the company is likely to go up. There are many reasons for that in the context of a significant construction activity, expanding our terminals, bigger footprint of our terminals, more activity coming on the commercial front. So all that, I think this company will get bigger. And therefore, the OpEx of this company as a consequence of that, is likely to go up. And finally, from the remuneration standpoint, as the Chairman was referring, we think that we'll get an adequate and attractive, a reasonable WACC. And if I look at many of the inputs that are taken into account in order to estimate WACCs, what I see now is a scenario in which risk-free rates are higher, cost of debt for Aena will be higher than the one used for DORA II. So there are reasons there to defend a higher remuneration for this company in the context of DORA III than the ones that we had through the consultation process of DORA II, and that would be my answer, Elodie. Operator: Your next question comes from the line of Nicolo Pessina with Mediobanca. Nicolò Pessina: About the governance rights that many local authorities had has in the last couple of months, I understand Aena's view to preserve the current model. However, I wanted to understand better what the objective of the local authorities in asking these governance rights is. What would they like to do differently? And is it technically possible to give them a role in the decision or process of a single assets, maybe giving them voting rights for a single asset while retaining the economic rights? Maurici Betriu: This is Maurici Lucena speaking. Well, I think that for the reasons why local authorities or certain local authorities ask for more involvement in the management or regulation of airports. I think that you should ask them the reasons because I don't know. I mean I cannot be abstractly in their place to think why they ask it. You know that the political world is complex. And I think that the best approach is to ask them directly. On the second issue, you mentioned again, I want to be crystal clear. We think that it's stronger than we think. We are convinced that the constitutional framework and the part of the Spanish constitution that refers to airports along with, and this is very important, along with the shareholders structure of Aena, which is a hybrid state-owned and private and listed, provides a very strong protection of the model. And in other words, Aena will and can only decide things that -- to put it simply, that are in harmony with a business case with this profitable for the company. So why the company would be interested in sharing the management of the company being the most efficient company in the airport sector, probably in relative terms in the world. Why? So this is why I say that we consider our model, which is, by the way, the model defined by law in Spain of airports and of the company of Aena very solid. And at present, I consider it impossible to modify anything in the line that has been mentioned by some political actors. Operator: The next question comes from the line of Andrew Lobbenberg with Barclays. Andrew Lobbenberg: Can I ask about external activities. And I know you're always limited on what you can say about where you're looking and what you're doing. But as we are focused on the scale of CapEx. And as Maurici spoke about how you recognize the importance of shareholder returns to investors, and you reiterated your expectation of sustaining the 80% dividend payout. I mean, how are you thinking in terms of the flexibility to participate in further external opportunities given that potentially Luton is on the table and then press reports have you looking at the CCR and assets and indeed Catania as well. How are you balancing this? Maurici Betriu: Thank you, Andrew. I will be very sincere because your question is a question that -- on which I have been reflecting, I would say, a very long period of time because, yes, I will be very clear. I think that to the extent that the current information allows us to, let's say, reflect on this, I think that it is comparable so far for Aena to invest enormous volumes of money in the coming years to defend a very high payout of our net profit. And that's why I say, I said that I don't see at present any reason to change our payout policy in the coming years at present. And thirdly, the potential of M&A projects. I think that these 3 elements, investment, a very generous dividend policy and potential M&A projects are comparable. And this is why I wanted to be clear when I said what I said on the dividend policy. And specifically, in M&A, I've said this many times, we look at everything. We look at everything because this is a sort of not very wide market. I refer the one that offers new international opportunities. So we look at everything, but actually, we are interested in very few projects because the combination of the quality of the asset price, regulatory risk, the country, culture, culture, I mean, culture proximity to express it clearly. The combination must be a very specific one. And when this combination takes place, so we can then be very concrete in being interested in a specific project. But this happens very few times. Operator: Your next question comes from the line of Dario Maglione with BNP Paribas. Dario Maglione: I agree with the Chairman. The group CapEx makes sense. I think the regulated WACC should be reasonable for the next quarter. I'm more concerned about the execution. So Aena, how will Aena manage the construction risk? If I think about the construction, Aena has not done a lot of CapEx over the past 15 years. And of course, EUR 13 billion is a large number. So if there are delays, cost overruns in 1 project, what happens? Can Aena transfer some of these risks to subcontractors how would the regulator look at this for the next order? Maurici Betriu: This is Maurici Lucena, again. Well, all that I can say at present before I give the floor to Ignacio Castejon is that as CEO of the company, I consider the company very well prepared for this very -- it's true, stressful period of an enormous amount of investment, but if it was otherwise, I would not have proposed this volume of investment to the Board and then convey it to the government for each analysis. And it's a final decision in the coming year in next year. So I think that we will be prepared. You are right when you say that it's not the same when in Spain, you invest, well, this year, we will be investing in Spain from a regulatory perspective, EUR 750 million. And this is very different from the volume that we will face in DORA III, but I consider the company very well prepared. And if there are any doubts, I would kindly ask you that you analyze what we have just done in Brazil. In Brazil, it's first time ever, and this has been said by the Brazilian authorities that an airport company complies with everything related to all the construction that was associated to the concession. And I'm very optimistic as well on the success of the construction in Congonhas, which is very challenging, of course. So -- but I think that this is a very good precedent to assess the, let's say, the probability that Aena in Spain will complete successfully the new DORA III. So again, I'm very confident that we'll do it. And now we'll give the floor to Ignacio Castejon. Ignacio Hernandez: Thank you, Maurici, and thank you for the question, Dario. The 2027 to 2031 investment plan, of course, will be a challenge. I think one of our main aims, Dario, is maintaining and that's why it's an important challenge. It's maintaining airport capacity during the construction activity. So while the works are underway. The most significant works will begin in DORA III, and our plan in order to have them being executed and delivered, is that they will be gradually put into service. So it will be a phasing -- a phased approach, sorry. I would also like to highlight or to underline that we will tender out the projects, the construction projects when they are already designed, already completed. So when they are tender out by us, there won't be very little, I would say, very limited room for potential deviations or changes that mitigates -- that materially mitigates risk, at least from our perspective. I think the Chairman referred to Congonhas, to Recife. We also have in front of us, the example in Palma, where we are delivering the project one year ahead of schedule in 2027. Also, thank you to the investment approved by the regulator that we -- that gave us more room to finish this project next year. So I think it's a transformational phase for the company, but we think we have the right resources, tools, processes and our approach to tender contracts will help us to mitigate the risk that you were pointing out. Operator: Your next question comes from the line of Marcin Wojtal with Bank of America. Marcin Wojtal: I just wanted to ask about the regulatory process and the time line. So you mentioned that you have until 15th of March 2026 to submit your DORA plan to the regulator. Are you going to make it public? Are you going to perhaps organize some sort of presentation, explain your assumptions and giving us more detail? And then what happens later? Are you expecting the regulator to issue maybe like a draft determination, preliminary determination before the summer? Or we have to wait literally until September 2026 to get further visibility. Ignacio Hernandez: Thank you for your question, Marcin. I think with respect to what the company may communicate in -- after March of next year. We haven't made an internal decision about it. So we will make that decision at that moment or in the following months if we think it's the best for the company, the shareholders and the process. If I understand well, during process -- during the process of DORA #2, there was some privileged information being disclosed by the company with some with a summary or the main elements of the proposal of the company being shared with the market. That happened in DORA #2. I think let's make a decision, let's make the call about DORA III at that moment in time, if we finish the best course of action, always taking into account our regulation and the Securities Exchange Commission regulation. With respect to your question #2, I think it's unlikely that they publicly revert to us before summer, but I don't have -- that's a question for them, not for us how they will make progress before summer with all our information. Operator: Next question comes from the line of Harishankar with Deutsche Bank. Harishankar Ramamoorthy: Maybe one around the tariff increase that you're talking about for DORA III, what would be a reasonable WACC behind your assumptions for a slight increase in tariffs? And on the tangent, if you do land a tariff increase under DORA III, what's the risk that airlines start pulling out more capacity. Are you worried about that? Ignacio Hernandez: Thank you for your question, Hari. We -- of course, we are working with numbers internally and we have been working for a while. We haven't even presented to our Board those final numbers. And in the consultation process, discussions about WACC will happen later on. So it would be, I would say, it wouldn't be the right approach from our end, setting that information with you at this moment in time. Apologies for that, Hari. I'm sure that in the future, we'll be able to have this conversation, but not now. Harishankar Ramamoorthy: No, I completely understand that. And any thoughts around what might happen to airline capacities and whether you would be worried about that, in the event of a tariff increase, I mean. Maurici Betriu: I didn't get your question, Hari, sorry. Harishankar Ramamoorthy: Sorry. So you've seen some reports on how certain airlines have been looking at taking capacity on the back of tariff increases. So given your projection for slight tariff increases, are you worried about any capacity changes from airlines? Ignacio Hernandez: Sorry, I didn't understand your question initially. Apologies for that, now I got it. I think that those have been comments from one specific airline with respect to a specific season, prior to DORA #3. So what we see is a market that is one of the largest touristic markets in the world that according to ACI is going to be a top 5 market in aviation, a very important activity sector like tourism accounting for around 15% of the Spanish GDP. So we believe that there will be appetite and demand from airlines to be present sorry in this kind of market, Hari. Operator: And the last question for today comes from the line of Jose Arroyas with Santander. José Arroyas: Yes. Thank you for the clarifications. They were very helpful. I wanted to ask you on the Barcelona food and beverage contract. What are, in your opinion, reasonable expectations for the market increase in that contract? I can see that there is a 30% more square meters than in the previous contract, and I can see that in Madrid, a similar contract was awarded in 2023 with more than 40% increase in MAG. So I wanted to make sure my expectations that we might see the MAG rising by more than 50% in that individual contract is not out of kilter. And whilst we are on that topic, I wanted to check with you if there is any other large tender outside Barcelona food and beverage that we should have in mind during 2026. Ignacio Hernandez: Thank you, Jose Manuel. This is Ignacio speaking. I think we are very excited about the F&B tender in Barcelona. The commercial team has been working really hard in that matter and the feedback that we are receiving from the market is that I would say it's very strong. And we are adding a space. We are trying to have a very attractive and appealing approach to this contract in terms of tenure, in terms of layout, in terms of concepts, with respect to expectations... [Technical Difficulty] Operator: And that is the end of our Q&A session. Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines. We thank you for your participation.
Dominik Prokop: Good morning. My name is Dominik Prokop. I am the Head of Investor Relations. Welcome to this conference presenting Alior Bank's Q3 2025 results. In the first part, the results and the trends will be presented by Alior Board members, Piotr Zabski, CEO, who will present the main trends and discuss the business performance; VP Marcin Ciszewski, who will speak about risk; and VP Zdzislaw Wojtera, speaking about financial results. Right after the presentations, we will move right into your questions. Before I hand over to our CEO, Piotr, I urge and encourage all of you to ask your questions even during the presentations. Just like every quarter, this will allow us to smoothly segue into the Q&A. Thank you, and over to Piotr. Piotr Zabski: Good morning, and welcome to yet another presentation of our quarterly results. Yesterday, the Supervisory Board approved our results and it is our pleasure to present them today, to present our Q3 performance and the results year-to-date. Before I move to the highlights, I'd like to first talk about our strategy that we announced and published in March. In the third quarter, we continued to pursue our strategy, and in summary, we came close to saying that we are well on track implementing the strategy. The strategy is based on 3 pillars: growth, scale, stabilization of results and operational excellence, which you will see in our numbers. Operations, just a few highlights and facts I'd like to draw your attention to. This year, year-to-date, our revenues reached PLN 4.5 -- more than PLN 4.5 billion, including NII at PLN 3.87 billion year-on-year, stable with lower rates, of course. Our net fee and commission income grew. That's the other leg of stabilizing our results. So that has materialized. In Q3 alone, we have a drop in NII due to the lower rates, but we have made up for it by growing our net fee and commission income, which is our strategic objective. Hence, the net profit in Q3 amounted to PLN 563 million and year-to-date PLN 1.679 billion. And we have achieved all that with a very good return on equity, close to 19%, well in line with our strategy. My comment over that period of time, we also recognized 50% of last year's profit in our equity, and so we are even more proud of our ROE as equity is growing. Speaking of risk, we have very good readings, PLN 124 million cost of risk and the ratio is 0.72, less than 0.8 that is our target, down 0.2 percentage points year-on-year. NPL stood at 6.29%, down 0.81 percentage points in the past 12 months. So we are well on track, in line with the trajectory of eliminating the problems that burdened us over the past few years. I've mentioned equity. Our capital position is solid with a big surplus. Our ratios, Tier 1 and TCR, remain very strong, well above the regulatory minimums. And that surplus allows us to continue with our strategy of growth. Speaking of growth, just a few highlights, a few facts. As you may recall, our strategy relies on relationships, growing the number of relationship customers who are the future of this bank. That number grew by 100,000 year-on-year, the number of relationship customers, the biggest growth we have seen in this regard over the years. 1.68 million -- sorry, we have 1.68 million customers, 98,000 more than at the end of Q3 2024. And the number of mobile app users was 1.59 million, 15% up year-on-year. Our deposit portfolio grew 8% year-on-year to more than PLN 80 billion and our assets grew, especially mortgages. We are proud to say this, the increase was 111% year-on-year to PLN 1.3 billion of new mortgages in Q3. The share of our portfolio of mortgage loans in the portfolio is now more than 30%, which ensures some stability in our portfolio. This is a long-term, well-secured portfolio at good margins, so it is a stable factor working for us in the coming periods. Another success we are proud of regarding liquidity, we issued MRL bonds that Marcin will discuss in more detail at a very good margin, 1.5%, with a lot of demand. So something -- that's something we are also very proud of. The next slide presents more details of our activity across the bank. Assets grew 7% year-on-year, and we are very close to a special mark, PLN 97.7 billion -- very close to the mark of PLN 100 billion. We'd like to get there next quarter. The volume of deposits was growing faster than loans, specifically up 8%. That's more than PLN 80 billion. Performing loans grew 6% to PLN 63 billion. At the bottom of the screen, you can see 2 lines with some readings for Q3. The top - there's the top line and then year-to-date in the bottom line. Cost-to-income ratio was very strong. Our costs increased affecting the portfolio due to inflation. And I think Zdzislaw will focus on that later on. But as you can see, the growth of this indicator is lower than the growth in costs. NIM and net interest margin. The interest rate cuts are materialized here. ROE, very high, as I said, both in Q3 and year-to-date. Cost of risk, very low as well in both terms, in Q3 and year-to-date, better than we expected, in line with our strategy. And the NPL and capital ratios are very strong. Most importantly, in a downtrend this continues. Let me now move on to our main 2 business lines. First, retail. That's the top left-hand side of the slide. These are the assets of our retail customers that grew 12% year-on-year. We are very happy to see that growth. Basically, every line has improved year-on-year. On the right-hand side, you can see the gross loans to retail customers by real estate loans in yellow and other mainly consumer loans up 6% overall. In the bottom part of the screen, you can see the breakdown of that figure. We are happy with the growth of non-mortgage consumer loans, up 21% year-on-year. The sales have stabilized over the past few quarters, but we have maintained the dynamic growth. So growing scale is part of our strategy, and we are very much doing that. Last but not least, in the bottom right-hand corner, you can see the efforts we've made to sell mortgages, which grew by more than 200%, 2.1x bigger. That is our production and sales year-on-year. The sales grew to PLN 1.3 billion in Q3. So our market share is much bigger than our overall share in the banking industry. Customer relationships and relationship customers, part of our strategy. The number of relationship customers grew by more than 100,000 or close to 100,000, 1.68 million, the best numbers we've seen ever in this regard. Relationships are very important for us to stabilize our performance and the other -- to prop up the second pillar of our strategy. Our customers are using the mobile app more and more, the number of mobile app users has been growing. More of that later. But I'm happy to say that customers who do not hold accounts with us but only have installment loans or cash loans, they have a reason to use our mobile app. That number grew by more than 200,000 customers year-on-year. The relationship customers, about 50% of them are using the app. That's 5% more than last year. And we also see a 5 percentage point increase in the number of end-to-end customers, that is people who start their relationship with us in the mobile app and they only use mobile banking. Now very briefly about our mobile app. That's one of the key factors of our performance. Mobility is a key focus for us. We want the bank to be available, the entire bank and only bank in the app. We have improved that. We have improved our ratings and we have a very good NPS, very good customer ratings, even before what you can see in the bottom of the screen. In Q4, we will present a new version of our app, which we are building on the new technology provided by Kotlin, a multi-platform with new processes which rely on state-of-the-art technologies. We are working with Xiaomi and that's supported by the latest CRM. As a result, we have launched a number of new functionalities, BLIK prepayments for installment customers, for instance, those customers who do not have an account but have an installment loan are now actively banking over the mobile app, and they are using a number of other functionalities as well. And that's even before we have presented our new app. This is happening in Q4. Now let me move on to our business customers. We see stabilization in the performance and in the portfolio. The portfolio is stable, even though new sales would suggest that the portfolio should be now growing. At the bottom of the screen, the yellow bars, you can see the total credit limit granted, up 34% year-on-year, which has not yet fully produced complete results. On the right, at the top, you can see that we are phasing out the loans in the nonperforming portfolio. So this works both ways. But we are very happy to see that new sales are growing, and these will soon outweigh the termination of bad loans. So the portfolio should start to grow. What we see in some of the segments, maybe not in micro because this segment has been stagnant over the year and is now only starting to bounce back. But I'm speaking of the small and medium enterprise segment. The new sales there are growing by a double-digit number year-on-year, so a solid growth in new sales. Not across all segments yet, but in the segments where we want to be a bigger player. That's where we are being very, very active. So the portfolio mix that we are -- that we have now and our target portfolio mix are very different. So the results are not really comparable year-on-year. As far as business customers are concerned, obviously, deposit assets, there's an increase of 5% there. They keep banking online even though there's been a very recent launch of a business app. We've now been having a campaign about that for the past few days. I'll talk about it later. What we are very happy about is the activity in the leasing sector, lease and loans portfolio. That's a good start for our business customers. The portfolio grew by 8%, by 3% in the last quarter. The lease and loans market has seen some stagnation this year. So the 8% growth is really very satisfying. On the right-hand side, you see the growth in the new business. There's been a growth of 21% year-on-year. We are very strong in a few areas, especially vehicles up to 3.5 tonnes or machines and equipment. So we have a considerable share in those market segments. A few words about this part of the strategy. We want to leverage our brand. We want to refresh it. And we, therefore, continue further activities in that area. There is a new look in our cards. There is an [ e- Kantor ] business. As you can see, a slightly reversed banking model for business customers where we give them the possibility to conduct the company in the mobile app with our banking in the background. Obviously, there's a new model of functioning. I invite everyone to visit it. You can manage both your warehouse and your invoices directly from the app, and it is all combined with the actual account. We also want to follow the route of trying to reach new segments of customers. That is why in the last column on the right, you can see that we have joined the Inside Seaside festival as the main partner. We want to be visible there at the events of that particular festival. And another aspect of our strategy, we want to refresh our target group. We want to expand into younger people. That is why we have a dedicated offer to that group. We've started collaborating with Anita Lipnicka and the PRO8L3M music band. We have issued a new video with a piece of music dedicated to that group. And there's been a good pickup in that target audience, a growing interest in Alior Bank. So we find this direction of development to be a good fit, and we will be reaching into new segments in that particular way. So that is all as far as business results are concerned. I will hand over to Marcin to tell you more about credit risk. Marcin Ciszewski: Good afternoon, everyone. I will begin with the capital ratios. Our position is very secure. As has been mentioned by Piotr, there's a big margin quite above regulatory requirement, PLN 4.9 billion is the amount. The Finance Committee has given access. And at the end of September, there was an introduction of a new buffer, the capital buffer. Nevertheless, at the end of the quarter, the liquidity ratio is 17.5%. We also grow our liquidity, MREL. In the fourth quarter, we have placed another position of our bonds to the tune of PLN 450 million, senior preferred it's called, and the margin of those bonds goes down. It is 1.5 percentage points above the 6-month WIBOR. With considerable oversubscription at the end of the quarter, the ratio was 20.75%. The liquidity ratios are above the regulatory minimums. As regards LCR, it was 214% and NSFR at the level of 146%. Moving on to the credit risk. Let me start with the nonperforming loans ratio, which at the end of the quarter was 6.29%. In that particular quarter, we did not really sell any new loan NPL packages, but we did identify a default at a big customer in the mining and steel works industry. But that is a one-off event, which had an impact on the NPL and CoR level. But we have managed to bring that into order, and we still maintain the strategy where the cost of risk should not go above 0.8%. And after clearing the field from these negative events, it would be at the level of 0.7%. We maintain our strategic assumption, where by the end of next year the NPL ratio should go down below 5%. Moving on to the next slide. We can see some important information at the business slide, there's a growth there. There was that one-off negative event. But in case of the retail customers, it is quite flat, but a slight increase compared to the previous quarter. At the end of the second quarter, we sold an important package of loans, which did not happen in the third quarter. In the fourth quarter, there will be another package sold and a revenue will be credited, which will impact both NPL and the cost of risk ratios. Thank you very much. I now hand over to Zdzislaw. Zdzislaw Wojtera: Good afternoon. Let me tell you about the financial results. Let us begin with our income. The objective was to stabilize the revenues this year, especially in the environment of decreasing interest rates, 125 points dropped in 1 half of the year. Comparing year-on-year results, we are at the same level of revenue. Also, in quarter-on-quarter terms, they are very similar results. If we look at the net profit, there are a few one-offs that need to be taken into account and which represent the differences between the quarters. Let us look at the second quarter or the first half compared to the third quarter. As Marcin mentioned, in the second quarter, we had a one-off, which was the sale of the NPL loan package, which increased our profit for the second quarter. If we compare the years, the third quarter of '24 and the third quarter in this year, we were still before the principle of spreading out the cost over the quarter. So the cost in the third quarter were very low. And then in the fourth quarter, we had to report more costs, considerably higher costs, which resulted in the result of the third quarter of last year to be quite high. So these are the ones which explain the difference. In other conditions, we still deliver considerable result above PLN 500 million in each quarter. In the next slide, we see the breakdown of our income statement. The first yellow column is the quarter, then the second yellow column is the cumulative result, one through third quarter. And the first position, we will discuss them in the subsequent slides because we dedicated additional slides to these specific positions. If we look at the costs of activities, which we keep to control very well -- and there is a dedicated slide to that, so I will discuss those in detail later. Two important bits of information for you is the fact that when we use the conservative approach, we have created PLN 47 million of additional reserves for mortgages in currencies and additional PLN 19 million for the so-called pre-credit cost. We keep observing a growing increase of new cases in the third quarter, and so we had to react. But this is our very conservative approach. Nothing that could raise any concern is happening in terms of currency loans. This is a margin of our activities really. And so the currency loans is a very small part of our activities. So there are 2 events which we included in the third quarter which impacted the net result, PLN 563 million, which translated into a very good profit of 19% in quarterly terms and over 19% in cumulative terms. Cost-to-income ratio is also very good considering the scale of our activities. 36.9% in quarterly terms is a very good result. The next slide is addressed to the interest income. I talked in the part about revenues. This is obviously a very important part of it. Especially at the lower part, you can see that between the second and third quarters, we had a slight increase. Looking at 3 quarters of this year, there's been a stabilization of the result. And we expect that in subsequent quarters, we will observe a gradual improvement in the result according to our strategy. So on the one hand, there will be a low interest rate environment and potential further decreases of the interest rates, but the volume of our income, profits and commission and margin will help us improve the interest result and the profit. If we look at the commissions, the interest margin, we started with 6.20% and ended up at 5.61% for this current quarter. Two important constituent parts are important, the drop in interest rates, of course, but also the change in the structure of sale, where the important part of our balance sheet are the mortgage loans, which have a lower margin and income but can allow us to plan a stable income stream for the subsequent years. And these 2 elements impact the result, where you can see the drop in interest margin. What can we expect in the next quarter? Well, there will be further drop, about 10 basis points. So that is what we can expect as far as the next quarter is concerned. However, the interest result should be at a comparable level and will subsequently improve. And one final point on the loan-to-deposit ratio. You can see that our lending picks up, steps up, and so the curve is now turning north from 78% up to 80%, which shows that our loans are simply growing faster ever than before. NFC, the net fee and commission income. As we said when presenting our strategy, this item is of special importance for us. We want to grow it. And we cannot grow it unless we work over time. This cannot be done overnight. We have to offer better quality to our customers. And step by step, we can see results. NFC grew 5% quarter-on-quarter and 10% year-on-year, with a significant increase in Q3 alone. In FX transactions of our customers, the summer, the holidays, travels helped to boost FX income. And then we have another important line, sales of insurance in the group. That's good news. What are we anticipating in the next quarter? It may be difficult to copy the Q3 numbers one-to-one, but I think we will balance somewhere between Q2 and Q3 numbers with positive growth over the year. And my final slide talks about our operating expenses. I've already mentioned that if you look at the numbers starting in Q1, net of the BFG contribution, our operating costs or management costs, general expenses would be PLN 540 million, then PLN 550 million, PLN 565 million. And we expect that the total operating expenses net of the BFG charge should be up 6%, 7% year-on-year in 2025, which proves that we keep costs well under control and our cost/income ratio remains strong at 37.9% on a normalized basis net of the credit holidays. And that's a very good and solid result looking at the scale of our activity. In Q3, we saw a very positive contribution to the net profit -- in Q3 2024 to be specific. This is when our costs were still relatively low. Then in Q4, we booked very high costs with a significant increase. This is why that line is not straight. Now we expect to keep the costs stable quarter-on-quarter in a transparent way, and we are well on track. So it will be much easier to anticipate Alior Bank's costs quarter after quarter. Thank you, and over to Piotr. Piotr Zabski: Well, to summarize, let me go back to the strategy once again. As I said, our 3 pillars to grow scale. And you can see that we are growing. Our assets are growing and so are our liabilities. Our lending and new sales are growing. The portfolios are improving. So we are growing scale. Especially proud to say that our number of customers has been growing. We attract new customers. They recognize our efforts. We are refreshing our target group. It's going to be younger. We get results. Our customers are banking with us using mobile and digital solutions. The second pillar, stabilize our revenue. We are very proud with the increase in the share of NFC in our income mix. We are growing sales of insurance, for instance, that stabilizes our figures. And that's quite an impressive result I'm sure. Third pillar is operational excellence, and it's also bringing results. The cost-to-income ratio is very strong. The increase in costs is well below the market average. We have fully implemented the agile model -- business model, and we work in tribes to provide even better solutions and better performance for our customers, especially digital solutions, as we said in our strategy. After Q3, our bank is thriving, we are well on track with the strategy. And that's all for me. Thank you very much for listening to this presentation, and we open the floor for your questions. Dominik Prokop: Excellent. Moving on to your questions. What provisions for the CHF portfolio are you expecting in Q4 2025 and in 2026? Unknown Executive: Well, as you know, it all depends on how fast new cases are opened. I'm sure in Q4, we can expect a slightly higher number, maybe similar to what we reported in Q3. But we expect that in the coming quarters, these numbers will definitely be lower. If I may comment. Our CHF portfolio is disproportionately lower than those of other banks. So this is a fractional number really. Dominik Prokop: Another question. What were the reasons for the positive impact at PLN 14.8 million in your CIT in Q3 2025 in other items of the income tax? Unknown Executive: Well, as you remember, in the last year, we said we were closing down our activity, our branches in Romania. And this year, we started to clear the losses from the windup of that branch. So that is the positive impact. Dominik Prokop: Next question. What is the scale of the impact of the proposed CIT adjustments that are expected in Q4 in deferred assets? Unknown Executive: Yes. This is perhaps not that intuitive to some of the market participants. A higher tax rate expected next year means that the banks will be disclosing some additional impact on the net profit this year. I don't want to speculate. At Alior Bank and in all other banks subject to the new tax, the impact will be positive this year, which is paradoxical I know. But we've heard very different comments on this draft law. There may be an alternative draft proposed. So we don't want to disclose any numbers, but that would be the impact of the new tax strategy. We would have to look into it and present a positive result this year, which will be relatively high. Dominik Prokop: The next question. What is the WFD, the long-term ratio at the end of Q3? Unknown Executive: It's fairly stable at the bank, 40.54%. Dominik Prokop: Thank you very much long-term financing ratio. Next question, the increase in the corporate loans portfolio in Q3, was it affected by any one-offs? Unknown Executive: I think we are well on track of growth. As you may recall, our strategy says we want to shift the focus, and we are interested in micro -- in the micro segment. This year, the micro segment has been stagnant with no growth at all, very little growth in small enterprises and double-digit growth year-on-year in large customers. Well, I must say that Alior Bank is playing in this market in proportion to its size. We are not a leader or a trendsetter, but we are focusing on different segments than we used to. And so the growth you have seen may not be very impressive. But the segments we want to be a strong player in are now producing double-digit growth. Dominik Prokop: Next question. Why did your bancassurance income grow quarter-on-quarter in Q3 2025? Unknown Executive: That was partly due to a higher cost of provisions against insurance repayments that we set up in Q2 and partly due to better penetration of insurance that is bundled with products we sell. Dominik Prokop: What NIM are you expecting in Q4 2025? How will NIM perform in the next quarters? Unknown Executive: As I said, we are expecting a drop of 10 basis points or a dozen basis points in Q4. The annual average NIM next year is expected to reach 30, 40 -- sorry, to drop 30, 40 basis points. Dominik Prokop: Why was -- were your NPLs growing so slow in Q3? Unknown Executive: As I said during the presentation, one customer, a large customer was defaulted. They defaulted in Q3 as a one-off. But we maintain our expectation for the NPLs to go down for the entire loan portfolio by the end of next year to less than 5%. Dominik Prokop: Next question. Why did the number of relationship customers grow year-on-year, 40,000? Was it new mortgage customers or customers using installment loans? What products can you offer to the new 40,000 customers? Unknown Executive: Well, our definition of a relationship customer is quite broad, customer who banks with us day after day. An installment customer has a single relationship with us, an installment loan. So that's not covered by the definition and not covered by the growth. So we are looking at the number of customers who are actually banking with us. And there is no good answer to that question really. We are playing a number of different instruments like an orchestra, and all these instruments play together. We are refreshing our brand. We are entering new segments, launching new products, launching new campaigns, reaching out to new customers, communicating with them in new ways, improving our mobile app. We are now working differently with distribution, production. So all of that is now starting to contribute to the performance. Of course, we are continuously working to develop new products, simplify our processes, improve the time period, time to cash, and many other ratios. So it's a set of many different factors which we started to develop as we joined the bank and that we have addressed in the strategy. Dominik Prokop: Next question. Any of your strategic objectives to grow the loan portfolio, grow your NFC or your net profit, is any of those more difficult for you to achieve 6 months after you presented your strategy? Unknown Executive: Yes. I think after 3 quarters, we are in a different place and depending on the segment. So the situation differs segment to segment. We have great achievements in selling mortgages, better than expected really. In other segments, we are growing less fast than expected. But again, in most of them above the market average. So it depends. And as I said before, our loans may not be growing as fast as we would like them to. Our mortgages are growing faster than we expected. Installment loans are well on track. Business customers, we are changing our trajectory and reaching out to new segments. So in those segments where we want to grow, we can see sales grow by double-digit figures. It will definitely be difficult to improve the net fee and commission income now that interest income is falling, NIM is falling. It will be difficult to grow the margins. We need to regroup. We need to reorganize our processes and products and build up the customer base of relationship clients who are not only producing NIM, NII, but also NFC. In all these segments, we can see some challenges. As of now, I think we have addressed challenges across many different strategic initiatives, that we have defined now a tactical plan. We have aligned the bank with the objective of delivering solutions very fast. The agile business model we applied in Q3 was implemented. 100 teams in several tribes are working to develop even better solution for our customers. So we have seen some deviation from plan, but I think we are managing them quite well. Let me also mention leasing, which is also delivering double-digit growth year-on-year. Dominik Prokop: Thank you very much. This is all the questions asked. I want to thank everyone for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Thank you for standing by, and welcome to Generac Holdings Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Director of Corporate Finance and Investor Relations, Kris Rosemann. Please go ahead. Kris Rosemann: Good morning, and welcome to our third quarter 2025 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer; and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation as well as other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron. Aaron P. Jagdfeld: Thanks, Kris. Good morning, everyone, and thank you for joining us today. Home standby and portable generator shipments grew sequentially in the quarter, but were below seasonal expectations as a result of a power outage environment that was significantly below our long-term baseline average and the lowest third quarter of total outage hours that we've experienced since 2015. On a year-over-year basis, overall net sales decreased 5% to $1.11 billion. Residential net sales declined 13% as compared to the prior year quarter with softness in home standby and portable generators, partially offset by strong growth in sales of residential energy technology solutions. Global C&I product sales also increased 9% during the quarter, led by growth in the domestic telecom and industrial distributor channels as well as international markets, which included the first shipments of our large megawatt generators to data center customers. Our significant momentum in the data center market has continued with our backlog for these products now doubling to over $300 million over the last 90 days, with even greater opportunities developing in our growing sales pipeline. Now discussing our third quarter results in more detail. Third quarter home standby shipments and activations increased sequentially from the second quarter, but shipments decreased at a mid-teens rate on a year-over-year basis as a result of the significantly weaker outage environment in the current year period as well as the strong prior year period that included the benefit of multiple landed hurricanes. The historically low outage activity in the quarter was broad-based with all regions declining as compared to the prior year and resulted in portable generator sales also declining on a year-over-year basis. Home consultations for home standby generators also increased sequentially from the second quarter, but declined year-over-year during the third quarter. Although the seasonally higher levels of IHCs that we would have normally seen did not materialize this year, home consultations held a solid baseline level with the ratio of home consultations to outage hours at the highest level since we began tracking these metrics more than a decade ago. We view the relative resilience of the home standby category as further evidence of continued growing awareness for these products and the underlying demand we continue to see as representative of a new and higher baseline level following the elevated outage environment of 2024, despite the very low level of outages seasonally in the third quarter. Our expanded investments in our marketing and lead generation capabilities as well as our solid execution and optimization of promotional campaigns also provided important support for the home standby demand during the quarter. Importantly, close rates improved substantially on a sequential basis and came in better than expected during the quarter with strong momentum continuing here in the month of October. We remain focused on initiatives to support ongoing improvements in close rates such as further increased awareness of financing alternatives and optimize sales tools and training for our partners. We also attribute the recent improvement in close rates to a significant change in our approach to distributing leads to our dealers through the implementation of an enhanced data-driven process that allows our dealers to select or pull which leads they prefer to pursue as opposed to the previous push approach, which distributed leads directly to specific dealers based on certain criteria. The new lead process allows a wider pool of dealers with higher close rates, the ability to select which leads they believe they have capacity to address. We believe the resulting improvement in close rates will further optimize our customer acquisition costs and lead to a broader distribution of sales leads across our residential dealer base. Our residential dealer network continued to expand during the quarter as our dealer count reached nearly 9,400, an increase of approximately 100 from the prior quarter and an increase of nearly 300 dealers over the prior year. We view this continued strength in contractor interest in the product category as evidence of the growing underlying demand for backup power solutions despite the softer outage environment. In addition, our aligned contractor program, which targets contractors that purchase our products through wholesale distribution, has also continued to grow and provides for incremental engagement, training and installation bandwidth through this important distribution channel. Also during the third quarter, we began the initial shipments of our next-generation home standby generator product line, which represents the most comprehensive platform update for the category in more than a decade. The new product rollout will continue in the fourth quarter with our first shipments of the higher end of the product range, including the market's first 28-kilowatt air-cooled home standby generator. This new product line features the lowest total cost of ownership available driven by reduced installation and maintenance costs as well as introducing industry-leading sound levels and the best fuel efficiency of any residential generator on the market today. The next-generation platform, together with our new Field Pro application also offers a number of important benefits for our channel partners, including significantly lower commissioning times and improved remote diagnostics, enabling operational efficiencies for their businesses and greater uptime and cost savings for their customers. Moving to residential energy technology solutions. Sales of these products and services outperformed our expectations once again and grew at a significant rate during the quarter, led by shipments of energy storage systems in Puerto Rico. Our team continues to execute extremely well alongside our partners on this energy grant-related program, which is expected to drive continued strong residential energy technology sales growth into the fourth quarter. Our ecobee team continued to drive that business forward and delivered another profitable quarter with significant gross margin improvement and operating leverage as a result of continued strong sales growth and disciplined cost control. Additionally, ecobee's installed base grew to approximately 4.75 million connected homes with increased energy services and subscription sales supporting a growing high-margin recurring revenue stream. We expect ecobee to deliver positive EBITDA contribution for the full year, a key milestone for the strategically important part of our business. As we begin launching new energy storage, microinverter and home standby products that are integrated with the ecobee's platform during the second half of this year, we are intent on delivering a premium feature set and user experience, which we believe will be an important differentiator for our growing residential energy ecosystem. We also made significant progress in our solar and storage product development efforts during the third quarter as we began shipping PowerCell 2, our next-generation energy storage system and introduced PowerMicro, our solar microinverter that will begin shipping by the end of this year. As we close out 2025, we are focused on leveraging these new products as well as our distribution and marketing capabilities to drive market share gains and significant sales growth in the future. As appropriate, however, we intend to recalibrate our investment levels to reflect the completion of our energy grant program in Puerto Rico and to adjust for a broader market environment that is likely to contract in 2026 as a result of the substantial reduction in federal incentives for solar and storage technologies. Although we see this market contracting in the near term, we believe that the secular trends of rising power prices and declining component costs are creating a situation where the economics of residential solar and storage technologies will provide for an attractive long-term market opportunity regardless of the level of government incentives. Now let me provide some additional commentary on our commercial and industrial product categories, where we continue to see year-over-year sales growth, which accelerated during the third quarter. In particular, sales to our domestic industrial distributor customers increased at a solid rate in the period as we further reduce the lead times for our C&I products. Our teams have been working hard to increase production rates over the last 18 months by bringing our new facility in Beaver Dam, Wisconsin online earlier this year. And as a result, we have successfully brought our lead times down to more historically normal levels. In addition to our operational execution in the quarter, our efforts to further develop our distribution partners, both owned and independent, have helped to expand our share of the domestic backup power generation market over the last several years. In addition to the growth in our industrial distribution channel, shipments to national telecom customers also grew at a robust rate in the third quarter compared to the prior year as part of the ongoing recovery for this important channel during 2025. We continue to expect the growing dependence on wireless communication and additional infrastructure required enhanced reliability to provide a solid backdrop for secular growth in sales of C&I products to our telecom customers into the future. Mobile product shipments to national and independent rental customers outperformed our prior expectations and increased on a sequential basis, which we view as signaling the beginning of a recovery for this market. We anticipate favorable momentum to continue building in the coming quarters for our mobile products, and we continue to believe we are well positioned for long-term growth given the mega-trend around the infrastructure-related investments needed both domestically and internationally that leverage our global portfolio of mobile products. Internationally, total sales increased 11%, driven by continued strength in C&I product shipments in Europe and the first shipments of our large megawatt generators to a data center customer in Australia. International sales continue to benefit from the favorable impact of foreign currency, which we expect will continue in the fourth quarter. Additionally, international EBITDA margins expanded at a strong rate from the prior year due to favorable sales mix. Our initiative to penetrate the large and rapidly growing data center market continued to gain momentum with initial shipments in international markets beginning during the third quarter. And as we saw our global backlog of large megawatt generators for this important end market doubled to more than $300 million over the last 90 days. The first domestic shipments of these new large output generators began here in the month of October, and we are projecting strong sequential growth in sales to the data center end market during the fourth quarter. The large majority of our backlog is expected to ship in 2026, providing a meaningful tailwind for overall C&I product growth in the coming year. Importantly, we continue to develop a robust pipeline of new opportunities within the data center market that represents significant upside for our C&I product in 2027 and beyond. Data center power demand is forecasted to grow at a significant rate for the foreseeable future. And the high uptime requirements of these facilities drives backup power needs in excess of site electricity consumption. Third-party estimates suggest that global data center power demand will cumulatively grow by more than 100 gigawatts over the next 5 years, with the potential for incremental annual capacity additions to double by the end of this decade. Additionally, further global market opportunities exist for large megawatt generators within our traditional end markets, in particular, providing backup power for large manufacturers, cold chain distribution centers, health care facilities and other critical infrastructure that have higher backup power requirements. Given the existing supply constraints within the high end of the C&I backup power generator market, large megawatt generators represent a massive opportunity for Generac as a long-standing well-known participant in the C&I backup power markets. In addition to our highly competitive lead times, we believe that our strong reputation as an engineering-driven organization that is uniquely focused on backup power with a customer-centric approach and world-class service capabilities will allow us to gain share in the data center backup power market as well as our traditional end markets. Given the momentum in our sales pipeline and the significant incremental market opportunity we see in the future, we have been actively exploring further investments to aggressively expand our competitive positioning and increase our capacity and capabilities for these products. We expect to undertake several important capacity expansion-related projects and investments during the fourth quarter to position Generac as a significant producer of these products well beyond 2026 and to support what we believe could be a potential doubling of our C&I product sales over the next 3 to 5 years. In closing this morning, our third quarter results and our lower residential sales outlook reflect a historically weak power outage environment. However, the mega-trends that support our future growth potential remain intact as lower power quality and higher power prices will be an ongoing challenge given the more frequent and severe weather patterns as well as broader electrification trends. And at the same time, the massive increase in data center power demand is expected to further stress the already fragile power grid by amplifying the growing electricity supply/demand imbalance. Additionally, we're entering a period of unprecedented growth for our C&I products as the expansion of our product line to include large megawatt generators has allowed for our entry into the rapidly growing data center market. As a leading energy technology company, we believe Generac is uniquely positioned at the center of these mega-trends that have the potential to drive substantial and sustainable growth in the years ahead. I'll now turn the call over to York to provide further details on third quarter results as well as our updated outlook for 2025. York? York Ragen: Thanks, Aaron. Looking at third quarter 2025 results in more detail. Net sales during the quarter decreased 5% to $1.11 billion as compared to $1.17 billion in the prior year third quarter. The combined effect of acquisitions in foreign currency had an approximate 1% favorable impact on revenue growth during the quarter. We believe looking at consolidated net sales for the third quarter by product class, residential product sales decreased 13% to $627 million as compared to $723 million in the prior year. As Aaron discussed in detail, a significantly lower power outage environment as compared to the prior year resulted in a decline in home standby and portable generator shipments. This was partially offset by robust year-over-year growth in sales of energy storage systems and ecobee home energy management solutions. Commercial & Industrial product sales for the third quarter increased 9% to $358 million as compared to $328 million in the prior year. Core sales growth of approximately 6% was driven by an increase in shipments to our domestic telecom customers, together with a strong growth in Europe and initial shipments of our new large megawatt generators to a data center customer in Australia, partially offset by continued weakness in shipments to national rental accounts. Net sales for the other products and services category increased approximately 5% to $129 million as compared to $123 million in the third quarter of 2024. Core sales increased approximately 3%, primarily due to growth in ecobee and remote monitoring subscription sales and other installation and maintenance services revenue, partially offset by a reduction in parts and accessory shipments given the lower outage environment. Gross profit margin was 38.3% compared to 40.2% in the prior year third quarter, primarily due to unfavorable sales mix, together with the impact of higher tariffs and manufacturing under absorption, partially offset by increased price realization as a result of price increases implemented earlier in the year to address the impact of incremental tariffs. Operating expenses increased $20.2 million or 6.7% as compared to the third quarter of 2024 as a result of certain legal and regulatory charges in the current year as disclosed in the accompanying reconciliation schedules. Excluding these items, which are not indicative of our ongoing operations, operating expenses decreased $0.6 million or 0.2% from the prior year. Adjusted EBITDA before deducting for noncontrolling interests, as defined in our earnings release, was $193 million or 17.3% of net sales in the third quarter as compared to $232 million or 19.8% of net sales in the prior year. This margin decline was primarily driven by the previously mentioned unfavorable sales mix and the operating expense deleverage on the lower sales volumes. I will now briefly discuss financial results for our 2 reporting segments. Domestic segment total sales, including intersegment sales, decreased 8% to $938 million in the quarter as compared to $1.02 billion in the prior year, including approximately 1% sales growth contribution from acquisitions. Adjusted EBITDA for the segment was $166 million, representing 17.7% of total sales as compared to $212 million in the prior year or 20.7%. International segment total sales, including intersegment sales, increased approximately 11%, $185 million in the quarter as compared to $167 million in the prior year quarter, including an approximate 3% benefit from foreign currency. Adjusted EBITDA for the segment before deducting for noncontrolling interest was $27 million or 14.8% of total sales as compared to $20 million or 12.2% in the prior year. Now switching back to our financial performance for the third quarter of 2025 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $66 million as compared to $114 million for the third quarter of 2024. The current year quarter includes an unfavorable Wallbox fair market value mark-to-market adjustment of $5.7 million and a loss on refinancing of debt of $1.2 million related to our Term Loan A and revolver amend and extend transaction that closed in July 2025. Our interest expense declined from $22.9 million in the third quarter of last year to $18.5 million in the current year period as a result of lower borrowings and lower interest rates relative to prior year. GAAP income taxes during the current year third quarter were $11.8 million or an effective tax rate of 15% as compared to $33.5 million or an effective tax rate of 22.7% for the prior year. The decrease in effective tax rate was primarily driven by favorable discrete tax items in the current year quarter related to certain return to provision adjustments that did not occur in the prior year. Diluted net income per share for the company on a GAAP basis was $1.12 in the third quarter of 2025 compared to $1.89 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $108 million in the current year quarter or $1.83 per share. This compares to adjusted net income of $136 million in the prior year or $2.25 per share. Cash flow from operations was $118 million as compared to $212 million in the prior year third quarter. And free cash flow as defined in our earnings release was $96 million as compared to $184 million in the same quarter last year. The change in free cash flow was primarily driven by an increase in inventory levels during the current year quarter and lower operating income, which was compounded by a decline in inventory levels during the prior year quarter. Total debt outstanding at the end of the quarter was $1.4 billion, resulting in a gross debt leverage ratio of 1.8x on an as reported basis. With that, I will now provide comments on our updated outlook for 2025. As discussed by -- as discussed in detail by Aaron, the extremely low outage environment in recent months has resulted in lower demand for home standby and portable generators and a reduction in our full year 2025 outlook for overall net sales growth. We now expect consolidated net sales for the full year to be approximately flat compared to the prior year, which includes an approximate 1% favorable impact from the combination of foreign currency and acquisitions. This updated outlook compares to our previous guidance of plus 2% to 5% net sales growth over the prior year. Looking at product classes, we now project full year 2025 residential product sales to decline as compared to the prior year in the mid-single-digit percent range, while C&I product sales are expected to increase as compared to the prior year, also in the mid-single-digit percent range. The resulting sales mix shift is projected to have an unfavorable impact on gross and adjusted EBITDA margins for the year as compared to our prior guidance. Specifically, we now expect gross margin percent for full year 2025 to be approximately flat to slightly down compared to the full year 2024 levels. This represents a nearly 1% decrease from our prior expectation of approximately 39.5% as a result of the previously mentioned unfavorable sales mix and lower manufacturing absorption given the lower residential production volumes, together with incremental new product transition and C&I plant start-up costs that are transitory in nature. Additionally, this gross margin guidance assumes that current tariff levels that are in effect today stay in place for the remainder of the year. Looking at our adjusted EBITDA margin expectations for the full year 2025, given the factors impacting our gross margins, together with additional operating expense deleverage on the lower sales volumes, we are reducing our guidance for adjusted EBITDA percent to approximately 17%. This is compared to our previous guidance range of 18% to 19%. Additionally, as a result of higher use of cash for primary working capital and capital expenditures, free cash flow conversion from adjusted net income is now expected to be approximately 80% for the full year 2025 as compared to the previous guidance range of 90% to 100%. This would still result in approximately $300 million of free cash flow in fiscal 2025, which provides for near-term optionality to allow for additional investments to drive future growth as part of our disciplined and balanced capital allocation framework. As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2025. For full year 2025, our GAAP effective tax rate is now expected to be between 20% to 20.5%, down from our prior guidance of 23% to 23.5% due to the lower realized third quarter tax rate. Specifically for the fourth quarter 2025, our GAAP effective tax rate is expected to be approximately 25%. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add-back items should be reflected net of tax using this 25% effective tax rate. We now expect interest expense to be approximately $70 million to $74 million for the full year 2025, assuming no additional term loan principal prepayments during the year. This compares to our previous guidance of $74 million to $78 million and contemplates lower interest rates and outstanding borrowings than previously assumed. Our capital expenditures are now projected to be approximately 3.5% of forecasted net sales for the full year 2025, a 0.5% increase from prior guidance as a result of incremental CapEx investment for data center capacity expansion expected in the fourth quarter of 2025. Depreciation expense, GAAP intangible amortization expense and stock compensation expense are expected to remain consistent with last quarter's guidance. Our full year weighted average diluted share count is expected to be approximately 59.4 million to 59.5 million shares as compared to 60.3 million shares in 2024. Finally, this 2025 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value during the year. This concludes our prepared remarks. At this time, we'd like to open up the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Tommy Moll of Stephens. Thomas Moll: I want to start on the data center market opportunity, Aaron. What all have you learned thus far in terms of the competitive dynamics there, the size of the opportunity? I think last quarter, you framed it at about $5 billion, the deficit next year. And then just in terms of the types of customers where you're seeing some traction, what's the nature of the conversation with hyperscale at this point? And any orders there in the backlog number that you gave us? Aaron P. Jagdfeld: Yes. Thanks, Tommy. So I mean, obviously, this is just a really unique opportunity for us. The structural deficit of the supply side of backup power for this particular market is as you would imagine, with the foot rate that's ongoing here to put these data center facilities in the ground. Every single conversation we have with a developer, with a hyperscaler, and edge data center provider, all of those conversations are almost the same in terms of just the difficulties in bringing these facilities online because of some of the constraints. The constraints being in the electrical side of the buildings, transformers, switchgear, generators. All of those components are in heavy demand as you expect. And this is, I think, just from a structural standpoint, it feels like this is going to continue for some time. We don't have in our backlog today any orders reflected from any hyperscalers, but we continue to have very productive conversations there. And we're very optimistic as we work to get added to the approved vendor list for these hyperscalers. They are very eager to have additional supply coming to the market. They're very eager to have us be a supplier to the market. Again, I think our brand, we're a trusted brand. We've been in the C&I backup power market for over 50 years. And so our expansion into this product line is kind of a -- it's a natural evolution. And it's not some fly-by-night supplier coming into the market. It's somebody who's well known, well capitalized and somebody who is going to be very aggressive, as I said on the call in the prepared remarks. We see a unique opportunity here for us to do something that is kind of generational with the company and with this part of our business. And as I said in the prepared remarks, we will have -- we've got a number of balls in the air here that by Q4 -- here in Q4, we're going to have to pull the trigger on a number of things. We've taken up our CapEx guide range slightly. That's part of the front end of this. That's everything from facilities to equipment. Our M&A funnel has also expanded where we think we could add capabilities and additional capacity through acquisitions. So we're looking at -- basically, we're not leaving any stone uncovered here, Tommy. It's a -- again, we have to be aggressive. We have to lean forward and we will capitalize on this in a way that I think -- the market certainly wants us to succeed. Every conversation we've had is to that effect, and we will succeed. This is going to be an area that's right in our wheelhouse. I feel very comfortable and very confident that we can execute on this. Our first shipments, I watched them go out of our factory in Oshkosh, Wisconsin last week, 1.5 weeks ago. Our first shipments went out internationally to a customer here earlier in the month and things are rolling. We've got products online, and we are looking at how can we aggressively expand our capacity with -- by leaning forward with investment in this area of our business. Operator: Our next question comes from the line of George Gianarikas of Canaccord Genuity. George Gianarikas: Now I know you're not talking about 2026 just yet, but if you could just sort of help us work through all the moving parts here? Clearly, outages have been weaker. There is a pull from data center generators and there's this -- the roll-off potentially of what's happened so far in Puerto Rico. So how should we sort of think about 2026 broadly with all the moving pieces at play? Aaron P. Jagdfeld: Yes. George, thanks for the question. Yes, just kind of -- and again, not giving guidance here, but I think to answer your question, let's start with just from a product category standpoint, our residential products and kind of being down a level deeper there with home standby and portables. Yes, it was a crappy season, I mean, let's be honest. The weather was really nice everywhere. We've been doing this a long time. We have not seen many 3Qs where we just didn't have outage activity. Like we planned the business around normal baseline outage and we got nowhere near normal. I mean we were literally 75% to 80% below normal for the quarter, just in raw outage hours. And that's without, obviously, any major events happening either. And obviously, we're comping against majors last year. So just -- it looks bad. It feels bad, but it's temporary. I mean we've been through this before. The weather patterns, we don't know what happens with weather. It comes and goes and these outage -- structurally, nothing's changed there. I mean just you've got -- in fact, I would point to all the structural things from a mega-trend standpoint that we've been talking about only continue to point to less reliability in the grid going forward. So -- and what's really remarkable, I would just put this out, like -- and we said this in the prepared remarks and people can call what they want. But those product categories, home standby and portals were up sequentially over Q2. So like we're holding that baseline of growth that we achieved last year. It's amazing to me that the underlying kind of -- the underlying strength of that category. We just didn't see the seasonal lift that we would normally see. So fast forward to 2026 for that category, it's going to grow well, right? I mean if we return, again, the assumption there, returning to baseline level of outages, now we're going to go to easy comps. Now we're going to have the opportunity to grow that category, and I would also point out, we continue to grow dealer base, right? Our dealer count went up. We added over 100 in the quarter, which I think is indicative of a healthy market. We continue to see lead demand, lead flow. Our customer acquisition costs continue to improve. We've been continuing to use data to refine our lead algorithms and our processes there in a way that we believe is going to impact and had -- we actually saw favorable impact to close rates in the quarter, and we think that's going to accelerate into 2026. So improved close rates next year, broader dealer counts, a return to normal baseline outages. And we also won shelf space for portable generators coming off of last season's hurricanes. So we've got expanded presence at retail. Those are all -- that's all a really good setup for the categories, those product categories next year. So I would put that in the plus column for next year. It's going to grow very nicely. We also have pricing, the effective pricing. We'll get a full year of that next year. So all of those things are good things for our residential products. Energy technology is a subset of that. Inside of that, obviously, Puerto Rico, the energy grant program there goes away after this year. We haven't heard that it's going to continue at least at this point. There's a chance it could, but we're not banking on that at all. And obviously, structurally, I think everybody knows that market is going to contract in 2026, the market for solar and storage. And that's on the back of the loss of -- primarily the loss of the 25D tax credit, incentive tax credit for homeowners. That said, when you look at longer term, look at your electricity rates. And George, I know you follow this. I know a lot of folks follow this. Electricity prices are up. They're up in many cases, in many areas, they're exceeding the rates of inflation and they're only going higher. We're just getting started. That is before we see this wave of AI power demand really impact pricing for electricity rates. And as rates go up, electricity prices go up, as the cost of these technologies continues to come down for storage and solar. And I would also say that as interest rates come down. Structurally, you can say, okay, the market is going to be off. The overall market is going to contract by 20% to 25% next year. I mean, I think it's conceivable that we're not going to claw all that back, but we've got growth with ecobee. And I think we have these other elements that longer term are still a really good setup for solar and storage. We've got a lot of new products just hitting the market. So we feel good about -- it's not going to feel good in terms of the results next year for that segment. I don't think it will be off 20% to 25%. It will be off something because of the loss of the DOE grant program. But again, I think we've -- long term, we feel good about where we're going with that product category. We feel good about the new products, feel really good about ecobee. Ecobee has been an outstanding performer for us within that part of our business. We feel good about that. And then you move to C&I. And that is just a tremendous story in terms of -- we've got great visibility now. That $300 million of backlog that we've amassed. It's doubled in the last 90 days. Most of that is 2026. As we said before, structurally, we think we can probably go to $500 million from a capacity standpoint in '26. So we still have opportunity to take that pipeline and convert more in '26 to the degree that we have customers who may need product and may need to get their hands on gen sets next year, we think we can provide them. And in fact, we think we can probably go north of $500 million to some degree by stretching capacity, by making some of the investments we're making right now. I think there's a little bit of upside there for '26 beyond the $500 million. But what we're focused on right now, George, is beyond 2026. We're focused on growing that business, growing our capacity in a way that, again, it's just as I mentioned before on the previous question, it's just unique, it's generational. It's -- I don't think we'll ever see this opportunity again, and we've got to go after it aggressively. Operator: Our next question comes from the line of Mike Halloran of Baird. Michael Halloran: I think you mentioned it briefly in there, Aaron, but maybe just on the new product launches on the clean energy side, I know early days, how is that tracking? And then maybe more importantly, could you just frame up what you mean or what the latest thought process is in terms of getting back to breakeven in those product categories? And what kind of that iterative process looks like as we work through the remainder of this year, early thoughts on '26 as far as how much of that loss you can reclaim? Aaron P. Jagdfeld: Yes. Thanks, Mike. So again, long term, we feel really good about that set of products for us and the market opportunity there, given the structural challenges around energy prices, and I think -- and continued need for resiliency, right, with that side of the business. We're building out an energy ecosystem. '26 is going to be tougher. We mentioned in our prepared remarks, we used the word recalibrate. We're using that word a lot internally here on how to make sure that as we get to the tail end of our product introduction cycle here with those products, we can ramp down some of the R&D spend associated with that. Now that will shift over into some -- there'll be some hypercare efforts. Those new products are just hitting the market now. Our first shipments of PowerCell 2 -- we're here in Q4. We're kind of on a limited launch schedule. We're looking to expand it in 2026. PowerMicros will start shipping here at the end of this year. So I don't have a ton of data points to offer for the market on the success or acceptance by the market of those products. I can only reiterate what we've been told over the last several years as we've been working on developing these products and that as the market feels that it needs additional suppliers. It's a bit of a duopoly right now on the inverter side. And honestly, it's kind of a -- I want to say it's a monopoly on the storage side, but obviously, there's a supplier there in Tesla that has -- it provides the lion's share of the market opportunity or the market supply. So we think there's great opportunities for us to be successful. Our kind of north star there is still to be breakeven by 2027. That is our north star. It hasn't changed, even though the market is going to contract. That was our north star prior to the loss of federal support, 25D for these products. But we believe, I think given, again, the high -- the continued upward movement in retail electric prices, the continued downward movement in these technologies, the cost of these technologies and the potential for a pullback in interest rates. So we think it's a good setup. The paybacks on these systems will improve over time. They'll take a step back here in '26. But for us -- and again, we're going to recalibrate. And we do -- I want to say -- the last thing I want to say on this, we do need to see success in 2026. Even if it's -- we need to see at least share gains for storage and inverters or we'll have to recalibrate further. If we don't see that kind of success, it is not our intention to be in a money-losing business forever. We are not a start-up with unlimited capital backing from investors. We understand, and believe me, we treat this as our own money. We don't want to lose money on anything we do, but we see this as an investment in the future as an important market, as an important part of building out an energy ecosystem that we believe will provide a differentiated solution for us to be a market participant over the long haul. And we think it's an important thing for us to do. We're committed to it, but we need to see success and we need to see progress. And we're confident that, that will happen. Operator: Our next question comes from the line of Jeff Hammond of KeyBanc Capital Markets. Jeffrey Hammond: Just back on the data center, I think you said you think you could do $500 million or maybe better next year. So one, just as you start to get orders, are all of those kind of contemplated for '26? Or are people -- are those longer-dated orders? And then just in terms of like this new capacity you're considering, like what would that look like? Is it a plant? Is it expansion? Is it -- we got to double this thing as soon as we can? Aaron P. Jagdfeld: Yes. Thanks, Jeff. So just to clarify, so there's a $300 million we have in backlog. We said that the majority of that -- the vast majority of that is a 2026 shipping schedule. The $500 million or north thereof, that's capacity number. So just to be clear, we haven't subscribed that fully yet, but we have the opportunity to do that. I will say, and I think we said this on the last call, a lot of our conversations we're having today, in particular with hyperscalers, is about 2027 and beyond because they've already -- because of the long lead times for these products, many of them have already got their 2026 plans completed. So anything that -- any incremental above the $300 million that we've talked about here for '26, that's going to come as opportunistic things, maybe other suppliers who have delivery challenges. And so somebody needs a Plan B, we could be a Plan B. Perhaps somebody who wants to accelerate connecting a data center more quickly. We are having those types of conversations where they believe they'll have a facility that's ready to go sometime in the second half of 2026, but they maybe weren't planned to be online until early '27, but they want to move that up. And if we can supply generators, that's obviously an important consideration for bringing any of these facilities online in terms of just having the uptime requirements, that could be an opportunity. So we're going to continue to look to how do we improve our capacity numbers even for '26 above the $500 million we have now. But the substantial change, kind of maybe the second half of your question, the substantial change in capacity, what we're looking at there is how do we increase our capacity. Basically, how do we basically double it again? How do we increase that 50% to 100% more than where we're at today? How do we double that for 2027 and beyond, at least '27 certainly, '27, '28? And that's going to come through -- you kind of touched on it. We're going to need hard assets like facilities, right? These are big units. They take up a lot of room. So we're going to need facilities, we're going to need space. We have line of sight on a number of facilities that we are in negotiation on here in Wisconsin and in other parts of the U.S. We haven't signed anything yet, but we are in far along in negotiation and diligence around some of those physical areas where we can expand. Beyond that, we've got equipment ordered with some of the longer lead time elements that we know from the testing equipment to some of the material handling equipment for products of this size. Those lead times are also extended, as you would imagine. And we put those bets down here recently. And so we feel like we'll be able to bring that online in time to satisfy late '26, early '27 type of production time lines. We also, as I mentioned in the prepared remarks, we continue to look at our M&A opportunities. Are there other ways that we could accelerate even more quickly, more rapidly, not only in terms of raw capacity, production for these products, but also certain elements where we can -- are there other value streams we can capture in the unit? We don't make the engine. So structurally, we're in a bit of a disadvantage to some of our competitors who actually make the engine, not all of them do, but some of them do. So where else can we look to add value in these products? And is that an opportunity? Are there other critical components where we've heard of shortages? And can we look to acquisitions to put us in the market to be a more fulsome supplier, not only of the back of equipment, but maybe other elements around the backup systems that go into these facilities? So we're looking at all those things. We've had a very -- as you know, Jeff, you've followed the company a long time. We've got a very active M&A group here, team here. Nothing's changed there. We've done a lot of M&A over the last 15 years. We're very comfortable doing that. We've got an excellent team here that is working on a number of things that could provide us additional capacity and/or capabilities more quickly as we get into 2026. So all those things are on the table. I think the point that I want to make, I think, for you and for others is, we have a fantastic position financially, a great -- a really strong balance sheet. We produce a ton of cash flow. We're going to put that to work. We're going to put that to work in our C&I business in a way we have not put it to work before. We're going to put to work going after this opportunity because, again, we feel this is just a unique thing. And so we're going to be aggressive there. We're going to lean in and that's going to have a -- we believe a material impact to potentially double this business in the next 3 to 5 years, that C&I business. Operator: Our next question comes from the line of Brian Drab of William Blair. Brian Drab: This is sort of an easy segue to my question. You're talking about the capacity expansion and the idea that you don't manufacture the engine. I'm just wondering, Aaron, like what are the biggest challenges? What are your biggest concerns about adding this much capacity that quickly in terms of supply chain or just anything in terms of the manufacturing operation that's going to be challenging? I think people are looking for just that confidence that this capacity can come online smoothly. Aaron P. Jagdfeld: Yes. Thanks, Brian. It's great question. I would just point to -- we brought it online -- brought the product line online in our Oshkosh, Wisconsin facility very quickly. We finished our development earlier this year, produced our first lines. We made -- by the way, within our CapEx numbers this year, a bunch of upgrades to that facility to allow for the start-up of manufacturing in these products. It was part of getting to the $500 million or slightly north of capacity that's available for us in 2026. That's in our run rate -- our CapEx run rate this year. We've been working around the clock, and that's in terms of the test cell upgrades, the material handling upgrades, the physical upgrades. I mean we're moving walls, we're moving cranes. We're expanding. We're doing things there that are readying us for production. And as I said, we rolled some of the first units down the line a couple of weeks ago, got those out on trucks and shipping about 10 days ago, and we're building here in the fourth quarter. So I feel very comfortable that like the production side of this, we can do that. That's within our wheelhouse. The supply chain side, our engine partner there has a ton of capacity. And I don't feel like that's going to be a constraint for us, which I think is -- if you look at the market, the broad market today and the structural imbalance that we've talked about on this call and on the previous call is largely around the engine supply. And so coming into the market with an engine supply partnership like we have with Baudouin, we just -- who has a -- they've made a massive investment that they brought online in these, what they refer to as large bore diesel engines. We feel like we're in a really good position there to be able to supply the market with these types of products. Engines will not be a constraint. Then you move to the next large component, which is alternators. We're working with multiple alternator suppliers. They are all suppliers we know because we buy from them today for our C&I market. So it's not a new supply base. This is a very similar supply base to what we see in C&I, where we have great long-term relationships. So we're able to leverage those relationships to work with them to grow that business and to leverage, again, our expertise and our -- again, we're known commodities. They're not selling to somebody on some fly-by-night operation or some potential customer here, they don't know. We are not a credit risk. We're not a risk operationally. We're a known commodity. So I think those are all pluses. I think where the physical constraints are going to happen or the constraints are going to happen is physically, right? Just the amount of product that we can build because these things take up space. And then downstream, some of the packaging constraints that could happen. You've got a lot of the industry -- we build the unit up to a certain level and then the product is shipped to -- in our industry, what's known as a packager. The packager then provides the outer housing, the enclosure to the end customer spec and those are unique specifications. So they're really a lot of times, they're engineered to order. And so they're highly configured, and they're built to unique specifications for customers. We believe there's opportunities there for us to participate and work with some of the packagers. We've lined up a couple of partnerships there to make sure that we've got at least adequate capacity for the orders we have in-house today. But how do we grow beyond that? We don't want that to be a constraint our growth as we're going forward. So we're looking at ways to partner more deeply with those packages so that we can ensure that, that's not a constraint on our growth for this market opportunity. So there's a lot of things that I just said there, and there's a lot of things that we need to do execution-wise. But again, when I look at what this is, it's just not that far afield from what we do today and, again, or what we've been doing for the last 50 years in the C&I industry. And so I just feel like we're -- if there's a place where something is in our wheelhouse and where we can we have the opportunity to really have an impact, it's in this -- not only the data center end of it, but as I said, the traditional market for large backup power is also a great opportunity for us. We've got a lot of order activity, a lot of pipeline activity there that we're working through as we bring the first products to market on an order basis for that end of the market as well. So a lot of great things ahead for that part of our business. Operator: Our next question comes from the line of Mark Strouse of JPMorgan. Mark W. Strouse: Aaron, you mentioned earlier trying to get on the approved vendor list for some of the hyperscalers. Can you just give a bit more color on what that process really looks like? And is the time line for that kind of more measured in months or quarters? Or anything that you can share there would be great. Aaron P. Jagdfeld: Yes. Thanks. Yes, it's different for each hyperscaler. We are just -- I might just point out, I mean, we are the preferred supplier for 2 global co-locators already. So in terms of like what it means to be on the ABL, when we're talking about that, we're really referring to the ABL from hyperscalers. We're making really good progress with the co-locators, and we are already listed as a preferred supplier for 2 of them globally. So I feel really good about where we're at there. Back to the hyperscalers, I mean, if this is a baseball game, we're not playing baseball here in Milwaukee anymore, unfortunately. God here swept this, but for those that are fans of the game, 9-inning game, not an 18-inning game like the other night, but a 9-inning game, I would categorize our progress there. First of all, it is measured in months. I think, again, the hyperscalers that we're working with are pushing us to get through their gauntlet and it is a gauntlet. It's just a process. A lot of it is -- there's contracts, right? So you've got a lot of back and forth from a legal perspective. You have certificates of insurance. You have entity discussions, right? Like what's their org structure, energy structure. There are high-level management meetings. They want to be face-to-face, right? Every one of them has a little bit of different approach and there are different boxes to check for each one. We do not see any showstoppers in those processes. They just decide to get through. I would say this is a baseball game, back to their reference. We're probably something in the sixth or seventh inning with most of those hyperscalers, maybe a little bit different one to the other from -- each one is a little bit different, as I said before, but good progress. We hope to have better updates as we go forward here. I think the greatest evidence there will be the continued growth in that backlog and actually having a hyperscaler come in and with their trust, give us an opportunity to supply them with product, whether it'd be in '26 or what is more likely, as I said before, it's 2027 and beyond. Operator: Our next question comes from the line of Christine Cho of Barclays. Christine Cho: Just as a follow-up to Mark's question. I understand that your engines are actually coming from France, but are you finding that the Chinese ownership of the supplier is something that is brought up in your conversations with the bigger type of customers? And would you say that you need at least one hyperscaler contract in hand in order to feel comfortable in doubling the capacity? Aaron P. Jagdfeld: Yes. Great questions, Christine. So on the supply chain side, with our engine supplier, we've talked through with our customer base where we're getting our engines from. Obviously, I think if you look at the supply of any of these engines, by the way, from the competitive set, there are components that today are only available in some parts of the world like China. And so our reliance on the supply chain there, that's global in nature, but specific to certain areas of the world, like China in certain countries is not unique. The ownership structure there, I mean, it's something we've talked about. But again, where those engines are manufactured that -- our partner there has a global base of manufacturing that they are expanding by the way. It's not just going to be France. They've got facilities in India. They've got facilities that they're looking at in other parts of the world. So we believe that over time, it's something that will -- if it's a concern today, I think that's something that we're going to be able to mitigate. There are also potential structures -- ownership structures in the future that could look different, right, be the JVs or some other structure there, nothing is off the table. We don't want that to be a negative on our entry into this market. We don't think it is. And nobody has indicated that it's a showstopper at this point, but something that we want to continue to stay ahead of. I think as far as to answer your question about the doubling of capacity or potential doubling of capacity, yes, I would certainly feel better if we had a hyperscale commitment there, that would make me feel better about the long-term usage of that. But I would just say this, the way we're structuring the expansion of capacity there, I want to be clear that we feel it's something that if we needed to be repurposed for something else, we'll use it for that. It could be the next leg of growth in another part of our business, could be -- we lease quite a bit of outside storage space today that could come in-house if we needed to, convert some facilities. It's not ideal. But I think the added capacity that we're leaning into, we feel -- we're not getting to a point where, I would say, let's say, that hyperscale business doesn't come to us for whatever reason. And I don't think that will be the case. I think quite honestly, it will be the other way around. But I do think we'd be able to deploy that capacity to our benefit. It would take longer to use up, of course. And I feel more confident, to your point, if we had that commitment. But I do think that's something that we'll be able to talk about here in the months ahead. York Ragen: There will be growth in the traditional markets. Aaron P. Jagdfeld: For sure, growth in our traditional markets that we'll need for that as well. Operator: Our next question comes from the line of Keith Housum of Northcoast Research. Keith Housum: I appreciate it. Staying along the lines of the data centers, Aaron, perhaps you can touch on the pricing for these data center generators and like the margin profile and kind of thinking of how that might affect the margins going forward? Aaron P. Jagdfeld: Yes. Thanks, Keith. It's a great question. Pricing ASP on each unit, you're talking about a 3.25 megawatt unit or larger. And by the way, I mean, I would just note, I mean, today, our product line -- we've rolled out the first part of the product line up to 3.25 megawatts. The next part of the product line from 3.5 to 4 megawatts will roll out in 2026. But the ASPs on these products range from -- depends on the content, depends on the customer, but it can be anywhere from $1.5 million to $2 million per gen set. So pricing is -- and we're competitive on pricing across the market. I would say the margin profile domestically, margin profile is very similar to our C&I product set here in North America, maybe a little bit below that, but not dramatically so. Internationally, it's a little bit below that. The international markets are always -- when you look at our C&I products, gross margins are not quite as strong internationally and that's kind of a legacy -- that's just structural in terms of the international markets being, I would say, more competitive overall and us being a smaller player internationally. So I think that's what kind of leads to that. We're working -- we've made a lot of progress on that, by the way, in our ownership with Pramac over the last decade. They've improved their gross margins dramatically, which has been great, and we're going to continue to work on that. But gross margins for those products, I would just say this, I mean, the incremental impact to EBITDA margins is fantastic for the data center market in terms of the -- that overall impact on our C&I product margins. And if you just looked at the incremental impact on EBITDA margins, it will be positive. Operator: Our next question comes from the line of Sean Milligan of Needham & Company. Sean Milligan: I was just curious about the margin progression. I know you don't want to really give guidance for next year. But in terms of the framework, the back half EBITDA margins are kind of weaker than what were expected. So just gives and takes into next year, like does core resi HSB get better? Energy tech, you have some revenue headwinds and then the data center piece. Just trying to kind of think about what that all means for margins moving forward on the EBITDA side. York Ragen: Yes, Sean, it's York. So yes, I think if you looked at our updated guidance for '25, we're talking more like 17 -- approximately 17% EBITDA margins versus the, call it, 18% to 19% that we were previously guiding. So at the midpoint of the last guide, call it, 1.5% reduction. So maybe, obviously, the unfavorable mix with selling less -- bringing our home standby guidance down, given the outage environment, that's our highest margin product. So I'd say about 1/3 of that 1.5% decline is mix, which to Aaron's point, if you think about 2026 and you revert back to the mean with regards to outages, that mix, we should see a nice pop in home standby that should -- should it help claw back some of that mix decline. So I think on the mix side, there will be some recovery in '26. Obviously, the OpEx deleverage on the lower guide is probably the remainder of the 1.5% EBITDA guide. So obviously, as we are talking about a framework for '26 and growing home standby and portables and C&I, we're going to be able to leverage our OpEx structure. So we'll be able to improve our EBITDA margins from the 17% we're talking about in '25. There's probably some small price cost impact in that 1.5% decline for '25 that I would say is transitory in nature, which shouldn't repeat in '26. So that's a long-winded way of saying we should see some nice recovery in EBITDA margins off the 17% that we're talking in '25, some due to mix, some due to operating leverage, some due to some of these transitory costs coming through, new product introduction costs, plant ramp-up costs, et cetera, pricing. So should see a recovery in those EBITDA margins for '26. Operator: I would now like to turn the conference back to Kris Rosemann for closing remarks. Sir? Kris Rosemann: We want to thank everyone for joining us this morning. We look forward to discussing our fourth quarter and full year 2025 earnings results with you in mid-February 2026. Thank you again, and goodbye. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to The Chefs' Warehouse Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Aldous, General Counsel, Corporate Secretary, and Chief Government Relations Officer. Please go ahead, sir. Alexandros Aldous: Thank you, operator. Good morning, everyone. With me on today's call are Chris Pappas, Founder, Chairman, and CEO; and Jim Leddy, our CFO. By now, you should have access to our third quarter 2025 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section. Throughout this conference call, we will be presenting non-GAAP financial measures, including, among others, historical and estimated EBITDA and adjusted EBITDA as well as historical adjusted net income, adjusted earnings per share, adjusted operating expenses, adjusted operating expenses as a percentage of net sales and as a percentage of gross profit, net debt, net debt leverage, and free cash flow. These measures are not calculated in accordance with GAAP and may be calculated differently in similarly titled non-GAAP financial measures used by other companies. Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release and third quarter 2025 earnings presentation. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements, including statements regarding our estimated financial performance. Such forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's release. Others are discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the SEC website. Today, we are going to provide a business update and go over our third quarter results in detail. For a portion of our discussion this morning, we will refer to a few slides posted on The Chefs' Warehouse website under Investor Relations section titled Third Quarter 2025 Earnings Presentation. Please note that these slides are disclosed at this time for illustration purposes only. Then we will open up the call for questions. With that I will turn the call over to Chris Pappas. Chris? Christopher Pappas: Thank you, Alex, and thank you all for joining our third quarter 2025 earnings call. Business and demand trends improved sequentially through the third quarter and momentum in demand and market share gains continued into October. Our operating divisions across domestic and international markets delivered strong growth in revenue and gross profit dollars as well as continued progress, increasing relevance with our customer base with strong year-over-year growth in unique item placements. As we head into the busy holiday season, I would like to thank all our Chefs' Warehouse teams from sales and procurement operations to all the supporting functions for their dedication and commitment to delivering our diverse and high-quality product, service in partnership with our suppliers and customers and the communities we serve. As a reminder, earlier in 2025, we eliminated 2 noncore programs in Texas that came with the acquisition of Hardie's in 2023. These programs -- one protein program focused on high-volume, low-dollar poultry, and another produce processing and packaging program -- together only represented approximately 1% of our revenue. As such, until we lap this attrition in the second quarter of 2026, we will present price and volume metrics as reported and also excluding the impact of these changes to present more representative year-over-year price inflation and volume changes for our business overall. With that, please refer to Slide 3 of the presentation. A few highlights from the third quarter include 9.6% growth in net sales. Specialty sales were up 7.7% over prior year, which was driven primarily by unique placement growth of 5.3%, reported specialty case growth of 3.2%, and price inflation. Excluding the elimination of the Texas produce processing and packaging program, specialty case growth was 5.4% versus the prior year quarter. Unique customer growth, 2.6% year-over-year. Reported unique customer growth was impacted by the Texas commodity poultry attrition and the temporary impact of the heightened conflict in the Middle East during the summer months. Despite the temporary summer impact, our Chefs' Middle East business continued to grow and exceed our expectations. Excluding these impacts, third quarter year-over-year unique customer growth was approximately 5.8%. Pounds in center-of-the-plate were approximately 1.1% lower than the prior year third quarter. Excluding the attrition related to the Texas commodity poultry program, center-of-the-plate pounds growth was 9.6% higher than prior year third quarter. Gross profit margins increased approximately 7 basis points. Gross margins in the specialty category increased approximately 59 basis points as compared to the third quarter of 2024, while gross margin in the center-of-the-plate category decreased approximately 49 basis points year-over-year. Jim will provide more detail on gross profit and margins in a few moments. Please refer to Slide 4 for an update on certain of our operating metric improvements. In summary, Chart 1 shows continued improvement in gross profit dollars per route. Third quarter 2025 trailing 12 months was 4% higher versus full year 2024 and 37.8% higher than 2019. Chart 2 shows third quarter 2025 trailing 12-month adjusted EBITDA per employee increased 9% versus full year 2024 and 28% versus 2019. Third quarter 2025 trailing 12-month adjusted operating expense as a percentage of gross profit dollars improvement by 114 basis points versus full year 2024 and 206 basis points versus 2019. Subsequent to the close of our fiscal third quarter on October 1, 2025, we completed the acquisition of Italco Food Products, a small specialty food and ingredient distributor located in Denver, Colorado. We are excited for the Italco team to join The Chefs' Warehouse family of companies and brands. We look forward to leveraging our unique CW go-to-market and supply chain model as we grow into the dynamic urban and resort markets in the Centennial State. With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity. Jim? James Leddy: Thank you, Chris, and good morning, everyone. I'll now provide a comparison of our current quarter operating results versus the prior year quarter and provide an update on our balance sheet and liquidity. Please refer to Slide #5. Our net sales for the quarter ended September 26, 2025, increased approximately 9.6% to $1.021 billion from $931.5 million in the third quarter of 2024. Net inflation was 7.4% in the third quarter, consisting of 4.4% inflation in our specialty category and 12.3% inflation in our center-of-the-plate category versus the prior year quarter. Reported inflation was impacted by 2 primary factors in the third quarter versus the prior year quarter. Center-of-the-plate inflation was impacted by the commodity poultry program attrition in 2025. Excluding this attrition impact, net inflation in the center-of-the-plate category was 5% versus the reported 12.3%. Continued growth in specialty cross-sell, as we further integrate CW and Hardie's results in elevated reported specialty third quarter inflation. Excluding this impact, specialty inflation was approximately 2.1% and overall inflation for the company was approximately 3.3% versus the prior year quarter. Gross profit increased 10% to $247.2 million for the third quarter of 2025 versus $224.7 million for the third quarter of 2024. Gross profit margins increased approximately 7 basis points to 24.2%. Selling, general, and administrative expenses increased approximately 7.9% to $208.1 million for the third quarter of 2025 from $192.9 million for the third quarter of 2024. The increase was primarily due to higher costs associated with compensation and benefits to support sales growth, higher depreciation driven by facility and fleet investments, and higher self-insurance-related costs. Adjusted operating expenses increased 7% versus the prior year third quarter. And as a percentage of net sales, adjusted operating expenses were 17.8% for the third quarter of 2025. Operating income for the third quarter of 2025 was $38.9 million compared to $31.9 million for the third quarter of 2024. The increase in operating income was driven primarily by higher gross profit, partially offset by higher selling, general, and administrative expenses versus the prior year quarter. Our GAAP net income was $19.1 million, or $0.44 per diluted share, for the third quarter of 2025, compared to net income of $14.1 million, or $0.34 per diluted share, for the third quarter of 2024. On a non-GAAP basis, we had adjusted EBITDA of $65.1 million for the third quarter of 2025 compared to $54.5 million for the prior year third quarter. Adjusted net income was $21.5 million, or $0.50 per diluted share, for the third quarter of 2025, compared to $15.4 million, or $0.36 per diluted share, for the prior year third quarter. Turning to the balance sheet and an update on our liquidity. Please refer to Slide #6. At the end of the third quarter we had total liquidity of $224.6 million, comprised of $65.1 million in cash and $159.5 million in availability under our ABL facility. As of September 26, 2025, total net debt was approximately $575.2 million, inclusive of all cash and cash equivalents, and net debt to adjusted EBITDA was approximately 2.3x. Turning to our full year guidance for 2025. Based on the current trends in the business, we are updating and raising our full year financial guidance as follows. We estimate that net sales for the full year of 2025 will be in the range of $4.085 billion to $4.115 billion, gross profit to be between $987 million and $995 million, and adjusted EBITDA to be between $247 million and $253 million. Please note, for the full year 2025, we expect the convertible notes maturing in 2028 to be dilutive, and therefore, we expect the fully diluted share count to be approximately 46 million shares. Thank you. And at this point, we will open it up to questions. Operator? Operator: [Operator Instructions] The first question comes from the line of Alex Slagle from Jefferies. Alexander Slagle: It sounds like case growth trends and [ volume backdrop ] improved sequentially through the 3Q and [Technical Difficulty] just given some of the choppiness we've heard elsewhere in the industry. And I know you're also lapping some tougher results. So just curious if you could expand on these trends [Technical Difficulty]. James Leddy: I think from a Q3 standpoint, the last couple of years, we've mentioned that July and August were a little weaker than we expected, given all the international travel. I think we didn't really see that impact this year. So while July and August are seasonally some of the weaker months in the food distribution industry in general, we actually saw a very good summer results. And then September was strong. And as we mentioned in our prepared remarks, trends continued into October. So the fourth quarter is looking pretty good at this point. Alexander Slagle: Any thoughts on the potential impact of the government shutdown as you look ahead and I know you mentioned the Middle East. Maybe you can give an update on [Technical Difficulty]. Christopher Pappas: Yes, you're breaking up a little bit, Alex. But right now, where we sit, we're always cautiously optimistic. The fourth quarter, we think it's going to perform pretty well. The Middle East is performing. I think Qatar took a little hit, but the Dubai and Abu Dhabi, Oman, I think our business is really strong. Our major markets are all performing well. And I think a lot -- again, it comes down to we got way ahead of it a long time ago, started to invest in the facilities for capacity and invest in the sales force, invest in the technology. And I just think that whatever headwinds are out there, the team is just doing a phenomenal job of gaining market share and winning in a lot of categories. And I think that's why you see such great numbers. Alexander Slagle: And the first part of the question was on the government shutdown in the U.S. and just whether you expected any impact... Christopher Pappas: I think there might be a little effect maybe in D.C. or something. But our customers' customer base is skewed to obviously a lot of business meals and upper casual to high end. We've lived through a bunch of government shutdowns. We never saw a real big impact. James Leddy: We haven't seen a material impact to date, Alex. Operator: We take the next question from the line of Mark Carden from UBS. Mark Carden: So to start, just building on the 4Q commentary a bit. So the midpoint of your updated guidance, it implies a notable slowdown in adjusted EBITDA growth and little-to-no margin expansion. Just curious if this reflects some conservatism. I know the compare is a bit tougher, but is there anything else that we should be keeping in mind there? James Leddy: No, Mark, I don't think so. I think we raised the full year revenue guidance by $50 million to $70 million from the midpoint to the higher end. I think we feel pretty good about the mid-to-higher end of the guidance at this point given what we've seen in October. As you know, we're always a little bit on the conservative side in terms of guidance. And we raised adjusted EBITDA by $5 million to $7 million from the mid-to-higher point. So it implies a pretty healthy 7% to 7.5% year-over-year Q4 revenue growth and full year 8% to 8.5%, which would be slightly lower than what we've seen year-to-date. But I think it implies a really healthy 10% flowthrough on that revenue growth to adjusted EBITDA. And so, yes, I think that's where we ended up. Mark Carden: And then you guys talked about the acquisition of Italco in Colorado. I know that Rockies are a growth geography for you guys. Does this solve a lot of your capacity desires there? Would you need to do more? And then just more broadly, with some of the economic uncertainty that's out there, have you noticed any shifts in M&A backdrop? Christopher Pappas: Yes. Well, listen, I 100% agree, the Rockies is a great -- it's going to be a great market for us. You have all the resorts and Denver is a dynamic town and they've had good population growth from, I'd say, from the higher end. Obviously, Aspen has always been pretty higher end. But we've been talking with the company that we just acquired for many, many years. We were very familiar with them, very similar product catalog. Obviously, it's a small business, but we think it's going to be a great, great market for us. And the M&A market, I mean, it's pretty frothy. It's been like that for a while. We've been really, really conservative because we just have so much positive momentum going on with all the facilities that we've just opened and all the people we've hired in the last 5 years. So we've just been really, really picky and careful and just pick spots that really make sense for us because I just think we have so much momentum in the organic growth. And it's just -- it's a good time to be able to sit back and just be really picky. Operator: Thank you. We take the next question from the line of Brian Harbour from Morgan Stanley. Brian Harbour: I was curious, have you actually seen accelerating share gains perhaps recently? Or could you talk about how your market share has trended lately? James Leddy: Well, Brian, we have -- given the investments that we've made coming out of COVID the last couple of years in capacity expansion in markets like the Middle East and the Northwest and Florida and Southern California and even in the New York metro area, we have a number of markets that are growing at different phases. We have -- our high-growth markets are growing low double digits to anywhere between 10% and 20%, and we have our mature markets still growing very healthily. And as we add categories in those high-growth markets that are maybe underpenetrated from in terms of the opportunity, we're obviously taking market share, growing penetration, and adding a lot of new customers, and then doing things the same but maybe on a slightly smaller scale in our more mature markets as we continue to add categories and grow. So it's different in every region, but that's part of our model is to grow that way. Brian Harbour: And could you maybe talk a little bit more just by types of customers that you serve? You're seeing this acceleration here. Is that true with nonrestaurant customers? Is it true with the different types of restaurants that you serve? Could you just dig into that a bit? Christopher Pappas: Yes. Well, again, we're obviously the smallest of the public companies. And I always say we are really a marketing company that also distributes. So we're really very differentiated from the big 3 broadliners -- public broadliners. So I think it is a little confusing when you really look at who Chefs' Warehouse is, we are servicing -- obviously, there's overlap. We always have competition. Our motto is anybody that has a truck is a competitor. So we have that competitive nature. But we really do beat to a different drum. It's a much more complicated logistical business that we've put together over 40 years. And the way we go to market and the customer base, it's very diverse, purposely that way because I've lived through all the past recessions and things that can go wrong, obviously, COVID. So it's pretty diverse, and it was strategically created that way. So we do have a balance. And no one is immune to a big headwind. But we like the position -- where we're positioned in the market, and we're cautiously optimistic that our customer base is more resilient than the overall food-away-from-home market. Operator: We take the next question from the line of Peter Saleh from BTIG. Peter Saleh: Congrats on a great quarter. Maybe I just wanted to ask on inflation and beef costs. There's been a lot of discussion. There's been a lot of inflation in beef. What are you guys seeing? It doesn't seem like it's impacting your margins, at least not in the third quarter. Any thoughts on the go forward and the overall beef market and the impact on financials? James Leddy: Yes. I think what you saw in the third quarter, Pete, was an elevated level of inflation year-over-year. I think protein prices have been pretty firm the entire year. So some of it is the year-over-year comparisons. But when you exclude the Texas transition, it's around 5% year-over-year. So definitely elevated. Our year-over-year protein margins were down versus prior year, but we got really good gross profit dollar growth because when you have that level of inflation, you're not going to pass all of it on to your customer, and you're going to get it back over time as you hold prices a little bit and drag them down a little slower when the market comes down. So I think our team has done a good job of managing through this inflationary environment in terms of securing the supply chain. We sell the highest quality proteins in the industry to the best restaurants and steakhouses. So I think they've done a good job of navigating this inflationary environment. Peter Saleh: And then just on the Chefs' Middle East business, I think you mentioned there was maybe a little bit of a step back, which makes sense. Has that started to recover again as we head into the fourth quarter here? Just curious as to the trajectory on that business. James Leddy: Yes. We just highlighted that our unique customer growth, which is usually in the mid- to high mid-single-digit year-over-year type of growth, consistent with our placement growth and volume growth. It was impacted by obviously the attrition in Texas, the Texas transition of those low-margin customers. And then in the Middle East, during the summer when you had the Qatar conflict, we had some customers shut down for a couple of months, but they've started to come back online, and those 2 things impacted our unique customer growth. We really just highlighted The Chefs' Middle East just for that temporary impact. Overall, the business continues to grow really nicely. As you know, we've expanded not only our Dubai facility, but we've also recently expanded our facility in Qatar, and then we're pretty close to finishing our facility in Oman. So we're expanding our capacity in all 3 of those markets, and we're seeing really nice double-digit growth, and they continue to improve -- a good amount of our elevated protein volume growth in the quarter year-over-year was driven by our nascent but really well-growing protein program that we've started to enhance in the region. Operator: We take the next question from the line of Kelly Bania from BMO Capital Markets. Kelly Bania: I wanted to just go back a little bit to the acceleration in the past couple of months. Just curious if you can talk about that a little bit more in terms of how that played out between your mature markets and maybe your higher growth markets, if that's more broad-based, or if there's any particular categories or regions that are standing out in terms of how that played out through the quarter in terms of the growth rates. Christopher Pappas: Yes. I think you got to look at it, Kelly, that obviously, the bigger markets have more impact on our numbers, and they're doing great. The smaller markets, obviously, their percentage growth is higher, but it's from a smaller number. So I think that -- I know it's hard to look at from your seat -- it's so diverse now, Chefs' Warehouse that we're pretty much -- I mean, there's a few exceptions, and they're minor in the total volume. But we're accelerating growth in so many different categories and in smaller markets that it's hard to really give you a total picture. But from my desk, obviously, I look at categories, I look at subcategories, I look at the major territories, outer territories. And I just think the team has done such a great job executing the vision that we want to be the partner of the chef in that mid-to-high casual all the way up to super-fine dining. And I just think they're really executing. And obviously, they're taking market share, and they're also winning on a lot of what's opening, , which is really important for us because just our natural attrition is, say, 7% to 10%. So it's so important for us to keep growing the account base and the category base, especially when you have negative news all over the news that some customer accounts are [ down ]. I just think our customer base -- again, we're small compared to if you're going to put us in the distribution world, we're really boutique. And we like being boutique, and we like where we are, and I just think it's hard to compare us to everything else and all the noise that's out there. Kelly Bania: Just to follow- up on that, and then wanted to ask about the acquisition. But how much do you, Chris, attribute this to just the training that you've been investing in with the sales force and some of the education and tools that you're giving the sales force? Christopher Pappas: Yes. I think a lot. Again, we're celebrating our 40th year, and I've been looking at these numbers for probably 42 years, even while we were trying to get going. So it takes so much to train the team to -- especially to sell the premium products that we sell. It's not overnight. You got to invest way ahead of time. And I just think the team is doing such a fabulous job executing, and you have to be at this level. And our digital team, our IT team, we're giving them all the tools that you need today. And everyone talks about AI. Of course, we're using AI and investing in AI. And I think everybody is going to have good AI. I don't think that's going to be the differentiator at the end of the day. You have to have it, but the customer needs to want to do business with you. We always say, Chefs' not for everyone. And of course, we want to sell more and more products, but we're really disciplined on who we are, and we're not for everyone. So I think the AI tools are making us better. I think we're right there, world-class, with everybody else and where we're investing, and we're getting a great return on those tools. But at the end of the day, you still have to satisfy the customer in every way. You have to have the service and you have to be likable. And I think our laser focus on our customer base and who we are and not trying to be someone else, I think that's what I see -- I think you're seeing the results from that. Kelly Bania: Can I just ask one more about the acquisition, I think Italco? Just maybe what stood out about that acquisition? It's been a while. I'm sure there's a lot of potential targets on your desk. What stood out? Why does this make sense for Chefs' now? And can you just talk a little bit about the margin structure and the quality of their book of business and how much it aligns with Chefs' philosophy on the quality customer? Christopher Pappas: Great question. And again, it is a small acquisition. It's really a super-high-quality company, great people. We've known them for years and years and years. We just were so busy with so many other markets and all the facilities that we're putting up, getting going, and all the categories we've invested in that, thank God, they were very patient and waited for us because it's one of the -- I would say, one of the last, I'd call like really pure specialty businesses. We bought a bunch of these early on when we went public, and we were getting our foot into all the states. We said we're going to be in just about every -- in every NFL city, except maybe Green Bay. And they were really one of the last small boutique companies that for us, it was like a no-brainer. They have a similar catalog of high-end products. They service a ton of customers. Their offerings are much more narrow than us. So that's why we're really excited about this because with Chefs' Warehouse, catalogs, and all our teams going in there, doing training, hiring, we're going to hire a lot of salespeople throughout Colorado, and obviously, boutique places like New Mexico, and they're going to all the mountains and resorts. And we just are really excited that this is going to be a great Chefs' Warehouse over the next 10 years. Operator: We take the next question from the line of Margaret-May Binshtok from Wolfe Research. Margaret-May Binshtok: I just wanted to ask if you guys continue to see progress with digital penetration, trying to get towards your long-term goal through the quarter and if there's anything to call out in terms of how digital penetration is helping you guys gain relevance with your existing customers? Christopher Pappas: Yes. The digital team has done a great job, and it's making the sales force more and more efficient. I think the whole goal of this is to be able to do more with less. And I think we're having great success. But we continue to really rely on our tremendous sales force really to push penetration. I think the digital tools are great support, and it's giving us that last extra -- I always say it gives you that last extra yard getting into the -- to score a touchdown. So we continue to invest in it. It continues to give us a great ROI, and it's just part of what I call the go-to sales strategy of Chefs' Warehouse. James Leddy: And Margaret, on adoption, we didn't have it in the presentation this quarter, but we're a little bit over 60%. So it continues -- on the specialty side, we continue to drive adoption. Margaret-May Binshtok: And then just one more. Anything to call out in terms of business-related travel? Are you seeing any weakness there? Christopher Pappas: I mean, we hear a lot of complaints. We hear complaints, especially like in Las Vegas. The Canadians aren't coming. We hear that in Florida as well. But in so many of our major cities, there's someone eating all this food. So I think there's lots of domestic tourism still. And in the Middle East, they continue to have great tourism. So we hear noise, but we look at our results, and we're really happy with them. So it'd be great if there was a big boom again with our friendly neighbors. I think that would obviously juice the returns even more. But we hear a lot, but we see the numbers, and we say someone is traveling. Operator: We take the next question from the line of Todd Brooks from The Benchmark Company. James Leddy: A couple of questions. First, and Jim, you talked about when you were thinking about the updated guidance and being comfortable with the mid-to-upper end of the revenue guidance. And Chris, you've been doing this a long time. When you're through October and you're talking to your customers now, what's the sense of trend being locked in for a good holiday season based on the momentum that you've seen build across September and October? Christopher Pappas: I'm always cautiously optimistic. We just did -- we just had a bunch of big shows in a lot of our markets. So I was fortunate enough to get out and attend and speak to a lot of customers. And it can always change. We live in really interesting times. A few tweets and the sentiment changes, but we're hearing good holiday bookings. So I was really enthused to hear that a lot of the holiday bookings are pretty strong. So we're really cautiously optimistic it's going to be a good quarter.. Todd Brooks: And then my last question. You've seen a lot, Chris. You've been doing this for over 40 years, like you said. So I get a lot of incoming calls about, well, if Performance and U.S. Foods get together, isn't that bad for Chefs'. Can you talk about just historically when you've seen big consolidations in the industry, what it's meant for the Chefs' Warehouse as far as maybe customers to be had, sales force talent to be had, I think that might clear up some of the maybe trepidation that some people think about the combination potentially happening. Christopher Pappas: Great question. And I could just go by historically, what we've seen -- and even when we do an acquisition, when we look at an acquisition, we're looking at it for long term. Obviously, fold-ins are very synergistic, because you usually just take in the sales force and you're getting the efficiency on trucks and customer service and the back office and all that wonderful stuff. But we always model going backwards in most acquisitions. Not all. Colorado, we think, it's really small, but we think because it's so small, once we get everything squared out, it's just going to be an explosive market for us. But historically, we go backwards when we do an acquisition because customers usually want to hedge their bet, they're not sure, and all that wonderful stuff. And when we've seen big acquisitions from in territories, we usually get a nice uptick. And again, a lot of it is customers want to hedge their bet or salespeople are nervous and there's a lot of integration and a lot going on. So if this big deal goes through, we are cautiously optimistic that it could be really, really good for CW just from the fact that customers are going to want to hedge their bet, and we'll pick up a lot of new business. Operator: We take the next question from the line of Ben Klieve from Lake Street Capital Market. Benjamin Klieve: Congratulations on a really good quarter here. I've got a question about your organic growth initiatives over the last year or 2. They're really starting to, I would expect, fill in. And I'm wondering if there's anything to call out operationally out of Texas, Florida, California that has maybe been a surprise or an operational challenge as you go into the holiday season. Have those organic investments continued to hum as expected? Or has there been any issues to call out? Christopher Pappas: Yes. I don't think I've woken up one day in 42 years where there [ isn't ] an issue. It's the nature of a service company. But yes, I mean, we have such a great team at this point. We're never satisfied. Obviously, every day we're trying to get better. Most markets, again, we're really cautiously optimistic they're going to have a great fourth quarter and a great 2026. The biggest opportunities for us are places like Texas, where we're just -- we're really new, even though we bought a company that's historically been in the market, but as Chefs' Warehouse, we're still in the first inning. So we're just so excited about the opportunity for that growth over the next 10 years. Florida, we made the big investment. We're getting a great ROI. We've got an incredible team, and we still think that we're in the first inning there, but we're really excited. L.A. has got a new facility, and they're having great growth. So we're really excited about that. We got our new protein facility up and running in Richmond, and they're having a great year. And we have great hopes for '26 and beyond. So I don't think there's a market that I'm not really -- I have any complaints about and couldn't be more proud of what they're doing. But the big opportunity in a market that we're just really new in, like Texas, I think, is really exciting. Benjamin Klieve: Well, congratulations again to both of you and the whole team on a good quarter and a good outlook here for the fourth quarter. Operator: Thank you. Ladies and gentlemen, as there are no further questions, I would now hand the conference over to Chris Pappas for his closing comments. Christopher Pappas: Yes. Well, once again, I want to thank the team at CW. They've done a phenomenal job and really excited what they're going to do in '26 and beyond. And we thank all our investors and analysts for joining our call, and we look forward to the next call. And thank you again for joining. Operator: Thank you. Ladies and gentlemen, the conference of The Chefs' Warehouse has now concluded. Thank you for your participation. You may now disconnect your lines.
Operator: Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM International Third Quarter 2025 Earnings Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Victor Bareño, Head of Investor Relations. Please go ahead, sir. Victor Bareño: Thank you, operator. Good afternoon, and welcome, everyone, to our 2025 Q3 earnings call. I'm joined here today by our CEO, Hichem M'Saad; and our CFO, Paul Verhagen. ASM issued its third quarter 2025 results yesterday at 6:00 p.m. Central European Time. The press release is available on our website. With our latest investor presentation, we remind you, as always, that this earnings call may contain information related to ASM's future business and results in addition to historical information. For more information on the risk factors related to such forward-looking statements, please refer to our company's press releases and financial statements, which are available on our website. Please note that the profitability measures mentioned in this call today will be primarily based on adjusted non-IFRS figures. For the reported results as well as the reconciliation between reported and adjusted results, please refer to the quarterly results press release. And with that, I'll now hand the call over to Hichem M'Saad, CEO of ASM. Hichem M'Saad: Thank you, Victor, and thanks to everyone for attending our third quarter 2025 conference call. First off, I'd like to thank all our investors and stakeholders who joined us for Investor Day last month. It was great to see so many of you. For today's call, we'll be following the usual agenda. Paul will begin with an overview of our second quarter financial results. Next, I'll discuss the market trends and outlook, followed by the Q&A session. I will now turn it over to you, Paul. Paul Verhagen: Thanks, Hichem, and thanks, everybody, for joining our call today. Let me start with revenue. The revenue in the third quarter of '25 amounted to EUR 800 million, up 8% year-on-year at constant currency. And compared to the second quarter, sales were flat at constant currency. This was at the high end of a guided range of flat to down 5%. Equipment sales increased 10% year-on-year at constant currency and were led by ALD followed by Epi. Spares and service sales were up 2% at constant currency. Year-on-year growth in spares and services was lower than in the past few quarters, and this is explained by the accelerated above trend demand in China in the second half of last year. Growth in our outcome-based services continues to be healthy. In terms of customer segments, revenue was led by logic/foundry, followed by memory and then power/analog/wafer. Logic/foundry continued to account for the majority of sales. Advanced logic/foundry sales for the largest part 2-nanometer related were up substantially compared to the third quarter of last year and approximately similar to Q2. Mature logic/foundry sales mostly in China, were up year-on-year and down from the second quarter. Memory sales decreased compared to Q3 of last year and were roughly similar to Q2. of this year. ALD sales for advanced HBM-related DRAM applications represent a larger part of our memory sales. The year-on-year decrease was mainly explained by some lumpy and relatively high sales and orders from memory customers in China in Q2 and Q3 of last year, as we also discussed in previous quarters. Sales in the power/analog/wafer segments were up slightly but still at relatively low levels, reflecting the continued downturn in these markets. Gross margin in the third quarter remained strong at 51.9%, roughly similar to Q2 and up from 49.4% in the third quarter of last year and again supported by a positive mix. As mentioned in the press release, we expect a less stable mix in the fourth quarter, which should bring the gross margin to around 51% for the full year. One of the mix factors was revenue from China, which decreased both year-on-year and compared to Q2 but still represented a solid level in Q3. We still expect China sales in the second half to be lower than in the first half with a more substantial drop in Q4. As discussed in the last quarter, our forecast for the gross margin excludes the impact from potential new U.S. tariffs. Our industry is currently still exempted, but it remains unclear what any new tariffs will be. We have several contingency scenarios in place to help mitigate potential direct impacts including the option of expanding localized manufacturing in the U.S. SG&A expenses were 10% lower year-on-year. This reflects lower variable spend and our continued cost focus. For the full year, SG&A is still expected to be somewhat below prior year. Gross R&D was up 10% in Q3, reflecting ongoing increases in our R&D programs. This increase plus the inclusion of a EUR 4 million impairment was partially offset by a relatively higher increase in capitalized development expenses, leading to an increase of 3% in net R&D expense. At 30.9%, the operating margin continues to be strong, supported by the solid gross margin and the year-on-year decrease in SG&A. Below the operating line, financial results included a currency translation gain of EUR 11 million, and this compares to a currency loss of EUR 60 million in the second quarter and a loss of EUR 48 million in the third quarter of last year. As a reminder, we hold the largest part of our cash in U.S. dollars. Let's quickly switch to ASMPT. Our share in income from investments, reflecting our stake of approximately 25% in ASMPT amounted to a loss of EUR 7 million in the third quarter, which is explained by one-off restructuring costs taken by ASMPT in the quarter. Our net results in Q3 also includes an impairment reversal of EUR 181 million, driven by a recovery in the market valuation, our stake in ASMPT in the quarter. With that, the impairment charge of EUR 250 million that was recognized in Q1 of this year has now been fully reserved. Let's go back to ASM now. Order intake. Our new orders amounted to EUR 637 million, a decrease of 7% compared to the second quarter and a decrease of 7% compared to the third quarter of last year at constant currency. With the Q2 results, we already indicated that book-to-bill would be below one in Q3. As an expected rebound in advanced logic/foundry orders will be offset by a sharp drop in China orders following a very strong first half of the year. In our update last month, we indicated advanced logic/foundry orders would still be up, but not as strongly as previously expected due to very mixed trends per customer and also that power/analog/wafer orders came in somewhat lower than expected. Looking at the breakdown by customer segments, logic/foundry was the larger segments, followed by memory and then power/analog/wafer. Logic/foundry orders decreased slightly year-on-year and compared to Q2. As just mentioned, a solid increase in advanced logic/foundry compared to Q2 was offset by a sharp drop in mature logic/foundry orders mostly in China. Memory orders dropped compared to last year and were relatively steady compared to Q2. And the largest part of memory orders was for advanced DRAM applications. Let's turn now to the balance sheet. ASM's financial position remains in good shape. We ended the quarter with EUR 1.1 billion in cash, up from EUR 1 billion at the end of June. Days of working capital dropped to 37 days at the end of September, down from 43 days end of June. This level is relatively low and also below the longer-term target range. As previously explained, this is due to a relatively high level of contract liabilities for a large part in China, which is expected to gradually normalize over time. CapEx amounted to EUR 38 million in the third quarter due to phasing of investments for our new Arizona facility, CapEx in the fourth quarter will be higher. And for the full year, we still expect CapEx of EUR 200 million to EUR 250 million. During the quarter, we also paid EUR 100 million in earn-outs related to the acquisition of LP in 2022. In total, free cash flow amounted to EUR 139 million in Q3. Excluding the earn-outs, the free cash flow amounts to a stronger level of EUR 239 million in Q3 and EUR 628 million in the first 9 months. During the third quarter, we spent EUR 109 million on share buybacks as part of our EUR 150 million program that was completed on July 25. And lastly, let me recap the 2030 financial targets we shared during the last month's Investor Day. Growth prospects for ASM remains strong on the back of rising ALD and Epi intensity in the logic/foundry and DRAM markets and new opportunities in, for instance, PECVD and advanced packaging and continued double-digit growth in spares and services. We expect the revenue to grow to more than EUR 5.7 billion by 2030, and this represents a CAGR of at least 12% from 2024 through 2030, twice the rate expected for the wafer fab equipment market. We raised our gross margin target to a range of 47% to 51%. And as part of this, we discussed a number of initiatives that will drive efficiency and productivity improvements. One of the key initiatives I'd like to highlight again is the successful launch of a new ERP and PLM systems. We went live 3 months ago and the transition was executed smoothly without any disruption to operations. This milestone lays a solid foundation for future efficiency improvements, including the rollout of real-time analytics and other digital transformation efforts. We will remain disciplined regarding operating expenses. Combined with the operating leverage effects, we expect SG&A to drop to less than 7% of revenue by 2030. We intend to increase R&D investments. This is our lifeline as the opportunities continue expanding in the next nodes. The target is to keep net R&D in a low double-digit percentage range of revenue. This will all lead to solid operating margin of 28% to 32% in the coming years and from 2030 onwards of more than 30%. In terms of CapEx, we expect an annual level of EUR 150 million to EUR 200 million during years of infrastructure expansion and EUR 100 million to EUR 200 million in years without such an investment. Combined with improving profitability, we project free cash flow to increase to more than EUR 1 billion by 2030. During Investor Day, we also reiterated our capital allocation policy. #1 priority remains investing in the growth of our company. That includes R&D and infrastructure investments and also M&A in case of attractive opportunities. In addition, a strong financial position remains important with at least EUR 800 million in cash as we remain committed to our dividend policy and to return excess cash in the form of share buybacks. And with that, I'll turn the call back over to Hichem. Hichem M'Saad: Thank you, Paul. Let's now continue with a review of the market and business trends. Starting with the end market conditions. The overall picture continued to be mixed, similar to the previous quarters. In various parts of the semiconductor market, the recovery continues to be held back by uncertainties around the economic outlook and geopolitics. It's clear that AI remains the bright spot across multiple sectors and markets, adoption of AI is being accelerated as a key driver of innovation and productivity gains. The surging demand has been highlighted by recent strategic partnerships and announcements from industry leaders aimed at expanding AI data center capacity. In terms of wafer fab equipment, the growth in AI is expected to drive significant and structural growth in the advanced logic/foundry and DRAM markets. These strengths play to ASM's strength. If we first look at our advanced logic/foundry business, overall demand continues to be healthy even though trends by customer has been very mixed. As already mentioned, these mix trends had some impact on Q3 bookings and will also impact sales in the second half. For the full year, we still expect a very strong increase in our gate-all-around related sales. The 2-nanometer transition continues to be a strong driver for our company. In the Investor Day last month, we reconfirmed the $400 million SAM increase in the move from FinFET to first-generation gate-all-around. We also reconfirmed that in this transition, we at least maintain our ALD market share and expanded our share of Epi layer accounts from 22% to 33%. Our customers continue to report strong demand for 2-nanometer for both AI and smartphones. We expect this to support continued investment in 2-nanometer capacity expansions in 2026, including new sub nodes, such as the backside power distribution. At the same time, customers continue to progress steadily in the development of the upcoming 1.4-nanometer node. In the second half of 2026, we expect the first 1.4-nanometer pilot line investments, followed by the start of volume production in 2027 and 2028. As also shared in our Investor Day, we expect a SAM increase of $450 million to $500 million in the 1.4-nanometer transition. Based on the intensity and breadth of our R&D engagement, we expect again to at least maintain our market share in the transitions to the next 1.4-nanometer node. We expect new ALD layers in [ backside ] power in NIMCAP and metal ALD layers in the middle-end-of-line. However, the biggest area of increasing ALD intensity continues to be in the transistor area, the front end of line. This is the heart of the chip where the overall device performance is defined by functional materials such as the high-k and electric dipole layers for multi-DC and work function layers. As a percentage of total ALD layers, we expect the number of layers in front end of line to increase from 50% in the 2-nanometer node to 60% in the 1.4 nanometer node. This is an area where our company holds strong market share position. Let's now review the memory business. High-bandwidth memory, HDM-related DRAM continues to be the main driver. Fueled by strong demand for AI data centers, customers are expanding manufacturing capacity for the most advanced DRAM devices for HBM applications. These devices require ALD High-K Metal Gate technology in which ASM has a leading position. Looking at the year-on-year performance, despite the good momentum in high-end DRAM, it's important to note that our memory sales last year included elevated sales from Chinese customers, which are not repeated this year. As a result, we still expect our memory sales to be lower than last year at less than 20% of overall equipment. The outlook for CD NAND, which is the smaller part of our memory business, has been improving somewhat, and we continue to be well placed with our ALD death field solutions with key customers. We expect DRAM investment to further increase in 2026. In the next couple of years, we expect a further gradual increase in the number of ALD layers in advanced DRAM. In the press release, we highlighted new wins in Epi and ALD dipole and work function-related layers in DRAM HBM for most expected to ramp in 2026 and 2027. Starting in 2028, we anticipate a significant increase in our SAM in DRAM driven by 2 major technology transitions. The move to 4Fsquare architecture and the adoption of FinFET in the periphery. In 4Fsquare, the channel structure becomes vertical, and producing a more complex 3D architecture. This shift will require additional ALD layers for gap-fill, oxides and metals and we'll also increase the role of Epi as an enabling technology. Shortly thereafter, the transition from planar to FinFET in the periphery will further increase demand for logic like ALD and Epi layers. At our Investor Day, we quantified the SAM expansion in DRAM at $400 million to $450 million as a result of this multi-node transition. In addition, this presents a compelling opportunity for ASM to grow our ALD shares in the DRAM market and to accelerate the expansion of our memory business. Next, the power/analog/wafer segment continued to experience weak market conditions. While there were early signs of end market recovery at the end of Q2, it became evident over the past 3 months that investment level in this segment will not rebound in the second half of the year. Assuming no adverse economic development, we expect spending in these markets, starting from a low base to gradually improve over the course of 2026. Thanks to innovative products that we launched in recent years, we are well positioned to benefit from this recovery. One example is our Epi Intrepid ESA tool which has helped us secure several new customers and position in 300-millimeter power and wafer applications. It's important to note that our outlook for gradual recovery excludes the silicon carbide market, where market conditions remain more challenging. Looking at China. Revenue was still at a solid level in Q3, but bookings dropped significantly. And as Paul already mentioned, this was the main reason for the sequential drop in our overall bookings. China bookings were still strong and very much concentrated in the first half of the year. On top of this, we incurred some additional impact from the export restrictions that were announced earlier this month. The impact on a total annualized sales is expected to be around 1% to 2% negative. With a stronger drop in Q4 sales, we project sales from China to be lower in the second half compared to the first half. Equipment sales from China will also be lower in the full year of 2025 and expected to account for approximately 30% as a percentage of total ASM revenue. Looking forward, we expect a gradual normalization in China demand in 2026 and subsequent years, in line with our previous view. This follows on a number of years of very strong spending, particularly in the mature logic/foundry segment. For 2026, the contribution from China is projected to remain meaningful, although sales are to decline by double digits. Before moving to the guidance, I'd like to repeat a few more of the takeaways and strategic priorities we shared in our Investor Day. ALD and Epi remains key growth markets for our company. We project a CAGR of 9% to 13% for both markets in the period of 2024 through 2030, which is clearly ahead of the 6% growth expected for the WFE market. This growth is driven by increasing complexity and increasing ALD and Epi layers to address challenges related to more 3D structures and new materials in these nodes, both in logic/foundry and DRAM. Advanced packaging is emerging as a key midterm growth driver for ASM, with the market projected to grow at an attractive CAGR of 15% through 2030. Although it currently represents a smaller portion of our business, upcoming generations of advanced packaging featuring finer pitches will demand more sophisticated solutions were aligned with our strength in chemistry, innovation and surface preparations. We've recently secured new ALD wins for TSV liner applications, and we are currently pursuing initiatives aimed at doubling our served available market by 2030. At the Investor Day, we also introduced growth targets for our spares and services business. For the period of 2024 to 2030, we expect a continued strong CAGR of more than 12%. The main engine of this growth is our outcome-based services, which we target to account for more than 50% of our sales and service sales by 2030. These innovative services deliver guaranteed outcomes to our customers, such as improved tool performance and availability. One example is our new dry cleaning solutions for refurbishing critical tool parts. Compared to conventional cleaning technologies, this approach improves defectivity performance and extended parts lifetimes, thereby reducing costs for our customers. It also contributes significantly to sustainability with a 67% reduction in CO2 emissions versus traditional wet cleaning methods. Another example is the use of automation in services by developing robots to place replacement parts in reactors, we achieved far greater precision than manual placements. This enables customers to operate our tools with action level precision, essentials as geometries shrink and nodes become more complex. Last but not least, we remain focused on driving operational excellence, maintaining a flexible footprint and as Paul also emphasized delivering improved financial performance. Let's now have a look at the guidance as outlined in our press release. For Q4 2025, we expect revenue to be in the range of EUR 630 million to EUR 660 million. For the full year 2025, we continue to expect revenue growth at close to 10% at constant currencies. Despite the projected slow start in 2026, we expect ASM revenues to grow in 2026. In terms of orders, we expect the trend to bottom out in Q4 at a slightly higher level than Q3. And looking at next year, we project quarterly orders to pick up again as 2026 progresses. With that, we have finished our introduction. Let's now move on to the Q&A. Victor Bareño: We'd like to ask you to please limit your questions to not more than 2 at a time so that as many participants as possible have a chance to ask a question. Operator, we are ready for the first question. Operator: Thank you. This is the Chorus Call conference operator. [Operator Instructions] The first question is from Didier Scemama, Bank of America. Didier Scemama: Maybe a first question for Hichem. Can you maybe give us a little bit more color as to what's already in your backlog? Because we've seen, of course, over the course of the last few weeks, a significant improvement in the picture for AI CapEx or logic chips, but also HBM, but also commodity DRAM. We've seen, of course, one of your customers this morning talking about a substantial increase in CapEx next year. So is that already in your backlog? Or is that yet to come and sort of give us confidence that your bookings have to materially improve from here? I've got a follow-up. Hichem M'Saad: Yes, Didier, I'm going to have Paul answer your -- this question, okay? Paul Verhagen: Yes, Didier, thanks for the question. You've seen our backlog, which came down further on the back of book-to-bill below of one, to be precise 0.8. So what's in the backlog, as you know, we have a relatively short-term backlog, if you compare it to let's say, one of our companies here in the southern part of the Netherlands, 3 to 6 months, typically. We also said that we expect a relative soft start of 2026. So not everything that you are referring to is already in our backlog. Of course, some elements are -- I'm not going in detail what is precisely in or out. But given the relative low bookings that we have, which we also guided for after the -- or at the Investor Day, you can imagine that not all of that is in the backlog at this stage. Didier Scemama: Okay. Got it. And I think in the last 12 months or so, commodity DRAM and commodity NAND, which historically are reasonably small part of your revenues, have been very, very low in terms of capital investments. If we were to see greenfield capacity addition for 3D NAND, but also investments in DDR5. Do you think that could become a meaningful driver in '26? Or is your participation in those markets fairly de minimis? Hichem M'Saad: Yes, I can take this question. I think that as DRAM devices will -- will improve, increase, there is more and more ALD layers. And with that, we expect an increase in our business from that point of view. Didier Scemama: I think you said 25% is memory? Is it like a really small sliver of your revenues today that's basically ex-HBM? Hichem M'Saad: So most of the revenue right now is actually in HBM, Didier, okay? That's what... Operator: The next question is from Tammy Qiu, Berenberg. Tammy Qiu: So the first question is on GAA. I remember earlier this year, you were saying that GAA order would be up quarter-on-quarter in 2025. So now we have a little bit of timing-related issues. So going to 2026, would you say that GAA would be still grow year-on-year versus 2025 level? And how should we be thinking about this pattern on the -- from an order perspective? Hichem M'Saad: So we see that 2026 is going to grow in GAA versus 2025. I think in 2026, there's going to be 2 things happening. First 2-nanometer production will continue in gate-all-around. But also, you see the 1.4-nanometer node will also start in pilot production in the second half of the year. The other thing that we see happening is that also there is going to be more customers in a 2-nanometer technology node in 2026 versus 2025, which is also driving some new business, especially in the U.S.A. Tammy Qiu: Okay. And was 1.5 -- sorry, 1.4-nanometer, you mentioned, the first batch of order for pilot line should be starting to be seen in next year. So is that coming from all the customers? Or this is only from one customer? And also, when would you expect the volume kind of ramp-up phase for 1.4 nanometer start to be seen? Hichem M'Saad: So to answer your question. So right now, for the 1.4 nanometer in our numbers, what we looked at is one customer in 1.4 nanometer in the second half of 2026. I think the -- we hope that there's going to be another customer in 2026, then that would be also a better business for us in 2026. Tammy Qiu: And -- sorry, the volume ramp-up time frame? Hichem M'Saad: So the volume ramp-up is going to be very small. It's the pilot production in the second half of 2026. That's what we put in. And we -- the 2-nanometer node that we mentioned is a very long node. So 2-nanometer is going to continue in 2026 and also 2027, it's a very long growth. As you know also the 2-nanometer node has sub-nodes and with different structure -- like different structure like a midcap that backside power distribution and so on and so forth. So for 1.4 nanometer, I think the big production start will be 2027 and 2028. Operator: The next question is from Robert Sanders, Deutsche Bank. Robert Sanders: Maybe a question on the gross margin. You're looking for a double-digit decline year-on-year in 2026. When I plug in a kind of estimate for China gross margin, that means that the consensus gross margin looks too high by quite a big margin. So is there anything that could mean that the gross margin is not well down next year as I think about next year? Paul Verhagen: I'm not sure I understand the question. What you say, a double-digit decline in gross margin? Hichem M'Saad: In China sales. Robert Sanders: You put in your release a double-digit decline in China sales. I look at the consensus. And the consensus is pretty optimistic on gross margin for next year despite the China mix being a headwind. So I was just wondering if there's any reason why the gross margin ex China would improve? Paul Verhagen: Improve compared to what? Robert Sanders: Calendar '25. Paul Verhagen: Yes. Then I think I have to disappoint you because I don't see it improve compared to '25, to be very honest. We have -- I mean, in '25, we have a few things that are very important. One, we have a pretty still strong level of China sales over the full year, with H2 below H1, Q4 below Q3, et cetera. But still, if you look at full year, a pretty strong level of China sales, and we expect to meet a double-digit decline next year, which everything else equal will have impact. Two, we have a very strong product mix, especially with, of course, 2-nanometer ramping to have a lot of leading-edge products and relatively spoken, lower, let's call mature products, power/wafer/analog, et cetera. So next year, when we also expect, of course, still continued growth in leading edge as Hichem just explained, but we also expect growth in, let's say, the power/wafer/analogs are relatively spoken, the rate of that segment will increase a little bit. That doesn't mean that every product in that segment has a lower margin and leading-edge product. But on average, I think it's fair to say that leading edge, we can demand higher margins than in that segment. So if you add it all together, lower China sales and a slightly different mix relatively spoken, you very likely get to a lower margin than in 2025. How much lower? I'm not going to tell you. Hichem M'Saad: But that's also at the end of the day, really, it all depends on customer mixture, and product mixture. And I think that as Paul has mentioned, okay, we have made some efficiency in our business and also our cost structure in such a way that we fundamentally improved our gross margin from previous years. So it's still well -- we're going to see what's going to happen in 2026. But we are very happy with really what we achieved this year. For us, 51% for 2025, this is a record for ASM, really a record. And that's an indication of the -- first, our position in the market, our competitiveness, but also in our cost control and better operational efficiency. And we will continue to really drive that in the future. We're not stopping right now. Paul Verhagen: And maybe to add, Rob, that was also the reason why we have increased our margin guidance during the Investor Day from 46% to 50% to 47% to 51%. So overall, indeed, we see improvements based on everything that Hichem also just once more emphasized. Operator: The next question is from Francois Bouvignies, UBS. Francois-Xavier Bouvignies: So my first question, Hichem, on your new wins in Epi and ALD dipole and what function that you talked about in the DRAM HBM. So can you just provide more details on that design wins? Did it happen in the quarter? Was it competitive? And I mean you said in your remarks that it was for '26, '27 time frame, which I thought it would be more like '27. So is it like earlier than you expected? Maybe these wins and how many layers are we talking about? So I know it's many questions within that, but basically, giving more color on this Epi and ALD dipole design wins you had this quarter? Paul Verhagen: Yes. And we're very excited about the wins that we have made in both Epi and ALD in the last quarter. So this is really work we've been doing with our customer for the past couple of years, and we've been able to become POR for this business. And with starting HVM high-volume manufacturing in 2026 and beyond. As I mentioned, we're really working with many customers and on more and more layers and products. I think what we have seen right now in the industry is really pull-in in a way in some of the high-performance. I think the AI market is becoming super-hot on that point of view. And we see that the customer really want to have a higher performance. So with a higher performance, we see some of these things have been a little bit pulled in. But I think the majority of the business, the bigger business for us really would happen when the move of DLM to FinFET, I think that would be great. But also we see many of the memory customers also very much using advanced packaging. And we're working with many of those right now on some of advanced packaging applications. But I think we see that 2027 and 2028 where things will become much more positive from that point of view. So 2036 will be the start and '27, '28... Francois-Xavier Bouvignies: How many layers did you win specifically for that this quarter? Paul Verhagen: [indiscernible] how many layers, but to be honest with you, we have many customers right now. We're actually working with all the DRAM customers. And you will hear in the next few quarters, more and more wins as those materialize. Francois-Xavier Bouvignies: That's great. And maybe China. I mean China, you forecast double-digit percentage growth. It seems that everybody is seeing the same thing, the double-digit decline, sorry, percentage next year for China business, LAM is seeing the same. [ ASML ] is seeing the same. So how do you build your forecast, I mean, out of interest? Because I mean, my understanding is China is quite low in terms of visibility right now. You had some restrictions that only impact 1% to 2% of your sales, obviously, it's more bigger of your China business. But how do you build this forecast out of interest? Because it's very difficult to know where China is going to be next year. And when I look at the retail imports are increasing significantly in the second half of the year versus H1 this year. I would think that you should see decent year from a deposition and etching point of view. So just wanted to understand how you forecast China? Paul Verhagen: Yes. Let me take that question, Francois. Actually, the very short answer is customer intel. So we have people on the ground. We get, of course, we try to get, of course, as much as we can insights into the plans various customers have into new fabs that are being built or not being built. So every year, we have an idea, but you're correct, there is limited visibility. That's also true for next year. So there's no change from that point of view, but still based on the number of new fabs that you think might start based on inputs in that respect that we get from customers. We had one year, it's maybe higher than the other year. That's an important input for us. Also last year, we had that input for this year. We're actually at the beginning of the year, we were -- I mean we were maybe a little bit prudent. Looking back now, China did a little bit better than what we anticipated but not to the extent that it was better than the year before. So also for next year, I mean, it could be slightly higher, slightly lower than what we currently think. But in any case, what we see based on all the intel that we have is what we guided and what we said in the press release. So that is, let's say, the best guidance we can give you based indeed on the limited visibility we have, but it's still supported by as much as possible customer intel that we can get. Operator: You next question is from Jakob Bluestone of BNP Paribas Exane. Jakob Bluestone: I had a slightly similar question actually. I mean, you say that you expect the order trend to bottom out in Q4 at a slightly high level than in Q3 and then sort of gradual recovery through '26. And I guess, just interested in the sort of broader business, where do you get the confidence from that? Is that what you're starting to hear from your customers? Or was that just sort of more from the various announcements that have been made? So just to get a sense of how concrete is your confidence on that trajectory that you've laid out for the improvement in orders? Hichem M'Saad: So I'd like to -- what Paul has mentioned earlier, we are very close to our customers, especially we are extremely close to our logic customers. Since we're working with all the top larger company, leading edge -- in leading edge logic and foundry. And then so that's the information really we're getting it from them. I think they have their investment plan for 2026. And based on that, okay, we are talking to them, and we know what kind of business we're going to achieve from them. So we feel confident from that point of view, okay? Jakob Bluestone: Understood. And if I can just ask a quick follow-up as well. Just on lead times. Can you comment on whether the lead times, particularly for advanced logic are changing or have they stayed the same? Hichem M'Saad: Lead time for us as a company, we always said that our lead times like used to be 6 months. But as I mentioned during the Investor Day, actually we have made a significant improvement, whereby we can reduce our lead time to about 3 months right now. So we took -- like we mentioned, we have made significant efficiency in our business processes, in our manufacturing and operations in such a way that we can be very fast in really being able to meet customer expectations. Operator: The next question is from Nigel van Putten, Morgan Stanley. Nigel van Putten: I guess another question on your sense of growth into '26. So what are the areas you are seeing the biggest certainty and uncertainty in terms of materiality both on positive and negative. Now my guess is that the advanced foundry is pretty predictable and a strong positive into next year. And it seems to be that maybe more advanced logic and also power/wafer/analog are maybe a little bit more uncertain. Am I in the right ballpark here? And also, do you think that you could still grow if these 2 areas do not show growth next year? That's my first question. Paul Verhagen: Yes. So I think you're directionally correct, Nigel. So I think where we -- as Hichem also said, where we have, let's say, the most reliable -- maybe too strong, but we work the forecast with customers and especially the large customers and especially with the leading edge logic/foundry, the quality of the forecast that we get is better, I would say, than with quite a few other customers. So that's one. So there, we have, I think most confidence. That does not necessarily mean that things cannot change. Things will always change. For sure, pull-ins, pull-outs, et cetera, will always happen. But will also happen next year. But -- and that's the area where we have most confidence. Two, I think in DRAM, given everything that is happening there, if you read all the market intel, I mean there is capacity shortage, I would say, demand is higher than supply. I think we're relatively confident on what we can achieve there. So there, we have quite some visibility. We just talked about China. We do believe China will come down, as we said, there is limited visibility, but it's not that we steer completely in the dark. We have still reasonable customer intel, but not as good as what we have from the logic/foundry customers. And then for the power/wafer/analog, I would say it's maybe most uncertain. That market is now 7 quarters and by the end of the year, 8 quarters in a cyclical downturn. So it is more based on the fact that at a certain moment in time, that market should also start to see a turning point. But there, we do not yet see that in orders coming in, but we do expect that to come in and partially also based on, I guess, on customer intel, but that, I would say, is maybe the most uncertain one, but we would expect that to happen somewhere in the course of next year. Nigel van Putten: Got it. I'm going to use my follow-up then to still maybe press a little bit on sort of the dynamics you've also pointed out this quarter that there is still quite a bit of difference between one and the other. So maybe just for your forecast, are you sort of assuming multiple customers to grow next year in a material way? Or is that not your base assumption at the moment? Paul Verhagen: Yes. Basically if you talk leading edge for customers at this moment. I think 2 of them, and I'll leave it up to you to guess which one. We are reasonably confident that they will grow. One of that is still uncertain, and it's not an important one. But yes, we'll see what will happen there. We have, of course, a certain view baked into these projections that we have given, but at least 2 and maybe 3. Hichem M'Saad: Yes. But I think if I add something to what Paul has mentioned, I mean we see customer concentration has increased in the recent quarter for advanced logic and foundry and we think it will continue in 2026. Operator: The next question is from Stephane Houri, ODDO BHF. Stephane Houri: Yes. Actually, I have a question about 2027. I know you gave -- just gave sense of guidance for 2026, with a very low point apparently and so it means that there is a need for an acceleration in the second half. Overall, we should expect probably a growth kind of low growth next year or mid-single-digit growth, I don't know. But it means that you reach your 2027 target, you need to have a double-digit growth in '27 at least. So what are the pieces of the puzzle we should look at to understand if you're in the good trajectory or not? Paul Verhagen: Fair to say, Stephane, I think firing on all cylinders is the right description here. So one, as I think Hichem already said at the beginning of the call, end of this year or middle of the second half of this year, we expect pilot -- investments in pilot for 1.4 and then going into HVM in '27. That's of course, a big driver. You've seen the SAM increase that goes with it. Two, of course, we would expect memory to continue to be good on the back of, in particular, AI, which now, by the way, is driving both HBM also, let's say, conventional more high performance in DRAM, in particular, which should be good by '27. I mean, if power/wafer/analog by then is still not recovering then, okay, I don't know what is happening there, but we would expect logically that's also there. By that moment in time, you would see a turning point. So -- and also spares and service business will continue to grow as we -- based on outcome-based services, as we said, during the Investor Day. So firing on all cylinders would be, I think, the right description here. Hichem M'Saad: Yes. One thing I would add to what Paul has mentioned is also what we see in 2027 is in logic, you're going to have 2-nanometer continued investment in capacity, but also the capacity increase in 2027 for the 1.4 nanometer node, okay? So you're going to have really leading edge 2-nanometer and 1.4-nanometer significant investment in those 2 technology at the same time. Because 2-nanometer is actually a very strong -- it's a very strong node, it's a very long node. That's what our customers are telling us. And as you know, there's many sub-nodes in 2-nanometer. So investment in 2-nanometer is still going to continue at a very healthy level in 2027. At the same time, you have the 1.4 nanometer expansion in that same year. Stephane Houri: Okay. Okay. And I just wanted to come back on China where you see double-digit decline next year. Are you sure that this is only the market and that you are not facing an increased level of local competition. There is more and more noise about the efforts they are making and the quality they are obtaining. So can you maybe describe the situation there and the sustainability of your market share? Paul Verhagen: That's a good point. I think it's a combination of both things. One, China, we've seen everybody actually also appears to have seen a very high level of investment in the last 2 years or so, 2.5 years. So we've already communicated, I think, end of last year that we would expect this to gradually normalize, whatever that means. Two, with recent, let's say, announced export controls, that also has impacted us to a certain extent, but also our peers, although it's maybe not materialized 1% to 2% of our annual revenue globally, but it's still a few percent, of course, of our China revenue, which again leaves a vacuum for local competition to step in. So yes, local competition will for sure, benefit from this, will get on a quicker learning curve because, yes, the unfortunate reality is that because of all these restrictions, yes, there is a playing field -- an unleveled playing field where local competitors can step in with what we would say inferior products compared to our products, but at the same time, learn at an accelerated pace compared to the situation if they would not have been able to get their products into customer fabs. So it's a combination of these 2 things, I would say. Hichem M'Saad: And one thing I would add to what Paul has mentioned, okay? We think that we are very competitive in China vis-a-vis the Chinese competitor. We don't see our position to be really worse than what it was before. I think our products are very good, and we continue innovation unabated which really gives us an edge from that point of view. In China, what really -- what 2026 shows for us right now, we have really very low visibility on how some of the part of the market is going to materialize. I talked today in my prepared remarks that we have won some significant business in Epi Intrepid ESA in the power/wafer/analog and some of those actually businesses is happening in China. So depending on what that -- so that shows really our competitiveness in that market. And I think if the market -- if the power/wafer market analog recovers, that's going to be also very positive for us in the future. And as you know, in the power/wafer/analog, visibility is very -- it's not very long. That market can go down immediately and go up at the last minute. So that's really a question we're going to find out in 2026, but we are very competitive. We think we can compete very well in that market. And it's an important market which we're going to continue to address. Operator: The next question is from Adithya Metuku, HSBC. Adithya Metuku: I had 2. Firstly, look, when I look at your growth, you've always tended to outperform WFE given the company-specific growth drivers. As I look out to 2026, is there any reason why you will not outperform WFE next year? I just wanted any -- is there any headwind that we should keep in mind? Any color there would be helpful. And then I've got a follow-up. Paul Verhagen: I think on the outperforming the wafer fab equipment, we have mentioned that in our Investor Day that we will outperform the wafer fab equipment when going from '24 to 2030 -- from 2024 to 2030. It doesn't mean, okay, we're going to outperform every year. So still I'm sure about that. I mean we already announced saying that the 2026 for us is actually a growth year, which we are very confident about it. But to answer the -- whether we're going to outperform it in 2026, that's too early to say. But what we can tell you that from 2024 to 2030, we will outperform the WFE market. Adithya Metuku: Got it. Maybe just on that, I mean, if you were to underperform given where you sit today and your visibility into the different end markets that you talked about on this call before, if you were to underperform what would be the reason? I struggle to see what -- I don't see any reasons, but I'm just trying to see if I'm missing something here. Hichem M'Saad: It depends really on the WFE mix. What's the mix of products, memory versus logic versus power/wafer/analog. It's really mix dependent. Adithya Metuku: Okay. Got it. And just as a follow-up. Paul, I just wondered if you could give us some color on OpEx in 4Q. I know you commented on SG&A, but I don't think you commented on R&D. And also if you could give any color on how we should think about OpEx into 2026? That would be super helpful. Paul Verhagen: Yes. So R&D for Q4, I think, there will be similar to Q3 gross R&D and most likely also net R&D. SG&A, Q3, we mentioned that there was relatively low variable expenses, where we made an adjustment based on certain accruals that were made. So I think the Q2 is more of an indication than Q3 going forward and into '26, and we've given guidance in the Investor Day. We will continue to invest in R&D, which is a lifeline. So there, you will see gradual increases compared to this year. And SG&A, we will keep very tight. And as a percentage of revenue, with revenue growth, we would expect that to come down a little bit further. Victor Bareño: Can we have the next caller, please? Operator? Operator: The next question is from Timm Schulze-Melander, Rothschild & Co Redburn. Timm Schulze-Melander: My first one just very big picture, maybe a question for Paul. 2026, do you -- should we expect the aftermarket side of your revenues to outgrow system sales? And then I had a follow-up. Paul Verhagen: I have a view, I'm not going to tell you because it's too early to tell. But what I can say is that we do expect a healthy growth in our spares and service business in '26 compared to '25. It's too early to already say it will be higher or lower. But we do see what we believe will happen is that we will continue to see a very healthy growth in spares and service business. Timm Schulze-Melander: Okay. That's helpful. Maybe just one other one. If we just -- you talked a lot about how important mix is to the outlook in 2026. Could we just when we think about your ALD business, I know you've talked about it being more than half of your system sales, but could you give us a kind of 5% to 10% range kind of what that ballpark looks like for 2025? Paul Verhagen: No, we were not going to give very specific guidance other than what we've given. We've obviously had ALD is more than half of our equipment business, which indeed it still is and maybe this year more so given the ramp-up 2-nanometer. It's also one of the reasons why the margin is where it is. Also given that, again, the more power/wafer/analog market is down. So relatively spoken, a lower percentage of the overall mix. And of course, still China is strong, although below last year, was still strong. So adding that all up, that's what you get, what we have, but we're not going to give specific guidance within a few percentages, what -- where we stand with ALD. Timm Schulze-Melander: Okay. But given your prior comment about power/analog and some of the other mix, then as a percentage of sales, ALD might be flat or down as a percentage of your equipment sales in '26? Paul Verhagen: Depending on what we assume and depending on how much the relative markets grow, there might be indeed relatively spoken, a -- but now we're really talking scenarios, there might be relatively spoken, slightly lower share of ALD compared to power/wafer/analog if -- and it's a big if, if power/wafer/analog will grow more fast or faster than ALD, but that's still to be seen as well. So it's really too early tell. I really don't know. We have, of course, certain scenarios and assumptions, but it's too early to give external guidance on that. Operator: And the last question is from Marc Hesselink, ING. Marc Hesselink: Yes. I have 2. Actually, on 2 bit smaller categories. Firstly, advanced packaging that you also now point out again in the press release, also at the Capital Markets Day spent some time of it. The fact that you're really focusing on it, does it show that this is something that can be material as well over the coming years? And how do you expect that then to ramp into your revenue numbers? Hichem M'Saad: So I think we mentioned -- thank you for the question. I think we mentioned that we have made some wins in advanced packaging the past quarter, which we are really very excited about. We really think that advanced packaging is very enabling. We think that as a company, we can provide meaningful innovation and disruption to the market in the area of new materials and in the area of surface preparations and based on our experience in both ALD and also chemistry. We have a significant engagement in the past actually a few quarters with some key customers in both memory and logic, high-end logic to develop some of those films. We're very excited about this part of the business. And hopefully, we see more and more wins in the next few quarters, and we'll keep you updated of those when time comes. Marc Hesselink: But maybe to add, is it then material? Or is just the first start of something that can be material in the future? Hichem M'Saad: It's really the first start. It's really the start right now. And that's why we're excited about the future of the company, and I think that would be something that, let me say, very excited about it, to be honest with you. I think there's -- we see customers putting in very hard. I think the -- as you know, in both memory and logic, heat generation is a big problem. So we're developing some films that really would reduce the hotspots with higher conductivity capability. We see films in actually the microphotonics area team developing films that can reduce light dispersion. So it's really one area that becomes very important for both the logic and the memory customers. And that's an area that, hopefully, is going to be very accretive to us in the future. Marc Hesselink: Great. And the second question is on -- actually on LPE. So you paid the earn-out in the quarter. So you did hit the milestone for that one. I mean I think in the press release, you can still read that it is very, very weak at the moment and also no recovery into next year. So can you then still talk about the building blocks, why did you still reach the milestones? And when do you -- are you still confident on this one to pick up maybe in the longer term? Paul Verhagen: Simple answer. The milestones are based on 2024. And 2024 was a star year for us with almost, I would say, explosive growth in silicon carbide. So if it would have been -- if the milestones would have been based in 2025, they would not have been met. But yes, the reality is that they were based on '24 and '24 is a very strong year for silicon carbide. Marc Hesselink: Okay. And no visibility on that improving in the beyond '26 period? Paul Verhagen: We, of course, expect that markets to come back at a certain moment in time, not yet for next year, at least we see no evidence for that to start to happen next year. But we still believe that there is a market for us, a good market for silicon carbide that we will start seeing come back, hopefully, also in 2027, but that's as again, it's too early to tell. Operator: Gentlemen, there are no more questions registered at this time. I turn the conference back to the management for any closing remarks. Hichem M'Saad: Thank you all for attending our call today and also on behalf of Paul and Victor. We hope to meet many of you again in the upcoming investor conference and other events. Thanks again, and goodbye. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
Operator: Greetings, and welcome to the Clean Harbors Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors. Thank you, sir. You may begin. Michael McDonald: Thank you, Christine, and good morning, everyone. With me on today's call are our Co-Chief Executive Officers, Eric Gerstenberg and Mike Battles; our EVP and Chief Financial Officer, Eric Dugas; and our SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our Investor Relations website, and we invite you to follow along. Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, October 29, 2025. Information on potential factors and risks that could affect our results is included in our SEC filings. The company undertakes no obligation to revise or publicly release the results of any revision to the statements made today other than through filings made concerning this reporting period. Today's discussion includes references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of performance. Reconciliations of these measures to the most directly comparable GAAP measures are available in today's news release on our IR website and in the appendix of today's presentation. Let me turn the call over to Eric Gerstenberg to start. Eric? Eric Gerstenberg: Thanks, Michael. Good morning, everyone, and thank you for joining us. As always, let me start with our safety results. Through September 30, we were at a TRIR of 0.49, putting us on a track record for another record year. We are extremely proud of that performance. The only way you achieve this level of excellence is with constant operational focus from the whole team to protect themselves and each other. Safety performance delivers measurable benefits across multiple dimensions from enhanced operational efficiency and productivity to stronger employee retention and company reputation. For any team members listening, congratulations on these great safety results, and let's finish strong in Q4. Turning to a summary of results on Slide 3. Our Q3 performance reflected year-on-year growth from an increase in overall waste volumes into our network. Pricing gains and increased productivity even in an environment where softer conditions resulting from macroeconomic factors have impacted some customers. Our ES segment grew on strength in Technical Services and SK branch. Our Safety-Kleen Sustainable Solutions segment performed in line with expectations, mainly due to our charge for oil program and product mix. Driving margin growth continued to be a focus for us as we are -- we were pleased to see our consolidated adjusted EBITDA margin increased by 100 basis points from a year ago to 20.7%, demonstrating the effectiveness of our pricing, the leverage in our network of permitted facilities and cost-saving strategies. Within all of the underlying ES businesses, we drove pricing gains and improved productivity while lowering costs, driving better margin contributions. Corporate segment costs were up from a year ago, primarily due to higher insurance expenses and health care increases, offsetting partially by cost-cutting actions. Overall, Q3 results fell slightly short of our expectations due primarily to slowness in field services and industrial services, combined with some higher-than-anticipated employee health care costs. We remain optimistic with the continued growth and momentum in our waste collection and disposal assets. We believe that the productivity and margin enhancement initiatives undertaken throughout 2025 and across our businesses put us in a position to benefit as some macroeconomic conditions improve. Turning to our segments, beginning with ES on Slide 4. Segment adjusted EBITDA margin grew year-over-year for the 14th consecutive quarter, with revenue up 3% and adjusted EBITDA up 7%. Our waste volumes, PFAS work, remediation projects and pricing drove our revenue increase as that more than offset the slowdown in Industrial and Field Services. Looking at revenue by the segment components. Technical Services led this quarter with 12% growth as demand was steady. Incineration utilization remained high and our landfill volumes were up 40% from a year ago. Incineration utilization was 92% versus 89% in the same period of 2024. For comparison purposes, our utilization excludes the new unit in Kimball as we continue to ramp up. With Kimball included, our utilization rate was still high at 88%. As we've seen in the past several quarters, incineration demand has remained high due to the diversity of our end markets as well as projects underpinning our growth. Our sales teams have done an excellent job winning volumes in an environment where some of our customers have been impacted by current economic conditions. That sales effort includes our SK branches who have consistently driven significant containerized waste volumes into our network. In Q3, Safety-Kleen Environmental Services rose 8% through a combination of pricing gains and growth in our core service offerings. The number of parts washer services was 249,000 in the quarter with a larger average service ticket per stop. The consistency of that business has been a key element to our profitable growth over the past 5 years. Field Services revenue declined a 11% from a year ago, more than we anticipated in our guidance. This shortfall reflects the absence of medium to large response projects. While we responded to more than 5,900 ER events, demonstrating consistent baseline demand, the revenue impact came from having no substantial projects. Within Industrial Services, we continue to see customers in both the chemical and refining verticals limit their spending on turnarounds as they remain under significant cost pressure. As a result, revenue was down 4% from a year ago. In light of these market conditions, we focused on cost management, including workforce and equipment utilization. While we are hopeful that maintenance deferrals from IS customers we've seen for the past few years improves, we do not expect any meaningful recovery in revenue opportunities for chemical and refining customers before the spring turnaround season. Based on our service platform and extensive lines of business we provide, we are focused on growing our wallet share with these customers. Turning to Slide 5. We want to highlight our recent successful PFAS incineration study done in partnership with the EPA as well as the DoD. This study, which we completed in late 2024 in our Utah facility was a milestone achievement for the company. The study published by the EPA in September provided the type of scientific data sought by customers and regulators. The study was conducted using the EPA's most recent and rigorous emission standards. The study confirmed what we already know. Our RCRA-permitted high-temperature incinerators cannot only safely destroy these forever chemicals in various forms, but can do so at a cost-effective commercial scale. In addition, our total PFAS solution has continued to gain traction in the marketplace with offerings ranging from lab analytics to water filtration to site remediation to disposal. We are in active discussions with customers on projects across many of these fronts and expect PFAS to generate $100 million to $120 million of revenue this year, up 20% to 25% from a year ago. Moreover, based on our pipeline and our momentum in the marketplace, we expect PFAS-related sales to further accelerate in the years ahead. With that, let me turn things over to Mike to discuss SKSS and capital allocation. Mike? Michael Battles: Thank you, Eric, and good morning, everyone. Turning to SKSS on Slide 6. This segment delivered results in the third quarter that were in line with our expectations. Despite pricing headwinds in the base oil market all year, we effectively managed our re-refining spread and drove value from other initiatives. During the quarter, we dramatically lowered our waste oil collection costs versus a year ago as we advanced our CFO program. It is clear that our used oil customers understand that we are collecting a waste from them and providing value and reliable services. The team continues to manage costs while still collecting the volumes we need to run our plants. In Q3, we gathered 64 million gallons of waste oil, which is consistent with the second quarter. On the top line, our revenue decreased as expected. In terms of profitability, our adjusted EBITDA was essentially unchanged. The result was a 100 basis point margin improvement, largely stemming from the CFO increase, cost reduction initiatives and efficiency gains. We also increased our direct lubricant sales, which are among our highest margin gallons to 9% of our total volumes, which also contributed to that margin improvement. During the quarter, we continued our partnership with BP Castrol to support their more circular offering for corporate fleets. Additionally, we are growing our Group III production as those gallons carry a premium to our traditional Group II volumes, and we remain on track to add several million gallons of Group III this year. Turning to Slide 7. Today, we announced plans to construct a state-of-the-art processing plant that we refer to internally as the SDA Unit. By using an industry-proven Solvent De-Asphalting process and combining it with our existing hydrotreating capabilities, we can unlock incremental value from an everyday product, VTAE generated today in our re-refineries. This new plant will upgrade VTAE into a high-value 600N base oil. 600 neutral is a high-purity base oil that is typically used in heavy-duty industrial applications due to its durability and high-performance characteristics. Total spend on the SDA Unit is expected to be $210 million to $220 million with commercial launch anticipated in 2028. We spent approximately $12 million on this project year-to-date with a total of approximately $30 million expected in 2025. As a result of the project, we expect to generate annual EBITDA in the range of $30 million to $40 million, a 6- or 7-year payback on the investment once completed. Such return will rival what we've seen from similar sized incineration projects and represents an additional growth opportunity for SKSS. Turning to capital allocation on Slide 8. We remain active in seeking opportunities to generate strong returns for shareholders. We also remain well positioned to execute our strategy with record cash flows in Q3, low leverage and a terrific balance sheet. On the M&A front, we're evaluating both bolt-on transactions and larger acquisitions that would provide leverageable assets with high synergy potential that support our market position in a particular business or geography. We believe that in our space, it is best to be patient and prudent in pursuing the right transactions. We've also been evaluating a series of internal investments, including today's announcement of the SDA Unit. Including that facility, we currently see a path to potentially investing over $500 million in internal projects over the next several years, ranging from greater processing capabilities within our network, additional hub locations, fleet expansions and additional incineration capacity. We look forward to sharing more of these plans with you in the coming quarters as plants for individual projects get finalized. We also view share repurchases as an attractive capital allocation opportunity to generate strong shareholder returns as demonstrated by our $50 million in repurchases in Q3. Looking ahead, while we believe that the challenges we faced in Q3 are temporary and market-driven with year-over-year growth illustrating our resiliency, we expect our incinerators to run strong through year-end and waste projects to continue to feed our entire disposal and recycling network. Tariff-related uncertainty and other macro factors in North American economy have ripple effects through some of our customers over the past 2 quarters, but we believe the overall economic outlook remains promising. Based on conversations with customers, we anticipate incentives to reshore and the benefits of the recent U.S. tax bill will drive meaningful lift in American manufacturing and continue to support remediation and waste projects. We expect that spending constraints related to Industrial Services and Field Services in our key verticals, including chemicals and refineries will loosen in the coming quarters as economic conditions improve. Overall, our project pipeline remains substantial with growing PFAS opportunities expected to contribute meaningfully to future activity. We also remain excited about the steady ramp-up in production and mix in our new Kimball incinerator as it works towards full capacity. For SKSS, we believe we've stabilized this business with our efforts around CFO, partnerships and Group III production and are looking forward to the new SDA Unit. We expect to achieve our profitability targets for this business in 2025. And with that, let me turn it over to our CFO, Eric Dugas. Eric Dugas: Thank you, Mike, and good morning, everyone. Turning to our Q3 results and the income statement on Slide 10. While our quarterly performance came in below our expectations due to the factors Eric outlined, primarily a shortfall in Industrial and Field Services plus elevated health care costs, I want to highlight the underlying strength in our business. Total revenue increased to $1.55 billion in the quarter, with Environmental Services growth stemming from our wide range of service offerings and diversified customer base. Adjusted EBITDA increased 6% to $320 million, demonstrating our ability to drive profitable growth through a steadfast commitment to margin expansion. Our consolidated Q3 adjusted EBITDA margin expanded to 20.7%, led by a 120 basis point improvement in Environmental Services. This margin expansion reflects our strategic focus on pricing initiatives, cost reduction efforts and productivity gains as we see evidence of margin improvement across each of our business units within the ES segment. Within Environmental Services, demand in our disposal network and collection businesses remained solid, driving revenue growth despite macro headwinds in some verticals like chemical. SKSS delivered more than $40 million in EBITDA, its strongest quarter in the year demonstrating operational resilience in a soft base oil market. SG&A expense as a percentage of revenue increased from a year ago to 12.2%, reflecting higher health care costs, professional fees and compensation. We are maintaining our full year SG&A guidance as a percentage of revenue in the low to mid-12% range. Depreciation and amortization was approximately $115 million, reflecting our continued capital deployment, including Kimball operations and increased landfill amortization related to greater disposal volumes. We've raised our full year depreciation and amortization guidance to $445 million to $455 million, primarily due to the strong landfill performance. Income from operations in Q3 was $193 million, flat versus the prior year as our 6% adjusted EBITDA growth was offset by higher depreciation and amortization, as I just mentioned. Net income grew modestly year-over-year, delivering earnings per share of $2.21. Turning to the balance sheet on Slide 11. With continued focus on cash flow generation and a record level of free cash flows in the quarter, we ended Q3 with cash and short-term marketable securities of $850 million, providing substantial flexibility for our capital allocation strategy that Mike just outlined. Our recent refinancing was executed at favorable terms as we replaced our 2027 senior notes with 2033 senior notes and replaced our term loan at a more favorable rate of SOFR plus 150 basis points. This refinancing provides us with more surety, extends the maturity of the debt, increases our flexibility and demonstrates market confidence in our credit profile. With net debt-to-EBITDA below 2x and a blended interest rate of 5.3%, we maintain a conservative capital structure. Our credit profile remains strong, just one notch below investment grade on our overall debt rating, while our secured debt carries an investment-grade rating, reflecting the quality of our asset base, cash flow stability and overall capital policies. Turning to cash flows on Slide 12. Our Q3 cash flow performance was exceptional. Operating cash flow of $302 million and a Q3 record adjusted free cash flow of $231 million, which was up $86 million year-on-year, underscores the generative nature of our -- the cash-generative nature of our business model. CapEx net of disposals of $83 million was down from the prior year, reflecting disciplined capital allocation. As previously highlighted, we began construction of our high-return re-refinery project, investing more than $10 million in Q3 to launch this exciting initiative that we expect to deliver excellent shareholder value. We also continued advancing our strategic hub facility in Phoenix, further strengthening our network capabilities. For 2025, excluding the SDA Unit and Phoenix Hub project, we now expect our net CapEx to be in the range of $340 million to $370 million. This is slightly down from our previous range as we expect asset sales to be closer to $15 million this year instead of the $10 million previously thought. We bought back more than 208,000 shares of stock for a total spend of $50 million in Q3. We currently have roughly $380 million remaining under our authorization. We continue to view our shares as attractively valued at current levels. Turning to our guidance on Slide 13. Based on Q3 results and current market conditions for both of our operating segments, we are revising our 2025 adjusted EBITDA guidance to a range of $1.155 billion to $1.175 billion or a midpoint of $1.165 billion. This adjustment reflects the Q3 EBITDA results factored into our annual guide. Importantly, we anticipate any Q4 carryover effects in the Field Services or Industrial Services will be offset by our facilities performance, project pipeline and PFAS opportunities. The long-term trends of PFAS, remediation and reshoring create substantial upside potential with recent developments like our EPA incineration study further validating our strategic positioning. For the full year 2025, our revised adjusted EBITDA guidance will translate to our reporting segments as follows: at our guidance midpoint, we now expect 2025 adjusted EBITDA in Environmental Services to increase by more than 5% from 2024. While recent economic turbulence has impacted some aspects of our business, we're optimistic about our future and ability to navigate the current landscape. SKSS is stabilizing effectively, we continue to expect full year 2025 adjusted EBITDA at the midpoint of our guidance to be $140 million. The combination of our operational improvements, CFO strategy and initiatives that Mike outlined have established a stable foundation for this business. Within corporate, at the midpoint of our guide, we expect negative adjusted EBITDA to now be up 3% to 5% compared to 2024, driven by growth-related expenses, higher wages and benefits and rising insurance costs. We continue implementing multiple cost savings initiatives to partially offset these increases. We are raising our full year adjusted free cash flow guidance to a midpoint of $475 million based on year-to-date performance and favorable provisions passed in the U.S. Tax Act this summer. This represents more than 30% growth from 2024, underscoring our focus and ability to convert earnings into substantial free cash flow returns. While Q3 presented near-term challenges, our highest margin businesses continue to grow and demonstrate competitive strength. Our incinerators, landfills and other permanent locations drove our profitable growth and supported our margin improvement. The slowdown in Industrial Services reflects deferred maintenance and projects that will return to market, positioning us well for recovery. Within Field Services, we remain confident in our prospects despite the absence of medium and large event work in the third quarter. SKSS appears to have leveled off, and we expect this segment to deliver greater consistency moving forward. We look to finish the year strong and carry that momentum into 2026 and are excited about the many growth and margin increasing initiatives undertaken this year, which place us in a solid position for profitable growth as macro conditions improve and we execute on longer-term goals. With that, Christine, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Tyler Brown with Raymond James. Patrick Brown: So it feels like there's a lot of puts and takes out there. The industrial malaise, I guess, continues to march on a bit. But Eric Dugas, just it looks like you brought the midpoint down, call it, $15 million. But if you had to bucket the culprits, would you say it was really the field and industrial shortfall? And then how big was the health care issue? You brought it up a few times. Was that onetime? Or is that a go-forward step-up in cost? Eric Dugas: Sure, Tyler. So in terms of the total takedown, the $15 million, a lot of that is reflected in our Q3 results. Industrial Services being the most predominant piece of that, we estimate maybe $7 million. Field Services, really just the lack of those medium and large projects that we've seen a good chunk of in earlier quarters, probably about $4 million. And then the healthcare in the Environmental Services segment is about $4 million and probably about $6 million overall to the entire company. So I think you're absolutely right in terms of a lot of puts and takes. We still see really strong momentum and good volumes in more of our waste disposal-related businesses of tech services and SKE and think those will perform quite strong kind of here into Q4 and into 2026. I guess the last point on healthcare, Tyler, it is a trend I think a lot of companies are combating. We have built in the increases into our Q4 guidance, and we're in the process of doing some things to make sure that we can offset some of the increases we're seeing there. But probably not entirely unusual, but certainly higher cost than we would have liked here in Q3. Michael Battles: Tyler, this is Mike. The one thing I'd add to what Eric said, we did have a fair amount of high-cost claims. That's much higher than, let's say, averages for the past 2 or 3 years. Hard for me to say if that's the new normal. It doesn't feel that way. But as Eric said, we're trying to make sure we're changing some of our plans to make sure we cover off on that in 2026. Patrick Brown: Okay. Okay. That's helpful. And then I appreciate that you guys aren't giving '26 guidance. But conceptually speaking, I mean, should we think about EBITDA on a more consolidated basis kind of flattening out year-over-year just into maybe the first part of '26. It sounds like maybe, Eric Gerstenberg, you're not looking for an industrial pickup really until the spring turnaround season? Or are there enough internal levers to kind of drive the EBITDA growth even in the first half without a whole lot of economic help? Eric Gerstenberg: Yes, Tyler, I'll start. And certainly not expecting a real rebound of an industrial turnarounds until the spring. However, we're going to continue to grow our EBITDA across our waste collection businesses and our service businesses as well. So we're looking at next year, preliminary. We're still of a budget process to go through. But 5% EBITDA growth, I mean, we're really still targeting that. We think we can do that based on the demonstration of cost-cutting initiatives and volume and pricing growth in those waste businesses. Patrick Brown: Okay. That's extremely helpful. And then I do just want to come back to capital allocation, Mike and Eric, just obviously, you guys announced a very sizable organic growth project. I'm sure someone will go over all of that. There was another decent buyback in the quarter. But just realistically, what should we be expecting on the M&A front? I mean, how does that pipeline look? Are you looking at bigger deals? Are you looking at smaller deals? Do you think you can get something across the line this year? Or is that something maybe more into '26? Michael Battles: Yes, Tyler, the answer to that question is yes. So we are looking at larger deals. We're looking at smaller deals. I think that we obviously, we talk about the SDA and happy to go into that and maybe other projects we're thinking about. But in the interim, we want to remain prudent. We want to remain disciplined, like we have for the company's history, frankly. But certainly in the past couple of years, we certainly try to be very thoughtful about it and make sure we're getting a good return on our shareholders' investment. And I think there's plenty of things out there, both large sizes, publicly available and smaller things that are out there. And so we remain very active. In the interim, we did buy back some shares. I don't think that's a change in trends. That's more like we saw opportunities there to take advantage of some market dislocation, and we took advantage of that, and we bought back over $115 million worth this year. And so I think that's a good return on our shareholders' investment. So we'll continue down that path. I don't think that's a change in strategy. But we see ourselves as a growth company. We see ourselves as M&A company, and we'll continue to do things like that. Patrick Brown: Okay. Perfect. Michael Battles: And one follow-up, too, Tyler, when you think about the 5% that Eric mentioned, obviously, budget processes is in that area code. It's probably -- most of that's going to be in ES with a little bit in SK and a little bad guy in corporate, I think as I think about the piece parts of that. Operator: Our next question comes from the line of Noah Kaye with Oppenheimer. Noah Kaye: Let's kind of continue along the capital allocation theme. Made some really nice progress this year on free cash flow conversion and free cash flow generation, as you talked about, Eric, with Kimball rolling off and the underlying growth. Mike, when you talked about potentially up to $500 million of organic investments and obviously, this SDA investment might be part of that. Can you give us some guardrails around where you want to convert free cash flow to EBITDA within the business broadly over the next couple of years? Is there a baseline we should think about? And I know it's a little bit path dependent on what kind of M&A you do. But just kind of try to give us a baseline level that we should be underwriting here? Eric Dugas: Sure, Noah. So this is Eric Dugas. And I think you're absolutely right. The free cash flow generation has been fabulous this year, a lot of initiatives on that front. As we look out into the future, I think we're going to continue to target kind of that 40% free cash flow generation, 40% of EBITDA. I think there'll be pluses and minuses to that along the way for the minuses would be these accretive capital investments that we mentioned that will be adjusted out of that, and we'll call that out and explain those clearly. But those are really growth projects that we see, and that will be a detriment to the 40%. But normal baseline guardrails, I'd say 40% conversion and each year trying to grow up from that. Michael Battles: I think the team under Eric's leadership has done a great job with cash collection. The organization has done a great job with cash collections, managing our spend, and you really see it in the margin improvement, and that's really been helpful trying to get to that 40% and hopefully beat that over the next few years. Noah Kaye: Okay. And just so we're clear, you do intend to formally adjust this SDA investment out of free cash flow because that was not the case with Kimball, right? So is that kind of the practice going forward that these extraordinary organic investments would be excluded? Eric Dugas: Yes, you got it Noah. Noah Kaye: Okay. And then I guess to double-click on this specific investment, I think just help us understand some of the key assumptions you made in underwriting this. I mean you talked about the 6- to 7-year payback. Obviously, we've seen the value of base oils fluctuate a lot over the company's history. What is it sort of dependent on to hit those target returns from a commodity value, if at all? Eric Gerstenberg: Yes. Noah, this is Eric. I'll start. It's really a great investment for us. It's a bolt-on technology out at our East Chicago refinery, and it's upgrading a product that we already produce called VTAE, Vacuum Tower Asphalt Extender, and it's moving it up the value chain by implementing this technology and taking over 30 million gallons of what we already generate and sell and creating it at a better market value. There is some -- certainly some fluctuations in the price of that 600N product. It's not as -- it doesn't fluctuate as much as base oil. It's used in heavy-duty applications. So it's a more stable price look at when we sell that product. So we're excited about that. Overall, though, it's just a straight baseline upgrade of that 30 million gallons into a new arena, bringing that up the value chain, proven technology with a hydrotreater back down the back end. And so we're excited about that incremental $30 million to $40 million of EBITDA once we start up in 2028. Michael Battles: And Noah, one thing I'd add to that is that, as Eric said, we're using kind of our -- the byproduct of the re-refining process, VTAE, as Eric mentioned, and using that in this process to make a higher-value product. But there's also that -- we're not -- this won't fill -- that 30 million gallons won't fill the new product. We'll have an opportunity to grow from there. We're not assuming we get any other VTAE from any other third parties, which that would be upside to the model. The reason why I bring that up is just as an example is that I think that as we built this model up, it came up with the $30 million -- $30 million to $40 million that we spoke of in the live call, I think there's plenty of upside to that model. I think that we -- I thought Eric and I went through the analysis with the team, we're very reasonable in our assumptions as far as how we build it, how we think about the price of VTAE, how we think about the price of 600N, how we think about the cost of building the plant, how we think about the time line of building. I mean we thought through that. We've had many, many meetings on this with the team and with the Board to ensure that we're doing this in a thoughtful way. So we continue to do, what we've done with every large project on time, on budget, hit the numbers we say we're going to hit, simple as that. Noah Kaye: If I could sneak one more in. I think you're clear now on sort of the delta versus expectations in Industrial and Field Services. I guess just from a forecasting perspective, I know usually, IS tends to gather steam into September and then October is kind of the big month. So with that particular line of business, was it just the case that these deferrals really started to manifest late in the quarter and kind of continued through October here, and that's what we're seeing? And is there some way to think about normal seasonality in the future perhaps being different at all than what we've seen in the past? Eric Gerstenberg: Yes. No, I'll begin. This is Eric. When you look at kind of what occurred in the quarter, our turnarounds have been -- the number of count of turnarounds has been pretty stable. There's been some pushes. But overall, when we get into working for the turnarounds at our customer sites, the scope of the turnaround ends up being a little bit less than what we originally quoted or scoped with that customer. They really wanted to get the units cleaned and back online as quickly as possible. As we proceed into the fourth quarter, we took that into our guidance for the fourth quarter. We're still having turnarounds here, as you mentioned, as we flow into October here, and that's solid. But we're -- we really didn't -- we pared back a little bit of what we expected based on the third quarter results. And we truly expect as things continue to stabilize that as we get into 2026, we're not losing turnarounds to any competition. We're performing all the turnarounds. And we're going to -- we expect it to have a little bit better growth path as the economy recovers a little bit, particularly in the chemical and refinery sector. Eric Dugas: Yes, I think just to add one thing to what Eric said and one thing that we can see in our P&Ls and here around the business is the business is -- we're setting ourselves up really well for when things loosen up and come back. And when I look at even the Industrial Services P&L, Noah, I can see much better labor management. So I can see labor as a percentage of revenue in a better spot. I can see overtime coming down as a percentage of revenue. I can see us using less subcontractors and internalizing more work. So despite the financial results here in Q3 and what we believe into Q4, which is really impacted by the cost pressures, particularly in chemical and refinery, as we said, that those customers are seeing, we set ourselves up really well for when things change in the future because I do think those investments, particularly on the labor front and other areas, we should reap benefits of that hopefully next year, but definitely in coming years. Operator: Our next question comes from the line of Jim Schumm with TD Cowen. James Schumm: So maybe just help me understand, I'm sure other people don't know the 600N base oil market very well. Can you just help us with like what is the market pricing right now? What is like peak to trough pricing for this market? What's the total demand? Just how should we think about this? Like what's the total demand this year? What was it 5 years ago? Is demand expected to grow? Why? What's the end market? Just help us understand this is a fairly big investment for you guys. So I just want to understand this market a little better? Michael Battles: Yes, Jim. So we have an hour on the call, we're not going to take an hour trying to explain that 600N base oil market. But I will tell you, I will tell you that it is used primarily in industrial applications, which tend to be a little more resilient and gear oils, heavy-duty diesel engines, hydraulic oils is not as sensitive to electrification as passenger car engine oils would have. We've had a lot of customers express interest in this high-value buying this high 600N oil, and we've kind of worked out. We've kind of given them samples of what we provided, and they seem like there's a very good receptivity in the marketplace for this base oil. When you think about that the market, we'd be a very, very small player in a very large market. It tends to trend a little bit with Group II base oil, which has been down over the past couple of 3 years, but it's at a much higher premium. And it's been a consistent dollar premium to what we're thinking in the Group II base oil. And most of the country has to import 600N today, including from Korea and from other places. And so it's hard to kind of put a finger on, what's it going to be 3 years from now. We're assuming that the trend we see of some decrease -- we're assuming decreases over the modeling period. We're not expecting this plan to get turned on until 2028. So we do have some time there. But I do think that we've cut this way -- we've cut this 7 different ways. So let's assume that base oil -- the Group II 600N pricing is down. I think there's other levers out there, including taking additional VTAE from other customers to help offset that. I think the model that we put forth, I think, is a very balanced model. Hard to predict what happens to base oil, hard to predict what happens to 600N oil, but we think we have enough levers in the actual model that even if that comes up a little softer than we expect, there's other levers we can pull to help offset that to kind of get to where we need to get to. Again, we've consistently put together a large-scale construction projects that are on time and on budget that hit or exceed the EBITDA numbers that we have quoted. I believe this is no different. James Schumm: Mike I just wanted to clarify, it sounded like you -- were you saying the consumption, you're expecting the consumption to decrease over the next couple of years of this oil? I did I... Michael Battles: No, no, no. It is more about -- we have assumed pricing goes down a little bit in the modeling period not the demand per se. And the point I think that maybe I misspoke is that when we produce this 600N oil, we still be a very small player in a very big 600N market, I guess what I'm trying to say. James Schumm: Okay. Okay. All right. Maybe switching over to the SKSS guidance. I kind of -- my recollection was just that it was sort of the $140 million was the number. You guys just referenced a midpoint. What is -- just so everybody is clear, like what is the range for SKSS this year? So -- and then what's the confidence level in hitting that $140 million midpoint? Eric Gerstenberg: Jim, Eric here. I'd say that as we sit here today, we're very confident in that $140 million mark. To range bound that, I hesitate to do so. You might have to force me into a range, maybe it's a few million on either side. But the way the business is performing right now, particularly around our initiatives of CFO and our ability to continue to drive CFO pricing due to market conditions. The catalyst of that is obviously the high level of service we continue to provide and the fact that we haven't lost customers. I mean that really is the area that the team has done excellent on this year, and that gives us the confidence that we'll be able to meet that $140 million of EBITDA. So hopefully, that answers your question. Range bound, we haven't really looked at it that way, but high confidence in that number right now. Eric Dugas: We feel the $140 million is the new low watermark, we grow from there. Operator: Our next question comes from the line of David Manthey with Baird. David Manthey: My first question is on incinerator pricing. I didn't see a number in the slide deck. Could you talk about what that was? And then somewhat related, I know you gave the data specifically in the 10-Q later today, but could you talk about specific growth rates for Industrial Services, Field Services, SKE and tech services? Eric Gerstenberg: Sure. Dave, it's Eric. I'll take that, and I'm sure the guys will add on. In terms of incineration pricing, there's pockets, but over the entire population, we're looking at mid-single digits again, I think pretty consistent with prior quarters. In terms of the different sub-business lines or business units underneath ES, you'll find our tech services business, really great revenue growth there, some nice volumes, good pricing, but some of our -- as we alluded to in the prepared comments, kind of waste remediation projects, those types of things really saw a really strong quarter. So you're looking at double-digit growth there. Safety-Kleen branch continues to do really well. Again, some nice initiatives around our back services and pricing, mostly leading to about an 8% growth. And then we mentioned Field Services, not overly concerned here. You'll see, I believe, about a 9% drop in revenue there, maybe a little bit higher, maybe 11% now that I'm thinking it through. But really, it's those projects that didn't come through kind of medium, large-scale projects. We're not overly concerned about that right now. These things can be a little episodic. But when you look at that business over the longer term over the last few years, you're going to see some nice organic growth there. So not concerned with that. And then Industrial Services, as Eric mentioned earlier, about, I think, a 3% or 4% decline kind of year-on-year there, largely related to the turnaround services. David Manthey: That's great. And I know we've talked a lot about capital allocation here this morning. But does the investment you're making in this SDA Unit say anything about your M&A outlook? And I was also wondering that since you put out these Vision 2027 goals, we're a little bit past half time here. I think HydroChem was already in that 2022 starting point, and you've added Thompson and HEPACO basically. But could you maybe talk about how things have played out since that update and kind of how you're thinking about the market in general? Michael Battles: Yes, Dave, this is Mike, and I'm sure Eric and Eric have some thoughts on this as well. But the SDA Unit has no reflection on our M&A appetite. That was -- that's been an investment that we've talked about internally for a few years, frankly. And so this is more like, hey, we got the Board approval. We're starting to spend money on it. We should talk about it. It's a material asset that we need to make sure that our investors understand and we track against that. So that's really the driver of the discussion of the SDA. The other items that are out there, the $500 million, those are other things we're thinking about. As we think about where we go next with this, things like adding more hubs or making some investments in other incineration capacity. These are not new topics that we've talked about many times before. So it's more like just trying to say, look, that's another good use of capital that has great awesome returns, as you saw from the math that we're doing on this. So that's just a good use of capital. We're going to have $1 billion in cash by the end of the year. We're going to generate another high $400s million of cash flows in 2026. I mean those are -- we're going to have plenty of cash to do a variety of different things, including good M&A. As Eric mentioned in his Eric Dugas in his remarks, the leverage market is very -- our leverage is very low. Our appetite for debt -- from our debt investors is very strong. It was way oversubscribed. We got the rates. Eric and the team did a great job of pushing that debt out for a number of years, and it shows the appetite that the marketplace has for our high-quality debt because it's a high-quality asset. So it doesn't change one little bit. When thinking about Vision 2027, that was always a vision, just what it was. It was a vision of where we want to take the company, but we want to be disciplined about capital, and we've been thoughtful about M&A, and we'll continue to be thoughtful. And there are opportunities out there that are big and small, and we'll continue to capitalize on that. So I'm of the view that nothing has really changed with that announcement with the SDA announcement. I just want to make sure that you understand that this is more of kind of a timing issue that we've been talking about for a number of years that we want to share with the investing public because it's going to be a material number. Operator: Our next question comes from the line of Larry Solow with CJS Securities. Lawrence Solow: I guess first question, just on the guidance again, not to beat a dead horse, but the miss in the quarter, you guys clearly outlined that, a little bit of industrial, a little bit of Field Services. But it sounds like you kind of -- you've bucketed that miss out in the quarter and it skew cards out for the year. But do we -- so do we bounce back? Were you assuming a little bit of a better Q3 than you are going forward already? I'm just kind of curious if turnarounds seem to be a little bit less even than expected. So do we -- what gives you the confidence that we kind of get back to where you thought we were going to be in Q4, not to kind of get the details, but if you get where I'm going with that question. Eric Dugas: Certainly, Larry. And as we digested kind of our Q3 results and then projected our thoughts on kind of Q4 and the guide there, I think one thing that gives us -- makes it -- allows us to feel really good about Q4 is, I mentioned a moment ago, and I think in response to Dave's question, kind of the growth that we're seeing in Technical Services that 12% revenue growth, more projects coming our way, continued good waste volumes. So we're continuing to see because of our diverse customer base, although there's softness in certain verticals that we mentioned around chemical and refinery, we continue to increase volumes by collecting from other customers and bringing into the network. So that part of the business, we see a lot of strength. I think the other thing that pleasantly that we saw in Q3 here that I mentioned a moment ago is our margin expansion, right? I mean I think, as I mentioned in my remarks, the steadfast commitment to continuing to drive margins and generate free cash flows. That gives us comfort, quite frankly, as we move into Q4 in some of those more waste disposal type businesses. Certainly, the services business, as Eric alluded to, Industrial Services, we're not forecasting any large pickups there. And Field Services, again, like Industrial Services, a lot of good margin accretion there that we're seeing, but that can be episodic. So both medium and large jobs will come back. It's just a question of when and where, quite frankly. Michael Battles: I guess I would say one more thing, Larry, to that end. I'd say that all our [ LOBs, ] all the businesses that make up SK -- that make up Environmental Services had good margin accretion year-over-year. And when you think about from where we were a year ago, where we were concerned about SKSS, when we stabilized that business. We're concerned about free cash flow conversion. While we're going to have great free cash conversion this year, we continue to grow. When you think about EBITDA margins and our mark to 30% margins, I mean, that's on ES, that continues on unabated. It's 14 straight quarters of year-over-year margin growth. So I mean, I feel like we're kind of hitting all our strides. Look, it's a miss. I get that. I get the point. But really, it really is, I think, very, very temporary, as I said in my prepared remarks. Lawrence Solow: Absolutely. I appreciate it. And I'm kind of looking how this miss -- how you put this on a go-forward basis as opposed to just the miss. I just want to make sure that going forward, obviously, it's only 1 quarter, but you threw out -- we appreciate a little bit of color for next year in that 5% number, which I'm sure can move around. That's just kind of a baseline, we get all that. But I just want to make sure that you're not -- it doesn't sound like you're building a rapid improvement in Industrial and Field Service. So I just kind of trying to say then if you weren't building that in, in this quarter, then why we have the miss. But I get the extra color really does help. Just shifting gears real fast, just on PFAS. It sounds like things are continue to go well internally. To get a real acceleration, obviously, 20%, 25% growth is great, but I think your queue is growing a lot faster than that. To translate that into actual sales, right, we'll need some governmental -- some kind of legislation or something, I guess, right, or maybe even the National Defense Authorization Act or something. And I guess we're just in a holding period on that. Obviously, government shutdown doesn't help, but any further -- any color on that? Eric Gerstenberg: Yes, Larry, this is Eric. So obviously, getting our -- the results of our test that we did on our thermal units out and exposed and published by the EPA was a great milestone for us. The activity in the market has been extremely strong and became even stronger when that published results came out. The level of activity of what we've seen, how our pipeline has been growing. We've continuously talked about how our pipeline has been growing 15% to 20% quarter-over-quarter. It continues to do that. It feels like we even got more of a bump. So we're not really thinking that any major change in regulation has to happen to continue to drive that growth and even accelerate it. We're pretty bullish on how our prospects are panning out and the opportunities in front of us. So we feel pretty good about it. We think it's just going to accelerate. And as far as the Department of Defense lifting their moratorium, that's just -- that will be just another accelerator for us, and we're optimistic about that as well. Operator: Our next question comes from the line of James Ricchiutii with Needham & Company. James Ricchiuti: So outside of chemical, the refinery markets, are you seeing any choppiness, any other signs of weakness in some of the broad end markets that you guys service? Eric Gerstenberg: James, Eric, this is -- I'll begin. No, we haven't. We really -- as evidenced by our results in Q3, our volumes have been growing across our waste businesses. It's really strong through Q3. We're beginning Q4 very strong. So where there's been this pullback a little around IS spending around turnarounds and chemical spending around turnarounds. On the waste side of the business, it's been strong, volumes, price into the network and project growth with PFAS, but other projects happening across the board. So we feel pretty good about what we've seen from manufacturing, from retail, from the whole list of other verticals that we service. And that's really very resilient in our waste collection business because of all the diverse verticals that we service. Everybody is generating hazardous waste and what they're making out there these days. And we're certainly a beneficiary of driving those volumes into our network, which we continue to see and projects ever lift. James Ricchiuti: Okay. Maybe just turning to Kimball, and I know you touched on it a little bit, but how should we be thinking about how the scale-up of Kimball is going, maybe discussions you're having with customers? And you've talked in the past about better network efficiencies that come as a result of this and then potentially some lift to margins. And just talk to us about maybe how Kimball plays out in 2026? Eric Gerstenberg: Yes. So in the third quarter this year, we -- the new Kimball incinerator Train 2 unit processed over 10,000 tons. When we came into the year, our plan was to burn an incremental 28,000 tons in our network, and we're doing that with the Kimball expansion. It's been great. The ramp-up has been solid, typical start-up type things. We expect that tonnage to continue to grow as we've laid out. Nothing that -- everything that we see continues to see a path to hit our ramp-up objectives of that new unit going into 2026. The network efficiencies are alive and well. The routing of our -- how we manage our customers' waste into our units, the transportation efficiencies, those are showing up. So we're really bullish about how Kimball has helped the network in so many ways. As far as speaking with our customers, the trend continues on how our network provides them a really security in being able to have multiple units service their needs and well positioned geographically with transportation efficiencies built on. And when we even think about what's going on with captives, we talk a lot about that, where the interest of what we have now continues to be strong. Those captives are our customers, as we've mentioned. Our relationships with them are strong as they continue to evaluate their cost positions, we have active discussions. So we're just adding Kimball to our network continues to prove to them in those large generators of hazardous waste that we have the network and the capabilities to supply their needs. James Ricchiuti: Got it. Last question, just on M&A. And again, you touched on this, but is valuations or is that the main challenge with respect to the potential for larger opportunities that might be out there? Just wondering how we might think about the pipeline for larger deals? Michael Battles: When you think about larger deals, Jim, this is Mike. Certainly, valuations have gone up from where they were. The whole industry, including our stock, has experienced kind of some valuation appreciation, which is well deserved and probably can go further. But I think that we have the best opportunity for the larger deals to provide the most amount of synergies that are out there and that would provide, when you look at it kind of post-synergy basis on multiple levels that are very reasonable and very value accretive to our shareholders. So -- the answer to your question is that we're trying to stand our swim lane. We look at deals all the time. Price is certainly part of the discussion, no doubt about it. We're trying to be thoughtful and make sure we get a good return. But I think on some of the deals we look at, synergy component is a big part of it, but I think we can provide a fair amount of synergies from the larger deals we're looking at. Operator: Our next question comes from the line of Tobey Sommer with Truist. Tobey Sommer: I'm going to ask another capital allocation question, but maybe from a broader perspective over the next 2 years plus. If you look back at your Investor Day, 2.5 years ago, you have about $3.4 billion you thought at the time you'd incrementally you'd be able to deploy on acquisitions. Now we've got $500 million internal investments that you cited and who knows maybe there's even more. How does the -- if you could compare and contrast sort of today's capital allocation profile between acquisitions, share repurchase and internal investments versus what you thought 2.5 years ago? What are the differences in that mix of spend? Michael Battles: Tobey, this is Mike. I'll start and Eric and Eric can certainly chime in. I think that there's been really no change in our deployment of capital when you think about internal investments or buybacks. I think those 2 -- when you think about the 4 legs of the stool, the fourth being debt repayments, I think that we have maintained a consistent posture on both capital internal growth projects like the Kimball incinerator, now like the SDA Unit or buybacks, a steady growth of buybacks this year, maybe a little higher than normal, but we buy back a float plus depending on the market that's out there. We still have $350-plus million of availability under our current authorization. When I think about M&A, I mean, M&A is lumpy. It takes two to tango, and we got to make sure that we're getting a good return on our investments. We never said it was going to be a straight line to get to that level of growth. We always said that it's going to be -- this is kind of -- we wanted to message to the Street that this was our -- Eric and I's intent to go do M&A, but it's got to make financial sense. And as such, there have been deals that we got to a point where we stopped or deals that didn't fit very well that we talked to the Board about a couple of 3 times that didn't fit well that we decided not to go forward on. So these are all the process of being very cash disciplined, getting -- trying to make sure we get a good return. And that I think that our long-term shareholders are happy about, frankly. Tobey Sommer: And if I could ask another question about health care expense. Do you anticipate health care expense growth increasing or accelerating again next year? Some of the surveys out of the big health care consulting firms suggest that next year is going to be even tougher. Eric Gerstenberg: Yes, Tobey, it's Eric here. I think difficult to project, kind of read the same news you do. I think at a gross level, certainly, I don't think one could say that health care costs in general won't increase. However, I think some of the reasons for our increase this year that Mike mentioned around the preponderance of high-cost claims. The frequency of those this year just seems to be higher than normal, and I don't necessarily see that impact continuing. It could, but I think the law of kind of long-term averages would get that back down to a normal level. So I think in short, yes, they'll continue to increase. I don't think they'll increase at the same level that we saw this year at the gross level. However, as I mentioned earlier, we are doing some things internally to try to mitigate the increase. And I think it will mitigate the increase in health care costs going forward. Operator: Mr. Gerstenberg, we have no further questions at this time. I'd like to turn the floor back over to you for closing comments. Eric Gerstenberg: Thanks, Christine, and thanks, everyone, for joining us today. Our next investor event will be at the Baird Industrial Conference in Chicago in a few weeks, followed by a Stephens event that Jim will be presenting at in Nashville. Also, have a great day today. Keep it safe and enjoy the upcoming holiday season. Thank you. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Welcome to the Radware conference call discussing third quarter 2025 results, and thank you all for holding. [Operator Instructions] As a reminder, this conference is being recorded today, October 29, 2025. I would now like to turn this call over to Yisca Erez, Director of Investor Relations at Radware. Please go ahead. Yisca Erez: Thank you, operator. Good morning, everyone, and welcome to Radware's Third Quarter 2025 Earnings Conference Call. Joining me today are Roy Zisapel, President and Chief Executive Officer; and Guy Avidan, Chief Financial Officer. A copy of today's press release and financial statements as well as the investor kit for the third quarter are available in the Investor Relations section of our website. During today's call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. These forward-looking statements are subject to various risks and uncertainties and actual results could differ materially from Radware's current forecast and estimates. Factors that could cause or contribute to such differences include, but are not limited to, impact from changing or severe global economic conditions, general business conditions and our ability to address changes in our industry, changes in demand for products, the timing in the amount of orders and other risks detailed from time to time in Radware's filings. We refer you to the documents the company files and furnishes from time to time with the SEC, specifically the company's last annual report on Form 20-F as filed on March 28, 2025. We undertake no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date of such statement is made. I will now turn the call to Roy Zisapel. Roy Zisapel: Thank you, Yisca, and thank you all for joining us today. I'm pleased to share that we delivered another solid quarter with revenue of $75 million, representing 8% year-over-year growth. Non-GAAP earnings per share climbed 22% year-over-year to $0.28. The quarterly results demonstrate steady progress in delivering on our strategic priorities. We remain focused on expanding our business in cloud security, driving innovation through AI and automation and strengthening our global go-to-market capabilities. Let's talk a bit about each one of those. Cloud security remained a key growth driver in the third quarter delivering another exceptional performance. Cloud security ARR climbed to $89 million, up from $72 million in Q3 last year. Our cloud ARR growth trajectory accelerated once again from 21% last quarter to 24% year-over-year growth in Q3. We also saw continued double-digit growth in active cloud customers and a strong wave of new logo acquisitions, backed by a robust and expanding pipeline. This sustained momentum reflects our strength and competitive edge, the growing demand for our cloud security offerings and accelerated growth in North America. To meet this growing demand and our expanding customer base, we've continued to scale our global cloud infrastructure and resources. We're adding more R&D, delivery and sales personnel to support the growth. In the third quarter, we opened 2 additional cloud security centers and we plan to open 3 more in the fourth quarter, bringing the total number of centers opened in 2025 to 8. The growth in cloud security ARR was a key contributor to our overall subscription revenue growth, which grew 21% and rose to 52% of total revenue in the third quarter compared to 47% in the same period last year. This shift from a product appliance revenue stream to a subscription revenue model driven by cloud security growth enhances both revenue visibility and long-term business stability. One of the cloud deals we closed in the third quarter was a competitive displacement in the U.S. health care sector. The customer selected Radware Cloud DDoS Protection to replace their incumbent cloud-based solution. We secured this win through a combination of trusted relationship, Radware's best-of-grade DDoS technology and world-class support. As part of our broader cloud application security portfolio, Radware continues to drive innovation in API security. With APIs now central to modern application and application layer attacks surging, our AI-powered protection dynamically adapt to evolving threats, mapping business logic and defending against complex multi-endpoint attacks. Complementing this, our API analytics capabilities provide deep insights into API behavior, empowering teams to detect anomalies, understand business logic sequences and optimize performance with actionable intelligence. Following our success in cloud DDoS protection and cloud application security, we see API security as the third wave in our cloud security growth strategy and believe it is a significant potential for 2026. Radware's leadership in application security continues to be recognized. We were named a leader in the 2025 SPARK Matrix for web application firewall and bot management and an overall leader in the 2025 KuppingerCole Leadership Compass Report for web application and API protection. These honors reflect our commitment for delivering intelligent, scalable and multilayered security, including web application firewall, API protection, bot management and DDoS mitigation across modern cloud environments. Our go-to-market strategy continued to gain momentum this quarter. In North America, the team is now fully ramped, as reflected in a 28% year-over-year revenue growth in the Americas and 15% growth over the trailing 12 months. We recorded solid business with our OEM partners, making our second best quarter ever. This continued successful collaboration reflects the growing demand for our integrated solution and the strength of our joint value proposition. One example of this is a strategic win in EMEA through Cisco with a telecom provider. Seeking to transition from a legacy DDoS competitor, the customer required a more advanced and future-ready solution to support its expanding infrastructure and services. Our technical leadership and responsiveness to the customer's evolving needs helped to build trust and positioned Cisco and Radware as a long-term strategic partner. Another win with Cisco was with a large U.S. health care system. Facing increasing threats and limited internal resources, the organization sought comprehensive protection across web applications, API and bot traffic. After evaluating multiple vendors, they selected our solution for its broad coverage and operational efficiency and our ability to align with their evolving needs. Third quarter performance was also fueled by a strong DefensePro X refresh cycle, which grew approximately 40% year-over-year alongside successful competitive displacement in DDoS that doubled during the quarter. As previously noted, the DefensePro X refresh opportunity remains substantial with less than 50% of our end-of-sale installed base upgraded to date. During the quarter, we secured several 7-digit DefensePro X refresh deals, including a deal with one of the largest telecom companies in the U.S., a deal with a European financial service provider and with a leading European bank, among others. In closing, our third quarter performance highlights the steady progress we're making against our strategic plan. Cloud security continue to be our strong growth driver with robust ARR expansion and accelerating momentum. We're seeing the benefits of deeper collaboration across our partner and channel ecosystem, which is helping us scale efficiently and reach new customers. At the same time, our continued investment in AI-powered innovation is enhancing our platform and reinforcing our competitive edge. With a healthy cloud security business, a growing global partner base and increasing demand for our security solutions, we believe in our ability to sustain our momentum and capture long-term growth opportunities. With that, I will turn the call over to Guy. Guy Avidan: Thank you, Roy, and good day, everyone. I will provide an overview of our financial results and business performance for the third quarter as well as our outlook for the fourth quarter of 2025. Before beginning the financial overview, I would like to remind you that unless otherwise indicated, all financial results are non-GAAP. A full reconciliation of our results on a GAAP to non-GAAP basis is available in the earnings press release issued earlier today and in the Investors section of our website. In the third quarter, revenue grew 8% year-over-year to $75.3 million, fueled by sustained demand in our cloud security business. Our cloud ARR growth accelerated from 21% in Q2 2025 to 24% year-over-year, reaching $89 million, a clear validation to our strategy. This momentum reflects the growing demand for our cloud solution and underscore the strength of our transition to a recurring cloud-first business model. This recurring revenue base is a cornerstone of our long-term growth. Total ARR rose to $240 million, up 8% year-over-year, reflecting the momentum behind our revenue growth. Total ARR is serving as a strong indicator of our overall revenue trajectory. As our cloud security business continues to scale at a faster pace, we expect it to drive total ARR growth higher and, as a result, drive faster company revenue growth. Looking at regional performance. In Q3, the Americas lead the growth race with revenue rising 28% year-over-year to $35.4 million, representing 47% of our total revenue, up from 40% in the same period of last year. On a trailing 12-month basis, the region grew by 15%. EMEA revenue was $22.8 million, representing a 10% decrease in year-over-year and accounting for 30% of total revenue. Trailing 12 months growth was 7%. APAC posted modest growth with revenue up 3% year-over-year to $17.1 million, contributing 23% of total revenue. On a trailing 12-month basis, APAC grew by 8%. Turning to profitability. Gross margin remained strong at 82.2%, similar to that of Q3 2024, underscoring the efficiency of our operations. Operating income grew 34% year-over-year to $9.6 million, up from $7.2 million in Q3 2024, this growth achieved alongside continued investment in cloud initiatives, highlighting the scalability and resilience of our business model. We are executing our strategy of scaling our go-to-market and R&D capabilities. These investments are designed to capture rising demand and position Radware as the leader in cloud and AI-driven security. Adjusted EBITDA for the third quarter of 2025 increased by 25% to $11.4 million compared to $9.2 million in the same period last year. Excluding the Hawks business, adjusted EBITDA was $14.4 million representing a 19.1% EBITDA margin, up from $11.9 million, and a 17.2% EBITDA margin in Q3 2024, a testament to the operational leverage in our core business. Financial income for the quarter was $5.3 million, up from $4.9 million in the same period last year. Due to decrease in interest rates, we expect slightly lower financial income in the fourth quarter. Our effective tax rate for the quarter was 15.5%, the same as in Q3 2024. We expect the effective tax rate to remain approximately at the same level in the coming quarter. Net income rose 24% year-over-year to $12.6 million compared to $10.2 million in Q3 2024. And diluted earnings per share increased by 22% to $0.28, up from $0.23 in the same period last year. Turning to cash flow and balance sheet. Cash flow from operations in Q3 2025 was negative $4.2 million compared to positive $14.7 million in the same quarter of last year. The decline was primarily driven by an increase in accounts receivables due to timing of cash collections from several large deals and a decrease in deferred revenue. Looking ahead, we expect RPO at year-end to exceed the level at the end of 2024 and anticipate a return to positive cash flow from operations in Q4 2025. We ended the quarter with a strong balance sheet, holding approximately $465 million in cash, cash equivalents, bank deposits and marketable securities. And now for the guidance. We expect total revenue from the fourth quarter of 2025 to be in the range of $78 million to $79 million. We expect Q4 2025 non-GAAP operating expenses to be between $52.5 million to $53.5 million. We expect Q4 2025 non-GAAP diluted net earnings per share to be between $0.29 and $0.30. I'll now turn the call over to the operator for questions. Operator, please? Operator: [Operator Instructions] Our first questions come from the line of Chris Reimer with Barclays. Chris Reimer: Congratulations on the strong results. First off, I was wondering if you could talk about how you feel your operations are going now. You mentioned that North America fully ramped and the 2 centers opened, plus another 3. Going forward, do you think there will be any other areas that you want to reorganize? Or are you satisfied with the level you're at now? Roy Zisapel: Thanks, Chris. So I think given our progress in North America, we actually would like to ramp our investments further. We see the potential. I think we've discussed it last quarter that given the momentum in cloud and the opportunities we see, we are planning to continue to increase there. I think still we will see that with good output on the profitability. But we are definitely very optimistic about North America and about us actually investing more for growth. That's on the sales and go-to-market side. And with that, across the world, we are continuing to expand the cloud security platform, the R&D investments there. We really feel there's a big opportunity. Chris Reimer: Got it. Yes, that's helpful. And how would you describe your competitive position in the market now? Are you seeing any new players? What would you say is the most important thing the customer is saying when they make their decision? Roy Zisapel: Yes. So I think overall in the market, and we are competing in multiple areas, but in cloud security specifically, I think we are known for the strength of our security capabilities and specifically on the fact that we are very, very algorithmic based. A lot of our protections have a very strong algorithmic support and that makes us unique versus our competitors that, I would say, are more reliant on policies, rules, databases and so on. The second thing that we are very strong is in the fully managed service that we provide as part of our offering. And we are able to do that not because we deploy or we have such a big amount of people, but because of the algorithms and the automation. So we actually use the technology to create a very strong advantage in the fully managed solutions. So customers, large customers that have the need, and I think, the majority are, to have augmentation to their capabilities, 24/7 global expertise in application security or DDoS, this is a major advantage. And I think you see that in our growth and the accelerated growth. Operator: Our next questions come from the line of Joseph Gallo with Jefferies. Joseph Gallo: Can you just talk through the demand environment that you saw in the quarter? How did it compare to 2Q and what assumptions you're baking into your 4Q guide? Roy Zisapel: Okay. I think the demand across enterprise and carriers across the world was solid. I don't think it improved or degraded from previous quarters. We do see strong environment going into Q4. We're actually very encouraged with what we are seeing. As it relates to guidance, I think Guy mentioned it and I'll let him talk about it more, but we see the ARR -- the total ARR growth, we're seeing as our guiding indicator for future revenue growth. And having that at 8%, that's how we're guiding forward. Of course, we have additional appliance deals and CapEx deals that can take it higher. But overall, short-term guidance is based on our total ARR growth. Guy Avidan: Yes. So as Roy already mentioned, we have a pretty good visibility since currently around 82% of our business is based on recurring. So ARR is a very good indicator for guidance. But we also have now, after 1 month into the quarter, pretty good visibility about demand, which we feel pretty good. We posted 24% growth on cloud ARR and we're back to the levels we used to see, let's say, 2 years ago. And we always mentioned going to 25%, but we're not saying 25% is the ceiling. So we think this is the main growth engine for us and it will continue to grow. Joseph Gallo: That's helpful. And maybe just as a follow-up. So ARR growth was super impressive and that's definitely the North Star for revenue growth going forward. But just on the billings side and the free cash flow weakness. You mentioned RPO will rebound. Will billings follow that same trajectory? And was there anything unusual to call out in 3Q relating to the timing of billings? Guy Avidan: First, yes, we expect billing and cash collection to be stronger this quarter and we mentioned it's going to be positive cash from operations. We also alluded to the fact that we expect the backlog represented by RPO to be higher than the numbers we mentioned in December last year. We're mentioning the 8% because of ARR. We're looking at, let's say, high single-digit year-over-year RPO growth. So all the KPIs or, let's say, the negative cash from operation or the decrease in cash balances this quarter, we're planning to be positive in Q4. Operator: Our next questions come from the line of Ryan Koontz with Needham & Company. John Jeffrey Hopson: This is Jeff Hopson on for Ryan Koontz from Needham. Congrats on the strong performance in North America. Kind of talking about the competitive landscape like you were earlier, some of your large competitors have been focused on other things besides security like cloud computing, So I was just curious if this kind of presents an opportunity for you to gain more customers who may be focused on just security and not some of these other offerings that they have. Roy Zisapel: Yes. I think it's a great question and that's exactly what we are talking with customers. Actually, while some of our larger competitors are, I would say, broadening their offering and, by that, not necessarily staying as focused on application, API, data center security, we're actually double downing there. And the reason is we see more complicated attacks, more AI-based attacks, more challenges. And it's an extremely critical area for our customers. So we continue to broaden the algorithmic moat that we're building. We continue to broaden the competitive advantages there. And therefore, we feel very good about the competitive positioning and the long-term strategy that we have. So we see a huge amount of opportunities. The market is the TAM and the SAM is huge for us versus our current revenues. And therefore, we continue to focus there, double down on security. I've mentioned API now as the third wave of growth. That's where we are investing. John Jeffrey Hopson: And maybe just a follow up on the AI piece. You've been adding capabilities to SOC X. You announced the vulnerability you guys found in ChatGPT. Just kind of curious where we are with AI. And is it still just driving conversations? Or is it getting to that point of driving production and your AI offering, SOC X, could start to meaningfully contribute? Roy Zisapel: Yes. So I think we're using AI today on the general availability capabilities, mainly to improve the security we provide to our customers. So like you mentioned, SOC X is our agentic AI on the platform that automatically detects and mitigates for our customers' attacks by detecting early and providing recommendations or automatic modification to the security posture. In that sense, our customers are enjoying faster time to resolution. They are able also in a conversational way talk to our platform and understand exactly what's happening and what the recommendations are. So to summarize, we're using a lot of AI and Gen AI in the platform to improve the security we provide to the customer. I do believe there might be also good opportunities in protecting the AI systems of our customers. To that end, you mentioned that we uncovered a major vulnerability in OpenAI agents, and we're working on these problems. And I'm sure we will update you in the coming quarters on our progress there as well. Operator: Thank you. We have reached the end of our question-and-answer session. I would now like to hand the call back over to Roy Zisapel for any closing comments. Roy Zisapel: Thank you, everyone, and have a great day. Operator: Thank you, ladies and gentlemen. This does now conclude today's conference call. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Operator: Hello, and welcome to W. P. Carey's Third Quarter 2025 Earnings Conference Call. My name is Diego, and I will be your operator today. [Operator Instructions]. Please note that today's event is being recorded. [Operator Instructions]. I will now turn today's program over to Peter Sands, Head of Investor Relations. Mr. Sands, please go ahead. Peter Sands: Good morning, everyone, and thank you for joining us this morning for our 2025 third quarter earnings call. Before we begin, I'd like to remind everyone that some of the statements made on this call are not historic facts and may be deemed forward-looking statements and factors that could cause actual results to differ materially from W. P. Carey's expectations are provided in our SEC filings. An online replay of this conference call will be made available in the Investor Relations section of our website at wpcarey.com, where it will be archived for approximately 1 year and where you can also find copies of our investor presentations and other related materials. And with that, I'll pass the call over to Jason Fox, Chief Executive Officer. Jason Fox: Good morning, everyone, and thank you for joining us. Strong momentum we established over the first half of the year has continued in the second half, and we remain ahead of our prior expectations. As a result, we're further raising our full year AFFO guidance resulting in mid-5% year-over-year growth, which we believe will be among the highest in the net lease sector this year. Our raised guidance is supported by several positive trends within our business. Year-to-date, we completed $1.65 billion of investments at attractive initial cap rates averaging in the mid-7s, primarily with fixed rent escalations averaging in the high 2% range. The strength of our investment activity year-to-date has put us just over the midpoint of prior guidance range. I'm pleased to say we're raising our full year expectations for investment volume to between $1.8 billion and $2.1 billion. Our sector-leading same-store rent growth continues to be in the mid-2% range and is expected to remain around there or be slightly higher in 2026. The progress we've made funding our investments this year, primarily through asset sales, is expected to continue in the fourth quarter, achieving better than initially expected disposition cap rates and attractive spreads to where we're reinvesting the proceeds. Our original rent loss assumption, which reflected a degree of caution given the backdrop of broader economic uncertainty earlier in the year proved to be conservative and the performance of our portfolio has enabled us to lower our estimate as the year has progressed and the strength and flexibility of our balance sheet with over $2 billion of liquidity, including our recent forward equity sales provides us with additional flexibility to fund future investments. This morning, I'll review this progress and our confidence in sustaining that momentum into 2026. Toni Sanzone, our CFO, will focus on our results and guidance raise and touch upon aspects of our portfolio and balance sheet. And as usual, we're joined by our Head of Asset Management, Brooks Gordon, to answer questions. Starting with the transaction environment and investment volume. Lower interest rate volatility has helped keep net lease cap rates relatively steady this year, and that sense of stability has positively impacted our transaction activity, both in the U.S. and Europe, specially sale leasebacks, which have comprised a large majority of our investments to date. Our continued strong pace of investment activity, adding close to $660 million of investments during the third quarter and about $170 million so far in the fourth quarter brings our year-to-date investment volume to $1.65 billion at a weighted average initial cap rate of 7.6%. We continue to structure leases with attractive rent escalations, the significant majority of which were fixed bumps averaging 2.7% for our investments year-to-date. When factoring in rent escalations and a weighted average lease term of 18 years, our average initial cap rates in the mid-7s translate to average yields in the mid-9% range. By transacting at these levels, we continue to generate very attractive spreads to our cost of capital. Warehouse and industrial represents over 3/4 of our investment volume year-to-date, although we continue to invest in a diverse range of property types. And while the large majority of our investment volume was in the U.S., where we continue to see a significant number of opportunities at attractive spreads, we also continued to grow our investment volume in Europe relative to the last couple of years. The investment we've made over the last 27 years to steadily build and develop our European platform continues to serve as a key competitive advantage there. Today, our European team consists of over 50 people across our offices in London and Amsterdam, which has built strong broker and developer relationships and has the local expertise necessary to successfully execute across Europe. Moving to our pipeline and capital projects. Our near-term pipeline remains strong with several hundred million dollars of transactions currently in process at cap rates and weighted average lease terms consistent with where we've been transacting year-to-date. We expect many of those deals to close in the fourth quarter, although some may spill over into next year depending on where they are in the closing process, which would set us up for a strong first quarter. Our near-term pipeline includes close to $70 million of capital projects scheduled for completion in the fourth quarter. We also have approximately $180 million of additional capital projects underway, the large majority of which will deliver in 2026. While capital projects are something we've been doing for a long time, it's an area we can allocate more capital to often with higher returns compared to acquiring existing assets. Over time, we've built up a dedicated in-house project management team with deep real estate expertise and strong local connections to development resources. We have a long track record of build-to-suits, expansions, renovations and development projects. Historically, capital projects have averaged around 10% to 15% of our annual investment volume, and we believe we can expand that proportion. Turning now to our capital sources. Since our last earnings call, we've made further progress with our strategy of funding investments with accretive sales of noncore assets this year, including operating self-storage properties. Currently, we're in the market with the second half of our self-storage portfolio and have closed further sales since quarter end. We're confident we'll close additional sales during the fourth quarter but we're also maintaining a degree of optionality on the timing and execution of certain storage sub portfolios. And while we expect asset sales to fund our fourth quarter investment activity, the approximately $230 million of forward equity we recently sold gives us additional flexibility as well as enabling us to get ahead of our funding needs for 2026. So let me pause there and hand the call over to Toni to discuss our results and guidance. ToniAnn Sanzone: Thanks, Jason. AFFO per share for the third quarter was $1.25, representing a 5.9% increase compared to the third quarter of last year. Our strong results continue to benefit from both the pace and volume of our investment activity as well as the internal rent growth generated by our portfolio. We've raised and narrowed our full year 2025 AFFO guidance, driven largely by higher investment volume and lower expected rent loss within the portfolio and we currently expect AFFO to total between $4.93 and $4.99 per share for the year, implying 5.5% year-over-year growth at the midpoint. As Jason mentioned, given the investments we've completed to date and our outlook for the remainder of the year, we raised our expected 2025 investment volume to a range of $1.8 billion to $2.1 billion. As we continue to fund our investment activity this year with proceeds from dispositions of operating and noncore assets, we're also revising our expected disposition volume to total between $1.3 billion and $1.5 billion which has increased to include additional sales of operating self-storage assets. And based on the successful execution we've had to date, we expect to generate overall spreads of approximately 150 basis points between our investments and dispositions for the year. On the expense side, G&A continues to track in line with our expectations to fall between $99 million and $102 million for the full year. Property expenses are expected to total $51 million to $54 million, with a minimal increase to the lower end of the range. And tax expense is expected to be between $41 million and $44 million, representing a marginal reduction at the midpoint. Turning now to our portfolio, which continues to generate strong internal growth. Contractual same-store rent growth for the quarter was 2.4% year-over-year. comprised of CPI-linked rent escalations averaging 2.5% for the quarter, while fixed rent increases averaged 2.1%. For the full year, we expect contractual same-store rent growth to average around 2.5%. Based on current inflation levels and further supported by the higher fixed increases we are achieving on new investments, our contractual same-store growth is expected to remain strong in 2026, likely surpassing the 2.5% growth we expect to see this year. Comprehensive same-store rent growth for the quarter was 2% year-over-year and is expected to track in line with our contractual rent growth for 2025 and at around 2.5% despite the uptick in vacancy flowing through the back half of the year. Portfolio occupancy declined to 97% at the end of the third quarter, which we view as temporary in nature and was factored into our earlier guidance. Of the 3% total vacancy at the end of the third quarter, around a quarter has since been resolved or is in the final stages of closing and another half is in process and well underway to being resolved. Hellweg added minimally to our third quarter vacancy following planned store takebacks in September, and our asset management team continues to further reduce our exposure through re-leasing and dispositions. Hellweg now represents our 14th largest tenant, down from 6th largest a quarter ago, and we expect it to be out of our top 25 next year. We've experienced minimal rent disruption this year, enabling us to further reduce the rent loss assumption embedded in our guidance to $10 million, down from our prior estimate of between $10 million and $15 million. Currently, we have visibility into total rent loss of about $7 million for the year, representing about 45 basis points of ABR, which includes the downtime on the Hellweg assets we took back. The balance of our reserve includes ongoing caution towards Hellweg, which remains current on rent, but is still navigating a challenging turnaround, and we hope for that to be conservative with only 2 months of the years remaining. Other lease-related income totaled $3.7 million for the third quarter, down from $9.6 million in the second quarter and is expected to total in the mid-$20 million range for the full year. Turning to our operating properties. So far this year, we've completed sales of 37 operating self-storage properties and 1 student housing property and converted 4 operating self-storage properties to long-term net leases. Factoring in the additional sales we expect to close before year-end, we estimate operating property NOI for the fourth quarter will total between $7 million and $9 million, reducing further in 2026. Moving now to our balance sheet and capital markets activity. Our balance sheet remains strong and extremely well positioned to fund our continued growth, further bolstered by our equity and debt capital markets activity this year. Since the start of the third quarter, we sold approximately 3.4 million shares subject to forward sale agreements through our ATM program at a gross weighted average price of $68.5 per share all of which remains outstanding, resulting in gross proceeds of approximately $230 million available to fund future investment activity. And on the debt side, as previously announced, Early in the third quarter, we enhanced our liquidity position with the opportunistic issuance of USD 400 million bonds priced at a coupon rate of 4.65%, which was used to repay amounts outstanding on our credit facility. Our weighted average interest rate for the quarter was 3.2%, and we continue to believe we have one of the lowest cost of debt in the net lease sector through our mix of U.S. dollar and euro-denominated debt. Our debt maturities remain very manageable. We have a EUR 500 million bond maturing in April of 2026, and our next U.S. dollar bond maturity isn't until October of next year. We currently expect that we would refinance these bonds with issuances in the same currencies at or near their maturities. We ended the third quarter with liquidity totaling about $2.1 billion, comprised of availability on our credit facility, cash on hand and held for 1031 exchanges and unsettled forward equity. With dispositions expected to fund investment activity for the remainder of this year, we have a great deal of flexibility in accessing the capital markets. Taking into account our free cash flow of over $250 million annually, in addition to our unsettled forward equity, we expect to be well ahead of our funding needs for new investments as we enter 2026. Our key leverage metrics remained within our target ranges at quarter end. Net debt to adjusted EBITDA, inclusive of unsettled equity forwards was 5.8x. Excluding the impact of unsold equity forwards, net debt to adjusted EBITDA was 5.9x. In September, we increased our quarterly dividend by 4% year-over-year to $0.91 per share, equating to an attractive annualized dividend yield of 5.4%. Our dividend continues to be well supported by our earnings growth as we maintain a healthy year-to-date payout ratio at approximately 73% of AFFO per share. And with that, I'll hand the call back to Jason. Jason Fox: Thanks, Toni. In closing, the investment volume we've completed year-to-date and lower rent loss assumption have enabled us to again raise both our full year investment volume and AFFO guidance ranges. We've repeatedly raised our guidance this year and have consistently executed strong investment volume since mid-2024, completing well over $2 billion of new investments over the trailing 12-month period. We have the infrastructure, expertise and team in place to continue performing at these levels. As we look ahead, we have an active deal pipeline that extends into the first quarter of 2026. We're not seeing anything in the transaction environment that would take us off our current pace of activity. Given where our debt and equity is pricing, we view all the elements as being in place to continue generating double-digit total shareholder returns in 2026. Through a combination of AFFO growth that would put us in the top tier of net lease REITs and our dividend yield. That concludes our prepared remarks. So I'll hand the call back to the operator for questions. Operator: [Operator Instructions] Our first question comes from John Kilichowski with Wells Fargo. John Kilichowski, your line is open. Please go ahead. Jason Fox: You might be on mute, John. Operator: We'll move on to the next question. Our next question comes from Anthony Paolone with JPMorgan. Anthony Paolone: Now that you guys are rounding the corner on the operating self-storage asset sales, can you maybe give us a sense as to what the menu of noncore and other internally generated capital sources, maybe as we start to think about deal activity next year and maybe perhaps how to help fund it? Jason Fox: Yes, sure. I mean, certainly, when we think about next year, equity is going to be a much bigger picture and part of that story than this year, and we're not currently teeing up a disposition program, anything close to what we did this year. So dispositions should revert back to a more typical run rate. We do have a couple of operating properties left, but apart from the possibility of some self-storage sales slipping into next year, we should be back at more normalized levels. Disposal will still be a source of incremental capital for us, but it won't be significant like it was this year. So the expectation is we're kind of back to normal core spread investing, typical the net lease company where issue equity and debt, keep leverage targets in mind and you use it to do deals and generate spreads. So that's kind of the plan going forward. I think the other thing maybe to note is, and Toni talked about this, that we do have lots of funding flexibility right now looking into 2026. Revolver at a little over $2 billion is mostly undrawn. She referenced, call it, $250 million of free cash flow and then as we talked about earlier, we have gotten a head start on equity needs. We have $230 million of forwards that we recently issued on the ADM. So we're in good shape, and we think we're ahead of the game there for funding for next year. Anthony Paolone: Okay. And then just a follow-up. Are you seeing any competition or greater competition on deals from some of the private net lease platforms that are out there in any part of your buy box? Jason Fox: Yes. I mean look, the net lease market has always been competitive, especially in the U.S., and we have seen a bit of a pickup in new competition. It's mainly the private equity players, as you mentioned, and they're finding that lease attractive. We really don't think we run into all that much. We don't always have full visibility on who we may be competing with and that's at least thus far right now. So I'd imagine we'll see incremental competition that comes up and that likely leads to some pricing pressures, but it feels manageable right now. And we certainly have a cost of capital to allow us to compete on price when needed. So I think that's -- I think it's okay. I think it's also worth keeping in mind that especially on sale leasebacks, experience and track record on execution matter quite a bit. So newer entrants may have a little bit more of a hurdle to cover there and our reputation and kind of history should be a real competitive advantage, too. Operator: Your next question comes from Smedes Rose with Citi. Bennett Rose: I wanted to ask you first just a little bit, if you could just give us an update or a reminder, I guess, on where you are on the Hellweg process in terms of leases that I think you had expected 7 to be terminated by this time of the year and then maybe I think 5 more to go. Is that still kind of the case and maybe where you are on stores that are expected to be sold versus released? Jason Fox: Yes, sure. Brooks, do you want to cover that? Brooks Gordon: Yes. So first, maybe just a broader status update. As Toni mentioned, they remain current on rent. We've reduced them down to our #14 tenant, and we're making good progress on our plan to reduce that. Specifically to your question, we're taking a number of actions to reduce our exposure there. We've sold 3 occupied stores in Q3, I expect a couple more over the next few months there. As you mentioned, we took back 7 -- the first 7 of the 12 in total, we're taking back. So of those 7, we signed leases with new operators at 2 and 1 is in process, that should be signed soon or are under contract to sell. Those will close in Q4 and into Q1 and then as I mentioned, we're taking back another 5 in 2026. We signed leases on 3 of those locations, 1 more in process and then 1 will be targeted for sale. So making very good progress on that strategy and we would look to reduce the exposure on top of that quite quickly. We're targeting out of our top '25 sort of towards the midyear of '26. And we think we have a path to get them out of the top 50 kind of by the end of 2026. So we expect the exposure to come down meaningfully going forward. Bennett Rose: Great. And then you mentioned in the fourth quarter, maybe having gone in a little too conservative around rent loss assumptions. And as you just think about next year, any thoughts on how you could sort of maybe assess that? I mean are you concerned about the underlying economy at all that would maybe drive you to be maybe more conservative than you have been historically? Or just any kind of thoughts on how you're thinking about that at this point? Jason Fox: Yes. Brooks, do you want to take that one as well? Brooks Gordon: Sure. I mean without kind of projecting forward any specific guidance, I think what's important to note is that our broader watch list and kind of credit quality has improved materially over recent quarters. Again, that's driven by resolutions on True Value and Hearthside and the progress we're making on Hellweg. And we continue to closely monitor that turnaround at Hellweg, and we'll continue to have caution there. That said, our broader credit watch universe has come down meaningfully. So we'll continue to take a conservative and cautious approach there with respect to credit broadly and how specifically but we expect to be able to drive strong earnings growth even net of that. Operator: Your next question comes from Michael Goldsmith with UBS. Kathryn Graves: This is Kathryn Graves on for Michael. So my first, you've completed the $1.6 billion of investments so far year-to-date. You raised investment guidance. Can you maybe just provide some color on the -- what's currently in your pipeline as far as the incremental volume increase? Anything just in terms of geographic split between Europe and U.S., property-type mix, industrial versus retail and any non cap rates that you're currently seeing in the pipeline as you build for 4Q? Jason Fox: Yes, sure. So near term, currently includes, I would call it, several hundred million dollars of identified transactions, most of them in advanced stages. We think many of those will close in the fourth quarter, although at this time of the year, it's always hard to predict and some may slip into next year, which would set us up for a strong start to '26. I think on top of that, which you can also factor in and we included in our sub is about $70 million of capital projects that are scheduled to complete this year. These are the build-to-suits and expansions that we regularly do. You probably would also note that we have -- in addition to that $70 million, we have another $180 million that are in construction much of that, probably most of that would close in 2026. In terms of geographies, I mean, one of the things that we've -- maybe worth noting is more activity in Europe, while year-to-date, North America still makes up about 75% of the deals that we've done. The third quarter, we saw the split closer to 50-50 between North America and Europe. And I think the themes that we're seeing in Europe are probably similar to those in the U.S., where rate stability has led to a tightening of bid-ask spreads and sellers who may have been on the sidelines for a while now are willing to transact, and that's kind of translated into more activity, and that's both in the U.S. and Europe, but I think it's maybe most notable that we've seen more deal flow in Europe over the last, call it, 1 quarter, 1.5 quarters compared to the prior years. In terms of property type, we continue to see the best opportunities in industrial, and that includes both manufacturing and warehouse. I think that's reflected in our deals completed to date, and it also makes up the bulk of our pipeline as well. I think you asked about kind of pricing as well. And we continue to target deals in the 7s, and we've been transacting on average in the 7s, and that's been the case for pretty consistently throughout 2025, and it's also largely where the pipeline is right now. So cap rates have mostly remained unchanged year-to-date. But as I mentioned earlier, I would expect to see some tightening as we head into 2026, especially if rates kind of stay at the current levels in that 4% zone and certainly increased competition could factor into that as well, but that kind of remains to be seen. So overall, I think the pricing still works for us very well, and we always want to make sure we remind people that we're achieving kind of mid-7 initial cap rates that equates to an average yield and kind of the 9s which we still believe that's among the highest in the net lease sector and certainly provides really interesting spreads relative to how we're funding these deals. Kathryn Graves: Got it. Thank you for the comprehensive answer. That's super helpful. And then my second -- same-store rent growth looks like it ticked up about 10 basis points this quarter. And I know you talked about the expectations for the remainder of the year. But just thinking through the roughly 50% of rent currently tied to CPI. How should we think about the sustainability of that like mid-2% growth if inflation moderate? And then should we also sort of expect in the future to see more fixed rent bumps in future acquisitions going forward? Jason Fox: Yes. Let me take the second question, and maybe Toni can just comment on how we kind of look on a on a kind of go-forward basis of the CPI impacts on our same-store. In terms of should we continue to expect to see inflation, I think since we saw the inflation spike a couple of years back, it's gotten a little bit more difficult as we're negotiating kind of rent structures and sale leasebacks. It's been a little bit more difficult to get inflation, at least in the U.S. Year-to-date, it looks like about 1/4 of our deals have CPI-linked increases. And a lot of that is in Europe, and that's where it's still customary to get those increases in Europe, and we would expect to continue to see that. But I think with CPI increases or inflation changes have also impacted is our fixed increases and the levels at which we're able to negotiate those. I think historically, we've probably been closer to 3% on average. And now we're typically seeing new deals with fixed increases in the maybe 50 to 100 basis points above that. Year-to-date, the deals that we've done have averaged a fixed increase of 2.7% and the pipeline is fairly consistent with that. So while we're not getting as much inflation on new deals, our same store is still quite strong and it should remain that way. Toni, I don't know if you have any views into moderation of inflation, kind of the timing of our bumps and how that could flow through. ToniAnn Sanzone: Yes. I think it's helpful to just think through the way that our leases work, and we've mentioned this historically. The CPI-based leases specifically have a bit of a look back. So they're looking at inflation really in this kind of last quarter of the year, if you will. So we have a pretty reasonable line of sight into what next year same-store could look like, especially just given how many of our leases bump in January or in the first quarter. So even with CPI stabilizing kind of at its current levels are decreasing slightly, we do still expect our contractual same-store to be even north of where it is this year. And some of that, as I mentioned, is supported by the fixed increases being higher than what they've been historically but also with the expectation that CPI stabilizes. So again, north of 2.5% is our expectation for next year. Operator: Your next question comes from Greg McGinniss with Scotiabank. Greg McGinniss: My apologies if I missed it, but did you provide the disposition cap rate achieved on the self-storage assets? And do you expect to fully sell out next year, early next year at similar cap rates? Jason Fox: Brooks, do you want to cover that? Brooks Gordon: Yes. Sure. So we were not going to speak to kind of active transactions. But as we mentioned on our Q2 call, we've thus far transacted just inside of a 6% cap rate on the storage assets. In total, I'd expect it to be right around 6%. Some will be a little higher, some a little lower. It really depends on exactly the mix this year. And with respect to the full platform, as Jason mentioned, we're in the market with the balance of it, we do retain a bit of flexibility in terms of the exact timing -- I mean what sub-portfolios transact. But over the medium near term, we'll be exiting the full operating storage platform. Greg McGinniss: Is there any difference in terms of the operations or occupancies of those assets that would lead you to believe that maybe cap rates might be different geography, something like that? Brooks Gordon: Each sub portfolio is different. And as I mentioned, some will trade a little higher, some will trade a little lower. But on average, we would expect the total self-storage exit to be in and around a 6% cap rate. Greg McGinniss: Okay. And then I appreciate the color you guys provided on your thoughts on acquisitions. And you've certainly been busy over the last couple of quarters, some guidance Q4 may slow down a little bit, but I'm just trying to clarify whether or not you expect to generally maintain this level of investment pace in 2026. Jason Fox: Yes, sure. Look, it's hard to predict since the macro certainly factors in and at this point, we typically only have visibility out maybe 60 to 90 days. But our intention is certainly to keep the pace and I think you can look at what we've done. I referenced earlier that if you go back on a trailing 12-month basis, we've been well over $2 billion, and there's not a lot that we're seeing right now that's a catalyst to change that dynamic. And the infrastructure team is in place here with lots of liquidity including meaningful free cash flow, we referenced the equity forwards that we've raised already and improved cost of capital that work. So we should continue to see good activity. We can lean into pricing and kind of feed that net lease growth algorithm. So we do feel good, but it's hard to predict exactly where things will go. Operator: Your next question comes from Mitch Germain with Citizens JMP. Mitch Germain: Congrats on the quarter. It seems like operating storage assets are going to be dwindled down. How should we think about the remaining operating properties. I think you still have a couple of hotels, maybe one other student housing asset. Is that -- are those also sale candidates? Jason Fox: Yes. Brooks, do you want to take that? Brooks Gordon: Yes, you're right. So we own 4 operating hotels. So that includes 3 of the former net lease Marriotts that we still own. One is the Hilton in Minneapolis, we'll sell that when the time is right, that could be in 2026, something we're evaluating. The 3 Marriotts are all slated for either sale or redevelopment. We're evaluating both paths. They're all operating normally in the meantime. I'd say the first is one in Newark, which we're still -- in our final evaluation phase there, but towards mid-'26 would seek to trigger redevelopment into warehouse there. The others are great locations in Irvine and San Diego, but we're being patient there. And then you mentioned we have one remaining student housing property in the U.K., something we're evaluating from a sale perspective, again, that could be a near-term sale candidate, something we're evaluating now. Mitch Germain: Great. That's helpful. And then maybe Brooks will have you, the rent recapture on your retail leases a little bit lower than the rest of your portfolio. Is that Hellweg and is that kind of how we should expect the leases that you're looking to release going forward? Brooks Gordon: No. Actually, this is totally unrelated. These are just 2 AMC theaters. So we only own 4 movie theaters total. We'll bring that number down to 0 as quickly as we can, but it's a very, very small piece of ABR, if you look at the actual contribution there. So we rolled those rents down to keep those theaters open and operating. Operator: Your next question comes from Jason Wayne with Barclays. Jason Wayne: Just on the move-outs that led to the sequential drop in occupancy. So those have been known for a few quarters. I know you said that many of those have been resolved or nearly resolved by now. So just wondering kind of the strategy you think about managing occupancy when you're aware of some known vacates. Brooks Gordon: Yes. So they can pick up a bit Yes, Vacancy did tick up a bit, as Toni mentioned, just to recap, the largest addition or 2 warehouses, formerly to Tesco that we had discussed previously. That's about 50 basis points of occupancy. Also 2 former True Value warehouses for about 45 basis points and a couple of Hellweg for -- or several Hellwegs for about 20 basis points. All of those are in process of being resolved and should be closing imminently. If you step back and look at our total vacancy, we really do view this as a temporary spike. Of the total, roughly 30% of the vacant square footage has either already closed or is closing imminently. And then another 50% of that is in active negotiations or diligence. So we'd expect the vacancy rate to get back to a normal place kind of over the next quarter or 1.5 quarters time frame. So periodically, we'll get a bigger building back vacant. We work very proactively to resolve those, and that's why these resolutions are well on their way. Jason Wayne: And then yes, just on a couple of debt raises expected next year. Just wondering what kind of pricing you're seeing in the U.S. and Europe right now? Jason Fox: Sure. Yes, we have 2 bonds coming due next year. I think the expectation is that we would probably repay each of those in kind of the same currency. In terms of where we're seeing pricing, I think, in the U.S., you can kind of think of it as low 5s. And in Europe, it's probably maybe 100, 125 basis points below that. So kind of think about it high 3s and around 4% is roughly where they are. Operator: Your next question comes from Eric Borden with BMO Capital Markets. Eric Borden: I just wanted to talk a little bit more about the cap rate expectation going forward. I know you mentioned you expect maybe some compression just given where the 10-year sits today. But just curious if there's any difference or bifurcation between cap rates in the U.S. versus cap rates in Europe? Jason Fox: Yes, sure. I mean over the last couple of years, cap rates, obviously, it's a pretty wide range depending on a lot of the specifics of the transaction and in Europe geographies matter as well. But I think on average, we've been roughly in line between the U.S. and Europe. Maybe this year, we've seen a little bit of tightening in Europe, attribute that to rates stabilizing a little bit earlier there than over here. But it's also important to note, and I just mentioned it that we can borrow meaningfully inside of where we can borrow in the U.S. So we're still generating better spreads in Europe. But yes, I think they're roughly in line. Maybe it's 25 basis points delta between the 2. Eric Borden: Okay. Great. And then can you just remind us of your hedging strategy and like how movements in exchange rates impact AFFO per share? And then if you have any thoughts or indications on the impact positively or negatively in 2026? Jason Fox: Sure. Toni, do you want to cover that? ToniAnn Sanzone: Yes. I think just a big picture in terms of our strategy. We continue to hedge our European cash flows. First, naturally, we do that with our expenses. So if you think about our interest expense is denominated in euro and certain of our other property expenses. That really reduces our gross AFFO currency exposure to less than 20% of AFFO for the euro before hedging. So if we focus on that, we've implemented a cash flow hedging program beyond that to further reduce our exposure on the vast majority of the remaining net cash flows. So really material movements in the currencies are really not expected to have an impact on positive or negative. I'd say over the course of this entire year, we saw pretty meaningful movements in the euro and that maybe added about $0.02 to our total AFFO this year, relative to where we started the year from an expectation standpoint. I wouldn't want to go as far as to predict what next year would look like from an FX rate and movements there. I would just say that our strategy should continue to be effective from a hedging standpoint so that we wouldn't see any material movement to the bottom line from an AFFO perspective. Operator: Your next question comes from Daniel Byun with Bank of America. Keunho Byun: I appreciate the update on your potential rent loss forecast. I was wondering if you could touch on how that compares historically for portfolio and whether it's more weighted towards Europe or the U.S. Jason Fox: Brooks, do you want to take that? Brooks Gordon: Sure. So as Toni mentioned, with respect to rent loss forecast, there's a degree of caution embedded in that. We've continuously brought that down throughout the year. I think in terms of a good way to think about credit loss in any given year, as we've discussed in the past, kind of the spread between our contractual and comprehensive same-store that number will move around, but we expect that on average to be something like 100 basis points for a round number. We think out of that 100 basis points about 30 to 50 could relate to credit with the balance being the kind of portfolio activity. So that kind of 30-ish basis points is a good kind of average credit loss assumption. And that matches up closely to what our actual data suggests from the last 20-plus years. So that's kind of a good rule of thumb. Again, that's going to move around in any given period, but that has been our history. With respect to geographic concentration, I don't have that data directly in front of me, but I would expect that to broadly track our overall portfolio ABR allocation of kind of 2/3 U.S. Keunho Byun: I guess for my second question, I think you just mentioned the escalators are trending in the high 2s. Which sectors delivered the strongest rent escalations in Q3? And where are you seeing pressure, if any? Jason Fox: Yes. Toni, I don't know if you have any details around that. ToniAnn Sanzone: This is on the new deals you're referencing? Keunho Byun: Correct. Jason Fox: Oh, on new deals? Let me take that out, that you meant just in the same-store growth of the portfolio. I mean most of what we've been doing this year has been industrial, and that's a mix of both manufacturing and warehouse. And I think one of the maybe drivers of our ability to achieve higher negotiated rent bumps within these leases is the fact that it's in an asset class that the market for those assets tend to have higher expected market rent growth compared to say retail, where a lot of those leases, especially with the investment-grade retailers, they tend to be flat. And if they're not flat, you see them in maybe the 1% to 2% range on average. So yes, there is a bit of a driver behind the mix that more of what we're doing is industrial. So yes, I think that's a theme. Operator: [Operator Instructions]. And our next question comes from Ryan Caviola with Green Street. Ryan Caviola: With acquisitions in the quarter across Europe, Canada and Mexico, could you provide any color on international competition? And has any of the private capital that has entered the net lease space competed on international deals? Or do they stay primarily in the U.S.? Jason Fox: Yes, sure. Yes, Europe historically has been less crowded. Certainly, there's not many, if any, pan-European public REITs. So it's more on the private side, and that's what it's been historically. I would say we are seeing a little bit of competition pop up there and much of those are U.S. funds that are looking to kind of enter in Europe. It's probably worth noting that that's easier said than done. I mean we've been on the ground in investing in Europe over 2.5 decades. I mentioned earlier that we have a team of over 50 people on the ground there across our London and Amsterdam offices. We have deep relationships. We have a very good brand and track record across Europe. We know the various markets well. We also know to optimize leases and tax structures and have scale and all that stuff matters. So we have our advantages over there. That said, even with a little bit more competition, it's still a big fragmented market. I think activity levels are increasing with more opportunities opening up. So we still feel good about our prospects for more deal volume in Europe. Ryan Caviola: Appreciate that. And then -- just kind of going back to the U.S. I know there's been more of a focus on industrial and the acquisition front, but I did notice Dollar General assets have been consistent additions to the portfolio the last few quarters and the net larger deal in the fourth quarter of last year, now they're top 20, 10 and could you just update us on that relationship? And how you feel about the Dollar Store space in general and how much you'd like to grow that? Jason Fox: Yes, sure. I mean we do have a relationship with the company itself as a good sized landlord now. Those deals, and I think pretty much all or most Dollar General deals that are traded in the market come through the development pipeline. So we have relationships with a most of our deals that came through were from developers that you were recently built stores and I think we've been opportunistic there. Dollar General took a little bit of a credit hit mid last year when they reported on lower growth expectations and your stock price went down, but we took advantage of that. I think a lot of our peers are pretty full on Dollar General, maybe dollar stores more broadly. So I look at it as opportunistic pricing, and we've been in the layer in a really good credit, good concept, long leases. And so would we do a lot more? I don't know. I mean, they're top 20 now. Could they enter our top 10 at some point? Perhaps, but it's going to be more opportunistic based on pricing. Operator: And your next question comes from Jim Kammert with Evercore ISI. James Kammert: Are you able to provide any sort of visibility or details regarding, say, the '26 and '27 lease expirations. I'm just curious about maybe what percentage of that is kind of being actively discussed with the tenants today, if you will, versus I think you run at the last moment? Jason Fox: Yes. Sure, Brooks, do you want to take that? Brooks Gordon: Yes. So virtually all, if not all, of the 2026 and 2027 expiring ADR is actively being worked on. Our general process is that 3 to 5 years out, we're really engaging with and strategizing and then 3-ish years out, really engaging with tenants. So virtually, all that's active. 2026 is a pretty manageable year to 2.7% of ABR expiring. And so we're working on virtually all of that. James Kammert: Great. And you can kind of tease out as a related question, just looking at the average ABR per square foot, seems like a little lower in '26 versus '27. But I'm just trying to think about the organic. Is there any tilting towards industrial or retail across those next 2 years or getting too granular here? Brooks Gordon: Well, both years have reasonably similar breakdown in terms of property types, they're, call it, 60% warehouse and industrial. In 2026, we have a couple of warehouses, which we expect to be able to put new tenants at much higher rents. These are very high-quality warehouses in the Lehigh Valley, where rents are, call it, 40% or 50% below market. So we're working on those actively. The others often tenants have renewal options at continuing rent. So we don't necessarily always get a true mark-to-market opportunity. But so it will be a mix, but I think -- we think it's a very manageable year with some opportunities to push rents. Operator: Thank you. And at this time, I am not showing any further questions. I'll now hand the call back to Mr. Sands. Peter Sands: Thank you. And thank you, everyone, for joining us and your interest in W. P. Carey. If anybody has additional questions, please call Investor Relations directly at (212) 492-1110. Operator: And that concludes today's call. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to Masco Corporation's Third Quarter 2025 Conference Call. My name is Sylvie, and I will be your conference operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to Robin Zondervan, Vice President, Investor Relations and FP&A. You may begin. Robin Zondervan: Thank you, operator, and good morning, everyone. Welcome to Masco Corporation's 2025 Third Quarter Conference Call. With me today are Jon Nudi, President and CEO of Masco; and Rick Westenberg, Masco's Vice President and Chief Financial Officer. Our third quarter earnings release and the presentation slides are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow-up. If we can't take your question now, please call me directly at (313) 792-5500. Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We've described these risks and uncertainties and our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I will now turn the call over to Jon. Jonathon Nudi: Thank you, Robin. Good morning, everyone, and thank you for joining us. I want to start today with a few reflections on my first 100 days as President and CEO of Masco. Over the last 3 months, I've had the privilege of meeting with our teams, customers and shareholders. I've toured manufacturing sites, participated in strategy reviews and listened to feedback related to both our strengths and opportunities or confirm what I believe to be true when I took this role. We have a strong foundation, industry leading brands, innovative products and incredibly talented and dedicated people. Our product portfolio is focused on the right categories and we have industry-leading capabilities. We've shown resilience in navigating dynamic environments while continuing to deliver value for our customers, consumers and shareholders. I've been especially impressed by the market leadership across our business units. Delta Faucet company has demonstrated incredible agility in the face of a dynamic geopolitical and macroeconomic environment, very strong partnership with our largest retail customer drives significant value for them and for us. Hansgrohe continues to be a global leader with customers in over 100 countries, and Watkins Wellness is winning with strong innovation, even amid broader category headwinds. There's real momentum here and also a real opportunity. In the coming months, we will focus on unlocking those opportunities with continued strong execution, greater speed and strategic investments in the capabilities that set us apart. I'm proud to be part of a team that delivers at a high level. I'm incredibly excited for the opportunities ahead. Now let's turn to our third quarter performance and updated outlook for 2025. Please turn to Slide 6. We continue to navigate a dynamic geopolitical and macroeconomic environment during this quarter. While the near-term market conditions remain a headwind to our business, our teams continue to focus on execution to grow market share and drive long-term shareholder value. For the quarter, our net sales decreased 3% in local currency, and excluding the Kichler divestiture, sales decreased 2%. Operating profit was $312 million, and operating profit margin was 16.3%. Earnings per share for the quarter was $0.97. Now turning to our segments. Plumbing sales increased 1% in local currency. North American plumbing sales increased 1%, driven by favorable pricing. Delta Faucet delivered strong performance again this quarter, particularly at e-commerce and trade. We recently relaunched our iconic Newport Brass brand, showcasing the brand's timeless design and enduring quality. This relaunch helps shape and expand our luxury portfolio represents an important growth initiative for our business with an addressable market of $1.8 billion. Another important growth initiative for Delta is in the water filtration category with a market of $1.2 billion for under-counter water filtration products. Delta's new product introductions in this category continue to outperform our initial expectations and our tankless reverse osmosis water filtration system was recently named the winner of the Good Housekeeping 2026 Kitchen Award. International plumbing sales were in line with the prior year in local currency. We saw growth across many of our European markets, while the China market was increasingly challenged. Operating profit for the segment was $204 million. Operating margin was 16.4% and included higher costs such as tariffs, commodities and inventory-related reserves. Turning to our Decorative Architectural segment. Sales decreased 12% in the quarter or 6% excluding our divestiture of Kichler. Operating profit for the segment was $128 million, and operating margin increased 100 basis points to 19.1%. Within our Paint category, overall paint sales decreased low single digits. DIY paint sales decreased mid-single digits as demand for DIY paint remained soft across the industry, impacted by low existing home turnover. In PRO Paint, sales increased low single digits. This continues the trend of multiyear growth for our PRO Paint. We remain tightly aligned with The Home Depot as we both prioritize and invest in strategic initiatives that allow us to capitalize on the sizable growth opportunity in the PRO Paint market. We also continue to develop new products at Behr that serve the needs of our customers. Most recently, we've launched Kilz original water-based primer and Behr Premium plus Ecomix, a plant-based interior paint. These launches demonstrate our commitment to introducing innovative and sustainable products with quality that our customers can trust. Turning to capital allocation. We generated strong free cash flow during the quarter and maintained a solid balance sheet. We remain committed to our capital deployment strategy and returned $188 million to shareholders this quarter through dividends and share repurchases. I'm proud of how our teams continue to work diligently to implement various mitigation actions in response to the near-term macroeconomic uncertainty, the geopolitical environment and rising costs. We are focused on remaining agile as we continue to execute effectively in this rapidly changing environment. Turning to our expectations for the full year. We now anticipate adjusted earnings per share for 2025 to be in the range of $3.90 to $3.95 per share compared to our previous expectation of $3.90 to $4.10. Our updated range includes the impacts from our third quarter results as well as higher tariffs and our expectations for softer industry demand resulting from the ongoing macroeconomic and geopolitical uncertainty. While uncertainty remains for the near term, we are focused on positioning ourselves for growth over the mid- to long term. The structural factors for repair and remodel activity are strong, including the age of the housing stock, consumers staying in their homes longer and near record high home equity levels. We have the right portfolio mix and our innovative new product introductions are outperforming our expectations. We continue to gain market share in key growth areas, including e-commerce, luxury faucets and showering and PRO Paint, and we are building strategies to further accelerate growth opportunities. Our high-performing teams have a history of leadership in navigating dynamic environments. When that leadership is combined with the strength of our brands, innovative products and unmatched customer service, we believe we are well positioned to continue to deliver long-term value for our shareholders. With that, I'll turn the call over to Rick to go over third quarter results and our 2025 outlook in more detail. Rick? Richard Westenberg: Thank you, Jon, and good morning, everyone. Thank you for joining. As Robin mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization charges and other onetime items. Turning to Slide 8. Sales in the third quarter decreased 3% or 2% excluding the impact of our divestiture of Kichler and favorable currency. Our divestiture of Kichler in the third quarter of 2024 resulted in a decrease in sales by 3% year-over-year in the third quarter of 2025, while currency represented a 1% increase in sales. In local currency, North American sales decreased 6% or 2% excluding the divestiture impact. International sales were in line with the prior year in local currency. Gross margin of 34.6% in the quarter was impacted by higher tariffs and commodity costs. SG&A decreased $16 million, primarily due to our divestiture. SG&A as a percent of sales improved 20 basis points to 18.4% in the quarter. Operating profit was $312 million in the quarter, and our margin was 16.3%. Operating profit was impacted by lower volume and higher costs, primarily related to tariffs, commodities and inventory-related reserves. Note that the temporarily elevated tariffs of 145% on China imports added approximately $15 million to the overall tariff impact in the third quarter, primarily in the Plumbing segment. These impacts were partially offset by pricing actions and cost savings initiatives. Our EPS was $0.97 per share in the quarter. Turning to Slide 9. Plumbing sales increased 2% in the third quarter or 1% excluding the favorable impact of currency. This growth was largely driven by pricing, which increased sales by 3%, partially offset by lower volume. In local currency, North American plumbing sales increased 1% in the quarter. This performance was primarily driven by Delta Faucet, which delivered growth in both the e-commerce and trade channels. In local currency, international plumbing sales were in line with the prior year. Hansgrohe continued to see growth in many of its European markets, including its key market of Germany. This growth was offset primarily due to an increasingly challenging market in China. Segment operating profit in the third quarter was $204 million, and operating margin was 16.4% Operating profit was impacted by lower volume and higher costs such as tariffs, commodities and inventory-related reserves, partially offset by pricing actions and cost savings initiatives. Turning to Slide 10. Decorative Architectural sales decreased 12% in the third quarter or 6% excluding the divestiture of Kichler. Performance in the quarter was driven by lower volume in our paint business as well as our builders hardware business, which also was unfavorably impacted by timing of shipments. In the quarter, total paint sales decreased low single digits due to lower volume. PRO Paint sales were up low single digits and DIY Paint sales decreased mid-single digits. Given the persistent softness in the overall DIY paint market and the favorable inventory timing we experienced in the fourth quarter of last year, we continue to anticipate our total paint sales for the full year to decrease mid-single digits. Excluding the impact of the prior year inventory timing benefit, we would anticipate full year DIY Paint sales to decrease high single digits. In our PRO Paint business, we continue to expect sales to increase mid-single digits for the full year. Operating profit in the third quarter was $128 million, primarily impacted by lower volume, partially offset by cost savings initiatives. Operating profit margin increased 100 basis points to 19.1%. Turning to Slide 11. Our balance sheet remains strong with gross debt to EBITDA at 2x at quarter end. We ended the quarter with $1.6 billion of liquidity, including cash and availability under our revolving credit facility. Working capital was 18.5% of sales at quarter end. Working capital continues to be impacted by tariff-related dynamics, including higher material costs and pricing, increasing our working capital balances. Given our strong cash generation, we returned $188 million to shareholders in the third quarter through dividends and share repurchases, including the repurchase of $124 million in stock. As it relates to capital allocation, we now expect to deploy approximately $500 million towards share repurchases or acquisitions in 2025, slightly higher than our previous expectation of at least $450 million. This increase is driven by a cash tax benefit from the recently enacted tax legislation. Now let's turn to Slide 12 and review our full year outlook. The market environment remains volatile and tariff uncertainty persists. The guidance that is being provided today includes the impact of currently enacted tariffs in effect in October, which now includes new tariffs on copper, antidumping duties on glass and increases to global reciprocal tariffs, particularly on Vietnam, Thailand and the European Union. As a result of these additional tariffs, we now estimate that the total annualized cost impact of all incremental tariffs enacted this year to be approximately $270 million before mitigation, up from $210 million as of our second quarter earnings call. Of the $270 million annualized cost impact, approximately $140 million continues to be related to the incremental 30% China tariffs. And the remaining $130 million is driven by the global reciprocal tariffs, the 50% tariff on steel, aluminum and copper and the glass antidumping duties. Of this approximately $270 million total annual cost, we expect a 2025 in-year impact of approximately $150 million before mitigation, up from $140 million as of our second quarter call. Our teams continue to actively work to mitigate these additional costs through a combination of levers. These include cost reductions, continued efforts to change our sourcing footprint and pricing where necessary. We anticipate that these mitigation actions will mostly offset the direct cost impact of the currently enacted tariffs in 2025. It is important to note that our guidance does not attempt to estimate the impact of potential future tariffs or any changes in existing tariffs. Turning to the overall market. Our expectation continues to be that the U.S. and international repair and remodel markets will decrease low single digits in 2025. For Masco, we expect our sales in 2025 to decrease low single digits, impacted by the 2024 divestiture of Kichler, which will reduce sales by approximately 2% year-over-year. We anticipate currency will have a favorable impact of approximately 1%. Excluding the impact of our divestiture and currency, we now anticipate Masco's overall sales to be down low single digits versus our prior guidance of roughly flat year-over-year, given continued industry softness with lower volumes partially offset with pricing. As a reminder, fourth quarter sales will face a challenging year-over-year comparison due to the favorable inventory timing impact we experienced in our paint business in the fourth quarter of last year. We now anticipate total company operating margin to be approximately 16.5% in 2025 versus our previous guide of 17%, driven by slightly lower volume, impact of additional tariffs and higher costs. In our Plumbing segment, we continue to expect 2025 full year sales to be up low single digits. We now anticipate the full year Plumbing margin will be approximately 18% versus our previous guide of 18.5%. In our Decorative Architectural segment, we continue to expect 2025 sales to decrease low double digits or mid-single digits, excluding the impact of our divestiture. We also continue to anticipate the full year Decorative Architectural margin to be approximately 18%. Finally, as Jon mentioned earlier, our 2025 EPS estimate is $3.90 to $3.95 per share. This continues to assume a 211 million average diluted share count for the year and a 24.5% effective tax rate. With that, I would like to open up the call for questions. Operator? Operator: [Operator Instructions] And your first question will be coming from Stephen Kim at Evercore ISI. Stephen Kim: It's Steve. We will have -- we do have a tariff question, but I wanted to start off actually on the paint side. There was a competitor who talked about a price increase going in Jan 1. I was wondering if you could sort of talk about how that might influence your outlook for pricing as we get into the new year on dec arc. And maybe you can talk just generally about how given the relationship you have with depot, how you think about pricing relative to competitor actions? Jonathon Nudi: Steve, it's Jon. Thanks for the question. We certainly have a unique relationship with Home Depot. It spans 40-plus years, incredibly strong. As you mentioned, we do have a relationship, it's essentially price cost neutrality over time. As we look at our dec and particularly our paint input costs, we see some upward pressure, but not significant. So at this point, again, we'll continue to have private conversations with our retail partner, but I wouldn't expect to see significant pricing on paint as we move into the coming year. Stephen Kim: Okay. That's very helpful. Appreciate that. Aatish, do you want to jump in on the tariff? Aatish Shah: Yes. I just want to clarify on the tariffs. When all is said and done kind of longer term impact to Plumbing margins from tariffs, like, how do you see that given that price action will mostly mitigate tariffs dollar for dollar? It's kind of like more of a longer-term question on Plumbing. Richard Westenberg: Yes, sure. Well, from a tariff perspective, as we've all realized here, it's a relatively volatile and dynamic environment. And so based off of the current tariffs enacted as of October, we articulated it's about a $270 million annualized impact. And we're tackling that on a number of fronts from a mitigation standpoint. First and foremost, from a sourcing footprint standpoint, particularly sourcing out of China, where our largest exposure exists to other markets, also reducing cost and sharing that tariff impact with our suppliers. And third is pricing, as you alluded to. Those are levers that we continue to pull. And our objective is to not only offset the dollar cost of the tariffs, but ultimately, the margin implications over time. So obviously, we've got to track and monitor the situation closely. But based off of where we sit today, our expectation is that we'll continue to work towards mitigating. As we mentioned in our comments, we've mitigated a large part of the tariffs, not all, but a large part of the tariffs here in this calendar year. And certainly, our objective as we move into 2026 is to mitigate further as well as start working to build margin. So we're continuing to focus on the mitigation and working to restore our margins over time. Operator: Next question will be from Matthew Bouley at Barclays. Matthew Bouley: I wanted to ask one, I guess, kind of zooming into the plumbing margins, and I guess, the 3Q results, specifically. I think you guys have previously signaled that there would be some of that impact from the 145% tariffs. And so I mean, I guess that played out. But the question is, was there anything else that was effectively a surprise versus your own expectations? Did any of those incremental tariffs that were coming in the summer end up sneaking into the quarter there as an impact? Or just any other cost that ended up surprising you? Richard Westenberg: Sure, Matt. It's Rick. As it pertains to our Q3 results, I would say it was impacted really by 3 drivers. One is tariffs, as you articulated. There were incremental tariffs since our Q2 call as you articulated. But those -- that took our in-year impact from $140 million to $150 million. But that incremental $10 million of in-year impact is really going to be a Q4 event. So those were new tariffs since our Q2 call. And so that factors into our updated guidance for the year, but that's really a Q4 dynamic. As you also alluded to, within the tariff realm, we did experience that elevated tariff impact on the 145% on China imports. That was about a $15 million impact in Q3 specifically. And that was, as we alluded to in Q2, something that we anticipated, but did manifest itself in Q3. The second driver is with regards to overall softness in the industry. And so we do believe that the industry, both North America and international is going to be down low single digits. We're really coming in from an industry perspective on the lower end of that range. And so that was a bit of an impact as we flow through Q3 as well as the calendar year outlook. And then fourth, we're incremental -- I'm sorry, third was incremental cost, both with regards to commodity inputs, particularly on copper, that continues to be elevated as well as the inventory-related reserves, which really was an update in our assumptions based off of market conditions that we -- as we generally review our reserves on a quarterly basis, we just had a higher than typical adjustment in the quarter. So that would be really the drivers behind our margin performance in the quarter. Matthew Bouley: Okay. Got it. I guess secondly, I wanted to touch on the builders' hardware business since, I guess, paint and coatings is only down low single digits, overall. I think I heard you say there were some unfavorable inventory timing. I'm wondering if there was maybe a pre-buy there earlier in the year or just kind of more elasticity related to price increases in that category. So presumably, it would have been a fairly large move in that business to impact the segment as it did. So just any more color on exactly what's going on there. Richard Westenberg: Sure, Matt. It's Rick. Yes. So as it pertains to the builders' hardware business, it was impacted by softness in sales as we saw really across the industry. But as we mentioned in our opening comments, there was a bit of a shipping timing dynamic. It was really due to a planned shipping process change in the quarter. So we curtailed our shipments during the quarter in order to infatuate the change, so it is something that we noted in our talking points, but we do not believe that it would be a significant impact for the calendar year overall. Operator: Next question will be from Michael Rehaut at JPMorgan. Michael Rehaut: Great. First question, I just wanted to clarify on the margins -- Plumbing margins for the third quarter. The -- given that some of that was already anticipated the 145%, was the delta perhaps versus expectations a little more driven by the inventory-related reserves? Or were there other factors also at work? Because I think the overall more recent tariff changes, I think you said was more of a 4Q event? Richard Westenberg: Yes. Sure, Mike. You're right. As it pertains to our expectations coming into the quarter, we did have contemplated the elevated China tariffs. So that was part of our expectation. I'm not sure it was fully contemplated all in Q3 in terms of external expectations, but certainly, we had contemplated that internally. As it pertains to development since our second quarter call, I would say there were 2. One is the inventory-related adjustments that we alluded to. And second is just softer sales, particularly in certain markets like China that came in, from an industry perspective, lower than we had anticipated. Michael Rehaut: Okay. Perfect. And then in terms of the overall full year sales guidance, I believe last quarter, you had consolidated sales still down low single digits similar to what you have in this updated guide. But it seems like perhaps you're now kind of talking towards the lower end of that guide or lower end of that down low to single-digit range. Just wanted to make sure I also have that right. And again, just to kind of -- and I apologize, if you kind of hit on this earlier, but just to be clear, which segment that's really coming from, if part of that is the builder hardware or maybe a little bit softer trends in plumbing as you just alluded to, international or North America, just a little bit more granularity around that. Richard Westenberg: Sure, Mike. Yes, your observation is directionally correct. Ultimately, we see the industry coming in a bit lower, kind of on the lower end of our range. As expressed in EPS, we are coming in at the lower end of our range that we publicized in our due to earnings call, and part of that is driven based off of lower industry expectations. And it's relatively across the board, I would say that it does impact the Plumbing segment, as we mentioned, particularly China, but also impacts our builders' hardware as well as our DIY Paint. So not dramatic changes, but the industry is a bit softer, really at the lower end of our expectations. As it pertains to our underlying performance, I would classify that as pretty solid, meaning that we're continuing to perform in line or in many categories better than the overall industry. It's just the overall industry softness that continues to be relatively weak. Operator: The next question will be from Mike Dahl at RBC Capital Markets. Michael Dahl: Some clarifying questions on tariffs. I guess just to be clear on China. It seems like you're still at, call it, $450 million to $500 million of underlying cost of goods sold. So there's been discussions in the last couple of days about the tariffs getting reduced by maybe 10%. Is it right to think about that as a $50 million annualized impact if that came to fruition in terms of that $140 million going to something more like to $90 million to $95 million? And then the second part of the question would be, if you could just break out what's like within that other $130 million, can you just specify what the global reciprocal bucket is versus the steel, aluminum, copper and the antidumping? Richard Westenberg: Sure, Mike. Your math on the first question is directionally correct. As we've articulated in the past, our annual import exposure from China is $450 million on a 30% tariff from China that represented about $140 million of impact. So hypothetically speaking, if there were a change in tariffs, whether it's plus or minus, you can extrapolate from there. As it pertains to your second question, we're not going to provide a detailed breakdown in terms of the composition of our exposures in the "other bucket". It's really a composition of reciprocal tariff, Section 232 tariffs on steel, aluminum and copper as well as the glass antidumping duties. And part of it is it's a dynamic environment. And so as we continue to modify our sourcing footprint, as we move out of China into other markets, and we continue to manage and work aggressively to mitigate our tariff exposure, those underlying exposures will change and update over time. What we will do and we will continue to do is provide the investment community with an overview in terms of the financial implications split between China and pretty much everything else as we've done this quarter. And then from an annualized perspective, as we've articulated, we have a $270 million annualized exposure -- or I'm sorry, impact. $140 million is China, $130 million is everything else. And we'll continue to provide updates if and as things change in our quarterly reviews. Michael Dahl: Okay. Understood. That's so helpful. My second question is just specifically on paint. I understood that you've got the comp dynamic. The fourth quarter, it still implies like a pretty big step down in margins in the fourth quarter versus what's been really solid like 2Q, 3Q performance despite the top line challenges. So I'm just wondering if there's anything else there in the fourth quarter aside from just comping against that load-in that would be driving that margin down so much? Richard Westenberg: Yes, nothing particularly of note. What I would say is the biggest driver on a year-over-year basis in terms of top line and margin. I know you're talking about Q4 specifically in regards to the unfavorable comparison relative to the impact of the channel -- favorable channel inventory build that we experienced in Q4 of 2024. So that is really the biggest driver from a year-over-year basis. Operator: Next question will be from Sam Reid at Wells Fargo. Richard Reid: Wanted to touch on plumbing price in a little bit more detail, the 3% you reported. Could you just characterize kind of where that landed relative to your expectations? I know you had obviously larger price increase in the market. So just curious kind of what you got on a realization standpoint versus what you were expecting to get? And then as you look to the fourth quarter, does the guidance contemplate any step-up in plumbing price sequentially? Just wanted to maybe understand that Q4 dynamic as well on price in plumbing. Jonathon Nudi: Sam, this is Jon. Maybe I'll start, and then Rick can jump in as well. I would say that pricing and plumbing primarily played out according to plan and what we expected. If you think big picture, obviously, significant increase in tariffs versus what we thought at the beginning of the year. And the team, particularly at Delta, which is the most impacted business, have done really a remarkable job of mitigating tariffs. And it really starts with making sure that we optimize our footprint. We've been doing that over time. We have a 40% or 45% reduction versus 2018. We'll continue there, working with our suppliers on concessions, looking at our own cost structure and making sure that we optimize that. Then ultimately, as the last resort, we will take pricing. And we did take pricing throughout this year. I would say it's executed according to plan, and we'll continue to look at our -- what we need to do as we move into the coming year as well. In terms of Q4, I'll let Rick cover that. Richard Westenberg: Yes, Sam, in terms of sequentially, as you would expect, our mitigation actions take hold over time, really from a pricing, cost reduction and sourcing standpoint. But you'd expect that our pricing being one of the levers to continue to get increased traction over time. And I guess I'll leave it at that. Richard Reid: That helps. And then one more plumbing-related question here. You called out strong Delta performance in 2 channels, e-commerce and trade. I might have missed, but how did Delta perform in home center? And perhaps can you talk through kind of how you trended in home center relative to the broader category? Jonathon Nudi: Yes, absolutely. So Delta in particular had a very strong quarter driven by e-commerce, where we saw nice growth. Our wholesale channel grew kind of low single digits. And we saw relatively flat, maybe slightly down performance in retail. And as we look to the coming year, we're excited about the plans we have coming, and we believe that we'll be driving even stronger results in retail as we hit 2026, but no major bogeys from a plumbing standpoint and, again, strength in e-commerce, wholesale and then relatively flat in retail. Operator: Next question will be from John Lovallo at UBS. John Lovallo: There's a couple of factors impacting the back half. One of them, you talked about on the inventory side. Just wanted to get a little bit more clarity, if I could, on the lower employee-related costs that are not expected to repeat in the back half. So curious what was the third quarter impact of that and what's the expected fourth quarter impact? Richard Westenberg: John, you're referring to a comment that we made in the Q2 call, correct? John Lovallo: Correct. Yes. Richard Westenberg: Yes. So from an employee related, yes, you're correct. We did have a favorable benefit in Q2. We continue from a cost perspective to be very disciplined on cost, particularly given the current environment and managing people costs as well as other costs that continues to be a priority for us. So we didn't have a repeat of the onetime item, so to speak, that we benefited from in Q2. But suffice it to say, we're continuing to drive efficiencies, cost reductions, et cetera, throughout the business just to drive operational efficiencies. John Lovallo: Okay. And then maybe just a follow-on to that, maybe outside of some of the tariff mitigation actions, what are some of the cost savings initiatives being taken in both segments to help kind of lower the cost basis? And what do you expect for the impact of that on a go-forward basis? Richard Westenberg: Yes. So John, we continue -- I know you've heard us talk about before, leverage our Masco operating system to continue to drive productivity and efficiency. And so that is productivity in our plants, supply chain efficiencies, procurement cost savings. I know we talk about tariff mitigation, but we also are working on driving cost efficiencies throughout our sourcing footprint. We talk about automation, VA/VE. And in this year, in particular, we're looking at more austerity measures as it pertains to the headcount and discretionary spend. So really a combination of all those factors. And it's not isolated to a particular segment. It's really across our businesses. Operator: Next question will be from Trevor Allinson at Wolfe Research. Trevor Allinson: You mentioned seeing some input cost inflation, more input cost inflation you expected in Plumbing, call that metals. Can you put some numbers around what inflation rates you're seeing in your plumbing business in the third quarter and what you're expecting for the fourth quarter? Richard Westenberg: Sure, Trevor. It's Rick. So yes, we are seeing some upward pressure, particularly on the copper input. And as you may recall, in Q2, I believe it was at a record high at least on the COMEX. So it continues to be a headwind for us from an overall input perspective. We can going to manage it from a cost standpoint. But ultimately, it's -- to answer your question, it was a low single-digit inflationary impact in Q3 in Plumbing, and we expect a similar low single-digit inflation for the calendar year for the Plumbing segment. Trevor Allinson: Okay. That's helpful. And then a question on DIY Paint. Obviously, it's been weak for some time now after being very robust during the pandemic. Now we've had several years of DIY Paint declines. Can you talk about where you think we are in terms of pull forward versus deferral? And do you think DIY Paint is a category that can get back to growth in fiscal '26? Jonathon Nudi: Yes. Trevor, this is Jon. We really like our DIY Paint business. Obviously, the strength of Behr over time. DIY Paint correlates heavily to existing home sales. And as you know, existing home sales are near 3 decade lows right now. And if you think about it, it's pretty simple when you go to sell a house, you typically paint it, when you have buy a house, you typically paint it again. So without existing home sales moving at the pace that they have historically, that's really put a dent on the market. We expect the long-term fundamentals to get better for sure as existing home sales free up and start selling at more historical rates. I think consumer confidence in interest rates will help with that. And at the same time, we're excited about our PRO business. When you think about the upside that we have there. We have a relatively low share. We've grown nicely over time. And it's approaching nearly 50% of our business at Behr. So again, we think that we can continue to drive DIY. And at the same time, we think there's a significant opportunity on PRO as we work with our retail partner to really maximize that. Operator: Next question will be from Susan Maklari, Goldman Sachs. Susan Maklari: My first question is going back to Delta, you cited the strength that you're seeing in e-commerce and the wholesale channel there. Can you talk a bit about what is driving that strength, the outlook, the ability to sustain that? And what that could mean for volume and price mix in the Plumbing segment next year if the macro does stay tougher? Jonathon Nudi: Yes. So this is Jon. Maybe just a little color on Delta. As I mentioned, really pleased with that team and is also we're driving. I think it starts with -- they do a great job of building the Delta brand as well as the Brizo brand and all the different brands portfolio and really making them stand for something with end consumers. Innovation has been a big part of the Delta story. So our vitality rate, which is new products launched over the last 3 years at 25%, which we think is industry leading, and we'll continue to drive that and drive even more innovation as we move forward. And then really developing great capabilities from an e-commerce standpoint, we believe that we're growing share in that channel at a pretty significant rate just due to the capabilities and really the customer insight that we have with different retailers and different e-commerce customers in that channel. So the team is really firing on all cylinders. We would expect that momentum to continue as we move into fiscal '26. Susan Maklari: Okay. And then turning to capital allocation. You mentioned that you are increasing the outlook for returning cash to shareholders by $50 million for the year. Can you talk a bit about the timing of that? And also, what you're seeing in terms of other uses of cash, such as the M&A environment and the potential there? Richard Westenberg: Sure, Sue. It's Rick. Yes, as you mentioned, we did increase our expectation for cash available for share buybacks or M&A activity from about $450 million to $500 million. A big component of that was the favorable cash tax benefit from the recently enacted tax bill. So that was a favorable impact, and we are increasing our cash available for share buybacks and M&A accordingly. What I would say is as it pertains to in terms of timing, through the first 3 quarters of the year, we've returned just over $350 million to shareholders. And so you could envision that about $150 million remains for the fourth quarter. As it pertains to M&A activity, no change in terms of our overall capital allocation framework and our strategy in that regard. We continue to cultivate a pipeline of opportunities, focused really on bolt-on opportunities and nothing to report at this time, but it's certainly something that we look at as part of our overall growth algorithm. To the extent we do not have an opportunity this year, you would expect us to utilize that cash for ongoing share repurchases. Operator: Next question will be from Phil Ng of Jefferies. Margaret Grady: This is Maggie on for Phil. I guess, first, just maybe to ask the Plumbing pricing question a little differently. It was kind of surprising to see a similar pace, that 3% in 3Q similar to 2Q, just given the tariff mitigation efforts and the magnitude of pricing you have out there. So are you seeing more pressure from competitive dynamics or just pricing fatigue from customers? Maybe just walk us through some of the puts and takes there? Richard Westenberg: Sure, Maggie. It's Rick. So I think Sam asked a similar question from a sequential standpoint. So our price, as you articulated, was about 3% favorable from a Plumbing segment perspective, and that is as our pricing continues to gain traction in the market. So I'm not going to get into specifics on Q4 at this point. But suffice it to say, we're gaining traction. As it pertains to the overall dynamics, it's something that we're monitoring very closely. As Jon articulated, there's a number of levers that we pull with regards to our tariff mitigation and to address our margin headwinds, which are sourcing footprint changes, cost reductions and as necessary pricing. So we will leverage the pricing component of that, but it's something that we do in a very targeted way, and we look for a balanced approach overall. But I guess the bottom line is we continue to see pricing as a favorable impact on a year-over-year basis, but it's largely going to be driven based off of our need to mitigate the tariff impact as well as our assessment of the overall market dynamic. Margaret Grady: Got it. And are there any nuances to call out between channels in terms of realization or acceptance by channel? And then thinking ahead, you have this January price increase announced out there. What have you seen this year that's kind of influencing how we should think about realization on that in 2026? Richard Westenberg: Yes. So Maggie, we're not going to comment with regards to specific channel pricing performance. That's just something that we manage with our customers. As it pertains to anything that might be out there as it pertains to future pricing, I'm not going to really comment on that either. That's something that would be kind of in development. And so again, I would just take a step back and just look at it from a standpoint of pricing continues to be one of the levers that we've deployed in terms of mitigating our tariffs as well as other impacts such as commodity inflation, et cetera, and that's something that we're going to continue to focus on and execute against. Operator: Next question will be from Adam Baumgarten at Vertical Research Partners. Adam Baumgarten: Just on the timing-related issues in builders hardware, which is obviously a headwind in the third quarter. I think you mentioned that maybe it wouldn't be much of an impact for the full year. So would that imply that 4Q, those shipments kind of go through and therefore, the full year won't be as impacted? Richard Westenberg: Yes. And directionally, that is correct. So it was a Q3 adverse impact. But for the overall year, we don't expect it to be a significant impact. So I guess that would be a fair conclusion. Adam Baumgarten: Okay. Got it. And then just in plumbing, just on China. You talked about that being a headwind. It seemed like maybe a bigger headwind than it's been in prior quarters. If you can maybe kind of walk through what you're seeing on the ground over there? Jonathon Nudi: Yes, Adam, for sure. So the market itself has been challenged. And I think, obviously, you read about the housing market and what's happening in China. But at the same time, I think local players have become much stronger as well. So between those 2 things, the market itself is challenging, and I think the competitive situation is challenging as well. I'll tell you that we feel like we are holding up at least as well and probably better than our other major global competitors that are in that market. We still like that market. It's a significant market for us. And we think over time, we'll be able to get back to growth, but it has been a bit more of a headwind, certainly in Q3 than what we had seen through the first half of the year. Operator: Next question will be from Keith Hughes at Truist. Keith Hughes: Just a question of the inventory reserves you discussed in plumbing. Is that -- are you writing off obsolete inventory? Or what specifically is going on? And how much of a dollar hit is that? Richard Westenberg: Yes, Keith, it's Rick. So as part of our normal process, we review our balance sheet reserves on a quarterly basis as you anticipate. We make adjustments quarter-to-quarter based off of the assumptions in place at the time. And it's really driven based off, this quarter based off of the overall market environment and really the slow pace of the industry sales, et cetera. And so we do have adjustments, as you would expect, kind of quarter-to-quarter. This quarter was bigger than typical. So we've called it out, particularly given it hit our Plumbing segment and one of the drivers in terms of our margins. Although we wouldn't expect this to occur kind of on a regular basis, it was something that was -- we felt appropriate to call out for Q3. As it pertains to overall magnitude, I'm not going to give you a specific dollar amount, Keith, but I could dimension it a little bit for you. And I would say, on a year-over-year basis, if we look at whether it's operating profit or operating profit margin, it represented about 1/4 of the performance impact on a year-over-year basis. That helps? Keith Hughes: Okay. And is there a cash offset to this that comes or is this a noncash element. Richard Westenberg: This will be noncash. Operator: Next question will be from Eric Bosshard at Cleveland Research. Eric Bosshard: Two follow-ups. On the DIY Paint, I understand the softer sales, the down 7% to 9% and the market overall -- R&R market, that's not that bad, but you're linking that to housing turnover. I'm curious if strategically, there's anything different to do in this business to drive better growth. Obviously, you're having success with the PRO initiative in Depot. But on the DIY side, is there anything strategically different to do to stimulate better performance? Jonathon Nudi: So this is Jon. Good question. I think at the end of the day, I think the biggest thing we can do to drive our business continue to drive a better brand. And Behr paint has amazing quality, and we offer great value as well. And I think we can get even tighter in terms of our communication of why we have such a great proposition for our consumers. I think the other thing we can do is continue to innovate. As I mentioned in the prepared remarks, we're launching some innovation we're excited about some plant-based paint that's obviously very much in trend with younger consumers and millennials, and we think that will be a positive for us as well. We are with the right partner that obviously continue to do well in market. We continue to work with them to make sure we maximize our sales. I think, for us, though, again, I think getting tighter on our messaging from a brand standpoint really around value and quality because we think by far, we've got the best proposition in the industry. Eric Bosshard: Okay. And then for Delta, your comments were optimistic about retail '26 growth. I'm curious if there's anything in the business or from a market share perspective that informs that or if this is more function of lower rates and at some point, consumers will spend money. Just trying to figure that out. Jonathon Nudi: Yes, great question. As you would likely imagine, we have a good sight line into 2026 in terms of our plans with our major retailers. And without going into the details, we feel really great about where we're going to be from a distribution standpoint. We feel really good about our innovation that we're launching as well. And we would fully expect to have a very strong year at retail in 2026 as a result of those plans that are in place. Operator: Next question will be from Rafe Jadrosich at Bank of America. Rafe Jadrosich: I wanted to just get a little bit of a better understanding about the timing of when tariffs like hit your P&L and the cadence of the mitigation. So obviously, you have to work through some of the inventory that maybe came in pre-tariffs. Like how much of that of the impact is being like in your P&L today? And how do we think about that going forward? And then sort of same question on like the mitigation that you're planning, how do we think about the cadence of that? Richard Westenberg: Yes. Rafe, it's Rick. So as it pertains to the cadence of the tariff impact, as we've articulated in prior calls, that we fully expect most of that impact -- we know that most of the impact is going to occur in the second half of the year. And so that's why, as you saw in Q3, the tariff impacts really get kind of traction in our P&L. We did see some in Q2, but the vast majority is in Q3 and Q4. As articulated, we did have incremental or additional tariff impact in Q3 given the temporarily elevated China tariffs at 145%. So that translated into a $15 million additional tariff impact in Q3. Now that is hopefully onetime in nature as it pertains to the tariff dynamics. As you think about on a prospective basis, that's why we give the annualized tariff impact and our annualized tariff impact is $270 million. So you can think of that as a run rate basis on a calendar year basis. We saw, again, most all of that in the second half, thus the $150 million in the second half of the year, inclusive of the $15 million that I talked about. But $270 million is how we think about it going forward. I would caution, of course, that, obviously, we continue to be in a dynamic environment from a geopolitical standpoint. And so that estimate of $270 million is based off of really a static picture of not only the tariff environment, but our footprint. And we'll continue to provide updates in terms of our exposures as well as our tariff impact as we move quarter-to-quarter. Rafe Jadrosich: Got it. Okay. And then would you -- are you -- is the plan to fully mitigate in 2026? And then of those, you listed a few things that you're shifting supply chain pricing, like how do we think about the timing of that and when you would be planning to fully mitigate? Richard Westenberg: Yes. So with regards to mitigation actions, those are all underway, and we're pursuing them very aggressively and expeditiously. And so each exposure has a different time line. But ultimately, we would expect to, as we said before, offset a large part of the tariff impact this year, not all, but a large part. And really, our goal is to ultimately offset the tariff impact, not only from a dollar perspective but also from a margin standpoint, based off of the tariff environment as we see it today, and we would expect and we'll provide more color on that in our February call in terms of our expectations for 2026 specifically. But one of the largest levers of our tariff mitigation strategy is our sourcing footprint, and that takes some time. It continues to be an exercise that the team has done an excellent job in terms of reducing our exposure specifically to China. As mentioned earlier in the Q&A section, our exposure to China is $450 million, but that's down 45% from levels of 2018. And we continue to be on that glide path and accelerate that. So we'll provide an update in terms of what that looks like in 2026 in our February call. But suffice it to say, we're continuing to really execute towards the tariff mitigations and offset the dollar amount as well as margins over time, and we'll provide further updates in February. Operator: Next question will be from Collin Verron at Deutsche Bank. Collin Verron: Just one for me. I guess on the plumbing side of the business, can you just talk about how long you think this soft demand environment will really last here? And I guess like if you're looking out over the next 6 to 12 months, like what specific factors would you be looking for that would get you a little bit more excited about the demand environment? Jonathon Nudi: Collin, this is Jon. I'm relatively new to this industry, as you know, but it's been consistent as I go out and talk to our customers, channel partners, suppliers. I think everyone feels like the rebound will come, the crystal ball. We don't have a crystal ball, we can't tell you when that is. But all the macro factors remain incredibly positive. If you think about what drives R&R activity. I mean it's really about home equity levels. We know that they're at record highs right now. We know the age of the housing stock in the U.S. is ripe for renovations, remodels. In fact, over the next few years, something like 20 million more homes will become into that prime point to be remodeled. That's 20 to 40 years of age. And then I think it's about consumer confidence and interest rates. So I think if we see interest rates continue to tick down, consumer confidence in their economy increase, we'll see consumers tap into their home equity funds and start those remodels that they've been deferring. So we're very confident about the long term. Obviously, we don't have a crystal ball. I can't predict exactly when that will happen. As we sit here, we're not going to talk too much about 2026 or certainly give guidance, but I think we would expect to see a gradual improvement in our markets as we move forward into the coming year. Operator: Our last question comes from Anthony Pettinari at Citi. Anthony Pettinari: I just had 2 quick ones on Plumbing. I guess first, how would you characterize the performance of kind of your best brands. You talked about the strength in Delta, I'm just wondering how Brizo and Hansgrohe, are they still kind of outperforming the good, better? Or is there like any change in that dynamic? And then, I guess, just second question, sauna, wellness, smaller part of the business, but I'm just curious how that category is performing in what's obviously been kind of a tough market? And do you see the growth opportunity there organically or inorganically maybe different than you did 6 months ago, 12 months ago? Jonathon Nudi: Yes. Absolutely. In terms of plumbing, we really like the way our brands are performing. When you look at upper premium and luxury, we've got brands like Brizo as well as Newport Brass, Axor, which is our global luxury brand. And really, we see a bifurcation in terms of the market. We're seeing the upper income consumers hold up relatively well. And actually, we're growing the fastest in upper premium and luxury, so really like the performance there. From Hansgrohe growth standpoint, really like the way that they're performing around the world. Germany in particular, the home market, they're growing nicely, taking a tremendous amount of share. And really, we believe, growing share in most markets around the world. I mentioned China is definitely the soft spot for Hansgrohe and that's something we'll continue to work out for sure. So I really like the way they're performing around the world from a Plumbing stand point. In terms of Watkins, that's been a business that, again, we're really excited about the long-term opportunity for. When you look at Wellness very much being on trend from a consumer standpoint, the low household penetration of our categories. If you think about hot tubs, only has 5 or 6 household penetration in North America. Sauna is only 1% household penetration. And if you listen to what's happening in culture and society, you see and hear a lot of buzz around both of these and particularly saunas are on fire, right? So we think there's a tremendous opportunity for us. We're the market leader in hot tubs in North America, we continue to push our advantage there. We're a leader in sauna. I think that's an area that we'll continue to drive as we move through the future. We think there's a lot of tremendous upside for that business for the short to long and long term as well. Operator: At this time, we have no other questions registered. I would like to turn the call back over to Robin Zondervan. Robin Zondervan: We'd like to thank all of you for joining us on the call this morning and for your interest in Masco. That concludes today's call. Have a wonderful day. Operator: Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.
Abel Arbat: Good morning, everyone. This is Abel Arbat speaking from the Capital Markets team at Naturgy. And we thank you for joining our results call for the first 9 months of 2025. Next to me sits the Head of Financial Markets and Corporate Development, Mr. Steven Fernández; and the Head of Control and Energy Planning, Ms. Rita Ruiz de Alda. As usual, we will begin with the presentation and leave Q&A for the end. Please submit your questions in written form, through the webcast platform during the presentation and we will address those at the end of the presentation. So without further ado, I'm going to hand it over to Steven to start off on the presentation. Steven Fernández: Thank you, Abel, and good morning, everyone. As you have seen this morning, this presentation is basically divided into 3 main sections that we're going to go through. Firstly, we're going to review the results for the first 9 months of the year. Then we're going to give you a little update on the reestablishment of the company's free float following recent moves. And finally, we're going to give you some glimpses into the outlook for the remainder of the year 2025. If we move over to the results, the key highlights that we'd like to discuss basically, as you can see, we've had an overall robust operational performance amid a challenging and uncertain geopolitical backdrop. We are, as a result of that performance, on track to deliver on its 2025 guidance, building again on a track record of commitment and delivery. On the capital markets front, we have increased the free float for the company and subsequently, the share liquidity, positioning us to return to the MSCI indexes. As a reminder, the free float for the company has increased from 10% to almost 19% in record time and preserving value for shareholders. As a result of this effort, as I mentioned previously, liquidity has improved, and the monthly average trading volumes are up 2x versus the first half of the year. Our solid balance sheet also continues to provide flexibility and optionality. And we also remain committed to an attractive shareholder remuneration. As a reminder, the second 2025 dividend of EUR 0.60 has been approved by the Board, and it will be payable on November 5 on track for a minimum annual total DPS of EUR 1.7 per share. If we move over to review the results, what you can see is that average Brent prices were 14% lower in the first 9 months of the year compared to the same period last year, decreasing from $83 to $71 per barrel. In contrast, natural gas prices increased across key benchmarks. For example, the TTF was up 26%, the Hub up 58% and JKM up 17%. Hence, we have witnessed a decoupling of gas and oil indexes during the period. Geopolitics also weighed on energy markets during the first 9 months of the year, although volatility has thankfully gradually eased in recent months. Iberian electricity pool prices for its parts showed an increase from EUR 52 per megawatt hour in the first 9 months of 2024 to EUR 63 per megawatt hour in the first 9 months of this year, mainly driven by higher demand for gas-fired generation in the period, along with higher gas prices. As a result of this scenario, we take a quick look at the results for the period. EBITDA amounted to EUR 4.21 billion. Net income amounted to almost EUR 1.7 billion. A reminder that the dividend that we have paid so far this year amounts to EUR 1.1 billion and net debt for the group amounts to EUR 12.9 billion, which, by the way, does not include the proceeds from the bilateral sale and subsequent total return swap we have entered into. The results, therefore, maintained record levels while delivering on shareholder remuneration and maintaining a strong balance sheet. As we will review in the coming pages and especially with the help of Rita, during the third quarter of 2025, market trends and business dynamics have remained broadly in line with those that we had seen in the first half of the year. Moving over to the income statement. EBITDA remained in line with last year, although 2025 shows stronger underlying results as it does not include relevant extraordinary items contributing to it as 2024 did. And in terms of EBITDA contribution by business, 49% was generated by networks and 51% by energy management, generation and supply. In terms of activities, you also see a balance here with 54% of the EBITDA being generated by gas with the balance from electricity. And again, in terms of the geographical diversification, a little bit more than half of the EBITDA generated in Spain with the balance coming from all our other operations abroad. The group's diversification across businesses, activities and geographies continues to support its earnings resilience. And the way of its regulated activities provide us with cash flow predictability. So all in all, the earnings were [ 6% ] higher compared to last year in the period, reaching almost EUR 1.7 billion. If we turn over to the cash flow, free cash flow after minorities reached almost EUR 2.2 billion, demonstrating strong cash flow generation for the first 9 months of the year. In this period, the company invested EUR 1.2 billion, roughly of which 45% was allocated to networks, 35% to renewables and the balance of the business accounting for 20% of these investments. This growth -- this shows greater focus on the networks CapEx versus renewals compared to 2024 and is aligned with the company's financial discipline. Also note that EUR 169 million of hybrids were amortized during the period, which means only EUR 330 million of hybrids remain outstanding. We will continue to follow a strict financial discipline, deploying capital to ensure value creation on our investments. As a reminder, we believe in value over size. So all in all, strong cash flow in the period to back investments and shareholder remuneration, as you can see. But if we then turn over to the net debt, you can see that the balance sheet remains strong, actually stronger than we had anticipated. In April and July, Naturgy distributed its 2024 final dividend and first interim dividend for 2025, respectively, both of them in cash at EUR 0.60 per share for a total of EUR 1.1 billion spent year-to-date. In June, the company also completed a EUR 2.3 billion tender offer on our own shares. And already in August, we were able to undertake a successful placement and return 2% of its capital to institutional investors in addition to 3.5% to a financial institution with whom we have signed a TRS. This places net debt as at the end of September 2025 at EUR 12.9 billion with a comfortable net debt to last 12 months 2025 EBITDA of [ 2.4x ]. Moreover, as you have seen, in October, the company also managed to undergo a second placement of treasury shares amounting to 3.5% of the share capital, which will be reflected in the net debt figures as of the year-end. The cost of debt remains at around 4%, while the percentage of fixed rates has decreased to roughly 66% in the lower interest rate environment. So all in all, you can see we have a strong balance sheet with low leverage post recent capital market transactions and free float increase that provides the company continued flexibility and optionality. And with that, I'll hand the turn over to Rita, who will go over the businesses. Rita de Alda Iparraguirre: Thanks, Steven, and good morning, everyone. Starting with Networks on Page 10. Networks reported a total EBITDA of EUR 2,098 million in 2025, representing an 8% decline when compared to 2024. This decrease was primarily driven by one-off positive impact in Chile last year and the depreciation of several Latin American currencies, most notably the Argentine peso. In Spain, Gas Networks experienced a remuneration adjustments foreseen in the current regulatory framework as well as increased demand in residential segment due to temperature effects. As highlighted in our latest results presentation, a public consultation was launched in July targeting companies in the sector and marking the start of the regulatory review process for the 2027-2032 period. In line with the regulatory calendar, a draft proposal is expected to be published by year-end or early 2026. In electricity, EBITDA increased driven by higher regulated asset base and the publication of the 2021 and 2022 definitive remuneration as well as retroactive impacts. The CNMC has already published a second draft of the resolution of the new regulatory scheme for the 2026-2031 period and the companies in the sector have already sent validations. In Mexico, results mainly impacted by negative foreign exchange effects compensated by tariff updates in July. In Brazil, results were also affected by currency depreciation. In Argentina, EBITDA has improved following a substantial tariff increase implemented in 2024 to offset inflation. At the same time, we are observing a rising trend in FX volatility, largely driven by electoral milestones. As mentioned in July, a new tariff review was approved for the 2025-2030 regulatory period, in line with our strategic plan estimates. This new regulatory review provides visibility to 2030 and includes monthly inflation adjustments within a stable regulatory framework. In Chile, performance declined when compared to last year due to an extraordinary effect in 2024 as the partial reversal of the provision related to TGN conflict. As we already mentioned in the last presentation, this legal process is now officially closed due to an agreement between both parties. In Panama, results were negatively affected by lower demand due to temperature effects and increased operating expenses from higher maintenance activity to improve quality standards. In summary, comparison is affected by extraordinary impact in 2024 and currency depreciation in Lat Am. Now turning to energy management on Page 11. EBITDA reached EUR 718 million, which shows an increase versus 2024 of 18%, mainly due to higher margins on hedge sales. On average, European gas prices were 26% over 2024 levels. As mentioned during the strategic plan presentation, the group is fully hedged for 2025, having adopted an active risk management approach in the context of high volatility and uncertainty. The figures already reflect current market conditions for gas contracts in 2025, while negotiations with Sonatrach are still ongoing. The group is continuously evaluating new gas sourcing opportunities to complement our portfolio as we consider natural gas, a key enabler, for the energy transition. Finally, last week, the EU formally adopted a prohibition on the purchase import or transfer of LNG exported from Russia into the European Union. The prohibition will be effective starting in January 2027 in the case of long-term gas contracts, such as the one which Naturgy holds with Yamal. Overall, the period benefited from effective hedging and diversified procurement portfolio. Continuing with thermal generation, EBITDA reached EUR 523 million, 22% over 2024 EBITDA levels due to higher activity in Spain, partially offset by lower revenues in Lat Am. In Spain, the increase in results was supported by higher demand for ancillary services from our combined cycle fleet. Naturgy holds the largest CCGT fleet in Spain with 7.4 gigawatts, acting as a backbone to energy security of supply. In Mexico, production and margins remained stable. However, revenues from availability markets declined, mainly due to exceptionally high revenue base in 2024. Overall, CCGTs continue to play a key role to ensure system stability. Let's turn now to renewable generation on Page 13. Renewable generation reached an EBITDA of EUR 452 million during the period, slightly above 2024. Spain renewable generation production was 8% lower when compared to 2024, mainly due to lower wind and hydro generation, given the exceptionally high levels of hydro production in our basins during 2024. This negative impact was partially offset by the commissioning of new installed capacity and higher electricity prices. In the United States, results are higher when compared to 2024, mainly due to higher energy prices. The group completed construction of its second solar plant in Texas, which has recently started operations. In Lat Am, activity continues with impact due to currency devaluation in Mexico and Brazil. And finally, in Australia, performance benefited from the additional installed capacity added when compared to 2024. All in all, higher results in renewable generation due to commissioning of new capacity and selective growth prioritizing value over size. Last, moving to supply. EBITDA has been EUR 500 million, a 16% lower when compared to 2024. It is important to remember that in 2024, we had an extraordinary impact due to the positive ruling in favor of Naturgy regarding tariff subsidies. Leaving this aside, the business performed relatively stable when compared to last year despite incremental margin pressure and competition. As margins have shown resiliency supported by higher visibility on procurement costs, but negatively affected by regulated tariffs. In terms of electricity, the group has expanded its client portfolio in a highly competitive environment, leveraging on its integrated model and diversified generation mix, however, impacted by increasing adjustment services costs. I will now pass the floor back to Steven to update you on the free float and outlook. Steven Fernández: Thank you, Rita. So I'll take you really quickly to Slide 16. Naturgy has increased its free float to return to the MSCI indexes. On the 24th of June of this year, as I mentioned previously, we successfully completed a voluntary partial public tender offer to repurchase up to 9.1% of our share capital aimed at restoring the company's free float and enhancing share liquidity. The offer targeted 88 million shares, again, 9.1% share capital at a price of EUR 26.50 per share, totaling EUR 2.3 billion. All reference shareholders participated in the tender, reducing their shareholdings, as you can see in the right-hand side of the page. Aligned with the strategic plan '25-'27, our objective was to reintroduce the repurchase shares into the capital markets to improve free float and liquidity. And to this end, we executed a series of transactions this year. On the 4th of August, we completed an ABB of 2% of the share capital. We signed a bilateral sale and executed a bilateral sale for 3.5% of the share capital to an international financial institution. Both transactions were priced at EUR 25.9 per share, reflecting the tender offer price adjusted for the EUR 0.60 dividend paid on the 30th of July and thereby preserving shareholder value. On the 7th of October, just a couple of weeks ago, we also completed a second ABB for 3.5% of the share capital. Following these transactions, Naturgy's treasury shares now represent approximately 0.9% of the share capital and our free float has increased to almost 19% versus 10% in the previous year. Through the disposal of approximately 9% of our shares and the reduction of reference shareholder stakes, Naturgy has reaffirmed its commitment to enhance share liquidity and increased free float, which are, as you know, key steps towards inclusion in major stock indices, particularly those of the MSCI families, where on the following weeks, specifically on 5 November of this year, we'll hopefully have some good news. these transactions were overall executed swiftly and at a value-preserving terms for shareholders, hence, delivering a key strategic plan objective in record time. If we move over to Slide 17, and we look at the share price and the liquidity evolution, share price remains above the levels at which the tender offer was launched, considering the dividend of EUR 0.60 paid in July. And liquidity has substantially improved with monthly average daily trading volumes of around 2x the volumes in the first half of the year. So in essence, we have managed to increase the free float and liquidity, reducing the holdings of our reference shareholders as intended while preserving shareholder value. And all of this has been achieved in barely 4 months. If we look at the rest of the year now, in terms of the energy outlook for the -- the current market forwards are anticipating a generally less favorable energy scenario for the TTF in the last quarter compared to the first 9 months of the year, but still maintaining levels of around EUR 32 per megawatt hour. On the other hand, market forwards for Iberian electricity pool prices are pointing towards average levels of around EUR 72 per megawatt hour, above the 9M '25 numbers, but below the comparable period in the fourth quarter of last year. Finally, Brent prices are expected to remain just below $70 per barrel, while CO2 prices are expected to remain fairly stable. So in essence, the current energy outlook and market forwards are aligned with our expectations and the basis of our guidance for the year-end. Indeed, when you think about the guidance, we are on track to deliver our 2025 numbers. After the results presented today and the perspective for the remaining of the year, we are obviously in a position to reaffirm this guidance for EBITDA, for net income, for DPS at a floor of EUR 1.7 per share and improving our net debt outlook from an expectation of a little bit less than EUR 14.7 billion to approximately EUR 13 billion by year-end as a result not only of the good performance of the businesses, but also as a result of the placements in the treasury stock. Our short-term priorities, however, remain unchanged. If we look at them on Page 21, for networks, we are looking for a final regulatory framework for electricity networks in Spain. We are proactively engaging regulators for Nedgia, so that's gas distribution and negotiation of extension in concessions in Lat Am, Brazil and Panama. We are continuing to advance in our OneGrid initiative, which implements operational best practices across geographies. In energy management, we maintain gas procurement contracts aligned with market conditions, continue to assess, as Rita mentioned, new gas procurement opportunities as a key energy transition enabler. And we are proactively managing the risk both through physical and hedging alternatives. In thermal generation, we continue to look for capacity payments. We continue to play a key role in the security of supply through flexible generation in all the markets where we operate. And we are engaging in the initial discussions for PPAs extensions in Mexico. In renewables, we continue to look at selective renewable growth, and that's basically focused on repowering, hybrids and batteries. And we continue to execute our ongoing developments. In renewable gases, we continue to ambition leading the biomethane in Spain. We have more than 70 projects under development currently. We are promoting networks injection and adequate regulation. And as a result of that, you can imagine that we are actively engaging all authorities to make sure that this is a viable alternative for the energy transition. Finally, in supply, we continue to look to grow our client base and continue to evolve our operating model, deepening our excellence in client service and maintaining a balanced integrated position. As you can see from the slide, we remain fully committed to executing on our strategic plan. So finally, to conclude before opening up the floor for questions, we are proud, we are happy to report a strong performance achieved amid a backdrop of macroeconomic uncertainty. This resilience reflects the solid fundamentals of our businesses and the effective execution of our strategic priorities and the hard work of all people from Naturgy. We are on track to deliver our 2025 guidance, building on a strong track record of commitment and delivery. We have increased the free float and liquidity to return to the MSCI indexes, delivering a key strategic plan objective in record time and at value-preserving terms. We retain a strong balance sheet, providing the company flexibility and optionality. And we continue to deliver on our DPS commitment of a floor of EUR 1.7 through the payment of a second interim dividend of EUR 0.60 payable on the 5th of November. And with that, happy to conclude our presentation and open to answer any questions you may have. Abel Arbat: Thank you, Steven and Rita for the presentation. So let's start responding to the questions received through the webcast, and we're going to start touching on a few generic or more strategic questions before getting into the business questions. So the first set of questions relates to the current balance sheet flexibility and what are our strategic priorities around this. What would be the preferred route to deleverage at the moment, either deploying M&A, increasing shareholder remuneration, maybe additional share buybacks or a combination of the above? Steven Fernández: Thank you, Abel. I mean, it's a wonderful problem to have. A company with a solid balance sheet that provides flexibility, and I highlight optionality. So the best way to answer this question is we have a strategic plan that goes from '25 to '27. We're going to stick to this plan. We're going to meet the targets in this plan. This plan does not contemplate inorganic growth, and it contemplates investments that have been disclosed to the market that provide shareholders in Naturgy with value creation. If market conditions change and we are in a position to identify more organic growth opportunities that continue creating value for shareholders, and obviously, accelerating that organic growth could be an option. Alternatively, if opportunities present themselves for inorganic growth that makes sense, that could also be an optionality that we will explore. But I think the most important point is, again, to highlight our strategic plan does not contemplate external growth and it contemplates organic growth that focuses on delivering value as opposed to gaining footprint or size. Abel Arbat: Thank you, Steven. And in this context, would the company consider any further measures to increase the liquidity similar to the ones that we have executed in recent months? Steven Fernández: The company has a treasury stock position right now of 0.9%. Look, I mean, we're in no rush to deliver that to the market. We'll do that when and if the conditions are right at a time of our choosing. What I would say is that having done the bulk of the work, that 0.9% is not really going to move the needle. Abel Arbat: Thank you, Steven. Then there are a few questions around our portfolio of businesses. And if we think that there is anything that we consider noncore or that do we have any plans for portfolio optimization in Lat Am. Again, I think that Steven already mentioned that the plan is only based on organic growth, but do you want to... Steven Fernández: So the plan does not contemplate disposals or sizable disposals. We have taken quite a bit of time to review our existing portfolio, are satisfied with the positions that we have. We see potential in the countries where we operate in Lat Am, and we have no intentions at this stage in rotating assets. Abel Arbat: Perfect. Moving on to a more specific question around free cash flow. There's a question around the positive working capital contribution in the 9 months 2025 and whether or not do we expect any reversal of that positiveness into Q4? Rita de Alda Iparraguirre: The evolution of the working capital in the company is normally influenced by seasonal demand patterns, fluctuations in energy prices and also the negotiation of gas contracts with our suppliers. In this case, working capital evolution is strongly affected by balanced regularizations with our gas procurement suppliers in 2024 and 2025. We could expect partial reversal of our working capital in the future according to contract agreements. Abel Arbat: Okay. Thank you, Rita. Moving now on to various questions on each of the businesses. And I'm going to start with Networks and Networks Spain and particularly Spanish electricity networks. There are a number of questions around the second regulatory proposal, how it compares versus the current one, what's our opinion on its attractiveness, the treatment on OpEx and so on and so forth. So perhaps we could give high-level view on the topic. Rita de Alda Iparraguirre: Yes. Well, as probably everyone knows, the CNMC has already published a second draft of the resolution of the new regulatory framework covering the 2026-2031 period and companies in the sector have already submitted their comments. The published proposal introduces a shift to a TotEx-based remuneration model, along with an adjustment factor linked to increasing contracted power. The second proposal reduces OpEx cut, but still fails to incentivize efficiency and instead penalizes the most efficient operators. Moreover, the proposed methodology does not incentivize reaching the investment volumes outlined by the ministry, which are necessary to achieve decarbonization goals. We expect a final resolution before the end of the year. Abel Arbat: Thank you, Rita. So Again, a number of questions on how this proposal on electricity distribution in Spain could affect the upcoming regulatory review in gas distribution. So could we share our views on the Spanish gas networks' upcoming regulatory review? Do we have any visibility? Do we expect any changes in the current methodology and parametric formula? Rita de Alda Iparraguirre: Okay. So the CNMC indicated that the first draft of the remuneration methodology should be ready by the end of 2025 or beginning of 2026. From our point of view, continuing with the parametric model would be a sizable option to provide stability and predictability to the sector with appropriate adjustments to reflect the exceptional inflation of the current period. Furthermore, we see this new regulation as an opportunity to incentive new renewable gases, smart metering and also to bet for the decarbonization of the gas network. Abel Arbat: Thank you, Rita. Okay. So now moving on to Networks Lat Am. There are a few comments around the FX headwinds that we've experienced this year. And how this is expected to impact the company going forward and also with a view of the EUR 3 billion target by 2027. Rita de Alda Iparraguirre: So in terms of the developments in Lat Am networks, I would say that we have 3 main priorities. The first one that is the most important is obviously the negotiation of the concessions in Brazil in 2027 and Panama in 2028, as Steven mentioned before. Second, obviously, we are also -- one of our key priorities is to manage regulatory management that -- so we aim to obtain fair tariff reviews and also inflation updates to compensate for inflation -- for depreciation rates. In the case of Argentina gas, as I mentioned before, the new tariff review published this year includes monthly adjustment inflation, which is an important milestone for us. And additionally, we continue to focus on what we call OneGrid initiative, which consists of sharing implemented operational best practices across geographies in order to position Naturgy as best-in-class operations and continued efficiency gains. Abel Arbat: Thank you, Rita. We move now on to the questions around our liberalized activities. And in particular, there are a few questions on energy management. So perhaps starting on what's our expectation for energy management margins in Q4 and also what's our outlook for gas prices and spreads going forward? Can we comment on our hedging levels and the key drivers going forward? Rita de Alda Iparraguirre: So forecast for the upcoming winter indicates a moderate price environment for gas in Europe, mainly driven by adequate underground storage levels. We have an 83% storage levels currently in the European Union and the absence of major changes in the global LNG demand market, particularly due to declining demand from China in the last months. However, main price drivers will be more linked to winter temperature trends, demand requirements for power generation and potentially geopolitical developments we've seen in the past. In this context, the company will actively optimize both physical sales and financial hedging to manage its risk exposure and the underlying scenario. Likewise, negotiations with Sonatrach for 2025-2027 gas procurement prices are ongoing with -- to maintain gas procurement contracts aligned with market conditions. Abel Arbat: Thank you, Rita. Then a few questions on the recently approved ban of importing Russian gas into Europe. And the questions primarily relate to any contingency or breach of contract risk. Then there is also questions around the margin contribution from our contract from Yamal and possible replacement alternatives to that contract. Rita de Alda Iparraguirre: So yes, on Thursday, the European Council officially approved the 19th sanction package, which includes a ban on Russian LNG imports effective in January 2027 for long-term contracts. The European Commission is working to provide a legally sound and effective toolkit for companies to achieve the targets avoiding legal problems. While the contribution from the affected contract relevant for Naturgy is 35 [ kilowatt ] hour per annum. The impact is expected to be mitigated through our diversified gas portfolio and access to market purchases. As we mentioned during the presentation, we continue to assess new gas procurement opportunities as we are confident that natural gas and LNG constitute a key energy transition enabler in the future. Abel Arbat: Perfect. Thank you, Rita. Now a few questions on Spanish thermal generation, in particular, around the contribution of flexible generation or CCGTs in the context of higher demand and production in ancillary services. Do we expect this contribution to be sustained over time? What is the run rate that we expect for 2026? And if we can comment as well on our expectation for capacity payments and whether we have more visibility on this process? Rita de Alda Iparraguirre: Okay. So we expect more visibility on capacity payments and its design in the coming months. However, at the moment, there are no further indications on the matter. What is clear is that CCGTs continue to play a key role in the current environment, and we don't expect this to change in the near or medium term. The reinforced operating mode translates into higher demand and production in ancillary services that warranty the system stability and the security of supply. However, the launch of capacity payments, the incorporation of new batteries or the development of new infrastructure will obviously influence how restrictions are allocated in the future. Abel Arbat: Thank you, Rita. A question as well on data centers and what is our role? Do we see opportunities in the data center and how Naturgy is positioned to take advantage of the data centers build. Steven Fernández: So I mean, thank you, Abel, for the question. We are exploring opportunities that data centers present in Spain, namely through the procurement of energy and specifically on some of the sites that we have available, which are generating interest from international players with whom we are in the process of engaging discussions to see how we can work together. What I can tell you is that the model that we are pursuing is not one where the company will take up equity stakes in the data centers themselves or the data center projects themselves, but where the company will be in a position to provide access to the grid and provide electricity as demanded by the investors. Abel Arbat: Thank you, Steven. Now there's a question in renewable gases. What level of capacity is being developed? When we think these projects will start to see commercial operation dates? And what's our view in terms of what is needed for this business to take some speed and start gaining some critical mass? Can we comment on that, please? Steven Fernández: So look, what I would say is that this is a key area that we are developing right now, although admittedly not at the pace that we would like. We see renewable gases as a key solution for hard-to-abate businesses. They can already benefit from existing infrastructure. So we don't have to build brand-new infrastructure like in the case of hydrogen, for example. And by the way, when we say renewable gases, we mostly mean biomethane. So what the team has been doing so far is developing agreements and joint ventures with a number of other developers that provide us with access to good locations, good sites, which is our first process among a series of other processes, including the procurement of feedstock, et cetera. That will allow the company to jump-start its operations once we have adequate regulation that supports the development of biomethane in place. And therefore, the team is not only paying attention and spending time in identifying sites and signing agreements, but also in lobbying and explaining to the government and the regulator why it's important to develop a biomethane regulation that allows for the high-speed development and deployment of all the CapEx potential. So as a reminder, the strategic plan contemplates initial CapEx for biomethane, but the bulk of the CapEx, the way we look at it based on our assumptions, falls outside of the scope of the strategic plan. So it's highly unlikely that you will see very significant CapEx being developed or deployed before the end of year 2027. Abel Arbat: Thank you, Steven. Okay. So there are a few questions as well around the supply business. There is some margin construction in the recent quarter. So the questions relate around the outlook for energy prices and margins in gas and power supply in Spain and what are the repricing dynamics and so on and so forth. Rita de Alda Iparraguirre: Okay. So generally, the sector is experiencing, as you mentioned, high levels of competition and churn ratios in both gas and electricity. In the electricity segment, the group has expanded its client portfolio in a highly competitive environment. However, churn rates still remain high across the sector. In the gas segment, margins have remained resilient, supported by improved visibility on procurement costs, but negatively affected by regulated tariffs. Looking ahead, we expect margins in both gas and electricity to remain solid, leveraging on our integrated position. And we also anticipate maintaining or even growing our customer base, continuing the positive trend of serving electricity during the year. Additionally, the group is improving customer service and operational efficiency, thanks to the new digital platform. Abel Arbat: Okay. Thank you very much, Rita and Steven. I think that broadly concludes the questions received. There are a few more detailed and quantitative questions that the team will address subsequent to the call. And other than that, thank you very much for joining the results presentation, and we remain at your disposal for any additional questions you may have. Thank you so much.
Operator: Good morning, and welcome to Dana Incorporated's Third Quarter 2025 Financial Webcast and Conference Call. My name is Regina, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q&A session will be recorded for replay purposes. For those participants who would like to access the call from the webcast, please reference the URL on our website and sign in as a guest. There will be a question-and-answer period after the speakers' remarks, and we will take questions from the telephone only. [Operator Instructions]. At this time, I'd like to begin the presentation by turning the call over to Dana's Senior Director of Investor Relations and Corporate Communications, Craig Barber. Please go ahead, Mr. Barber. Craig Barber: Thank you, Regina, and good morning, and welcome to Dana Incorporated's Earnings Call for the Third Quarter of 2025. Today's presentation includes forward-looking statements about our expectations for Dana's future performance. Actual results could differ from what we present here today. For more details about the factors that may affect future results, please refer to our safe harbor statement found in our public filings and our reports [indiscernible]. I encourage you to visit our investor website, where you'll find this morning's press release and presentation. As stated, today's call is being recorded and the supporting materials are the property of Dana Incorporated. They may not be recorded, copied or rebroadcast without our written consent. With me this morning is Bruce McDonald, Dana's Chairman and Executive Officer; and Timothy Kraus, Senior Vice President and Chief Financial Officer. Bruce, call is yours. R. McDonald: Thank you, Craig, and good morning, everyone, and thanks for joining Craig, Tim and I for a discussion here on Dana's Q3 earnings. Maybe just before I get into my slide here, just stepping back and talking about kind of the puts and takes in terms of the third quarter. I guess, here's what I sort of see as the highlights. First of all, I think you'll see improving business performance, and that's something that we expect to see accelerate as we get into our fourth quarter. And the driver for that would really be a few restructuring initiatives that have been completed or substantially complete and will start to turn from sort of headwinds that are in our numbers right now with tailwinds for us going forward. Secondly, on the volume side, even though we're down year-over-year, the comps are getting better. They're negative, but they're getting better and that drives improved financial performance. On the tariff side, less of a headwind. You'll see we have minimal impact here in Q3. Our full year charge in terms of tariffs is lower than we thought a quarter ago. And then cost savings, we're on track to deliver the $310 million we talked about last quarter, but we are realizing those quicker, and that's helping us with some of the uplift to our outlook here. In terms of negatives, I'd say we have some volume softness, particularly in CV North America and to a lesser extent in Brazil. We did have JLR down for about 5 weeks in the quarter. So those were headwinds against us. And then the last thing I'd sort of point out is we do have -- there has been some supplier or some EV program cancellations and we have some charges in the quarter that we took associated with that, that we expect will recover here in the fourth quarter. So just turning to the highlights in terms of the Off-Highway divestiture, that remains on track. We do expect to close here later in the fourth quarter. In terms of regulatory approvals, we've received almost all of them. We have 1 minor European country that we expect to wrap up here in the next week or so. I'd say the joint teams between ourselves and Allison are working hard to sort of all the plethora of work streams that we have in place to affect an orderly transition here in the quarter. In terms of our capital returns, you'll see in our note, we talked about buying between $100 million and $150 million of shares in the third quarter. We actually bought more than that $9.5 million or 7% of our shares outstanding. We have had a 10b5 plan in place throughout the quarter. And as we sit here today, we've bought nearly 30 million shares or just over 20% of our shares outstanding and we expect to complete the balance of the share repurchase here over the next month or so. As I said in my earlier remarks on cost savings side, really good number here in the quarter. We're almost up to our full year run rate of $73 million. We continue to look for other opportunities. I guess, really pleased with the progress our team has made on bringing these homes. Tariffs, the situation, I guess, is getting a little bit better. We continue to make progress getting USMCA compliance which reduces the sort of headwind both from an on-charge point of view, but also the margin deterioration that we see. And our outlook, our recovery rate is now up in the upper 80%. Then lastly, in terms of the balance of the year outlook, I'd say the light demand -- the light-truck demand remains relatively stable. We do have the odd production interruption here and there. But overall, Light Vehicle is looking good for the quarter. In terms of Commercial Vehicle, we continue to see deterioration in North America and to a lesser extent, Brazil. Nonetheless, the fact that we've got a better outlook in terms of tariffs, quicker realization of cost recovery, we are taking our full year guide up $15 million at the midpoint. I would note that within our guidance, we do have some volume catch-up factored in here JLR. We factored in the lower Commercial Vehicle outlook here in North America in line with like estimates out there. And then we've factored in the latest Super Duty schedule releases that we have as of this week. So with that, a good solid quarter. And Tim, I'll turn it over to you to go through the financials. Timothy Kraus: Thanks, Bruce, and good morning to everyone. Turning to Slide 6 now. Let's review our third quarter financial performance. First, a reminder, results are presented excluding the Off-Highway business, which is classified as discontinued operations. Sales for the quarter were $1.917 billion, up $20 million compared to Q3 of last year. This reflects recoveries in currency benefits offsetting the impact of lower demand. Adjusted EBITDA came in at $162 million, an improvement of $51 million year-over-year. Our margin expanded by 260 basis points to 8.5%, driven by cost-saving actions and operational efficiencies that help mitigate the profit impact of lower sales and tariffs. EBIT improved significantly to $53 million from a loss of $8 million in the prior period. Net interest expense increased $11 million to $44 million due to higher borrowings and modestly higher rates. Income tax was a benefit of $2 million. While this is down $16 million from last year, we continue to benefit from positive adjustments to the carrying value of our deferred tax assets. Net income attributable to Dana was $13 million compared with a loss of $21 million in Q3 of last year, a positive swing of $34 million. Overall, these results demonstrated an effect -- the effectiveness of our cost savings initiatives, operational improvements in offsetting market headwinds. Please turn with me now to Slide 7 for the drivers of the sales and profit change for the quarter. In line with the new reporting method, we have revised our walk presentation to include the impact of discontinued operations in the current -- for the current and prior periods. The $579 million in sales and $121 million of profit removed from 2024, represents the Off-Highway business being sold and the accounting treatment for discontinued operations. Beginning with sales this year's third quarter volume and mix were $66 million lower, driven by lower demand in Commercial Vehicle end markets, partially offset by higher sales in Light Vehicle. Production disruptions at certain customers had minimal impact on Light Vehicle System sales in the quarter. Performance drove sales higher by $8 million due to pricing actions, while tariff recoveries totaled $49 million. Currency translation, primarily the strength of the euro against the U.S. dollar, yielded $21 million in higher sales compared to last year. Moving to adjusted EBITDA. Volume mix lowered EBITDA by $35 million. This was a decremental margin of about 50%, higher than we typically expect, reflecting significant mix changes and continued operational impacts within our thermal products business, including battery cooling. But recall, we are breaking out performance, which includes efficiency gains in manufacturing separately. Performance increased profit by $11 million due to pricing and efficiency improvements across both segments. Cost savings added $73 million in profit through the actions we have taken across the company. This brings us to $183 million to date, and we are securing our increased target of $235 million in savings for the full year 2025. Tariff impact in the quarter was minimal at just $1 million. Due to the catch-up in tariff recoveries, we expect to see continuing profit headwind in the future, but we do expect recovery of majority of this impact this year. Next, I will turn to Slide 8 for details on our third quarter cash flow. As I discussed on Slide 6, the accounting for cash flow includes both continued and discontinued operations as shown here on [ Slide 9 ]. For the third quarter of 2025, we delivered adjusted free cash flow of $101 million which represents a $109 million improvement compared to the prior year. This strong performance was driven primarily by higher profitability and lower working capital requirements. Onetime costs primarily related to our cost savings program were $17 million, which is $8 million higher than the prior period. Net interest increased by $11 million, primarily due to higher borrowing costs associated with the capital return initiatives. Taxes were lower at $47 million compared to $72 million last year, driven by the timing of payments. Working capital improved significantly by $76 million, reflecting better management -- inventory management and timing of receivables and payables. Capital spending was $59 million, up $16 million year-over-year as we continue to invest in new programs to support our backlog. Overall, these factors combined to deliver a substantial improvement in free cash flow, positioning us well to achieve our full year target. Please turn with me now to Slide 9 for an updated guidance continuing operations. For all our targets, we have narrowed our ranges as we approach the end of the year as we remain confident in achieving our targets. We expect sales from continuing operations to be approximately $7.4 billion at the midpoint of the tightened range. Adjusted EBITDA from continuing operations is now expected to be about $590 million at the midpoint of the narrower range. This is approximately $15 million higher than previously anticipated, driven primarily by accelerated cost savings and performance improvements. Full year adjusted free cash flow is anticipated at $275 million at the midpoint of the tighter range for the year. The profit improvement in continuing operations is expected to be offset by lower profit from discontinued operations. Please turn with me now to Slide 10 for the drivers in sales and profit change for our full year guidance. As with the quarterly walk, we showed earlier, our full year guidance walk adjusts 2024 for estimated discontinued operations and walks forward our guidance for continuing operations. Beginning on the left, discontinued operations reduced 2024 sales by $2.5 billion, so we begin 2025 at $7.7 billion in sales for continuing operations. Adjusted EBITDA from discontinued operations was $490 million reducing adjusted EBITDA to $395 million, resulting in a 5.1% margin. In this presentation, we have combined the impact of sales from continuing ops in our Off-Highway business into the volume and mix category. We are expecting volume and mix to lower sales by approximately $600 million, driven by lower demand in traditional Commercial Vehicle markets as well as for electric Light Vehicles impacting our battery cooling business. Adjusted EBITDA from volume and mix is expected to be lower by $130 million. Performance is now expected to increase EBITDA by approximately $110 million, mostly through pricing improvements. Cost savings will add $235 million in profit, as I mentioned previously. The tariff impact for the full year is expected to add about $150 million to sales, and we now expect it to lower profit by about $20 million. The majority of this profit headwind will be recovered next year. Foreign currency translation is now expected to increase sales by $25 million, primarily driven by the strengthening euro compared to the U.S. dollar, offsetting some of these sales impacts of lower volume. Finally, commodity cost recovery should drive about $15 million in higher sales and now only about a $5 million headwind to profit. The net result will be about 290 basis point margin improvement in continuing operations compared to last year as performance and cost saving actions overcome market headwinds. Next, I will turn to Slide 11 for the details of our free cash flow guidance. As I mentioned, we anticipate full year 2025 adjusted free cash flow to be about $275 million at the midpoint of the guidance range. We expect about $105 million of higher free cash flow from increased adjusted EBITDA. Onetime costs will be about $30 million higher as we invest in our cost saving programs and restructuring. Working capital will be about $105 million lower as we continue to reduce the requirements to operate the business. And capital spending net is expected to be about $325 million this year, which is $45 million lower than last year. And finally, I will turn back over to Bruce for some closing comments on Slide 12. R. McDonald: Okay. Thanks, Tim. So this slide is really the same as we talked about last quarter, which kind of reflects the fact that I think the business is performing well, and we're delivering on our commitment. So cost savings for the year or so the run rate that we're targeting, the $310 million, we're solidly on track. And as we've discussed here earlier, we're realizing more of that benefit here in 2026 -- sorry, 2025. In terms of our margin outlook, we've been consistent for a year now that we were going to have 10% to 10.5% [Audio Gap] margins for 2026. And it's really nice to be giving guidance here for the fourth quarter that's in top or in that range or even slightly on top of. I'd say, overall, our team is doing a great job over delivering on the things that we can control, and it's helping us offset the things that we cannot control. In terms of our return of capital to shareholders, we're committed to the $600 million this year. And then lastly, I would say, in terms of our growth story, I think it's underappreciated by the market. We have had some deteroriation or backlog due to easy program cancellations, deferrals or lower volumes. But nonetheless, our team has done a nice job this year gaining share, winning incremental programs. And so we plan on having an analyst call here in January and going through our revised backlog. We continue to win new business. And I hope to add to our backlog between now and January. With that, we'll turn it over for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Tom Narayan with RBC Capital Markets. Gautam Narayan: Yes. My first one, it's kind of an OEM question, but it relates to you guys to -- the big story from this earnings season was the big policy change, the MSRP exemption or extension that included broadening the scope of parts. And you saw that 2 large OE -- U.S. OEMs, huge impacts on their tariff guidance and presumably their volume outlook. Conversely, earlier this morning, a large European OEM reported results. It had no positive impact from that. So I was just wondering if you were seeing some dynamic here where the U.S. OEMs, which you guys have more exposure to, maybe benefiting more from tariff policy changes than perhaps others, European or maybe even the Japanese and the Korean -- and I have a quick follow-up. R. McDonald: Yes. Yes. No, I think you're absolutely right. I mean the rebate is based on vehicles assembled in the U.S. and obviously, the big -- the Detroit 3 make more in the U.S. than the European or the other transplants. So I think to me, the most important thing in the recent announcement in that regard is, I think there's always been some concern around are customers going to have to pass along the higher prices that in the short-term, they are eating in their margins to the end customer. And to the extent that were to happen, then obviously, vehicle demand is going to drop. And so I think that risk has substantially diminished with the new guidelines that have come out. That's kind of the way I look at it. Gautam Narayan: Okay. And then my quick follow-up, the Commercial Vehicle side, it sounds like from your prepared commentary that, that situation is deteriorating. Just curious if you could give us the context of like how typically that cycle works? And are you seeing any kind of light at the end of the tunnel? R. McDonald: No. We're not seeing any light at the end of the tunnel. I would say -- I mean, if you look at kind of the run rate here -- I'll talk about North America specifically in the third quarter, we're running around a 200,000 unit annualized run rate. I know from talking to our customers that the backlogs that they all have, have really been run down. I think there's a lot of uncertainty in the marketplace. There's -- we would have expected maybe to start to see some signs of pre-buy in 2026 associated with some emissions legislation changes, and we're not seeing any of that. So I think it's going to be a fairly soft market here certainly for as long as we can see into mid-2026. And at this point in time, I don't see any green shoots that would suggest it's going to turn around. I also don't think we're going to have a heck of a lot of deterioration from here either. I mean, we're at pretty historically depressed levels. Operator: Our next question comes from the line of Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: My first question is on the implied outlook for the fourth quarter, which, as you pointed is, is pretty strong and with margins already basically above -- slightly above the high end of your margin outlook for next year. Just curious if you can help us out in terms of sequential drivers. So it's like it will be a 200 basis point margin improvement versus Q3 on what is essentially lower revenue at the midpoint. You flagged a few exogenous events such as some of the forward schedules and the impact potentially from the fire. So just curious how to think about the performance quarter-over-quarter into the fourth. Timothy Kraus: Yes. Emmanuel, this is Tim. So a couple of things. Obviously, we've got a continued improvement coming through from our cost savings initiative. We do see mix improving in the quarter. And then I think the other big driver and Bruce mentioned this in a couple -- in his opening comments, we are at the tail end of some restructuring actions that we believe -- well, which have some headwinds certainly through the third quarter that we think will also drive additional performance and better profitability into the fourth quarter, and that provides us a great springboard into 2026 as we get some of these actions behind us. And we did announce the closure of a battery cooling plant earlier in the quarter. So -- this is part of what we're seeing, and we're continuing to work to improve the cost base of the business across the board. So you'll see those come through in the fourth quarter as well as next year. Emmanuel Rosner: That's helpful. And then just honing in on the top line and the mix dynamics. So -- could you give us a little bit more color around what mix you're referring to in terms of improving in the fourth quarter? And also maybe sort of like any color around what's assumed for some of these potential indirect impact on your customers from the Novelis fire because IHS has one view around fourth schedule and then Ford obviously give their own guidance, which had a fairly massive amount of volume production of a loss. So just curious what's embedded in your -- the schedules that you have received. Timothy Kraus: Yes. So obviously, I don't want to get ahead of our customer, but we're fairly in line with what our customer has said publicly around those, how they ultimately run, we'll see. But certainly, from our perspective, we're fairly in line with where we see Ford's public statement. In terms of mix, some of this is really the mix of products as we're moving from plant to plant. So that's -- we do have a bit better mix on some of the products where we have better contribution margin quarter-to-quarter. But a lot of it is really getting some of the restructuring and the movement of some of the product around in the plant as we rationalize our production footprint. R. McDonald: Yes. Maybe just one other comment on that one, kind of going the other way is if you look at our third quarter, we were -- we are pretty constrained in terms of magnets. We have facilities in China, India and Europe, where we had difficulties getting magnets. And that log jam [ knock wood ] seems to broken free here. So we do -- we do expect to have some substantial catch-up in terms of frustrated orders, which are, for us, very high margin. Timothy Kraus: Correct. Operator: Our next question will come from the line of Edison Yu with Deutsche Bank. Yan Dong: This is Winnie Dong on for Edison. My first question is on the $110 million performance. I think in your prepared remarks, you mentioned that it's mostly driven by pricing improvement. I'm just curious, is there sort of like bigger programs that are all going on at better pricing? And then what are some of the other drivers that might be embedded in this number? Timothy Kraus: Yes. So some of it is as we move through and bring new platforms and new programs in place that comes with revised pricing. So that's running through there. And then the teams -- the commercial teams have done a really nice job with the customers to go get recoveries both from an economic and for improvement. So a lot of that is real pure pricing that we see. And you see that falling through. I don't have the number in front of me, but I think there's about $80 million of top line that's flowing through, and that's what you're seeing in that $110 million. The balance of that is really productivity and performance improvement at the plant level, net of all of the inflationary impacts that flow through the business. Yan Dong: Got it. That's very helpful. And then maybe on both Light Vehicle and Commercial. You can maybe just provide some higher-level preliminary puts and takes that you're seeing or considering into 2026? Timothy Kraus: Yes. So I think Bruce mentioned we don't -- we're probably not seeing a lot, at least through the first half on the Commercial Vehicle side, especially in North America, that there'd be a whole lot of improvement. As we look through on the Light Vehicle side, we have a number of programs that are launching next year. That should be -- should help volume. But our core Light Vehicle program, especially on the driveline side, right, Super Duty, Bronco, Wrangler, Ranger, those are all still very strong runners, and we would continue to see those well into next year to continue to drive the volume side of this and Wrangler is going to come out and have some refreshments. So that should help as well. R. McDonald: Yes. And maybe just a couple of other color commentary on that. I mean, obviously, with oil prices being quite soft, that's a nice tailwind in terms of large SUV. Some of the short-term deterioration that we're seeing in Super Duty, Ford has already talked about uplifting their volume next year in the middle, I think it's August of next year, they're introducing incremental Super Duty production at their Oakville facility. So I would say the tailwinds in terms of ICE, large SUV our product exposure bodes well for us as we drift into 2026 year. Yan Dong: Got it. I'm just a little surprised to the question, I know I didn't mind before that you're just not seeing a lot of impact in Q4 itself from one of your larger customers. Is it just because like the original guidance was conservative and therefore, even if you're taking in some of the impact, you're still retaining a lot of it? Or are they not really flowing through that impact to you guys? Timothy Kraus: Yes, it's a bit of both, right? Winnie, it's a bit of both. So we had some of this in our forecast that we had back in August. So -- and then some of it's -- the view from the customers are going to make up some of this as we move through the back part of the quarter. R. McDonald: And I mean keep in mind, we're -- our exposure is Super Duty, not F-150. So when they -- when you're hearing the volumes, you're hearing kind of both. And I think just given the profitability of the Super Duty, they're kind of over-rotating to try and keep that running as strong as they can. Operator: Our next question will come from the line of James Picariello with BNP Paribas. James Picariello: Good morning, everyone. Just as we think about next year, are we at a point at all to quantify the next [ slot ] of cost savings beyond the $310 million program with respect to plant closures, which you touched on in your prepared remarks and just overall, I guess, stronger execution. R. McDonald: Yes. Thanks for that question. It's a good one. But yes, I would say, in terms of the opportunity we have to expand our margins, we still have a long way to go. If you think about the $310 million, it's heavily focused on things that we could implement quickly without investment. And so if I just look at that bucket of costs through standardization and some systems work, we would still say we probably have another $50 million, $75 million that we can get over the next few years. If I look at the cost base outside of where we've been focusing on in terms of our plants, for sure, we've got some footprint opportunities, and we announced 1 earlier this month. I would say just given the amount of investment that we've had to make in electric vehicle over the last few years, we've made those investments, you could think about at the expense of our core operations. And so if you looked at the level of automation that we have in our plants, it is well below what you would see at other well-capitalized suppliers. I think we've got other opportunities in terms of product line rationalization. We still have a lot of products where we make inadequate or negative returns, and we're working our way through that. And then I would say lastly would be on the EV side. We do expect to continue to refine our cost base there and get that business from being a drag on our margins to being accretive. And I expect that to sort of flip around here in the next 6 to 12 months. So there is still an awful lot of levers that we can pull. I don't see 10% or 10.5% as being our high watermark. I believe we've got opportunity to continue to grow it fairly significantly over the next couple of years. James Picariello: Got it. That's really helpful. And my follow-on, maybe on the topic of plant automation. How are you thinking about the right run rate for CapEx as a percentage of sales next year? And then could you just remind us what's assumed or expected for the stranded costs capture for next year as well? Timothy Kraus: Yes, James, so about sort of think of CapEx in about the 4% of sales range. So that's probably where we'll end up plus or minus. In terms of stranded costs, it's -- it's probably $30 million to $40 million. We do expect to be able to start taking a good chunk of those costs out as once we close the -- we close the transaction and move into 2026. Now some of those costs will remain because we'll have some transitional services that will need to be provided, but they'll be offset with payments from Allison for that. But again, $30 million to $40 million, and we believe we'll be able to take all those out really as we get through and we exit 2026. R. McDonald: You'll see next year a fairly big -- within that number that Tim talked about a fairly big step-up in terms of automation expenditure next year. And I don't want anybody being misled you. Like we're not talking about humanoid robots and stuff like that. We're talking about basic automation, unloading and loading machines, AGVs moving material in our factories, we're way behind the automotive standard. And I view that as a huge opportunity for us. Operator: Our next question will come from the line of Joe Spak with UBS. Joseph Spak: I just wanted to maybe follow up on that last point. So -- it sounds like there's a big bucket of opportunity here, but it will require some investments. I just want to be clear, should we expect some of that investment to start next year? And then maybe savings and just say how quickly can savings come in after that investment? R. McDonald: Yes, we will -- I mean if you think about it, we've been spending pretty significantly on EV over the last few years. We'll -- the easy way to think about this is we plan to take some of those dollars and re-deploy them. As Bruce mentioned, we were investing in EV to some extent at the expense of some of the stuff in our normal old-school ICE plants, and we'll spend that capital to find areas. And by the way, it's a target-rich environment in terms of being able to improve the efficiency on the plant floor. I mean -- we do this every day, but this will be a bit more deliberate and accelerated as we go through and those dollars are freed up. Don't forget that as we come through the transaction, we'll free up a lot of cash flow -- operating cash flow from lower interest expense and lower taxes, and we intend to make sure that we're investing in the right places at the right returns for the business to drive shareholder value. Timothy Kraus: Yes. With that level of CapEx, we're still maintaining our 4% free cash flow guide. Joseph Spak: Right. But some of it is redeployment and some of it's incremental is the right way to... Timothy Kraus: Yes. Yes, correct. That's correct. I mean, we're below that, obviously, today, but our view is that will have more -- given the improvement at the operating margin level, we're going to redeploy some of those dollars that we're delivering from increased profitability back into the business to kind of generate the snowball effect and continue to drive those margins higher over the next 2, 3 years. R. McDonald: Yes, this is fairly short payback stuff. Joseph Spak: I guess the second question, I just want to make sure I heard correctly, Bruce, I think in your opening comments, you talked about some EV charges in the quarter, I think that related to sort of -- I don't know if that was sort of some of the plant actions you took. But then you sort of alluded to a recovery maybe from lower EV volumes in the fourth quarter. I guess, a, were those -- are those charges in the third quarter results? And then is the recovery in the guidance? And how much are we talking about here? Timothy Kraus: Yes. So we did take -- I mean, let's say, charges. We did have to book some additional costs related to some of the EV programs that were canceled during the quarter. It's a number of different OEMs. The total number is, you can call it, $10-ish million maybe plus or minus. It's not a massive number. But again, we are in active discussions with the customer over recovery of these amounts, and we expect to get those in the fourth quarter. R. McDonald: Yes, they just didn't match. Timothy Kraus: It just didn't match up. The accounting rules are a little different between what we got to book in terms of cost and what we have to book in terms of the recoveries and since they're noncontractual on the recoveries. But I don't want to get into specifics of programs or customers because obviously, we're actively engaged with those discussions with the customer today. Joseph Spak: No, that's totally fine. R. McDonald: $8 million or $10 million in Q3 that we anticipate recovering in Q4. Timothy Kraus: Correct. Joseph Spak: I guess what I wanted to make sure was that, that was actually in the results. You're not excluding that to... Timothy Kraus: It's included in the adjusted EBITDA number, Joe. Operator: Our next question will come from the line of Ryan Brinkman with JPMorgan. Ryan Brinkman: And I know we just had the discussion about what's next in terms of the additional opportunity to improve margin and cash flow beyond even the 10% to 10.5% and 4% of sales that you target, respectively, you continue to target for 2026. I don't think that's a premature discussion to have. I plan to ask that question myself. If you really are at 10% to 10.5% exit run rate at the end of the fourth quarter. But maybe just taking a step back, I mean, it's worth pointing out, I think consensus is at like 9.4% for next year for EBITDA margin. So maybe just review a little bit to your confidence in next year and the lack of incremental execution, I think, that may be needed to get there in on the free cash flow number too, are there like additional levers that you need to pull or you feel like you're pretty much going to be on track for that so long as the end markets are there by the end of this quarter? Timothy Kraus: So just -- so making your assumption on end markets as the premise. Bruce and I and the entire team are supremely confident in our ability to deliver what we've said for next year. In the fourth quarter, we think, is a good indication of that. Do I think there's opportunities above that. Absolutely, I do. We -- there's a lot of things can go right and a lot of things can go wrong over the course of a year. But yes, we think there are additional opportunities both in terms of margin and cash flow even in 2026. Right now, we're focused on closing out 2025, delivering the $310 million and really setting the company and the team up for delivering on next year. So like when you say the consensus is below that, Bruce and I share a bit of frustration. I mean we've been saying this here for the better part of the year, and we're really -- we're thinking that what we're going to deliver in fourth quarter will help cement the fact that we're going to deliver that 10% to 10.5% next year with potentially some upside. R. McDonald: Yes. I'd say, Ryan, in terms of -- here's how I look at it. We -- a year ago, we said we're going to be 10% to 10.5%. And our consensus has slowly moved up. The reason why we bought back our stock so aggressively is because we're highly confident in our number. And if you use our number, our stock price is significantly undervalued. And so it's almost like we're buying two and getting one free. Timothy Kraus: So on sale. Stock is on sale right now. Ryan Brinkman: And congrats on the execution so far. Maybe just to finish on the end market point. I feel you have been -- well, others have been quicker to point out the headwinds that they were experiencing in the commercial vehicle market, both in North America and in Brazil. And I just wonder if you're situated a little bit differently relative to some of the competition. I don't know if it's a Class 5 through 7 relative to 8 or I'm not sure, but you are seeing the softening now. I mean others are saying the floor has fallen out on the new vehicle builds in North America. So just curious if maybe you've got a little bit different exposure, a little bit more on the aftermarket? I'm not sure. Timothy Kraus: Yes. So obviously, we have exposure to aftermarket, but I would assume most of the other players do as well. Look, vehicle fleets are aging. They're still up there. We do think that the run rate we're at now is still pretty low. Now we had some of this built in. So all others are calling it. I mean we were building a bit more conservative into the CV vehicle build when we came out 3 months ago. So that's part of the reason why we're not probably as calling it out as much now, and we're holding to the $7.4 billion. But I think as we move into next year, the first half is not going to be -- we're not going to see gains, but we don't see it going a whole lot lower than we are now. I just don't think even with the backdrop that the age of the fleet, they'll have to do some work to replace it. R. McDonald: Yes. I would maybe just adding to that one on the CV side, our business has gained share. If you look at kind of our share of wallet at our customers, we're -- we've done a lot of -- the team prior to when I got here, had done a lot of good work on re-footprinting that business. And I think we have a cost advantage model right now, and we are picking up share at our -- at the Big 3 customers that we have exposure to here in North America, which is helping to offset some of the market deterioration. Timothy Kraus: Yes, that's a really good point, right? Our share at some of these has increased significantly over the past 12 months, and we expect that to hold and continue to increase. Operator: Our next question will come from the line of Dan Levy with Barclays. Unknown Analyst: Josh on for Dan today. First one. Just kind of trying to wonder how we should bridge the 4Q margin into 2026. I understand on the slides, it kind of shows the main drivers of increased margin. We're trying to figure out if there's anything weird in 4Q that wouldn't, I guess, imply like a larger step-up in margin in next year? Timothy Kraus: No. I mean these are really -- if you look at Page 12, right, those basis points are off of our total 2025 full year continuing ops basis financials. So they're not off of the fourth quarter. But obviously, when you look at the fourth quarter, it's highly indicative of what we -- why we believe the full year overall run rate bridges into that 10% to 10.5% next year. Unknown Analyst: Okay. So I guess we should assume that -- I mean, I guess a decent portion of those main drivers are included already within the 4Q margin? Timothy Kraus: Yes. Think about the cost saving. It's 100 basis points. We -- I mean our fourth quarter, when you look at the full run rate out of 2025, right, we're going to deliver $235 million. We had $10 million last year. That's already in $245 million off of sort of where we were at in 2024. So like that incremental $65 million of -- or $75 million of cost savings runs through next year, and we'll have a full run rate of $310 million. So that's 100 basis points-ish right there. And then stranded costs, right? We just talked about that. That adds some incremental margin in the business because right now, when you look at our continuing ops, it's burdened with the stranded costs that we expect to take out. So to say it modestly, I think from our perspective, moving from where we're at on a full average basis this year to 10% to 10.5% next year, we do not see -- assuming the markets hold up, that we're going to have any trouble getting to 10% to 10.5% next year. And again, our fourth quarter run rate supports that in a very strong manner. Unknown Analyst: Another follow-up. I know you mentioned some of your key platform volumes are holding in next year. I know some of your customers have mentioned that just given the regulatory environment, some of the platforms can go to, I guess, with your mix off-road performance trends. I was just wondering if you would have like -- I'm going to see a significant benefit from some of those [ power chain ] changes? Timothy Kraus: Yes. I mean, obviously, better mix. I mean, we're one of the original creators of the 4-wheel drive vehicle where we created the Wrangler or the Jeep for the government for World War II. So yes, richer mix, larger axles. So if you think of Wrangler, right, if that mix moves further to Rubicon, that's much better for us. We have more content on it. The same would be true for Bronco. And Bruce already mentioned Super Duty with Ford's plans to expand that capacity and build more trucks for us, that's a great program to have content on. And that content, if it gets richer, is better for us as it is for the OEM. Operator: Our final question will come from the line of Colin Langan with Wells Fargo. Colin Langan: Great. I just want to follow up on the sequential margin increase of $220 million on lower sales. I mean, just to make sure I'm capturing all the factors, you have the incremental cost savings from Q3 to Q4. I think you mentioned like $20 million of EV headwinds and those will get recovered. So it's like -- sorry, $10 million of headwinds that will get recovered. So $20 million maybe swing quarter-over-quarter. And then I think mix. Are those the big factors? And then a little surprised by the -- I thought you said in the last quarter, you had taken most of the actions. So I'm a little surprised there's even more coming sequentially in Q3 and Q4. Timothy Kraus: When you say -- Colin, this is Tim. And when you say actions, what are you talking about for actions? You talked about the cost saving actions? Colin Langan: Yes, I thought that was the comment you made last... Timothy Kraus: Yes. No, I mean -- but I mean, we had a -- we still have additional actions coming through the third and into the fourth. Now I think the incremental or sequential savings will be lower in the fourth quarter. It's implied when you look at our $235 million. So they're obviously slowing down. But right, we're on track to have a run rate exit at 310 coming out. But we do have -- we do have those actions. There's also additional performance actions at the plant level that will come through in the fourth quarter. I mentioned, hey, we're in the middle of rationalizing some product, and that's been a headwind for us in our performance and in the volume and mix through the first 3 quarters of the year, we do see that improving as well. So that's -- all of that combined continues to drive that margin from quarter-to-quarter up. Colin Langan: Okay. Got it. And then I think in the past, you've mentioned that the backlog of $300 million for next year is still pretty much intact. Has that changed much with some of the EV cancellations that you just mentioned on the call. And in the past, it was like 70% EV or something. What are some of the ICE launches that are going to help as we think about next year? . Timothy Kraus: Yes. So I don't want to get into the specifics, but our backlog has been impacted by program delays and cancellations. I think what we want to do is we'll take you through a pretty fulsome review of backlog and how it looks and how it shakes out in January, probably mid-January so that you get a really full view. We're right in the middle of finalizing our plans for New Dana. And we want an opportunity to really have a -- give you the full information and be able to answer your questions then. So I think that's it. But we do see increases in ICE, no question about it from a backlog perspective. R. McDonald: There's EV in there, but the proportion will be more ICE. Timothy Kraus: Yes. Colin Langan: Okay. But nothing -- has anything changed since the last quarter with the comments on... Timothy Kraus: Yes, sure. I mean, obviously, we've had cancellations in EV. I mean like we talked about the [indiscernible]. Absolutely, that's impacting -- that will impact some of the backlog that we have out there. R. McDonald: And delays. Timothy Kraus: Yes. R. McDonald: Okay. Maybe with that, we'll sort of get into some closing comments here. So first of all, and it goes without saying, thanks to the Dana team for continuing to deliver on our commitments, like I said earlier in my comments, despite external headwinds, we're over delivering on the things that we can control, and I couldn't be prouder to be part of the team. A year ago, we committed to 3 things: one, selling our Off-Highway business, and we're very close to having that done. When that has been completed, we will have returned a substantial amount of capital to our shareholders and still be left with what we think is a best-in-class balance sheet in terms of our sector. We committed to $200 million of cost reduction, which we subsequently up to $310 million, and we're in great shape and basically at that run rate here this quarter. And then lastly and very importantly, we said we could get to double-digit margins in 2026, and we're exiting 2025 at that level. I know there was a healthy amount of skepticism around some of our -- some of these commitments last year, but hopefully, the market also recognize that the Dana team is delivering on its commitment. Despite some EV deterioration, we have an impressive backlog that we will talk about in January, it does have a combination of both ICE and EV. But as we said before, EV will be a smaller percent there. And we'll see a lot more details on our January call. Long-term, I continue to see a lot of upside in terms of our margin potential. I think a combination of us getting our margins up to the double digit and growing them beyond the 10% to 10.5% in 2026, combined with our balance sheet, we believe we're going to be rewarded with multiple expansion. And so I think we've got an extremely motivated management team here. I couldn't be prouder of the accomplishments year-to-date, and I think our best days are in front of us. And so with that, thanks for joining us on our call today. Operator: This will conclude today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, and welcome to the Centene Corporation 2025 Third Quarter Financial Results Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Investor Relations. Please go ahead, ma'am. Jennifer Gilligan: Thank you, Rocco, and good morning, everyone. Thank you for joining us on our third quarter 2025 earnings results conference Call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Specifically, our discussion today of our expectations for the drivers of adjusted diluted earnings per share for 2025 and any commentary on expected adjusted diluted earnings per share for 2025 are forward-looking statements. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our third quarter 2025 press release, Centene's most recent Form 10-Q filed this morning and its 10-K filed on February 18, 2025, Additionally, other public SEC filings, which are available on the company's website under the Investors section. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. This call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our third quarter 2025 press release. With that, I will turn the call over to our CEO, Sarah London. Sarah? Sarah London: Thanks, Jen, and thanks, everyone, for joining us to review our third quarter 2025 financial results and updated full year outlook. We are driving significant progress against the milestones we provided to investors in July, yielding a better-than-expected adjusted EPS result in the period. This morning, we reported third quarter adjusted EPS of $0.50, ahead of our previous expectation. Within these results, our Medicaid business delivered anticipated HBR improvement in the period that was further aided by a positive 2025 retroactive revenue adjustment in our Florida business. SG&A and performance within our noncore segment were both slightly favorable. Net investment income was stronger than we previously expected, and we experienced a lower effective tax rate in the quarter than originally forecasted. Marketplace experienced additional medical cost pressure in the last month of the quarter, but the segment still produced an on-track result for the period. And our Medicare segment, including MA and PDP, performed in line with expectations we shared on our second quarter call. With 3 quarters of the year complete, we are increasing our adjusted EPS forecast to at least $2, up from our previous forecast of $1.75 per share. When we came to you in July with recalibrated earnings expectations, we laid out 6 key assumptions that bridged us from our April outlook to the $1.75 per share forecast. We'd like to take a moment to update you on how those 6 factors evolved during the quarter and are now treated within our new adjusted EPS outlook of at least $2. One, relative to marketplace morbidity and its corresponding impact on risk adjustment assumptions, we received the second tranche of Wakely data in September, improving our visibility with industry-level paid claims through July. We are pleased this data was consistent with our previous estimates, and we have, therefore, made no changes to our original full year assumption of a $2.4 billion pretax earnings impact within this new forecast. As a reminder, the next update from Wakely is expected in December. Two, also in the forecast was $200 million we added to account for additional Marketplace medical spend in the back half of the year. Marketplace delivered an in-line result for the quarter. But given the uptick in utilization we saw in September, we are holding the remaining $125 million of this provision in Q4 and are adding another $75 million given the volatility around eAPTCs. While we may not need this cover, as of now, we believe this to be a prudent posture given the landscape uncertainty that remains. Three, in July, we pointed to a 2025 Medicaid composite rate of roughly 5% based on the rates in hand at the time. With all scheduled rate adjustments now finalized, we expect the 2025 composite rate adjustment to be roughly 5.5%. Four, in July, we were targeting a second half Medicaid HBR of 93.5%. Our third quarter Medicaid HBR was 93.4%, which included $150 million in Florida Children's Medical Services program revenue, of which $90 million or 40 basis points was retro. As a result, we are now on a trajectory for a back half HBR of approximately 93.2%. Five, we continue to expect the Medicare segment to deliver $700 million of pretax favorability relative to our April full year forecast. Medicare Advantage and PDP results in the quarter were consistent with our outlook, so no change to this expectation. Six, we are also still on track to deliver $500 million in pretax benefit from SG&A. In fact, we performed slightly better than expected with administrative expense reduction in Q3. However, given the fluid nature of marketplace open enrollment and the potential for additional enrollment activities surrounding eAPTCs decisions, we are keeping the full year SG&A assumptions unchanged for the last quarter as of now. In addition to those items from our Q2 bridge, we want to highlight investment income and tax rate performance in the quarter and how they impact our expectations for the remainder of the year. As mentioned earlier, Q3 investment income was stronger than expected. Gains were largely driven by onetime items and therefore, not expected to recur. We believe there may be opportunity to take some investment losses in the fourth quarter to improve the trajectory of investment income in 2026, and we are providing flexibility in the guidance to do so if the opportunity arises. Tax favorability in the quarter was driven by a lower tax rate, which was purely a matter of timing. Our view of the full year tax rate remains unchanged. While we continue to track and pull levers to address Medicaid cost trend and are similarly watching marketplace utilization dynamics closely in this uncertain environment, we are pleased with the overall performance of the business in the quarter. With that, let's take a closer look at the performance and trajectory of each core business line, starting with Medicaid. We were pleased to deliver 150 basis points of sequential improvement in our Medicaid HBR this quarter. While this was aided by improved revenue from the Florida Children's Medical Services contract, it also reflects fundamental improvement that is a direct result of the actions we described on our Q2 call, including rate advocacy, program changes, clinical management, network optimization and more aggressive fraud, waste and abuse interventions, among others. Those efforts yielded tangible proof points in Q3. During our second quarter call, we identified 2 states, Florida and New York, where we were experiencing outsized Medicaid medical cost pressure. In Florida, you'll recall we saw significant trend pressure in the CMS population as members receiving ABA services were transitioned into that sole-source contract. We engaged in constructive dialogue with the state and shared real-time data throughout the summer. In September, the state moved to address the underfunding of that program going back to February 1. Additionally, the state provided a rate update for the coming year that better reflects the underlying medical demand within that population. In New York, we made real progress on the fraud, waste and abuse front, particularly in the behavioral health space. Fidelis team was able to terminate a provider group that engaged in suspicious billing practices and drove sizable excess medical costs at the expense of New York taxpayers. The state has simultaneously taken several serious actions against the same provider. It's a great example of the confidence our state partners in Albany have in Centene. Through these and other performance improvement efforts, the New York team is currently on track to deliver meaningful HBR improvement in the back half of the year compared to Q2 results. We continue to see trend in Medicaid with the same drivers we described in Q2, namely behavioral health with ABA a primary contributor, home and community-based services with home health the major driver and high-cost drugs, though high-cost drug trend did show slight moderation in the period. As you heard on the Q2 call, we have organized enterprise-wide to address these dynamics and saw solid momentum in the quarter on those initiatives. A few examples. We have been actively working with states on solutions to address high-cost drugs and have seen multiple states make movements over the last quarter to implement drug-specific carve-outs and revised formulary decisions, including 2 states who have reversed course on GLP-1. Additionally, our ABA task force successfully leveraged our multistate experience and unique breadth of data to drive important policy advancements with our state partners. One state established increased precision in ABA clinical service definition as well as more stringent supervisory and caregiver engagement requirements. This drove a 45% reduction to outlier payment rates, which results in tangible financial improvement for the state's program and aligns members to higher quality services. We are pleased to be making real progress on our Medicaid margin improvement agenda, but we are certainly not declaring victory. With behavioral health still driving 50% of above-baseline trend, we continue to aggressively pull levers internally to appropriately manage medical costs and advocate for rates that reflect the medical demand in the ecosystem, all part of returning Medicaid margins to a more normalized long-term levels. Despite the challenges we have navigated over the last few years, our commitment to serving low-income and underserved populations has never been stronger. We are pleased to be making progress against our financial goals and making good on our commitment to be responsible stewards of state taxpayer dollars, all while continuing to provide high-quality care and access to vital health care services for our members. Turning to Marketplace. From a membership standpoint, we ended the quarter with roughly 5.8 million members, slightly better than expectations. As you heard earlier, the business produced an in-line result inclusive of medical cost pressure in September. Given what we saw in September and the reality that we are supporting a population staring down eAPTC expiration and potentially the wholesale loss of affordable health care coverage next year, we felt it was prudent to provide for additional coverage in Q4 against a potentially more pronounced year-end utilization push. In the meantime, we have been laser-focused on positioning our marketplace book for 2026 margin expansion, and Q3 was the critical window for that effort. We were data-driven in the buildup of our revised rates, which ultimately averaged in the mid-30s, taking into account increased 2025 baseline morbidity, a prudent assumption for year-over-year trend and the combined risk pool impacts of expiring eAPTCs and program integrity measures. Consistent with what we shared in September, we were able to reprice our products for 2026 in states that cover 95% of our current membership and where we were not able to fully reflect the expected morbidity in the rates, we took additional actions to minimize margin impact for the remaining membership. Those rates have now been officially approved and absent any late-breaking policy changes will drive open enrollment as it launches this weekend. Congressional dialogue around eAPTCs has obviously gained traction in recent weeks, the outcome remains uncertain. While our products are priced to support year-over-year margin improvement in a scenario where eAPTCs expire, we believe these tax credits offer critical support for hard-working Americans, small business owners and rural health care infrastructure, and we are hopeful Congress can find a path forward. In the meantime, we are ready to open enrollment with strengthened digital tools and well-trained call center personnel to aid members during this time of uncertainty. Regardless of the outcome, we remain confident in the long-term importance and viability of the individual health insurance market as a critical coverage solution for millions of Americans. As we move beyond this moment of policy evolution, we continue to see a greater role for this platform to support a more affordable, portable individual insurance experience that we are excited to lean into and lead forward. Finally, Medicare. Both of our Medicare segment businesses performed well during the quarter, producing results consistent with our updated outlook provided this summer. Our reported Medicare segment HBR was 94.3%, reflecting typical cost of care patterns within Medicare Advantage as well as the inverted seasonality of pharmacy costs within PDP, owing largely to changes related to the IRA. Note that these dynamics are even more pronounced now that PDP is half of our Medicare segment revenue. Medicare Advantage medical cost trend remains elevated compared to historic levels, but was consistent with our expectations for the quarter. PDP performance was consistent with our previous view and is now largely contained by risk corridors, providing for increased visibility into the fourth quarter as the corridor serves to narrow the band of outcomes through downside protection for the product. AEP is live, and we are actively enrolling members in our 2026 Medicare products. Margin recovery once again took priority over membership as we constructed Medicare Advantage bids, but we are pleased with both the value proposition we are offering beneficiaries as well as our competitive positioning. We continue to invest in our member experience, providing enhanced digital tools and resources for members and prospective members. Dual eligible populations are a strategic focus for Centene, and we recently launched the first phase of our enhanced integrated duals model across 8 states as part of the broader transition of MMPs to integrated D-SNPs effective January 1, 2026. We look forward to the opportunity to serve these beneficiaries as their needs and our capabilities continue to align and evolve. Earlier this month, CMS released 2026 Star ratings that impact 2027 financial results, and we are pleased to have generated another year of progress. During this cycle, we elevated our performance despite continued cut point headwinds to 60% of members in plans at or above 3.5 stars versus 55% from the prior year with roughly 20% of members in 4-star plans. These results demonstrate a true One CenTeam effort with the initiatives being planned and executed at every level of the organization and provide us with increased confidence in our ability to achieve breakeven pretax margin in 2027. We are proud of the Medicare Advantage Star score advancements we have achieved over the last 3 years, but remain focused on the opportunity for continued improvement. In the near term, we are leaning into provider interoperability, multimodal member engagement and advanced VBC partnerships as levers for the future. Overall, we are pleased to have maintained strong Medicare segment results, including positioning PDP well to achieve results better than the 1% pretax margin guidance we began the year with and putting Medicare Advantage on an even stronger path to achieve breakeven in 2027. As we reflect on the quarter, we are pleased to have made material and necessary progress on Medicaid profitability and delivered solid results across the balance of the business. It is a testament to the resilience and discipline of this entire organization that we are able to raise the outlook today. And while a tremendous amount of work remains ahead of us, we intend to harness the positive momentum we have generated here in the third quarter to help power the balance of the year. Looking ahead, given that we will not be hosting an Investor Day in December, our plan is to provide detailed 2026 guidance on our Q4 earnings call in early February. In the meantime, we wanted to offer some initial comments on the major building blocks of our 2026 plan. In Marketplace, as we've shared, we were able to successfully take actions to account for baseline morbidity, trend, eAPTC expiry and program integrity impacts for 2026 across 95% or more of our membership. While the policy landscape remains uncertain, based on what we know today, we believe we have positioned the portfolio well for meaningful margin improvement in 2026. As a result of thoughtful bid construction and disciplined management, we believe our Medicare Advantage business is also well positioned for margin improvement in 2026. CP continues to outperform in 2025, but you can assume we would not guide to a similar level of outperformance as we step into 2026, making this a year-over-year headwind as we set initial guidance. In Medicaid, in light of our now better-than-expected full year trajectory, we believe a prudent posture for 2026 is profitability consistent with our current full year outlook in 2025. Additionally, you should assume that a lower tax rate environment makes net investment income a headwind and that our tax rate increases. Overall, we remain focused on driving margin improvement across the enterprise and delivering EPS growth in 2026. The current dynamic policy landscape has presented significant challenges in 2025, but also offers meaningful opportunity in the months and years to come. We have incredible runway ahead of us in the form of operational improvements, efficiency gains and margin expansion, all in service of our dual mandate to ensure quality health outcomes and serve as responsible stewards of taxpayer dollars. None of this would be possible without the tireless work of more than 60,000 Centeneers across the nation, serving and supporting our nearly 28 million members. Thank you once again for showing up day in and day out in service of our mission. With that, I'll turn it over to Drew. Andrew Asher: Thank you, Sarah. Today, we reported third quarter 2025 results, including $44.9 billion in premium and service revenue and adjusted diluted earnings per share of $0.50. The GAAP loss per share of $13.50 was the direct result of a $6.7 billion non-cash goodwill impairment charge recorded in the quarter. More on that in a minute. Within the $0.50 of adjusted EPS, we had a temporarily low adjusted effective tax rate in the quarter, which contributed about $0.10 compared to an expected full year 2025 adjusted tax rate of 20% to 21%. Let's go through the drivers for the quarter and then map that to the full year. Starting with Medicaid. We are pleased to report a Q3 HBR of 93.4%, better than we expected for the quarter and heading in the right direction. Of the 3 previously discussed high trending areas, Medicaid high-cost drug trends settled a little in the quarter, and we successfully advocated for much improved revenue in our Florida Children's Medical Services or CMS business, where we've seen very high ABA costs. As Sarah covered, we received a net $150 million positive revenue adjustment in Q3 for the Florida CMS program for the 21 February 1 to September 30, 2025 period, of which about $90 million was retro to Q1 and Q2 2025. Retro piece was worth about 40 basis points on the Q3 Medicaid HBR. We also made some progress in New York, but there is more work to do to further improve performance. Overall, given the Q3 result and momentum we are seeing from actions we have taken in 2025, we're a little ahead of our back half Medicaid HBR goal. On the rate front, the 9/1 to 10/1 cohort that represents about 28% of annualized premium averaged in the mid-5s, consistent with the full year 2025 composite rate. We are focused on 1/1 and 4/1 rates, representing about half of our 2026 annualized premium revenue, and that advocacy is in process. Medicaid membership is at $12.7 million, and we would expect slight attrition over the next few quarters. Stepping back, we are pleased with the sequential progress in Medicaid with opportunity for improvement ahead. In our Commercial segment, our HBR was on track for Q3 at 89.9% Sarah indicated, in September, we received and evaluated the second run of marketplace weekly data, which represents updated claims through July. Our review of this data is consistent with the $2.4 billion forecast change we described on the Q2 call. Recall also, our previous guidance had accounted for a pickup in marketplace trend in the back half of the year, especially given the level of public discourse around the eAPTCs. We did see a pickup in utilization in September, including ER. And as we assess risks and opportunities for Q4, we added another $75 million to our prior marketplace medical expense forecast. The more critical activity during Q3 was focused on 2026 rate filings and eAPTC education and advocacy. We sit here today based upon our rate filings in 29 states, we have priced for our estimates of: one, 2025 baseline correction; plus two, 2026 forecasted trend; plus three, the impact of program integrity rules implemented in 2025 and those announced for 2026; and four, the sunset of eAPTCs. Unlike 2025, which is expected to run at a slight loss, we expect these pricing actions to support margin expansion in our Marketplace business in 2026. Our Medicare segment was also on track in the quarter. Medicare Advantage continues to show progress toward our 2027 goal of breakeven, and we were pleased with the progress with the October Stars announcement, as Sarah covered. Within PDP, while trends are still high in the non-low-income PDP population, they weren't as high as we had planned for in Q3. That's good for cash flow and forward forecasting, but is largely offset against the risk corridor receivable for current earnings purposes. As we discussed at a webcast conference during Q3, we are pleased with our 2026 PDP product positioning relative to the relevant benchmarks and direct subsidy estimates. More to come on the Medicare segment after AEP. Our adjusted SG&A expense ratio continues to be strong at 7.0% in the third quarter compared to 8.3% last year and 7.3% year-to-date compared to 8.3% year-to-date last year. This is largely due to growth in 2025 PDP revenue and continued leveraging of expenses over higher revenues, coupled with good discipline. Given the amount of activity expected in Q4 with open enrollments and member communications, we are assuming for now that we will spend any remaining Q3 SG&A outperformance in Q4. You will notice investment and other income is up $79 million in Q3 compared to Q2. We had a few gains in the quarter, plus temporarily higher cash balances than expected. As we think about Q4, we may harvest some unrealized losses like we did a couple of years ago in Q4. as we think about reinvesting in higher-yielding instruments for 2026 and beyond. So for now, we are assuming that Q3 investment and other income outperformance will be earmarked for that purpose. Overall, the fundamental business performance was good in Q3 relative to our July forecast. Our GAAP results, you can see a reduction or write-down of about 38% of our goodwill during Q3. As we covered on the Q2 call, the drop in market cap required us to accelerate our annual goodwill evaluation into Q3. After going through an accounting promulgated and detailed review of our goodwill, we took a onetime non-cash charge of $6.7 billion in our GAAP results. This has no impact on statutory capital, cash or adjusted EPS results. Our sole credit facility financial covenant is a debt-to-cap limit at 60%, and we sit at 45.5% on 9/30/25 after this write-down. The topic of the balance sheet, we had 0 drawn on our $4 billion revolver that has a duration until 2030. We also had a strong cash quarter with cash flow provided by operations of $1.4 billion in Q3, primarily driven by net earnings and the net timing of pass-through and other payments. Unregulated cash on hand at quarter end was $357 million. As you can see in the 10-Q, we expect to receive net $200 million in dividends from subsidiaries in Q4. Medical claims liability totaled $21.5 billion and represents 48 days in claims payable, an increase of 1 day as compared to the second quarter of 2025. We look at the full year 2025, we are increasing our 2025 adjusted EPS forecast from the previous $1.75 to at least $2, driven by early execution on the improved Florida CMS revenue. 2026. We look forward to providing 2026 guidance on our next quarterly call in early February once we have closed out 2025. But as you heard from Sarah, we look forward to growing adjusted EPS in 2026. Thank you for your interest in Centene, and we can -- Rocco, we can open it up for questions. Operator: [Operator Instructions] And today's first question comes from Josh Raskin with Nephron Research. Joshua Raskin: I guess my question really would be, how do you get comfortable that you are getting ahead of trend in the exchanges? And do competitor exits make the pool less stable for 2026? And is there a point where this adverse selection spiral causes you to rethink certain markets or maybe even the segment entirely? Sarah London: Josh, thanks for the question. Let me hit utilization and trend in marketplace both as we think about the back half of 2025 and then how we've thought about it for 2026. So as we said, we saw a slight uptick in utilization in September, primarily outpatient ED. It correlated from a time standpoint with the direct uptick in dialogue nationally around both rate increases for 2026 and the eAPTC discussion at the congressional level. So not a perfect correlation or causation, I guess, but sort of correlation there. And as we thought about Q4 and thought about sort of that $200 million provision, pushing the remainder of the $125 million into Q4 and then adding another $75 million was really based on taking what we saw in September, extrapolating that out and assuming that given just the volatility in the landscape and the fact that some folks are going to be concerned about their ability to access health care next year, we may see more of an uptick than we normally do in terms of that Q4 utilization. So we feel like we've put prudent coverage in Q4 as we run out the year. Relative to 2026, we obviously did a lot of work and just want to call out again the marketplace team jumping on top of the weekly data in July really through that and understanding the drivers of what we were seeing and the fact that there were indicators in that data of what the extrapolated morbidity shifts would be above and beyond what we're seeing in '25 or '26. So what we built into the revised rates that we talked about filing across 95% of membership were 4 major components. One was that adjusted 2025 baseline morbidity. And obviously, the fact that the September weekly data came in consistent with our extrapolation of the July data is a strong reinforcing data point. So that's one. Two is a healthy provision for trend as we step in -- year-over-year trend as we step into 2026. Three is the assumption of the expiration of eAPTCs because that is current law of the land and what that will do to risk pool shifts. And then the last is a sort of composite view of the additional risk pool shifts that would be driven by both the continuation of the 2025 program integrity measures and sort of enrollment hurdles that were put in place as well as those hurdles that are -- were in the final rule and also in OB-3. And so all of that was loaded as part of that revised rate. And that gives us confidence that an average step-up, as I mentioned, in the 30s, really with a focus on margin over membership sets us up well for meaningful margin recovery in '26. Now there are multiple pieces that are still moving, right? Obviously, we don't know where eAPTCs will land. The payment program integrity measures that were in the final rule have been stayed in the courts. And our view is it's unlikely that those move ahead of Saturday and possibly not even through at least the original planned open enrollment period. And so we need to see where those land, but the bottom line is that our pricing took into account sort of all of those actually being in place during the open enrollment period. Lastly, just relative to your comment on overall stability, we do feel like there is still a competitive market. We feel like peers were thoughtful about '26 in terms of understanding the risk pool shifts. And we do think that sort of the fundamental construction of the market with those advanced premium tax credits prevents any kind of sort of death spiral, but we've been cautious as we constructed our view of 2026. Operator: And our next question comes from A.J. Rice at UBS. Albert Rice: Maybe just a follow-up on that and then maybe ask you something on Medicaid as well. On -- so presumably, the open enrollment people -- the open enrollment that enrollees are going to see will reflect the loss of these tax credits, and there may well be a move by Congress to extend them in some form or fashion. Do you have the ability to quickly reengage people to get them to sign up? I assume the people that are sicker and dealing with the health system through their providers will get prompted to resign, but I'm thinking about those that are younger, healthier and have less frequent contacts, many of those still using the exchanges. How easy is it to notify them that now it may make sense to re-sign up? And what efforts do you have in place for that? And then just quickly on your comment about stable margins or stable contribution in Medicaid next year. There's a lot of discussion about some states trying to adopt work rules early and also putting in place program integrity measures on that side of the business. How are you thinking about that when you think about your outlook for Medicaid next year? And is that a meaningful swing factor? Sarah London: Yes. Thanks, A.J. Great questions, easy question. So let me hit marketplace first. And you're right. So what we are navigating through is the idea that traditional open enrollment launches on Saturday. The eAPTC discussion is, we assume live as we speak with the possibility that there may be action before the end of the year. And so I think what you're really asking about is sort of breakage. So even if we got eAPTC extension, are we able to go and recapture folks who maybe got an initial letter, made a decision about the affordability of their insurance based on that data point and don't actually reengage or return of their own volition to understand how that landscape may change. So that is something that we are paying a lot of attention to. And in fact, if you think about our commentary about rolling forward some of the SG&A favorability that we saw in Q3 because of this idea that we may be going through sort of a multilayered enrollment process. We may find ourselves with a special enrollment period or an extension. We may want to be putting forward additional marketing efforts, obviously, mobilizing our broker relationships to go and find those members if and as the landscape changes midstream. Our view is that there will still be some degree of breakage. And so even if the eAPTCs are extended in the middle of the cycle and you go forward, for example, with an additional 60-day special enrollment period, our view of market contraction for 2026 is in the high teens to mid-30s range. So again, that's based on sort of all of the different factors that could be at play. But it tells you that even that bottom end where, for example, the program integrity rules remain stayed and eAPTCs are extended that there is going to be some degree of market contraction. And again, some of that is the roll-through of '25 program integrity enrollment hurdles, but also a view that there will be some abrasion and breakage on members who get that initial letter and don't come back. But we are certainly prepared to do everything we can to go find those members and help them understand in the event of an extension that they do have access to affordable insurance and certainly have done all of the work kind of both mathematically and administratively to be prepared, frankly, for any of these scenarios. so that we can help be a good partner both to the administration as they navigate through this, but also supportive of our member base. So that's Marketplace. Medicaid, so a couple of things embedded there. Relative to work requirements, we saw some movement over the summer for states that were putting in waivers and thinking about potential early start, call it, 7/1/26 implementation of work requirements. As of now, those states that were sort of early in that have all moved back to a 1/1/27 start date. So we don't have any firm data points of states that have our intent or have explicitly pinned 7/1/26 start date. There's also quite a bit of important guidance that is still to come from CMS that is not scheduled to come down in rule-making until the summer. And those are really important provisions relative to state flexibility, how to define able bodied what additional population states may be able to carve out what the data capture and reporting requirements are going to be, what the frequency is of all of this. So states can certainly and it should be, and we are working very closely with them to plan ahead, but there's a lot about what this is actually going to look like that is not even scheduled to become clear until the summer, which means that 2027 and for some states beyond that is going to be the more rational sort of implementation time frame of that. And then what, therefore, is the impact as we think about '26, we don't see a huge impact in '26 relative to work requirements as we think about the the overall sort of margin profile and our ability to retain, as we said, sort of initial view of '26 sort of consistent profitability. And then the program integrity measures, similarly, we are expecting some degree of membership attrition next year just as we're seeing states get better at the reverification process, but we don't see that as a huge swing factor. Operator: And our next question today comes from Justin Lake at Wolfe Research. Justin Lake: First, just a quick follow-up on the exchanges. I appreciate you sharing your thoughts on the market contraction potential. I wanted to hear your view on competitive positioning for '26 versus '25. And would you expect your growth overall to be in line with that market [ SAR ] or better or worse and by how much? And then maybe, Drew, any color you could share with us in terms of how much of that $700 million of Part D upside we should think about unwinding next year? Sarah London: Yes. Thanks, Justin. So a little bit about market competitive position. So again, sort of a slightly refined view of overall market contraction in that sort of high teens to mid-30s. Obviously, it depends on sort of which scenario lands, and we need to see how open enrollment, which may be extra complex plays out. But it's possible that we end up slightly on the higher end of that range. However, relative to our competitive positioning and sort of the landscape, relativity, we had 55% of our portfolio in the low-cost silver positions in '25 and 42% in '26. So not a huge change, but a change that I think reflects the fact that we were very focused on margin recovery over membership as we stepped into those 2026 pricing decisions. And then I'll kick it over to Drew on PDP. Andrew Asher: Yes. PDP, good question, Justin. So as Sarah said in her remarks, PDP is now about half of our $37 billion of full year '25 Medicare segment revenue. So you can keep that in mind on the impact on the full segment. And then underneath that, PDP, think about it this way. We're running -- we expect to run in the 3s in terms of pretax margin in 2025. And while we're still constructing all the elements of the plan, and we need to see how open enrollment plays out, we would probably come out of the gate something less than that as we think about initial guidance that we will give in February for 2026. Operator: And our next question today comes from Andrew Mok at Barclays. Andrew Mok: Last quarter, you expressed confidence in margin improvement across all business lines, including Medicaid. Now it sounds like you're not expecting much improvement in Medicaid profitability. First, was that comment framed through the lens of earnings dollars or margins? Because I think there might be some pressure on the revenue line from disenrollment and contract losses. And second, was there a change in underlying performance across the broader portfolio when excluding some of the idiosyncratic events in Florida? Sarah London: Yes. So let me sort of step through Medicaid, and I'll take your last question or last piece of the question first and just reinforce that, first, obviously, very pleased to be delivering sequential HBR improvement quarter-over-quarter. And the fact that what we delivered is reflective of the improvement that we were expecting in the July guidance. It was further aided by the $150 million in Florida, which actually, I think, is a great proof point of the fact that rate advocacy is an important lever. And that while in Medicaid, we don't set the rates, we can influence the rates and those rates are ultimately data-driven. So what influences our view of '26 now versus July, the biggest shift is really that we're on a better-than-expected trajectory than we were in July. But a couple of factors as you think about how we're looking at progression and important to note that regardless, we are not taking our foot off the gas on HBR improvement overall as an organizational focus. But we were jumping off a very high starting point in Q2 and a first half HBR of 94.2%. So we're going -- we're expecting to have a lower HBR in Q4 even than Q3, which was lower than Q2. We have the benefit of solid rates at 5.5% composite, which is sitting in that sort of back half cohort annualizing into 2026. We'll also have -- be lapping the acceleration of trend. And so does trend step up at the same accelerated rate? Our belief is that it is more likely to moderate to some degree, but that is also something that we are very focused on controlling where we can. And so a big proof point for us in Q3 was the fact that we were able to put points on the board against every one of those major levers that we talked about. So rate advocacy, not just in Florida, but the fact that the 10/1 rates materialized better than expected, clinical policy design in states. And I talked about a couple of those examples where we are influencing states to change their approach to high-cost drugs. And in fact, some of those changes that I described are effective 1/1/26. So we have hard data points about how states are making changes. We've got another great example of states that are adding CCBHCs to their program and the fact that we have experienced where that can drive unintended high costs in states from other parts of our portfolio have been able to inform states about what could happen if you don't put those in place with the right guardrails. And so they're stepping into those program changes in the right way in the first instance. Network optimization, I talked about some examples of that, not just from a fraud waste and abuse perspective, but we have a great program called Partnerships in Care when we go out to outlier providers and provide them with data and really talk about -- sometimes it's just a question of education about a better path of care for members. And then, of course, stamping out fraud waste and abuse. So really strong proof points of that work in the quarter and the fact that we've been at this now for almost a year. So good visibility into additional opportunities and additional tactical efforts that are out there and ahead and will manifest in '26. We also have almost 40% of the membership that re-rates in the 1/1 cohort. So our view, as we stand here today, sitting on a better-than-expected trajectory with important dates in 2025 still to play out, which will tell us a lot about Q4 trends, will tell us about sort of the right jump-off point for next year. We only have about visibility into 50% of 1/1 rates, and those are only draft. So if asked what jump-off point for '26, we believe it's prudent to say consistent profitability and margin as we go from '25 to '26. I will tell you that I will be disappointed if that's all we can deliver. But we think that, that is a prudent assumption at this time, given where we stand and what we know and also what we don't yet know. But we absolutely look forward to giving much more detailed perspective and formal guidance on the Q4 call. Operator: And our next question today comes from Ann Hynes with Mizuho. Ann Hynes: Just in your main businesses, Medicaid, Medicare health exchanges, can you tell us what -- you had that initial 2026 outlook, what you're assuming the trend is in each segment? And then with Medicaid, can you tell us what your initial thoughts are for the composite rate increase? Andrew Asher: Yes. So thanks, Ann. Let's start with Medicare. Medicare trend has been running high single digit to even maybe 10 plus for the last couple of years. And so we're assuming that, that continues. If you compose it with respect to our bids and what's baked into that progression towards breakeven, that would be low double digits. And at some point, that's going to start being reflected in the fee-for-service rates that we all get as an industry. So we look forward to getting an advanced notice in February and seeing what that looks like. In Marketplace, you have to think of the 4 buckets that I laid out in my remarks because they foot to like a mid-30s average rate increase. And certainly, fundamental trend is a component of that, but probably even more important than trend in Marketplace is the expected risk pool shift. And we learned -- and back to an earlier question, we learned a lot in 2025, which we talked about in the Q2 call, like what happens to risk pools when program integrity measures are put in place. And it was fortuitous that we were able to see that and learn that before we undertook the repricing effort that was largely successful, as Sarah indicated. So you've got to add a bunch of things up to get to that mid-30s, but that would include 1 of the 4 pieces is the fundamental trend. And then in Medicaid, -- if you think about this year, our HBR is up probably 120 basis points from 2024, and we got mid-5s rates. And as Sarah said, 30% of that will roll into next year and 2026 in terms of the annualization of what we got in 7/1 and 9/1 and 10/1. And then we have a little bit of the visibility into the 1/1 cohort. And jumping off of a high baseline, including, as Sarah said, like a 94.9% in Q2, a 94.2% for the first half of the year. And then with the levers we've been able to pull a couple of things Sarah mentioned in her script, the 2, maybe even 3 states rolling back on GLP-1s for weight loss, high-cost drug pools being formed, carve-outs of high-cost drugs like Zolgensma, Elevidys, Lyfgenia. And so examples of where we're able to pull levers impacting the trajectory of even then home health with private duty nursing management and behavioral health with the -- what we're being able to do with the task force, we think we're taking sort of a bite out of forward trends. So we'll give more details on the components. But all of that goes into the formula where we can sit here today, once again, with the visibility we have and the visibility we don't have about 2026 and feel like stability in that HBR relative to 93.7%, if you do the math on 2025, expecting to be able to maintain that in 2026 is the starting point of our forecasting for 2026. Operator: And our next question comes from Kevin Fischbeck at Bank of America. Kevin Fischbeck: I was wondering if you could talk a little bit about Medicaid margins, obviously, flat next year. Are you guys expecting that 2026 is going to be basically more of a trough year and that you should be expecting to build on that in '27? It sounds like you're assuming work requirements more of an issue in '27. Is that enough of a risk pool shift to offset the catch-up of prior rates? Or is it clear from this point that probably '26 is where you think the low point will be? Sarah London: Yes. Thanks, Kevin. It's a fair question. And as we look out over the next couple of years, our goal continues to be to drive back to more normalized Medicaid margins. As Drew walked through and I referenced, I think we've got a lot of momentum as we think about stepping into 2026 and our view of flat profitability, again, is sort of a prudent posture. As I said, I will be disappointed if we don't do better than that because I think that the enterprise is really organized around pulling the levers that we are in control of and those that we can influence. 2027 and 2028, to your point, is where we will start to see, I think, the real introduction of impacts of [ OB3 ] and what that means for work requirements within the expansion population there is a lot, as I mentioned, a lot still there to play out, including how much of that programmatic change actually takes root and how it manifests state by state. And so the way that we're approaching that is really leveraging lessons learned from the redeterminations process, leaning into state conversations. We've got a formal team that has already been organized around this over the last 6 months and starting to plan, again, at the enterprise level, coordinating with each one of our boots on the ground health plan teams to understand how the states are thinking about this, where we can step in and leverage the data that we have as an MCO and the expertise to help make sure that every member who is eligible and who is contributing to their community and who is working has access coverage. So we feel like we are preparing very well for that. We also feel like we have the precedent now of states incorporating more recent data and also understanding that as there are seminal program shifts, they need to make different decisions in terms of how the risk pools are going to shift prospectively. And so bringing forward a very concrete view of the expansion population, the specific rate that they're getting, what we think the shift is going to be so the states think about the '27 rate setting process as early as 2026, back half of '26 that we're having those conversations as well. So we obviously can't guarantee that states are going to perfectly nail the rate relative to what that shift will be. And so we're thinking about how that will play through in '27 and '28, but doing everything we can to set up the organization to continue to drive consistent margin improvement over the next couple of years to get to a place where we're back at long-term margins in Medicaid. Operator: Our next question today comes from George Hill at Deutsche Bank. George Hill: I guess this is more for Drew. I guess, Drew, can you talk about any of the assumptions that underpin the margin stability for Medicaid in '26? In particular, does that include the Florida retro and what's changed in New York. And I'd be interested if you'd be able to talk about the contribution of benefit cuts or benefit design changes you called out the high-cost drug carve-outs as it relates to margin stability in '26. Andrew Asher: Yes, George, thanks for the question. So if you think about -- you asked about the retro, that's actually not retro to a prior year. It's just retro. The Florida retro was retro to Q1 and Q2. So when you look at the full year, once again, around 93.7%, you guys could do the math, some I will tell you, 93.7% is sort of what we're forecasting for 2025 and stability, the goal of stability in that. And I agree with Sarah, like that's our initial goal, but we'd be disappointed if we don't move that down a little. But 93.7%, some of the things I covered with Ann, including the levers that we're pulling, you mentioned high-cost drugs. And so yes, those would get -- in one case, in one large state, they're going to do a carve-out. In another state, there's a kick pool, kick payment pool for those payers that have those encounters. And there's other examples of well-run reinsurance pools that other states are considering because of the lumpiness of some of those high-cost drugs. So that's just -- that's one example of sort of the hand-to-hand combat we have to go through in terms of managing care and creating affordability for our state partners and our members. So I won't repeat everything I went over with Ann, but those were some of the levers we thought about when we contemplate being able to have stability as we go into 2026. Operator: Our next question for today comes from Erin Wright at Morgan Stanley. Erin Wilson Wright: So you're still very committed to the business. And I know last week, I think, Sarah, you were at an industry conference talking about ICHRA still being a compelling area. But how do you just think about some of the longer-term dynamics across the exchange business, the longer-term margin targets and growth profile of that business? I guess a lot is dependent on the regulatory changes, right? But just given your level of commitment, how confident are you in some of those targets? And then -- and just what would potentially make you change your commitment to that as well? Sarah London: Yes. Thanks, Erin. So we haven't changed our commitment, obviously, to this product and not -- we haven't really changed our view of what philosophically we should be able to price for long term. And as we said, the work that we did for 2026 was really designed with the intention to make a meaningful step forward in margin recovery in 2026. But I think to your point, sort of longer-term stability, you're absolutely right. First of all, a fair amount depends, although not ultimately, but some short term certainly depends on what plays out relative to policy changes. eAPTCs, I think, is probably the biggest swing factor just in terms of getting to a really, really stable base so that we can think about building on the platform. There are still millions and millions of Americans even if eAPTCs go away that rely on the individual marketplace for coverage that have the backstop of the eAPTCs. And so we believe that this product stabilizes, we still think there is growth or millions of Americans who are still uninsured. And actually, I think the way that this administration is thinking about, at least in conversations, the possibility of getting creative about different product design and different ways to drive affordability in this market is really encouraging. We obviously think that the individual market is a compelling chassis as we consider the future of insurance and a view that individuals are going to want more agency. They're going to want more affordability. And as I mentioned last week in the conference, it's really hard to take a small number of benefit options across for Centene's 60,000 employees and feel like you're really customizing to each individual's needs. I use the example of the fact that I'm a 45-year-old healthy woman, and I didn't go to the doctor until last Saturday. And so I am definitely paying more for health insurance at Centene than I need. And so we continue to be excited and lean into ICHRA. We're hopeful that this administration is also very interested in ICHRA because it is -- a lot of the legislation is a legacy of Trump's first term, and we have leaders in the administration who have spent careers thinking about how this could be a way to sort of reinvent individual coverage. So we are going through a policy transition on the base, and we feel very confident that we will get through that. We're thinking about ways to drive additional transparency and stability in the core business. And so how can we partner with CMS, how can we partner with the DOIs, how can we partner with our peer set and actually do a better job of sharing data as we step through each year so that the risk adjustment conversation itself is sort of incrementally derisked. But we're not backing off sort of the view that we can design benefits that drive value and price for that value on the exchange and that this is a platform for future individual growth that I think we are investing in and positioned well to help capture. Operator: Our next question today comes from Stephen Baxter at Wells Fargo. Stephen Baxter: I just wanted to ask about the kind of the rate mechanics in Florida. It's obviously good to hear that CMS, the population there, Florida saw reason on the rates. But just in terms of the cadence, it looks like in the third quarter, obviously, you got trued up on your performance there. So if we're thinking about the Florida rate update, does Florida actually improve sequentially in the fourth quarter now, which is normally what you would expect when you see those rate updates come in? Or should we think about the Q3 performance effectively showing that you've got the rate year-to-date rather than getting it in Q4? Hopefully, that makes sense. Andrew Asher: Yes. No, good question on the progression. And so the way I'd probably look at it is we put up a 93.4% in the quarter. And the $150 million, if you sort of take that out and you want to sort of judge the progression into Q4, that's 60 bps, the full $150 million, of which [ 40 ] of that related to prior periods. So you're jumping off a 94.0%. And then, yes, you can evaluate, call it, mid-5s in terms of the 9/1, 10/1 cohort and Florida was slightly above that in terms of the mix between CMS, MMA and the long-term care population. And so yes, we expect a sequential lift going from Q3 to Q4 given the cohort of 9/1 and 10/1 rates, and that will be a contributor to the improvement that we expect in Q4. And then obviously, we have trend as well as a pretty soft November in terms of the day count. If you look at November, it looks more like a February in terms of the number of business days and the holidays. So that all goes in the formula of how we can get -- how we expect to get to around 93% for Q4, which then when you add to all the other numbers you know would get us to the 93.7% for the full year that we would jump off of and seek to maintain for 2026. Operator: And our final question today comes from Lance Wilkes of Bernstein. Lance Wilkes: Great. Yes. Could you give some maybe additional color on the resetting environment at the states? And what I was interested in is what sort of variability are you seeing across states in rates? And then as you're looking at the budget outlook for fiscal '26, '27, how is that budget, the '25, '26 fiscal year and then the '26, '27 kind of conversations that you're seeing impacting the potential for future rate increases? And as a result of these things, are you seeing any smaller competitors that are looking to either exit contracts or not rebidding in any of the states you participate in? Sarah London: Yes. Thanks, Lance. So every state is a little bit different. So there's certainly variability in the actual absolute rates. But I would say that what we have seen consistent across the states and consistently now for more than 18 months is very constructive collaborative dialogue around rates. The integration of more recent data. We've obviously now got for the 1/1 rates, the benefit of a full 12 months with sort of the step-up in trend drivers that we're seeing and then 18 months with the acuity impacts from redeterminations. And again, I think this increased sort of cadence and reflex around leveraging more recent data, both at sort of a baseline period, but also being able to better anticipate what inflation may be prospectively into the future period. Obviously, Florida is a great example of that because they had to use '25 rates to make the '25 adjustment. But again, that has become sort of normal course, and it's how we think about what we expect to see in the 1/1 cohort and going forward. The budget outlook for the states, there are obviously concerns that with the changes in legislation, there will start to be budget impacts in '26 as states need to balance their budgets and go through those legislative sessions. one of the things that I would point to, and we've said this before, but I think this is really a moment where we will start potentially to see this play out because we're seeing it play out from a program design standpoint is this is a moment where we -- our partnership with the states can really drive value. And they're coming to us and saying, we've got a balanced budget. We've got tighter sort of guardrails, how can we think about continuing to deliver the core benefits that we want to and continuing to drive health outcomes, but make adjustments where we can to optimize the program. And Drew and I have both given a bunch of examples of that. But we think there are -- there's definitely runway on that front. But then also states thinking about carving in fee-for-service populations where if you have a state that has ABA and a fee-for-service disposition over the last 12 months, they are struggling right now. And so there's opportunity as they go through upcoming procurement cycles to think about aligning some of those fee-for-service populations into kind of the core procurement. We started to see some opportunity for net new program adds in the RFP pipeline in '26. And so yes, we do expect there will be budget pressures. But in our world, that's actually an opportunity to help them think about managing care and therefore, managing taxpayer dollars. And that's really kind of the business that we're in. Operator: Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for closing remarks. Sarah London: Thanks, Rocco. Thanks, everyone, for the questions and for your time and interest in Centene this morning. 2025 has definitely been a challenging year, but I firmly believe that the Centene is stronger for it. And I just want to take a moment to thank my teammates for being unwavering in your focus on and commitment to our mission. We look forward to continuing to provide updates on these key inputs and milestones and then obviously provide formal guidance for 2026 on our Q4 call. Thanks, everybody. Operator: Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.