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Vesa Sahivirta: Good morning, everyone, and welcome to Elisa's Third Quarter 2025 Analyst Meeting and Conference Call. I'm Vesa Sahivirta, Head of Investor Relations. And here together with me is a very familiar team, CEO, Topi Manner; and now for the last time, CFO, Jari Kinnunen, who will leave us in the end of the year. We have also our incoming CFO, Kristian Pullola here, but now he is in the audience still. Next week, by the way, we are in a roadshow together with Kristian and Jari. But now going through the agenda of the day and following the normal practice, we start the presentation followed by Q&A. And now I give word to Topi. Please go ahead. Topi Manner: Thank you, Vesa, and good day, everybody here in the room. And those of you who are joining remotely. Welcome to this earnings call also on my behalf. I understand that there are quite many quarterly reports today in the Nordics as well as throughout Europe. So let's jump right into business and try to be relatively condensed with the presentation so that there will be time for Q&A. In terms of the highlights of the quarter, the revenue of Elisa increased with 4.6%. That was very much driven by the international software services as well as mobile service revenue. The mobile service revenue landed at 3.3%, that was supported very much by the 5G upselling and also the introduction of security features to our mobile plans. And then pointing to other direction was especially the competition in the 4G category of mobile subscriptions. In international software services, our revenue increased with 53% roughly. The comparable organic growth was 3%, impacted by some project delays related to the tariff-related uncertainties in the global market. EBITDA was up with 3.7%, solid as such. What was very, very good to see is that the comparable cash flow grew with more than 12% from the Q2 level, which was already an all-time high level. This was on the back of the increasing EBITDA, strict CapEx discipline and also the net working capital management. In Finland, the post-paid churn increased to 22% or a bit more than 22%, indicating that the competition was quite intense during the quarter. Post-paid subscriptions decreased by 20,000 a bit more. Of that, close to 6,000 were related to machine-to-machine and IoT subscriptions. There is some quarterly fluctuation in this one. In Q2, we won quite a bit of post-paid subscriptions, especially in the corporate side of the business. And therefore, it is useful to take a little bit longer perspective on this. The fixed broadband subscription base increased by close to 5,000 and the fiber-related revenue starts gradually to pick up. So if we look at our revenue in total, it was indeed supported by the international software services and mobile service revenue. What was also good to see is that the fixed service revenue turned to growth during the quarter. That was impacted by some customer wins in the corporate networks in that side of the business. And then as mentioned, also the fiber-related revenue is starting to pick up and then being visible this quarter. EBITDA landed at EUR 214 million. Mobile service revenue, as mentioned, was 3.3% in terms of growth, supported by the introduction of the mentioned security features. And that particular change, that offering change has been well received by customers. We have now enrolled something like 600,000 customers to this offering, and that was supporting the MSR growth. The churn number was especially, as mentioned, impacted by the competition in the 4G category, especially in the low-speed tiers of the 4G category. And we saw some campaigning basically throughout the quarter in this one. So then looking into the various business areas that we are having. The Consumer business was impacted by the mentioned mobile competition. Revenue up 0.9%, EBITDA up 0.4%. Corporate business on its turn had a strong quarter, revenue increased with 5.6%, especially boosted by the price increases in the corporate side of the mobile business. The mentioned fixed service revenue contributed positively also interconnection and roaming. And EBITDA grew with 3.6% in the Corporate business. So a good quarter for that segment. In International Software Services, our EBITDA during the quarter improved with EUR 5 million. And if we look at the first 9 months of the year, profitability-wise, we are now effectively in breakeven for the first 9 months in that business in terms of EBITDA. And that is ahead of the fourth quarter that typically is the strongest quarter in software business in terms of revenue and in terms of EBITDA. Then this morning, we announced that we are introducing a transformation program to accelerate the implementation of our faster profitable growth strategy. So coming back to our strategy, the one that we communicated in our Capital Markets Day in March, simplicity and productivity is very much a fundamental of that strategy. Simplicity and productivity is enabling the growth in our 4 growth pillars, namely 5G & Fiber, Home Services, Corporate IT & Cyber and International Software Services. We have been working with simplicity and productivity with continuous improvement measures in the past. And now we are accelerating the implementation of that. With the aim to simplify our operations, improve agility and speed of decision-making in the company and with that, enable growth. And at the same time, we are taking swift action to improve the cost competitiveness of our business in the current market environment. With the transformation program, we are aiming for EUR 40 million of annual cost savings during the calendar year of '26. And with these measures, we ensure that we will achieve our midterm revenue and EBITDA targets, the ones that we set for ourselves in the CMD. So when we look at that what the transformation program includes, it will be about organizational streamlining, delayering the organization. It will be very much about process simplification, process optimization, also cross-functionally within the organization. It will be also about scrutinizing our outsourced services, most notably the use of IT consultants in the organization, renewing our software development model. And then we are resetting our procurement effectively and finding efficiencies in the procurement space of the company. In the organizational streamlining, in the changes related to the way of working, we will be utilizing more and more automation and AI, and that is an element that is embedded in the transformation program. But as stated, the bottom line is that this is in line with our communicated strategy, accelerating the implementation of the strategy. When we look at the mobile business in a bit more detail, the 5G upselling continues with the trend that we have seen in the past. I mentioned upgrades related to security features are supportive of the mobile service revenue. As stated, we have now enrolled something like 600,000 customers, and that enrollment rollout process will continue in phases in cohorts during the course of this year but especially going into '26. We have been also launching new types of security features, scam call blocking for foreign numbers being one of the examples, and that has been now well received by customers. And the initial take-up rate is encouraging. We also had a nice opening with private 5G standalone networks with slicing technology in one of the ports in Finland, where we are able to serve our customers with the kind of technology, standalone slicing technology that our local competitors do not have at this point of time. So a good reference case for similar opportunities in the future. When we look at the fiber business, as mentioned, we are starting to see strong revenue momentum in that part of the business. And our accelerated network construction is being continued as we speak, all within the 12% CapEx to sales envelope that we are having. Then just quickly looking into the digital services. In the Home Services space, we introduced a new Elisa original service called Icebreaker and the international distribution actually for that one has started well in a number of European countries. In terms of Home Services, in energy solutions for households, our home battery solution now has a coverage of 70% in Finland. We are very -- in very initial stages of the rollout, but we have clearly proven the product market fit, and therefore, an encouraging outlook for this solution for '26 and onwards. In Corporate IT & Cyber, we are clearly very competitive on the market in terms of our cyber offering. And one of the examples is that in cybersecurity, one of the biggest retailers in Nordics, Kesko chose us as their cybersecurity provider in Finland, Sweden, Denmark, Norway, the Baltic countries as well as Poland. So yet again, a good reference case for the future. In International Software Services, in that side of the business, we -- our aim has been to grow more than 10% organically. There, the tariff-related concerns have resulted in some delays of customer projects that have been impacting especially the license and service revenue part of the business. And therefore, when we look into the Q4, when we look into the likely realization of the project, we expect for full year an organic comparable growth between 5% and 10% in this part of the business. However, an important indicator in software business, of course, is the recurring revenue. And the recurring revenue during the quarter grew with 13%, double digits and the year-to-date number is 15%. The share of recurring revenue is increasing all the time in the total revenue of ISS. An interesting individual reference point is in our energy flexibility solution called Gridle, previously called Distributed Energy Storage. And there, we signed a first grid scale battery solution with energy company City of Vantaa for 10 megawatts. So an interesting reference point opportunity to scale for the future. And then finally, when we look at our outlook and guidance for this year, we will keep our guidance in terms of revenue and EBITDA intact. The bottom line being that with the transformation program, we will be accelerating the implementation of our strategy. And with that, I will be handing over to Jari. Jari Kinnunen: Thank you, Topi. Let's first look at the profit and loss. Q3 continued with good trends, growth trends, solid growth in revenue as well as in EBITDA. Revenue, EUR 25 million increase, 4.6% growth in Q3. If you look at behind the revenue growth levers, overall good development in service revenues, 5.8% growth in service revenues. Mobile services increasing with EUR 9 million, both Consumer and Corporate Customer segment growing 5G customer base increasing and changes in the service offering, security features and price changes in that change all contributing to that 3.3% mobile service revenue in Q3. Fixed services growing EUR 3 million, fixed broadband, especially fiber broadband connections growing also in Corporate segment, corporate networks and related security services contributing to growth. Negative impact in traditional fixed voice services. Domestic digital increase was EUR 2 million. IT services in Corporate segment contributing slight decline in Consumer segment, digital services. International software services increased with EUR 12 million. Acquisitions and sedApta, first consolidation impacting approximately EUR 11 million to acquisitions impact and comparable growth at 3%. Equipment sales flat like was the interconnection and roaming and other. All in all, organic growth totally was at 3%. EBITDA 3.7% growth to EUR 213.5 million. EBITDA margin was strong 38.1%, EBIT 1.9% growth to EUR 138.6 million. EBIT margin was 24.7%. EPS was growing 2.3% to EUR 0.64. In Estonia, improvement both in revenue growth as well as in profitability and revenue was growing 2%. Mobile and fixed services developing positively and negative impact in equipment sales. EBITDA increase was strong 9%, driven by service revenue growth as well as cost efficiency measures. In mobile, post-paid subscriptions, slight decline 1,200, pre-paid base minus 200. Churn came slightly up from Q2, still relatively low at 9.4%. Then CapEx, reported CapEx was EUR 81 million, excluding licenses, lease agreements and acquisitions, the guided CapEx at EUR 65 million and in line both Q3 and year-to-date guided CapEx in line with 12% from sales. Main investments continuing in 5G network as well as fiber network and IT investments. In Q3, cash flow continued good development like has been in the previous quarters. Comparable cash flow was growing 12% as a result of higher EBITDA, lower CapEx as well as lower paid interest. Net working capital change was positive, however, slightly less positive than a year ago. Year-to-date cash flow -- comparable cash flow growth is at 10% through higher EBITDA, positive net working capital change and lower investments and negative impact through financial expenses. Cash flow conversion was improving and EBITDA cash flow conversion at 70% in Q3. Then if you look at the balance sheet and capital structure in line with the medium-term targets, net debt to EBITDA decreased from Q2 to 1.7x. Equity ratio increased from Q2 to 35.7%, and return ratios continue to improve. Return on equity was at 30.7%. Return on investments improved to 18.6%. And in terms of financing, average interest for interest-bearing debt continues same level as was in the previous quarter at 2.5%. And now I give word to Vesa, please. Vesa Sahivirta: Thank you, Jari. Now we move on to Q&A part. And first, we ask if there is any questions from the audience? No, we don't have. So we go to the conference call lines and ask first question from the lines, please. Operator: [Operator Instructions] The next question comes from Andrew Lee from Goldman Sachs. Andrew Lee: I had 2 questions. The first one was just on your adjustments in guidance on the cost-cutting side of things. So 2 incremental things you said today is one that you're raising your cost-cutting expectations to offset mobile service revenue growth weakness and also macro uncertainty weakness. But at the same time, I think what you're saying is that you're seeing a macro improvement in your fixed business. So with your cost savings to offset macro weakness, are you being conservative in your outlook on macro weakness, i.e., assuming it goes -- gets worse again or doesn't continue to improve? Or is there something else going on there? Just a little bit of help in terms of what's changing versus where you're adopting a conservative approach would be helpful. And then second question is just on your mobile service revenue growth, which is, I guess, the big negative surprise today. Could you just give us a bit of a sense of the mobile service revenue growth trend in Q4, just so we can get a sense as to how badly things have deteriorated in terms of the competitive environment versus what you were saying by sticking to the guidance at Q2? Topi Manner: Thank you, Andrew. If I start on the first one, yes, the transformation program that we introduced aims to have EUR 40 million of annual savings during the calendar year of '26. And when we come back to the macro and especially the impact of macro to fixed service revenue. During the quarter in the Corporate business, we had a handful of very good customer wins that contributed to the fixed service revenue growth. And also the fiber pickup starts to be visible there. I think that these are more micro examples in a sense that they are telling about our competitiveness in terms of fixed service revenue. If I look at the sort of near term for the next couple of quarters in fixed service revenue, I think that we will be seeing some quarterly fluctuations still. And I wouldn't yet say that there has been a macro trend change in this one. But when we look further to late '26 and 2027, we do see that in the fixed service business, there is a possibility for additional growth, revenue and profitability growth in terms of data center connectivity, data center fiber connectivity. So I just want to check whether that addresses at least part of your question? Or did you have something else on mind on that? Andrew Lee: Yes. No. Thanks, Topi. That was great. Can I just -- just as a follow-up, can I just check that EUR 40 million, is that a net benefit that we can just add on to the EBITDA line? Or is that a gross benefit? Topi Manner: Yes. Related to the cost? Andrew Lee: Exactly, yes. Topi Manner: So the bottom line with the transformation program and with the annual cost savings is that with this transformation program, given all the changes in our business, we aim to achieve our midterm targets, the ones that we communicated in CMD last March. Andrew Lee: Okay. I thought you said that you're accelerating it earlier on in the call. Maybe I misunderstood that comment on the... Topi Manner: Yes. We aim to achieve the midterm targets, like I stated, we are accelerating the implementation of the strategy, accelerating the implementation of the enablers for [ growth ]. And then the second part of your question, I guess, was related to the mobile service revenue and the competitive landscape that we are seeing on the market. So on that one, the outlook that we have for mobile service revenue development as of now is that during this calendar year, it will be low to mid-single-digit MSR growth. And as stated, what we have seen now lately is intense competition, more intense competition in the -- especially in the 4G category of things. At the same time, when we look at the total market, the 5G upselling continues. Our bundled offering related to security features has been well received on the market, and we will continue that rollout, and that will be supportive of mobile service revenue. So you need to look at both high end and the low end of the market in order to understand the full dynamic. Andrew Lee: And how should that play out in Q4? Should we see any kind of material difference to the growth trend you saw in Q3 and Q4? Topi Manner: When -- I mean when we look at now the competitive situation, Q4 is a bit more challenging before the cost savings kick in at the start of the year from Q1 onwards. Operator: The next question comes from Owen McGiveron from Bank of America. Owen McGiveron: It's Owen McGiveron from Bank of America here. On the elevated post-paid churn in Finland, could you just give us a few more details on the moving parts there? How much is hard bundling contributed to the churn? And is it all or the majority from this more competition in the 4G offerings? Topi Manner: Yes. I think that what we are seeing is that the market is more diverse than it has been in the past. So if we look at the high end of the market, 5G category of business and especially if we look at those cohorts of customers to whom we have been rolling out the new offering with the security features. I think that, that has proceeded well. As stated, we have now rolled out 600,000 customers approximately to the new offering. And when we look at the churn of those customers isolated, that has met our expectations or actually has been a little bit below our expectations. So that means that we do see that customers understand the value and there's a possibility for us to continue expanding that offering. At the same time, at the other end of the market, where consumers are more price sensitive and more prone to be attracted by 4G offerings, then there we see price competition and campaigning. And that has been one of the drivers or the main driver behind the increased churn number from Q2. Owen McGiveron: Okay. That makes sense. And just a very quick one on the high bundling cohort rollout. In seasonally more competitive Q4, should we expect a slowdown in the rollout of your security offerings to customers? Or do you think you can continue at a steady pace? Topi Manner: I mean if we look at the rollout schedule for the remainder of the year, the original plan was already that Q4 will be calmer in terms of that rollout. So the rollout pace will pick up in '26. Operator: The next question comes from Andreas Joelsson from DNB Carnegie. Andreas Joelsson: Just 2 questions from my side as well. First of all, the delayed projects in the International Software business, how should we view that? Is it more cancellations of orders? Or do we expect that to come back in the near term? And secondly, the cost reduction program usually come with a cost. So what kind of restructuring costs should we expect from that and when? Topi Manner: Absolutely. So if I take the first one and Jari, you take the second one. So on the first one, in the International Software Services, this is really a delay. So no cancellation of projects. It is a timing issue as such. I mean, typically, in a customer project, when a project starts, there's a license element in terms of revenue, then there is a certain service revenue element related to installing the software, configuring the software. And then there's a significant recurring revenue element on this one. And we are proceeding according to plans in terms of the recurring revenue part in ISS, but the delay of some projects is impacting the license and especially the service revenue part of these projects. Jari Kinnunen: And the program -- cost reduction program and restructuring charge question. So we -- at the moment, we estimate that there will be a restructuring charge, approximately EUR 20 million, and that will be booked in Q4. Operator: The next question comes from Paul Sidney from Berenberg. Paul Sidney: I have 2 questions as well, please. Firstly, on Finnish mobile, if we sort of take a step back and look what you said 3 months ago, you said that Q2 all price increases have landed well, customers have valued the offering of the new services. What's really happened in the past 2, 3 months to change the competitive dynamics so quickly? Just to get a better understanding for that, please? And then secondly, given the competition is mainly at the bottom end, you mentioned 4G. Is there any measures you can take to accelerate the migration to 5G? And also, are you confident that this elevated competition level won't spill over into the 5G market as well? Topi Manner: Yes. So I mean, if we look at what we said about the introduction of the bundled offering with the security features, not that much has changed between Q2 and Q3 on that category of the offering. We have been moving forward with our original rollout schedule and customers understand the value. We see that the take-up rate of those individual security features is increasing among our clientele. And as stated, that whole initiative is supportive of our mobile service revenue growth at this point of time. What we are seeing is in the market is that especially in the lower end of the market, speaking of predominantly 4G, 4G subscriptions. The competition has been tighter as the churn figure indicates during Q3, there has been campaigning ongoing. When we sort of slice and dice that a bit, one new mobile virtual network operator started during the quarter, Giga mobile in September. That individual player has not impacted the market that much. So the competition in the 4G category is very much between the traditional 3 big players on the market. For us, our stance in this one is very, very clear. We will keep our market #1 position. We will keep our market share in mobile subscriptions. And with the transformation program, we are improving our cost competitiveness on the market. Paul Sidney: That's great. Can I have a quick follow-up, Topi? Would you consider cutting price at any stage looking forward if the competition levels remain? Topi Manner: Sorry, Paul. Now I missed some of it. So could you please repeat? Paul Sidney: Apologies. It was just a follow-up. Would you potentially consider cutting price looking forward? Or is that not an option? You want to continue to compete on quality? Topi Manner: Yes. We will be a responsible market leader. So we are not fueling the price competition on the market. So we will be a responsible market leader. At the same time, we will keep our market share. I repeat, we will keep our market share. So we will be responding to the price competition if needs be. Operator: The next question comes from Ajay Soni from JPMorgan. Ajay Soni: The first one is just around that this 4G low-speed area where you're seeing more competition. I was wondering if you could give us an indication of what portion of your customer base is within that. Obviously, you highlight within the slides, it's around 37%. I think that's for the market, which is below 200 megabits. But what about for you guys specifically within your customer base? And the second question was just a quick clarification. The workforce reductions of -- or the EUR 40 million savings that you expect in '26, do you expect that full run rate to come from Q1 '26? Topi Manner: Good. So if -- Jari, you take the last one. So I mean, when we look at the various segments of the market, and now, of course, I'm simplifying quite a bit. But our -- we are not disclosing the number of 5G penetration. We are disclosing the number of high-speed penetration, more than 200-megabit penetration where we have all of our 5G customers and then we have some 4G customers. But if we look at the high end of the market and we include all of the 5G subscriptions to that one, we are closing in on 50% of the market in that one. And then the sort of most price-sensitive customer group is not half of the customer base, it's less than that. We are probably talking about roughly 30% plus/minus of the client deal. Jari Kinnunen: And regarding EUR 40 million cost savings, majority of that comes through personnel reductions. There are other parts, however, on that. And we estimate that from the beginning of the year in Q1, we have a majority of the savings already coming in. Topi Manner: And still coming back to the mobile competition and the overall dynamics of the market. I think that it is worthwhile to say that we have been seeing times of a bit more intense competition also in the past. If you look at the past 10 years, there have been quarters -- individual quarters when the churn has been on 22% level like now. So the competition comes and goes as such and is of volatile nature. And I think that if we take sort of a mid- to long-term perspective to our market, this is an effectively a 3-player market in terms of mobile services. And we don't think that the underlying rational nature of the market has changed. Operator: The next question comes from Abhilash Mohapatra from BNP Paribas. Abhilash Mohapatra: Sorry to come back to the transformation program, please. But it's just interesting that you've put a very explicit number around the cost saving of EUR 40 million linked to the headcount reduction. Just trying to understand, is that -- I mean, is it -- should we be reading something into that, that -- that's the sort of headwind that you're expecting in your business elsewhere due to a combination of all those things you talked about, like sort of mobile competition, macro pressures, and that's why you're looking to do this? Or was this always a part of the Capital Markets Day sort of strategy and you've just now taken this moment to announce this program. How should we be thinking about that, please? Topi Manner: If I start on this one, and Jari will continue. So it's more the latter of what you have stated. So if you come back to our strategy in Capital Markets Day, simplicity and productivity has always been part of our plans. We have factored that into our midterm targets in terms of EBITDA. We have been working with simplicity and productivity for long with continuous improvement measures. If you look at what we did during '24, there were some productivity measures visible during the calendar year of '24. Now since the Capital Markets Day, we have been working with issues like finding efficiencies from procurement. We have been looking into automation and AI possibilities, cross-functional synergies within our organization, possibilities to delayer in the organization. And now the time has come to accelerate the strategy implementation. And at the same time, there is an element of taking swift action to improve the cost competitiveness in the current market environment, but in this order. Jari Kinnunen: Yes, I can literally repeat the -- the accelerated growth strategy that we presented besides the concrete growth levers for revenue, important part of that strategy is and also as we presented in the Capital Markets Day, is the productivity cost efficiency development. So it's an elemental part of that strategy. And we will continue also beyond this program to build productivity. Operator: The next question comes from Artem Beletski from SEB. Artem Beletski: So I joined the call a bit later. So maybe those have been answered but still coming back to competition situation and the increased intensity during Q3. Could you maybe comment on churn profile, what you have seen during this quarter? So has there been a gradual pickup? Or did it really increase during September months? And maybe how do you see the development in early part of Q4? And the second question is relating to EUR 40 million program. So in the past, you have been doing this type of efficiency actions, but you haven't really been quantifying those ones. So could you maybe provide some color how this EUR 40 million program could be compared to what you have been doing over past years? And maybe just in terms of cost inflation. So could you maybe comment what you see on that front? Just trying to extract what could be the net figure in terms of these actions? Topi Manner: Okay. So if I quickly start on the churn profile. So looking into Q3, I think that we saw the 4G category competition to pick up in July and basically continue throughout the quarter. And then, of course, there was some campaigning also in September. So basically something that was across the quarter as such. Now looking into Q4, typically, we see campaigning in Q4 during the Black Friday weeks of November and then a calmer period before that. So if we look at sort of very tactically the sort of short-term sort of patterns in terms of churn, I think that, that is playing out as of now. And then remains to be seen that what happens in November related to Black Friday weeks. Jari Kinnunen: And to cost efficiency development plan and this program. Yes, it's true that we've been doing that also, of course, in the past, increasing productivity, cost efficiency. We did some reductions also last year in employee numbers. And in different times, these opportunities mature, and there are several levers below that automation, AI among the others. And like mentioned already, this is part of the -- a very central part of the strategy that we introduced earlier this year, and we will continue with the productivity development also going forward and beyond this. Topi Manner: And if you look at this transformation program, I guess that in the nature of things that we will be implementing, if we look at the things that we did during '24, we basically did continuous improvement within the verticals of the organization. In this transformation, there will be also horizontal end-to-end process optimizations and streamlining of those processes, also seeking synergies between business areas, business areas and the tech ops part of the organization. And with that, there's a bit more transformational element to what we are doing right now to give you a bit of flavor of the nature of things. Operator: The next question comes from Siyi He from Citi. Siyi He: I have 2, please. The first one is following up your comments on the cost cutting earlier. I think looking at the past, it's probably one of the rare times we see that you announce a major staff reduction. Just wondering if you could comment on the current negotiation progress with the unions. And if you could -- in what areas if mobile, ISS, we see most of the staff reduction from your program? And the second question is if you could talk about the market position in B2B. I think in mobile; you showed some decline in mobile ads in B2B. But I think last quarter, you mentioned that have won some contracts. Just wondering how should we square your comments from last quarter and this quarter's performance? Topi Manner: Okay. Thank you for that. So if I take the staff implications first and how they will be divided and distributed within the organization. I mean, the overall estimated number of job reductions within the company will be 450 of that, 400 will be associated with our businesses and functions in Finland, namely Consumer business, Corporate business, corporate functions and the tech ops part of the organization. And then that also means that in Finland, the union dialogue is important that has been initiated. We have a good tradition for collaboration in that space, and then we will be proceeding with that when we implement these changes during the weeks to come during the remainder of this year. And then coming back to your other question about the B2B and the customer wins. Yes, during Q2, we won significant new customers, especially for our IT business and sort of all-around customers in B2B in a sense that they would be having connectivity services like corporate networks, cybersecurity and IT services. And the sort of takeover of those services has partially commenced and will continue during Q4, but it is not in any material fashion impacting the Q3 numbers yet. Operator: The next question comes from Terence Tsui from Morgan Stanley. Terence Tsui: My question was just again on this cost-saving program. Just wondering why you haven't been a bit more ambitious. I think some of your Nordic peers have been a bit more aggressive in taking out their headcount. From my calculation, it's roughly about 7% of the headcount. So just wondering why didn't you see scope for maybe a bit more aggressive cost cutting, please? Topi Manner: I mean if you look back a bit and include the sort of continuous improvement measures that we did during the '24 -- calendar year of '24. During that year, we reduced some 300 people in terms of staff. And then when you calculate the impact of the transformation program now into it, then that total number is quite equivalent to what we have been seeing some of the other players doing. Then I think that there's a difference in terms of how we have been doing it. We have been doing it predominantly with continuous improvement measures and now also figures of the cross-functional sense of this -- or cross-functional nature of these initiatives, introducing this transformation program to accelerate the implementation of the strategy. So we have been implementing it in and designing it in a little bit different way. And then, of course, there has been this strong culture of continuous improvement in the company for a long time. And therefore, we have been cost efficient previously as well. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Vesa Sahivirta: Thank you for your questions and participating in this call. And now I give the closing remarks to Topi, please. Topi Manner: Thank you for all of you for participating this earnings call. And before we close, I would just like to acknowledge Jari and his great contributions to the company during the 25 years that you have been serving as the CFO. So I don't know whether it's 100 quarters or even more than that, but many, many quarters. So your contribution has been invaluable. So thank you for that and all the best for the future. Jari Kinnunen: Thank you, Topi, for kind words and small correction. Of course, CFO knows the numbers. So it's been 20 years as CFO. Topi Manner: Yes, 25 years in the company. Jari Kinnunen: 25 years in the company. Topi Manner: That's correct. Jari Kinnunen: It's been -- yes, great journey and of course, a great development over the years. And I'm very privileged and grateful that I've been part of that journey and worked with great colleagues in the finance team, in the management team all over the Elisa and of course, with you, Topi, and before that long years with Veli-Matti. And with this audience as well, there has been great cooperation and interactions over the years and big thank you for all for that. And I'm very please -- pleased that I can hand over this responsibility to Kristian going forward and the company is in a great position to continue value to customers and especially also to the shareholders going forward with the strategy in place, with the culture in place and great people in the company. So thank you very much. Topi Manner: Thank you for participation. Vesa Sahivirta: Thank you and until the next time. And next week, we are on the road with Jari and Kristian, so we'll meet you where we are. So until next week. Thank you. Topi Manner: Thank you.
Operator: Good morning, ladies and gentlemen. Welcome to the Wyndham Hotels & Resorts Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Now at this time, I would like to turn the call over to Mr. Matt Capuzzi, Senior Vice President of Investor Relations. Please go ahead, sir. Matt Capuzzi: Good morning, and thank you for joining us. With me today are Geoff Ballotti, our CEO; and Michele Allen, our CFO and Head of Strategy. Before we get started, I want to remind you that our remarks today will contain forward-looking statements. These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission and any subsequent reports filed with the SEC. We'll also be referring to a number of non-GAAP measures. Corresponding GAAP measures and a reconciliation of non-GAAP measures to GAAP metrics are provided in our earnings release and investor presentation, which are available on our Investor Relations website at investor.wyndhamhotels.com. We are providing certain measures discussing future impact on a non-GAAP basis only because without unreasonable efforts, we are unable to provide the comparable GAAP metric. In addition, last evening, we posted an investor presentation containing supplemental information on our Investor Relations website. We may continue to provide supplemental information on our website and on our social media channels in the future. Accordingly, we encourage investors to monitor our website and our social media channels in addition to our press releases, filings submitted with the SEC and any public conference calls or webcast. With that, I will turn the call over to Geoff. Geoffrey Ballotti: Good morning, everyone, and thanks for joining us today. Our Q3 results illustrate yet another quarter of resilience and execution by our teams around the world. Despite a challenging macro environment, we delivered a 21% increase in room openings, signed 24% more deals in the quarter and grew our global pipeline by 4% to 257,000 rooms and nearly 2,200 hotels. We drove an 18% increase in ancillary fee streams and year-to-date, our resilient, highly cash-generative business has produced over $260 million of adjusted free cash flow and returned $320 million to our shareholders. As we continue to focus our development on higher FeePAR brands and geographies and expand our direct franchising in regions that previously relied on master licensees. We're adding hotels with stronger long-term economics. As of September 30, our global pipeline carried a FeePAR premium of over 30% domestically and 25% internationally compared to our existing system. Here in the United States, we grew our mid-scale and above system by over 200 basis points, led by solid conversion activity and some great new construction additions, including another 4 ECHO Suites opening in strong markets like Reno, Nevada and Sterling, Virginia. Earlier this month, we also introduced Dazzler Select by Wyndham, a domestic extension of our Latin America Dazzler by Wyndham brand into the economy lifestyle space here in the United States. Targeting hoteliers seeking flexibility without sacrificing the power of scale, we're attracting owners of high-quality economy hotels who want to preserve their properties' individuality while tapping into Wyndham's global distribution, loyalty, technology and marketing platforms. Internationally, we grew net rooms by 9%. EMEA grew its net rooms by 8% with several new construction additions like the stunning new Wyndham Grand Udaipur in India, where we now have 88 direct franchise hotels open across that important country and another 50 in our development pipeline. Along with spectacular new conversions like the Dolce by Wyndham, Comwell, an iconic upscale edition with 5-star meeting facilities in the heart of historic Aalborg Denmark. Latin America and the Caribbean grew net rooms by 4% with 5-star additions like the new Wyndham Grand Costa del Soul located inside of Lima, Peru's new Jorge Chavéz International Airport, as well as several exceptional conversions like the Isla Verde, a trademark collection by Wyndham Hotel near some of the most beautiful beaches in the Caribbean. In China, we grew our direct franchising system 16% with many outstanding new construction additions like the Wyndham Grand in the port city of Yucheng on the Yangtze River, our 50th Wyndham Grand in China, along with the La Quinta Turpan in the hub of the world famous Silk Road, our 10th La Quinta in the Asia Pacific region. In Southeast Asia and the Pacific Rim, net rooms increased 13% with several exceptional additions like the Hotel Traveltine, our first trademark collection hotel in Downtown Singapore. And in July, we announced a strategic partnership with the Ovolo Group, bringing 4 Design Forward Ovolo hotels and resorts into our system later this quarter and strengthening Wyndham's upscale offerings in Sydney, Brisbane, Canberra and Melbourne. RevPAR declined 5% in constant currency, both globally and domestically, reflecting continued consumer caution in an uncertain economic environment, especially within the select service segments here in the United States, where our guests are more price sensitive. While we saw continued outperformance across parts of the Midwest in states like Oklahoma, Michigan, Illinois, in Missouri, Minnesota and in Ohio, which collectively grew RevPAR 4% versus prior year, continued softness in the Sunbelt states where Wyndham over-indexes from a room count standpoint more than offset that strength. Internationally, RevPAR declined 2%, driven primarily by Asia Pacific, which was down 8%, led by China down 10% and Latin America, which declined 5%. Elsewhere internationally, performance remained strong. Both Europe and the Middle East grew 4% with considerable strength in Spain, Turkey and Greece. And in Canada, which continued to impact U.S. leisure drive-to markets, RevPAR increased 8% as Canadian travel domestically remained strong. Beyond RevPAR, our focus on growing our ancillary fees again delivered impressive results. New strategic partnerships, new technology initiatives and growth in our co-branded credit card program, where new accounts increased 11% and average spend grew 7%, fueled an 18% growth in third quarter ancillary fees, raising our year-to-date growth to 14%. A key contributor to this growth is the continued strength of Wyndham Rewards, which achieved a record 53% share of occupancy contribution for our domestic hotels and an 8% increase in our global membership enrollments. And earlier this week, we introduced Wyndham Rewards Insider, a travel rewards annual subscription program and a first of its kind among our branded peer set in the hotel loyalty space. As the $500 billion subscription economy is projected to grow to over $2 trillion, Wyndham wants to be a part of that, and Wyndham Rewards Insider offers unmatched value to our 121 million Wyndham Rewards members for an annual subscription of $95 per year. Members subscribing to these upgraded lifestyle benefits will enjoy savings of up to 30% and earn opportunities across flights, hotels, car rentals, cruises and so much more. They'll be granted annual Wyndham Rewards Gold status, exclusive concierge services, Ticketmaster, earn and burn access, expansive bonus earning opportunities on hotel stays and many additional exciting benefits. Capturing the essence and generosity that defines Wyndham Rewards as the fastest way to earn a free night, Wyndham Insider will further enhance the program's appeal and reinforce the strength that has kept Wyndham Rewards ranked the #1 hotel loyalty program by the readers of USA Today for the eighth consecutive year. Last quarter, we talked about the success of Wyndham Connect and Wyndham Connect PLUS, a suite of supercharge technology innovations that we're promoting to our owners as Wyndham AI. This quarter, over 230 AI agents with encyclopedic knowledge on each of our 8,300 hotels began leveraging the power of Salesforce, Oracle and Canary Technologies to generate and modify direct bookings while also answering questions and providing tailored travel recommendations by utilizing large language model AI and first-in-industry Agentic AI voice assistance. These new Wyndham AI Agentic Assistants are delivering seamless and complete natural language conversations with full guest service support while also handling live messaging through WhatsApp and Apple messaging. Wyndham AI is driving more direct bookings, introducing front desk workloads that's accelerating significant ancillary revenues for thousands of our hotel owners through automatic upsell opportunities like early check-ins, late checkouts and in-room amenity upgrades. To date, Wyndham AI has already handled more than 0.5 million customer interactions, delivering faster service, higher booking conversion and a 25% reduction in average handle time, all contributing to nearly 300 basis points of improvement in direct contribution for hotels leveraging Wyndham AI to its fullest potential. And with only 7% of our 8,300 hotels now live with this new Agentic AI by Wyndham component and adoption ramping quickly, we're only beginning to unlock what Wyndham AI can deliver. Before Michele takes us through the financials, we as always want to extend our sincere appreciation to our team members and franchisees worldwide without whose passion and collaboration, our solid performance and execution would not be possible. Their conviction in the opportunities ahead of us, coupled with their commitment to our strategic initiatives to deliver exceptional value, continues to be the cornerstone of our success. And with that, I'll now turn the call over to Michele. Michele Allen: Thanks, Jeff, and good morning, everyone. I'll begin my remarks today with a detailed review of our third quarter results. I'll then review our cash flows and balance sheet, followed by an update to our outlook. Before we begin, let me remind everyone that the comparability of our financial results continues to be impacted by the timing of our marketing fund spend. In the third quarter of this year, marketing fund revenues exceeded expenses by $18 million compared to revenues exceeding expenses by $12 million in the third quarter of last year. To enhance transparency and provide a better understanding of the results of our ongoing operations, I will be highlighting our results on a comparable basis, which neutralizes the marketing fund impact. In the third quarter, we generated $382 million of fee-related and other revenues and $213 million of adjusted EBITDA. Fee-related and other revenues declined 3% year-over-year, primarily reflecting a 5% decrease in global RevPAR, as Jeff mentioned, as well as lower other franchise fees. These headwinds were partially offset by an 18% increase in ancillary revenues, a larger global system and royalty rate expansion, both domestically and internationally. Despite $12 million of lower fee-related and other revenue, adjusted EBITDA was flat year-over-year on a comparable basis as the revenue decline and elevated costs related to insurance, litigation defense and employee health-care programs, all of which are reflective of the broader operating environment were more than offset by operational efficiencies and onetime cost containment measures. Adjusted diluted EPS for the quarter was $1.46, up 1% on a comparable basis as the benefit of share repurchases was partially offset by higher interest expense. Adjusted free cash flow was $97 million in the third quarter and $265 million year-to-date with a conversion rate from adjusted EBITDA of 48%. Development advance spend totaled $22 million in the third quarter, bringing our year-to-date investment to $73 million. These investments support high-quality FeePAR accretive additions that strengthen our system and future earnings power. Year-to-date, about 30% of our openings have included development advances, and these hotels are entering our system at a FeePAR premium roughly 40% above our current system. We returned $101 million to our shareholders during the third quarter through $70 million of share repurchases and $31 million of common stock dividends. Year-to-date, we have now repurchased 2.5 million shares of our stock for $223 million. We closed the quarter with approximately $540 million in total liquidity, and our net leverage ratio of 3.5x remained as expected at the midpoint of our target range. Last week, we completed the refinancing of our revolving credit facility, increasing total capacity to $1 billion, a more than 30% increase in potential liquidity while reducing the borrowing cost of the facility by 35 basis points and extending maturity to 2030. Turning to outlook. With RevPAR trends softening throughout the third quarter, we now expect full year constant currency global RevPAR to range between down 3% to down 2%. This represents a reduction of 100 to 300 basis points from our prior outlook and implies fourth quarter global RevPAR of down 7% to down 4%. At the low end, this assumes roughly 200 basis points of additional softening beyond third quarter results, while the high end assumes slightly better performance than the 5% decline experienced in Q3. This outlook also assumes that U.S. performance continues to lag meaningfully behind our international regions and that international trends moderate modestly from recent levels. There are no changes to our net room growth outlook of 4% to 4.6%. Fee-related and other revenues are now expected to be $1.43 billion to $1.45 billion, down $20 million to $40 million from our prior outlook of $1.45 billion to $1.49 billion. Since our initial outlook in February, RevPAR has come in about 500 basis points softer and our revenue forecast has decreased by approximately $60 million. Through cost containment measures, including both operational efficiencies and onetime variable reductions, we have been able to offset approximately $30 million of that revenue shortfall as well as $15 million of incremental costs primarily related to litigation defense and employee health-care programs. As a result, adjusted EBITDA is now expected to be between $715 million and $725 million, down $15 million to $20 million, or approximately 2% from our prior outlook of $730 million to $745 million. Our marketing fund expenses are now expected to exceed marketing fund revenues by approximately $5 million, which reflects a modest investment to support in-flight initiatives that strengthen the long-term health of our franchise system. As a reminder, we do not adjust the performance of our marketing funds out of our reported results and we have a strong track record of recovering these investments and fully intend to do so here as well. Adjusted net income is projected to be $347 million to $358 million and adjusted diluted EPS is projected at $4.48 to $4.62, which is based on a diluted share count of 77.5 million and as usual, does not assume future share repurchase activity or incremental interest expense associated with any potential new borrowings. There are no changes to our outlook for development advance spend or free cash flow conversion. In closing, we remain focused on executing our plan in this challenging economic environment. We're maintaining cost discipline across controllable expenses, delivering strong ancillary revenue growth returning capital to shareholders and investing in our business to attract high-quality additions to our system, all while continuing to expand our royalty rate and grow our pipeline. With that, Geoff and I will be happy to take your questions. Operator: [Operator Instructions] We'll go first this morning to Dan Politzer with JPMorgan. Daniel Politzer: This is dual-pronged, but as you think about this challenging RevPAR environment that we're currently in, especially in the economy segment, can you talk about, I guess, what's in your control and what you're doing, and what's out of your control and kind of the active things that you're doing? And then similarly, how do we gain comfort that there isn't something structurally wrong with the economy segment, just given the recent RevPAR trends are obviously pretty concerning? Geoffrey Ballotti: The structural piece, I'll take first. I mean we're moving into our slowest quarter of the year. And despite the softness that we talked about in Texas, California, Florida, we are seeing nothing structural that concerns us in any of the leading indicators that we look at daily. Our booking lead times, they're up 2% to prior year. Our length of stay are consistent with last year, something that if we thought something structural was happening would not be the case. And our cancellation rates have actually improved over last year by 160 basis points in Q3 versus prior year. So on those indicators, we feel good. Slide 11 is an interesting slide that we've -- because we know you're getting a lot of questions, we're getting a lot of questions on this structural question. And we're looking at demand and occupancy. And this year, if you look at that slide, we're seeing occupancy down across all chain scales year-over-year with the divergence of RevPAR really being driven by ADR with the upscale segments taking rate, while the economy and the mid-scale where we're concentrated are not. Occupancy, as we all know, has not recovered to pre-COVID levels in any segment, but it has more so in economy and mid-scale. If we look versus 2019, STR mid-scale is down 5% to 2019 versus upper upscale and luxury, both down 8% to 2019, 100 basis points worse than economy and 300 basis points worse than mid-scale. So the question you ask in terms of is there anything structural that we're seeing out there aside from persistent inflation and consumer uncertainty and immigration in some of those states that we mentioned that aren't helping is the upscale hotels are able to price more aggressively to inflation than the lower chain scales are where the guest is obviously more price sensitive. STR ADR for economy is up 11% to 2019 versus up 29% in the luxury segment. And luxury is the only segment, as we know, that's been able to outpace inflation growth at 26%, which is very good news for economy and mid-scale segments from a pricing power standpoint moving longer term, especially as wage growth continues to outpace inflation, providing upside when that consumer confidence stabilizes and we get back to that 2% to 3% CAGR. In terms of the first part of the question, what we're doing to help our franchisees, franchisees in the lower chain scales are beginning to discount. We're seeing that in the rates, more so to try to capture demand right now. And we're helping franchisees where we can and urging franchisees to hold rate where it makes sense, especially on leisure versus the corporate contracted pricing and discounting where appropriate, but not playing heavily in that last-minute discounting on those all channel sales. We're trying not to discount last minute because of the long-term value dilution. And we're seeing our brands, they gained the most share in the mid-scale. We saw 160 basis points of RevPAR index, and it's being driven by the weekday, which was up 180 basis points for our mid-scale brands. And we're gaining with more rate index, which our revenue management teams really want to see continue for franchisee profitability. Operator: We'll go next now to Brandt Montour of Barclays. Brandt Montour: So just a follow-on to that. We'll stick on the demand side for a minute. And maybe just talk about business and infrastructure-related travel demand, specifically to what extent the new administration's curtailment of government spending and that sort of program has slowed down the pipeline of projects that I know that you guys have been excited about that was driving a tailwind late last year. And maybe data centers have been a bit of a positive offset, but if you could sort of frame that up for us. Geoffrey Ballotti: Thanks for the question, Brandt. Yes, look, we continue to view the $1.2 trillion of infrastructure as a multiyear tailwind for our franchisees. That's going to drive over $3 billion of revenue to our hotels. And the 150 basis points of growth that drove for us in the Q4 of last year is now more on par with the rest of our portfolio. Obviously, there's a lot of headlines out there that allocated monies have potentially been frozen as the federal government looks to possibly reallocate among states. And we're seeing some projects being paused as project priorities are certainly shifting. For example, EV-related spending is more shifting to energy spending or modernizing highways and bridges and air traffic control we read a lot about. But we're optimistic that the infrastructure spending, again, over 80% of which is not spend, is going to resume at some point. Infrastructure room nights contracted this year are up 2x versus consumed, and they're pacing well ahead of same time last year. And to the back part of your question, we're also very confident that private investment in reshoring and manufacturing will continue to boom as it has specifically with data centers, as you mentioned, where our hotels in those markets outperform the hotels from a RevPAR standpoint and have gained 500 to 600 basis points. Many of the states that we called out in our script are certainly benefiting from that. We're spending a lot of time with our teams. We've identified over 150 planned data centers. And the Wyndham hotels in those markets that we're tracking and targeting from the $1.6 billion Amazon Web data center in Canton, Mississippi to the $800 million Meta data center in Graniteville. They're seeing traction, and we're contracting with the surveyors from a GSO global sales standpoint and the design firms on the data centers that haven't even begun. There's so much early site development. Our teams, we met recently with the Mississippi Governor, Kate Reeves. And the $1.4 billion AWS data center in Richland, Mississippi is the biggest investment that's ever seen. So our hotels within the radius, and we've got a lot of them, are seeing improvement in Q3 market share, which gives us a lot of optimism compared to the other sites and markets outside of those radius that are under pressure for all the reasons we mentioned. So it's a really big deal and something that we're very excited about. Operator: We go next now to Dany Asad of Bank of America. Dany Asad: Michele, in your prepared remarks, you mentioned that you expect U.S. RevPAR in Q4 to be in line with Q3. Look, we're obviously still early in the quarter, but any early reads you can share with us as to where we're trending today relative to that domestic down 5% expectation? Michele Allen: I'd say from an October perspective, we are encouraged by some of the early trends in our 3 largest states, California, Texas and Florida, we're seeing RevPAR track about 100 basis points above September performance. We've also seen stabilization in U.S. booking pace month-to-date in October and a really strong Oktoberfest in Germany. So those are some of the green shoots that we're tracking. The rest of the portfolio appears to be performing more in line with third quarter results. So our fourth quarter implied RevPAR is at the midpoint anchored to those third quarter results and also includes, I'd say, the headwinds from last year's hurricane. And then the high end would assume some modest improvement from those trends, not a sharp rebound at all. And again, it's supported by those things that I just mentioned. And then, of course, the low end would allow for some further softening. But we believe -- certainly believe it is potentially achievable if booking trends hold and some of that strength I mentioned continues through the end of the year. Operator: We'll go next now to David Katz of Jefferies... David Katz: With respect to net unit growth, right, presumably, the bigger it gets, the easier it is to weather RevPAR volatility. Geoff, can you -- or Michele, can you talk about what kinds of momentum we can expect to see from you in terms of net unit growth, and what the gating factors or puts and takes would be toward next year being the same or better than what we have in terms of total net unit growth in geographies, et cetera, a lot to talk about there. Geoffrey Ballotti: Yes, there is, David, and our favorite David Katz quote, "Nothing lasts for a lifetime." We need RevPAR to get back. But we're feeling very good about our NRG outlook. Accelerating in the higher fee segments, it's continued. And as you've seen, we've opened a record 48,000 organic rooms year-to-date. which is up 9% to prior year. It's up 29% to 2019. And what we're really happy about and confident about looking forward is that openings are pacing ahead of prior year. And net room growth sequentially is pacing ahead each quarter throughout the year. So Q1, we added net 4,800 rooms. Q2, 6,800 net rooms were added and Q3, 8,700 net rooms were added in the quarter. So as of September 30, we have opened 9% more rooms versus where we were same time last year. So we're feeling again very good about our outlook. And 70% of those rooms are in the mid-scale and the above segments. We're -- in terms of next year, given just how strong the pipeline is, we're feeling very, very good. This was our 21st consecutive quarter of pipeline growth. and it's up sequentially and it's up 4% versus year-over-year with, again, a concentration in higher RevPAR segments in markets not only across the U.S., but obviously internationally as well. 60% of our pipeline is international with really steady growth across Europe, the Middle East, Eurasia, Latin America, which have grown 140% since spin and 170% in Latin America's case since spin. So with that type of continued growth in net rooms, we're feeling confident about the rest of the year, obviously, and more importantly, next year in '27. Operator: We'll go next now to Michael Bellisario of Baird. Michael Bellisario: Two-parter for you, probably for Michele here. Just first on the franchise fees in the third quarter. Can you maybe give us a little more detail on what's in that other bucket that you mentioned? And maybe also why were they down more than you thought? Any color there would be helpful. And then second part is just as we think about the bridge into next year, maybe help us put some of the moving pieces with G&A, the cuts this year and maybe any step-ups that you expect next year? Michele Allen: With respect to franchise fees, Mike, that line item captures a number of items that aren't tied directly to rooms or RevPAR. So those are things like termination fees, transfer fees, application fees, transactional revenue that's subject to varying revenue recognition policies. These items are event-driven. So the level of activity can vary quarter-to-quarter. For example, the number of transfers in any given quarter can shift based on deal timing and obviously, transaction volume, which is down quite meaningfully this year industry-wide 24% for the select service space. So I think when we look at these fees, they're healthy. It's a high-margin part of our business, but naturally variable. And that's why occasionally, you're going to see some movement year-over-year in this line item. This quarter, we saw a $7 million decline versus last year third quarter. But in terms of our internal expectations, we were only short about $3 million to our forecast. And year-to-date, I think these fees are just roughly maybe $2 million ahead of last year. So we're really -- we really look at the Q3 decline as timing related. I think the second part of your question was with respect to next year. And I'd say it's still too early to talk about our 2026 expectations. We're just beginning our planning process now. We are, of course, approaching the budget the same way we always do. We're staying very focused on what we can control. From an expense perspective, we did have some variable reductions this year. About half of those we expect will be permanent to the margin and the other half are more temporary for 2025. Operator: We'll go next now to Steve Pizzella with Deutsche Bank. Steven Pizzella: Maybe we could pivot to ancillary revenue. Can you talk about your expectations for ancillary fee growth to accelerate from low teens this year to mid-teens in 2026? What are the drivers of that, specifically from a credit card perspective? How should we think about lapping the tough compares for most of this year? And do you expect the procurement business to also accelerate next year? Michele Allen: Okay. Yes. There's a lot in there. I'm going to try to remember your 6-part question. We're really pleased with how ancillary revenues are performing, up 18%, I think, in the quarter. Year-to-date, we're tracking 14%, pretty much in line with maybe modestly ahead of our low teens expectation. On the credit card side, we saw a 10% increase in new accounts. We saw a 7% lift in average spend per cardholder. That's an acceleration from the Q2 metrics, which were 5% and 2%, so 5% in new accounts and 2% in average spend. For ancillary revenues, we've got several initiatives driving this multiyear above algo growth. So Credit card is obviously the largest contributor to growth this year, but we've got the replatforming happening later this year as well as early next year. That's another inflection point from a growth perspective. Then we've got international expansion. We've got the debit card, which is ramping slowly and intentionally slowly. We've got technology like Wyndham Connect. And then we're really excited about Wyndham Insider. It's first of its kind, as Geoff mentioned, to add-on subscription service. It won't drive much in EBITDA this year or even perhaps next year as we focus on ramping the program and testing and proving out the model. But we think there's real opportunity here in future years from an ancillary fee perspective. So at this point in time, like I just mentioned, still a little too early to talk about 2026. We don't consider the forecast or the 2026 period as lapping a tough comparison. We see -- we're growing off of a higher base, obviously, post renewal, but we still think there is a significant growth opportunity, not just in 2026, but like I said, multiyear tailwinds from the number of initiatives we currently have in place. Geoffrey Ballotti: I think the only thing you missed, Steve asked about was sourcing, a team that Michele leads and a team that's making significant strides, Steve. We've got new sourcing categories and global expansion of programs that are really benefiting our franchisees. New sourcing brands that Michele's team are adding like Nestle, Seattle's Best, Starbucks on the coffee side and a great program for franchisees when it comes to sourcing insurance through a program that's driving significant savings on franchisee insurance quotes, which is a big issue for small business owners, resulting in a lot of savings for franchisees. So we're optimistic as well that we've got a lot of upside on the sourcing side. Operator: We'll go next now to Lizzie Dove of Goldman Sachs. Elizabeth Dove: You mentioned in the presentation that your new deals which require key money are coming in at about a 40% FeePAR premium versus the portfolio. But then China is also becoming -- or has become a bigger part of the mix. Curious like how we should think about the kind of balance of that mix shift, the benefit from the key money deals versus China and whether this is kind of accretive or dilutive to RevPAR over time? Michele Allen: So key money is absolutely accretive to RevPAR over time. We are having great success with that strategy, bringing in high-quality product in higher demand, higher RevPAR markets. I think your question more has to do with the mix of net room growth, right? So as we grow faster in international regions that have lower royalty rate, that could wind up looking dilutive to the overall royalty rate and maybe even dilutive to FeePAR on a global basis, but still very accretive to revenue and very accretive to EBITDA. So we have -- from our perspective, the world is a very big place. Nothing -- no market is off limits just because it's a lower RevPAR market. We may not be incentivizing our development team as much to tap into those markets, and we may be adding more feet on the street in higher RevPAR markets, all of those things are very true. But if the deal comes our way and we can support it appropriately and drive the value proposition, we're not going to say no just because the RevPAR market itself is a lower RevPAR market. And again, like I said, I think from a key money perspective, feel highly confident that where we are deploying our money is for higher FeePAR product coming into our system. Geoffrey Ballotti: And I think it's fair to say, Michele, that we're not deploying key money in China today, correct, or very little. Michele Allen: That's right. Geoffrey Ballotti: Yes. I mean -- and we're, Lizzie, just having a great success over there with -- as we've talked a lot about with you when we've been out on the road driving that double-digit net room growth increase in direct FeePAR accretive rooms without key money. And it was just so great to see what happened again this quarter, the team executed 52 new deals in the quarter in China, 30% more than last year and 11% now more than last year year-to-date. And it was great to see that net room growth grow sequentially and the pipeline grow sequentially. Pipeline was up 3% in China without key money. And so many of those contracts awarded are new construction. I mean, just absolutely positively stunning new adds this quarter with Wyndham Grands and just some phenomenal locations competing against our larger peers in so many cities across China without the use of key money. So we're really excited that, that could continue. And congratulations on your recent nuptials. Operator: We'll go next now to Stephen Grambling of Morgan Stanley. Stephen Grambling: Geoff, I appreciate some of the detail you gave on the AI front, but I want to make sure I understood some of what you're doing there. Is that largely an internal AI tool to drive bookings in the direct channels? And if so, how do you think about partnerships or opportunities with indirect channels? For example, what would make partnering with an LLM more or less attractive versus other LLMs or even considering compared to OTAs? Geoffrey Ballotti: Well, a lot to unpack there, Stephen, how we would consider it. I mean, certainly, Chat, Perplexity, Gemini are reshaping how guests book hotels. And it is presenting a unique opportunity for us to continue to reduce our dependency on OTAs. I've heard you asked this question before. We continue to add new capabilities to optimize how our brand.com sites appear in LLM searches, and we're currently experimenting with MCP server, a sort of USB port, if you will. For AI to allow LLMs to plug into us to directly access all of our hotel availability, all of our rates, all of our inventory, making it easier for an LLM to receive fully updated hotel information from a trusted source. What we referenced in the script and that we've not put into the IP is what the last 6 years of investment, the $375 million that we have invested in our industry-leading tech stack with best-in-class providers who all embrace AI. We don't think we could build it better than Oracle or Adobe or any of these great providers we partner with. We were the first to cloud with a very scalable system that is fully optimized right now, 100% optimized to drive down cost. You could read a lot about our tech team's success. Rackspace, a global leader in cloud management recently said that Wyndham's cloud environment is more optimized for AI than most, if not all of its competitors. And that's enabling us to innovate faster and innovate at a lower cost. I mean AI has been helping everyone in the industry for years on the security front, the marketing front, the operations front. But what we're doing with Wyndham AI, which is an industry first is leveraging now that we have the system built Salesforce and Canary, Canary Technologies with the 250 AI agents that we talked about who are handling hundreds of thousands of guest calls. Mrs. Grambling calls and she wants to book the Gramblings on a holiday. And one of our AI agents know everything about whichever one of our 8,300 hotels, the Grambling kids want to visit. And it's able to answer any question, on any question that, that guest might have about any of our hotels and seamlessly book it. And that's what's driving direct bookings. That's what is allowing our franchisees to save on the labor cost. And it's what's driving right now 300 basis points of increased direct contribution for only 600 of our 8,300 hotels have that specific Wyndham AI piece enabled so far. We talked last call on Wyndham Connect, which is allowing us to talk to customers with AI. A lot of our competitors are doing that. We're taking labor-intense tasks away from our franchisees. We're allowing them to make extra money by seamlessly selling an early check-in or late checkout to the Gramblings, or an upgrade or amenities in terms of what the kids want in the refrigerator. But what we're doing right now with Wyndham AI in terms of that direct booking piece is what really excites our franchise sales team and our franchisees. We're told by Oracle, who works with all of our peers that we're doing things really no one else is, and it's something that our franchisees are very, very excited about. Operator: We'll go next now to Ian Zaffino of Oppenheimer. Ian Zaffino: I just wanted to ask kind of a follow-up on the Wyndham Rewards Insider. Michele, I know you said kind of not a lot of EBITDA impact either this year or next year. But how do we kind of frame the opportunity here? Maybe just longer term, like when you conceptualize what it could deliver to you from either a profitability standpoint, et cetera, or maybe point us to kind of a comparable program that you might think your rewards system could deliver? And then also, how do you actually get there? Would that just be on the fees? Would it be on more loyalty? Just any other type of color you could give us there would be helpful. Geoffrey Ballotti: I would frame it, and Michele could add to this, but we're very excited about it. I think it has the potential to deliver engagement on par at some point with our credit card. Wyndham Insider right now, as Michele said, we expect a strong take rate for members over the next 24 months. And over time, it has that type of potential. So long-term fee growth is certainly the goal. But short term, as Michele said, the focus is more on proving out the model and using returns to further grow Wyndham Rewards. Our new co-branded credit card complements it, and with the credit card rewarding everyday spend, and we're really excited about that, but Insider enhancing Wyndham Rewards value proposition. I mean we know, to frame the opportunity that the subscription economy is absolutely booming, the hotel loyalty travel subscriptions are really in their infancy. Of those that have something like this in the hotel space, they're tied and they're limited to select brands or hotel-only benefits. But at $95 a year, we expect the savings for the average Wyndham Rewards member to more than cover the fee after just one trip. Plus members earn a free night, and we hope you subscribe to this, Ian, at thousands of hotels with the 7,500 annual bonus points. It expands our value prop to our most important members and it basically stacks their discount. So if our promo rate to you is 10% off, as an Insider, Ian Zaffino as a Wyndham Insider gets an additional discount on top of that with a 50% acceleration in the points earned. And without impacting our franchise, and that's a very important point, without impacting our franchisees' costs, the program is absorbing the costs. We've had a lot of interest, a lot of excitement from franchisees, a lot of interest, obviously, from the media, upgraded points called quite a lot of value for $95, T+L magazine, no editorial from our friends at T+L, it's completely separate, compares this program well to premium credit card fee programs, which are charging anywhere between $795 to $895 that we see. We're partnering with American, with United, with JetBlue, with Avis, who else? We're partnering with Carnival with up to 30% discounts from some of those providers. And that's really driving the value prop and the affinity to most importantly, increase our Wyndham Rewards members engagement and their share of wallet. So we're super excited about this. Operator: We'll go next now to Alex Brignall of Redburn. Alex Brignall: The first one is on the marketing expense overspend. Could you just talk a little bit about what that specifically is and you talk about getting it back. Does that sort of specifically mean in the next couple of years? And what are the benefits that you're getting and who's sort of sharing them between you and franchisees? And then the second, you talked a lot about the structural dynamics of RevPAR and demand in the U.S. It's obviously something that's a curiosity for a lot of people. In September, it was obviously a very, very hard comp for the economy segment because of the hurricane impact last year. But versus 2019, the gap between luxury and economy was actually -- there was no gap having previously been a very large gap in the months before. I guess what I'm wondering is if that gap is to close and you talked about franchisees cutting rates, are you worried that it will be because the higher segments will have to see price deterioration because you become a better value prop versus them because of the relative cumulative price growth over time? Or do you think that the economy segment can see sort of a big bounce back in pricing in 2026? Michele Allen: I'll take the fund question, Geoff, and then maybe you want to address the second part of Alex's question. I mean, look, it's $5 million overspend to the marketing fund, let's keep it in perspective. The fund is over $0.5 billion, right, so in annual activity. So it's only roughly 1% of total spend. So still a very immaterial amount when we're trying to kind of manage that level of spend. And remember, we're the only large lodging corporation that does not adjust these marketing funds out of our reported earnings. If you look at the peer set, their -- the variability from their marketing funds is much larger than $5 million. So we feel pretty good about how we've been able to manage that level of annual activity in this RevPAR environment. specifically. And I think as RevPAR deteriorated specifically throughout the third quarter, we had to make a conscious decision on whether or not we were going to stop some in-flight initiatives or we were going to continue them. And certainly, there were ones that we decided to pause, but there were a bunch of other ones that we looked at the overall benefits of those investments to our franchisees and to our -- the overall health of our franchise system. things like Wyndham Insider, for example, some of the AI initiatives that Geoff was talking about, a bunch of personalization initiatives that we're doing and some updates we're doing even to our digital platform to our websites. And so we decided that we were going to continue to invest in those programs. They will have benefits not just in 2025, but well beyond 2025. So ultimately, we view this modest overspend as an investment, and we do have a very strong track record of recovering these funds in future periods, and we're really comfortable with that decision. When we recover this $5 million could be as early as 2026. It could be 100% in 2026, it could be 100% in 2027. It could be some in '26 and some in 2027, but certainly more in the nearer term as opposed to the longer term. Geoffrey Ballotti: In the back half, Alex, it's a really good question. I've seen your sort of the answer on it, I think, in your Hitchhiker's Guide. If you think about the rate for economy up whatever it is, 10% to where we were pre-COVID and luxury right now at up 30%. And to your point, what's happening there, it is very good news for our economy and mid-scale segments from a pricing power standpoint. And at some point, we do believe, to your question, that can flip when consumer confidence stabilizes. Remember, both of those segments, economy and mid-scale were the first to recover coming out of COVID. And we know that at some point, domestic RevPAR is going to return to that 2% to 3% long-term CAGR that it's always averaged, and especially given the earlier comments, everything that's out there from a macro setup on the infrastructure and private investment side, the historically low levels of supply and moreover on the leisure side, I mean, we've got a lot to look forward to next year, like America 250, the FIFA World Cup, which is a $20 billion impact in markets like STR says Atlanta's impact is $2.1 billion. We've got a lot of hotels in Atlanta, along with Dallas and Houston, right, which right now, with all of the consumer uncertainty and immigration activity is stressed, but Dallas and Houston are both going to benefit from that next year. L.A. and California, where we're down, is going to benefit. Miami is going to benefit from FIFA World Cup next year, where we've got a lot of hotels in Florida, 300 in Florida, 400 in California, 700 hotels in Texas, our 3 largest states, and we've got half a dozen other cities that this FIFA World Cup is going to play in where we've got collectively about 1,000 hotels. So it's an interesting observation. Operator: We'll go next now to Meredith Jensen with HSBC. Meredith Prichard Jensen: So many questions, I don't know where to start. So I was thinking about something touching upon what Stephen mentioned. So realizing how the lodging sector supply continues to evolve and there's a wider array of options for consumers, including short-term rental and distribution shifting, all these moving parts. Of course, this is nothing new to Wyndham. But it is something we're increasingly fielding questions on given the push from OTAs like Booking and Expedia and Airbnb to get into the lodging sector. So I was really hoping you might be able to speak a little bit about how Wyndham views these opportunities and how you're going up against some of these challenges in nontraditional or as some might label it shadow supply. So that would be really helpful. Geoffrey Ballotti: Yes. It's an interesting question. Our teams think about a lot, Meredith. Agentic AI, the possibility of STRs, short-term rentals coming into the space from a distribution standpoint is they're all certainly bringing a different rhythm to search that's more frequent and more automated. AI is really moving the traditional SEO to GEO, which we talk a lot about that generative engine optimization with these new channels searching for more trust and more contextual relevance. And so how we think about it is all about with our franchisees and our teams and our brand teams is our reputation and the confidence, which is always the top signal in any search. Whenever you go on vacation, you're doing your own research. And we're trying to find ways, and we are finding ways through Wyndham Connect, which we've talked a lot about and Matt put in the deck. It's improving that confidence with guests and more frequent reviews from our guests. We're engaging more frequently and more immediately through so many different ways, SMS messaging, voice and digital to add context to your search. And we're boosting higher online review scores. because immediately, when Meredith Jensen checks out now from one of our hotels, we're asking you for review on TripAdvisor, on Google Reviews, on all of the major OTAs because we want your feedback, and we want to improve that feedback because we know it's the key indicator of quality. And it's the whole point of consistency for overall satisfaction in those large language model searches. Operator: And Mr. Ballotti, it appears we have no further questions this morning. So I'd like to turn things back to you for any closing comments. Geoffrey Ballotti: All right. As always, Leo, thank you very much, and thanks, everybody, for your questions and your interest in Wyndham. Michele, Matt and I look forward to talking to and seeing many of you in the weeks ahead at several of the upcoming investor lodging conferences that we'll be attending. In the meantime, have a great weekend ahead, and happy Halloween, everyone. Thanks again for joining us today. Operator: Thank you, Mr. Ballotti, and thank you, Ms. Allen. Again, ladies and gentlemen, that will bring us to the conclusion of today's Wyndham Hotels & Resorts Third Quarter 2025 Earnings Conference Call. Again, thank you so much for joining us, everyone, and we wish you all a great day. Goodbye.
Niina Ala-Luopa: Hello, and welcome to Vaisala's Third Quarter Results Call. I'm Niina Ala-Luopa from Vaisala's Investor Relations. And today with me in this call are President and CEO, Kai Öistämö; and CFO, Heli Lindfors. And like always, first, Kai will present the results, and then we have time for questions. Kai Öistämö: Hello, and welcome, everybody, from my side as well. Vaisala had a good third quarter, strong sales and profitability as the headline says. So, let's dive a little bit deeper where did it come from and what are the details behind. So, first notion, the net sales growth was strong, 13% in reported currency, which can be characterized really as strong sales in a quarter. The orders received simultaneously declined by 21% and leading into a decline in the order book. Whilst when going back to the financial performance, we maintained a very solid profitability, 18.2% EBITDA margin. And if I exclude extraordinary items due to the restructuring and so on, actually, the EBITDA margin was 20%, which I think is all-time high for us in terms of an EBITDA margin, if I recall right. Really happy on Industrial Measurements on the demand picture and now clearly also broader than earlier. And on demand and on the other hand, Weather and Environment side, more challenging market environment, and I'll talk about both in detail in the coming slides. And really happy on the subscription sales growth continued to be very strong, 57% year-on-year and also the underlying organic growth on a very healthy level. And as I said in the release already, it was great to see also subscription sales now contributing positively also to the profitability of the company. The market environment continued to be challenging. If you think about the entire third quarter within -- inside of the third quarter, we kind of we start -- it started with the tariff changes and kind of fixing the tariffs between Europe and U.S. And then at the same time, during the year, continued in the third quarter, the depreciation of euro vis-a-vis USD and Chinese yuan. So, the environment has many moving parts, and the depreciation of euro, dollar and renminbi really are things that don't often get talked about as much as the tariffs. But actually, if you think about it, like the magnitude of the depreciation of those currencies vis-a-vis euro, the impact actually is equal, if not greater, than what the tariff impacts actually are. So, it's good to remember that as well. And as I will conclude at the end of my presentation, the business outlook for the year 2025 remain unchanged. But before going into the numbers and performance of the company in more detail, good to look at a couple of words on strategy execution inside of the company and this time in terms of a couple, we picked a couple of kind of interesting launches that are reflecting also the strategy and strategy execution of the company. The first one, Vaisala Circular, it's a service product and the emphasis really is on the word product, where the industry measurement probes are recalibrated and provide a reuse service where the customers maintain a dedicated pro pools at our service centers. Essentially, what it means is that we have productized the calibration service in such a way that now we are selling always accurate on uptime and continuous operations in our customers' operations instead of talking about calibration or other technical terms. This is obviously kind of crucial in terms of selling services that how do you productize it, crucial for the customers to understand what's the value and crucial for our sales to actually then be able to communicate what the value is and what the customer should be paying for. So, kind of a great example of the things that we are doing to drive our service sales, both in Industrial Measurements where Vaisala Circular is an example of, but we are doing similar things also in the Weather and Environment side. Then on Xweather, the hail forecasts. Hail actually is one of the more difficult weather phenomena to actually forecast. And it's been really one of these places where -- one of the things that really is -- has been really a challenge for meteorologist for a long, long time. Super happy to report that now we have an Xweather hail forecast. And hail is really important in terms of the damage it causes for various kinds of a property or infrastructure. For us in Finland, the hail sometimes gets to be kind of pea size and even that can kind of cause some damage. But in more southern countries where more extreme weather and extreme thunderstones typically are when hails get to be baseball sized, they really can kind of create quite a bit of damage. And it really is like billions of dollars losses in various kind of places. The example we are showing here where we can apply the kind of capability to forecast and create alerts for hail is solar parks. And if you think about solar parks, there's a whole host of glass facing upwards. And in case of a hail that's really prone for damages. And if you think about solar parks, one of the features is also that in many cases, they actually track sun, i.e., they are turnable. So, in case of hail forecast, you can actually turn them sideways so you can avoid the damages. And there's a kind of a big market and unsolved problem that we are solving for here with hail forecast as an example. And then WindCube, the next generation. Here, this is really, again, a good example of how we push the boundaries of the technology with our own R&D. With this evolution on LiDAR technology, we can actually increase the distance out of which we can read the wind and the wind fields, increased data availability and much, much more robust performance in clean air and complex terrain environment. So significant step-up in terms of our performance, which I believe both demonstrates our capabilities and is important for that business and puts us squarely in the lead also from technology and solution and performance perspective in that business. Then moving on to the financials. So, starting with the group level, strong growth, as I said, with -- in both business areas. Orders received decreased as talked about, and I'll still kind of talk about that a little bit later when I go into the business areas because there's differences in performance side. Order book consequently kind of down from same time last year. And then net sales-wise, a very strong quarter, 13% up year-on-year. And if you take the constant currency side perspective, it would have been 16% up from year-on-year, same time, so third quarter last year. Gross margin, a bit down, and I'll give you -- it's easier to explain when I go through the different business areas. Nothing dramatic about that there. And then on the profitability side, as I said, if you exclude the restructuring side, actually the EBITDA margin being all-time high, at least in my recollection. And cash conversion, no news there remained on a strong level. Now going into Industrial Measurements, yet another strong quarter and really happy to note that now the positive results are coming from all market segments and all geographies. And super happy to see that now Asia performing really well compared to the same time last year, equally so -- almost equally so, Europe and at the same time the U.S. growth continuing. Obviously, in the U.S. and in China, for example, where the local currencies have devalued vis-a-vis euro, that has a negative impact. If you -- like if I take, for example, U.S. in a constant currency, year-on-year growth was 9% in Industrial Measurements in Americas region. And I promised to talk about the gross margin in the business area side. And if I take Industrial Measurement side first. So, first of all, what I forgot to say is the orders received actually increased on the Industrial Measurement side, corresponding to the net sales growth, actually a little bit more increased 9% year-on-year here when the net sales grew 6% in reported currencies. But back to the gross margin. So gross margin decreased a little bit. And this really is due to exchange rate impact, but clearly, kind of big part of the impact was the proportional impact on the U.S. tariffs. And here, maybe worthwhile kind of just pausing and explaining the math that we've said that we have been fully mitigating the tariff impacts in our business. And that means that we've raised the prices correspondingly to whatever the tariff costs have been. And if you think about how that math works, it means actually that the -- even if it's fully mitigated in absolute terms, since the divider and the above the line and below the line kind of when you do the division are added the same amount, the relative number actually goes somewhat down. So that's really like if you have time, just play with the math and you'll see what I mean. So that's a big part of the explanation. So, I am not worried. It's within the normal boundaries in terms of what the gross margin changes have been and it's worthwhile saying also that while we are in the Industrial Measurement side, it's obviously easier to kind of mitigate by price changes, extraordinary events like the import duties and such changes in import duty regimes compared to fluctuations in currencies. Since we price and any global company would do the same, price in local currency, you cannot go every time currency exchange rates go back and forth, go change the local pricing. Obviously, long-term, there are kind of pricing means to compensate this. But short-term, you cannot kind of react to all of this, and it would not be constructively taken either from a customer perspective. Then Weather Environment. In net sales, actually a great quarter and subscription sales-wise, equally so. At the same time, the orders received in decreased in Weather Environment, driven by a couple of things. There's a strong decline in renewable energy market, as we have been saying since the first quarter of this year. Nothing has really changed on that. And there was kind of a significant change in the market in the beginning of the year, and it continues to be on a low level, and we do not expect that to change in any time soon. And I'll come back to that in the outlook. And then likewise now in aviation and meteorology markets, there was a very strong comparison period and kind of big orders taken in the comparison period last year. But also this part of the market, when you take aviation and meteorology, there is a fluctuation between kind of natural fluctuation in those markets as well as this year, where there have been a couple of headwinds that we talked about before, one being the China investments due to a large extent, I would argue, to the fact of the cycle in terms of the 5-year plan this year being the last year of the 5-year plan and very often being the least investment in at least in this sector. So that we have seen that in declining order intake and then simultaneously, the administration changes and so on impact on delaying the order intake in this year in the U.S., which obviously is another contributor to this. And then there are kind of gives and takes on the rest of the market, which is within the kind of, I would argue, in the normal boundaries. And good to remember in the comparison period in the aviation and meteorology side on the back of really kind of a very strong now 2 years in terms of an order intake, really driven by the European stimulus fund on the radar networks in Southern Europe, most notably in our case was the big order that we got from Spain, but there were multiple other ones that we benefited from as well during the past year, 1.5 years that are still in our order book, and are being executed. Now on the gross margin side, a decrease of 3 percentage points. Sales mix, a stronger portion of the project revenues being recognized. So that's in plain English, what the sales mix means. And then same things as what I talked about in Industrial Measurement side on exchange rate and the U.S. tariff impacts, albeit somewhat less pronounced in case of Weather and Environment as the sales mix it's not as heavily weighted in euros and dollars or the U.S. business is a little bit less than what Industrial Measurement is. And then EBITDA percentage being on a very healthy level of 14.6%. I mentioned the cash flow continued on a good level. Here you see on the bridge on puts and takes on the cash flow and cash conversion being at excellent level of 1 and free cash flow around EUR 40 million during the period. Now if I look at the year-to-date, both net sales and profitability clearly improved during the first 9 months compared to the same time last year. And orders received did decrease by 13% year-on-year and while net sales grew by 9% year-on-year. And subscription sales, if I take the first 9 months of the year, almost incredible 58% up, obviously boosted by the acquisitions of WeatherDesk and Speedwell Climate, but also a great performance on the underlying organic growth. And then gross margin, slightly negative, again, same explanations that I went through. And then on EBITDA percentage and EBIT percentage up from comparable time or same time last year. And then worthwhile saying on the operating expenses, the restructuring costs, as I said, also in regards of this past quarter have been not insignificant as we have been adjusting our renewable energy business to the new market reality. And that's now behind us, that restructuring. And then acquired businesses and so on other explanations when you look at the year-on-year comparison on operating expenses. Financial position continued on a very good level, low leverage on the balance sheet, and we continue to have asset-light business model, no changes seen or foreseen in that. And on this page, I think it's good to note that the automated logistics center is now in a phase where we are loading it. So, it's actually fully in schedule, and we are putting material into that and starting to use it as scheduled in the fourth quarter of this year. And then also notable thing during the quarter was the acquisition of Quanterra Systems. Think about it this way that it's kind of an interesting team and technologies on monitoring CO2 fluxes, which means question whether individual geographic area, field or piece of land is a carbon zinc or carbon emitter, which a very interesting piece of technology, potential long-term kind of quite a bit of potential on that, and that was announced in September. Market and business outlook. We continue to see growth in industrial, instruments, life sciences and power, we continue to see roads as a stable marketplace. And then renewable energy, meteorology and aviation decline, and this is outlook for the rest of the year. And obviously, the renewable energy being kind of a clear change in the marketplace since the beginning of the year, whereas the meteorology and aviation now suffering a slightly different market conditions, as I explained before, in terms of the government subsidies and government incentives kind of on a lower level than when we compare to last year. And then on the business outlook, no changes to this. We continue to see the net sales to be between EUR 590 million and EUR 605 million and operating result being between EUR 90 million and EUR 100 million. With that, I want to conclude my prepared remarks, and I'll open up for any questions you may have. Operator: [Operator Instructions] The next question comes from Nikko Ruokangas from SEB. Nikko Ruokangas: This is Nikko Ruokangas from SEB. I have 3 questions, and I'll go one by one. Starting with Weather and Environment and orders, which you already discussed, and you told the reasons why they have now declined for a couple of quarters. But should we soon start to see the trend in orders happening there? Or has the demand continued sequentially weakening? And then do you think that the U.S. government shutdown could affect you now in Q4? Kai Öistämö: Yes. So obviously, kind of when we talk about we compare to year-on-year kind of things will obviously, when the comparables change, then that will change. Your question was on a sequential basis especially aviation, meteorology, things kind of come as they come. So even if there would be like numbers improvement or decline from one quarter to another, it would be hard to make a conclusion out of it since it's a lumpy business as a starting point. As I tried to explain on meteorology and aviation, it is more of a -- it's a bit of a cyclical business where now we have enjoyed, I would argue, almost like exceptionally high cycle in it for good almost 2 years. Now it's more on a normal basis, what it looks like. So, I would not be overly worried about it where I'm standing today. Then, on the U.S. government shutdown, it's a great question. And so, 2 comments on that. We've seen the budget proposal, and I would be actually happy, and this is the government's budget proposal, not minority budget proposal. I would be happy if and when that is approved. So, I have no issues with what is proposed. The shutdown itself, obviously, during the shutdown and getting a new order for next year since there's no budget approved nor and then there are a whole host of people furloughed. It's postponing things. If I look at bit on the history, typically, what has happened is that during this kind of U.S. government shutdowns, the orders will just come a little bit later in. But if I take kind of 12 months average or what kind of a little bit longer time series, it will normalize itself post the shutdown. So, it's like a little bit plowing snow in front of a snowplow kind of a thing, at least has been in the past. And we'll see how long it will last, it can stop tomorrow, or it can be continuing for some time. Nikko Ruokangas: Yes, I understand. Then on the guidance, as it indicates for Q4, clearly kind of year-on-year basis, weaker sales and EBITA development than now in Q3. So, is this basically explained by smaller project deliveries expected for Q4? Kai Öistämö: A big part of it is also very high comparable. If I actually go -- and I'm usually not doing this, I'll try to go back in my slides just to illustrate what I'm saying on this slide. And it's not this slide, here. So, if you look at this slide, it's kind of like highlights the unusual nature of the last year in terms of how the order intake kind of behaved and especially net sales behaved that we had a very weak first quarter, very strong second quarter, weak third quarter and a very strong fourth quarter. And if you went back into '23 or earlier years, typically, the second half, both quarters have been stronger. Typically, even the third quarter has been stronger than like second quarter clearly on an average year. So, there's a bit of when you compare to year-on-year kind of numbers, the anomality of last year makes it a bit harder this time around. Heli Lindfors: And I think the second topic is actually the FX that Kai was referring to earlier on. So, in the beginning of the year, the FX was still more similar level to last year, whereas now in the second half of the year, we see more of an impact of the volatility of the FX. So that will definitely be a factor in Q4 as well if the kind of rates remain as they are currently. Kai Öistämö: Correct. And it's again, a good illustration of that. If you go back and look at our second quarter results, we said that there was not really a material impact on FX yet. Nikko Ruokangas: Okay. So, this year, more normal seasonality expected than last. Kai Öistämö: Correct. Correct. Correct. Nikko Ruokangas: Then last one from me, at least at this point on cost side. So, you mentioned the EUR 3 million restructuring expenses. So, if we leave those out, so to me, it seems that your operating expenses were down in weather despite the acquisition or fixed expenses, but then clearly up in Industrial side. So, if you exclude those restructuring expenses, were those including something extraordinary? Or is it kind of describing the trends you are now having? Kai Öistämö: Yes, the extraordinary costs, as I said, was they were related to the restructuring that what I talked about in relation to the energy business and renewable energy business. So, I think your conclusion was exactly right. And like if you look at our numbers, and we have now a good trend also on the Industrial Measurement side, we have been a little bit longer kind of time series again, over the past 2 years where we had more modest growth, we were more conservative in spending and spending increases in Industrial Measurements. And now we see kind of clearly more growth opportunities and a bit more spending, not going wild, but a bit more spending on Industrial Measurement side. Operator: The next question comes from Pauli Lohi from Inderes. Pauli Lohi: It's Pauli from Inderes. I would start with this demand-related question. Have you seen any signs that the increased tariffs could start to dent the good market activity you have seen in the U.S. market or elsewhere compared to what we have seen already this year? Kai Öistämö: So elsewhere, I don’t see it go – it could have – now I understand your question. So okay, no, answer is no. We can't point anything in the U.S. or anywhere else, that would be at all related to tariffs. It's been more positive than what would have speculated pre-tariffs. Pauli Lohi: Well, that's definitely positive. And your scheduled deliveries for the rest of the year in the Industrial Measurements are a bit lower compared to Q3 last year. So, do you think that the current favorable market activity could still offset this? Kai Öistämö: No, Pauli, remember what Heli just said in terms of the exchange rate changes, which is, if you compare to last year, I think we are about 15, 16 points cheaper dollar than it used to be a year ago, and Industrial Measurements and Xweather are highly exposed to dollars. Heli Lindfors: Also, in dollars and renminbi. And especially for the Industrial Measurements, the renminbi is also very important currency. Kai Öistämö: So, it's not [indiscernible] then you can draw your own conclusions. I would not be worried about the demand picture per se. Pauli Lohi: Okay. Then, regarding the cost base, how large savings you expect from the recent restructuring on an annual level? Kai Öistämö: We have not communicated that. I'll put it this way that when we said in earlier quarters, similar calls, we've said that we are going to adjust our operating expenses to the level that matches the market picture on the renewable energy business. We've now done it. Pauli Lohi: All right. Then, regarding the new logistics center, do you expect any short-term cost-base increase or operational extra costs from starting to use the new center? Kai Öistämö: No, no, no. Absolutely not. Pauli Lohi: And do you see that it could provide any material financial benefits next year? Kai Öistämö: Over time, I think it clearly -- I mean, if you think about it now, fully automated material flow, it should yield into kind of a better rotation days, better management of the inventory, multiple benefits in terms of how much capital is tied into an inventory, and different tools also to optimize that inventory. So obviously, we have a business case, and over time, this is an investment where we expect a payback as well. Pauli Lohi: Okay. Finally, on Xweather, do you think that the current roughly double-digit organic growth rate is sustainable going forward? Taking into account the new product launches and maybe potential synergies from the recent acquisitions? Kai Öistämö: Yes. So, short answer, yes. And here also, short-term, we have to take into account the currency exchange rates when we look at the euro reported numbers. But typically, we do the pricing changes at kind of around the year-end in all of the businesses, well, at least Industrial instruments as well. So, we need to then see how those impact kind of going forward as well, depending on how the exchange rates then turn out to be. Operator: The next question comes from Waltteri Rossi from Danske. Waltteri Rossi: A few questions. First, about the Industrial Measurements orders in America. The report said that they grew slightly. I think the wording was a bit softened from the previous. So, have you seen any changes in the activity level in the Americas? Or is this only related to the FX? Kai Öistämö: So, I think I earlier said that it was a 9% on a constant currency level year-on-year. And if you look at the reported currency, it would have been 2%. So here, you see kind of direct impact on the currency exchange rate. I would be very happy with the 9%. I'll offer you that. Waltteri Rossi: Okay. Okay. Perfect. But you don't disclose how much the Americas is of the Industrial Measurements orders. Can you give us... Kai Öistämö: Not on orders and not on a quarterly basis, but it's clearly the biggest market that we have, and it's clearly north of 1/3 of Industrial Measurement sales. Waltteri Rossi: Okay. Okay. Then, about the Xweather business, it said that over the past quarters, it's actually been contributing positively at profitability. So, does that mean that the segment is now making positive operating profit already? And if so, are we talking about a low single-digit margin, or what? Kai Öistämö: We are not reporting that business separately. So, I will decline to answer you. So, we have not quantified. But contributing positively kind of would imply that it actually makes money. Waltteri Rossi: Yes, yes, sure. But I was just making sure that we're talking about EBIT on an operating profit level. But kind of... Kai Öistämö: Remember on the EBIT level, we did the acquisitions last year. And that's obviously kind of the amortizations of those assets raised the hurdle on one hand. But if you look at on an operating profit side, then that's what I'm referring to. Waltteri Rossi: Okay. Okay. So, we should still expect that you are continuing to invest in the growth of that business and shouldn't expect the profitability to kind of start to improve or scale up from now on? Kai Öistämö: Yes. Well, if software business grows 50% year-on-year, one should expect that it scales. Waltteri Rossi: All right. But you are still keeping the view that you are shifting focus from growth to clearly start improving the profitability side only later during this strategy period? Kai Öistämö: No. There's no shift between profitability and growth to be foreseen. It's always -- like when you are scaling a software business, it's always a kind of a trade-off, of how much you invest in the growth. And typically, in this kind of a software business, it really is investments into sales and demand generation rather than increasing the R&D when software businesses are scaling. And then the return on investment should be quite quick. And it's relatively easy to verify as well, kind of from a cost of acquisition side. If you kind of invest in customer acquisition cost, you can actually measure what the return on investment is, and it really should be quite quick. Waltteri Rossi: Okay. Okay. Lastly, as of now, earlier in the year, the expectations were kind of lowered because of the U.S. tariffs and how they will impact, especially the Weather and Environment public side sales. How would you describe the impacts of the tariffs on public sales this year today? Like, has your view changed since at all... Kai Öistämö: I would say no impact so far on the Weather and Environment sales in the U.S. from the tariff side. As you may recall, we did kind of a plan for the tariffs, and we mitigated the tariffs by actually shipping into our own warehouse in the U.S. so kind of that we have a little bit of time to pass the tariff costs into prices. And I think we are executing against that plan very well. Operator: The next question comes from Joonas Ilvonen from Evli. Joonas Ilvonen: It's Joonas from Evli. I have a couple of questions about Industrial Measurements. You already discussed this question of cost, but if I can come back to it. So, I think like R&D costs were down this quarter at a relatively low level. And of course, I think there's always a bit of like a quarterly variation when it comes to that. But then also you say -- and I saw your total OpEx still grew quite a bit, albeit it was still at a rather moderate level. But you mentioned this investment in sales and digital capabilities. So, my question is that how do you see the kind of overall Industrial Measurements investments continues to grow from now on? Like, do you expect it to grow basically at the rate of sales volumes? Kai Öistämö: If I take all kind of that will be a good approximation over time. Obviously, these things change over, like vary over quarters, and the quarters are not equally strong, and so on. So, kind of different quarters are a little bit different. But over time, that's a good proxy. Joonas Ilvonen: Okay. That's clear. And then you mentioned IM APAC growth that was especially strong. So, was this mainly due to China? Or were there any other countries there you would like to highlight, and which specific industry groups, like you mentioned, life science and power in your report? Kai Öistämö: Yes. As I said in the prepared remarks, if I start from the kind of latter side of the question, it came from all segments in the Industrial Measurement side. So, all market segments, grew. And it's both in China and outside of China. China did have a marked change compared to the second quarter, clearly having more market optimism in the third quarter, great to see. But it was not only in China, it clearly was outside of China as well. And if I pick one very interesting market, which continued to be strong is Japan, and where obviously, lots of industrial activity, and we have a great position in Japan in various different segments, but not only those 2 markets. It's broader than that. Joonas Ilvonen: All right. So, there weren't basically any kind of weaknesses in terms of geographic regions or... Kai Öistämö: No, no, not that I can think of. Joonas Ilvonen: Okay. That's clear. And maybe one last question. So, you already discussed this IM gross margin headwind due to exchange rates and tariffs. So, it's going to fade at some point, but did you comment on when exactly is it going to? Does it still continue over Q4 or into next year? I mean, considering how things look right now? Kai Öistämö: Yes. So, 2 things on, if you look at gross margin, and this was a bit on the net sales side as well, what I tried to say earlier, one thing is we -- and then they function differently if you think about FX and then the tariffs. The tariffs, what I said and what we've been saying all along, is that we fully mitigated that by raising prices. And that has kind of by itself a negative relative impact on gross margin. And I'll do you the math, pardon my details here. But if you think about that -- let's imagine that the transfer cost out of which the tariffs are counted would be 100 units. And then you put a 15% tariff on it. Now that cost would be instead of EUR 100 million, that will be EUR 115 million. And you fully move that into the sales price and let's do an easy math and call it like it's EUR 200 million and you put EUR 15 million on top of EUR 200 million. Now you fully mitigated it. And if you do the relative calculation, there is a negative impact on relative number. Joonas Ilvonen: All right. Kai Öistämö: Sorry about that. I think it's good to understand that that's when you -- and then on FX, as I said, you can't manage FX-related changes within a quarter or within a half a year. You cannot like fluctuate your local prices based on exchange rates. But we do try to be smart when we do the annual price increases as we do every year in the beginning of the year. So that's a chance of actually taking the currency exchange rates and our costs and everything else into account. Operator: [Operator Instructions] The next question comes from Matti Riikonen from DNB Carnegie Investment Bank. Matti Riikonen: It's Matti Riikonen. And sorry if I have to ask some questions again because I had to jump to another call for 15 minutes during the presentation. So, some of the questions might have been asked already. So, I start with the math question that Kai you just explained. So is it in rough terms, we are talking about that the price increase that you made, it covers the kind of cost price, but then the margin that comes on top of that doesn't follow. So, you are not getting the compensation for the lost margin compared to the normal situation where you put the kind of markup to the imported price. Kai Öistämö: Yes. And even if you put a markup to it, you can do the math in different scenarios, how much of a markup you need to do in a high gross margin business in order to kind of mitigate the gross margin if you -- and there's obviously a limit how much you can pass on the costs if you think about the tariff a drastic change in the middle of the year, it's what's acceptable from a customer side. So yes, in a way, what you asked for. And then I'll go back to what I just said that beginning of the year, we are going to review our prices anyway, and we are going to look at different kinds of costs and things that where do we put the prices going forward. Matti Riikonen: Yes. But basically, isn't it always so that when the new year begins, you are trying to kind of achieve the same profitability level or higher what it used to here. So, it takes some time for the following price increases to kind of correct the situation into what it was from there. Kai Öistämö: Yes. That being said, when the book-to-bill cycle is 3 weeks in the Industrial Measurement side, that's pretty fast. Matti Riikonen: Right. Then regarding the Weather and Environment, when you talked about received orders and how they were kind of suffering different things, you meant that there's also industrial cyclical fluctuations or I don't remember what the term that you used was. But what does that actually mean in the Weather and Environment business? So, what kind of industries are there on the customer side that are affected if you're not talking about the renewable business, which I would... Kai Öistämö: No, I was not talking about the renewables business. And maybe I'll just explain it a bit more. So, it's not really an industrial activity. Think about it this way that this is -- it's a relatively small market in the end, I mean, in the total market as we are the market leader in terms of an absolute market leader in this. So, you kind of -- it's a relatively small market. And then many of the products are having their natural cycles and sometimes they are quite long cycles. So, if I take the radars that we just sold, I'm not expecting the same kind of a complete renewal of Finnish network until 15 years from now or something like that. And here, relatively small individual things like the COVID-19 fund to renewal, which was used to renew Southern European radar network kind of increased the tide a bit and now the tide is kind of lower as we speak. But that has been a phenomenon, if you go on a longer-term kind of a history in meteorology and aviation that the relatively small 2 big airports get to be built at the same year, kind of increases the size of the market and the years are not exactly the same. So, this market kind of just has a phenomenon where there's a relatively small discrete demand changes change the size of the market somewhat. Matti Riikonen: Yes. Okay. And that clarifies because maybe the wording in the Finnish stock exchange release was about the industry and basically, it means the sector where you operate in the crisis. Kai Öistämö: Correct, correct. That's good. Thank you, Matti, well spotted. Matti Riikonen: If we then think that these sector changes tend to be quite slow and one year is not necessarily enough to make it go away. Are you afraid that this would continue also in 2026? I'm not talking about the order backlog, which you already have or the Indonesian order, which might come sometime next year, but basically new weather orders that you were -- or you are expecting every year. Is there a danger that we would see an even slower 2026 when it comes to new business? And if your order backlog is decreased this year, then, of course, you would have less to kind of deliver in '26 based on old kind of order backlog. Do you think that is a kind of risk that you would like to highlight? Or of course, you have to take a stance on that when you give the guidance for '26. But at least -- I mean, at this point of the year, you probably already know, and you have made some internal plans how it's going to be in the weather business in '26. So, any thoughts on that would be great. Kai Öistämö: Correct. Yes. So let me answer -- well, it's exactly like you said, we're going to give guidance next year when the time comes. But let's think about it this way that there are the product sales, which are selling to existing projects and existing customers and the fluctuation on that business is very small. The fluctuation really comes from the kind of new projects and bigger and smaller and so on. So, there's kind of a level that has been at least relatively stable in the past, and I don't see any changes why that assumption should be different going forward. But then how will individual projects come through and so that obviously will not only impact our sales but actually like if kind of a couple of big orders come -- big projects come in a half a year, that kind of theoretically means also irrespective of who wins that impacts the entire market as well. Matti Riikonen: All right. So we will wait for your guidance for '26 to see that what is your plan that you promise to deliver. Kai Öistämö: Correct. Matti Riikonen: Okay. I'm just saying that it doesn't look so good when this year, of course, the order backlog has been decreasing. And when you have basically negative outlook for all key metrological... Kai Öistämö: For the rest of the year. Remember the outlook. Matti Riikonen: What would need to happen that it would kind of recover to a normalized situation in '26. Do you foresee some positive changes to this current trend, which you have now said that will impact '25, but do you see some positive triggers that would change the situation for '26? Kai Öistämö: Yes. Like I said, so as the market impact -- market size is really individual like bigger orders can swing that different ways. So that's something that is, as you know, historically, it's really, really hard to say when certain things kind of come through. The pipeline remains on a good level on new projects. But kind of a flow through the pipeline continues to be very unpredictable as it has been in the past. So... Matti Riikonen: All right. Fair enough. Final question, you already touched the topic of Industrial Measurement and some investments in digital capabilities. Just out of curiosity, what kind of digital capabilities are you talking about? Kai Öistämö: So online as a sales channel, whether we talk about to our distributors or whether we talk about to the end users, especially on the services side. If you think about -- so today, it's mainly -- we don't have much of a sales through the digital channel. We are doing demand generation, but the actual sales transactions we do very little through digital channels and that capability we are building. And very important, like kind of first it will have an impact on the services delivery side. But longer term, I believe, like in any other business, obviously, kind of -- it will have an impact on our overall sales, I believe, as well. Matti Riikonen: Does that mean that the existing customers would kind of want or need a different approach to maybe order from you? Or does it mean that you are seeking new business through those channels? Kai Öistämö: I think in the end, it will be both. And I don't think any businesses will remain as they have always been, and I'll just use the car analogy here that nobody ever believed that a car can be bought online and look where we are today. Try to buy a Tesla offline, then they will throw you online. Operator: The next question comes from Waltteri Rossi from Danske. Waltteri Rossi: So just to still clarify the Xweather profitability question. I was actually -- I think I was talking about EBITDA and operating profit as a synonym previously. But just let's talk about EBITDA. So, is the Xweather currently contributing positively on EBITDA level? Kai Öistämö: Yes. Subscription sales to be specific. That's what we report today. We don't report separately Xweather. Operator: There are no more questions at this time. So, I hand the conference back to the speakers. Niina Ala-Luopa: Okay. That was our Q3 call. Thank you all for joining. Thank you for the questions. Thank you, Kai. And I would like to mention or remind that we will arrange a virtual investor event for analysts and investors on November 24. And there, Kai and our business area leaders will provide an overview of Vaisala's strategy and business areas. And you will find more information on the event on our investor website, vaisala.com/investors. But now thank you all for joining and have a nice rest of the week.
Operator: Welcome to today's Covenant Logistics Group Q3 2025 Earnings Release and Investor Conference Call. Our host for today's call is Tripp Grant. [Operator Instructions] I would now like to turn the call over to your host, Mr. Grant. You may begin, sir. James Grant: Good morning, everyone, and welcome to the Covenant Logistics Group Third Quarter 2025 Conference Call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subsequent to risks and uncertainties that could cause actual results to differ materially. Please review our SEC filings and most recent risk factors. We undertake no obligation to publicly update or revise any forward-looking statements. Our prepared comments and additional financial information are available on our website at www.covenantlogistics.com/investors. Joining me today are CEO, David Parker; President, Paul Bunn; and COO, Dustin Koehl. Our business remained resilient in the third quarter, although margins were compressed, particularly in our Asset-Based Truckload segment due to an inflationary cost environment, persistently high claims expense, headwinds from excessive unproductive equipment and continued pressure on volume and yields in our Expedited and Dedicated segments. Year-over-year highlights for the quarter include consolidated freight revenue increased by 4% or approximately $10.2 million to $268.9 million. Consolidated adjusted operating income shrank by 22.5% to $15 million, primarily as a result of year-over-year increases within our combined Truckload segment. Our net indebtedness as of September 30th increased by $48.6 million to $268.3 million compared to December 31st, 2024, yielding an adjusted leverage ratio of approximately 2.1x and debt-to-capital ratio of 38.8%, as a result of executing our share repurchase program and acquisition-related earn-out payments. The average age of our tractors at September 30th increased to 23 months compared to 20 months a year ago. On an adjusted basis, return on average invested capital was 6.9% versus 8.1% in the prior year. Now providing a little more color on the performance of the individual business segments. Our Expedited segment yielded a 93.6% adjusted operating ratio. While this result falls short of our expectations for this segment, we've been pleased with the resilience of this segment over the prolonged downturn. Compared to the prior year, Expedited adjusted operating ratio increased 160 basis points. The average fleet size shrunk by 31 units or 3.4% to 861 average tractors in the period. We expect the size of this fleet to flex up and down modestly based on various market factors. As market conditions improve, our focus will be on improving margins through rate increases, exiting less profitable business and adding more profitable business. Dedicated's 94.7% adjusted operating ratio also fell short of both the prior year and our long-term expectations for this segment. We were successful in growing the dedicated fleet by 136 tractors or approximately 9.6% compared to the prior year as we have continued to win new business in specialized and high service niches within our Dedicated segment. Going forward, we plan to reduce certain of our fleet in this segment that is exposed to more commoditized end markets, where returns are not justified and continue to invest in areas that provide value-added services for customers. Managed Freight exceeded both revenue and adjusted operating income compared to the prior year. but fell backwards sequentially due to the loss of a short-term customer that scaled up in the first half of 2025 and rolled off in Q3. Our team showed resilience through this difficult freight cycle with their ability to bring on new freight, handle overflow freight from Expedited and reduce costs to offset lost business. Over the longer term, our strategy is to grow and diversify this segment. And we know that an operating margin in the mid-single digits generates an acceptable return on capital given the asset-light nature of this segment. Our Warehouse segment experienced freight revenue and adjusted operating income that was slightly below the prior year quarter and yielded an adjusted operating ratio of 92.1%. The adjusted operating profit and adjusted operating ratio in this segment was a solid improvement sequentially. Going forward, we anticipate top line revenue growth and operating income growth, as a result of a large customer start-up scheduled for November. Our minority investment in TEL contributed pretax net income of $3.6 million for the quarter compared to $4 million in the prior year period. The impact of incremental bad debt expense in the quarter compared to the prior year reduced TEL's pretax net income. Although TEL's overall business remains strong, exiting capacity from the general freight environment is expected to impact them again in the fourth quarter and potentially beyond. Regarding our outlook for the future, we anticipate the fourth quarter of the year to remain challenging. with the continuation of the soft freight market, combined with the impact of company-specific factors that will result in what we believe to be an unseasonably soft quarter despite a slight positive impact from peak. Company-specific factors within our line of sight include the negative impact of increased claims accruals, the negative impact the U.S. government shutdown is having on volumes of freight we carry for the Department of Defense and accelerated customer bankruptcies with TEL will all prove to be challenges for the quarter. In addition, as capacity exits accelerate within the general market, we anticipate the cost to procure transportation will likely lead our ability to capture rate increases from our customers in our Managed Freight segment, resulting in constrained margins. Despite both the general market and company-specific challenges over the short term, we are increasingly optimistic about the pace at which the freight market should recover. Recent enforcement of government policies concerning English language and non-domicile drivers have seemed to accelerate the pace of capacity exiting the market. We believe the impact of this trend is being masked by consumer pause and uncertainty as a result of elevated interest rates and volatility of global trade policy. Our belief is that consumer demand will improve with the continuation of monetary easing and the eventual settlement of trade tensions. In addition, the impact of recent tax policy will further facilitate demand. Regardless of when the market environment turns, our team is ready to move quickly to execute with urgency to capture additional market share and the appropriate amount of operational leverage that returns appropriate levels of capital to our shareholders. Thank you for your time, and we will now open the call for any questions. Operator: [Operator Instructions] And our first question comes from Scott Group of Wolfe Research. Scott Group: So I want to start where you wrapped up just talking about the capacity backdrop and maybe just give us some color on what you're actually seeing in the market with respect to capacity exits? How big of a deal do you think this is going to have? And then I don't know maybe just like -- there's certainly more talk in the market about this. Why don't you think we're seeing any impact on like national spot rates? I know there's a lot of talk about local markets getting tighter, but why do you think this isn't showing up necessarily in national spot rate data? David Parker: Scott, it's David. Yes, I mean, this is something that didn't drive me crazy trying to figure out where all this is going. And I would say a couple of things because great first question. From a standpoint, I'm more excited. I've been in this thing 53 years. I'm more excited right now than I've ever been in my entire career for the next 2 to 3 years. I see some things that we've never ever been in a position, where we are starting to get the government that is now starting to get concerned about who's driving trucks and why should they be driving them, and you are sensing that, and I just see an avalanche that's in the process of happening. And as I think about from spot rates, I mean, we have seen compression on margins on our brokerage side in the last 3 weeks when all this stuff started. And it is right now defined to a lot of individual states. And I met yesterday with our brokerage group and California, Texas, Oklahoma, Chicago, those are states and cities that keep coming up over and over. And you have got third parties that are scared to go to those states, right, wrong or indifferent. And that's the reason why you are seeing instead across the board that you are seeing, I believe, spot areas of the country, where it's becoming tighter and rates have gone up in those areas because a lot of these truckers are still going to go. I'm not going to Oklahoma. I heard Oklahoma pulling over 135 trucks and [ sending by the ] jail and all those stories that we're all hearing. I'm not going to Laredo, Texas. They're going to stop everybody that can't speak English. And so that is really leading the effort. Now that said, will it be a red versus blue states, red being aggressive, blue not being as aggressive. But I'm here to tell you that if they continue to have -- if we all continue to wake up every day, with another fatality accident by illegal immigrant, it is going to spread throughout the United States. And as I look at this, as I look at non-domiciled CDLs, as I look at the English-speaking issue, as I look at ELDs, there is more cheating going on and toggling is unbelievable guys to what's going on with ELDs. And so far, the government has suspended 5 or 6 companies. I'm here to tell you there's going to have to be hundreds -- there's about 950 that are approved ELD suppliers, and they need to look at every one of these ELD suppliers. We all thought that when we went to ELDs that everything was going to be legal and you're not going to have log books and everybody is not going to be cheating. Well, I'm here to tell you, us big guys, we love the ELDs. We love not having log books. But when you got toggling going on, it's rampant cheating that is happening. I run a truck 100,000 miles, they're running trucks 140,000 miles. And so the government is just now for the first time ever that it's starting to go down this road And so, I feel very confident that over the next 6 months, 1 year, 2 years, whatever it's going to be, it's going to be a snowballing effect that we are going to have less drivers on the road. We're going to have safer drivers on the road. We're going to have English-speaking people that can have the ability to speak English and understand it. We are going to have ELDs are going to be in much better shape, get rid of the multiple MC numbers. Guys, it's rampant with shutting down this, opening up that one. Today, I shut down tomorrow, I open up another one. We're just now learning about this and just now starting to do anything about it. So as I look at capacity, one of the things that strikes me is this is coming to a head. It's going to be -- it's in the process of exiting. But as good as anything, I'm here to tell you the funnel is stopping coming in. whatever that number is, that's leaving, whether it's 1,000 or 200,000, they're going to leave, but there's not going to be a flood of entries coming in And so, that is extremely encouraging that for the first time in my 53 years, there's actually a constraining of supply that's happening. And there's not going to be a bunch of new drivers from all over the world that's entering the truck driving workforce. I looked at that, Scott, and I'll shut up here in a minute. You asked the first question of what I've been [ alive ] with for the last month. But as I look at this supply, then I start looking at what the Fed is doing on interest rates. They're going to continue to lower interest rates. They're going to continue to pump the economy up. This physical -- the stimulus package that we all hear Trump talk about $17 trillion, $20 trillion [indiscernible] I don't know what the number is. One thing I do know it's gigantic. And there is a lot of freight on these plants that are being built in America, even if it takes 2 years, there is a lot of business that's coming to America that's got a lot of freight in it from these new plants that are going to be coming up. So as I look at supply, I am more excited than I've ever been. There is no doubt. I think we and the industry, we got some jump to go through. What do I mean by that? Brokerage, margin compression is happening now. I see it in our business. All the brokers are going to see it in their business. As I look at used truck market as we speak today, it's less than what I want, but I believe it's going to turn around fairly soon, maybe next year because nobody is going to buy a Class 8 truck. We don't know what we're going to pay for a Class 8 truck. I'm at ATA next week in San Diego, and I can't tell you what a price of a truck is right now or if I'm even going to buy one. So it's going to drive up the used truck prices. So that I'm happy about that. This government shutdown. It hurt me on my Department of Defense business, but I'm a month into it. We'll see what happens there, but it's not helping. Eventually, it will -- eventually will go back to work and everything will be good there. But -- and lastly, I was just telling the guys here before we got on here, one of the things that I'm really excited about, as we all know, our industry has not raised rates in 4 years. I haven't raised rates virtually at all in 4 years. And I was in a meeting in the last couple of days with sales and both on our legacy dedicated and on our expedited, we got 8 or 10 accounts that we have asked for rate increases and actually have been given 2.5% to 4% in the last couple of weeks. That excites me. Is that something that's going to happen on every customer I got? I don't know, but I haven't seen it in 4 years, and I'm starting to see it. I'm starting to see bids at all-time highs. So you're seeing the customers -- our bids are up 17% since August. Well that don't happen. That's a November, December, January, February event, and it started happening in August and September. Why is that? It's because our customers are concerned about capacity, even though we all need freight right now. So Scott, I'll shut up. As I look at it, I'm more excited than I've ever been about '26, '27, '28. If anybody is ever going to buy a trucker, it's now. If they don't buy truckers now, they don't need to be buying truckers. So that's where I'm at. James Grant: Thanks, Scott. Let me give you a couple of things. David talked a lot about the regulation, and there's no doubt that we're sensing it. And then we've given some color on maybe demand freight going forward. I would say there's a couple of words we're using internally right now. One is patience. I think we're all going to have some patience, and I'll get a little bit into that. The other is there's going to be some pain before there's some gain and pain in used truck prices and [ see ] smaller guys go bankrupt and flood the market, pain with some brokerage compression. But every time in history in this business, there has to be pain before there's gain. And I think that's where we're at. On the patient side of things, specific to your spot market question, the week after Secretary Duffy came out and talked about the non-domiciled CDLs, I think you did see spot rates go up and especially in those markets David was talking about. And what happened was a lot of those folks just stayed home. A lot of these non-domiciled CDLs have been issued in a -- they're concentrated in a handful of states. I mean there's some in every state, but there's some West Coast states that had a lot of these non-domiciled CDLs. The reason you hadn't seen the spot rates jump up is that the 2 largest West Coast states that have the non-domiciled CDLs, they have not -- they're in the process of trying to figure out what are they going to do with the people that have the non-domiciled CDLs. And so I think California is supposed to decide in the next 5 days, they're supposed to direct carriers what to do with those drivers. And so the first 5, 6, 10 days, you had some people that maybe had those type licenses stay home. Well, they've had to get back to work. So they're still out there running around. In the next 5 to 10 days, you're going to -- California is going to tell the carriers, here's what we want you to do. Here's the process to do that. And so I think that's when you're going to start seeing some of that capacity exit. And I think on that side, it's probably sooner than later. And then to David's point, the other is you're stopping filling the bucket with new entrants into the market. So I don't know if that helps paint a picture on maybe why the spot rates haven't jumped. But you had some of them stay home right when it came out, then they've gotten back to work. But I think in the next 5 to 10 days, you're going to see some of these states roll out the policies that here's what you do. And I think over 30 days after that is when you'll start seeing some of this capacity exit. Scott Group: Okay. Super helpful. David, at the risk of getting your blood pressure any higher. I'd like to ask a follow-up if I can. How do I think about like how many of these drivers do you have from just your perspective on enforcement, like it's always been easier to enforce large fleets than mom-and-pop truckers. Like how do you change this? And then like -- but is your perspective here that ultimately, like this is going to be a big help for large fleets? And is it a risk to a brokerage model in general? David Parker: Yes. Yes. I mean, we got a $200 million brokerage, and it does concern me because I think led by Duffy at DOT, I think that they're going to -- I think there's going to be enough leading from DOT that is going to go after more of the small carriers that are illegal than it is the big carriers. So yes, I think that I'm concerned about compression on my margins, on my brokerage. But I think after a period of time, whether that's 3 months, 6 months, I don't know, but a period of time that you'll start seeing the asset rates rise very nicely that will offset any of the brokerage compression. James Grant: Yes. I think, Scott, when I was referring to there's going to be some pain before there's gain. I think that, that was probably more on the brokerage side because there will be some pain going through this with a lot of brokerages. And to your point, it should help asset companies more. Brokers make money -- brokers make money when rates are rising hard, when rates are falling hard. And so, where they are getting troubles in the middle and if you got contract rates and hadn't [ reset ]... David Parker: And if the government was not doing nothing, if the government was just going to be on the sidelines, it all go back to the way it's always been for 40 years. But I don't believe that's happening. There's unbelievable amount of pressure, that the government is putting on it, but I think constituents are putting back to the government now saying, am I going to wake up every day to a fatality accident. Scott Group: Okay. And then just last one, if I can, just turning to your business. You talked about near-term pain in Q4. Any way to sort of size sort of what you're thinking about for Q4? And I know you've got a lot of like that linehaul LTL business. How is that performing right now? David Parker: Yes. The LTL is down, and it's interesting because forever, LTL would slow down in November, December, that was typical, to be honest with you, from COVID for 2, 3 years, say, '21, '22, '23, we really didn't see the LTLs really slow down a lot. But the LTL guys are slow. I mean, their business has been hit. And I think overall, the volumes are down, and I don't know when that is necessarily going to come back. It will, but I don't know when it's going to be. So yes, I look at that, that concerns me. I look at how long is the government shutdown going to be on my DoD business because it's only half of what it was. And so, we got to deal with that and then compression on the brokerage side of the business. So I think we got to go through that junk. In our TEL business, I'm happy about a couple of things. They've grown more business, more sales, more leases is what I'm trying to think of. The customers so far in the last 6 weeks, which is a good sign, but they also had to take back more trucks than they've had. So I'm seeing some sloppiness in the TEL business that concerns me. And so, I think all that adds up to fourth quarter that it isn't going to be third quarter. It's going to be less than third quarter, and I'll let [indiscernible]. James Grant: Yes. I think it's too early to put a number on it, Scott, but I would say it's softer than what it seasonably will be for all of the reasons that David talked about, mostly on the truckload side and also on the TEL side. I think from our line of sight and what we have seen, even though it's early in this quarter and then the visibility that we have into the peak, which there's some -- a little bit of good peak in freight in there, but it's not enough to offset some of the negatives that we've seen over the last first 2 or 3 weeks of October. So I do think it's unseasonably softer, but I'd be hesitant to put up. David Parker: That's interesting because I am somewhat optimistic about what I'm seeing about peak business. And some of our customers have already gotten back with us saying that carriers have given back freight to them, which is on the brokerage side. And so that's also interesting to me. So yes, peak is not going to take care of some of the reductions, but I am optimistic that peak seems like it might be a decent peak for us. Scott Group: Guys, I don't know if you can still hear me, but just so we can hear you. James Grant: Okay. Thank you. We're going to put it on mute. Our operator has disappeared. David Parker: Yes, we're trying to see if there's any other questions. Scott Group: Maybe you convince the operator who's busy buying trucking stocks. David Parker: He is busy. The market is open. We're trying to get the operator to see if they can facilitate any questions. So we'll see what happens. Scott Group: Just so there's [indiscernible], do you want me to ask more questions? David Parker: Yes, please. Scott Group: So sure. I mean, let's talk pricing a little bit. You -- I think you said you're starting to have some bid activity. Just what you're seeing from a pricing standpoint, early thoughts on '26 bid season. James Grant: Scott, it's early. As David said, we're going out to some customers. And I think low single digits is kind of the norm. I mean, we need a lot more than that. Inflation has been significant in '22, '23, '24, '25. And I'm betting the price of trucks is going to go up next year and health insurance and casualty insurance is going to go up. And so, we need a lot more. But I think low single digits, there are customers that are willing to have good active discussions around those numbers just from the recent experience we've had. Scott Group: Okay. And you made a comment that no one wants to buy trucks right now. What -- you're going -- and you'll be at ATA next week, but what are you doing from a fleet perspective? What are you thinking about from a CapEx standpoint James Grant: So a couple of things. Yes, I'll speak to it and then let David follow up. First off, nobody's pricing -- most years, most of the large fleets already have pricing by this point. But with all the questions around tariffs and there were some announcements in early -- late September, early October about additional potential big truck tariffs. And is that on the whole truck? Is that on parts of the truck? Is that which vendors? There's a lot that's been up in the air. Hopefully, by next week, we'll know more. We're meeting with all the OEMs while out in San Diego. And so I think nobody has been placing orders because you don't know what the price is, a; b, the order boards at all these OEMs are very slack right now. I mean, in the fourth quarter, going into next year, order boards are very, very slack on truck and trailer equipment. As far as our fleet numbers, I think our total fleet size in total, it's probably be about the same. We may rationalize a little bit of business if we can't get the margin out of it. From a net CapEx standpoint next year, I'll let you give a math. David Parker: Yes. I think, one, it's a big question mark. It is going to be somewhere probably net in the neighborhood between $70 million to $80 million, but I would be hesitant to commit to that. I would say that could be subject to change. We have a number of new trucks that we have financed and are sitting on the fence that are ready to go into service. And so we have quite a bit of unproductive equipment right now, whether it's new or used. We don't want to fire sell it. We don't -- I think we're in the position to kind of sit on it for a little bit longer and take advantage of a market swing. But at the same time, our fleet, although it aged probably 2 or 3 months compared to the prior year, it's a little bit of a misnomer because we've got a lot of new equipment that hasn't gone into service. So our fleet is very, very healthy. Our balance sheet remains very, very healthy, and we're going to buy some equipment. We just -- it's hard to commit to a number when you don't have pricing on it. And I think that gives us a little bit of an advantage over some of the other peers in our group, as we've been pretty consistent about replacement and replacing our fleets in bad times and having a good healthy fleet with the latest and greatest safety equipment on it and the best MPG, if you will, so fuel economy. And so that's what we're going to continue to do. We're going to continue to operate that playbook. And I think we've got a little more flexibility than maybe some of the others in the market to whether it's either delay purchase or reduce purchases next year, but we're just kind of in wait and hold mode in terms of absolute volumes. Scott Group: Have you guys tracked on the operator yet? James Grant: No [indiscernible]. Operator: Our next question comes from Jason Seidl from TD Cowen. Jason Seidl: I appreciate you joining the fray again. David, one of the things I love about you, you're just so calm about the markets and not really ever enthused. So [indiscernible]. I wanted to touch a little more on 2 different things. Can you talk a little bit about the government shutdown in the DoD? You said that business is down about half. Sort of how should we expect that to flow through the P&L? And once the government does reopen, whatever that may be, how quickly do you expect that freight to come back? And then I have a question on sort of capacity. M. Bunn: Yes. So Jason, this is Paul. A couple of things. On the DoD business, I would say about half that business will kind of just be lost. There's kind of the way they move that freight. Some of it is just inventory movements and then some of it is vendor type freight. And so, it's not like the -- some of it will build a backlog that has to be moved eventually and some of it won't. It will just be kind of lost freight. We've moved a lot of those trucks onto a lot of Expedited loads just to keep the trucks moving and keep the drivers getting paid and that kind of stuff. And so I think you'll see a little bit of a spike whenever the government opens back up. But I don't know that it's not going to be a one-for-one makeup. As far as it flowing through the P&L, I think the question is, does if it lasts the whole quarter, it's going to be pretty impactful on Expedited's results. If it's -- if they get something done first week of November, which I guess that's next week at this point, then maybe it will be a little muted. I hate that we've lost the month of October because a lot of these bases shut down around Thanksgiving, a lot of them shut down around Christmas. And so, October is a month that we really, really run hard in that fleet. I mean, really, October 1 to about November 15th is when that fleet is really flowing. And so the government shutdown could come at a less opportune time. I mean it's going to hit us. As David said, it kind of stinks, and that's another one of my -- there's pain before the game, but that business will come back. Jason Seidl: And I guess turning back to capacity, as Scott mentioned, we're really not seeing much of an impact in the spot market. But I think, obviously, you've seen what we've written. I think that eventually comes back as we keep sort of rolling through the months here. But my question is, what could accelerate this? Is there -- we've heard some smattering that some insurance companies have talked about taking some actions and then some customers have talked about taking some actions in terms of exposure to carriers who might have non-domiciled drivers. How should we sort of frame that up? And what are you hearing in the marketplace? David Parker: I think everything you just said there, Jason, is in the process of happening. I think you're going to see insurance companies that are not going to insure non-domiciled CDL license. I think that, that will be happening. And as Paul is saying, of course, California is leading it. We're going to hear next week or so what California is planning on doing about it. But I think you got insurance companies that are in the process of saying, we're not going to insure this. I guarantee they're sitting around in their offices right now, looking at their book of business, saying, what do we have on the books, and they're going to have to get their hands around that. But the process will be that there's going to be a bunch of folks, who aren't going to have no insures. So I think that, that is one thing that is definitely going to be transpiring, but then it's just going to be pressure from the government owned all the stuff. We didn't talk about cabotage. I mean, that's unbelievable how much cheating is going on in cabotage. And these people coming out of Mexico and going to Canada and going to the United States is supposed to go straight back and they sit here for a month going back and forth. The government is under that. That's under [ Christy Dan ] 39:57. They are under that, and that is coming to the top that I think will bring more freight back to us, U.S. carriers. There's just a lot of stuff that whether it takes between now, if I was going to throw one it's April, I don't know, only because fourth quarter is virtually over with here. It is what it is. And first quarter gets into the weather. But with the government's heavy hand, of which I agree with, their heavy hands, you are going to see capacity leaving the market, but better than anything, no new capacity coming. I don't know if you saw this, Jason, but we look at a number that is a plus and minus of MC numbers on a weekly basis. And to give you an idea, for the last few months, that number has been negative 50 to 100 MC -- less MC numbers a week, 50 to 100. Last week, it was over 400 -- 400 less. That was powerful. I look at another number that I keep an eye on. Look at total volume, a report that we look at that has taken all the reports that are coming out on whether it's cash or truck stop this and they accumulate them all and volume is down 17%, but rejections are up almost 2%. What is that saying? This is -- this week volume is down 17%, but rejections are up almost 2%. It's telling you something about capacity. And so that's the kind of stuff that we're looking at as we go forward. Jason Seidl: Well, David, let's say you're right and the recovery is in April with the start of spring shipping season because you finally get the volume back. Bid season, we're going to be well into that already and probably not at exceedingly favorable rates at this stage. What's your ability to go back to the customers and say, "Hey, look, it's June, the market is different, right? David Parker: 100%, not 99%, 100%. I mean, I love my customers. Nobody love my customers like I love my customers. But at the same time, if I've not raised you in 4 years, if I cannot make an argument that says 3 months into a pathetic rate, then I don't have the ability to be able to get a rate increase when the market allows me, then we have no relationship. And I don't want them in my portfolio. And so that, you will -- but it won't be me. It will be the entire industry. So as I look at that on the rates, Jason, that we talked about in DoD, and we got a margin compression on this, and we got to go through some difficult times that I think -- I think it is -- I'm happy with it. I'm very pleased with it because as I step back from this junk that we're having to go through and -- or the negatives or whatever word you want to use, and I look at how much positive demand opportunities, foreign investments, accelerated depreciation, as I look at rate cuts from the Federal Reserve, as I look at all this domestic investment that Trump is bringing, as I look at the Bill Back America Beautiful or whatever they're calling the -- whatever that bill is called. I mean, it is going to be -- and with ISM being down below 50 for 3 years, with what Trump is doing on bringing back plants, I promise you, interest rates going down, it is going to feed the economy with capacity leaving. So that's why I'm excited. A perfect storm. Jason Seidl: [ I can ] certainly see it. And listen, I don't have 50 years in trucking, but I have just over 30 years. So it's -- it's definitely one of the more interesting times I've seen for sure. But listen, gentlemen, I appreciate the time as always, and I want to stay safe out there. Operator: And our next question comes from Reed Seay from Stephens. Reed Seay: You've given a lot of good color, but I wanted to come back and touch on some of this government business. You mentioned like the volume will come back once the government comes back. But here in the fourth quarter, let's say maybe we get a shutdown here at the end of the month. Could we potentially see a catch-up of these volumes in 4Q? Or how would you expect maybe the cadence following a return of these volumes? David Parker: Yes. Reed, here's what I'd say. That's then to go and I speak to that. It won't be a full catch-up. It'd be a partial. There could be a partial catch-up. And part of what handcuffs the catch-up is these bases are -- they're going to shut down around Thanksgiving and they're going to shut down around Christmas. And so just the way the calendar is going to fall, it's going to hamper a full recovery and just some other things just around the nature of the freight. I mean, it's still moving. It won't be a full catch-up. You can have a partial catch-up if the government reopened sooner than later. Reed Seay: And then it looks like during the quarter, costs were moving in the right direction. Can you talk about maybe some actions that you've taken on the cost side here in 3Q? And maybe is there any more to come in 4Q if we have demand continue to be weak in the LTL or in certain parts of the business? M. Bunn: We've continued to try to make sure our headcount matched our -- was matching our freight volumes and tried to make sure we weren't getting frivolous on overhead. We've really shut down any significant growth in overhead. We did that earlier in the year, maybe even the end of last year, knowing this market was continuing to drag out. We saw -- I would say we're happy with maintenance costs, some things we've done on those and to really manage them down. And so I would say it's just more of blocking and tackling Reed and trying to make sure that we're battening down the hatches for the -- we've been in this storm for 36 to 40 months now. You can't be getting that over your skis on costs. James Grant: Yes. Yes, I agree. There were some call-outs. I'll just add on to what Paul was saying. There were some call-outs to some pretty hard cost-cutting decisions in the quarter for which we provided a table in there that kind of reconciled those. But those were difficult decisions. But I would also say that throughout the year, we've been very cost conscious and some of the headwinds that we saw probably earlier in the year, whether it's first quarter or second quarter, were equipment-related costs. And just as we grow certain of our dedicated fleets and we start to expand geographies, and it takes a while to begin to optimize your cost profile in those geographies and within those fleets and -- we're trying to find the sweet spot. We're trying to develop the amount of density needed to efficiently operate that equipment. And there was some cost in the quarter in Q3 related to some start-up costs, I would say, for shops and new hires, shop salaries and things like that, that we think will make us more efficient in the long run. So we continue to invest in the things that are going to return the right capital to our shareholders. It's just clunky. And I will say there was some clunkiness in the quarter. But I think longer term, as we continue to grow that business, you're going to see some efficiencies from it. Operator: And our next question comes from Jeff Kauffman from Vertical Research Partners. Jeffrey Kauffman: Just some quick kind of look ahead here. What are you expecting to hear from the other carriers at ATA that might be a little different than what you were thinking a couple of weeks ago? David Parker: I think it's just going to be an add-on Jeff; of everything we've talked about today. I think you've got motor carriers that are mad at. I think you got motor carriers that are happy with what the government is doing. And I think that, that's going to be the tone at ATA. I really do. Then the side note is going to be OEMs, what are we going to do about trucks. I think that will be -- I think that's going to be the 2 pressing issues. Don't you, Paul? M. Bunn: Yes, truck. I think it's going to be government regulation. It's going to be how bad has inflation been over the last 36 to 42 months that you haven't been able to get in rates and regulation trucks and inflation that has been a recovery in rates. That will be the 3 big talking points. Jeffrey Kauffman: And then just one follow-up question because I know a lot of questions were asked by Scott Group. The shares are about 9x earnings right now, give or take. I know it frustrates you. It just is what it is. I know the balance sheet is in good shape, but what are you thinking in terms of share repurchase here? I mean, you don't want to get over your skis and buying them in a tough environment. On the other hand, shares appear like a bit of a gift at these valuations for a buyback. David Parker: No, I agree with you. I think our shares are highly discounted. And I think there's a lot of potential value there. To your point, the balance sheet is in good shape. Our debt today in terms of EBITDA leverage is just over 2x. We -- for a variety of reasons, we bought back a ton of stock. In the first half of the year, we had an earn-out payment, and we front-loaded to avoid some tariffs on almost all of our equipment. And so I do think our margin -- our debt potentially, just call it, free cash flow, if you will, maintenance CapEx and cash from ops, cash flow from operations will improve in the fourth quarter and will allow us opportunities. And I don't want to commit. We do have some availability under our share repurchase program that was approved by the Board. But I don't want to commit to say that we're going to buy back any of that, but we have a full range of options that we've exercised in the past, whether that's M&A or whether that's share repurchases and continuation of dividends. And we feel like our formula is working, and we're going to stick with that. Operator: At this time, there are no further questions. I'll turn the call back over to Tripp for closing remarks. James Grant: All right. Well, thank you, everybody, for joining us for the third quarter earnings call for Covenant Logistics. We look forward to talking to you next quarter. Thank you very much. Operator: This concludes today's conference call. Thank you for attending.
Operator: Ladies and gentlemen, welcome to the Lonza Q3 2025 Qualitative Update Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Philippe Deecke, CFO. Please go ahead, sir. Philippe Deecke: Good morning, good afternoon, and a very warm welcome to our Q3 qualitative update. Before we go into more details, please let me remind you that we intend to provide you with a general business overview with our qualitative update, but we will not be sharing figures related to our financial performance. We will do so on the 28th of January with our full year update. Let me start with an overview of our group performance before we move to the performance of our business platforms and [ THI ]. Afterwards, I will provide you with an update on our business contracting and our growth projects, followed by the current macroeconomic situation before I close for the Q&A session. Today, we report a strong Q3 performance across our CDMO businesses aligned with our expected full year trajectory. Supported by this strong performance, we are confirming our 2025 outlook for the CDMO business, which we upgraded at half year, with sales growth of 20% to 21% at constant exchange rates compared to the prior year and a core EBITDA margin in the range of 30% to 31%. Excluding Vacaville, which is now expected to contribute at the upper end of the range of around CHF 0.5 billion in sales and a better-than-expected core EBITDA margin in 2025, we expect low teens percentage organic CER growth and a margin improvement in our CDMO business, in line with our CDMO organic growth model. As anticipated at our half year release in July, we confirm our expectation of higher sales in H2 2025 than in H1. We see a healthy progression of our core EBITDA margin in line with the 2025 outlook. Progressing well on its expected recovery path, we also confirm our full year 2025 outlook for the Capsules and Health Ingredients for CHI business at the low to mid-single-digit percentage CER growth and an improved core EBITDA margin in the mid-20s. Based on FX rates at the beginning of October, we can reiterate an anticipated year-over-year headwind of around 2.5% to 3.5% of sales and core EBITDA for full year 2025. However, our margin is well protected due to a strong natural hedge and our hedging program in place. Moving to the performance of our business platforms. Let's start with Integrated Biologics. Integrated Biologics continue to see strong momentum with robust demand for its large-scale mammalian assets. This is further supported by Vacaville, as I just commented on. In our small-scale mammalian assets, we see a high level of utilization, and we have a good level of visibility for the remainder of this year. But let me come back to the early-stage business later to provide further context and outlook. Overall, we are pleased to report a continued good operational execution alongside maturing growth projects and growth and margin drivers in our Integrated Biologics business. Turning to our Advanced Synthesis platform. We continue to see strong commercial demand for our small molecules and bioconjugates capacities as underlined by the deal mentioned in our Q3 release, signing a large multiyear supply agreement in small molecules. Growth is supported by new capacities in small molecules with our new highly potent API plant and bioconjugates. The business platform further benefits from a robust operating execution and the demand for complex products supporting margins as witnessed already with our half year results. Our Specialized Modalities platform improved in Q3 as expected. Also, we expect the full year performance to remain moderate in the context of the softer first half. Deliveries are weighted into Q4 and depending on the progress of key customer projects and decisions, sales may also fall into 2026. Life Science had a good Q3 with robust growth, and we are pleased to report that microbial returned to growth in Q3 after a softer H1 performance. In Cell & Gene, ongoing pipeline variability and complex manufacturing continues to weigh on asset utilization. While we anticipate a gradual recovery in operational performance, it will remain below the strong execution seen in 2024. Cell & Gene is a business with strategic relevance to Lonza and is our aim to increase resilience of the business over time, commercially and operationally. But in the meantime, some business variability may persist. Our CHI business returned to positive CER growth in Q3, in line with the expected full year trajectory for 2025. We are pleased to report that also the pharma capsules business is seeing improved demand trends and returned to positive volume growth in Q3. We can, therefore, confirm that both our nutraceuticals and pharmaceutical capsules business has moved beyond the post-pandemic destocking phase. In the current geopolitical environment, our manufacturing footprint in Greenwood, South Carolina and Puebla, Mexico is continuing to support CHI's customers to navigate the evolving geopolitical environment. In the U.S., recent preliminary affirmative countervailing and antidumping decisions continue to be in place, allowing more balanced competition for pharmaceutical and nutraceutical capsules in the U.S. In Q3, we progressed with the necessary internal carve-out measures to prepare our exit from the CHI business. The good business momentum highlights the attractiveness of the CHI business as a leader in its markets, and we are confident in the business ability to return to historical CER sales growth in the low to mid-single-digit percentage and a core EBITDA margin above 30%. We are, therefore, confident to exit the business in the best interest of our customers, employees and shareholders, and we will do so at the appropriate time. Before turning to our growth projects, let me say a few words on contracting. For 2025, we expect again a healthy level of contract signings across technologies and sites. Recently, we were able to sign several significant contracts, including a further strategic long-term contract for integrated drug substance and drug product supply of bioconjugates. In our small molecules technology platform, we signed a large multiyear commercial supply agreement. And in Integrated Biologics, we were able to secure a fourth significant long-term supply agreement for our Vacaville site. In Vacaville, we expect further contract signings in the coming months, and we continue to see strong customer interest for large-scale U.S. capacity. Let me say a few more words about Vacaville. One year after closing the acquisition, we are very pleased with the site's integration into Lonza's network, which is progressing in line with plan. The site continues to demonstrate robust execution in support of Roche and maintaining excellent quality track record, which is also reflected in our expectations for Vacaville continuing at the high end of our initial estimate for 2025. The site is also preparing new product introductions for 2026 and the first phase of CapEx is progressing as planned to the [indiscernible] system and [indiscernible]. [indiscernible] our new highly potent API facility is progressing well, and we commenced full commercial operation in July 2025. Our large-scale mammalian facility also showed good progress in ramp-up activity in Q3. GMP operations are underway and commercial production is expected to ramp up gradually from 2026 onwards. Ramp-up activities for both facilities are those progressing in line with plan. Before closing my remarks and opening for the Q&A session, let me reiterate our expectations of no material financial impact on Lonza from the currently announced official U.S. trade policies. The so far announced U.S. tariffs do not include tariffs on API, intermediates and raw materials as described in the Annex 2 of the Executive Order. We further remain confident that our well-diversified global manufacturing footprint with large capacities in the U.S., Europe and Singapore will enable us to support our customers' global manufacturing requirements today and in the future. We, of course, remain vigilant to the continued evolution of the situation and potential impact on our businesses. We also continue to closely monitor biotech funding trends and recent fluctuations in funding levels are expected to have only a minimal impact on Lonza's growth momentum in 2025 and beyond, with early-stage activities representing only approximately 10% of the CDMO business and only a portion of that business originating from companies requiring funding. To close, let me provide some final remarks. Lonza is on track to deliver on its full year 2025 outlook. We see strong contracting demand with customers seeking Lonza's services for their strategic projects. Our growth projects are on track and are contributing to our growth this year and will continue to do so also in the years to come. In the current geopolitical environment, our large commercial business provides stability and our global asset positions us well to support our customers in the complex manufacturing needs. With that, I would like to thank you for your time and hand over to Sandra. Operator: [Operator Instructions] Our first question comes from Ebrahim Zain from JPMorgan. Zain Ebrahim: Hopefully, you can hear me okay. This is Zain Ebrahim from JPMorgan. I'll stick to one question, which is on Vacaville. So just on the significant contracts you announced this morning, how should we think about the timing of tech transfer for the contract? And when can it start contributing to revenues? And related to that, just based on this contract, where are you with respect to your target for being able to maintain Vacaville sales stable over the midterm? Philippe Deecke: Thank you very much for the question. So I think as we've stated in the past, I think large commercial contracts are usually not for immediate use of batches. It takes time to tech transfers, as you say. But I think all the contracts we are announcing for Vacaville are part of the plan to offset the reduced need for batches from the initial Roche contract. And so this new contract is part of that plan and reconfirms that our stated trajectory for Vacaville of more or less flat sales in the next few years is exactly on track. So this contract will start working the [indiscernible] site next year [indiscernible] to revenue over the next 2 to 3 years. Operator: The next question comes from Charles Pitman-King from Barclays. Charles Pitman: Charles over here from Barclays. Hopefully, you can hear me okay. Just a question, please, on guidance. Just wondering, given you kind of raised the backfill outlook to the upper end of your around CHF 0.5 billion range this year, but you ran the top line guide. I was just wanting to confirm if there's one portion of your business that you think is kind of deteriorated such that you are just kind of reiterating that top line guide? And just maybe whilst we're on guidance, I was wondering if you were -- if you could provide commentary on your thoughts on FY '26 guidance next year, which is currently looking for low double-digit growth. I know you don't typically comment, but worth asking. Philippe Deecke: Yes. Thank you, Charles. Thank you for offering the answer to your second question. [indiscernible] more seriously. Look, I think on guidance for this year, I think we gave you a range. There's always things that move up and down. So certainly, I think we're pleased with the Vacaville progress this year and continue to be pleased with it. So that's helping us. On the other hand, there are, as we mentioned, some uncertainty on SPM. So I think within that range, this is what the puts and takes are. So that's for 2025. We're 3 months away. So we kind of have good visibility on what's going to happen for the rest of the year. On 2026, as you know, we usually guide in January when we report full year numbers. So we will stick with that. For 2026, I think we talked about early stage, which is not going to have a material impact on our numbers no matter what the funding level is. And I think we're very pleased with the contracting, as we said, for 2025, which will also help in '26. So, I think everything is in line for '26, so far [indiscernible]. Operator: The next question comes from Charles Weston from RBC Europe. Charles Weston: I wanted to stick on 2026, please. So not asking for a number. But since the large mammalian Visp asset will be ramping in '26, which could presumably be a bit dilutive to margin with a relatively high base in Advanced Synthesis in Vacaville, there might be some headwinds to margin improvement year-on-year in 2026, perhaps a bit offset by the Advanced Synthesis improvements. But are there any other moving parts that I haven't mentioned that could drive an improvement next year? Philippe Deecke: Yes, Charles, so again, you summarized very well, which is great to hear. I think, again, yes, we have large growth assets that start dilutive as it is very normal. Vacaville, I think, is probably more of a top line headwind because this is going to be more or less flat for next year. So that's a big block of sales, if you want, that does not contribute to growth next year. Nevertheless, I think our organic growth model is looking at low teens growth and improved margin year-over-year. And that's, I think, for now the new best assumption for next year. Operator: The next question comes from [ Theodora Rowe Beadle ] from Goldman Sachs. Unknown Analyst: So just on the separation of the CHI business, is the process of carving out this business now complete? And are you able to share with us anything in terms of the timing of separation or when you'll be able to communicate the decision? Philippe Deecke: Yes. Thank you for the question on CHI. So I think the progress on the internal separation, which contains of legal entity work, [indiscernible] as I said in my speech before, is progressing well. I think we're nearing completion of that. And I think the rest of the process is really an internal process that is going to be between us and the other parties and we will inform when things are decided. Operator: The next question comes from James Vane-Tempest from Jefferies. James Vane-Tempest: On back of [indiscernible], I mean you've announced you won a new contract and there's potentially some in the coming months. So just to clarify, should we understand that there could be some by year-end, but we're not going to find that out until full year in January if you don't plan to disclose more in real time like your peers? I guess I'm asking this because some of them have been more visible to the market in terms of the number of contracts they've signed, which suggests a much more competitive environment. So perhaps I can also ask what you're seeing on that front? Philippe Deecke: Yes. Thank you, James. So again, we usually do not communicate all the contracts we're signing. This would be issuing a lot of release. I think if you remember, our signing in 2023 was about CHF 12 billion. Last year, it was about CHF 9 billion, if I recollect right. So I think these are a lot of contracts being signed. We do not have a history and we do not mention every single contracts we're signing. I think we decided to do so on Vacaville to provide you, I think, more visibility into our confidence to fill the assets over time. So this is the reason why we're kind of providing you the Vacaville contracts on a more regular basis. And usually, our customers also have no interest for us to publicly announce their contracts. So we don't do so. I think indeed, I think if we were to sign further contracts this year, you'll probably hear about it at the end of January when we report our full year numbers. And I think as stated as well, I think we should get off the rhythm of announcing contracts for a single site. And probably we won't do so in 2026. But let's see, I think the contracting situation is very strong. We're also very pleased with the interest in Vacaville. So we have a lot of concurrent negotiations ongoing. Some will finalize over the next few months. Others may take longer. These are very large contracts. These are usually also complex multiyear contracts that need time to be negotiated. In terms of the competitiveness and what our peers are doing, you would have to ask them. I think for now, we are very pleased to have a very strong footprint in the U.S. with attractive capacities available in the U.S., but also our sites in Europe and Asia see good demand. And you saw that some of the contracts that I mentioned today also include some of our non-U.S. assets. So I think on the contracting side, we're very pleased with the progress and with the interest of companies, large and small to contract with Lonza. Operator: The next question comes from Patrick Rafaisz from UBS. Patrick Rafaisz: Just a follow-up on the large contract wins. For Vacaville, is there any chance you could add a bit of color on size and types of capacities, the amount of capacity required. And the same for the large bioconjugate contracts, for which site was that specifically? And can you add some color on what types of services from your end did this include? Philippe Deecke: Yes. Patrick, happy to take your question. So I think on the Vacaville contract, I'm not going to directly answer your question, but maybe give some more color about the contracts that we have signed so far. I think all of these contracts, including the latest one, are multiyear contracts that are significant for the site as well and which are very important for us to offset the declining revenue coming from Roche. So I think these are very helpful projects because they start contributing very soon, helping us to maintain flat sales for Vacaville. Important also to note that we see great interest for both assets within Vacaville. I think, as you know, we have a 12,000-liter asset and a 25,000-liter asset. And I think also coming from the market, I think there were certainly question marks around the market still requiring such large reactors like the 25,000 liters we have. And we're very pleased to say that, yes, indeed, there is big demand for such large reactors. So we see contracting for both our 12,000-meter reactor and our 25,000-meter reactor. So again, Vacaville for us following a very -- tracking very well along the plan that we had. And this confirms our outlook for kind of flattish sales to 2028 and then increasing sales further on as we ramp up utilization of the site. For the integrated offer contracts that we also mentioned today, I think here, we are offering several services, including producing the protein, the conjugation and the drug product. So again, I think the reason why we mentioned this contract to you is because, again, this shows the interest from pharma companies, large and small, to ask us for integrated business, which cover more than one modality. So more and more we get asked to do not just the protein or not just the conjugation or not just the drug product, but the combination of several modalities across our platforms. And I think we believe that this is, again, something where Lonza can clearly differentiate, of course, in the areas of ADC, but not only. Operator: The next question comes from Thibault Boutherin from Morgan Stanley. Thibault Boutherin: My question is just on tariff and the CapEx announcements in the U.S. by large pharma players. Clearly, there is a push from the U.S. administration to bring more manufacturing to the U.S. So did you have discussion with the administration and confirmation that investing through CDMOs such as Lonza meets the administration goals for locating manufacturing in the U.S.? So it makes sense that it does, but just wondering if you had an explicit confirmation that it would fit what you're looking for? Philippe Deecke: Yes. Thanks, Thibault. So I think there are multiple discussions happening. I think with the U.S. government, certainly, pharma companies are talking directly. The Swiss government is talking directly. We also have contacts that we use. I wouldn't go into more details of what's happening in these discussions until there's a result. I think this would be premature. So I think we'll wait until something is official and is being communicated. But overall, I think I reiterate that also we at Lonza are investing significantly in the U.S. So of course, if you compare this with the numbers of big pharma, this is a different magnitude. But I think as an industry leader, we are investing significantly in the U.S. in multiple sites -- of our investments in Portsmouth, of course, our investment -- of our large investment in California and Vacaville, and there are other sites that are seeing further investments. So I think we feel very confident to also here be very much in line with the intention of the government, but more importantly, the intention of our customers to have capacity and strong capacity in the U.S. So we will continue to offer increased capacity in the U.S. And if our pharma customers can leverage this, then even better. But in any case, having a footprint in the U.S. is helpful to our customers. Operator: The next question comes from Manesiotis Odysseas from BNP Paribas. Odysseas Manesiotis: First one, Philippe, I wanted to follow up on the detail you provided on the contracting between Vacaville bioreactors. Is it fair to interpret your -- the details you provided there as that you've landed in these 4 contracts, at least one of them has to do with the 25,000 liter? And on top of that, within these 4 contracts, you also have contracts for more than one bioreactor? So that's the first one. And secondly, could you remind us the pace of the new Visp mammalian capacity ramp? Is this still expected to run at full utilization by '28, '29? And has there been any plans change given the recent push to reshore capacity in the U.S.? Philippe Deecke: Yes. So let me give you -- maybe reconfirm what I want to say just before on the Vacaville contract. So indeed, I think we have been able to contract for both assets for the 25,000 and the 12,000. So I think there's a different mix in the contracts. I'm not sure I understand what you meant with the contract for more than one reactor. But I think I can confirm that the new contracts that we have signed are involving both 25,000 and 12,000 assets. I think on the Visp, on our large-scale mammalian facility, I think we mentioned a while back how the profile of such large-scale facilities look like. And indeed, it usually takes 2 to 3 years also to ramp. So since we started late this year, you can do the math as to when we would expect utilization to be high and contributing favorably to our bottom line and to our margins. So I think this asset is a typical large-scale asset that will follow this path. Yes. So everything is in line. We started GMP processing this quarter. So progress is in line with our plans. Operator: The next question comes from Max Smock from William Blair. Max Smock: Maybe just a quick one here on Vacaville. I appreciate the fact that revenue is going to be flat next year in 2026. But in the past, you've talked about margins at that facility ramping up as you replace some of that Roche revenue with additional third-party customers. Can you just talk about how you expect Vacaville margins specifically to trend next year? Philippe Deecke: Yes, Max. So I think on Vacaville, again, we said 2 things. One, I think revenue will be more or less flattish through '28 and margins will progress over time to basically be neutral to group by 2028. So I think this continues to hold true. I think margins this year were a bit better or better than we expected, as we mentioned in our first half call. Now of course, this was also an easier year. 2025 was an easier year for Vacaville since they were basically continuing to produce the products that they knew from before for Roche with not a lot of new tech transfers to do, et cetera. So 2026 will be more challenging, if you want, for Vacaville because they have not only the implementation or the execution of the CapEx investments to do, but they also need to start to onboard and tech transfer new programs while still delivering the batches for Roche. So it's a more complex year. Nevertheless, I think we believe that our goal for 2028 is confirmed, and we'll have to see closer to next year how the margin exactly behave versus what they do this year. I think we had before the question from Charles around the dilutive effect in terms of growth for the company. So in terms of growth, yes, this is a dilution. In terms of margin, we'll have to see if we can replicate this year's margin or not. But the progression -- the progression over the next 3 years is confirmed. Operator: The next question comes from Falko Friedrichs from Deutsche Bank. Falko Friedrichs: My question is on your Cell & Gene business. And now that we are in the middle of your fourth quarter, can you speak a little bit more about your level of visibility into this year-end pickup and what exactly is driving that? Philippe Deecke: Yes. So I think if you talk only about the Cell & Gene business, I think there, we met in H1 that we had also operational issues. I think remember this is a much more manual and very complex manufacturing process. So there, I think we see improvement in the second half and that business has certainly improved versus the first half. But I think we're still managing the complexities. And overall, for the year, we don't expect this to be as good of a year as we had in 2024. Now if you talk about SPM as a platform, I think there also, we saw better performance in the third quarter. We remain with several customer decisions and customer projects that are late -- happening late this year in Q4. And so these are the one that could still move between '25 and '26 and this we will only know probably late this year. Microbial, which is the second large business in this platform, is performing well and it's usually a very stable and strong business. We explained the first half in our July call with mainly a very high base and some contract -- some construction in our assets in microbial. But otherwise, this is kind of a stable and nice business. So overall, we see SPM better in the second half, but for the full year, certainly will be difficult to offset what happened in the first half. Operator: The next question comes from Sebastian Bray from Berenberg. Sebastian Bray: It's on the early-stage fraction of the portfolio. It was mentioned earlier in the call that it looks relatively robust, at least on a few months' view. How far does the visibility extend in this area? And if conventional biotech funding measures, which suggest that this business faces a funding squeeze in '26, are no longer a reliable guide, where is the money for these end customers coming from? When they go and sign the contract and if research funding is not there anymore, where is it coming from instead? Philippe Deecke: Sebastian, so let me first reconfirm what you said very quickly. I think the early-stage business is strategic for us because it allows us to look very early into the pipeline of pharma companies as to what services and technologies will be needed in the future and also contributes clearly to our future commercial utilization. So I think this is an important business for us. But again, this is not a very large business for us given the sizable commercial contracts and commercial assets that we have. So this early-stage work is about 10% of our CDMO revenues. And also for us, the funding in biotech is only a portion of what drives this early-stage work for us because many of our customers don't require external funding. This can be large pharma, large biotechs, midsized companies that have their own revenue and own funding. So only a portion of the 10% is actually really relying on external funding being from [indiscernible], follow-ons, venture capital, et cetera, et cetera. So I think what we wanted to make clear is that the funding levels that we're seeing today, and I'll come to this in a second, will not play a major role in the Lonza performance. And we have visibility of roughly 6 to 9 months in that business. That's usually the delta that you see between any movement of funding and then again, these smaller company relying on funding being able to deploy the capital they received or having to reduce their spending because of the lack of funding. So this is usually the visibility that we have. So for now, we would see roughly into the first half of 2026. And for there, I think we see good level of utilization certainly for '25 and early '26. I think the inquiries that we're seeing have reduced slightly throughout 2025, but not dramatically. And on the funding side, actually is good news. Q3 was actually better than Q3 last year. So I think this is not only bad news there. I think we saw a great increase in pipe funding, which is one of the other mechanisms for these companies to get money. [indiscernible], I think, was holding well at similar level as previous quarter. So I think this is still something that's volatile, but the decline that we've seen since early '25, at least has been put on hold for Q3. That's at least what we see, but that's probably the same data that you are all looking at. So I would say we're happy with the progress certainly in '25. We are confident that we can manage '26 and that we will continue to see interest for early-stage work to then be retained within the Lonza network over the years to come. Operator: Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the conference back over to Philippe Deecke for any closing remarks. Philippe Deecke: Yes. Thank you, everybody, for the question and the interest in Lonza. Again, a strong Q3 and confirming our outlook for this year. So I think good news from our end, and I wish you a great end of your day and talk to you in January. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Hello, and welcome to the First BanCorp Third Quarter 2025 Financial Results. My name is Carla, and I will be coordinating your call today. [Operator Instructions] I would now like to hand you over to the Investor Relations Officer, Ramon Rodriguez to begin. Please go ahead, when you're ready. Ramon Rodriguez: Thank you, Carla. Good morning, everyone, and thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the third quarter of 2025. Joining you today from First BanCorp are Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website at fbpinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman. Aurelio Alemán-Bermúdez: Thank you, Ramon, and good morning to everyone, and thanks for joining our call again today. I will begin by briefly discussing our financial performance for the third quarter and then move on to discuss our outlook for the franchise. We're definitely very pleased with the progress on the quarter we delivered another exceptional quarter of financial results that underscore our ability to produce consistent returns to our shareholders and consistent progress in our franchise metrics. We earned $100 million in net income during the quarter, including the benefit of certain nonrecurring special items that Orlando will explain later. However, adjusted for these items, normalized earnings per share grew 13%, when compared to the prior year. Most of the improvement came from record net interest income and well-managed expense base and disciplined loan production. Turning to the balance sheet. Our strong capital position enabled us to continue supporting our clients on the loan production side. We grew total loan by $181 million, of course 5.6% linked quarter annualized surpassing $13 billion in total loans for the first time since 2010. Since the beginning of the second quarter, we do -- we've been experiencing slowdown in consumer credit demand. Especially, I want to comment on the auto industry, which has been below our original expectation for the year. After the sector-specific tariffs were announced in April, industry-wide sales began trading down, which has negatively impacted overall loan origination in this space during the year and loan mix production. For some additional context, total retail sales in our industry are down 7% year-to-date as of September. But when looking at the third quarter sales, they are below 17% compared to the third quarter of the prior year. Thankfully, we've been able to mitigate this slowdown by executing our growth plan within the commercial and construction lending segment, coupled with a steady loan production progress in the residential mortgage business, it's about business diversification and regional diversification contributing to that. In terms of deposit, it was a good quarter. We grew $140 million on core franchise deposits, trends in the market flows remain favorable. Although we're seeing higher competition in just seeking flows, we believe that could be temporary, particularly from affluent customers and government relations. That said, we continue to focus on what is our core deposit franchise, while deploying a measured approach to retaining valuable cost core customer's relationships. In terms of asset quality, credit continues to behave in line with expectations, consumer charge-offs stabilizing, healthy commercial credit trends and a 7% reduction in nonperforming assets. Finally, our earning performance translated into growth across all capital ratios, while expanding our loan book organically and being able to repurchase another $50 million in shares of common stock. Consistent with the strategy of returning 100% of annual earnings to shareholders, as we announced yesterday, our Board authorized an additional $200 million share buyback program that we expect to execute through 2026. Please let's move to Slide 5 for some additional highlights on the macro. In terms of the macro, the operating background remains, as to stay stable with uncertain elements that are surrounding us as we continue to monitor and assess the potential impact that evolving trade dynamics are bringing to the market, any potential impact of federal government shutdown, tariff-related inflationary pressures are having pressure on businesses and consumers across our regions as everybody is realizing. That said, we are encouraged by the resiliency of the labor markets in Puerto Rico, the continued improving trend of the tourism activity and the recently announced investments of manufacturing companies expanding production capacity in Puerto Rico or establishing new facilities. We believe that the ongoing expansion of the manufacturing sector, coupled with the consistent flow of federal disaster funds earmarked for infrastructure will continue to support local economy for the years to come. Our franchise is in a great position to benefit from the tailwinds and we expect to strategically deploy our excess capital to continue growing organically our regions. Year-to-date, total originations other than credit card activities are up by 7% when compared to prior year. We're supported by sales discipline, client outreach, well-managed regional and business line diversification, which is really the strength of our franchise. Based on current commercial lending pipelines, development rate environment and the ongoing normalization of industry-wide auto sales. Our loan growth guide for the year will probably be closer to the 3%, 4% range, depending on commercial credit line uses and any level of unexpected payments that we don't have knowledge today. We will provide an updated guide on our -- for 2026, once we report our fourth quarter in January, and also full year forecast for next year. With that, I would like to thank you for your interest in First Bank, I'm definitely very proud of our team's accomplishments to 2023 -- 2025 and look forward to a strong end of the year. And now I will turn the call to Orlando to go over financial results in more detail before we open the call for questions. Orlando? Orlando Berges-González: Good morning, everyone. As Aurelio mentioned, we had a strong quarter with net income reaching $100 million or $0.63 a share. That compares to $80 million or $0.50 a share in the second quarter. Return on average assets for the quarter was 2.1%, much higher than last quarter. This quarter did include a few things, and I'm going to touch upon. We had a $16.6 million reversal of valuation allowance on deferred tax assets that are related to net operating losses at the holding company. This quarter, a new legislation was enacted in Puerto Rico allowing limited liability companies to be treated as disregarded entities, based on this change, we now expect that NOLs at the holding company will be mostly utilized against revenues from one of its subsidiaries, resulting in the reversal. Also, during the quarter, we collected $2.3 million in payroll taxes related to the employee retention credit. That's been outstanding for a while, but we collected it this quarter and it resulted in a reduction of payroll costs, obviously. We also recorded a $2.8 million valuation allowance for commercial other real estate property in the Virgin Island as a result of an ongoing litigation, which involved potential loss of title of the property. If we were to exclude the DTA valuation allowance and employee retention credit components from results. Non-GAAP adjusted earnings per share were $0.51 and return on average assets was 1.7%. The quarter also had a reduction of $3 million in provision as compared to last quarter. Provision was $17.6 million. This was mostly due to a $2.2 million benefit in the allowance for residential mortgage. We've seen updated -- improved updated loss experience in this portfolio and also the projected macroeconomic for unemployment has an improvement in the trends. In terms of our net interest income, we reached $217.9 million for the quarter, which is $2 million higher than last quarter. That includes a $1.3 million improvement due to an extra day in the quarter. Compared to the third quarter, net interest income the third quarter of 2024, I'm sorry, net interest income, it's 8% higher. Net interest margin for the quarter was 4.57%, 1 basis points higher than last quarter. And over the last 4 quarters, margin has grown 32 basis points. As stated in prior calls, the reinvestment of the cash flows from the investment portfolio resulted in a 16 basis points expansion in the investment portfolio yields. However, the margin ended up growing less than the 5 to 7 basis point guidance we had provided. Aurelio mentioned, we saw a slowdown in consumer lending originations for the quarter, which was below our expectations and ended up reducing the average balance in the portfolio by $12 million. Remember, these are high-yielding portfolios, and they are more accretive to net interest income. Also, we saw increased competitive pricing pressures led to a 15 basis point increase in the cost of government deposits and a 2 basis points increase in the cost of time deposits. The average cost of all other retail and commercial deposits remained flat at 72 basis points as compared to prior quarter. In addition, when we look at the mix of deposits, we see a shift with time deposits growing $166 million at the end of the quarter, while lower cost interest-bearing nonmaturity deposits decreased $45 million. Regarding other loan portfolios, we saw improvements in the quarter with net interest income on commercial loans increasing $3.8 million related to $126 million increase in average balances, 3 basis points increase in yields. And we had an extra day in the quarter, which also improved the net interest income. The average balance on the residential portfolio grew $19 million for the quarter. For the fourth quarter, we will continue to benefit from yield improvements from reinvestment of the cash flows from the investment portfolio, but this will be partially offset by the 2 projected Federal Reserve rate cuts that would result in reduction in yields on the floating commercial loan portfolio as well as the cash balance at the Fed. Remember, we have a floating commercial portfolio, which about half of it is floating with either prime or SOFR, mostly as it's a priced today. In that we have an asset-sensitive position repricing on the asset side will happen faster than on the liability side. We expect that margin for the fourth quarter to be sort of flat with increases in net interest income coming from loan portfolio growth. In terms of other income for the quarter was relatively flat, slight reduction on card processing income due to lower transaction volumes. Expenses for the quarter were $124.9 million, which is $1.6 million higher than last quarter, which is mostly due to the net loss on the OREO operation related to the $2.8 million valuation adjustment I just mentioned. Also, payroll expenses decreased $300,000 due to the $2.3 million employee retention credit that basically compensated for a $1.8 million increase we had from annual marine increases and from an additional payroll day in the quarter. If we were to exclude OREOs and excluding the employee retention credit, expenses were $126.2 million, which compares to $124 million in the second quarter, which is slightly above our guidance, but pretty much in line with the $125 million to $126 million we had provided. The efficiency ratio for the quarter was 50% pretty much unchanged also, when compared to prior -- to the second quarter. The projected expense trend for technology projects and business promotion efforts we plan to do in the fourth quarter. And so we reiterate our guidance expense base of $125 million to $126 million for the next couple of quarters. And still believe our efficiency ratio will be in that range of 50% to 52% considering expenses and income components. In terms of credit quality, it remained fairly stable in the quarter. In the quarter, NPAs decreased $8.6 million basically $3.8 million decrease in nonaccrual loans, mostly residential mortgages and CRE loans and a $5 million reduction in OREO balances. That includes the $2.8 million adjustment on the VI property I mentioned. Inflows to nonaccrual were $32.2 million, which is $2.2 million lower than last quarter. Mostly commercial and residential mortgage inflows of $6.7 million, which are offset by -- I'm sorry, a reduction of $6.7 million in residential and commercial with an offset of $4.5 million increase in consumer inflows. Loans in early delinquency, which we define it as 30 to 89 days past due increased $8.9 million, mostly 1 case in the Florida region, a $6 million commercial case that the payment was not received until later in October. In terms of consumer loans, early delinquency remained relatively flat from the second quarter, increasing only $300,000. Moving on to the allowance. The allowance is down $1.6 million to $247 million. The decrease was mainly in the residential mortgage portfolio as loss severities have continued to improve. On the other hand, the allowance for commercial loans increased based on the portfolio growth and some deterioration that is projected on the CRE price index as part of the macroeconomic over projections. The ratio of the allowance for credit losses to loans decreased 4 basis points to 1.89%, and this was mostly a decrease of 9 basis points in the allowance for credit losses on the residential mortgage portfolio. Net charge-offs for the quarter were $19.9 million, 62 basis points of average loans, which is up about $800,000 from prior quarter or 2 basis points. Last quarter, we had an $800,000 commercial loan recovery. And this quarter, we did not have any of this size to offset some of the charge-offs. As Aurelio mentioned, consumer charge-off levels continue to be normalizing and commercial charge-offs continue to be very low. On the capital front, again, our strong capital base continues to support the actions of share repurchases and dividends. During the quarter, we declared $29 million in dividends and repurchased the $50 million in common stock we had mentioned. Regulatory capital ratios continue to be low, but these capital actions were offset by the earnings generated in the quarter. In addition to all of this, we registered a 6% increase in the tangible book value per share to $11.79 and the tangible common equity ratio expanded to 9.7%. Also due to the $49 million improvement in the fair value of available-for-sale securities. The remaining AOCL still represents $2.42 intangible book value per share and over 177 basis points in the tangible common equity ratio. As we announced yesterday, our Board approved an additional $200 million in share repurchase, our intention is to continue the approach of opportunistically executing on our capital actions based on market circumstances with the base assumption of repurchasing approximately $50 million per quarter through the end of 2026. But again, as we have done so far, we will continue to deploy our excess capital in a thoughtful manner, looking for long-term best interest of our franchise and our shareholders. With that, operator, I would like to open the call for questions. Operator: [Operator Instructions] And our first question comes from Brett Rabatin with Hovde Group. Brett Rabatin: I wanted to start off. I just want to make sure on the tax situation, that's onetime, right? That doesn't continue from here in terms of any benefit? Orlando Berges-González: Well, there will be a benefit in the sense that we won't have reversals of deferred tax asset at these levels. But there is a benefit on the normal operating losses or expenses we have at the holding company. Those are annual expenses that are -- now we're not yielding any tax benefit. And they will be offset also against revenues from this stock. So it's not -- that is a huge amount, but you saw that the effective tax rate came down a bit, and that's reflecting some of that benefit. So not at the level of this reversal of DTA, but there is a little benefit on the effective tax rate going forward. Brett Rabatin: Okay. That's helpful. And then wanted just to talk about -- I've seen the stats, and I know that the auto lending has finally come in as expected for some time, a bit -- any thoughts on the health of the consumer in Puerto Rico and your credit trends seem fairly stable from a consumer perspective. But just wanted to hear any thoughts on how you guys are seeing on the grounds consumer activity? Aurelio Alemán-Bermúdez: Well, I think it's clearly auto sales, we can call it normalizing. We were expecting for the year, a 5% adjustment coming down. It's actually 7% year-to-date. But obviously, it disrupted by there were increased sales in the second quarter because of the tariff and they were coming. Now you see a reduction, some sales were accelerated. So I think we need to see what happened this quarter to normalize those auto sales and see what is a real stable volume. They have fluctuated between 100 to 120 units, 20,000 units per year for some years. So we expect somewhere on that range probably the second half of the year will determine how we project 2026. Yes, credit demand has been lower. It's been -- on the other hand, unsecured credit demand has been a little bit lower. We remember 3 years ago, 2 years ago, we have been doing adjusted policies. We've seen the good performance of the portfolios across the board and some of the higher losses that we experienced in credit cards and unsecured are being leveling. So we expect stability on the consumer, but we don't expect portfolio growth as we achieved for some years. So the portfolio growth will come from resi, which is performing excellent and from the commercial portfolio that we continue to gain some share across the different sectors. So that -- I would say, stability on the consumer. Obviously, working hard to diminish any contraction of the portfolio as we continue to move on with products and services in that segment. Brett Rabatin: Okay. And then 1 last one, if I can. Just around the margin guidance were flattish in the fourth quarter. Does that assume -- in the face of the rate cuts, does that assume you are able to lower funding costs, deposits, even though the beta in Puerto Rico on the way up was obviously a lot slower than maintenance? Are you expecting the beta on deposits to be better on the way down? Aurelio Alemán-Bermúdez: I think 1 element that definitely will come down, we have some index deposits for the government that are -- they move with the rates, and some of that will come down. We don't see the other core retail products coming down yet. Orlando Berges-González: Other than time deposits that we do see some reduction. Aurelio Alemán-Bermúdez: Other than time that they happen -- they move with the market. So there will be some reduction on the cost of deposits. Expected to happen during the quarter. Obviously, how much that can offset the mix of the portfolio. Obviously, the margin is very strong. So having less consumer loans at high yield impact the margin directly as well as which segments of the deposits are growing, which this quarter we have growth on the CD book at market, not necessarily above market. So as an example, so it depends on the whole mix of the balance sheet, which is big, yes. Operator: And the next question comes from Timur Braziler with Wells Fargo. Timur Braziler: Back on the deposits, can you just elaborate a little bit more on the competitive pressures that you're seeing on the government side? I guess, how much economics are you having to give up how much of that is going to potentially lower some of the benefits of being able to reprice those with some of these rate cuts. And then just lastly, you said that you are optimistic that some of these competitive pressures might abate here. Maybe just give us some color as to what gives you that confidence? Aurelio Alemán-Bermúdez: Well, I think the cycle matters. Some of these are contracted deposits that are indexed. So they are already contracted and they're not necessarily up for bid. So they would buy -- if the rates move, they will move. With them either monthly or quarterly. So some of them are, in our case, probably 40% of the government book is on that bucket. I think the others in the CD, whatever matures obviously, move down with rates. I think competitive pressures are really coming from the smaller players, not from the large players. And the way we manage that is we go after operational accounts plus what additional services the government entities need, but we compete in pricing, where we have other type of relationship, not just to get a CD or it really has to add something else to the mix of the products that we sell and the franchise services. Municipalities and other government have a lot of payment services, deposits. So obviously, to complement that, we compare on CDs when they come to the market. Timur Braziler: Okay. And I guess maybe tying that into kind of 4Q, 1Q is the expectation that deposit costs drop with the subsequent rate cuts? Or do some of these, I guess, how much of an offset could some of these competitive pressures be to the planned drop in deposit costs? Aurelio Alemán-Bermúdez: We do expect some reduction in deposit costs coming down from -- as a result of the reduction in rates. The main point is that typically, we have seen the betas on some of these deposit products move at a -- there is a lag as compared to some of the floating asset products. So there is a timing issue in terms of when we see that on the asset side versus the deposit side. But we do expect reductions. It's just the pace at which all of them will come down. Timur Braziler: Okay. And then just on credit, credit results at First Bank in 3Q are really strong. There was a couple, let's say, in-migration inbounds on the NPL side for your competitor banks on the island, including some degradation maybe on Puerto Rico itself. I guess to what extent does credit at the other banks influence your own level of reserving in the way that you're thinking about your own portfolio, if at all? Aurelio Alemán-Bermúdez: Well, we've been telling for some time that we have a firm risk appetite and we have policies that we follow, and we have ticket -- deal size tickets that we have. And so it's really our methodology. It's really the performance of our portfolio. Obviously, if there are things that could impact an industry, we take that into consideration. But from what we have seen so far, we don't see any systemic or industry-wide impactful. Orlando Berges-González: Yes. Other than we tend to look at each of our cases individually. And again, as Aurelio mentioned, unless we see something in the industry, it would be more of what we are seeing on our own customer base and what are the results and the lines of business they have. Timur Braziler: Okay. Great. And then just last for me. I think more recently, First Bank has been open to doing maybe M&A on the Mainland. Can you just remind us what you would be considering in terms of size, location, assets, deposits and kind of just your updated view on capital deployment here? Aurelio Alemán-Bermúdez: Well, capital deployment priorities are obviously #1 organic growth. As said in the Florida market could be an alternative fit for us is a franchise that enhance our current franchise. It's very easy to originate loans in Florida, if you have the right teams and they move from 1 bank to the other and as long as we have a good discipline of credit, it will perform well. And I think we have a history of that. I think it will be -- definitely have to be complementary to our deposit franchise. That would be the profile. We have the capital, so size will depend, yes. Operator: And our next question comes from Kelly Motta with KBW. Kelly Motta: Wanted to circle back to the competitive landscape in Puerto Rico. I appreciate the color on the government deposits. Wondering if there's been any competitor competition from outside the Puerto Rico banks any -- if you've seen any new entrants into the market and just opine on the competitive landscape? Aurelio Alemán-Bermúdez: None of the deposits. It's really -- while we see, it's more aggressive now with the smaller players, as I mentioned. Obviously, in the credit card business, there's always been a lot of entrance and they dominate U.S. banks dominate the card issuance, including the larger bank, so the larger bank so nothing new on that front. Orlando Berges-González: And it's also the credit unions that play in the market, but not coming from the outside. It's entities that have operations in Puerto Rico. Kelly Motta: Okay. Got it. That's helpful. There's some... Orlando Berges-González: I'm sorry. The only caveat. Kelly, I'm sorry, the only caveat is there is 1 player, big player, which is called the U.S. treasury and so the -- you face that with some of the high-end customers that they could move monies into treasuries. Aurelio Alemán-Bermúdez: Yes. Kelly Motta: Got it. That's helpful. There's been a lot of news onshoring early glimmers of that picking up and helping Puerto Rico. Have you seen any notable impacts? And how should we be thinking about that like more from a high level in terms of the potential? Aurelio Alemán-Bermúdez: Yes. I think in the short term, they have announced a few deals, and we will try to put some more detail on that in our investor deck, give you more granular things that have been already approved or negotiated. We're trying to get more data on that. In addition, but we don't see that it's really in the short term. Probably we continue to sustain and improve the construction sector and whatever is related to materials and the labor-related benefit of that. But not necessarily, we see anything that must flow through the economy other than that impact in the short term. As we -- as we see this expansion become operational, then we'll probably see more employment, better compensation and expansion of the workforce, yes. But we don't expect that until probably second half of 2026 or further. But the good thing is a long-term benefit to sustain the economy of the island rather than having a long-term risk by not having this commitment. Yes. Kelly Motta: Got it. That's really helpful. And then I guess circling back to the margin. I know you guys have had -- we saw a nice uplift from on the securities book. Can you remind us about the cash flows on that, 1. And then 2, what the new loan yield originations look like, just so we can kind of get a sense of the potential offset to some of the floating rate dynamics that you already articulated? Orlando Berges-González: So we have about $600 million of cash flows coming in this fourth quarter. The yields on that are around 1.5% on average. So that would be some of the cash flows that we immediately repriced. We also have about $1 billion more in the first half of 2026. That also, on average, are yielding that 1.5% that it's also come due. Obviously, with rates coming down, the reinvestment component, it's a bit lower than what we were -- we're seeing rates somewhere between 50 to 100 basis points lower already in some of the reinvestment options within our policy guidance. And some of it obviously could go into lending, but Aurelio made reference to it would be more on the commercial and residential side. Kelly Motta: Okay. And if your loan book right now is 7 -- 77%, what the new loan origination yields look like, I guess, in Q3? Orlando Berges-González: You're talking about the overall or you're talking about just the -- that's the average yield -- those are average yields, including consumer. If you take a look at the commercial side, mortgages, we're talking about sort of 6%, 6.25% kind of rates, right? It's market as so whatever you see in the market. The commercial portfolio yields are right now overall commercial portfolios, including everything, it's about [ 6.70% ] on average. So that's a combination of what goes into construction or CRE and C&I, obviously. So that -- we are not seeing big changes on spreads. It's a function of the base. The base meaning the base rate, which we either SOFR or Prime, which are the main ones. That would be the 1 the adjustments we'll see, but not necessarily on the spreads, it's a lot more. Consumer yields are going to be similar to what we have now, but it's only an issue of what's the level. We -- consumer on average are about 10.5% that what we have in the blended in the whole portfolio of consumer portfolio. And that stays sort of around those levels, but it's a function of volume more than anything on the consumer. Operator: [Operator Instructions] The next question comes from [ Erin Signaviwith ] Truist Securities. Unknown Analyst: I'm sorry, if you mentioned this, but what's your outlook for loan growth into the fourth quarter? I think you said that NII is expected to be higher despite the kind of flattish NIM just thinking about what you're thinking there on loan growth? Aurelio Alemán-Bermúdez: Yes. We -- I did mention that we -- the guidance that we have for the full year is between 3% and 4%. And I think the original guidance was 5%, mid-single digit. This is actually considering what happened in the auto lending side over the third quarter and actually part of the second quarter. it's the primary driver. Some offset has been provided by mortgage and we do have a fairly strong pipeline in the commercial. Obviously, there's always timing issues on those. But the pipelines continue to help. Unknown Analyst: Okay. And you announced a new share repurchase program, and there's still some remaining authorization from the prior plan. Can you talk about the cadence you're expecting in terms of share repurchases over the next several quarters? Aurelio Alemán-Bermúdez: Well, we've -- we always been opportunistic in the market, and we still have $38 million from this year authorization. We can move back and forth and increase or decrease as we believe is prudent. Again, open market is our approach. No ASRs are on schedule or as part of the strategy. So we'll continue monitoring. Orlando Berges-González: Yes. As I mentioned, were our base assumption continues to be around $50 million a quarter. Obviously, with the flexibility or the optionality of saying a little bit more or a little bit less depending on what are the circumstances on the market. Unknown Analyst: Perfect. All right. And then lastly, just a follow-up on the Mainland M&A question. I mean, it seems like a lot of other Mainland banks are also looking to expand in that geography. Would you say that the environment currently would be somewhat challenging to get a deal done around that area? Aurelio Alemán-Bermúdez: Again, opportunities come and go. So we'll see -- we continue to monitor and see what could happen. I think there's some -- if you see some of the bank reports, obviously, there's a credit side could be more reflected in the U.S., so that could bring opportunities too. Unknown Analyst: Got it. Aurelio Alemán-Bermúdez: These are always a timing opportunity. Thank you. Operator: The next question comes from Steve Moss with Raymond James. Stephen Moss: Orlando, just following up -- and maybe just following up, Orlando, on the margin here in terms of the timing of the cash flows from the securities portfolio. Is that just -- is that throughout the quarter? Or is that kind of late in the quarter to impact the margin? Orlando Berges-González: Well, you saw it's -- it's not really equally spread, but you can assume it's on average, November and December tend to be the highest in terms of the cash flow coming in. You saw that last quarter, we had that 16 basis points pickup. So we had about $500 million for the third quarter that those were the cash flows more or less than we're having the big repricing impact. So we -- and all of it did not benefit the third quarter. Some of it we'll see in the fourth quarter. So it averages out a bit. So we should see a pickup, obviously, with the only difference is what I mentioned that we are seeing rates the options that we have in rates being between 50 to 100 basis points lower based on our policy guidelines of what we put in the portfolio. As you know, we don't put much of credit risk in the portfolio. It's more of an interest rate more than anything. Stephen Moss: Right. Okay. Just I appreciate that color. And then on the loan loss reserve here, you guys have made a number of, I guess, qualitative adjustments, if you will, over probably the last 12 or maybe 18 months -- just kind of curious here kind of as you think about credit performed quite well on the island for an extended period, your consumer credit charge-offs are lower year-over-year, just kind of curious as to where you think that reserve ratio could shake out over the next 6 to 12 months? Orlando Berges-González: It's -- we don't talk about specific guidance like that is specific, but what I can tell you is that -- on the mortgage side, we have seen the trends with the lower charge-offs that our methodology uses historical loss information that is updated all the time. And obviously, as you get more history with better numbers in terms of losses that improves the ratio. So the residential reserves should come down. There is always an uncertainty on the forecast -- the macroeconomic forecast projections. We've seen the stability on the unemployment sector, the unemployment ratios in Puerto Rico reflect on the way the trends are expected on some of the portfolios, especially in when you look at the downside scenarios, we do include in our reserve calculations. So for mortgage, I do expect with the credit expectations we have that it would come down -- continue to come down a bit. The consumer, we're still seeing -- obviously, we had, as you mentioned, the '23 and '24, we saw increases related to those vintages of the older vintages at '22, '23 vintage, we've seen more stability now on the charge-offs, and that includes that affects calculations. So that for now will be sort of stable, I would say, in the meantime. And commercial has been pretty good. So I don't see major changes in commercial. Operator: [Operator Instructions] We have a follow-up from Kelly with KBW. Kelly Motta: Thank you for letting me jump back on. I just wanted to close the loop on the tax rate just given it looks like the FTE adjustment is up a bit and there was some noise in the quarter. Do you have a good like approximation of what the go-forward tax rate looks like here? Is it any materially different after adjusting for some of these onetime time things you had in the quarter? Any help would be appreciated. Orlando Berges-González: The number that we put on the press of effective tax rate of about 22.2%, which is estimated for the full 2025 already reflects some of this expected improvement. So I would say that's a good number to use as a guidance, remember that with a few things here and there. As we reinvest on the investment portfolio, a large chunk of that would have tax benefits. And since we have reinvested our better yields that reflects on the rates, then you have other components of the operations on some of the growth on the commercial lending side that's on a taxable side. So the 22.2%, I think, reflects fairly good number that we should be between that I'm sorry, 22% to 22.5% range. It's what I'm expecting now. Kelly Motta: I apologize. I think it's said in the release. Thank you. Operator: [Operator Instructions] And as we have no further questions in the queue, I will hand back over to Ramon Rodriguez for any final comments. Ramon Rodriguez: Thanks to everyone for participating in today's call. We will be attending Hovde's Financial Services Conference in Naples on November 4. We look forward to seeing a number of you at this event, and we greatly appreciate your continued support. Have a great day. Thank you. Operator: Thank you, everyone, for joining today's call. This conclude the call, please. You may now disconnect. Have a great day.
Operator: Good morning, ladies and gentlemen, and welcome to the Colony Bank Third Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 23, 2025. I would now like to turn the conference over to Brantley Collins, Communications Manager. Please go ahead. Brantley Collins: Thanks, Joelle. Before we get started, I would like to go through our standard disclosures. Certain statements that we make on this call could be constituted as forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Current and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance but involve known and unknown risks and uncertainties. Factors that could cause these differences include, but are not limited to, pandemics, variations of the company's assets, businesses, cash flows, financial condition, prospects and other results of operations. I would also like to add that during our call today, we will reference our third quarter earnings release and investor presentation, which were both filed yesterday. So please have those available to reference. And with that, I will turn the call over to our Chief Executive Officer, Heath Fountain. T. Fountain: Thanks, Brantley, and thank you to everyone for joining our third quarter earnings call today. We are pleased to report another quarter of improved operating performance. This is a result of our team members' continued dedication to serve our customers and communities with excellence, and our team's efforts, are driving meaningful results. We continue to see improvement in operating earnings driven by net interest margin expansion for another consecutive quarter. We also saw improvement in our operating pre-provision net revenue, indicating continued improvement in core earnings. This earnings improvement, along with improvements in our unrealized losses led to a strong increase in tangible book value for the quarter. We believe we are going to benefit from the Fed rate cuts on the funding side, and that will help margin, but we do expect the rate of the expansion to be slower than what we saw in the earlier half of this year and to be more in line or slightly more than what we saw during the third quarter. I want to take a moment to reflect on just how much we have improved our margin over the last year. Q3 of 2024 was the low point in our margin. And since then, we've seen our margin expand 53 basis points through disciplined relationship pricing, loan growth and the repricing of assets and deposits. I'm pleased that the majority of this increase after tax has fallen to the bottom line as operating ROA improved from 81 basis points in Q3 of last year to 1.06% this quarter. The team has done a great job of allowing margin improvement to increase our earnings while still making strategic investments for future growth. That will continue to be our plan as we move forward and margin expands. We've been very pleased to see meaningful loan growth throughout the first half of this year. While that pace was exceptionally strong, we're now observing that start to settle into a more normalized and sustainable growth rate, which aligns well with our long-term projections and capital planning. This past quarter was around 9% annualized, which is lower than the first and second quarters of this year, but for the year, still around a 14% annualized loan growth rate. We're seeing customer demand pull back a little, some of which we think is customers being cautious about the economic outlook and some of which is customers waiting for rates to fall further before they borrow more money. Based on the pipeline, we think the fourth quarter loan growth is going to be lower than this past quarter, which for the year should put us right around our long-term target of 8% to 12% a year. Our bankers remain committed to serving our relationship customers and look to deepen our relationships with a consultative approach that can grow core deposits and increase fee opportunities. Noninterest income remained solid despite a little slowdown in our SBSL and mortgage divisions. On an operating basis, noninterest income increased over $1 million from the prior quarter. In the third quarter, we saw a meaningful increase in fee income as well as interchange income. In addition, Colony Financial Advisors, Colony Insurance and Merchant all saw strong increases in revenues as those lines of business continue to grow and scale. Operating expenses were slightly higher this quarter as we expected and mentioned on the call last quarter. As we invest in talent and see more activity in various products and services, we expect to see some expense increase to go along with that. This additional expense was offset by additional noninterest income and our operating net NIE to average assets improved quarter-over-quarter by 4 basis points as we continue to focus on efficiency. While recent headlines have focused on one-off credit events at some larger regional banks, our portfolio continues to perform well. Credit quality remains relatively stable overall. Past due and classified loans both improved quarter-over-quarter, reflecting continued strong credit discipline across our portfolio. While criticized loans and nonperforming assets increased, they remain at manageable levels relative to our overall portfolio. Charge-offs were a little higher this quarter, primarily due to variability in our SBA portfolio, which we've discussed previously. At the bank level, net charge-offs remain at acceptable levels and in line with our expectations. With the federal government currently in a shutdown, we've been closely monitoring potential impacts on our business as well as the impacts to our customers and communities. Our teams are prepared to answer questions and provide guidance and assistance to our customers as needed. We reviewed our portfolio to identify customers who may be affected. And at this time, we do not expect any material adverse impacts or credit concerns as a result of the shutdown. We remain focused on staying proactive, supporting our customers and ensuring business continuity throughout this period. The area of our business that is most impacted by the shutdown is our SBSL group, which does government-guaranteed lending. In anticipation of a potential shutdown, we were able to seek approvals on a number of loans prior to that shutdown. Our team is currently focused on continuing to develop new business and process loans as far along as possible during this time. Our ability to get final approvals and loans sold will be impacted, but we believe that as long as the government gets back open this quarter, the impact should be minimal. Turning to our pending merger with TC Bancshares and TC Federal Bank, I'm pleased to report that everything continues to progress as planned. We filed our regulatory applications in August, and our S-4 registration statement has been declared effective by the SEC. Both companies are well into the process of shareholder approval, which we expect to have at our meetings in November. We continue to expect the transaction to close in the fourth quarter with system conversion planned for the first quarter of next year. Coordination between our 2 organizations has been excellent. The teams are working closely together and integration planning is well underway. We're very excited about bringing our companies together and leveraging the strengths of TC Federal's franchise to expand our market presence and create new opportunities for our combined organization. We have made and communicated employment decisions for the combined company post the merger, and we are on track to achieve the financial metrics of the deal that we laid out at the announcement. As we think about M&A going forward, we are optimistic that there will be opportunities for Colony to participate in further M&A next year. We continue to proactively have conversations with banks that we feel will be a good strategic fit with Colony. We also expect that a smooth integration with TC will be beneficial to those discussions. We are also being very strategic about opportunities to grow our customer base and talent pool from the disruption that is occurring in our footprint with the other bank M&A that we are seeing. In terms of talent, we're very excited to welcome Mitch Watkins, a seasoned and well-respected banker to our Columbus, Georgia team. Mitch brings extensive experience and strong local relationships that will further strengthen our presence in this important market. We remain focused on investing in talent acquisition that supports our growth strategy and helps us solidify and expand our market position across our footprint. We look to make very strategic additions where it makes sense in commercial banking, wealth and mortgage. Lastly, I'd like to take a moment and recognize one of our team members, Hugh Holler, our Director of Homebuilder Finance, who was recently inducted into the Homebuilders Association of Georgia Hall of Fame. This is a tremendous and well-deserved honor that reflects Hugh's deep commitment to this industry and the respect he's earned throughout the homebuilding community. We're fortunate to have Hugh on our team. He exemplifies exceptional customer service, servant leadership and strong relationship banking, and we congratulate him on this outstanding achievement. With that, I'm going to turn it over to Derek to go over the financials in more detail. Derek Shelnutt: Thank you, Heath. Operating net income increased $252,000 from the prior quarter. This increase is attributed to higher net interest income and operating noninterest income, offset some by increased provision and operating noninterest expenses. Operating pre-provision net revenue, shown on Slide 11 and in our earnings release under non-GAAP measures, improved both quarter-over-quarter and year-over-year. This sustained growth highlights the continued momentum and strength of our core earnings power. Net interest income increased $314,000 compared to the prior quarter by continued asset repricing and loan growth. Our cost of funds for the quarter was 2.03% compared with 2.04% in the prior quarter. As mentioned last quarter, we expected our overall funding costs to remain flat. The Fed cut late in the quarter will have more impact in the fourth quarter, and we expect to see that cost of funds number decline. Net interest margin increased 5 basis points from the prior quarter, which was a little slowdown from the increases we saw earlier in the year. We expected this and mentioned it on last quarter's call. Our margin stands to benefit from the September Fed cut and any other cuts we may get in the fourth quarter. With more normalized loan growth expectations, we don't believe it will be a huge jump in margin quarter-over-quarter, and we are anticipating that to be in the single digits going forward. Third quarter operating noninterest income increased just over $1 million. Service charge and fee income increased $425,000 with some of that being activity-based and some being a result of a process we went through late in the second quarter to evaluate and adjust our fees. Other noninterest income increased $788,000, driven by increased interchange fee income, improved income from wealth insurance and merchant services as well as a onetime gain from one of our fintech investment fund partnerships. Slide 20 shows the improvement in third quarter for Wealth, Insurance and Merchant Services. Mortgage and SBSL activity has been a little slower this year, and mortgage was even slower in the third quarter. This is driven by changes in SBA lending guidelines on the SBA side and a slower housing market on the mortgage side. Operating noninterest expenses were up $624,000 quarter-over-quarter, reflecting continued investment in our people and growth initiatives. Compensation and benefit costs were higher in the quarter related to strategic hires to support our growth and business development strategy. A portion of those new hire expenses are short-term salary guarantees for commission-based employees, and those will end in the fourth quarter. Technology and innovation remains a focus for our long-term growth and technology expenses were higher quarter-over-quarter as we continue to invest in ways to improve long-term efficiency and provide for a state-of-the-art customer experience. We remain very disciplined in managing expenses and maintaining our focus on efficiency. We are confident in our ability to balance cost control with the strategic investments that position us for long-term organic growth. On an operating basis, the increase in noninterest income more than offset the increase in noninterest expense. Our operating net noninterest expense to average assets improved 4 basis points from the prior quarter to 1.48%. On a go-forward basis, we still target a net NIE to assets of around 1.45%. Fourth quarter expenses will likely include at least 1 month of TC Federal expenses post merger. Our systems conversion is planned for the first quarter, and we plan to achieve our targeted cost saves in the second quarter and beyond. Onetime merger-related costs during the quarter were $732,000, and that was an adjustment to operating income. Also during the quarter, in our 10-Q last quarter, we disclosed a wire fraud incident where the company was the target and losses totaled $2.9 million. Upon recent new information, a portion of that loss that we believe to have been fully covered by insurance has become disputed. And in accordance with accounting standards, this quarter, we recognized a $1.25 million loss related to the disputed coverage. This is reflected in our adjusted income. All other coverages remain undisputed. We do not expect any other losses related to this matter, and we'll continue to pursue all avenues for recovery. Any recovery will be recognized as nonoperating income in future periods. Provision expense totaled $900,000 for the quarter, an increase from the prior quarter, driven by loan growth and charge-offs in our SBSL division. As we've mentioned before, SBSL charge-offs can have some variability, and that's what we experienced this quarter. Many of these SBSL charge-offs are related to older loans before we tighten credit requirements and often involve lower SBA guarantee percentages. This quarter represents the peak for charge-offs at SBSL. We do not expect them to increase from here. These are primarily variable rate loans, so a declining rate environment should provide some relief going forward. On the bank side, charge-offs remain low and past dues improved quarter-over-quarter. We've seen more activity in loans moving in and out of classified and criticized, and our team has done a good job of working these loans. There's been a lot of recent media attention on credit challenges at some regional banks, particularly related to shared national credits. I want to note that we do not participate in any shared national credits and our exposure to participation loans is very limited. Our lending strategy remains focused on relationship-based locally originated credits where we know our customers and markets well. Loans held for investment increased $43.5 million from the prior quarter. As Heath mentioned, we are seeing that growth rate moderate some from the early half of the year, and that will put us near our long-term targeted growth rate. Slide 34 shows our weighted average rate on new and renewed loans of 7.83% during the quarter. And when you compare that to our repricing schedule on Slide 36, we still have opportunity to gain yield on maturing fixed rate loans as well as investments cash flow even if rates move down some from here. Total deposits increased $28.1 million during the quarter. Part of that growth reflects our strategic use of brokered funding to replace seasonal municipal deposit runoff. We expect those municipal funds to return in the fourth quarter as tax revenues are collected, which is consistent with the historical seasonality we've typically experienced. We remain focused on building and deepening customer relationships that bring in high-quality, lower-cost deposits, which continue to be a core priority for our growth strategy. During the quarter, we sold securities for a pretax loss of around $1 million that netted close to $75 million in proceeds. Under the assumption of using half of those proceeds to fund loans and half to increase liquidity, our modeling indicated an earn-back of less than 1 year. The book yield sold on those investments was close to 3.16%. So there's opportunity to pick up meaningful yield there and increase interest income. We will continue to evaluate the need for future sales as well as consider a larger transaction as part of those evaluations. We did not repurchase any shares during the quarter, but continue to review the need for any repurchases based on capital needs and market conditions. This week, the Board also declared a quarterly dividend to shareholders of $0.115 per share. We're still in the process of filing a new shelf registration as part of our capital management strategy and expect that to be filed very soon. Our TCE ratio at the end of the quarter was 8% compared to 7.43% for the same quarter last year. Tangible book value per share increased to $14.20 from $12.76 a year ago, reflecting consistent growth in tangible capital and our continued success in building long-term shareholder value. Slide 20 highlights our quarter-over-quarter pretax profit for our complementary business lines. Mortgage had a slower quarter with production being down slightly compared to the second quarter. Expenses were a little higher due to some strategic hires of mortgage lending officers and the upfront cost and short-term salary guarantees associated with those hires. We believe these new MLOs will drive profitable growth for our mortgage division. The housing market and volatile interest rates have also caused some headwinds that contributed to the lower production during the quarter. SBSL was flat compared to pretax income in the prior quarter. The increased charge-offs were offset with decreased expenses. And as we see prime rate move lower, that should reduce some of the stress on the charge-off side. Marine and RV lending has had a good year and continues to improve. Pretax income is up $100,000 quarter-over-quarter. Loan balances are now around $90 million and have increased $45 million year-over-year. We are looking into the potential for pool loan sales, which could provide a good source of noninterest income. Pretax income for both the Merchant Services and Colony Wealth Advisors increased meaningfully from the prior quarter as those business lines continue to grow and perform well. We are excited about the performance and the outlook of these 2 lines of business. Colony Insurance closed on the OE acquisition in May and the second quarter was a focus on integration. The team is now focused on growth, referrals and sales targets with income increasing in the third quarter and continuing to scale. And that concludes my overview. And now I'll turn it back over to Heath before we take questions. T. Fountain: Thanks, Derek. And again, thanks to everyone for being on the call today. We're very pleased with our performance this quarter. That's all of our prepared remarks. And with that, I'll call on Joelle to open up the line for questions. Operator: [Operator Instructions] Your first question comes from Dave Bishop at Hovde. How about given the disruption in D.C. seeing any trickle down to your borrowers and local economy? T. Fountain: All right. Well, I appreciate Dave getting that question in. As I mentioned earlier, we are on the lookout for that. We really don't see a lot at this time. We have provided our team and our customers with resources to help out as we see things, and we scrub the portfolio to see if we have any exposures that we're concerned about. But at this time, we don't think there will be a material impact. We don't see any issues arising. Of course, I did mention the SBSL team and the government guaranteed loans and what -- that there could be a potential impact there just as if it drags out longer. But we think if we get a resolution within the next little bit, it shouldn't have too much of an impact on Q4. So we feel pretty good about where that is overall at this time. Operator: Related to loan pricing, what is the average roll-on versus roll rate this quarter and how NIM outlook looks? Derek Shelnutt: Yes, absolutely. I'll take that one. Great question. So when you look at the roll-off yields from our previous repricing schedule or our previous released investor presentation for the prior quarter, we had fourth quarter roll-off yields in the 5% range. And so our put-on yield for the new quarter is also in our investor presentation, and it was -- the new and renewed rate was 7.83% for this quarter. So you can see there we have some meaningful pickup in yield. And even with rates moving down a little bit, we'll continue to see that. That will drive some net interest margin growth. We expect that net interest margin growth to be both on the cost of fund side and the asset repricing side. But ultimately, going forward, we expect a modest growth in the single-digit range, but a little bit higher than what we saw this past quarter as we take advantage of some of those Fed rate cuts. Operator: Any NDFI loan exposure as well? T. Fountain: No, that's a great question. I appreciate Dave getting that question in, and we do not have any meaningful exposure to that. And I know that's been another area that we've seen a lot of concerns about and seen some situations as some other banks, larger banks have reported. And back to our comments that we made earlier, our real focus in our organic growth strategy has been to bank customers that we know, that are in our footprint, that we have a relationship with or even that our bankers have maybe had relationships with at other banks in the past. So we really focus on the customers we know and the kinds of business that we think we can understand and adequately assess the credit risk. Operator: There are no further questions at this time. I will now turn the call over to Heath for closing remarks. T. Fountain: Okay. Well, thanks again, everyone, for being on the call today. We're really pleased with how the quarter went and excited about the things happened in Q4 with TC and continued improvement in our margins. So we're very excited about where Colony is headed, and we appreciate you being on the call today. Thank you. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good day, everyone. My name is Leila, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Third Quarter 2025 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Lynn Antipas Tyson, Chief Investor Relations Officer. Lynn Tyson: Thank you, Leila, and welcome to the Ford Motor Company's Third Quarter 2025 Earnings Call. With me today are Jim Farley, President and CEO; Sherry House, CFO; Andrew Frick, President, Ford Blue and Model e; and Kumar Galhotra, Chief Operating Officer. Joining us for Q&A will be Cathy O'Callaghan, CEO of Ford Credit; and Steve Croley, Chief Policy Officer and General Counsel. Also with us is Alicia Boler Davis, President of Ford Pro. Jim will give a high-level overview, followed by Kumar on industrial progress, Andrew on market dynamics and Sherry on our financial review and guidance. We'll be referencing non-GAAP measures today. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck at shareholder.ford.com. Our discussion also includes forward-looking statements. Our actual results may differ. The most significant risk factors are included on Page 20 of our deck. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS and free cash flow are on an adjusted basis. Upcoming IR engagements include Andrew Frick at the Scotiabank Conference in Toronto on November 18 and Sherry House at the Barclays Conference in New York on November 19. Now I'd like to turn the call over to Jim. James Farley: Thanks, Lynn. Before I get started on earnings, I wanted to welcome Alicia Boler Davis to our team and to all of you. Her leadership is critical as we build our incredible powerhouse, Ford Pro into a durable product software services powerhouse. Alicia will cover Pro starting on our fourth quarter earnings call. I'd like to thank the Ford team as well as our suppliers and all of our dealers for delivering a very strong quarter. We not only solidly beat expectations, but our underlying performance has us on track to raise our full year 2025 EBIT guidance if it weren't for the impact of the Novelis fire in Oswego, New York. Sherry will provide details of the financial impact of the Novelis fire, and I'm very pleased with our team's swift and decisive response to this challenge. We immediately mobilized a dedicated crisis team worked around the clock with Novelis to secure alternative aluminum sources for our operational lines and accelerate the plant's recovery. Several top leaders and I personally visited the site to support all of these efforts. In addition, we are adding up to 1,000 new jobs to increase F-Series production to recover lost volume and fulfill strong customer demand. We have made substantial progress in a very short time frame in both reducing the 2025 impact and putting in place an exciting recovery plan for next year. Turning to our results. Our Ford+ plan delivered a record $50.5 billion in revenue and $2.6 billion in adjusted EBIT. Once again, we made meaningful progress in cost and quality, thanks to the disciplined execution of our industrial team. Kumar will share more details. I'd like to thank President Trump and his team for the recent tariff policy developments, which are favorable to Ford as the most American auto manufacturer. Credit based on our large U.S. manufacturing volume will allow us to offset tariffs on imported auto parts we need for our strong American production and manufacturing base. In addition, tariffs leveling the playing field for those imported medium and heavy-duty trucks is a positive for Ford because we are no longer disadvantaged for building every single one of our Super Duties here in the United States. We also continue to watch for relief from tailpipe emissions, which may come as soon as the end of this year. Federal legislation has already scaled back California ZEV rules, and we anticipate a meaningful reduction in federal requirements next year. We are adjusting our product mix accordingly. Our Ford+ plan is designed to win in the market among 4 key trends. Markets are more regional now. We all need tailored strategies. Customers are more fragmented between retail and commercial. This requires unique services and digital solutions for both. The competition is getting tougher, namely the Chinese OEMs are expanding globally. And the industry faces lower returns due to the EV overcapacity and global pressures. Thankfully, our strategy plays to our strengths at Ford, iconic work vehicles, passion products like Mustang and the off-road franchises like Bronco and Raptor. We're also prioritizing hybrids across our lineup, including the development of extended range hybrid options. In the near term, I believe EV adoption will now only be about 5% of the U.S. market, but this is going to grow, especially for affordable EV vehicles. We are well positioned for this with the universal EV platform, which underpins digitally advanced, very spacious and appealing products that start at around $30,000. This is not a distant plan. It's right around the corner for us at Ford. Sourcing is at 95% complete now. We are testing vehicles. We'll begin installing equipment in Louisville for the UEV later this year, and we are on track to start production of our LFP cells at Marshall, Michigan plant later this year. To compete, we need innovation and hyper cost efficiency. In this capital-intensive environment, smart partnerships will be essential to us. And our largest near-term opportunity is closing that cost gap and achieving world-class quality. Kumar? Kumar Galhotra: Thank you, Jim. Our industrial platform is delivering tangible progress in quality, cost and modernization. Improving quality is the single biggest driver to close our cost gap. Better quality lowers warranty expense and reduces recalls. Four key elements are essential for sustainable warranty cost reduction, seamless launch execution, minimal defects, greater reliability and durability and time. You need time to clear the car part of old issues. It all starts with a clean launch. A bad launch creates years of warranty and recall problems. Over the past 2 years, we have radically improved our launch quality. We are on track for best-in-class performance across 6 nameplates with 3 more nameplates in the top quartile. This is based on J.D. Power Warranty Analytics Data. Also, Ford was the most awarded brand in J.D. Power 2025 U.S. initial quality study. We're also catching defects earlier in the process through rigorous engineering reviews where leaders sign off to ensure accountability and fixes happen in real time. Our next focus is on long-term reliability and durability. We've identified the specific parts and systems needed to achieve industry-leading reliability. To get there, we've implemented a new powertrain testing regimen that is up to 7x longer than before. It includes extreme use cases that help us find issues we previously only found years after the vehicle was in the field. Now it takes time for these improvements to improve our recall numbers as older models have to work their way out of the system. But we're already seeing our recall costs shift towards more aged vehicles. And since the peak recall period is in years 3 to 5, we expect a meaningful improvement soon. On cost, we delivered another quarter of year-over-year improvement and are on track for a net $1 billion improvement this year, excluding the impact of tariffs. Lower material costs, freight and duty efficiency and lower warranty contributed to this. This is the result of a fundamental change in our team's operational DNA. We have dedicated work streams, reducing the cost of parts, optimizing repair times and transforming how we negotiate with our suppliers. We're also modernizing our facilities and IT to unlock the next level of efficiency. We are systemically deploying AI across the entire industrial system. For example, we have significantly improved CAD loading times to less than a minute. And we have added 900 AI-powered cameras across our plants to detect quality issues at the source and help us mitigate supply disruptions. Thank you. And now over to Andrew. Andrew Frick: Thank you, Kumar. I will start with Ford Pro, which is thriving due to our diverse vehicle lineup, service parts penetration and growth in our integrated software and services. Our specialized dealer network is a significant competitive advantage that is difficult to replicate. Dealers recognize the importance of customer uptime, and they continue to invest, adding another 1,700 service bays and 500 mobile service fans over this past year. This makes Ford the largest mobile fleet in the U.S., providing a structural advantage and brand differentiation for both Pro and retail customers. We have intentionally diversified our revenue streams for more durable profits. For example, softness in government sales this year was offset by strength in small to medium businesses or SMB. Our channel mix is now well balanced across large corporations, SMBs and government and rental fleets. In software, Pro's paid subscriptions grew 8% to 818,000 subscribers, and we're also seeing growth in our ARPU and attach rates. This is producing a flywheel effect. For example, customers who subscribe to our fleet software have a service parts capture rate up to 20 points higher, which also helps us win sales from new competitors in multi-make fleets. There is upside to software via strategic partnerships. Our new partnership with ServiceTitan, the largest software provider to the trades is a notable example of this. We are embedding our real-time vehicle data directly into their workflow, combining the insights from Ford Pro's data services with ServiceTitan's Fleet Pro software for a real-time view of fleet vehicle data. Customers will be able to manage vehicle maintenance, streamline services and simplify repairs. Now in our home market, industry conditions were strong this quarter with a SAAR of $17 million in positive pricing. Our total U.S. share grew to 12.8% with growth outpacing the industry despite our phaseout of the edge, driven by key products like F-150, Bronco, Explore and Expedition. In fact, the all-new Expedition is red hot, gaining over 3 points of segment share with 75% of customers choosing high-end trims like Tremor. And we continue to lead the hybrid truck market with about 70% share. Lastly, our ample inventory does position us for a strong fourth quarter and helps to insulate our retail sales from the near-term impact of Novelis. We will end this year with leaner retail stock levels between 55 to 59 days supply, with gross stock down 11%. As we look at 2026, even with our net recovery, we forecast being down roughly another 6% to about 520,000 units of gross stock, a disciplined approach yet still leaving us headroom to look for more market opportunities. Now I'd like to turn it over to Sherry. Sherry House: Thank you, Andrew. Ford continues to make great strides in our journey to build a higher growth, higher margin, more capital-efficient and durable business, and that progress is evident in our ongoing performance. In the third quarter, our strong product lineup drove global revenue growth of over 9%, roughly 1.5x faster than our growth in wholesales. And we delivered adjusted EBIT of $2.6 billion, flat with the prior year despite absorbing a net tariff headwind of $700 million. The durability of our business is strengthening. Over the past 3 years, total company EBIT from software and physical services has grown by over 20%, and our revenue growth has diversified across regions, segments, channels and software and physical services. Furthermore, our industrial system has delivered on their commitment to consistently deliver cost improvements, excluding the impact of tariffs. Total company adjusted free cash flow was strong at $4.3 billion in the third quarter with $5.7 billion year-to-date. We ended the quarter with nearly $33 billion in cash and $54 billion in liquidity. Our balance sheet is a competitive advantage. We are disciplined in our capital allocation strategy, and we are focused on the areas driving expected profitable growth such as our UAV platform launching in 2027. We remain committed to our investment-grade rating and returning capital to shareholders. Today, we announced the declaration of our fourth quarter regular dividend of $0.15 per share payable on December 1 to shareholders of record on November 7. Now turning to the segments. Ford Pro delivered another solid quarter. Revenue was $17.4 billion and EBIT was $2 billion with a robust double-digit margin. Revenue and volume grew by 11% and 9%, respectively. Growth in EBIT was driven by volume and continued improvement in warranty and material cost, partially offset by tariff impacts and pricing normalization in Europe and North America. Ford Model e delivered both revenue and volume growth, driven by new product introductions in Europe. EBIT losses increased due to lower net pricing and an increase in spending on our next-generation vehicles. Let me give you additional color on Model e. Year-to-date, Model e is at a $3.6 billion loss. Roughly $3 billion of this is from our first-generation products, Mach-E, Lightning, Puma, Explore and Capri. The balance is investment in our next-generation vehicles, including our UEB platform. The only practical way to improve the profitability of our Gen 1 vehicles is through one of the more of the following: pricing, new cost reductions and improved fixed cost leverage. Given current industry trends, it's clear scaling fixed costs is a challenge for most of the industry. You can see this in a multitude of recent program cancellations and charges globally. We've been proactive. Over 2 years ago, we reduced our planned battery capacity by 35%. And last year, we canceled our 3-row program, making room for additional commercial vehicle volume. Clearly, near-term U.S. customer and market realities for EVs continue to evolve. We will have more to share about how we are adapting to these changes at a later date. Ford Blue achieved EBIT of $1.5 billion, with revenue growth exceeding the rate of wholesale unit growth, highlighting the strength of our diverse product lineup. Higher costs were driven by tariffs, which muted progress in warranty. Adverse exchange was also a headwind driven by a weaker U.S. dollar against the euro and Thai baht. Ford Credit delivered over $600 million of EBT, up 16%, reflecting improved financing margin. Ford Credit also made a $350 million distribution. We continue to originate a high-quality book with U.S. retail and lease FICO scores again exceeding 750 for the quarter. So let me turn to our 2025 outlook. Excluding Novelis, our underlying business continues to perform well. In fact, we are tracking at the high end of the adjusted EBIT guidance range we provided in February of between $7 billion and $8.5 billion. This original guidance was provided before tariffs, which we have fully absorbed. Additionally, adjusted free cash flow is trending better than the guidance we provided in July of between $3.5 billion and $4.5 billion. Between 2025 and 2026, we expect Novelis to be a headwind of $1 billion or less. For 2025, we expect an adjusted EBIT headwind of $1.5 billion to $2 billion in the fourth quarter for Novelis, and we currently have line of sight to mitigate at least $1 billion in 2026, and we are working to improve the situation further. We also expect an adjusted free cash flow headwind of $2 billion to $3 billion in the fourth quarter. Keep in mind, the production disruptions result in an oversized short-term impact on our working capital, which will reverse next year. Given the recent announcements by the administration, we now expect tariffs will be a $1 billion net headwind for 2025, down from $2 billion. This brings our updated adjusted EBIT guidance for 2025 to between $6 billion to $6.5 billion with adjusted free cash flow of between $2 billion and $3 billion. Our full year outlook also assumes U.S. industry SAAR of about 16.8 million units, U.S. industry pricing of about 0.5%, a net cost improvement of $1 billion, excluding the impact of tariffs; and lastly, capital expenditures of about $9 billion. Turning to 2026. While it's premature to give guidance, I want to share some puts and takes as you think about the industry and Ford. First, we have line of sight to recover at least $1 billion related to Novelis. For tariffs, we expect a net full year impact similar to 2025. For compliance, the evolving global emissions landscape is expected to eliminate 2026 compliance headwinds, thereby unlocking opportunities to optimize our mix of ICE, hybrids and EVs and reduce reliance on credits. And for cost, we plan to deliver another $1 billion of cost improvements across our industrial system, which will be redeployed to strategic accretive ICE and hybrid cycle plan actions. Additionally, UAV platform spending will continue to increase as we ramp our Marshall LFP battery plant and change over to the Louisville assembly plant ahead of the 2027 launch. Before we go to Q&A, let me end with this. Our underlying business is strong. And importantly, we are starting to more consistently execute and deliver our Ford+ plan. I'll now turn the call over to the operator. Operator: [Operator Instructions] Your first question will come from the line of Joseph Spak with UBS. Joseph Spak: Maybe just a couple of points of clarification. I guess I want to understand why, as of now, you only think you could recover about $1 billion of the impact from Novelis. And then also just in some maybe breaking news, there was a journal article which said Novelis plans to have the plant back up by the end of the year. So is that sort of in line with your thinking and then considered in your outlook? Kumar Galhotra: Yes. Thanks, Joe. This is Kumar. Thanks for the question. And thank you for your very thoughtful paper on this earlier. Yes, that is in line with our communication with Novelis. The hot mill which is down now will be operational in late November, early December. It will then go through a quick ramp up through December. Between now and end of the year, we'll probably lose 90,000 to 100,000 units in fourth quarter. We announced today that we will add a third shift at Dearborn truck plant and higher line speed at Kentucky Truck. So through those actions, we expect to make up roughly 50,000 of those 100,000 units in 2026. James Farley: I would just add, it's important to realize that the makeup capacity next year will largely depend on Ford's capacity makeup. If we have more availability of aluminum, the real lever for us is going to be our own upside. And we're working through that. This is still early days. We'll have a lot more to update through this quarter and into next year's guidance. But please understand that's not Novelis restriction. Kumar Galhotra: Yes. Thanks, Jim. All F-Series plants were already running 3 crew and Dearborn wasn't and now it will run 3 crew as well. So the factories are basically flat out. Joseph Spak: Okay. Maybe just one more, and I guess it's unfortunately, we keep on having to bring these things up. But maybe you could just update us on how you're viewing any potential disruption from [ Nexperia ] chip impact and what kind of supply you have or alternative supply and whether there's anything considered for that as well? James Farley: We see this as a political issue. We're working with U.S. and Chinese administrations. I was in D.C. yesterday actually, and this issue is top of mind for every official we met in the U.S. government. They're very well aware of it, working to resolve it. These are fairly common parts, mature node semi components like diodes and transistors. We're maximizing our buy of these components. We got really good at doing that during the chip crisis. I think all the OEMs are doing the same thing. At the moment, the runout dates look very close to the date when we may see a resolution. It's an industry-wide issue. A quick breakthrough is really necessary to avoid fourth quarter production losses for the entire industry. That's all I'm willing to say at this point. Operator: Our next question will come from Dan Levy with Barclays. Dan Levy: Kumar or Jim, I wanted to actually just go to the topic of warranty. And thank you, Kumar, I think you unpacked some of it. But it looks like your warranty expense was better year-over-year. You're talking about $1 billion of better cost next year as well. And I'm wondering if you could just update us where we are on the path to breaking that cost curve on warranty. I know this is sort of the question that keeps on coming up, but we've heard about the improvements in the J.D. Power survey and the efforts you're taking. But when do we start to see this finally show up materially in the numbers? Kumar Galhotra: Thanks for the question. Let me make 2 points. First, the warranty is obviously made up of coverage and FSA costs. FSA costs are not simply a function of number of units. For example, software, OTA repairs and other repairs like that are significantly cheaper. And as you mentioned, our initial quality has improved substantially. And the reduction in those coverage costs is expected to offset any potential increase in FSA. And I use the word potential increase intentionally because given the large car part, it is somewhat difficult to precisely forecast the FSA number and the FSA cost. But next year, we expect the total cost coverage plus FSAs to also go down. James Farley: And I also want to highlight our Q3 warranty costs were down year-over-year. Kumar Galhotra: Correct. Sherry House: $450 million. James Farley: Yes. It was a big -- a really big achievement by the team, really seeing that coverages flow through one of the reasons why we were able to offset the tariffs. Dan Levy: Great. As a follow-up, I wanted to ask a question about industry competitive dynamics. And I know that the incremental 50,000 units of capacity is really just to make up for some of the lost volume from '25 here from the fire. But you're raising your capacity. We know that your other competitors in trucks are taking some capacity actions as well. What is your comfort that the industry price discipline that we've seen can be maintained even with this incremental capacity coming online? Andrew Frick: Yes, Dan, it's Andrew. Thank you for the question. As we look at the industry pricing this year, it's up about 0.5 point, and we expect that to remain strong. And when you look at the strength of some of the segmentation out there like full-size pickups, it also remains very strong within the industry itself. So we see strength as we move forward in those key segments, which are very important to us. James Farley: And the reason why we feel comfortable is when you look at the underlying segment drivers, fuel price, construction, they're very strong for those segments. And as well, our competitors and Ford have a relatively new lineup. We have a new Expedition Navigator. We have a very still new F-150. We are -- the Super Duty is basically still brand new, and we have hybrid lineup that others don't have. So I think it's a combination of our optimism about the freshness of our lineup as well as the underlying drivers of the segmentation. Operator: Your next question will come from Mark Delaney with Goldman Sachs. Mark Delaney: I want to start on emissions. Jim, you mentioned last quarter that the new emissions rules could be a multibillion-dollar opportunity for Ford over a 2-year period. And Sherry, you said today about the company having opportunities to optimize on mix for next year. So is that multibillion-dollar figure still the right metric for investors? And should investors think about that as being all additive to current EBIT? Or is some of this about avoiding future compliance costs that will no longer come into effect? James Farley: There's 2 -- thank you for your question. There's 2 principal drivers for investors for emissions in the U.S. to think about. The first is a different regime, if it's confirmed in December, whenever it will be, will allow us to minimize the cost of credits that we would buy. We had those as optionality and we don't have to use them. Sherry House: That's right. James Farley: That's a really big advantage. The second one is the monetization of that is very much centered around mix, mix of powertrains, mix of series, mix of vehicles. So even if we have basically maxed out industrial manufacturing capacity, we still have lots of levers to sell what customers really want. And we'll put a finer point on all that in the year-end when we look at next year's guidance. Anything to add, Sherry? Sherry House: Yes. Just that we have purchase obligations about $2.5 billion, and we think a lot of that may go away with Q4. And we're already 40% lower from where we started the year with the purchase obligations because the ZEV-related credits went away. We had no obligation any longer to those contracts. So that's a big part of what is being reduced. Mark Delaney: My other question was about better understanding what's happened with profits in the business this year, excluding tariffs and the aluminum issue. If I walk from the midpoint of the EBIT guidance given with the July call, I add in the $1 billion lower tariff headwind and then subtract the Novelis cost, you end up right at the midpoint of your new EBIT guidance for 2025. So it doesn't appear on the surface that the 3Q strength is continuing into 4Q and maybe there's some timing that's happening in 3Q and goes away. But maybe that's the wrong interpretation and really, you're tracking more to the high end of the outlook for the year. So any more color you can share around how to think about profit trends in the core business would be helpful. Sherry House: Yes. So let me just start by saying our business has been performing exceptionally well. And as a result, we would have guided $8 billion plus. With that, you take out the Novelis EBIT impact of $1.5 billion to $2 billion, and that's how you get to the $6.5 billion. If you would have taken our prior guidance of $6.5 billion to $7.5 billion and took out the $1.5 billion to $2 billion, we would have been guiding at 5% to 5.5%. So indeed, we do have progress in the business. It is partially because of the improvements in the tariffs, and that's going to be $1 billion. But before we even got to that, we've had material cost improvements. The credit business has been performing well and pricing and volume has also been strong. Operator: Our next question will come from Doug Karson with BofA. For our next question, we'll go to Edison Yu with Deutsche Bank Research. Xin Yu: Can you hear me? Operator: We can. Please go ahead. Xin Yu: First one, I think you mentioned that looking at next year, the tariff impact should be similar. Can you just walk us through some of the assumptions around that? I would have thought some of maybe the changes in policy could help. Sherry House: Yes. So the changes in policy, the proclamation that happened last Friday gave us $1 billion of benefit. And that's now allowing us to offset more of our parts tariffs expense. So that's going to be the primary improvement that we saw that was driving the $1 billion that I just talked about, leading to just a $1 billion net impact for this year and enabling us to have a similar impact on tariffs and costs for next year. So basically, what's going to be left is you're going to be left with the -- with auto parts tariffs that don't have offset steel and aluminum, in particular, and that's going to be both the tariffs of steel and aluminum as well as any of the pricing impacts that come through and then any of the vehicle import tariffs that are not offset by the U.S. content offset that we're allowed. James Farley: And the time frame is different. This year was a partial year, next year is a full year. Sherry House: That's right. But when you look at the impacts, we're expecting it to be very similar this year. Xin Yu: Understood. And then just a follow-up on, I think, some of the comments you made about Model e investment. I guess how are we thinking about the Skunkworks efforts now? Obviously, you talked a lot about the emissions being a huge potential tailwind. But obviously, there's -- you spent all this effort on the next-gen EV platform. Are there -- just high level, are there kind of changes we're thinking about related to that? How does one kind of move forward? James Farley: Great question. The EV North America market we're seeing now in the fourth quarter of this year, I believe will be -- we believe will be very different in '27 through '35 when that vehicle is out in the market. And so 2 things to think about. First of all, the UEV was designed for 2 priorities: the lowest possible cost platform with multiple top hats in one facility and designed to really compete in the heart of what we believe is the new EV market in North America, which is affordable commuter vehicles. We expect adoption will increase over time and the market continue to evolve and maybe even regulations evolve. We think this product is literally at the center of the future of the EV market in the U.S. Operator: Our next question will come from Ryan Brinkman with JPMorgan. Ryan Brinkman: Regarding Novelis impact, clearly, there's some shifting here of production and wholesales impacting the cadence of earnings and cash flows that matters to investors. Maybe with regard, though, to the impact on retail sales and the customer, what are you expecting there? It looks like at the end of September, you were fortunately sitting on an 88-day supply of F-Series more than GM at 70 days, full-size pickup segment average, I think it's 78 days. And of course, you operate with far less during the chip shortage. So how do you think about that impact or about managing that impact from a customer perspective? Andrew Frick: Yes. I think -- this is Andrew. Thanks for the question, Ryan. We believe we have enough stock to insulate us from the impact of Novelis in the fourth quarter given where we started the quarter. And that's why I wanted to make the comment on where we expect to end the quarter in the midpoint of our range just to give you confidence in how we're managing the Novelis impact. Operator: For our next question, we'll return to Doug Karson with BofA. Douglas Karson: I'm not sure if you could hear me. Operator: We can. Please go ahead. Douglas Karson: Ford and Ford Credit both have very strong balance sheets. It's a true asset, certainly for bondholders and I think equity alike. The leverage has been very low. The cash balance is very high. And in late September, [ Gordon ] Ford Credit rolled out what appeared to be a successful plan to offer subvented financing the F-150 to subprime customers, kind of providing them an opportunity to enjoy a lower loan rate kind of reserve for higher FICO scores, perhaps easing some affordability issues. So maybe you can kind of explore what opportunities you could maybe provide your customers through creative strategies around loans and rates given the strong balance sheet. Sherry House: Thank you for the question. Yes, we ran at the last few weeks of September, what we call a no tier upgrade marketing program, and it really was to generate news for the F-150. We haven't changed our purchasing policy or our risk appetite, but we're really focused on ensuring that we use these sort of incentives to structure deals for customers that they can afford their monthly payments on a sustainable basis. So I think this program -- this program proved to be very effective. Overall, it didn't change our average FICO scores. In fact, it went up. But these are sort of opportunities that we can look at on an ongoing basis. Douglas Karson: Just so I'm clear, I believe your subprime is a very small part of the overall book... Sherry House: Very small. Yes, it's very small. In fact, our high-risk portfolio mix is just 3%, and it's been very sustainable at that 3% for quite some time now. Douglas Karson: Okay. I think that's comforting for people, but also maybe an opportunity to expand some loans to more subprime and potentially get more sales done wouldn't be a terrible thing also. So I appreciate the question and the answer. I appreciate it. Sherry House: Yes. Thanks. We are concentrated on helping sell more products. So we're very open to new ideas. Douglas Karson: You must have some dealer friends. James Farley: I wish. Operator: Our next question will come from Itay Michaeli with TD Cowen. Itay Michaeli: Just wanted to go back to the powertrain and segment mix opportunity next year, maybe trim mix as well with the compliance costs. To what extent would that optimization end up pushing up your ATPs? And if so, how confident are you, given some of the affordability constraints that you can kind of pass that mix optimization through to the consumer? Andrew Frick: It's Andrew. Thank you for the question. Well, our ATPs are really strong right now, as you know, and we are among the leaders and above segment average. But I think at the core of what it allows us to do is build the customer demand and give us the flexibility to manage our mix, as Jim mentioned earlier, on certain vehicles, especially as we look at some of our off-road derivatives like Tremor and Raptor, it gives us some headroom in that to actually manage the mix within selected vehicles. Itay Michaeli: Terrific. That's helpful. And as a quick follow-up, maybe on the quarter, if you could talk through the drivers behind Blue's improved pricing, I think $400 million was better than what we did last quarter as well as any additional color on fleet pricing in the quarter? Andrew Frick: Well, I think in general, as I mentioned earlier, the industry pricing is up 0.5 point. Retail is up more. It's very strong right now, up 1.7 points. It's driven by a lot of the tariff pricing through the year. If you look at the counterbalance of that fleet has been down a bit. It's primarily in the van business. And fortunately, for us in our portfolio and what plays to our strength, our Super Duty pricing and full-size pickup has remained very strong for us throughout the entire year. James Farley: And one of the great offsets that we've been able to manage this year with Ford Pro is not rely on the traditional fleet business. Andrew, maybe you want to talk about the changing mix of our Pro business. Andrew Frick: Yes. We continue to increase our overall services as a percent of EBIT. Just a couple of years ago, we were around 13%, and we are now well on our way to hit our 20% total EBIT. Across the channels, we've also been able to diversify. We're roughly 1/3 of our channel mix now amongst large corporations, 1/3 with small, medium businesses and 1/3 with government and daily rental. So we are very well balanced, very diversified, both on the vehicle side and also with the services. James Farley: But our -- that strength in small, medium business, SMB, we call it, is really a key accomplishment by the team. We heavily focus on that group. We're continuing to try to grow that mix of that group, and that helps us a lot derisk any kind of pricing risk on the fleet. Andrew Frick: Yes. We've been able to grow. Operator: Your next question will come from Tom Narayan with RBC Capital Markets. Gautam Narayan: Just one quick clarification. So the net impact on tariffs on '25 $1 billion and the '26 to be similar, do you mean to say that the '26 net tariff, assuming everything we know now is also $1 billion? Sherry House: Let me clarify. So for Q4 of this year, we expect an EBIT impact of $1.5 billion to $2 billion due to Novelis. And due to tariffs, we're expecting to see a positive in the Q4 because we are going to get the receivable for the $1 billion. So that's going to be a positive in Q4. I wasn't sure if you were originally talking about the Novelis because the numbers. Gautam Narayan: No, no, no. The tariffs because I remember in 2Q, it was like negative $800 million, 3Q, negative $700 million. So it's like a plus $500 million for Q4 to get to that $1 billion. I'm just understanding how to think about '26. Sherry House: What's going to happen is you would have tariff costs, and it will be offset by this $1 billion that is retroactive that's coming in, in Q4. So to date, we're at like $1 and then you'll be able to take the $1 billion off, you'll encounter a little bit more next quarter, but you'll be positive for Q4. Gautam Narayan: Got it. Got it. And a quick follow-up. As you pivot, let's say, from EV to ICE, just understanding how that works. Clearly, there's stranded costs. We saw the EV losses worsened sequentially. I know some of that was investment. But how should we think about EV losses going forward like into next year as -- if volumes come down? I know some of the plants are flexible, some of them are dedicated, but how should we think about that? James Farley: We'll be excited to give you an update after the fourth quarter as we look into next year. Very big decisions for the company. Operator: Your next question will come from Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: Great. I wanted to ask you just a little bit more how to think about the mix optimization opportunity into next year as a result of some of these lower compliance hurdles. I think you mentioned the ability to maybe maximize some of the off-road offering, Raptor, et cetera. Is there a sense that those were supply constrained -- like you were constraining supply of those and that there's a large amount of like unmet demand in there? Like any sort of way to frame this in terms of how you had been managing the business before as a result of these compliance rules? And what -- essentially, what is the size of the opportunity here? Andrew Frick: Well, Emmanuel, it's Andrew again. Yes. So in -- when you're compliance constrained or under certain regulatory policy, we were having to restrain some of the mix because some of the off-road vehicles, like I mentioned before, Tremor and Raptor are actually very negative against compliance. So we would suppress some of the natural demand within that. So as we look at next year and our overall build mix, we'll obviously match that to customer demand. We don't want to overproduce against that, so we can remain disciplined. And we'll take a look vehicle by vehicle like we always do to maximize our mix within. James Farley: One of the big opportunities to complement what Andrew said on the series mix nameplate is the hybrid mix. And obviously, we can change the pricing in hybrid and change the demand curve for the vehicle. We've had to be very aggressive with hybrid pricing to make sure we cover the right mix. And that obviously is a big opportunity for us because F-150 is a huge volume vehicle for us and the hybrid F-150 is so popular, we have opportunity there to maximize the company's results. Sherry House: The only other thing that I would add, I just want to make sure everybody understands is that with the EPA changes that are likely, that is removing a compliance headwind that would have been going into next year. And so it's just really important that everyone understands that we were facing a headwind. And so that's going to help to eliminate a year-over-year impact. Emmanuel Rosner: Great. And then just one additional question on guidance, comparing it to just the most recent one that you had provided last quarter. So if I basically take the current guidance adjusted for the Novelis fire, but also the $1 billion benefit from lower tariff outlook, it seems like it's essentially an unchanged guidance versus last quarter. And that's despite essentially assuming now, I guess, expecting now for the industry, better SAAR as well as better pricing. So are there at the same time, some industry or company factors that are playing out maybe a little bit less favorably than 3 months ago? Sherry House: No, none to no. I mean, as I said, I mean, we were going to be $8 billion plus. When you take that $1.5 billion to $2 billion off, that gets you to the $6 billion to $6.5 billion, you add the $1 billion of tariffs. But we also are performing at the higher end of the guidance that we had put out there at the beginning of the year. And the reason for that is credit has been doing good, material costs have been doing good. The pricing and volume have been solid. And so that's why we were at the higher end of the guidance. Emmanuel Rosner: I take it offline on the sell side call. Operator: Our final question will come from Colin Langan with Wells Fargo. Colin Langan: Just wanted to follow up. I'm actually -- I guess I'm getting a little confused with some of the puts and takes. If I look at the midpoint of guidance, Q4 is like $550 million. I thought you just said that tariffs would be a refund of $1 billion. And then the Novelis -- so it just would imply almost like negative if it wasn't for the tariff refund. And then just even if I add Novelis, then it would still imply a pretty big drop underlying from Q3 at $2.6 billion to Q4. Am I misunderstanding the commentary there? Sherry House: We would have been at $8 billion plus -- you take out the Novelis impact in Q4. So that's going to be $1.5 billion to $2 billion, which gets you to the $6 billion to $6.5 billion for 2025. Now when I talk about makeup, that's in 2026. So that's where you get the $1 billion back in EBIT not in '25. Colin Langan: So I guess I'm just -- on the prior question, so year-to-date, you have like, what was it, $1.7 billion of tariff costs. The guide for the year is $1 billion. What -- how are we getting there for Q4? I thought that was the refund or maybe I misunderstood that, sorry. Sherry House: Yes, that's right. So as of last Friday when the proclamation was signed, we now can apply a greater percentage of the MSRP tariff offset to our parts. And now that we can do that as of last Friday, we're going to get $1 billion of benefit. We couldn't record that in the Q3 numbers because our books were already closed and this just happened last Friday. So now you're going to see a receivable in Q4 that's more than going to offset what the tariff cost would be in Q4. And then when you add Q1, Q2, Q3, Q4 together with that positive receivable, you'll reach $1 billion net for the full year. Colin Langan: Okay. Got it. And then just, I guess, a follow-up on your color on 2026. You highlighted cost is $1 billion positive, Novelis, it would be $1 billion help into next year. Any color? I think in the past, you've talked about around $600 million of sort of the regulatory costs just structurally going away as a tailwind. And did I catch the commentary on inventory, it will be actually down again next year. So we should kind of have a little bit of destocking factor that we should be thinking about, too? Sherry House: Well, Colin, there's a lot of texture we want to take you through as we position 2026 and beyond. And we're going to do that properly at Q4 earnings. And so for now, I just said we've got some tailwinds and headwinds that I wanted you to know, tariffs roughly the same, tailwinds make up Novelis, likely removal of the EPA compliance headwind, continued cost savings. But then the headwinds are going to be investments in our launches in Marshall and Louisville and investments in the cycle plan. So that's what we're able to share at this time, and we look forward to sharing more with you in our Q4 earnings. Operator: That was your final question. I'll now turn the call over... James Farley: I just want to say one thing. We appreciate all of our investors and the people that analyze our industry very carefully. I just want to note that I know Adam Jonas is moving on to another segment, and I wanted to thank you for your activist investor point of view. It certainly helped us be better managers and stewards of the company. And I think we just wanted to say thank you as a management team for all of you for what you do. But when someone moves on like Adam, we want to highlight that. Thanks. Okay. Well, thank you, operator, again. To summarize, Ford is addressing the key issues affecting our industry head on. Our improved industrial system is driving consistent results on cost and quality. Ford Pro is making Total Ford a more durable company and business. We have and will continue to take decisive actions to improve and grow our company, and I'm confident in a stronger Ford as we head into an exciting 2026. Thank you today. Operator: This concludes the Ford Motor Company Third Quarter 2025 Earnings Call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the West Fraser Third Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 23, 2025. During this conference call, West Fraser's representatives will be making certain statements about West Fraser's future financial and operational performance, business outlook and capital plans. These statements may constitute forward-looking information or forward-looking statements within the meaning of Canadian and United States securities laws. Such statements involve certain risks, uncertainties and assumptions, which may cause the West Fraser's actual or future results and performance to be materially different from those expressed or implied in these statements. Additional information about these risk factors and assumptions is included both in the accompanying webcast presentation and in our 2024 annual MD&A and annual information form as updated in our quarterly MD&A, which can be accessed on West Fraser's website or through SEDAR+ for Canadian investors and EDGAR for United States investors. I would like to turn the conference over to Mr. Sean McLaren. Thank you. Please go ahead. Sean McLaren: Thank you, Inna. Good morning, and thank you for joining our third quarter 2025 Earnings Call. I am Sean McLaren, President and CEO of West Fraser. And joining me on the call today are Chris Virostek, Executive Vice President and Chief Financial Officer; Matt Tobin, Senior Vice President of Sales and Marketing; and other members of our leadership team. On the earnings call this morning, I will begin with a brief overview of West Fraser's Q3 2025 financial results and then pass the call to Chris for additional comments before I share some thoughts on our outlook and offer concluding remarks. West Fraser posted negative $144 million of adjusted EBITDA in the third quarter of 2025 as we continue to operate within an extended cycle trough. Of note, this quarter included a $67 million out-of-period duty expense related to the finalization of Administrative Review 6 or AR6. New home construction remained relatively stable during the period, albeit at uninspiring levels, with annualized U.S. housing starts averaging just 1.31 million units through August on a rolling 3-month seasonally-adjusted basis as mortgage and interest rates continue to present headwinds to U.S. housing demand and affordability. And as we've noted for several quarters, repair and remodeling demand was subdued once again this quarter. Despite the tough Q3, our balance sheet continues to demonstrate strength as we exited the quarter with nearly $1.6 billion of available liquidity and a healthy cash position that remains positive net of debt. A strong balance sheet and liquidity profile, along with our investment-grade rating remain key elements of our defensive capital allocation strategy, which allows us to invest in our business countercyclically and take advantage of investment opportunities if and when they arise. With that brief overview, I'll now turn the call to Chris for additional detail and comments. Christopher Virostek: Thank you, Sean. And a reminder that we report in U.S. dollars and all my references are to U.S. dollar amounts, unless otherwise indicated. The lumber segment posted adjusted EBITDA of negative $123 million in the third quarter, inclusive of the previously mentioned $67 million out-of-period duty expense. This is in comparison to $15 million of adjusted EBITDA reported in the second quarter with the sequential change driven largely by lower pricing and the AR6 duty expense. Of note, operations at our old Henderson site are winding down and the new mill is entering its commissioning phase. Our North America EWP segment posted negative $15 million of adjusted EBITDA in the third quarter, down from $68 million in the second quarter, with the sequential change largely driven by lower OSB pricing. The Pulp and Paper segment posted negative $6 million of adjusted EBITDA in the third quarter compared to negative $1 million in the second quarter, with the sequential change largely attributable to Cariboo Pulp's annual maintenance shut that occurred in the third quarter. Prior to and following the maintenance outage, we are seeing improved operating performance from Cariboo Pulp in terms of daily output. Finally, our Europe business generated $1 million of adjusted EBITDA in the third quarter similar to the $2 million reported in the second quarter. In terms of our overall Q3 results, lower product prices for our lumber and North American OSB products were the largest contributing to tractors as compared to Q2. We were also buffeted by a number of major maintenance activities during the quarter, most significantly the Cariboo maintenance shut. Cash flow from operations was $58 million in the third quarter with our net cash balance at $212 million, down from $310 million in the prior quarter. The relative decrease in our net cash balance reflects lower earnings offset by -- in part by a reduction of working capital plus the impact of $90 million of capital expenditures and approximately $65 million of cash deployed towards share buybacks and dividends. In terms of our 2025 shipments guidance, with the demand softness, we continue to experience across our lumber product portfolio, we are narrowing our outlook by reducing the top end of the guidance range for both SPF and SYP 2025 shipments, while maintaining the North American OSB and EU OSB shipment guides for 2025. We are also confirming our 2025 CapEx guidance range of $400 million to $450 million. All updated views on our 2025 outlook are presented on Slide 8. Regarding softwood lumber duties. Earlier in the third quarter, the U.S. Department of Commerce released final CVD and ADD rates for AR6 which are based on the year 2023. These rates were largely as we had anticipated and at a combined rate of 26.5%. West Fraser has the lowest duty rate in the Canadian industry. More recently, the U.S. administration issued a proclamation that imposed Section 232 tariffs of 10% on imported softwood timber and lumber into the U.S., which came into effect on October 14, 2025. This tariff is in addition to the existing softwood lumber duties. With that financial overview, I'll pass the call back to Sean. Sean McLaren: Thank you, Chris. Looking forward, we continue to monitor macroeconomic conditions complicated by shifting trade policies. Despite such a backdrop, the company remains well positioned to navigate the dynamic and difficult business environment we face today, backstopped by a strong financial position. As a reminder, we acted early in this down cycle, optimizing our portfolio of assets to create a more resilient company. This included permanently removing 170 million board feet of capacity in our Canadian lumber business in 2022 and 650 million board feet of capacity in 2023 and 2024, through the permanent or indefinite closure of 5 of our leased economic lumber mills in the U.S. and Canada. Combined, these capacity removals account for 820 million board feet, representing approximately 12% of the company's lumber capacity prior to the actions taken. Considering our shipment guidance for 2025, our implied Q4 operating rate reflects the curtailment of approximately 20% to 25% of that capacity. Furthermore, we divested 3 pulp mills for $124 million in 2024 and acquired high-quality lumber and OSB assets. In the aggregate all these actions to high-grade the portfolio have made us better at the bottom of the cycle. Going forward, we will continue to take this approach of managing our asset portfolio to do what is both prudent for the long term and necessary in the short term. Also expect us to continue to be flexible in our operating strategy, meeting the needs of our customers and operationalizing the benefits of our strategic capital to drive down costs, all while keeping our focus on a safe working environment for our employees. We are wrapping up a number of capital projects that have been in progress during the current market and expect the start of these projects will continue to lower cost as they are operationalized. We will also continue to pursue a balanced capital allocation strategy that includes investment in value-enhancing projects, pursuit of opportunistic investments in growth, and the return of capital to shareholders as we leverage the competitive advantage of our balance sheet strength and available liquidity. In terms of our more general medium- to longer-term outlook, we will continue to lean on our industry knowledge and experience to make the decisions that we believe will not only keep the company resilient in the trough of the cycle, but will also allow the company to be better prepared for the next industry demand recovery whenever that may be. North American support lumber supply has been trending lower in recent years, with a material proportion of that capacity closed permanently due to factors including high-cost fiber supply, legacy technology, shrinking residual markets and now more recently, increased duties and tariffs. When lumber supply demand dynamics eventually find balance and demand cyclically improves, we expect our ability to add material new supply will face the same significant obstacles, access to economically viable fiber, high capital costs that challenge returns on investment and long-term viable outlets for residual products. Shifting briefly to tariffs. Regardless of what may happen on this front, as we have said before, we continue to monitor the Canada-U.S. trade situation closely and remain agile and ready to respond as needed, and we will continue to work closely with our federal and provincial governments to support discussions when called upon as they relate to softwood lumber. In closing, at West Fraser, we aim to deliver strong financial results through the business cycle. We achieved this leveraging our product and geographic diversity, modern, well-capitalized assets and the dedication of our people and culture rooted in cost discipline and a commitment to operate responsibly and sustainably. We remain steadfast in the strategy. Although we continue to have a challenged near-term outlook, we are optimistic about the longer-term prospects for our industry and for West Fraser, and we look forward to continuing to build one of the world's leading sustainable buildings products companies. Thank you. And with that, we'll turn the call back to the operator for questions. Operator: [Operator Instructions] And your first question comes from the line of Ketan Mamtora from BMO Capital Markets. Ketan Mamtora: Maybe to start with and recognizing that this is a pretty tough backdrop right now. I'm just curious sort of your approach to managing production in both lumber and North America OSB, particularly in this environment, which increasingly looks like that demand is likely to remain soft here in the near term. Can you sort of just give us some part on sort of how do you approach sort of managing production, particularly as we are looking at sort of another year where EBITDA could be kind of negative in lumber? Sean McLaren: Ketan, happy to touch on that. And maybe I'll just start with -- by reinforcing a few things that -- the actions we took early in the cycle, which we're closing permanently or indefinitely a number of our mills adjusting our shift configurations. And we have remained nimble in our lumber portfolio against after those actions. And as sort of -- you have seen in our guidance as the year has unfolded. So we maintain in both of our main -- all of our product lines, but in particular, lumber and OSB, a variable kind of operating strategy that first runs to our economics and our customer demand needs. So that's how we manage that, and we make those decisions all the time within our platform. Ketan Mamtora: Understood. And then on OSB, what was sort of the implied Q4 operating rate looked like based on what you all have discussed. You talked about sort of 25% temporary curtailment in lumber. How does that look like in... Sean McLaren: Yes. I'll let Chris touch on that one. Christopher Virostek: Yes. I think, Ketan, as you'll recall, I think when we've discussed this before, right, Q4 is always very heavy for us on maintenance shuts. We strategically take that maintenance downtime in Q4 because it is a weaker seasonal period. So I think our -- with the shipment guide that is out there, that would imply an operating rate of somewhere around 80% in the fourth quarter. Ketan Mamtora: Understood. And then just last one from me. On the balance sheet side, clearly, the balance sheet is very strong. You've got a net cash position. Curious about sort of how you think about M&A opportunity in this kind of down cycle at the moment? And where do you think you've got the most opportunity for inorganic growth? Christopher Virostek: Yes. Sure. I'll jump in there, and then Sean, you can add if you like. I think we're very consistent the last several years in how we've talked about M&A. And for us, it's quality first, right? And I think clearly, an environment like we're in today necessitates that -- it just shows how important that quality-first approach is around all those things that Sean mentioned that are challenges, whether that's residual supply or asset quality or workforce availability or timber availability. So I think the way that we have the balance sheet we have flexibility to pursue our -- the strategy that we've always had, and growth has always been part -- inorganic growth has always been part of the company's DNA going back decades. So -- but we're going to be guided first and foremost by quality and things that make the company stronger. And I think you can see that certainly in the actions that we've taken over the last several years where we've added to the portfolio, it's been very selective and high quality, and we've also removed things from the portfolio that we don't think make us stronger at the bottom of the cycle. So I think that will be the guide as to what we consider as opportunities is there's got to be -- we got to be satisfied with the quality that's out there. Sean? Mark Wilde: No, that's perfect, Chris, all quality and enhancing our strength at the bottom of the cycle. Those are the priorities as we think about what might be next for West Fraser. Operator: And your next question comes from the line of Ben Isaacson from Scotiabank. Ben Isaacson: Just two questions for me. Sean, I think last conference call, so 3 months ago, the federal government was starting to talk about a possible support and conversations around that when it comes to lumber. So it's been 3 months and things have not really improved in terms of the macro backdrop. Can you talk about what you're willing to share in terms of how those conversations are going and how federal support for lumber is starting to stack up. Sean McLaren: I can't remember, I don't have the exact date in front of me. I believe it was in early August, and it was in British Columbia, which was encouraging at a small business in -- a small lumber business for the premier rolled out some different support measures. I don't have all the details are all in the public domain, but they were providing some level of support for the industry, some level of funding for exploring different markets. But that would all be in the public domain. I think we, as a mandatory responded, we continue to and frankly, with a balance sheet that we -- that remains strong. We continue to support those measures for the industry with the government. And at the same time, are kind of maintaining our own balance sheets, which is reinforcing our operations. So I probably wouldn't add more than that Ben. Ben Isaacson: Okay. That's fair. And then just a second question is perhaps for you or for Matt. With respect to your own customers that you talk to regularly, can you give some kind of sense in terms of how many months or days or weeks of inventory is in the U.S. channel, again, when it comes to your customers only relative to normal conditions for mid-October. Sean McLaren: Go ahead there, Matt. Matt Tobin: Sure. I can answer that. I would say we don't really have visibility into our customer supply chain or their inventory levels. What I can speak to is our inventory levels and they're lean in both SYP and SPF which has been intentional in this uncertain market to run our inventories lean. Ben Isaacson: Okay. So just to be clear, I mean, from the rate of reorder, you don't have a sense as to -- in terms of planning when your customers are going to come back and what their needs will be in the next kind of 2 to 3 months. Matt Tobin: No, I'd say they're buying as their needs come to them, and we're ready to service them in whatever regions they're in. But I would say no fundamental change or visibility to their inventory levels. Sean McLaren: One thing I might add to that, Ben, is our customers are -- products readily available. So they're buying what they need as they need it. And I think our guidance would -- we're maintaining our inventories in a below average position. And so our guidance would -- things are flowing through based on that guidance. Operator: Your next question comes from the line of Sean Steuart from TD Cowen. Sean Steuart: Sean, I want to follow up on the M&A question, and I appreciate your comments around all the assets and building strength at the bottom of the cycle. I guess the follow-on is, we're 3 years into this lumber downturn in North America. Have you seen more opportunities coming to the surface. And if so, would those opportunities include the types of assets you're looking for? I guess I'm trying to gauge what the opportunity set looks like now and how that's changed over the last 3 to 6 months. Sean McLaren: Sean, probably not -- I think we maybe had this question on a prior call. Probably not a lot of change this year. I think there -- what you typically see is early in an upswing as people are thinking about if a quality asset to sell, people would then maybe look to market that. And then I would say in the pipeline, I don't think there's anything any more than normal and for sure, higher quality assets typically are being held to a better time to market them. So all those things saying that we wouldn't be -- there wouldn't be anything that is jumping out today, that is high quality and available that fit. Sean Steuart: And I also wanted to follow up with your comments on North American supply management on the lumber side and appreciating you've done a lot of work on permanent and indefinite closures over the last 3 years. Is a part of the decision making for you at this point in the cycle, we're arguably closer to the end of this downturn than the start at this point, hopefully. Is there reluctance to take more permanent or indefinite shuts at this point when maybe we can see the light at the end of the tunnel as affordability headwinds start to ease. Is that part of the thinking and the thought process when you're gauging sort of rolling downtime versus further definite or permanent closures. Sean McLaren: Yes. No, it's a good question. I think we always look at it against the backdrop of how is that asset holding up during the current down cycle, and do we have a clear path for the next down cycle. And we make kind of decisions against that backdrop, it's really hard to predict. I mean, I agree with your comments that hopefully, we're here closer to the end than in the middle or the beginning, but we really don't know that. So I think we always have to really challenge ourselves, especially in this environment. Is there a a better operating model that lowers our cost here at the -- and makes us more competitive at the bottom of the cycle. And I would look across our SPF business, Southern Yellow Pine, OSB major business lines and volume is coming out of those businesses and costs are lower. So that's really the way we look at all those decisions and -- but they really -- every asset gets pressure tested in this environment. Operator: And your next question comes from the line of Matthew McKellar from RBC Capital Markets. . Matthew McKellar: I appreciate all the details so far. First from me, could you maybe just share with us how conditions in the Canadian markets have evolved in the last few months, is there anything to call out in terms of differences with the band between the U.S. and Canada? And then are you seeing any of your competitors behave any differently in the Canadian market since higher U.S. duties or the tariffs took effect? Matt Tobin: Yes, I can take that. I would say that the Canadian market remains competitive. It's a much smaller market than the U.S. market. So while it's an important market for us and we service those customers, it generally doesn't drive demand. And I would say it remains competitive just with where we are in the cycle and all the other things you've mentioned going on, but I would say nothing unusual, just having to compete every day to service our customers in that market. Matthew McKellar: And then just a couple of cleanups. If we're in an improved, but still, relatively soft wood products market next year, how should we be thinking about CapEx? I appreciate that Henderson will fade year-over-year. How does that evolve into '26 in your view? And second would be just the fire of the Cowie facility, can you help us understand what the state of that facility is today? Christopher Virostek: Sure. Yes. Thanks. So on CapEx, as we look forward, I think as we said in the comments, right, like we've spent a lot of capital. And I think that's one of the advantages of our strong balance sheet is we've been able to be durable with our capital allocation strategy and invest for the future in what have been pretty difficult market in the last couple of years, considering that, as Sean said, we're wrapping up a lot of fairly major projects here, and our focus is shifting to operationalizing those. So I think you can sort of think about what that means relative to 2026. We'll be out in February with our 2026 CapEx guidance. We have had 2 pretty busy years with with big projects going on. With respect to Cowie, I think, flagged in the materials, right, that incident happened about 5 weeks before the end of the quarter. Facility has been repaired back up and running, and I think we're pretty pleased with what we're starting to see in the European segment in terms of maybe some green shoots of things starting to turn around there. Operator: [Operator Instructions] And your next question comes from the line of Hamir Patel from CIBC Capital Markets. Hamir Patel: Sean, we don't have access to the U.S. trade data at the moment during the shutdown. But on the ground, are you seeing any signs of European lumber imports increasing just given that their competitive position has improved relative to Canada with all the duty and tariff changes since August. Sean McLaren: Ask Matt, if there's -- I don't think we have a lot of visibility to that, Hamir, without the data coming in. But Matt, would you add anything to that? Matt Tobin: No, I'd say like you said, not a lot of visibility and no meaningful change that we can see in them. Hamir Patel: Okay. Fair enough. And I just want to ask in Europe, if you have any comments on -- with respect to OSB demand, how things are faring on both the new res and R&R side? Sean McLaren: Yes. And Chris sort of touched on that as unfortunate incident at Cowie, our team did an excellent job of making the repairs and getting the mill back up and running and it kind of shadowed that event really did shadow some progress in Europe, and we are seeing -- hard to say how much is kind of demand driven, some of it still may be supply driven, but kind of sequentially quarter-over-quarter, we are seeing some price improvement in OSB and seeing some demand improvement there. So we're looking more optimistically in Europe over the next few quarters, and we'll see how all that unfolds. Operator: And we have a follow-up question from Mr. Sean Steuart from TD Cowen. Sean Steuart: Chris, you guys have done a good job on working capital management. And yes, I appreciate the seasonality in Q1 you'll update big log deck builds in Canada. Can you speak generally though, to, I guess, the changes you've made in terms of how you're managing working capital, over the mid- to long-term room for more reductions there, ability to pull more cash out of that, just broader perspective on how you're thinking about that item. Christopher Virostek: Yes. Look, I got to give a lot of kudos to the operations teams across the company on this front, right? I think it spans all elements of the working capital, we manage our credit and receivables very tightly, while still maintaining good relationships with our customers. The cycle there is pretty short. I think as Matt indicated in his comments, in many of our businesses were at or below target levels and operating with fairly lean inventories, which, look, presents some challenges from time to time in terms of filling orders. But the teams are doing a remarkable job of managing through that and learning how to operate with lower inventories. And then lots of work, I'll say, going on in terms of on the procurement side as well as vendors and vendor selection and things like that. So say it spans all aspects of this. And I'd say it's not just something that because of the environment that we're in, that it's getting any more focus than it ordinarily does, think the teams work hard on this stuff all the time. They're probably tired of hearing me talk about working capital. But it's really been, I think, a source of strength for us here in the last while, really releasing on, frankly, all aspects of the balance sheet, and it helps run a more efficient and effective business. So what does that translate into going forward? Hard to say on the way out, but I think some great learnings across the business and a deep focus on strong execution. Operator: And there are no further questions at this time. I will now hand the call back to Mr. Sean McLaren for any closing remarks. Mark Wilde: Thank you, Inna. As always, Chris and I are available to respond to further questions as is Robert Winslow, our Director of Investor Relations and Corporate Development. Thank you for participation today. Stay well, and we look forward to reporting on our progress next quarter. Operator: And this concludes today's call. Thank you for participating. You may all disconnect.
Operator: Hello, everyone, and a warm welcome to the Heritage Financial 2025 Q3 Earnings Call. My name is Emily, and I'll be moderating your call today. [Operator Instructions]. I would now like to turn the call over to Bryan McDonald, President and Chief Executive Officer, to begin. Please go ahead. Bryan McDonald: Thank you, Emily. Welcome and good morning to everyone who called in and those who may listen later. This is Bryan McDonald, CEO of Heritage Financial. Attending with me are Don Hinson, Chief Financial Officer; and Tony Chalfant, Chief Credit Officer. Our third quarter earnings release went out this morning premarket, and hopefully, you have had the opportunity to review it prior to the call. In addition to the earnings release, we have also posted an updated third quarter investor presentation on the Investor Relations portion of our corporate website, which includes more detail on our deposits, loan portfolio, liquidity and credit quality. We will reference this presentation during the call. As a reminder, during this call, we may make forward-looking statements, which are subject to economic and other factors. Important factors that could cause our actual results to differ materially from those indicated in the forward-looking statements are disclosed within the earnings release and the investor presentation. Improving net interest margin and tight controls on noninterest expense growth continue to incrementally drive earnings higher in the third quarter. On an adjusted basis, earnings per share was up 5.7% versus last quarter and up 24.4% versus the third quarter of 2024. And on the same adjusted basis, our ROAA improved to 1.11% versus 0.87% in the third quarter of 2024. We are excited about the pending merger with Olympic Bancorp. Their addition to the Heritage franchise will add to the profitability of our operations and better position our company for growth in the Puget Sound market. We'll now move to Don, who will take a few minutes to cover our financial results. Donald Hinson: Thank you, Bryan. I will be reviewing some of the main drivers of our performance for Q3. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the second quarter of 2025. Starting with the balance sheet. Total loan balances were relatively flat in Q3, decreasing by $5.7 million. Although loan originations increased from Q2 levels, payoffs and prepayments also increased in Q3, while utilization rates decreased. Yields in our loan portfolio were 5.53%, which was 3 basis points higher than Q2. This was due primarily to new loans being originated at higher rates and adjustable rate loans repricing higher. Bryan McDonald will have an update on loan production and yields in a few minutes. Total deposits increased $73 million in Q3 and noninterest-bearing deposits increased $33.7 million. The increase in total deposits was net of a $31.4 million decrease in certificates of deposit accounts, most of which was the result of a decrease of $25 million in brokered CDs. The cost of interest-bearing deposits decreased to 1.89% from 1.94% in the prior quarter. As a result of the rate cut in September, we expect to see continued decreases in the cost of deposits. Investment balances decreased $33 million due primarily to expected principal cash flows on the portfolio. Due to the desire to preserve capital for the pending acquisition, we halted loss trade activity in Q3. We also did not purchase any securities in Q3. Moving on to the income statement. Net interest income increased $2.4 million or 4.3% from the prior quarter due primarily to a higher net interest margin. The net interest margin increased to 3.64% from 3.51% in the prior quarter and from 3.30% in the third quarter of 2024. We recognized the provision for credit losses in the amount of $1.8 million, up from $956,000 in the prior quarter due primarily to an increase in the weighted average life of the loan -- construction loan portfolio. New construction loans increased the average life of the portfolio as well as reduced portfolio utilization rates. Net charge-offs remain at very low levels. Tony will have additional information on credit quality metrics in a few moments. Noninterest expense increased $530,000 from the prior quarter due mostly to increased comp and benefits expense as well as professional services. We recognized 535 -- sorry, $635,000 of merger-related expenses in Q3, most of which was included in the professional services category. Comp and benefits expense was higher, primarily due to increased incentive compensation accrual. And finally, moving on to capital. All of our regulatory capital ratios remain comfortably above well-capitalized thresholds and our TCE ratio was 9.8%, up from 9.4% in the prior quarter. Similar to our inactivity and loss trades on investments, we were also inactive in stock buybacks in Q3 and are unlikely to resume stock buybacks this calendar year. I will now pass the call to Tony, who will have an update on our credit quality. Tony Chalfant: Thank you, Don. Through the first 3 quarters of the year, I'm pleased to report that credit quality remains strong and stable. Nonaccrual loans totaled $17.6 million at quarter end, and we do not hold any OREO. This represents 0.37% of total loans and compares to 0.21% at the end of the second quarter. The largest addition during the quarter came from 2 loans totaling $6.7 million that are primarily secured by a townhome construction project. That project is nearly complete and the unit should be listed for sale before year-end. There is currently no loss expected on these loans and the nonaccrual decision was primarily tied to the delinquency status. Also within our nonaccrual loan portfolio, we have just over $2.8 million in government guarantees. Nonperforming loans increased modestly from 0.39% of total loans at the end of the second quarter to the current level of 0.44%. This increase was primarily tied to the previously mentioned increase to nonaccrual loans. Criticized loans moved lower during the quarter. These loans rated special mention or substandard totaled just under $194.5 million at quarter end, declining by just over $19 million during the quarter. Substandard and special mention loans were down by 5% and 12%, respectively, during the quarter from a combination of payoffs and upgrades. At 2% of total loans, substandard loans remain at a manageable level and in line with our longer-term historical performance. Page 19 in our investor presentation provides more detail on the composition of our criticized loans and reflects the stability we've seen in this portfolio over the past 2 years. During the quarter, we experienced total charge-offs of $374,000 that were split evenly between consumer and commercial loans. The losses were partially offset by $256,000 in recoveries leading to net charge-offs of $118,000 for the quarter. For the first 9 months of the year, net charge-offs remained low at $911,000. This represents 0.03% of total loans on an annualized basis and compares favorably to the 0.06% we reported for the full year 2024. Page 20 of the investor presentation shows our history of low credit losses and how we compare favorably to our peer group. We are pleased with the strength and stability of our credit metrics for both the quarter and through the first 9 months of the year. While we are closely watching the increase in our nonperforming loans, it is important to note they remain at a low level when compared to our historical trends. While there has been some economic volatility this year, we have yet to see any material impact on our credit quality. We remain confident that our consistent and disciplined approach to credit underwriting will serve us well should the economy show any material deterioration in the coming quarters. I'll now turn the call over to Bryan for an update on our production. Bryan McDonald: Thanks, Tony. I'm going to provide detail on our third quarter production results, starting with our commercial lending group. For the quarter, our commercial teams closed $317 million in new loan commitments, up from $248 million last quarter and up from $253 million closed in the third quarter of 2024. Please refer to Page 13 in the investor presentation for additional detail on new originated loans over the past 5 quarters. The commercial loan pipeline ended the third quarter at $511 million up from $473 million last quarter and up modestly from $491 million at the end of the third quarter of 2024. As we look ahead to the fourth quarter, we are estimating new commercial team loan commitments of $320 million, which is very similar to Q3 levels. As anticipated, loan balances were fairly flat quarter-over-quarter with a $6 million decline in the quarter. Although total loan production was up $81 million or 30% versus last quarter, we continue to see elevated payoffs and prepaids. And similar to last quarter, the mix of loans closed during the quarter resulted in lower outstanding balances. Looking year-over-year, prepayments and payoffs are $124 million higher than last year, and net advances on loans have swung from a positive $142 million last year, to a negative $75 million year-to-date in 2025. Please see Slides 14 and 16 of the investor presentation for further detail on the change in loans during the quarter. Looking ahead to the fourth quarter, we expect loan balances to remain near Q3 levels then resume growth to more normal levels in 2026 as loan payoffs moderate, and the net advances moved back to a positive position. Deposits increased $73 million during the quarter and are up $173 million year-to-date. The deposit pipeline ended the quarter at $149 million compared to $132 million in the second quarter. And average balances on new accounts opened during the quarter are estimated at $40 million compared to $72 million in the second quarter. Moving to interest rates. Our average third quarter interest rate for new commercial loans was 6.67%, which is up 12 basis points from the 6.55% average for last quarter. In addition, the third quarter rate for all new loans was 6.71%, up 13 basis points from 6.58% last quarter. In closing, as mentioned earlier, we are pleased with our solid performance in the third quarter. Deposit growth has allowed us to pay down borrowings and broker deposits while our loans have continued to reprice upward. These factors drove our net interest income up $2.4 million versus last quarter and $4.4 million versus the third quarter of 2024. The combination with Olympic Bancorp and its subsidiary, Kitsap Bank, will add to this positive momentum in a significant way. We look forward to having the exceptional bankers of Kitsap join the Heritage Bank family and are excited about what we can accomplish together. Overall, we believe we are well positioned to navigate what is ahead and to take advantage of various opportunities to continue to grow the bank. With that said, Emily, we can now open the line for questions from call attendees. Operator: [Operator Instructions] Our first question today comes from Matthew Clark with Piper Sandler. Adam Kroll: This is Adam Kroll on for Matthew Clark. Yes. So maybe just starting off on the margin. I was wondering if you had the spot cost of deposits at September 30 and maybe the NIM for the month of September? Donald Hinson: Sure, Adam. Yes, spot rate on cost deposits was -- the interest-bearing was 1.87%. And that, of course, compared to 1.89% for the quarter and for total cost deposits of 1.35%. The NIM for September was 3.66% compared to 3.64% for the quarter. Adam Kroll: Got it. That's super helpful. And then just on deposit costs. I guess how much opportunity do you still see to reduce rates on the nonmaturity side? Tony Chalfant: Well, we have close to -- I think where it comes into play is mostly close -- is approximately $1 billion we have in exception price as it's -- that are costing us currently close to 3%. And so we will continue to, as rates are cut to work those down over time. It's a process, and it doesn't happen all at once. But we have been working them down some. I will say also, a lot of the new -- if we bring on new accounts, so they tend to be at the higher than the overall portfolio rate. So that mitigates some of the help of the rate cuts, but I do expect that we will continue to be able to work that down over time. Adam Kroll: Got it. I appreciate the color there. And then maybe just one last one for me is I was wondering if you could just expand on how you're thinking about organic loan growth in '26? And do you have any visibility into payoffs and when they might normalize lower? Bryan McDonald: Sure, Adam. We're expecting to move back to more of our traditional range, mid- to high single digits next year. On the second quarter call, I had mentioned, anticipated growth hitting in the fourth quarter, and we have several additional larger payoffs we're now expecting here in the fourth quarter. So we're expecting to be flat again. So there's kind of 2 things going on. One is the cycling of some construction loans we've booked over the last few years that are reaching perm and paying off. And you can see that on Page 14 in the investor presentation just with the utilization rates on the construction loans as those go to perm and pay off. And then we've -- a lot of the new bookings over the last couple of quarters have been in that construction bucket, and so our fundings have been lower. If you look at the detail on the change in loans during the quarter, you can see our net advances on construction loans or actually on all of our lines is down this year versus up last year. So we expect, as we get into 2026, work our way through the rest of these payoffs that we'll have positive net advances on those loans, so a bit of a tailwind versus the headwind that we had this year. And then the productions continue to be strong at over $300 million this last quarter and expecting, again, $300 million in Q4, over $300 million in Q4. It's a little harder for me to see out into 2026 because our pipeline is really accurate out 90 days. It's hard to anticipate loan demand in 2026, although I would say things have been strengthening since the summer. And so based on that, I'm not seeing anything at this point that would cause those -- cause loan demand to dip and the pipeline to shrink beyond all the obvious things that could drive that. We're just -- we're seeing the trend move in the other direction right now. Operator: Our next question comes from Jeff Rulis with D.A. Davidson. Jeff Rulis: Maybe staying on the payoff front, just a follow-up. Any of that kind of managed by you or encouraged balance reductions for credit-related reasons? Bryan McDonald: Yes, Jeff, I would say the kind of the change in the fourth quarter is some several larger payoffs that are for adversely classified credits, not necessarily a circumstance where we're working them out of the bank, but ones where the customers have decided to sell the assets and pay it off. So that's the difference versus last quarter. We've got a few in that bucket and then one additional construction loan that's going to pay off in Q4. We're expecting Q4 versus previously we thought it push into '26. So that's the change for Q3. Not a huge number of loans, but a couple of chunky ones in there. Jeff Rulis: Sure. No, that's helpful. Just to kind of get the whole picture that on the edges, maybe some of that activity is positive. I wanted to talk about the deposit success in the quarter, a pretty good core deposit growth. Is that a bit of seasonal factors in play? Or is this just execution with the team, a bit of both? Just trying to see -- unpack that a little bit. Bryan McDonald: Yes, it is a bit of both. Third quarter, traditionally our strongest deposit growth quarter during the year, and that was the case last year, and we saw it this year, the years previously was hard to see it, of course, because of all the rate changes and the outflow of excess deposits. But yes, seasonal increase. And then we've had good additions from the new account activity side. And so those are driving the balances as well as some accumulation in customer accounts, again, more related to that seasonality. Jeff Rulis: Got you. And then connected maybe, Don, on the margin, I guess, it sounds as if that -- those deposit costs or spot rate and margin trending well. Is there a bit of a carryover or a declining benefit from the loss trades. I guess anything you give puts and takes on margin, particularly in light of cuts as well, rate cuts? Where would you sort of position the margin ahead? Donald Hinson: Yes. I don't think we're going to get the margin growth based off the rate cut we had in mid-September, which we didn't feel the full effect of or experience full effect of and kind of expecting one next week. I think we're going to continue to get, again, help on the deposit side. But I think the loan yields are going to be fairly flattish this quarter. We're going to continue to be able to reprice adjustable rate loans higher and new loans going on will be higher. But those rate cuts when we have, I think, it's 22%, 23% fully floating that also impacts it. So having a flattish loan yields for the quarter and maybe some help on the deposit side, I think we might continue to see some NIM improvement, but it will be muted compared to last quarter. Operator: Our next question comes from Liam Coohill with Raymond James. Liam Coohill: Liam On for David. So we've talked a lot about the deposit success in the quarter and I was curious, how has competition been trending in your markets, especially with a lot of banks targeting high levels of loan growth. Where are you seeing the most opportunity for gathering those deposits even in a seasonally stronger quarter? Bryan McDonald: Yes, Liam, really, it's same strategy we've deployed in the past going after the operating relationships, accounts that look for strong servicing. Don mentioned in his deposit comments that some of the new relationships we're bringing on have a little higher average cost than the bank's average. And that's because for those excess deposits to the extent that customers are shopping between a few banks, we're having to pay up on those excess deposits, maybe a little bit more so than we are within the portfolio on average. But then, of course, we're getting strong demand balances along the way. So we still see competition in our market, strong pricing competition on deposits. It's kind of varied from local -- one local geography to another in terms of who the players are that are being particularly aggressive with deposits. So that continues to be a factor. But if you're going after the operating relationships, it's a different driver than price on that piece. So that's the key. Liam Coohill: I appreciate that. And on the acquisition of Olympic, how has progress in the pending deal been trending? And what are the most pressing priorities from your view post deal approval and integration? Bryan McDonald: Yes, Liam, everything is progressing right as planned. We have a project plan and time line and everything is going smoothly. Not seeing anything at this point that, that would change kind of our estimated closing date beginning of Q1, we're on track for that. And then, of course, coordinating closely with the Olympic team to make sure everything goes smoothly and that's also been going very well. So nothing at this point of concern, just going just as we had anticipated. Liam Coohill: Great. And then last one for me. I mean asset quality remains pretty strong broadly, and it's great to hear that, that credit migration is likely going to be resolved without loss in 4Q. With classified down quarter-over-quarter. Is there anything you're watching more closely moving forward? Or is all seemingly quiet? Bryan McDonald: Tony, I'll let you pick that one up. Tony Chalfant: Yes, Liam, it's a good question. I think what we're seeing is that the impact from some of the economic volatility has been sort of spotty through the portfolio, nothing really systemic. So we'll have -- we have a few loans that were relationships that we're looking at that have been impacted somewhat by that. But generally speaking, it's just kind of the normal, ins and outs of -- into the classified criticized buckets that we typically see. So no real particular trends we're watching. And as Bryan mentioned, we do have some positive momentum in the substandard category that may play out in the fourth quarter or should play out in the fourth quarter. And that -- the loans that are in our nonperforming bucket right now, we're just not seeing a lot of material loss potential there as of right now. Operator: Our next question comes from Jackson Laurent with Stephens. Jackson Laurent: This is Jackson on for Andrew Terrell. If I could just hit on expenses first, and I apologize if I missed it. Adjusting for like the merger costs in the quarter, expenses were right at the bottom end of like the previously guided $41 million to $42 million expense guide. Just wondering if that's a good run rate that we should be looking for going forward? Donald Hinson: Sure, I'll take that, Bryan. The one impact to this quarter that we haven't had is the state raised their revenue tax rate and that's going to impact us by about $300,000 per quarter. So other than that, I expect it to be pretty similar. It fluctuates some, right? But still I would say in the low 41s core, and then we also have this $300,000 that we'll be dealing with. So it may pump up more into the mid-41s as a result. But that I think it still is a pretty good run rate overall. And we'll still have some acquisition-related costs, which I'm not sure exactly when they're all going to hit. We're going to have some again this quarter, but there will also be some next quarter and of course, over the conversion post acquisition. Jackson Laurent: Got it. That's helpful. And then just last one for me. I know the primary focus has been on closing the current pending deal, integrating the franchise, but it seems like the M&A space has been heating up a little bit. Just wondering how you guys are thinking about M&A post deal close? And just honestly, how conversations have been trending recently? Bryan McDonald: Yes. Obviously, our first priority is to work through the transaction with Olympic and get that closed. We're anticipating early Q1 for the closure. We're continuing our discussions just like we always have. And if there was an opportunity that came up, we would consider it. So again, focuses on the Olympic deal and getting it closed. But looking ahead to next year, if the right opportunity came along, we'd certainly be open to taking a look. Operator: Our next question comes from Kelly Motta with KBW. Unknown Analyst: This is Charlie on for Kelly Motta. I guess just kind of piggyback on that last question. Just wondering how you're thinking about capital from here. You mentioned you're likely to pause the buybacks for the remainder of the year. once the Kitsap deal is closed and integrated successfully, do you expect capital priorities to change in any meaningful way going forward as a combined bank? Bryan McDonald: Don, do you want to comment on that one? Donald Hinson: Sure. It's kind of hard to comment on this until we get through it and see exactly what -- where we're coming out, obviously, we modeled certain things but we'll probably hold -- we'll probably be preserving some capital as we're experiencing the transaction costs associated with it in addition to the upfront dilution. So we do expect to be earning quite a bit of capital back over time. But it's kind of hard to comment if we're going to be involved in any sort of buybacks at this point. I really have a hard time commenting on that. We're just kind of wait and see. I wouldn't plan on anything in your model at this point. Unknown Analyst: Understood. And then in terms of how you're thinking about the loan-to-deposit ratio, it came down a bit this quarter. And I know you expect some liquidity from the Olympic deal. Just wondering high level, how you're thinking about managing that ratio moving forward? Bryan McDonald: Yes. High level, we like to get it back up to 85% and we'd be comfortable a bit above that as well. So we're continuing to look for loan opportunities to deploy more of our assets into loans. So certainly, our goal is to move it up to 85% and certainly be comfortable a bit higher than that. Operator: [Operator Instructions] With that, we have not received any further questions. And so I will turn the call back over to Bryan McDonald for any closing comments. Bryan McDonald: Thanks, Emily. If there are no more questions, then we'll wrap up this quarter's earnings call. We thank you for your time, your support and your interest in our ongoing performance. We look forward to talking to many of you in the coming weeks. Goodbye. Operator: Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.
Operator: Good morning all, and thank you for joining us for the Expro Q3 2025 Earnings Presentation. My name is Carly, and I'll be coordinating the call today. [Operator Instructions] I'd now like to hand over to our host, Sergio Maiworm, Chief Financial Officer. Please go ahead. Sergio Maiworm: Thank you, operator. Good morning, everyone, and welcome to Expro's Third Quarter 2025 Call. I'm joined today by Expro's CEO, Mike Jardon. First, Mike and I will have some prepared remarks, then we will open it up for questions. We have an accompanying presentation on the third quarter results that is posted on the Expro website, expro.com, under the Investors section. In addition, supplemental financial information for the third quarter results is downloadable on Expro website, likewise under the Investors section. I'd like to remind everyone that some of today's comments may refer to or contain forward-looking statements. Such remarks are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such statements speak only as of today's date, and the company assumes no responsibility to update forward-looking statements as of any future date. The company has included in its SEC filings cautionary language identifying important factors that could cause actual results to be materially different from those set forth in any forward-looking statements. A more complete discussion of these risks is included in the company's SEC filings, which may be accessed on the SEC website, sec.gov, or on our website, again at expro.com. Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in our third quarter 2025 earnings release, which can also be found on our website. With that, I'd like to turn the call over to Mike. Michael Jardon: Thank you, Sergio. Good morning, everyone, and welcome to Expro's third quarter call. I'll begin by reviewing the third quarter 2025 financial results from today's press release. Expro achieved its highest quarterly free cash flow ever and continued to improve its EBITDA margin. We expect a strong fourth quarter and have raised our annual guidance. Next, I'll cover operational highlights, macro trends, a preliminary 2026 outlook and key strategic themes. Sergio will provide further details on financials, updated 2025 guidance and our overall capital allocation framework. Let's begin on Slide 1. Expro reported quarterly revenue of $411 million and EBITDA of $94 million, representing a 22.8% margin. Adjusted free cash flow was $46 million or 11% of revenue, which was the highest recorded by the company to date. The financial results reflect ongoing operational efficiency gains relating to margins and free cash flow. This record-breaking free cash flow generation marks a significant milestone for Expro, highlighting the company's successful strategy in improving operational efficiency and maximizing cash conversion. Achieving the highest adjusted free cash flow in the company's history underscores our commitment to financial discipline, creating and returning value to shareholders. Such performance sets a new benchmark and demonstrates our focus on increasing performance amidst dynamic market conditions. In the third quarter, Expro also repurchased around 2 million shares for roughly $25 million, achieving our annual target of $40 million ahead of schedule. We are also raising the 2025 annual guidance for EBITDA and free cash flow to reflect anticipated performance to date and for the rest of the year. Further details will be provided by Sergio later in the call. Moving to Slide 2. Expro's $2.3 billion backlog provides solid revenue visibility and demonstrates the company's diverse portfolio and operations across regions. Securing long-term contracts and delivering cost-effective solutions strengthens customer trust and underpins ongoing growth. Maintaining safety, service quality and performance highlights Expro's strengths. As we look to the future, the strong backlog and steady customer relationships help guide our planning for 2026. It's also important to note that while the backlog is encouraging and supports our strategic planning and visibility on revenue, it isn't a guarantee of future outcomes. Primarily, the backlog acts as a valuable health check for our business, offering insight into its current strength and helping guide informed decisions amid changing market conditions. As we look ahead, it's important to consider the broader market context shaping our industry and our outlook. Despite the current softer commodity price environment, the outlook for Expro's core markets remains constructive. We fundamentally believe that oil and gas investments will remain resilient with continued investment in offshore and international projects, supporting demand for our services in Expro's core regions. Long-term demand for hydrocarbons remains resilient, particularly in non-OECD markets and offshore developments. Upstream investment is expected to remain largely flat globally in 2026. We do, however, see pockets of growth in some international markets. We expect upstream investments to recover later in 2026 and into 2027 and beyond, with growth led by offshore projects in Latin America, the Middle East and West Africa, regions where Expro is very well positioned. Natural gas fundamentals have temporarily softened, but gas remains critical to the global energy mix, and therefore, supporting long-term demand for Expro's services and technology. As operators prioritize capital discipline and production optimization, we see sustained demand for our brownfield-focused offerings and digital solutions. The ongoing shift towards decarbonization and increased investment in geothermal and carbon capture, or CCS projects, particularly in Asia Pacific, ESSA and North America, positions Expro's sustainable energy business for continued growth. While macroeconomic risks persist, Expro's diversified portfolio, strategic offshore and international exposure enables us to navigate near-term headwinds and capitalize on emerging opportunities across the full asset life cycle. Turning to Slide 3. At this stage, it is a bit too soon to provide definitive guidance for 2026. However, our current outlook for Expro suggests that activity levels in 2026 will be largely consistent, if not slightly lower than those anticipated than those projected in 2025. Preliminary assessments indicate that operational activity will likely increase in the second half of the year following a slower start during the first quarter where we will have the typical winter season effect from operations in the Northern Hemisphere and the NOC planning effect early in the year. Although revenue expectations remain relatively flat to slightly down for next year, Expro remains strongly committed to further expanding EBITDA margins and free cash flow generation. Based on our activity outlook and our position today, I am confident in our ability to achieve these objectives. It should be noted that this outlook is informed by initial discussions with our customers and our historical experience across various market cycles. As we are in the early stages of developing the 2026 budget, numerous factors, including continued customer engagement and geopolitical developments could influence our perspective prior to releasing formal guidance in February alongside our fourth quarter earnings report. Before turning to our operational update, I wanted to discuss a few things that make Expro unique and we think are important attributes for investors to consider beyond the broader macro dynamics. That is also on Slide 4. We believe Expro's future stock performance will also be driven by several company-specific factors that set us apart from peers and position us for sustained value creation. One of our most powerful differentiators is our ability to expand our wallet share with existing customers. By providing additional or enhanced services to customers we already serve, while leveraging the existing cost base, we are able to significantly expand our margins with new technology deployments. This approach, not only deepens our customer relationships, but also drives incremental profitability and efficiency without the need for increased personnel on board. Another unique driver is the transformation of our production solutions business. Historically, as a consumer of capital, this segment is maturing into a generator of free cash flow. This evolution reflects both operational discipline and the successful execution of our strategy to optimize asset utilization and drive higher returns from our installed base. As production solutions continues to scale, we expect it to be a meaningful contributor to our overall financial strength and flexibility. In addition, Expro's commitment to technology leadership remains a core pillar of our differentiation. Our ongoing investments in technologies, digitalization and artificial intelligence enable us to deliver innovative, high-value solutions to our customers. This, not only enhances our competitive positioning, but also supports margin expansion and operational efficiency enhancements across our portfolio. Finally, our disciplined approach to margin expansion and free cash flow generation, combined with a track record of integrating value-accretive acquisitions further distinguishes Expro. By focusing on international and offshore markets and executing on cost efficiency programs like our Drive 25 initiative and others, we can deliver superior returns and create long-term shareholder value independent of broader market dynamics. Moving to our operational performance on Slide 5. During this quarter, Expro has consistently demonstrated strong operational performance. We continue to secure new business and remain dedicated to delivering our services safely and efficiently in the field, a commitment validated by our customers and recognized within the industry. Expro was recently honored with ENI's Best Contractor HSE Performance award for our contributions to the Congo OPT project. This accolade coincided with the first anniversary of our OPT plant operating without a single lost time incident with over 2 million man hours of activity, underscoring our team's success and highlighting our exemplary standards in safety and operational excellence. We received the OTC Brasil Spotlight on New Technology award for both the QPulse multiphase flow meter and the ELITE Composition solution with the official presentation scheduled at next week's OTC Brasil event. At the Gulf Energy Awards here in Houston, Expro was shortlisted for a record 10 technologies across 7 categories, further affirming our leadership and innovative capabilities in the sector. Notably, Expro earned the Best Health, Safety and Environmental Contribution and Upstream award for our VIGILANCE intelligence safety and surveillance solution. Our purposeful approach to innovation ensures we address client requirements directly, contributing to industry progress and delivering measurable value. In addition to these achievements, Expro successfully completed the inaugural deployment of Velonix, an optimized pipeline pig control technology for a U.S. midstream client. This implementation results in a reduction of approximately 7 million pounds of carbon dioxide emissions, generated cost savings for the customer and improved data quality to support accelerated decision-making, further exemplifying Expro's commitment to operational excellence and sustainability. As detailed in our September 8 press release, Expro has established a new offshore world record for the heaviest casing string deployment, utilizing the advanced Blackhawk Gen 3 wireless top drive cement head with SKYHOOK technology. Conducted in the Gulf of America, this milestone sets a benchmark for safe and reliable offshore cementing operations in ultra-deep high-pressure environments. These achievements demonstrate how Expro's technology portfolio delivers a competitive edge, unlocks future revenue opportunities and supports margin expansion through scalable, differentiated solutions. Building on these technology milestones, our regional performance this quarter further underscores our commitment to efficient, effective innovation across our global operations. This quarter, we secured a 5-year extension with Chevron for subsea services in the Gulf of America. This long-term contract reflects the trust Chevron places in Expro and reinforces our reputation for high-quality service. In Alaska, we won a significant contract with ConocoPhillips, expanding our well testing leadership and creating new opportunities to deploy our multiphase flow meters and fluid analysis services. In Congo, we secured a multiyear slickline services contract with Perenco. This contract significantly strengthens our intervention services in West Africa and demonstrates our technical expertise. In the Middle East and North Africa, we secured key well flow management contracts for ADNOC and PETRONAS. The first contract is for well test services for 4 packages over 2 years, while the second contract involves 6 well test packages and a multiphase pump that will be used as a zero flaring solution for the well test activities. These wins enhance our reputation as a trusted partner in unconventional well development and reinforces our commitment to innovative sustainable solutions. Turning to the Asia Pacific region. In the second quarter, we reported that Expro completed the first rigless conductor driving operation on a client's platform in over a decade, delivered ahead of schedule, demonstrating our commitment to innovative solutions in the region. I'm also pleased to share that in the third quarter, the Bass Straight campaign received highly positive feedback from NOPSEMA, Australia's offshore safety regulator and was formally recognized for achieving ALARP, As Low As Reasonably Practicable, safety standards. This recognition reaffirms our dedication to operational excellence and the highest safety protocols. Across every phase, we champion safety through best practices, strict procedures and continuous improvement, underscoring our robust safety culture and commitment to protecting our workforce and partners. Across all regions, Expro's operational and technology achievements this quarter demonstrate our ability to deliver value-driven innovation and maintain the highest standards for safety and efficiency. These results position us strongly for continued growth and margin expansion in the quarters ahead. Before turning over to Sergio, I'd like to remind everyone of Expro's value proposition that we've highlighted on Slide 6. Expro's long-term strategy is anchored in building a large, diversified and compelling business mix company with clear market leadership positions. Our overarching goal is to maximize and sustainably generate free cash flow through industry cycles, ensuring resilience and value creation for our shareholders. First, we are committed to continuously improving our financial results. This means, driving margin expansion and robust free cash flow generation, underpinned by disciplined cost efficiencies through initiatives like our Drive 25 campaign. We are also focused on reducing the capital intensity of the business and consistently delivering top quartile performance across our operations. Second, we see significant opportunity to grow Expro through inorganic, scalable acquisitions. Our approach is to target international and offshore opportunities with adjacent offerings that present strong industrial logic and accretive financial profiles. We have developed a proven blueprint for integrating businesses efficiently and in a timely manner, and our track record demonstrates our ability to create shareholder value through disciplined M&A. Third, we are high-grading our business by leveraging technical leadership. We continue to invest in technologies across our core business segments and are actively scaling our digital capabilities, including artificial intelligence and digitalization. Importantly, we are globalizing the technology platforms acquired through recent M&A, ensuring that innovation and technical excellence remain at the heart of our value proposition. In summary, Expro's strategy is designed to deliver sustainable growth, operational excellence and superior returns. By maintaining a disciplined focus on financial performance, pursuing targeted acquisitions and investing in technology leadership, we are well positioned to lead our industry and deliver long-term value for our shareholders. With that, I'd like to turn the call over to Sergio to review our financial results in detail. Sergio Maiworm: Thank you, Mike, and good morning again to everybody on the call. As Mike noted, Expro continues to deliver consistent and above expectations financial results. In the third quarter, we reported revenue of $411 million. EBITDA for Q3 reached $94 million with a margin of 22.8%, up about 50 basis points from last quarter and 270 basis points year-over-year. Slide 7 illustrates our quarterly and annual margin growth. We are confident in further margin expansions in 2025 and 2026, with the latter being driven by the full impact of Drive 25, increased customer wallet share at higher margins, international growth from acquisitions like Coretrax and ongoing cost optimization and efficiency improvements. EBITDA margin expansion is not the goal in itself on Slide 8, but a means to increase free cash flow generation. And in the third quarter, Expro posted its highest quarterly free cash flow in the company's history, generating over $46 million on an adjusted basis. We aim to further reduce the capital intensity of the business and expect even stronger free cash flow in 2026, both as a percentage of revenue and in absolute terms. We have increased our 2025 guidance for free cash flow, though we're cautious about Q4 due to potential working capital effects. The Q4 guidance is conservative and already accounts for these factors. Expro also bought back $25 million in shares in the third quarter, achieving our $40 million goal ahead of time, and we still have another $36 million available under the current $100 million repurchase plan. Turning to liquidity. The company closed the quarter with $532 million in total liquidity. That includes $199 million in cash on the balance sheet after accounting for the revolving credit facility repayments and the share repurchases during the quarter. During the third quarter, the company completed a $22 million voluntary prepayment of its revolving credit facility. The voluntary prepayment reduced the outstanding draw balance on the RCF from $121 million to $99 million as of September 30. As mentioned before, we're raising our EBITDA and free cash flow guidance for 2025. The details are on Slide 9. We now expect our adjusted EBITDA to be between $350 million and $360 million compared to a notional $350 million plus before. We're lowering our CapEx guidance. We now expect our capital expenditures for the year to be between $110 million and $120 million, whereas before, we had approximately $120 million. Lastly, we're also increasing our free cash flow guidance. We now expect our adjusted free cash flow to be between $110 million and $120 million compared to the approximately $110 million we were estimating before. As mentioned, the free cash flow guidance is somewhat conservative given the possibility of working capital use in the quarter. We certainly have some upside potential from here. Now, I'd like to quickly address our segment performance this quarter before finalizing with our capital allocation framework. A reminder that details around our segment's performance can also be found in the appendix of the presentation. Turning to regional results. The North and Latin America, or NLA, third quarter revenue was $151 million or up $8 million quarter-over-quarter, reflecting higher well construction and well flow management revenue in the Gulf of America, partially offset by lower well intervention and integrity revenue in Argentina. For Europe and Sub-Saharan Africa, or ESSA, third quarter revenue decreased $7 million to $126 million sequentially, primarily driven by lower well flow management and subsea well access revenue in the U.K. and Norway. Segment EBITDA margin at 32% was up 200 basis points sequentially, reflecting higher activity and a favorable product mix. The Middle East and North Africa, or MENA, delivered another solid quarter, but slightly lower compared to Q2 with revenues at $86 million, driven by lower well construction and well intervention and integrity revenue in the Kingdom of Saudi Arabia, the UAE and Qatar. MENA segment EBITDA margin was 35% of revenues, a decrease of about 100 basis points from the prior quarter, reflecting the lower well construction activity. Finally, in Asia Pacific, or APAC, third quarter revenue was $49 million, a decrease of $8 million relative to the second quarter, primarily reflecting the lower well flow management, well intervention and integrity and well construction revenue in Malaysia and lower well construction and subsea well access revenue in Australia, partially offset by higher well construction and well flow management revenue in Indonesia. Asia Pacific segment EBITDA margin at 21% of revenues decreased about 500 basis points from the prior quarter, reflecting decreased activity and mix. Now I'd like to briefly discuss our capital allocation framework on Slide 10. Expro's capital allocation framework is designed to maximize long-term value creation by maintaining a disciplined and balanced approach across 4 equally important priorities. Our philosophy is that, every dollar of capital must be deployed where it can generate the highest risk-adjusted returns. And as such, each of these 4 areas continuously competes for capital on an ongoing basis. First, we're committed to investing in our business to drive organic growth with superior return profiles. This includes funding projects and initiatives that enhance our core capabilities, improve efficiency and support innovation across our service lines. Every investment is rigorously evaluated to ensure it meets our standards for superior returns throughout the business cycle. As a reminder, the vast majority of our capital expenditures are geared towards specific projects with known return profiles. These are not speculative investments. Second, we pursue selective, highly accretive mergers and acquisitions that complement our existing capabilities and customer relationships. Our M&A strategy is focused on opportunities that offer clear industrial logic, scalable technologies and synergies and the potential to expand our presence in attractive markets. We apply the same disciplined capital allocation criteria to acquisitions as we do to organic investments, ensuring that only the most compelling opportunities receive funding. Third, we're committing to returning capital to shareholders. Our framework targets the return of at least 1/3 of free cash flow to shareholders annually, primarily through share repurchases. This commitment reflects our confidence in the company's ability to generate sustainable free cash flow and our focus on delivering direct value to our investors. Finally, we maintain a fortress balance sheet to ensure financial flexibility and resilience. Preserving a strong balance sheet enables us to navigate market cycles, invest in growth opportunities as they arise and protect the company's long-term stability. Importantly, these 4 pillars, organic investments, M&A, shareholder returns and balance sheet strength are not ranked in order of priority. Instead, they are managed dynamically with each area continuously competing for capital based on the quality of opportunities available. This disciplined balanced approach ensures that Expro remains agile, resilient and focused on maximizing value for all shareholders. With that, I'll turn the call back to Mike for a few closing comments. Michael Jardon: Sergio, thank you. As we conclude our prepared remarks and before opening up for questions, I'd like to conclude with the following thoughts. Despite the softer commodity market backdrop in the near-term, we continue to see resilient, if not robust, investment in upstream oil and gas in the international markets. We also expect the offshore sector to further recover starting in the second half of 2026 and into 2027 and beyond. Looking ahead, we remain confident in Expro's ability to deliver resilient performance even as we navigate softer market backdrops. Our diversified business mix, disciplined capital allocation and relentless focus on operational excellence position us to weather industry cycles and continue creating value for our stakeholders. We expect to finish 2025 on a strong note with a robust fourth quarter that reflects both the strength of our customer relationships and the successful execution of our strategic initiatives. As we move into 2026, we are well positioned to further expand our EBITDA margin driven by ongoing cost efficiencies, margin-accretive growth and the maturation of our production solutions business into a significant free cash flow generator. Moreover, we anticipate continued growth in our free cash flow generation in 2026, supported by our balanced approach to capital allocation and our commitment to maximizing returns across all areas of the business. We believe these strengths will enable Expro to deliver sustainable long-term value for our shareholders regardless of the broader market environment. We thank our employees, customers and shareholders for their continued support and look forward to building on our momentum in the quarters and years ahead. With that, I'd like to open up the call for questions. Operator: [Operator Instructions] Our first question comes from Ati Modak from Goldman Sachs. Ati Modak: Just a quick question on the margin expansion comment for '26 on flat to slightly lower revenue. Can you help us understand what the drivers there are? Is it largely the Drive 25 initiative? Are there other factors that are driving that expectation? Michael Jardon: So, Ati, thanks for the question. Thanks for joining us today. I guess a couple of things I try to highlight is, yes, it will be the full year effect of our Drive 25 initiative. If you recall, although we've changed the total target throughout the year as we've expanded and increased it, we've really targeted taking out about 50% of that benefit in 2025. So we'll have the natural margin expansion from that in 2026, which will help us offset some of the inflationary cost pressures and those kind of things. Additionally, we'll continue to internationalize some of the M&As that we've made, Coretrax in particular. And then the third element really is, as we continue to roll out new technologies, and I think I've highlighted this to you and to others before, but just keep an eye on the number of new technologies you see us continue to roll out. We'll continue to get market uptake that helps us expand our wallet share, really helps us position ourselves. It's really a combination of all those. And frankly, what we have the organization focused on today is, we can't control the activity, the overall activity. We're going to continue to get our fair share. We're going to continue to position ourselves with customers globally. But we're going to stay focused on the things that we can really affect, which is operational efficiency, execution, rolling out new technology, those type of things. Ati Modak: And then on the comment that offshore activity could pick up in the second half, what are you keeping an eye on? And can you give us any additional sort of regional color in terms of how you're seeing activity play out at the moment? Michael Jardon: Sure. And I'll start with the one that I think is going to be the laggard. And I think the laggard is probably going to be Asia Pacific. I think it's the one in 2026 that is -- we're seeing some softness here in Q3 and even in Q4 in Asia Pacific. So I think it's going to be the one that's going to be a little bit of a laggard. That's not altogether different than how we foresaw 2025 overall. We kind of highlighted early in the year that we felt like Australia was going to be a bit soft overall. But I do think going into '26, and I think we'll start to see some activity ramp up in the second half is really it's going to be the Golden Triangle. It's going to be West Africa. It's going to be Gulf of Mexico, those type areas. I also think that 2 others to keep in mind is, we're starting to see some positive sentiments and some positive commentary in Saudi, in particular, with the jack-up activity. Although we don't generate a lot of activity in the jack-up market in Saudi, I think it kind of goes to the tone and the tenor that's going on in the Kingdom, I think that's going to be more constructive. And then I think some of the things we're starting to see out of Mexico is going to be helpful for us as an industry overall. So those are the ones I would really highlight. Sergio, anything I missed? Sergio Maiworm: No, Mike, I think that's it. Ati Modak: Maybe if I can squeeze in one more. The share repurchases, you mentioned you reached ahead of schedule. What does that mean for repurchase for the rest of the year? Will you not do anything? And then what's reasonable to think for '26? Sergio Maiworm: Yes, Ati, that's a great question. We'll continue to evaluate, as we always do in line with the capital allocation framework that we laid out on this call as well. We'll continue to look for opportunities to return more capital to shareholders. We adjusted our free cash flow guidance to $110 million to $120 million. So the $40 million that we've already repurchased represent at least 1/3 of that already. So as we continue to see more free cash flow generation, we will continue to evaluate opportunities to repurchase shares. So that is a continuous effort for us. So we'll continue to do that. Michael Jardon: And we still have plenty of room in the -- still have plenty of headroom in the preauthorized amount. So we'll continue to be thoughtful about that here just as we kind of see what are the market dynamics and how we see things playing out for Q4. Operator: Our next question comes from Eddie Kim from Barclays. Edward Kim: Just wanted to circle back on your comments on '26 activity levels being consistent, if not slightly lower than '25 levels. You mentioned activity is likely going to increase in the second half of next year, which implies that first half of next year could be a little softer than normal, even considering typical seasonality. So could you talk about maybe what's driving that softness in the first half of next year? Is it all being driven by Asia Pac? Or is there something else going on there? Michael Jardon: Sure. No, Eddie, thanks for joining us. I appreciate the question. I guess how I would frame it up is, this is -- we're just now in the early stages. We're kind of in the first, maybe the -- if not the top, maybe the bottom of the first inning right now in terms of our budget preparation process. So we're going out to kind of start that bottoms-up exercise with our customers and literally look at kind of project by project. Fundamentally, this is my sense from customer conversations and customer discussions that I've had with kind of trying to understand how do they see their spend for the rest of '25 and how it goes into 2026. I think they are thoughtful and mindful of some of the things going on today, commodity pricing, what's happening in the geopolitical sphere, does the peace agreement in the Middle East hold? Something happen more meaningfully with Russia and Ukraine. All those kind of things, I think, are kind of causing a little bit of a cautious sentiment for them to kind of wait and see how this is. And then fundamentally, how we see kind of going into next year, yes, you're right, there's some softness in Asia Pacific. And we -- as much as I would like to wish it away, we always have a Q1 effect. Northern Hemisphere is slow because of the winter season. Our NOC customers are always historically over the last 30-plus years in my career, they're always a little bit slow getting out of the gate in Q1. That's really kind of what we're seeing. But as we -- we'll get a better sense here over the next 8 weeks or so as we go through the budget process. But my sense is, we're probably talking about a flattish to slightly down 2026. And fundamentally, as I said in the earlier question, what we've got the organization focused on is, we're going to control what we can control, and we can't control how much activity there is, but we can control our service delivery, our agency performance, the rollout of our technology, continue to enhance efficiencies. That's what I want the team really focused on. And if we see a ramp-up in activity in the middle of Q2, we'll take it and we'll be ready to be positioned. If it's more like the end of Q2, then we'll deal with it that way as well. Edward Kim: Understood. My follow-up, just tailing on those comments. I understand you'll provide more detailed guidance during the fourth quarter earnings call. But yes, you mentioned activity levels flat or slightly lower next year. At the same time, you said you expect continued margin expansion. So just putting those 2 things together, is it fair to assume that EBITDA for next year should be at least similar to '25 levels? Or how should we think about that just directionally? Michael Jardon: Yes, I think that's a good way to think about it directionally. We will -- I will be very disappointed if we don't expand EBITDA margins in 2026. And what is the overall activity set look like to determine an absolute number, but kind of in the range where I think flat to slightly down going into next year, I would think we'd see similar EBITDA numbers. And quite frankly, what we're -- I would say, we're more focused on, but what we have a real sense of urgency around is better conversion of that into cash generation. Operator: [Operator Instructions] Our next question comes from Derek Podhaizer from Piper Sandler. Derek Podhaizer: I just have a couple of education questions. Maybe we could first start on the production solutions opportunity that you mentioned a number of times on the call. Can you help us understand what types of services you're talking about the technologies and maybe which regions are best suited for production solutions? Michael Jardon: Sure. Derek, thanks for joining us, and thanks for the question. So it is -- fundamentally, these are -- a great example of it is the early pretreatment facility that we put together that we collaborated with ENI on in the Congo. And that really was a facility that helped treat gas to ensure it met the export spec, which meant they could actually load it on an FLNG vessel. So that was an enhancement to an existing facility. We can also have production optimization or production enhancement where we're actually providing some places like Algeria, where we're providing gas recompression, gas reinjection, helping to reduce the flaring opportunities that those things have. So really it is existing infrastructure. It can be production facility type things. We don't pursue the big massive [ epic ] type projects. What we're really focused on is smaller modular kind of accelerated monetization of existing assets. And those are predominantly for us, very strong presence in the Middle East, strong opportunities for us in in West Africa and then also some that we see here in South America as well. So a good geographic spread that's more brownfield-type activity than it is greenfield activity. Derek Podhaizer: And then I know you mentioned those were big consumers of cash, but now you believe this is going to flip to cash generation. So can you maybe help us frame the magnitude of these projects that were consuming cash, but now what it can be when it's generating cash? Sergio Maiworm: Yes, Derek. No, that's a good question. So we actually embarked on a bunch of these projects over the last few years. So this is just the construction of those facilities, as Mike pointed out, and the investments that we had to make, and we had a few of those projects back to back. So we consumed a bit of capital. But now that a lot of these projects are already online, like the OPT project for ENI and the Congo, basically, that just becomes an annuity for us. There's a very low operating cost to continue to operate those facilities. And there's just a consistent stream of cash. It's very visible. It's very predictable for us. So as we stack up some of these projects that have been concluded and as those projects go from the construction phase into the operations and maintain phase of that, it just becomes an annuity and you just start stacking one on top of the other. So that actually contributes a lot for the free cash flow generation of the business. Does that make sense? Derek Podhaizer: No, it does. That's very helpful. And then just kind of a follow-up to the follow-up. Back to 2026, what Ati and Eddie were talking about on the margin expansion story, maybe could you help us provide a little bit more color on where we'll see the most impact, whether that's from a region line perspective or a product line perspective? Just want to start thinking about kind of the shape of '26 from either the product lines or the regions how you report it. Michael Jardon: Yes. I mean it's -- and again, it's kind of early for me to give too much granularity on what 2026 is going to look like. I think we're going to -- Gulf of Mexico, Gulf of America, I guess, I'm supposed to call it now, is probably going to be similar, flattish kind of year-on-year. We don't see a massive change and kind of what's going to happen with the rig count, those type of things. I think they'll continue to move from magically on Wednesday, the rig frees up, it's going to move to another operator on Thursday, so to speak. So I think the Gulf is going to be pretty consistent. I think South America will have some -- can have some particular strength. I think MENA is going to, again, be solid and probably have a little bit of upside in there. There has been some softness here for us in the last couple of months just because of some of the Saudi activity. They had some operational issues with a vendor that created some slowness there. So I think it will be solid. And I think West Africa will be kind of consistent year-on-year. I don't think we'll start to see some of the impact of some of the new FIDs, that's what we'll start to see in kind of the second half of 2026. That's kind of how I would frame it up. And then Asia Pacific is the one in which I think it's going to continue to be a little bit softer than what we would like to see it, but I think that's just kind of how the customer activity sets are going to be really until Australia, in particular, kind of gets kicked back off into more of a drilling phase. Operator: Our next question comes from Joshua Jayne from Daniel Energy Partners. Joshua Jayne: I just wanted to dig into the margin question that Derek just asked a little bit incrementally. So when I think about looking into '26, one of the regions you highlighted is for potential strength is the Middle East. And just when we think about the margin difference between that region and something like Asia Pac, for example, which you expect to be, I guess, a bit on the softer side in '26. Is that part of what's ultimately driving the margin uplift? Or could that -- or if you have a higher contribution there moving into '26, is that -- could that lead margins to expand further than what you're projecting outside of Drive 25? Michael Jardon: No, Josh, it's a really good question. It's a perceptive question. It really is going to be -- so for us, a lot of the driver is going to be the mix. And the mix can be what's the geographic mix. If we actually see a -- what's the impact of the Middle East? Is it flat year-on-year? Is there -- historically, we've kind of had some single-digit growth in the Middle East. And obviously, when there's growth in the Middle East for us, it really moves the needle because it has such a high margin profile. But also what's the impact of -- as we roll out new technologies or we continue to expand our customer wallet, those generally come with higher margins or more accretive. It really is the mix that has an impact on us that it is a little bit more difficult for us at this point in time to really kind of predict what's going to happen there. And then the other element, I know we've kind of been cautious on Mexico activity because we don't have a massive amount of Mexico activity. With Pemex, we're actually going to see some -- we'll start to see some activity in 2026 with non-Pemex operations, and that will be a positive as well. So long answer to say, it depends -- a lot of it depends on the mix, and we'll try to continue to accelerate technology rollout and those types of things, and we'll try to continue to expand our presence in places like the Middle East. Joshua Jayne: Okay. And then one technology question, one release that I thought was pretty interesting over the course of Q3. You highlighted the launch of your Remote Clamp Installation System. So it was deployed in Q4 of last year and then deployed again in Q2 of '25. Maybe just use that as an example of like when I think about a technology like that, how ultimately scalable do you see something like that and when you could really see acceleration of a product like that taking hold in the market? Is that something that happens in '26, more in '27? Maybe just a time line when we see announcements of successful deployment once and then a second one and just moving forward. Michael Jardon: And again, Josh, it's a good perception question. The Remote Clamp Installation simplistically, this allows us to robotically install clamps on completions. When you're running completion stream, you don't -- you have no hands on. You have no personnel, nobody is in the red zone, no hands are in there. And as we have moved from concept to field trials to commercial installations, our operators are extremely pleased with this. We increase the speed at which we can run completions and install control lines and [ install ] clamps on those. More importantly, if you don't have people with their hands in the red zone or their physically in the red zone, it reduces or almost completely eliminates the risk of having an HSE incident. So I think this is one that we'll continue to get more and more uptake from customers on it. We've had really, really good support in the North Sea. I think it's one we'll be able to continue to accelerate. So we'll start to see that more installations in 2026 and really ramp up as we go into 2027. Operator: Thank you very much. We currently have no further questions, and this will conclude the Q&A, and this will conclude today's call. We'd like to thank everyone for joining. You may now disconnect your lines.
Operator: Ladies and gentlemen, welcome to the Lonza Q3 2025 Qualitative Update Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Philippe Deecke, CFO. Please go ahead, sir. Philippe Deecke: Good morning, good afternoon, and a very warm welcome to our Q3 qualitative update. Before we go into more details, please let me remind you that we intend to provide you with a general business overview with our qualitative update, but we will not be sharing figures related to our financial performance. We will do so on the 28th of January with our full year update. Let me start with an overview of our group performance before we move to the performance of our business platforms and [ THI ]. Afterwards, I will provide you with an update on our business contracting and our growth projects, followed by the current macroeconomic situation before I close for the Q&A session. Today, we report a strong Q3 performance across our CDMO businesses aligned with our expected full year trajectory. Supported by this strong performance, we are confirming our 2025 outlook for the CDMO business, which we upgraded at half year, with sales growth of 20% to 21% at constant exchange rates compared to the prior year and a core EBITDA margin in the range of 30% to 31%. Excluding Vacaville, which is now expected to contribute at the upper end of the range of around CHF 0.5 billion in sales and a better-than-expected core EBITDA margin in 2025, we expect low teens percentage organic CER growth and a margin improvement in our CDMO business, in line with our CDMO organic growth model. As anticipated at our half year release in July, we confirm our expectation of higher sales in H2 2025 than in H1. We see a healthy progression of our core EBITDA margin in line with the 2025 outlook. Progressing well on its expected recovery path, we also confirm our full year 2025 outlook for the Capsules and Health Ingredients for CHI business at the low to mid-single-digit percentage CER growth and an improved core EBITDA margin in the mid-20s. Based on FX rates at the beginning of October, we can reiterate an anticipated year-over-year headwind of around 2.5% to 3.5% of sales and core EBITDA for full year 2025. However, our margin is well protected due to a strong natural hedge and our hedging program in place. Moving to the performance of our business platforms. Let's start with Integrated Biologics. Integrated Biologics continue to see strong momentum with robust demand for its large-scale mammalian assets. This is further supported by Vacaville, as I just commented on. In our small-scale mammalian assets, we see a high level of utilization, and we have a good level of visibility for the remainder of this year. But let me come back to the early-stage business later to provide further context and outlook. Overall, we are pleased to report a continued good operational execution alongside maturing growth projects and growth and margin drivers in our Integrated Biologics business. Turning to our Advanced Synthesis platform. We continue to see strong commercial demand for our small molecules and bioconjugates capacities as underlined by the deal mentioned in our Q3 release, signing a large multiyear supply agreement in small molecules. Growth is supported by new capacities in small molecules with our new highly potent API plant and bioconjugates. The business platform further benefits from a robust operating execution and the demand for complex products supporting margins as witnessed already with our half year results. Our Specialized Modalities platform improved in Q3 as expected. Also, we expect the full year performance to remain moderate in the context of the softer first half. Deliveries are weighted into Q4 and depending on the progress of key customer projects and decisions, sales may also fall into 2026. Life Science had a good Q3 with robust growth, and we are pleased to report that microbial returned to growth in Q3 after a softer H1 performance. In Cell & Gene, ongoing pipeline variability and complex manufacturing continues to weigh on asset utilization. While we anticipate a gradual recovery in operational performance, it will remain below the strong execution seen in 2024. Cell & Gene is a business with strategic relevance to Lonza and is our aim to increase resilience of the business over time, commercially and operationally. But in the meantime, some business variability may persist. Our CHI business returned to positive CER growth in Q3, in line with the expected full year trajectory for 2025. We are pleased to report that also the pharma capsules business is seeing improved demand trends and returned to positive volume growth in Q3. We can, therefore, confirm that both our nutraceuticals and pharmaceutical capsules business has moved beyond the post-pandemic destocking phase. In the current geopolitical environment, our manufacturing footprint in Greenwood, South Carolina and Puebla, Mexico is continuing to support CHI's customers to navigate the evolving geopolitical environment. In the U.S., recent preliminary affirmative countervailing and antidumping decisions continue to be in place, allowing more balanced competition for pharmaceutical and nutraceutical capsules in the U.S. In Q3, we progressed with the necessary internal carve-out measures to prepare our exit from the CHI business. The good business momentum highlights the attractiveness of the CHI business as a leader in its markets, and we are confident in the business ability to return to historical CER sales growth in the low to mid-single-digit percentage and a core EBITDA margin above 30%. We are, therefore, confident to exit the business in the best interest of our customers, employees and shareholders, and we will do so at the appropriate time. Before turning to our growth projects, let me say a few words on contracting. For 2025, we expect again a healthy level of contract signings across technologies and sites. Recently, we were able to sign several significant contracts, including a further strategic long-term contract for integrated drug substance and drug product supply of bioconjugates. In our small molecules technology platform, we signed a large multiyear commercial supply agreement. And in Integrated Biologics, we were able to secure a fourth significant long-term supply agreement for our Vacaville site. In Vacaville, we expect further contract signings in the coming months, and we continue to see strong customer interest for large-scale U.S. capacity. Let me say a few more words about Vacaville. One year after closing the acquisition, we are very pleased with the site's integration into Lonza's network, which is progressing in line with plan. The site continues to demonstrate robust execution in support of Roche and maintaining excellent quality track record, which is also reflected in our expectations for Vacaville continuing at the high end of our initial estimate for 2025. The site is also preparing new product introductions for 2026 and the first phase of CapEx is progressing as planned to the [indiscernible] system and [indiscernible]. [indiscernible] our new highly potent API facility is progressing well, and we commenced full commercial operation in July 2025. Our large-scale mammalian facility also showed good progress in ramp-up activity in Q3. GMP operations are underway and commercial production is expected to ramp up gradually from 2026 onwards. Ramp-up activities for both facilities are those progressing in line with plan. Before closing my remarks and opening for the Q&A session, let me reiterate our expectations of no material financial impact on Lonza from the currently announced official U.S. trade policies. The so far announced U.S. tariffs do not include tariffs on API, intermediates and raw materials as described in the Annex 2 of the Executive Order. We further remain confident that our well-diversified global manufacturing footprint with large capacities in the U.S., Europe and Singapore will enable us to support our customers' global manufacturing requirements today and in the future. We, of course, remain vigilant to the continued evolution of the situation and potential impact on our businesses. We also continue to closely monitor biotech funding trends and recent fluctuations in funding levels are expected to have only a minimal impact on Lonza's growth momentum in 2025 and beyond, with early-stage activities representing only approximately 10% of the CDMO business and only a portion of that business originating from companies requiring funding. To close, let me provide some final remarks. Lonza is on track to deliver on its full year 2025 outlook. We see strong contracting demand with customers seeking Lonza's services for their strategic projects. Our growth projects are on track and are contributing to our growth this year and will continue to do so also in the years to come. In the current geopolitical environment, our large commercial business provides stability and our global asset positions us well to support our customers in the complex manufacturing needs. With that, I would like to thank you for your time and hand over to Sandra. Operator: [Operator Instructions] Our first question comes from Ebrahim Zain from JPMorgan. Zain Ebrahim: Hopefully, you can hear me okay. This is Zain Ebrahim from JPMorgan. I'll stick to one question, which is on Vacaville. So just on the significant contracts you announced this morning, how should we think about the timing of tech transfer for the contract? And when can it start contributing to revenues? And related to that, just based on this contract, where are you with respect to your target for being able to maintain Vacaville sales stable over the midterm? Philippe Deecke: Thank you very much for the question. So I think as we've stated in the past, I think large commercial contracts are usually not for immediate use of batches. It takes time to tech transfers, as you say. But I think all the contracts we are announcing for Vacaville are part of the plan to offset the reduced need for batches from the initial Roche contract. And so this new contract is part of that plan and reconfirms that our stated trajectory for Vacaville of more or less flat sales in the next few years is exactly on track. So this contract will start working the [indiscernible] site next year [indiscernible] to revenue over the next 2 to 3 years. Operator: The next question comes from Charles Pitman-King from Barclays. Charles Pitman: Charles over here from Barclays. Hopefully, you can hear me okay. Just a question, please, on guidance. Just wondering, given you kind of raised the backfill outlook to the upper end of your around CHF 0.5 billion range this year, but you ran the top line guide. I was just wanting to confirm if there's one portion of your business that you think is kind of deteriorated such that you are just kind of reiterating that top line guide? And just maybe whilst we're on guidance, I was wondering if you were -- if you could provide commentary on your thoughts on FY '26 guidance next year, which is currently looking for low double-digit growth. I know you don't typically comment, but worth asking. Philippe Deecke: Yes. Thank you, Charles. Thank you for offering the answer to your second question. [indiscernible] more seriously. Look, I think on guidance for this year, I think we gave you a range. There's always things that move up and down. So certainly, I think we're pleased with the Vacaville progress this year and continue to be pleased with it. So that's helping us. On the other hand, there are, as we mentioned, some uncertainty on SPM. So I think within that range, this is what the puts and takes are. So that's for 2025. We're 3 months away. So we kind of have good visibility on what's going to happen for the rest of the year. On 2026, as you know, we usually guide in January when we report full year numbers. So we will stick with that. For 2026, I think we talked about early stage, which is not going to have a material impact on our numbers no matter what the funding level is. And I think we're very pleased with the contracting, as we said, for 2025, which will also help in '26. So, I think everything is in line for '26, so far [indiscernible]. Operator: The next question comes from Charles Weston from RBC Europe. Charles Weston: I wanted to stick on 2026, please. So not asking for a number. But since the large mammalian Visp asset will be ramping in '26, which could presumably be a bit dilutive to margin with a relatively high base in Advanced Synthesis in Vacaville, there might be some headwinds to margin improvement year-on-year in 2026, perhaps a bit offset by the Advanced Synthesis improvements. But are there any other moving parts that I haven't mentioned that could drive an improvement next year? Philippe Deecke: Yes, Charles, so again, you summarized very well, which is great to hear. I think, again, yes, we have large growth assets that start dilutive as it is very normal. Vacaville, I think, is probably more of a top line headwind because this is going to be more or less flat for next year. So that's a big block of sales, if you want, that does not contribute to growth next year. Nevertheless, I think our organic growth model is looking at low teens growth and improved margin year-over-year. And that's, I think, for now the new best assumption for next year. Operator: The next question comes from [ Theodora Rowe Beadle ] from Goldman Sachs. Unknown Analyst: So just on the separation of the CHI business, is the process of carving out this business now complete? And are you able to share with us anything in terms of the timing of separation or when you'll be able to communicate the decision? Philippe Deecke: Yes. Thank you for the question on CHI. So I think the progress on the internal separation, which contains of legal entity work, [indiscernible] as I said in my speech before, is progressing well. I think we're nearing completion of that. And I think the rest of the process is really an internal process that is going to be between us and the other parties and we will inform when things are decided. Operator: The next question comes from James Vane-Tempest from Jefferies. James Vane-Tempest: On back of [indiscernible], I mean you've announced you won a new contract and there's potentially some in the coming months. So just to clarify, should we understand that there could be some by year-end, but we're not going to find that out until full year in January if you don't plan to disclose more in real time like your peers? I guess I'm asking this because some of them have been more visible to the market in terms of the number of contracts they've signed, which suggests a much more competitive environment. So perhaps I can also ask what you're seeing on that front? Philippe Deecke: Yes. Thank you, James. So again, we usually do not communicate all the contracts we're signing. This would be issuing a lot of release. I think if you remember, our signing in 2023 was about CHF 12 billion. Last year, it was about CHF 9 billion, if I recollect right. So I think these are a lot of contracts being signed. We do not have a history and we do not mention every single contracts we're signing. I think we decided to do so on Vacaville to provide you, I think, more visibility into our confidence to fill the assets over time. So this is the reason why we're kind of providing you the Vacaville contracts on a more regular basis. And usually, our customers also have no interest for us to publicly announce their contracts. So we don't do so. I think indeed, I think if we were to sign further contracts this year, you'll probably hear about it at the end of January when we report our full year numbers. And I think as stated as well, I think we should get off the rhythm of announcing contracts for a single site. And probably we won't do so in 2026. But let's see, I think the contracting situation is very strong. We're also very pleased with the interest in Vacaville. So we have a lot of concurrent negotiations ongoing. Some will finalize over the next few months. Others may take longer. These are very large contracts. These are usually also complex multiyear contracts that need time to be negotiated. In terms of the competitiveness and what our peers are doing, you would have to ask them. I think for now, we are very pleased to have a very strong footprint in the U.S. with attractive capacities available in the U.S., but also our sites in Europe and Asia see good demand. And you saw that some of the contracts that I mentioned today also include some of our non-U.S. assets. So I think on the contracting side, we're very pleased with the progress and with the interest of companies, large and small to contract with Lonza. Operator: The next question comes from Patrick Rafaisz from UBS. Patrick Rafaisz: Just a follow-up on the large contract wins. For Vacaville, is there any chance you could add a bit of color on size and types of capacities, the amount of capacity required. And the same for the large bioconjugate contracts, for which site was that specifically? And can you add some color on what types of services from your end did this include? Philippe Deecke: Yes. Patrick, happy to take your question. So I think on the Vacaville contract, I'm not going to directly answer your question, but maybe give some more color about the contracts that we have signed so far. I think all of these contracts, including the latest one, are multiyear contracts that are significant for the site as well and which are very important for us to offset the declining revenue coming from Roche. So I think these are very helpful projects because they start contributing very soon, helping us to maintain flat sales for Vacaville. Important also to note that we see great interest for both assets within Vacaville. I think, as you know, we have a 12,000-liter asset and a 25,000-liter asset. And I think also coming from the market, I think there were certainly question marks around the market still requiring such large reactors like the 25,000 liters we have. And we're very pleased to say that, yes, indeed, there is big demand for such large reactors. So we see contracting for both our 12,000-meter reactor and our 25,000-meter reactor. So again, Vacaville for us following a very -- tracking very well along the plan that we had. And this confirms our outlook for kind of flattish sales to 2028 and then increasing sales further on as we ramp up utilization of the site. For the integrated offer contracts that we also mentioned today, I think here, we are offering several services, including producing the protein, the conjugation and the drug product. So again, I think the reason why we mentioned this contract to you is because, again, this shows the interest from pharma companies, large and small, to ask us for integrated business, which cover more than one modality. So more and more we get asked to do not just the protein or not just the conjugation or not just the drug product, but the combination of several modalities across our platforms. And I think we believe that this is, again, something where Lonza can clearly differentiate, of course, in the areas of ADC, but not only. Operator: The next question comes from Thibault Boutherin from Morgan Stanley. Thibault Boutherin: My question is just on tariff and the CapEx announcements in the U.S. by large pharma players. Clearly, there is a push from the U.S. administration to bring more manufacturing to the U.S. So did you have discussion with the administration and confirmation that investing through CDMOs such as Lonza meets the administration goals for locating manufacturing in the U.S.? So it makes sense that it does, but just wondering if you had an explicit confirmation that it would fit what you're looking for? Philippe Deecke: Yes. Thanks, Thibault. So I think there are multiple discussions happening. I think with the U.S. government, certainly, pharma companies are talking directly. The Swiss government is talking directly. We also have contacts that we use. I wouldn't go into more details of what's happening in these discussions until there's a result. I think this would be premature. So I think we'll wait until something is official and is being communicated. But overall, I think I reiterate that also we at Lonza are investing significantly in the U.S. So of course, if you compare this with the numbers of big pharma, this is a different magnitude. But I think as an industry leader, we are investing significantly in the U.S. in multiple sites -- of our investments in Portsmouth, of course, our investment -- of our large investment in California and Vacaville, and there are other sites that are seeing further investments. So I think we feel very confident to also here be very much in line with the intention of the government, but more importantly, the intention of our customers to have capacity and strong capacity in the U.S. So we will continue to offer increased capacity in the U.S. And if our pharma customers can leverage this, then even better. But in any case, having a footprint in the U.S. is helpful to our customers. Operator: The next question comes from Manesiotis Odysseas from BNP Paribas. Odysseas Manesiotis: First one, Philippe, I wanted to follow up on the detail you provided on the contracting between Vacaville bioreactors. Is it fair to interpret your -- the details you provided there as that you've landed in these 4 contracts, at least one of them has to do with the 25,000 liter? And on top of that, within these 4 contracts, you also have contracts for more than one bioreactor? So that's the first one. And secondly, could you remind us the pace of the new Visp mammalian capacity ramp? Is this still expected to run at full utilization by '28, '29? And has there been any plans change given the recent push to reshore capacity in the U.S.? Philippe Deecke: Yes. So let me give you -- maybe reconfirm what I want to say just before on the Vacaville contract. So indeed, I think we have been able to contract for both assets for the 25,000 and the 12,000. So I think there's a different mix in the contracts. I'm not sure I understand what you meant with the contract for more than one reactor. But I think I can confirm that the new contracts that we have signed are involving both 25,000 and 12,000 assets. I think on the Visp, on our large-scale mammalian facility, I think we mentioned a while back how the profile of such large-scale facilities look like. And indeed, it usually takes 2 to 3 years also to ramp. So since we started late this year, you can do the math as to when we would expect utilization to be high and contributing favorably to our bottom line and to our margins. So I think this asset is a typical large-scale asset that will follow this path. Yes. So everything is in line. We started GMP processing this quarter. So progress is in line with our plans. Operator: The next question comes from Max Smock from William Blair. Max Smock: Maybe just a quick one here on Vacaville. I appreciate the fact that revenue is going to be flat next year in 2026. But in the past, you've talked about margins at that facility ramping up as you replace some of that Roche revenue with additional third-party customers. Can you just talk about how you expect Vacaville margins specifically to trend next year? Philippe Deecke: Yes, Max. So I think on Vacaville, again, we said 2 things. One, I think revenue will be more or less flattish through '28 and margins will progress over time to basically be neutral to group by 2028. So I think this continues to hold true. I think margins this year were a bit better or better than we expected, as we mentioned in our first half call. Now of course, this was also an easier year. 2025 was an easier year for Vacaville since they were basically continuing to produce the products that they knew from before for Roche with not a lot of new tech transfers to do, et cetera. So 2026 will be more challenging, if you want, for Vacaville because they have not only the implementation or the execution of the CapEx investments to do, but they also need to start to onboard and tech transfer new programs while still delivering the batches for Roche. So it's a more complex year. Nevertheless, I think we believe that our goal for 2028 is confirmed, and we'll have to see closer to next year how the margin exactly behave versus what they do this year. I think we had before the question from Charles around the dilutive effect in terms of growth for the company. So in terms of growth, yes, this is a dilution. In terms of margin, we'll have to see if we can replicate this year's margin or not. But the progression -- the progression over the next 3 years is confirmed. Operator: The next question comes from Falko Friedrichs from Deutsche Bank. Falko Friedrichs: My question is on your Cell & Gene business. And now that we are in the middle of your fourth quarter, can you speak a little bit more about your level of visibility into this year-end pickup and what exactly is driving that? Philippe Deecke: Yes. So I think if you talk only about the Cell & Gene business, I think there, we met in H1 that we had also operational issues. I think remember this is a much more manual and very complex manufacturing process. So there, I think we see improvement in the second half and that business has certainly improved versus the first half. But I think we're still managing the complexities. And overall, for the year, we don't expect this to be as good of a year as we had in 2024. Now if you talk about SPM as a platform, I think there also, we saw better performance in the third quarter. We remain with several customer decisions and customer projects that are late -- happening late this year in Q4. And so these are the one that could still move between '25 and '26 and this we will only know probably late this year. Microbial, which is the second large business in this platform, is performing well and it's usually a very stable and strong business. We explained the first half in our July call with mainly a very high base and some contract -- some construction in our assets in microbial. But otherwise, this is kind of a stable and nice business. So overall, we see SPM better in the second half, but for the full year, certainly will be difficult to offset what happened in the first half. Operator: The next question comes from Sebastian Bray from Berenberg. Sebastian Bray: It's on the early-stage fraction of the portfolio. It was mentioned earlier in the call that it looks relatively robust, at least on a few months' view. How far does the visibility extend in this area? And if conventional biotech funding measures, which suggest that this business faces a funding squeeze in '26, are no longer a reliable guide, where is the money for these end customers coming from? When they go and sign the contract and if research funding is not there anymore, where is it coming from instead? Philippe Deecke: Sebastian, so let me first reconfirm what you said very quickly. I think the early-stage business is strategic for us because it allows us to look very early into the pipeline of pharma companies as to what services and technologies will be needed in the future and also contributes clearly to our future commercial utilization. So I think this is an important business for us. But again, this is not a very large business for us given the sizable commercial contracts and commercial assets that we have. So this early-stage work is about 10% of our CDMO revenues. And also for us, the funding in biotech is only a portion of what drives this early-stage work for us because many of our customers don't require external funding. This can be large pharma, large biotechs, midsized companies that have their own revenue and own funding. So only a portion of the 10% is actually really relying on external funding being from [indiscernible], follow-ons, venture capital, et cetera, et cetera. So I think what we wanted to make clear is that the funding levels that we're seeing today, and I'll come to this in a second, will not play a major role in the Lonza performance. And we have visibility of roughly 6 to 9 months in that business. That's usually the delta that you see between any movement of funding and then again, these smaller company relying on funding being able to deploy the capital they received or having to reduce their spending because of the lack of funding. So this is usually the visibility that we have. So for now, we would see roughly into the first half of 2026. And for there, I think we see good level of utilization certainly for '25 and early '26. I think the inquiries that we're seeing have reduced slightly throughout 2025, but not dramatically. And on the funding side, actually is good news. Q3 was actually better than Q3 last year. So I think this is not only bad news there. I think we saw a great increase in pipe funding, which is one of the other mechanisms for these companies to get money. [indiscernible], I think, was holding well at similar level as previous quarter. So I think this is still something that's volatile, but the decline that we've seen since early '25, at least has been put on hold for Q3. That's at least what we see, but that's probably the same data that you are all looking at. So I would say we're happy with the progress certainly in '25. We are confident that we can manage '26 and that we will continue to see interest for early-stage work to then be retained within the Lonza network over the years to come. Operator: Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the conference back over to Philippe Deecke for any closing remarks. Philippe Deecke: Yes. Thank you, everybody, for the question and the interest in Lonza. Again, a strong Q3 and confirming our outlook for this year. So I think good news from our end, and I wish you a great end of your day and talk to you in January. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good day, and thank you for standing by. Welcome to the Dime Community Bancshares, Inc. Third Quarter Earnings Conference Call. Before we begin, the company would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contained in any such statements, including as set forth in today's press release and the company's filings with the U.S. Securities and Exchange Commission to which we refer you. During this call, references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP measures and for reconciliation to GAAP, please refer to today's earnings release. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Stuart Lubow, President and CEO. Please go ahead. Stuart Lubow: Thank you, Diane, and thank you all for joining us this morning for our quarterly earnings call. With me today, as usual, is Avi Reddy, our CFO; and also Tom Geisel, who we hired earlier this year to continue growing our commercial bank. In my prepared remarks, I will touch upon key highlights for the third quarter of 2025. Avi will then provide some details on the quarter and thoughts for the remainder of 2025. Our core earnings power continues its significant upward trajectory. Core pretax pre-provision income was $54.4 million for the third quarter of 2025 compared to $49.4 million in the second quarter of '25 and $29.8 million a year ago. We had an increase in loan loss provision in the third quarter, primarily tied to charge-offs on loans in the owner-occupied and nonowner-occupied real estate segments. While NPAs were up slightly on a linked quarter basis, they are up off a very small base and represent only 50 basis points of total assets, which compares favorably to commercial bank peers. On a linked-quarter basis, we did see a decline in criticized loans in the third quarter of approximately $30 million and also saw a 33% decline in 30 to 89 days past due. Core deposits were up $1 billion on a year-over-year basis. The deposit teams hired since 2023 have grown their deposit portfolios to approximately $2.6 billion. We have a core deposit funded balance sheet with ample liquidity to take advantage of lending opportunities as they arise. Our cost of total deposits was 2.09% in the third quarter, which was unchanged versus the second quarter. By maintaining a strong focus on cost of funds, our NIM has now increased for the sixth consecutive quarter and has surpassed the 3% mark. Following the Fed rate cut in September, we were able to meaningfully lower deposit costs while maintaining loan yields. As mentioned in the press release, since the Fed rate cut, the spread between loan and deposits has increased approximately 10 basis points, and this will continue to drive NIM expansion in the fourth quarter. Outside of rate cuts, we continue to have several additional catalysts to continue to grow our NIM over the medium to long term, including a significant back book loan repricing opportunity. Avi will get into more details on the margin in his prepared remarks. On the loan front, we continue to execute our stated plan of growing business loans and managing our CRE concentration ratio, which is now 401. Business loans grew over $160 million in the third quarter compared to $110 million of business loan growth in the second. On a year-over-year basis, business loan growth was in excess of $400 million. Loan originations, including new lines of credit increased to $535 million. The weighted average rate on new originations and lines was approximately 6.95%. Our loan pipelines continue to be strong and currently stand at $1.2 billion. The weighted average rate on the pipeline is between 6.50% and 6.75%. Next, I will touch on our recruiting efforts. Disruption in our local marketplace remains very high, and we continue to execute on our goals of building out our C&I businesses. As outlined in the press release, we hired a number of talented bankers in the third quarter. Once they settle in, we expect them to meaningfully contribute to our business loan growth. In addition, we recently opened a branch location in Manhattan. The grand opening was actually yesterday, and we are on track to open our New Jersey location in Lakewood in the first quarter of 2026. Additionally, we have identified a new location in North Shore of Long Island that we expect to open in early 2026. In conclusion, the momentum in our business continues to be very strong, and we are executing our business plan of growing business loans and core deposits. We have clearly differentiated our franchise from our local competitors as it relates to our growth trajectory, our ability to attract talented bankers. We have an outstanding deposit franchise, strong liquidity -- and a strong liquidity position and a robust capital base. We expect more meaningful NIM expansion in the fourth quarter and significant opportunities in 2026 based on loan pricing opportunities, organic growth across deposits and loans. I'm looking forward to closing out the year strong. I want to again thank all our dedicated employees for their efforts in positioning Dime as the best commercial bank in Europe. With that, I will turn the call over to Avi. Avinash Reddy: Thank you, Stu. Core EPS for the third quarter was $0.61 per share. This represents 110% year-over-year increase. Core pretax pre-provision net revenue of $54 million represents approximately 1.5% of average assets. The reported third quarter NIM increased to 3.01%. We had around 2 basis points of prepayment fees in the third quarter NIM. Excluding prepayment fees and purchase accounting, the third quarter NIM would have been 2.98% -- as a reminder, the second quarter NIM, excluding prepayment fees and purchase accounting was 2.95%. Total deposits were up approximately $320 million at September 30 versus the prior quarter. We continue to see strong inflows across our branch network and across the Private and Commercial Bank. Core cash operating expenses, excluding intangible amortization, was $61.9 million, which was marginally above our prior guidance for the third quarter of $61.5 million. The variance versus the prior guidance was due to the additional hires we made in the third quarter. Noninterest income of $12.2 million was inclusive of a $1.5 million positive benefit tied to a fraud recovery that dates back to Legacy Bridge. We had a $13.3 million credit loss provision for the quarter, and the allowance to loans increased to 88 basis points. As Stu mentioned, criticized loans were down approximately $30 million linked quarter and loans 30 to 89 days past due were down approximately 33% on a linked-quarter basis. We continue to grow and our common equity Tier 1 ratio grew to over 11.5% and our total capital ratio grew to over 16%. Having best-in-class capital ratios versus our local peer group is a competitive advantage and will allow us to take advantage of opportunities as they arise and speaks to our strength and ability to service our growing customer base. Next, I'll provide some thoughts on the fourth quarter. As I mentioned previously, excluding prepayment fees and purchase accounting, the NIM for the third quarter would have been 2.98%. We would use this as a starting point for modeling purposes going forward. As Stu mentioned, we expect more substantial NIM expansion in the fourth quarter as we have been successful in reducing deposit costs and maintaining our loan yield, which has been helped by the pace of new originations. The spread between loans and deposits is approximately 10 basis points higher currently than what it was at September 15. While we have a larger cash position than we did in prior quarters that will eat into some of the NIM benefit from the spread differential between loans and deposits, we do expect more pronounced NIM expansion in the fourth quarter compared to the second and third quarters. In addition, we expect the asset repricing story that we've been talking about for a while to unfold with more vigor in 2026 and 2027. To give you a sense of the significant back book repricing opportunity in our adjustable and fixed rate loan portfolios, in the full year 2026, we have approximately $1.35 billion of adjustable and fixed rate loans across the loan portfolio at a weighted average rate of 4% that either reprice or mature in that time frame. Assuming a 250 basis point spread on those loans over the forward 5-year treasury, we could see a 20 basis point increase in NIM by the end of 2026 from the repricing of these loans alone. As we look into the back book for 2027, we have another $1.7 billion of loans at a weighted average rate of 4.25% that will lead to continued NIM expansion in 2027. In summary, assuming the market consensus forward curve plays out, we continue to have a path to a structurally higher NIM and enhanced earnings power over time. Now that we've crossed 3% on the margin, the next marker in front of us is 3.25% and after that, 3.50%. With respect to the balance sheet, we expect a relatively flat balance sheet for the remainder of this year as planned attrition in transactional CRE and multifamily masks the growth in our business loan portfolio. As we've typically done, we will only provide guidance for 2026 once we get into the new year. Next, I'll turn to expenses. As you are aware, we've added a significant amount of talented individuals to the organization, and we continue to have opportunities to selectively add more. We expect fourth quarter core cash operating expenses to be around $63 million. We don't expect any more wholesale additions of production staff until bonuses are paid in the first quarter, so we can treat the new fourth quarter expense run rate of $63 million as a good placeholder for now. Turning to noninterest income. For the fourth quarter, we do not expect a repeat of the fraud recovery item that we saw this quarter, meaning the run rate for noninterest income would be around $10 million to $10.5 million. Factors that will determine the eventual outcome will be swap fee income, which can be hard to predict as well as SBA fees, which are being impacted by the government shutdown. As has been our typical practice, we won't be providing guidance on 2026 until we report earnings in January. Suffice to say, we are very positive on the NIM trajectory as we exit 2025. Our efficiency ratio continues to improve, and we expect to continue driving that down with NIM improvement. With that, I'll turn the call back to Diane, and we'll be happy to take your questions. Operator: [Operator Instructions]. And our first question comes from Steve Moss of Raymond James. Stephen Moss: Maybe just starting off on credit here. Just curious with regard to the NPA formations and the charge-offs. Were the charge-offs related to this quarter's new nonperforming loans? And then was it weighted more towards owner-occupied CRE or nonowner-occupied CRE? And maybe if any of it was multifamily related? Avinash Reddy: Yes. So none of it was multifamily related, Steve. It was owner-occupied and nonowner-occupied. The split was around 20% owner-occupied, around 80% nonowner occupied over there. Like Stu said, criticized were down around $30 billion linked quarter. The 30- to 89-day bucket got better. And we're pretty confident that we should see some resolution of legacy NPAs in the fourth quarter, probably amounting to around $15 million to $17 million that we have a good line of sight into. So I wouldn't characterize the formation as anything out of the ordinary course of business. We're operating at 50 basis points of NPAs. We probably could be range bound around that between now and the end of the year. And we're seeing a very strong credit overall on the multifamily side. Stephen Moss: Okay. Appreciate that. And then maybe on the multifamily payoffs this quarter, those accelerated here. It kind of sounds like you're going to expect that similar pace into the fourth quarter. Is that kind of maybe how you guys are thinking about 2026 as you guys just have greater repricing and we're going to see just a continued step-up in the multifamily paydowns? Stuart Lubow: I think that I can see a continued paydowns in the multifamily. I think this quarter was a bit outsized, and we knew that we had some big prepayments or payoffs coming in. But I wouldn't expect it to be at this level of prepayment going forward, more normalized. But we are seeing maturities. When we do have maturities, there is a relatively high percentage that is refinancing out. Operator: Our next question comes from Matthew Breese of Stephens Inc. Matthew Breese: Avi, Stu, I wanted to follow up on the credit question just for a moment. On charge-offs specifically, Avi, I think in the past, you've discussed kind of, hey, look, we're building out a business bank. There's going to be some more normalized, call it, charge-offs than historical Dime, especially in the higher rate environment. Could you just reframe for us what you define as normalized? And I'm trying to kind of triangulate the comments. Is there a path back to normalized over the next couple of quarters? Avinash Reddy: Yes. No problem, Matt. I appreciate the question. So I think at the start of the year, our guidance for charge-offs was around 20 to 30 basis points. That's what we said before we start building out the specialty verticals, really. That was my comments back in January, right? So you look at on a year-to-date basis right now, we're basically at 31 basis points. So we're basically within the range of what we have. The new businesses that we're building out, fund finance, for example, we expect 0 losses in those new businesses, right? So I don't think the new businesses per se are going to add to the level of future charge-offs because we're making good loans and we're being very conservative in what we do. What it may change, though, is the reserving methodology because for C&I loans, we are reserving somewhere between 125 and 150. So if you think about the model going forward, we do expect the reserve to build and us to be in that 90% to 1% area, and that could gradually build over time. It will be a function of what we're putting on. But in terms of charge-offs, I mean, we're in probably the late cycles of a high rate environment. And it's our goal with increased earnings power to exit some criticized assets here and there. So that's probably a couple more quarters of that probably that we see. But I would expect as we get into '26 to get to more of a historical Dime level, if that's what you're asking on the charge-off level. But I think on the provision level, it's going to be a function of the new business, right? And we're reserving at a higher level for the new business. Matthew Breese: Great. And then going back to the multifamily reduction, I am curious, within that, was there any selection bias? -- stuff that's rolling off the book, was it more market rate multifamily versus rent regulated? And I would love just to hear what the market appetite is for those products refined away. Is it nondiscriminate and both are being refined away? Or are you seeing more of the market rate stuff get refined away than rent regulated? Avinash Reddy: Yes. So I think we're setting our new rates slightly above market, Matt. I think at a reprice, some of the customers are staying with us. But at maturities, we're not seeing any delineation between free market and historical rent-regulated items just because the LTVs are so low, and we've been pretty conservative in the underwriting. So I think there's a difference at the reprice. If something is repricing and still has 5 years left, you probably would see more of the rent-regulated stuff staying on with the books. But at maturity, we're seeing the same 80% to 90% of the loans are basically going away at this point. And there's really no delineation between that at this point in time, at least. Matthew Breese: Okay. And then 2 others for me. Just one, we may be in the process of getting some short order successive rate cuts. It feels like 2 by the end of the year and then maybe 1 earlier next year, so call it, 3 or 4 -- another 3 or 4 25 bps cuts. Can you give us some idea for expectations on deposit betas as a lot has changed on year-end than previous cycles? Avinash Reddy: Yes. I'll start with this cut, Matt. So I think you asked the question last quarter, I mean, rate cuts obviously help us and gradual rate cuts help us more than probably big rate cuts because that's sometimes it's hard to cut depositors by the full amount. So we kept the deposit cost at 2.09% this quarter, consistent with the last quarter, but we continue to grow deposits, right? So we're bringing on new deposits in the low 2s. Right now, our cost of deposits is in the low 190s. Prior to this rate cut, it was 2.09%. And so we were pretty much able to pass the full 100% on. I mean we do have 30% DDA. So that is what it is. So I'd say for this 25 basis points, we're very happy with where we ended up. So we started at 2.09%. We're at 1.90% right now. So we were able to cut and that's on total deposits. We're able to cut by 19 basis points. So I think for anything going forward for the next 2, we'd expect something similar, but it's going to depend on the competition. And look, the luxury that we have is we have a lot of new deposits coming in with -- from our branch network, from our municipal deposit bankers, from our private banking teams and from some of the commercial lending teams that we've built on. So we can be more aggressive with the existing deposit base that we have. And I don't think that's a luxury that a lot of other peers in our geography have. So while I think the models would say 50%, 60% beta, I mean, we're trying to pass everything on going forward on the way down. And if you remember, when rates were at 0, our cost of deposits was 7 basis points back then, right? We're not getting back there, but we did pay up on the way up, and there was industry events with Signature and some of the other stuff that happened where there was a bit of retention going on. But I think on the way down, our goal is to benefit from that. And again, the NIM guidance that we gave going forward, I mean, that's absent any rate cuts, right? I mean -- so for every rate cut, we should have 5 basis points plus or minus over there, and that's kind of primarily from cutting the deposit side of the business. Matthew Breese: Great. I appreciate all that. And then just my last one. There's been some larger banks that have identified Long Island as a market folks want to be in. And I know in prior calls, we've asked you about M&A as a buyer. And I'm curious your thoughts there. But I'm also curious to what extent you've thought about all strategic alternatives, including a potential sale if bids were to come in and some of these larger banks were to make a more pronounced effort in Long Island. That's all I had. Stuart Lubow: Yes. Thanks, Matt. Look, we're focused on organic growth. We have -- we've just brought on all these talented bankers and these teams on the loan side. We had already done that on the deposit side. We think we're really well positioned to deploy the excess liquidity that we have over the next 6 months to a year with all these teams coming on board. Our pipeline is very strong with very good yields. So I'm excited about the fact that we're going to start to see NIMs in the mid- to high 3s in a relatively mid- to long term, which is going to benefit the bottom line and our shareholder value. So really focused on that. As far as the other, look, everyone knows me. I've been around a long time. I'm always interested in maximizing shareholder value. But for now, we're really focused on organic growth. Operator: And our next question comes from Mark Fitzgibbon of Piper Sandler. Mark Fitzgibbon: I was wondering, with the capital ratios building nicely, and it sounds like no balance sheet growth in the fourth quarter. What are your thoughts on stock repurchases? Avinash Reddy: Yes, Mark, so we've started having those conversations in earnest at this point. I think last couple of quarters, we said early 2026, we will revisit it. I mean the common equity Tier 1 is over 11.5%. Total capital is over 16%. I mean the one thing we were trying to do is to get the CRE concentration ratio down to the low 400s, and we are there, right, at this point in time. I will say when you look at the peer groups, Mark, and more nationally because I mean, we've really broken out of the local peer group here. Our business model is completely different from a lot of the other banks here. And you look at TCE ratios or you look at common equity Tier 1 ratios, it's gone up industry-wide. And so I don't think we're an outlier when you compare us to the rest of the industry. We obviously have a lot more capital than historical Dime used to run the balance sheet. So I think the first and best use of capital, obviously, is putting into work on all of the existing lending teams that we have, a lot of the new teams that Tom has hired and putting that to work. I mean you've seen in the press release a number of new verticals that we've brought on board. And each one of them should be a $0.5 billion business for us over 2 to 3 years, right? So we'd like to deploy that. At the same time, the CRE runoff, the multifamily runoff is going to stop at some point relatively soon, and we'll be back in that market in a bigger way. So I think we're trying to balance a lot of those items, Mark. From a corporate finance perspective, obviously, we see the stock is very undervalued, especially as you start projecting out NIMs in '26 and '27. So from that perspective, we do want to be back in the market for that. If you remember, after the merger, we returned around $100 million of capital to shareholders. So we have been aggressive on that. But I think the limiting factor was the CRE ratio more from an optics perspective. And I think as we get below $400 million, that will go away, and it will probably help us be back in the market. So hopefully, that provides you a bit of perspective on the different dynamics there. Mark Fitzgibbon: It does. And also, I was curious, Avi, you mentioned there was a fraud recovery in the quarter. I guess I'm curious how much was that? And was that in other -- the other income line? Avinash Reddy: Yes, yes. So that was in other income, Mark. If you remember, this probably dating back to 2018 or 2019, Legacy Bridge had a fraud with a bus company. It was around an $8 million noninterest expense hit that they had more of an operational item. So we've been going through the legal process, and we were able to recover $1.5 million this quarter, and that's in the other -- other noninterest income line. Mark Fitzgibbon: Okay. Great. And then I guess just sort of a bigger picture and maybe not even necessarily relating to Dime, but just industry-wide. Stu, you and I have been through a few credit cycles. I guess I'm curious where you feel like we are and what inning are we in? How does the cycle play out? Does it get markedly worse? Does it sort of just muddle along? Are we -- have we seen the worst of it? I guess I'm curious of high-level thoughts. And again, not specific to Dime per se. Stuart Lubow: Yes. No, I think we're kind of in the later innings at this point. I think we're going to muddle along a little bit going forward. Look, we -- the issues of 2023 and the 2 years thereafter kind of exacerbated some of the situations with the higher rate environment. So I think overall, the industry has done very well. And I think we're at the point now where you got a lower rate environment coming. And I think generally, at least locally, the economy remains relatively strong. So I think that the industry has kind of worked through the process and managed the credit issues very well. I think as some of the issues come up with improved earnings, there might be a little bit more aggressive approach to resolving items. But I think generally, I think the industry has done well. And I don't see us entering a significant stress environment in terms of credit. Operator: I'm showing no further questions at this time. I'd like to turn it back to Stuart Lubow for closing remarks. Stuart Lubow: Thank you, operator, and Diane, and thank you all for -- thank all our dedicated employees and our shareholders for their continued support. We look forward to speaking to you in early 2026 after our fourth quarter. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good morning, 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 Kerry Group Third Quarter 2025 Results Webcast. [Operator Instructions] I would now like to turn the conference over to William Lynch, Head of Investor Relations. Please go ahead. William Lynch: Thank you, operator. Good morning, and welcome to our Q3 2025 trading update call. I'm joined on the call by our CEO, Edmond Scanlon; and our CFO, Marguerite Larkin. As usual, Edmond and Marguerite will take you through our presentation, and we will then open the lines up for your questions. Before we begin, please note the usual disclaimer on our presentation regarding forward-looking statements. I will now hand over to Edmond. Edmond Scanlon: Thanks, William, and good morning, everyone, and thank you for joining our call. So moving first to Slide 4 and my overview comments. We delivered a good performance across the first 9 months of the year with volume growth well ahead of our markets, combined with strong EBITDA margin expansion. Beginning with revenue, volume growth for Q3 and year-to-date was 3%, which represented a strong end market outperformance. Looking at this firstly by region, we achieved good growth in the Americas, supported by new product launch activity with both Europe and APMEA delivering sequential volume growth improvements in the third quarter. From a channel perspective, foodservice growth of 4.1% was driven by good innovation activity across new menu items, seasonal launches and LTOs. Growth in the retail channel was supported by increased retailer brand innovation and nutritional enhancement renovation. And by technology, we had strong performances across savory taste and Tastesense Salt and sugar reduction technologies as well as enzymes, natural extracts and proactive health technologies. Moving to margins. We delivered strong EBITDA margin expansion of 90 basis points in the period, primarily driven by Accelerate Operational Excellence, and we continue to see good margin expansion opportunity in front of us. On guidance, we remain on track to deliver our full year guidance. And finally, before we move to the performance review, I'd just like to update you on a few key strategic developments during the period. In recent weeks, we opened our new state-of-the-art Biotechnology Centre in Leipzig, Germany, which will play an important role in supporting future, fermentation and biotransformation innovation for the food and beverage industry. In the period, we initiated our Accelerate 2.0 program, which will focus on footprint optimization and enabling digital excellence across the organization. And we also continued to invest and develop our footprints, capacity and capabilities across our regions through the period. I'll now hand you over to Marguerite for the business review. Marguerite Larkin: Thanks, Edmond, and good morning, everyone. Moving to Slide 5 and the business review. Firstly, volume growth in the period of 3% represented continued strong end market outperformance, as Edmond mentioned. Pricing of 0.2% reflected overall input cost inflation. On the EBITDA margins, we delivered strong margin progression of 90 basis points in the period and 80 basis points in the quarter, primarily driven by cost efficiency, operating leverage and product mix, along with the contribution from acquisitions and disposals. Growth in our end-use markets was led by the Bakery, Snacks and Dairy end markets. Foodservice delivered growth of 4.1% despite soft traffic in places. Retail performed well overall, given increased customer focus on improving the nutritional profiles of their products. And volumes in emerging markets increased by 5.3% in the period, led by a strong performance in Southeast Asia. Turning to Slide 6 now and our performance by region. Firstly, in the Americas, where we had good performance across the region with volume growth of 3.6% year-to-date and 3.5% in the third quarter. Within North America, growth was led by snacks through Kerry's range of savory taste profiles and Tastesense Salt reduction technology. Growth in the retail channel was supported by renovation activity across global, regional and retailer brands with growth in foodservice led by good innovation activity with quick service and fast casual restaurants. And in LatAm, we had strong growth in Brazil and Central America, led by snacks. In Europe, volume growth was 0.7% in the third quarter, 0.4% year-to-date. This included a good performance in foodservice through seasonal and new launch activity with retail volumes reflecting soft market dynamics in Western Europe. Growth in the region was led by beverage through Kerry's integrated taste technologies and proactive health ingredients. Turning to APMEA, where our volume growth was 4.1% in the third quarter. This was primarily driven by strong growth in Southeast Asia with solid growth in the Middle East and Africa and volumes in China remaining challenged. Foodservice delivered strong volume growth with coffee chains and quick service restaurants and retail channel volume growth was driven by Kerry's authentic savory taste profile. Growth in our end market was led by bakery through food protection and preservation systems as well as reformulation activity in areas, including cocoa. Turning to the components of our reported year-to-date revenue bridge on Slide 7. Volume growth, as I mentioned, was 3%, with pricing up 0.2%. Transaction currency was favorable 0.2%. Translation currency was adverse 3.6% given the movements in the U.S. dollar and emerging market currencies versus the euro. And the acquisitions net of disposals was a net decrease of 0.8% in the period. Finally, to cover off a number of other matters on Slide 8. Net debt at the end of the period was EUR 2.2 billion, reflecting cash generation, capital investments and the share buyback program. We initiated Accelerate 2.0 as planned during the period, and we are pleased with the progress made. Firstly, in executing the footprint optimization strategy across Europe and North America, including the commencement of some site closures and the disposal of some associated business activities. And secondly, we have started the rollout of a number of digital initiatives we have been piloting over the last 18 months within our manufacturing operations and commercial activities. On input costs, while there is overall variation within our input cost basket, we are currently looking at limited input cost inflation for the full year. On currency, our outlook remains unchanged for a 4% to 5% translation currency headwind in the full year. To summarize, we delivered a good overall financial performance in the period with volume growth combined with strong margin expansion. And with that, I'll pass you back to Edmond. Edmond Scanlon: Thanks, Marguerite. So moving to our full year outlook on Slide 9. Our strong end market volume outperformance in the period demonstrates the strength of our strategic positioning across our markets, channels and customer base. And looking to the remainder of the year, while recognizing a heightened level of market uncertainty, we remain well positioned for volume growth and strong margin expansion as we continue to support our customers as an innovation and renovation partner. As I noted earlier, we're maintaining our full year adjusted earnings per share guidance of 7% to 11% constant currency growth. And with that, I'll now hand you back to the operator, and we look forward to taking your questions. Operator: [Operator Instructions] Your first question comes from the line of Patrick Higgins with Goodbody. Patrick Higgins: A couple of questions, if that's okay. Firstly, just in terms of, I guess, guidance, obviously, you reiterated the 7% to 11% on EPS. But just in terms of volumes, I think at H1, you said around 3%. Is that kind of reiterated as well? And I guess following on from that, at the H1 point, you noted end markets were broadly expected to be broadly flat this year. How has that developed since then? Could you maybe talk through the moving parts by region? And then my next question is just around the innovation pipeline. Obviously, you've been pretty consistent about the strength of that through this year. How has that developed since H1? Have you seen any delays or kind of smaller-than-expected launches just given the challenging kind of consumer backdrop? I'll leave it there. Edmond Scanlon: Thanks, Patrick. Firstly, on the volume outlook for the remaining of the year, no change to what we said at the half year. So we're expecting volume growth to be circa 3% in the full year. In terms of, let's say, market kind of, let's say, conditions or kind of what we're seeing by region maybe. The reality is there is a lot of variability out there at the moment. North America, the consumer backdrop has remained challenging. And I think we can all see that from different kind of market data out there or traffic data on the foodservice channel being slightly back year-on-year. In LatAm, the market in Brazil has improved versus last year, but we've seen the opposite in Mexico. And in the APMEA region, market demand in Southeast Asia has been healthy for us. I think it's fair to say Indonesia has been the standout performer for us. But when we look right across Southeast Asia, it's been quite strong, maybe the only exception being Vietnam. And I think what's really important for us is our ability to be able to pivot resources at pace and at scale. Then in terms of innovation, I guess, look, we called out a year ago that penetration opportunity and the scale of that penetration opportunity is quite significant. And as we look at the progression of our project pipeline between then and now, we've seen the impact of that penetration opportunity really, I suppose, contributing to our pipeline and contributing to the increase in scale in our pipeline over the course of the last 12 months. There has been quite a bit of launch activity in Q3, that will continue into Q4. Some of the performance of that launch activity in the market has been mixed in places. But overall, I would say the level of innovation that we have seen come through both on the retail channel and the foodservice channel is quite strong overall. The main driver being the penetration opportunity, but we've also seen customers, let's say, for instance in foodservice, be it the larger players or the smaller players step up the level of innovation with the larger players more focused on protecting market share and securing market share and bringing innovation to the menu to do that, whereas the smaller players have been, let's say, more into the zone of scaling their businesses and expanding their businesses through store openings. And on the retail side, we've seen significant step-up in activity on private label, which drives, I guess, the local and regional customer segment within our customer segmentation overall. Operator: Your next question comes from the line of Alex Sloane with Barclays. Alexander Sloane: Two questions from me, if that's okay. Clearly, it's too early to talk about '26 precisely. But relative to where we are today, would it be fair to assume that APMEA growth next year can be closer to the medium-term target if China improves? And perhaps you could give a bit more color on the trends and outlook that you're seeing in China, obviously, still challenged in quarter 3. The second one, in quarter 3, you had sort of more balanced growth between foodservice, which obviously slowed a touch on the traffic, but improved growth in retail. Would you expect that sort of balance to remain the case for the remainder of the year and into '26? Or should we expect foodservice to resume its historical outperformance? Edmond Scanlon: Maybe taking the second part of your question first. As you say, let's say, the performance across foodservice and retail has been, let's say, foodservice is slightly ahead of retail as we sit here at the moment. But as we look out, we would feel that foodservice will still continue to outperform retail like it has in the past. I guess the headlines that we're seeing maybe coming from the larger players or the traffic doesn't reflect the level of activity that's going on within the channel. I would say, from an innovation perspective, whether it's LTO, seasonal offerings, whether it's new taste profiles being launched onto the menus, a lot of innovation around chicken and pork, let's say, the whole poultry category, beverage continuing to be quite strong. Yes, the message really on foodservice is the headlines probably doesn't just capture the level of activity that's going on right across the channel. Then maybe on APMEA for a minute. Look, our expectations here going forward over the coming, let's say, quarters and over the medium term is that the APMEA region will continue -- our expectation is that the APMEA region will continue to be in that high single-digit volume growth zone. Obviously, we're not there at the moment but we do remain very positive on the region. We have developed our business significantly there in recent years, particularly in the Middle East and Africa. We continue to invest in that region with new capacity coming on in Jeddah. We brought new ground in the manufacturing facility in Turkey. We're opening a new state-of-the-art technology and innovation center in Dubai. And that's really our expected standout performer here going out into the future in the Middle East and Africa. China has been more challenging in recent times. Absolutely no doubt about that. We have, let's say, slightly adjusted our strategy in China in that we have seen some of our customer base in China look more to regions outside of China to grow their business. So we have made a slight pivot there from a personnel perspective and from a strategic customer engagement perspective, bringing them proactive concepts whereby they can target regions outside of China to grow their business and specifically develop products for, let's say, Southeast Asia and the Middle East and Africa, albeit these products will be produced in China. So a slight pivot there. We're not sitting back waiting for the market to change in China. We're being very proactive really to try and drive our business forward there and to get as proactive as we possibly can with our customer base. Operator: [Operator Instructions] Our next question comes from the line of Ed Hockin with JPMorgan. Edward Hockin: I've got 2, please. My first one is on Europe. So you saw a bit of an improvement in volumes growth in Q3, whether you could outline what drove that uptick and how durable it is as we think about Q4 and next year? And also with the appointment of Marcelo as the Head of that region, what is it do you think needs to be changed or developed or fixed within the region to get it on a more sustainable growth footing, after a couple of years that have been close to flat? And my second question, at the group level, as we think about 2026, and obviously, it's early days to be talking about. But in the absence of an end market improvement, supposing end markets remain flat, what kind of levers do you see or what kind of areas to draw our attention to that could drive growth improvement versus this year? Or is it your view that in a flat market then a circa 3% is the right level for 2026 volumes as well? Edmond Scanlon: Yes. Maybe first on the Europe question. I would say, look, our expectations for Europe and bear in mind, when we talk about Europe, we're talking about the developed Europe situation. Basically, our expectation is to be in that 1% to 2% volume growth range. And we are -- and we will progress towards that range in the, let's say, upcoming quarters. It's going to be a slow burn in Europe, though, nonetheless. I mean the market is, let's say, fairly challenged. It is a market that we're expecting to have a more proactive approach in that market. We've always been proactive in Europe, but we're expecting Marcelo to bring that level of pro-activity that we would typically have in emerging markets into Europe and to build on the good work that's already been going on in Europe. We're not calling out any change in strategy in Europe. It's a continuation of the strategy. We believe we have absolutely the right strategy for our customer base in Europe and to grow our business in Europe. It's about, let's say, doing a refresh in terms of our approach to the market, bringing that emerging market mindset of intense productivity to the customer base. Then in terms of maybe the outlook, I would go back to the point, Ed of, let's say, the market is going to do what the market is going to do. I guess we're really focused on driving our business forward. When I look at the scale of our pipeline versus where it was a year ago, it is significantly ahead of where it was a year ago. And I would call out maybe 3 big areas. The penetration opportunity that I've talked about many times in the past, that reformulation from a nutrition perspective, from a cost perspective and even from a sustainability perspective, these are all factors that are driving our business forward. There are challenges around availability of raw materials, et cetera, et cetera. All these things are driving our business forward, driving penetration, contributing to the growth that we're getting in the business. And the major, I suppose, reformulation opportunities, specifically in North America are in front of us. The entire discussion around, I would say, the [ maha ] or the potential front-to-pack labeling or let's see how things play out in North America. But that's still very much in front of us. States are doing their own things, but there hasn't been a federal intervention yet in North America in terms of exactly the direction of travel. If and when that happens, we feel that's a further underpin of growth and a further underpin of opportunity for us going forward into the future. Foodservice, there's -- we've seen a significant step-up in the level of value offerings and value meals and just our customer base being hyper focused and they're doing that through the lens of new launches, be it LTOs or seasonal offerings, but they've also stepped up their value offerings. And we expect that to continue over the coming quarters, and we're extremely well positioned as it relates to that channel. And the third area I'd call out is, let's say, that private label opportunity, whereby retailers are being quite aggressive in terms of trying to bring new products to the market that are not just national brand equivalents. They are trying to bring high-quality products to the market to grow categories. So I guess as we look out into the future, we feel that despite the challenging market, there are several factors there that we feel quite good about as we look out into the quarters in front of us. Operator: Your next question comes from the line of Fulvio Cazzol with Berenberg. Fulvio Cazzol: My question is really on the EBITDA margin, which is up 90 basis points in the first 9 months, up 80 basis points for the third quarter. So my question around that is, well clearly, it's developing probably better than what you would have anticipated at the start of the year, whether you can confirm that? And if that's the case, could you maybe just highlight for us what's driving this? Is it that you're seeing incremental cost-saving opportunities that you're unlocking? Or are you just executing faster some of the efficiencies? In other words, the 19% to 20% target that you've got for 2028, are you likely to achieve that earlier? Or is there going to be a bigger potential upside on the EBITDA margins? Marguerite Larkin: Maybe I'll take that question. So firstly, we are pleased with the strong margin expansion of 80 basis points in the quarter. In terms of the stronger performance in the quarter, it's mainly due to the phasing of benefits from Accelerate Operational Excellence and portfolio developments, so slightly ahead of our expectation. I would say, though, there is no change to the full year expectation for margin expansion of 70 basis points or greater. We are well on track to deliver that margin expansion in the current year. And then in terms of the -- looking forward to the margin expansion over the next number of years, we are happy that we have outlined a clear margin target of 19% to 20% by 2028. We have a clear pathway in terms of delivery of that target, and we're pleased with the progress that we've made in terms of commencing the Accelerate 2.0 program, which will be a strong underpin of delivery of that margin expansion over the next couple of years as well as continued expansion from mix and operating leverage. Operator: Our final question comes from the line of Cathal Kenny with Davy, Research. Cathal Kenny: Two questions from my side. Firstly, just going back to private label, Edmond. Just want to delve into that a little bit more. Which region are you seeing most activity on innovation? And which region are you best placed to execute on that opportunity? And then the second one is just on enzymes. I see it comes up in the press release a couple of times. Just wondering in terms of the end market applications you're focused on in terms of bringing that technology to bear. Edmond Scanlon: Maybe talking about enzymes first. I mean I think the 2 end-use markets that we are seeing, I would say, performance that is maybe even slightly ahead of expectations is on dairy and bakery. Firstly, on dairy, we have quite a strong offering into the dairy channel, let's say, historically, but lactose intolerance is a growing kind of need out there in the market, and we are extremely well positioned to be able to take advantage of that opportunity, and that opportunity is quite global. The second area is in bakery, whereby enzymes and our enzyme capability is a key tool to the toolbox, in our toolbox in terms of freshness and food protection and preservation. And again, that is a demand from our customer base across both foodservice and retail channels. And that is about basically bringing freshness and food protection and preservation in a clean label way to the bakery end-use market. And yes, we recently announced a new Biotechnology Centre in Leipzig, Germany, and we're expanding our footprint in Ireland as it relates to manufacturing enzymes, both on the fermentation side and on the packaging side. Then on private label. Private label is not new to us here in Europe or, let's say, in Ireland and the U.K. We have, let's say, a strong track record in private label, let's say, emanating from this region. And we have, I suppose, with that level of experience we have and expertise that we have in private label, we've deployed those capabilities into North America. It is in North America that we have seen a step change in terms of engagement with retailers around targeting certain categories where actually they want to take a leadership position in certain categories where they feel there's been a lack of innovation in recent years and they feel that there's, let's say, plenty of scope from a pricing perspective to bring really high-quality clean label, more nutritious food and beverage products into categories that they want to lead, and we're very well positioned to be able to actually enable them. From an overall, I suppose, business model perspective, it is quite similar in terms of approach as we take for foodservice. So we feel well positioned to be able to take advantage of this opportunity and expect that private label performance and private label, I suppose, market expansion will continue in North America. And yes, we feel good about that as we look forward into the coming quarters. Operator: And that concludes the question-and-answer session. I would like to turn the call back over to Kerry for closing remarks. William Lynch: Thank you, everyone, for joining us on the call today. If you do have any follow-ups, please do reach out, and we just want to wish you a good day.
Operator: Good day, everyone, and welcome to the Arca Continental Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this call is being recorded. I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Melanie Carpenter of IDEAL Advisors. Please go ahead. Melanie Carpenter: Thanks, Nicky. Good morning, everyone. Thanks for joining the senior management team of Arca Continental to review their results for the third quarter and the first 9 months of 2025. Their earnings release went out this morning, and it's available on the company website at arcacontal.com in the Investor Relations section. It's now my pleasure to introduce our speakers. Joining us from Monterrey is the CEO, Mr. Arturo Gutierrez; the CFO, Mr. Emilio Marcos; and the Executive Director of Planning, Mr. Jesus Garcia. They're going to be making some forward-looking statements, and we just ask that you refer to the disclaimer and the conditions surrounding those statements in the earnings release for guidance. And with that, I'm going to go ahead and turn the call over to the CEO, Mr. Arturo Gutierrez, who is going to begin the presentation. So please go ahead, Arturo. Arturo Hernandez: Thanks, Melanie. Good morning, everyone, and thank you for joining us today to review our results for the third quarter and to share some important recent developments. Let's begin with our consolidated results. I'm pleased to report another quarter of solid execution and sequential progress across our territories, even as the broader economic environment remains challenging. Our teams continue to navigate market headwinds with agility and discipline, driving robust profitability. Total consolidated volume declined 1.8% in the quarter, while consolidated revenues grew 0.5%, supported by effective portfolio mix and revenue management, partially offset by unfavorable FX impacts. Consolidated EBITDA grew 1.2% in the quarter, reaching a margin of 20.4%. This achievement marks a significant milestone with third quarter EBITDA margin at its strongest point since the acquisition of our U.S. operation in 2017. These results underscore our relentless execution, the strength of our portfolio and our continued focus on driving profitable growth. Let me expand on the results across our geographies. In Mexico, unit case volume, excluding jug water, declined 2.9%, largely reflecting the impact of heavy rains and below-average temperatures across much of our territory. Despite this temporary weather-related pressures, still beverages grew 2.2%, led by tea, juices and nectars and energy drinks, capitalizing on the positive momentum in the supermarket channel. Coca-Cola Zero continued to outperform delivering sequential double-digit growth, supported by the introduction of the new 450-milliliter format, which continues to resonate with consumers seeking convenient and affordable options. Santa Clara brand continues to deliver strong performance in Mexico, achieving double-digit volume growth rates, supported by robust momentum in flavored and specialized milk. We continue to gain value share in the value-added dairy category, reflecting the strength of our innovation and disciplined execution. Net sales grew 2.8%, with average price per case, excluding jug water, up 6.4%, underscoring our strong revenue management capabilities. EBITDA decreased 3% in the quarter, resulting in 23.9% margin, reflecting our disciplined commercial execution and solid revenue management capabilities in a softer demand environment. In South America, total volume declined 0.6% in the quarter, primarily due to softer performances in Ecuador and Argentina. This was partially offset by growth in Peru. Total revenue declined 13.6% and EBITDA was down 1% with a margin of 18%. This quarter reflects a steady though cautious progression of the recovery that began in the first half of the year with meaningful variation across countries. Collectively, our South American operations are advancing through a period of disciplined stabilization, setting the stage for more balanced and sustainable growth ahead. In Peru, total volume increased 2% in the quarter, supported by a stable economic environment and resilient consumer demand. Growth was broad-based across categories, led by sparkling up 1.7%, stills up 1.9% and water at 4.8%. Our core brands, Coca-Cola, Inca Kola and Sprite delivered strong growth, up 1.2%, 1.6% and 8%, respectively. Volume recovery remained consistent across channels with convenience stores leading the way up 22%. Supermarkets showed a sustained rebound while traditional trade maintained solid momentum, supported by our effective price pack and cross-category strategies, further enhanced by our digital capabilities. Turning to Ecuador. Volume declined 1.2%, reflecting softer market conditions and a fragile yet gradually improving macro environment. Even so, our team remained focused on executing our fundamentals and driving performance in the areas within our control. We sustained our value share in NARTD beverages, driven by continued growth momentum in still beverages, up 3.6%. In the sparkling category, Coca-Cola Zero once again delivered solid growth of 2.2%, while Fanta and Fioravanti grew 6.2% and 3.6%, respectively. The water segment rose 3%, showcasing the strength of our diversified portfolio. We also continue to refine our price pack and channel strategies, drive the adoption of returnable packages and invest in targeted market initiatives to strengthen our long-term position. Year-to-date, we have installed more than 17,000 cold drink units, further enhancing our market coverage and reinforcing execution at the point of sale. In Argentina, volume declined 5.6% in the quarter, reflecting the near-term effects of the country's economic adjustment. Nevertheless, we gained value share across NARTD categories, supported by our sparkling portfolio and our continued focus on affordability and returnable packaging initiatives. While volatility remains, our disciplined execution and agile commercial approach positions us well to capture growth as conditions normalize. Our beverage business in the United States delivered another strong quarter, sustaining solid momentum and achieving robust operating results. This marks our 30th consecutive quarter of EBITDA growth. Adding to this momentum, our U.S. team was recognized as the best Coca-Cola bottler in the world, receiving the prestigious Candler Cup. We are proud to be the only bottler to have earned this award twice, underscoring our operational excellence and market leadership. These impressive milestones reflect our team's consistent execution and the strength of our business model. Solid performance this quarter was driven by effective management of our price pack architecture, disciplined cost controls and continued focus on maximizing the value of our most profitable packages. Net revenues rose 3.5% this quarter, with the average price per case up 4.8%, supported by our strategic focus on boosting promotional efficiency through our trade promotion optimization digital platform. Volume for the quarter declined 1.3% and transactions grew 0.1%. Key performance highlights included a 5.9% increase in our low-calorie portfolio led by Coca-Cola Zero, Diet Coke and both Diet Dr. Pepper and Dr. Pepper Zero. In the stills portfolio, Monster, Fairlife, Core Power and Smartwater continued to post sequential growth, supported by robust brand execution. Notably, EBITDA increased an outstanding 9.7%, representing a margin of 17.2%. And an important update on our digital agenda, our e-commerce business continued to deliver strong results, driven by enhancement in our eB2B capabilities and outstanding execution in the e-retailer space. I'd like to close our U.S. update by sharing our excitement for the 2026 FIFA World Cup and our role as whole city supporters for the Dallas and Houston venues. Through this partnership with the World Cup Organizing Committee, we will actively support the city's legacy programs and showcase our brand through targeted initiatives that engage fans and local communities. Our Food and Snacks business delivered a resilient performance posting a low single-digit sales decline for the quarter. While facing top line challenges, our team remained focused on profitability through effective price management, portfolio optimization and operational efficiencies. In line with our broader sustainability objectives, we continue to advance the clean label initiative across our U.S. Snacks portfolio. This includes the removal of artificial colors, flavors and preservatives as well as the simplification of ingredients lists. These efforts exemplify our commitment to transparency, product integrity and long-term consumer trust. And with that, I will now turn the call over to Emilio. Please, Emilio? Emilio Marcos Charur: Thank you, Arturo. Good morning, everyone, and thank you for joining our call. As Arturo highlighted, the same factor that influenced our performance in the first half of the year continued to play a significant role in the third quarter. Macroeconomic environment remained challenging and weather conditions were still unfavorable. Even so, we have a sequential improvement in volume for most of our operations, demonstrating strong team performance despite challenges. The improvement in volume, together with our solid revenue growth management capabilities and disciplined approach to expense control resulted in an expansion of our consolidated EBITDA margin. Let me offer further insight into our financial results. In the third quarter, consolidated revenues increased 0.5%, reaching MXN 62.9 billion. Revenues for the 9 months of the year rose 6.6% to MXN 183.4 billion, mainly driven by an effective pricing strategy. On a currency-neutral basis, revenue rose 3.8% in the quarter and 3% year-to-date. During the quarter, SG&A expenses rose 1%, reaching MXN 19.4 billion. Despite the contraction in volume, SG&A to sales ratio was fairly in line with third quarter '24 at 30.8%, reflecting our continued commitment to operational discipline. In the quarter, gross profit increased 1.2% to MXN 29.5 billion, while gross margin expanded by 30 basis points due to a solid price pack architecture and solid hedging strategy. For the quarter, consolidated EBITDA increased 1.2% to MXN 12.8 billion with a 10 basis point margin expansion reaching 20.4%. In the 9-month period, EBITDA grew 6.1%, reaching MXN 36.6 billion, while EBITDA margin decreased by 10 basis points to 20%. On a currency-neutral basis, EBITDA rose 2.6% in the quarter and 2.2% as of September. Net income in the third quarter reached MXN 5.3 billion for an increase of 3.5%. Net profit margin increased 20 basis points to 8.4%. Now moving on to the balance sheet. As of September, cash and equivalents totaled MXN 32.3 billion, while total debt stood at MXN 63.9 billion, resulting in a net debt-to-EBITDA ratio of 0.62x. In our most recent Board meeting, it was approved to distribute an additional dividend of MXN 1 per share to be paid on November 5. Combined with the ordinary dividend of MXN 4.12 distributed in April and the extraordinary dividend of MXN 3.50 paid in June, we will reach a total dividend of MXN 8.62 per share. This reflects a payout ratio of 75% of retained earnings and a dividend yield of 4.3%. Total CapEx reached MXN 11.8 billion, representing 6.4% of sales. Investments were primarily directed towards expanding our production capacity, ensuring that we are well positioned and sustained future growth. We also continue to enhance our distribution and commercial capabilities, which are key enablers for our long-term strategic plan. Looking ahead, we expect market volatility to continue throughout the rest of the year. We remain confident in our business strength and ability to create value despite challenging conditions. We will continue managing expenses carefully to drive profit and sustainable growth. That concludes my remarks. I will turn it back to Arturo. Please, Arturo. Arturo Hernandez: Thank you, Emilio. As we reflect on this quarter, our disciplined execution enabled us to protect volumes, sustain market share and maintain profitability even in challenging conditions. Furthermore, as we marked the third year of our collaboration agreement with the Coca-Cola Company, this partnership continues to deliver on its core objectives while unlocking new opportunities through a broader portfolio. At the same time, we are staying proactive on regulatory developments and pursuing strategic initiatives, ensuring our readiness to capture growth when market conditions improve. By balancing resilience with agility, we're positioned to deliver a strong and sustainable performance across cycles and continue creating long-term value for our shareholders. We are focused, ready and energized to capture the opportunities ahead. Thank you for your continued trust and support. Operator, please open the line for questions. Operator: [Operator Instructions] We'll take our first question from Ulises Argote with Santander. Ulises Argote Bolio: My question is related to the margins in the U.S., right? So another quarter with positive surprises there. I was just wondering if you could give us some color on what continued to be the main drivers there and the main levers despite that slowdown in top line that we're seeing. And maybe just to pick your brain on how sustainable do you think these trends are going forward? Arturo Hernandez: Thank you, Ulises. Well, first of all, we have to say that we're very satisfied with the profitability in our U.S. business, considering also that we faced many challenges in that market. As you know, third quarter, we grew EBITDA, in dollar terms, close to 10%. And our margin is above 17%, which we -- again, we're very pleased with that. The drivers behind it, as we've said before, our pricing capabilities and also the management of promotions. We're looking forward to combine this premiumization of our portfolio with also a price architecture that would cover all segments, considering, again, the economic dynamics. We've also worked on efficiency projects. And I would say that our OpEx ratio has shown this operational discipline. We expect that also to be sustained. There's some efficiency projects underway. And in fact, one of the most important ones will not be fully captured in '26, the Wild West project that we call, which is the restructuring of supply chain in some of our plants and warehouses in the U.S. We also are looking at input costs in '26. They're expected to rise due to inflation, but we do have also a strong hedging strategy. I will ask Emilio to expand on that part. But in general, I would say that we are very confident for '26 to sustain our current margins. Emilio, why don't you expand on our raw materials and hedging situation? Emilio Marcos Charur: Yes. Thank you for your question, Ulises. Yes, for this year, as we have mentioned, we have over 97% of our LME needs in U.S. and 48% Midwest premium portion for this year and 79% of high fructose needs. And we started to hedge for next year. For 2026, we have 95% of our LME needs next year and 20% of Midwest premium. So that will allow us to together with what Arturo already mentioned, to consolidate the levels -- the margin levels that we have this year, and we expect it to reach those levels -- at least those levels for next year. Operator: Our next question comes from Thiago Bortoluci with Goldman Sachs. Thiago Bortoluci: Arturo, question on you for Mexico, right? How should we read the combination of negative sparkling volumes with returnables losing participation in your mix? And if I may expand, the reason I'm asking this is because the big debate today in the space is clearly how much of the drag is structural versus temporary issues, namely comps, weather and another few. So it would be very helpful to hear your perceptions on how you're seeing underlying elasticity, affordability, price pack performance and overall performance by channel. And again, if we can read anything between your volume print and your packaging performance in the quarter, especially in the context where weather conditions didn't help. Arturo Hernandez: Thank you, Thiago. Let me start by giving the context of the consumer environment in the third quarter in Mexico. As you said, this is a combination of not very favorable weather, increased rainfall, cooler temperatures. It was very, very unusual. Rainfall was probably 40% higher than usual in the North of Mexico, even more than that, maybe in some cases, just doubled and tripled in the West regions for us. So temperature has also affected volumes and consumption and traffic throughout the quarter. There was also the economic dynamics where activity slowed down and any activity really was driven by exports rather than domestic demand. So internal consumption has been reduced and special retail activity and traffic weakened. I would like to think that, that is also temporary, not only weather, which would naturally be different as we think about next year. But in terms of the economic weakness, we believe that as we gain greater clarity around trade rules and tariffs and the relationship with Mexico and the bilateral trade with the U.S. that will enhance Mexico's competitiveness and will provide even formal job creation and with that, domestic consumption. If you look at returnable packages, well, the main reason is that supermarkets were basically the only channel that grew volume in the third quarter, and that was driven mostly by intensified promotion, considering the current situation. But we're going to be pursuing our strategy of affordability going forward in Mexico, which means entry-level packages, both returnable and nonreturnable packages. And the 235-milliliter, 12-ounce 250 ml one-way packages. The 450 milliliter that probably you've seen in the market, one-way, very important for us. The multi-server fillable format, what we call the universal model. All those strategies will continue to move forward as we face these challenges. So that is -- it's hard to isolate the effect of weather and the economic situation, but we are convinced that those are the main factors. Our execution in the market continues to improve and our leadership in the market as well, which we believe that's the most important part. Operator: Our next question comes from Ben Theurer with Barclays. Benjamin Theurer: I wanted to get a little bit of how you think about pricing going forward. I mean, obviously, we know about what's in the proposal in terms of taxes for the different categories. But as we think about raw material inflation you face and what you usually pass on, what is your strategy going to be towards the end of the year and then into next year? How should we think about pricing? How much is needed for the taxes? How much would you do on top of that? And what are kind of like the sensitivities you're looking at as it relates to your volume if you were to raise those prices? Arturo Hernandez: Yes. Thank you, Ben. First, let me talk in general about our pricing strategy, which really has not changed. And I think under this market conditions, it's demonstrated that these capabilities do work very effectively of increasing prices in line or above inflation in every business unit. This requires not only this very advanced pricing tools that we have designed jointly with the Coca-Cola Company, but also leveraging the trade promotion models, which operate at a local level. So I think, for years, we have demonstrated these capabilities, which, as I've said, if there is one fundamental capability that consumer goods companies need to get right now or the future is precisely revenue management. So for us, it's combining affordability and also a premiumization strategy, as I said before. We will continue to monitor those pricing dynamics and make sure that we are competitive in the marketplace. And then going specifically to your point about taxes and Mexico. Well, this tax that we are expecting to be implemented for '26 would require us to pass through the impact via prices. And as you know, we've done that before, actually 12 years ago. And we have estimated that, that increase would be in the range of 8% to 10% probably. And that we would have to add inflation after that, considering that we want to remain competitive in terms of margins in '26. So we don't know exactly what the elasticity would be, but there's certainly going to be an impact in volume for next year. We have some of the learnings of past elasticity patterns following similar adjustments in 2014. But at the same time, we have so many things that work in our favor in the Mexico market going forward. I mean there are reasons to believe that we're going to be able to mitigate part of that impact. And there are many factors. I mentioned before, the impact of unfavorable weather this year. We also face this difficult economic situation. We expect normalization next year, considering the challenges we faced with brand retaliation that you know about some product constraints in our supply chain, particularly Topo Chico in '25 and the opportunities to keep deploying our digital capabilities that are still going to be rolled out, some of the new features and very particularly, the incremental demand that would be driven by the major events in Mexico and the U.S., the FIFA World Cup. In Mexico, we're also going to have the 100th anniversary of Coca-Cola in Mexico. So there are so many things that will work in our favor considering that certainly, it's going to be a challenging volume situation as we pass along these -- the tax that has been imposed, but that's going to be imposed. Operator: Our next question comes from Felipe Ucros with Scotiabank. Felipe Ucros Nunez: A quick question on the taxes in Mexico. Of course, not great news getting this tax increase. I was wondering if you can comment on a couple of things. The first one is the differences between this tax and the one that we saw 12 years ago. No tax for beer were changed. So the gap between soft drinks and beer, I guess, is changing. And I'm wondering if you can comment on what type of impact you would expect through that differential. And whether it's material for us to monitor it or you think the occasions are so different that it's really not a concern. And then the second question related to this is, it looks like there's more serious incentives in place to move the consumer towards no-low options. So I'm wondering if you can talk about how this may change profitability and returns for the business in the long run, if at all. And I'm talking about there's differences on the price per unit of sweetening from sucralose and sugar, perhaps there's a margin differential between the different presentations and concentrating price -- concentrate pricing might also be different. So just wondering if there's going to be like a change on the profitability of the business in the future from the change to no-low categories. Arturo Hernandez: Thank you, Felipe. Well, to the first part, we really don't anticipate an impact from any difference in the tax treatment of other categories really. We're looking at the dynamics within our own industry for sure. And in this case, as you saw, we really have a commitment to reduce the calories in our portfolio going forward. And this is not something that is new or that is improvised by the system. We've been, for years, developing and promoting options with less sugar and with no sugar in Mexico and in other markets. So now what we intend to do is to offer more proactively our broader portfolio, a more balanced and lower-calorie portfolio. And those are part of the commitments we've made with the government as we discussed the implementation of the tax. So as part of that, we also want to promote competitive prices and affordable Coca-Cola Zero packages, particularly. This, as you know, has been a great innovation in our portfolio. Coca-Cola Zero continues to grow, and we will connect that also even to the FIFA World Cup next year. Coke Zero will take center stage in many of the campaigns connected to the World Cup. In terms of profitability, we don't think that, that will really affect overall profitability going forward. Felipe Ucros Nunez: Great. That's very clear. And if I can do a second one on sales in Mexico, they did very well. And it's another quarter with the same categories, tea, energy and juice doing very well. So I was wondering if you could talk a little bit about what you're doing there and why the category is behaving differently from others during adverse weather. Is it that the elasticity for this category is a little different? Or it's more a case of things that you're doing at the micro level? Arturo Hernandez: I think it shows the opportunity that we have to grow these categories. As I said before, energy and juices and sports drinks and tea, they're underdeveloped really in the Mexican market. So we have proved that we can be successful in those categories as well. I think that's very important as you look at the story of Powerade in the last 15 years. And now you see Santa Clara, which I mentioned, also, it's a great success story. Tea grew 22%. Juices grew 6%. Monster continues to grow. So I think it's interesting to see them grow even under very challenging conditions, which means the great opportunity that we have to increase the per capitas of these categories that they don't compare very favorably to more developed markets like our own U.S. market. So it's very promising to see them grow even under a more challenging conditions. So we're excited about those possibilities and especially that we can be leaders in those categories as well as we've also demonstrated. Operator: Our next question comes from Rodrigo Alcantara with UBS. Rodrigo Alcantara: Arturo, Emilio, nice to hear from you. I want to go deeper into some of the comments about the commitments regarding -- with the government, right, ahead of the tax discussion, right, in the conference, the government and the Coke system hosted a couple of days ago. As you mentioned, there were some commitments in relation to this trend of increasing low-carb categories, et cetera, et cetera, right, like namely the reduction of commitment to reduce by 30% caloric needs of your products in a period of, if I'm not mistaken, 1 year or something like that, right, in addition to other commitments, right? So the question here would be how much of a challenge or deal in your view is implementing this, right? How are you implementing this? And possibly linked to the previous question is as a result of implementing this, we may see some impact on margins or profitability, which I think you already said no, right? But I mean just to confirm that, that would be the main question. And the other one, just because this is the one that we're receiving from investors as we speak. We have seen macro numbers in Mexico at the margin not looking as good as we may decide, right? Retail sales in September quite weak. So I mean how would you think 4Q would be shaping up in terms of volumes looking from a consumer demand perspective in Mexico? That would be my question. Arturo Hernandez: Thank you, Rodrigo. Talking about the taxes and also the commitments, as I said, this is really not new for us in terms of the commitments that we made with the government, with Congress. This is part of this plan to strengthen our caloric reduction innovation. And this has been around for years. So plan builds on the calorie content that we've actually been testing in the market for a long time in the Coke portfolio. So here, what we're going to do is just continue the migration. So those commitments are actually part of our own strategy in the last few years and also part of the promotion of Coke Zero that has been our strategy as well. But I think the most important takeaway of those commitments is how we remain committed to be part of the solution and how we've been able to have a dialogue with the government and stakeholders and how this collaboration really highlights our ability to engage constructively with the government and adapt to the frameworks and advance really our journey towards a more sustainable and health-focused portfolio because we really share with the government the need to advance in reducing obesity rates in the country. So we want to be, again, part of that solution. So I think that's main takeaway that we are -- that all this story about tax implementation concluded with a very constructive dialogue and conversation with government. And then talking about volumes and profitability, there is -- our concern is not really that this transition to low-calorie or no-calorie version is going to impact our profitability. Obviously, the impact will come from the volume decline that will be the result of the elasticity in these categories. But again, as I mentioned, looking forward in 2026, we have many things to be positive about as we compare with '25, where we've had so many negative factors combined with -- for the performance that we are seeing so far and that we expect to continue to see throughout the end of the year. So that is why, aside from our ability to pass through the tax and pricing in a smarter way, promoting the packages that we believe are important to protect, I think also we have these mitigating effects that I mentioned before, including our promotional activities, the FIFA World Cup and also the uplift we've seen from the deployment of our capabilities that we've been talking about before. So all in all, I think we're good positioned to mitigate that impact. Operator: We will move next with Lucas Ferreira with JPMorgan. Lucas Ferreira: Sorry to insist on the [indiscernible] topic. And just comparing and contrasting 2014 with the situation guys you will face in 2026, what sort of the tools do you think the company has now enhanced to mitigate the impact and mainly talking about price pack architecture, but also the sort of more developed relationship with Coca-Cola company, better partnership, I would put it this way. And if you can speak about -- generally about your, let's say, market share expectations for next year. If you think this is a situation, obviously, a challenging situation, but at the end of the day, could help you even expand your share. So how to think about that? And also, if I may, a quick follow-up on the very short term, obviously, second quarter for Mexico was already better in -- sorry, third quarter better than second. If you expect to end the year at a better note, how sort of the latest news are coming regarding consumer demand and traffic on the floor, et cetera? Arturo Hernandez: Thank you, Lucas. Well, first of all, talking about the tax and the learnings from 2014, increased prices double digit at the time plus inflation. I guess it was around 12%. We had a 3% volume decline approx, a little less than 3% in 2014 and -- but the volume decline was sequentially better throughout the year. I mean we started with a strong decline in volume in first quarter. By the end of the year, there were -- volumes were pretty flat that year, which means there's kind of a psychological impact as well in that elasticity. Now I think to your point about how are we better prepared. I think we've developed our RGM capabilities in this last 12 years quite a lot. We have a stronger leadership in the marketplace. And as you mentioned, we have a stronger partnership with the Coca-Cola company to jointly navigate through this situation, which is not only about passing along the prices, but also what are we going to do in the market to sustain leadership and increase our presence. So what are the things that works in our favor is that the price -- the tax is designed as a peso per liter. So that means for more premium-priced products, it's going to be a less percentage increase as compared to, let's say, value products out there, brands in the market. And thinking about the fourth quarter, well, the environment will remain very challenging. Again, we are continuing to focus on things that we can control, which are basically 3 pillars: disciplined execution with very targeted campaigns. We have very well-designed campaigns to be implemented in this final part of the year. We're launching especially higher impact marketing campaigns for the Gen Z consumers and also Share a Coke and Christmas that kind of deepens the connection of our brands with consumers as well. We continue to double down on our affordability initiatives, as I mentioned before, with entry packages and with single-serve packages that also provide affordability. And we'll start also deploying all of our efficiency initiatives and playbook in this next quarter and throughout' '26, which means reducing cost to serve as we have redesigned new service models. And a number of other projects like lightweighting, improvement in distribution logistics as well. We have an organizational restructuring that mostly addresses agility and clarifying roles, but also it's going to bring more efficiency. So there are a number of things that will help us mitigate this adverse environment. Operator: Our next question comes from Álvaro Garcia with BTG Pactual. Alvaro Garcia: Arturo, I have a question on Texas. I was wondering if you can comment on potential changes to SNAP benefit in Texas and how that might impact demand for your products. And just general commentary on sort of Hispanic consumer and just the consumer environment in general into next year ex World Cup would be very helpful. Arturo Hernandez: Thank you, Álvaro. Yes. Well, we are currently assessing the potential implications of those SNAP benefit changes in our portfolio. It's not -- we don't anticipate a significant impact, but it's something that certainly we're monitoring and looking at consumer trends and consumer demands and especially paying attention to the segment that this is going to impact the most, which is mostly the take-home segment. So we -- at this point, on the impact, we don't have a specific number to provide. But we continue to believe that's important to give consumers the freedom to choose what groceries they want to purchase for the family with the SNAP benefits, but we're still assessing the implications. What I can tell you about the U.S. market dynamics is that we have seen a sentiment among low mid-income and Hispanic consumers that has declined this year. Rising cost of living or interest rates probably, that's been softening spending. If you look at, for example, our value channel in the U.S., that grew almost 4% year-over-year. It's gained some mix. And also that's related to some of the border tensions we've seen this year, fewer people crossing. And Hispanic traffic has declined more sharply in retailers, even in Walmart Hispanic outlets as compared to the non-Hispanic stores. So total retail traffic did fall in this third quarter convenience stores only. Again, club and value saw traffic growth. So that tells you about how the dynamics are playing out. So what we have adopted is, as I said before, this premium strategy -- this dual strategy of premiumization with brands like Topo Chico or Smartwater for some consumers, for the higher income consumers and the introduction of a packaging architecture that addresses the pressure in that middle and lower-income segments in the U.S. market. And for sure, we're going to capitalize the FIFA World Cup events that are going to start actually this year. These major events include the tournament itself next year, we're going to be hosting 24 of the 104 matches in our 4 cities in Mexico and the U.S. We're the Coke bottler with the highest of matches in the tournament and 16 of those are going to be in our U.S. market. So we'll capitalize on all the activities surrounding the World Cup and also the celebration of the 250 anniversary of the independence of the U.S., we're going to be part of that as well next year. Operator: We will move next with Alejandro Fuchs with Itaú. Alejandro Fuchs: I wanted to shift gears and ask you one about South America, especially Argentina and Ecuador. I know it's a very uncertain scenario, right, but I want to see what your expectations going forward, maybe in the next 12 months. We're seeing volumes coming down, but margins going up. So I want to see how you see the business on the ground talking to the teams and what would be kind of the expectations if we should continue to see volumes being pressured or maybe profitability normalizing a little bit. Arturo Hernandez: Yes. Thank you, Alejandro. Let me start with Argentina. As you've seen, we've been facing a very challenging macro environment in the third quarter, rising uncertainty and some of the indicators deteriorating. And that has impacted the lower income segments of consumers and those provinces with high public employment. Unfortunately, we're in a market with high public employment. So we saw the steepest impact of this situation with consumption falling between 6% and 7% in general as compared to the central regions, which were -- had a less significant impact. So our year-to-date performance was still ahead of last year. But certainly, the trend is not very favorable. What we're doing is we're balancing our pricing discipline and affordability and our operational efficiency to stay competitive in this highly dynamic market. What's been important for that are, again, our pricing tools, our promotional tools to align prices with inflation. Our affordability and our playbook for things like Tapipesos promotions, tactical pricing on nonreturnable formats as well. Returnable is very important in Argentina. As you know, it's the highest mix of returnable in all of our markets. And to protect margins, we've been implementing very strict cost control measures. We are also launching new products and continue to innovate in some of the stills category. So we expect Q4 to outperform the third quarter as we expect a gradual improvement. But certainly, we're going to continue to focus on efficiency initiatives to protect margins. If we look at the context for margins in Argentina, we're going to see some upward pressure in some of the expenses related to payroll, particularly, but we're going to have efficiency in other concepts that will offset these pressures. Raw materials, we expected them to rise, driven by inflation. But we had the acquisition of the second sugar mill in Tucumán that is going to mitigate the impact of input cost for us. And I think that's also going to be very important going forward. If we look at Ecuador, and the dynamics in that market, also a difficult environment, mostly challenged by rising insecurity. The economy actually grew in the third quarter in Ecuador, but declining oil production and increased costs have resulted in some new policies like the elimination of the subsidy on diesel fuel and things like that. So -- but retail remains active despite this complex environment in Ecuador. And I think it's important to see how our business, and this is the same case for, I would say, all of our markets in this very difficult third quarter have demonstrated very strong resilience, improving in the case of Ecuador, profitability in the third quarter and outperforming the industry's volume decline in the year. So here, affordability also is going to be important. The execution of our point of sale with new cold drink equipment. That's also a very important in Ecuador. And how we leverage our new service models to enhance customer experience and also to bring efficiency to our go-to-market strategy. So stills categories is an opportunity and deployment of digital as well in Ecuador. So under this challenging environment, again, we're able to effectively protect the profitability for '26 in Ecuador. We are expecting OpEx to grow above inflation, and this is mainly due to the increased depreciation and diesel costs that I mentioned. And -- but some of the pressures will be partially offset by the optimizations that we have planned for our service models, our go-to-market models and some other adjustments. So PET are expected to rise in '26 with freight cost. Sugar is expected to be in line with the '25. So there's going to be some margin pressure considering all these factors, basically the removal of the subsidy, but our focus will be to protect our '25 margin in '26. Operator: Our next question comes from Renata Cabral with Citi. Renata Fonseca Cabral Sturani: It's a follow-up about Mexico. I would like to ask you if you can give some color in terms of competitiveness and how the brand has been reacting to the current environment for volumes and the company has been sustaining shares? And if you can provide some color on the performance in the channel strategy, the traditional channel versus the modern trade if they are different in terms of one is better than the other in the current environment? Arturo Hernandez: Thank you, Renata. Well, in terms of channels, the traditional channel received part of the impact and the decline in consumption this quarter, also convenience store reduced traffic. The only channel that actually increased volume in the quarter was supermarkets. And as I mentioned, was mostly driven by intensified promotions and more competitive pricing. So I think that's a natural consequence of the economic dynamics. But most importantly, we are strengthening our leadership in the marketplace, even considering that we have a price gap versus our main competitor versus rebrands as well. We did have an impact on our share of market with the first half of the year as a result of the retaliation of our brand that you know about. But that really has been solved, and now we're back to the position of leadership that we've had before. Operator: We will move next with Henrique Morello with Morgan Stanley. Henrique Morello: So I would just like just to explore the margin performance in Mexico. As you saw another quarter of compression on a year-on-year basis and at higher levels if compared to the last quarter, right? So if you could dive deeper on the dynamics behind the margin decline this quarter, perhaps beyond the volume decline? And if anything changed from last quarter? And how do you expect the margin to behave in Mexico going forward when you look at your hedge positions right now? Arturo Hernandez: Thank you, Henrique. I will turn that over to Emilio to respond the question. Go ahead, Emilio, please? Emilio Marcos Charur: Yes. Thank you, Henrique, for your question. Yes. Well, in Mexico, basically, there's several factors that affected the margin -- EBITDA margin being the one, the decline in volume as we have explained already. But there are also some changes that Arturo already mentioned. One is the mix of channels. The traditional trade was more affected by the rainfalls during the quarter compared to supermarkets. So channel mix change and also presentations. The mix of single-serve also declined in the quarter. So that was basically the main impact for the margin -- EBITDA margin in Mexico. . For the rest of the year, we've been working on expense control. You also can see that throughout the year, we've been improving our sales -- OpEx to sales ratio every quarter. So internally, everything that we control, we are looking in every efficiency that we can implement in all the operations. So in Mexico, we've been able to mitigate part of the volume decline impact talking about the margin. So for the full year, we're expecting to maintain -- at least maintain the current levels of EBITDA margins for the region. Operator: We will move next with Axel Giesecke with Actinver. Axel Giesecke: Just a quick one. Given your healthy balance sheet position, are you considering further M&A opportunities? And if so, which regions are you looking forward into? Emilio Marcos Charur: Thank you for the question. Yes. Well, as you know, there's -- talking about capital allocation, that's one of our main priorities. Well, as we have mentioned, number one is investing in our operations, and then we just announced an additional dividend. But yes, M&A, as you know, we continue to evaluate, basically, opportunities in U.S. and Latin America. So we have a very strong balanced position in order to close any opportunities. But in the meantime, we've been able to find another avenues for inorganic growth that we are on line with our core business, such as the recent acquisition that we announced, the Imperial, the vending and micro market business in U.S. But we keep exploring opportunities, basically, within the Americas. Operator: We will move next with Fernando Olvera with Bank of America. Fernando Olvera Espinosa de los Monteros: I just have one, and it's related to Mexico. Arturo or Emilio, how are you thinking about CapEx next year and the potential tax increase? Any insight on this would be helpful. Emilio Marcos Charur: Thank you, Fernando, for your question. Yes, regarding CapEx, well, as I mentioned, as of September, we reached MXN 11.8 billion, representing 6.4% of sales. We were expecting to invest around 7%. That's what we mentioned at the beginning of the year. The [ 6% ] of those CapEx are in Mexico and U.S. But at the beginning of the year, when we saw a slowdown in volume, we have postponed some initiatives this year. So ratio OpEx -- CapEx ratio will be around the same level that we have right now, 6.4%, instead of 7%. So we just adjusted some of the CapEx that we were expecting for this year without compromising our long-term growth strategy. So we remain committed to the strategic investment that we have for our capabilities and expanding our capacity and distribution, but I would say in a slower pace than we expected at the beginning of the year. Fernando Olvera Espinosa de los Monteros: Okay, Emilio. And thinking -- I mean, considering that the increase of the excise tax was just announced, I mean, how do you expect CapEx to behave in Mexico next year? I mean, is it possible that you keep postponing some projects for 2027 or... Emilio Marcos Charur: There are some projects that we started and we need to continue in order to be ready for the volume in the next, let's say, 2, 3 years. So there's some of the CapEx that needed to keep going to be ready in 2, 3 years. But the short-term ones are the ones that we are just postponing and see how the volume behave and then we'll decide if we continue with those next year or if we go and move it to 2027. So we expect around 5% to 6% maybe in Mexico CapEx to sales. Operator: This concludes today's Q&A portion. I would like to now turn the conference back to Arturo Gutierrez for closing remarks. Arturo Hernandez: Thank you. We really appreciate your time today and especially your ongoing commitment for company. So please reach out to our investor relations team for any follow-up questions you might have. Look forward to speaking with you again next quarter. Have a great day. Operator: Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
Operator: Hello, everyone, and welcome to the Southwest Airlines Third Quarter 2025 Conference Call. I'm Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. [Operator Instructions] Now Lauren Yett from Investor Relations, will begin the discussion. Please go ahead, Lauren. Lauren Yett: Thank you. Hello, everyone, and welcome to Southwest Airlines Third Quarter 2025 Earnings Call. In just a moment, we will share our prepared remarks, after which we will move into Q&A. I am joined today by our President, CEO and Vice Chairman of the Board, Bob Jordan; Chief Operating Officer, Andrew Watterson; and Chief Financial Officer, Tom Doxey. A quick reminder that we will make forward-looking statements, which are based on our current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results which excludes special items that are called out and reconciled to GAAP results in our earnings press release. Our press release for the third quarter 2025 results and supplemental information, including our initiative highlights, were both issued yesterday afternoon and are available on our Investor Relations website. And now I am pleased to turn the call over to you, Bob. Robert Jordan: Thank you, Lauren, and thanks, everyone, for joining us today. Third quarter was another story of continued strong execution across the board. Operational reliability, cost discipline and the delivery of initiatives against our transformational plan. Southwest continues to transform at a faster pace than ever before, and I'm pleased with the results of our strategic transformation that we saw during the third quarter and the quality of the initiatives delivered. Both costs and revenue finished meaningfully ahead of expectations and the rollout and impact of our initiatives remain firmly on track. We began selling assigned an extra legroom seating in July, a major milestone for our customer experience and product changes. The rollout was smooth and while still early, we're right on track with our expectations and we're already seeing a 4-point improvement in customer Net Promoter Score on aircraft with this new configuration. Additionally, we have continued to launch new products and services showing our commitment to meeting the needs of our customers, and our ability to execute quickly. Starting tomorrow, we will be offering free WiFi sponsored by our partner, T-Mobile, for our Rapid Rewards members. We continue to roll out our updated cabins with larger overhead bins, In-seat power, upgraded lighting and more. We expanded our distribution channels, launching a partnership with Priceline. We launched our new in-house vacation product, Getaways by Southwest. We announced a new partnership with EVA Air to provide customers more connection opportunities. We announced new markets, including the additions of Knoxville, Tennessee, St. Maarten, Santa Rosa, California and our first ever flights to Alaska, servicing Anchorage all to start in 2026 and we aren't done. While we don't have specifics to share today, we're actively looking at continued changes to widen our product offering for our customers, provide additional premium revenue opportunities and further enhance our Rapid Rewards loyalty program and co-brand economics, including things like premium seating, airport lounges and long-haul international destinations served by Southwest Airlines. And our customers are responding to these enhancements. Our brand Net Promoter Score has returned to the level seen prior to our policy changes announced in March and we are excited to deliver further enhancements as we improve the customer experience. Our strategic plan continues to progress well, and we're encouraged by the sustained outperformance of bag fee revenue and the momentum across other key revenue and cost initiatives. We saw a clear positive inflection in the demand environment beginning in early July, which continued throughout the quarter, and we are proud to report record third quarter revenue performance. Looking to fourth quarter, we expect to deliver an all-time quarterly record revenue performance. We maintained strong cost discipline across the organization, significantly beating our CASM-X guide for the quarter. We have identified additional cost-saving opportunities in the back half of the year and remain confident in our full year EBIT guidance range of $600 million to $800 million. We are entering the fourth quarter with confidence and anticipate meaningful margin expansion as the benefit from our initiatives continues to mature as we execute our transformational plan. Our people delivered a strong operational performance throughout the quarter. Their dedication, their resilience and the world-class hospitality continue to set Southwest apart. We've made measurable progress across nearly every key operational metrics since January, and we continue to lead the industry as we track our performance against the Wall Street Journal airline's scorecard. These results stand out even more given the hurdles that we faced, including summer weather, ongoing ATC constraints and the full rollout of reduced turn times across many of our stations, and it's a testament to our operational excellence and the heart of our company. While we're not providing 2026 guidance today, we're excited about the opportunities ahead and confident in our strategy. In 2026, we expect to recognize even greater benefits from our portfolio of Southwest specific initiatives, including a full year of revenue from bag fees. We expect to deliver more than $1 billion of incremental EBIT from assigned an extra legroom seating in 2026 and hit full run rate of approximately $1.5 billion in 2027. We will continue to be disciplined in our cost execution across the organization and expect that momentum to continue into 2026. It's just an exciting time at Southwest Airlines. We're transforming faster than ever before and the momentum is real. And with that, I'll turn it over to Andrew to share more on our revenue and operational performance. Andrew Watterson: Thanks, Bob. I want to echo Bob's appreciation for our people. Their hard work and commitment enabled us to deliver an outstanding operation this quarter even in the face of early July weather challenges. We've come a long way over the past couple of years, working to enhance processes and technology and improve daily operations and better managed disruptions. A great example of this was in September when an external telecommunications issue in Dallas, impacted radar, radio and computer systems, triggering FAA ground stops at local airports. . Despite our significant presence at Dallas Love Field Airport, we had just one cancellation, finishing second among all U.S. airlines for the day, including many that weren't directly affected by the issue. Our teams particularly those in the NOC and at the station, responded quickly and effectively, keeping our operation running smoothly and reliably. We know reliability is one of the biggest drivers of customer Net Promoter Scores and a primary driver of loyalty so it's critical that we continue to innovate and invest in both our operations and our people. The demand environment inflected up in early July and sustained momentum throughout the quarter. The improved demand environment and our execution of our initiatives contributed to our record third quarter revenue and to be in the midpoint of our third quarter guide with RASM coming in at up 0.4%. Even with increased capacity from our strong operational results and our ability to prolong the filling of the 6, [ 2 ]be-removed seats on our 737-700 aircraft. We were pleased to see load factor up year-over-year in August, September and so far in October. And corporate travel demand improved sequentially with a particularly strong September where we saw multipoint passenger growth. We're also seeing great traction with our loyalty program and co-brand credit card enhancements, which align with our new product offerings and incentivize everyday spending. Third quarter royalty revenue was up 7% and we saw double-digit growth in co-brand card acquisitions year-over-year. Our recent 100,000 point promotion saw the highest acquisition activity in over 5 years, signaling that these enhancements are resonating with customers and driving increased engagement. Looking ahead to the fourth quarter, we expect RASM to be in the range of up 1% to 3%. This outlook assumes the positive inflection in demand we've seen across the industry since early July remains at current levels through the end of the quarter. It also reflects the planned acceleration from our initiatives, the approximate 2-point year-over-year increase in fourth quarter capacity since July and the recent observed impact of the government shutdown. To the extent the demand strengthens beyond current levels, it will provide upside potential to our full year EBIT guide of $600 million to $800 million. We're planning for fourth quarter year-over-year capacity growth of approximately 6% which compares to a relatively low base in fourth quarter 2024 compared with fourth quarter 2023, plant capacity is up about 1%. This capacity level now contemplates further pushing out the retrofit timing of our entire 737-700 fleet to be completed in January without any impact to the planned operate date for seat assignments and extra legroom seating on January '27. A big shout out goes to our tech ops team for streamlining the time line to complete this work. Allowing us to capture additional revenue in those 6 seats during the entire holiday period at almost no incremental cost. On the product side, we launched the sale of assigned an extra legroom seating on July 29. While early bookings are in line with our expectations. We're seeing strong interest from customers and the trends are encouraging, including demand for our new products, fair product buy-up and ancillary seat sales. These offerings are helping us differentiate and enhance our products and drive incremental revenue. We feel confident in our ability to deliver more than $1 billion of incremental EBIT from assigned and extra legroom seating in 2026 and hit full run rate of $1.5 billion in 2027. We're proud of the progress we've made and excited about what's ahead. With that, I'll turn it over to Tom. Tom Doxey: Thanks, Andrew, and hello, everyone. As you've heard from both Bob and Andrew, our initiatives are on track for this year, and we expect further acceleration in contribution from these initiatives into the fourth quarter and into next year according to our plan. As you know, our continued performance on costs is a key element of our transformation, and I am pleased to once again report that we delivered strong cost performance this quarter, with CASM-X coming in at up 2.5%, beating the midpoint of our guide by 2 points, a strong beat with or without the capacity increase we saw in the quarter. We continue to see broad-based cost discipline across the entire business. I should also emphasize that this is more about spending smartly than it is about simply cutting costs. We're simply pushing costs forward as evidenced by the customer, technology and operational investments being made across Southwest Airlines. This was a company-wide effort, and I want to thank our teams for their focus and execution. Looking to the fourth quarter, we are expecting strong continued cost execution with CASM-X up in the range of 1.5% to 2.5% on capacity of approximately 6%, both on a year-over-year basis. Excluding the impact of expected book gains from fleet transactions in the fourth quarter of both years, which gives a more accurate view of the cost performance of the underlying base business, we expect CASM-X to be in the range of flat to up 1% year-over-year. Turning to fleet. Boeing continues to hit their delivery plan, and we've increased our 2025 delivery assumptions from 47 to 53 Boeing 737-8 aircraft. We received 8 aircraft deliveries in the third quarter and retired 16 aircraft from our fleet, including the sale of one 737-800 aircraft and plan to sell 4 additional 737-800 aircraft in the fourth quarter. We will continue to be opportunistic as we evaluate potential sale transactions from our existing fleet. We continue to expect full year 2025 capital spending to be in the range of $2.5 billion to $3 billion, which includes the additional aircraft deliveries expected this year as well as the expected proceeds from aircraft sales. We finished the quarter with $3 billion in cash, in line with our liquidity target of $4.5 billion, including our revolver and with a gross leverage ratio of 2.1x within our target range of 1 to 2.5x. We also executed an accelerated share repurchase program in the amount of $250 million under the previously announced $2 billion authorization. We intend to continue opportunistically repurchasing shares based on market conditions. This reflects our continued confidence in our strategy and our commitment to returning value to shareholders. Overall, our third quarter performance was ahead of our expectations for cost, revenue and net income which is another key milestone as we execute our transformational plan. We're managing costs well, executing our initiatives, investing in our product and customer experience, running an industry-leading operation, maintaining a strong and efficient investment-grade balance sheet, and we remain confident in our ability to achieve our full year EBIT guide of $600 million to $800 million. And with that, I'll hand it back to Bob. Robert Jordan: Thanks, Tom. As we wrap up, I want to leave you with a few key thoughts. First, the pace of change at Southwest is accelerating and at the same time, our execution has never been stronger. We're transforming our product, enhancing the customer experience and delivering meaningful financial improvement, all thanks to the incredible work of our people. Second, we're confident in our ability to hit our fourth quarter and our full year guide. We built a strong foundation, and our initiatives are ramping as planned. The operational rollout of assigned an extra legroom seating has been smooth, and we're seeing encouraging early results. Third, we're not stopping here. We've continued to evolve our product, expand our network and lean into the customer experience. Free WiFi for Rapid Rewards members starts tomorrow. New markets are launching, and we're building momentum across the business. And while we aren't ready to share specifics just yet, work on the longer-term strategy to meet evolving customer preferences is well underway. Finally, I want to thank our employees once again. Their excellence and hospitality are unmatched, and they are the driving force behind our success. It's a very exciting time at Southwest Airlines. We're executing with urgency and purpose, and we're confident in the future we're building and the benefit it will provide for our shareholders. Thank you all for joining us today. And with that, I'll pass it back to Lauren to start our Q&A. Lauren Woods: Thank you, Bob. This completes our prepared remarks. [Operator Instructions] Operator: Thank you, Lauren. [Operator Instructions] Our first question today comes from Conor Cunningham with Melius Research. Conor Cunningham: I was hoping you could frame up the sequential improvement that you're seeing into the fourth quarter versus what you were messaging in September. I'm just trying to understand the building box there. I realize that capacity is a little bit higher, but I think you knew that, that was going to be happening. And just if you could just talk about specifically around the new initiatives. Is that still 2 points? And does that carry into the first quarter of next year, just thoughts around the moving parts on unit revenue? Robert Jordan: Yes, Conor. It's Bob. I'll give it a start. I think it's pretty simple, and it's a couple of things. We have the 2 points of added capacity that you referenced, and that's just delaying the retrofits of the 700s into January that allows us to fly those extra 6 seats through the holidays and just capture extra revenue and peak demand period. Real proud of our tech ops folks because they can get all those retrofits done now in January. So that's the 2 points of capacity. And then we've got 2 other points and it's -- really, we just chose to not assume that the macro would inflect further from where we are. You heard we had a solid inflection in July that has maintained itself. But we didn't want to assume further macro inflection simply because you've got some uncertainty and in particular, it's uncertainty around the government shutdown its impact and then obviously, it's duration. So we felt it was prudent to guide assuming that things are stable from here, that the demand does not inflect further. And then yes, you've got, on the RASM front, you've got a tailwind as the initiatives continue to kick in. All of the initiatives are on track. They're on track from a benefit perspective, they are on track from a timing of delivery perspective. But it's really just those 2 points of not assuming that the macro would continue to inflect further. Andrew Watterson: Yes. I'd say, Bob, the -- we've seen past government shutdowns, right? And we know what happens when they go on. First, you see government travel -- goes to 0 very quickly. Then it goes to government adjacent than overall business travel then leisure travel as we saw in 2018, 2019. Obviously, like everyone else, we experienced, the government stopping travel very quickly. But last week, we did see government adjacent. This is state and local governments, depending upon government reimbursement. These are defense contractors. These are companies that kind of do business with the government and they held up until last week, and they went down sequentially. So through that more as a canary in coal mine, it's not material numbers that we're talking about between those 2 categories that we observed but we know what happens in the future. So if you're uncertain about when the government shut down ends, that makes you less able to assume an economic inflection. And so it all is tied up, I think, when the government shutdown ends. Robert Jordan: And Conor, just the last kind of maybe connect your tangent to that is either way, whatever happens to the macro or whatever happens with the shutdown, we're committed to hitting our 2025 reaffirmed EBIT guide. We're not sitting around waiting for the macro to show up as an example. We're going to continue to press on other areas, in particular, costs like you saw with press and [ beat ] on CASM-X in Q3 that just add more assurance around meeting that full year guide. So don't -- I wouldn't take that as we're just waiting to see. We're absolutely working proactively put some insurance around the guide irrespective of what the macro does, what the government shutdown does. Conor Cunningham: Am I allowed to follow up? Can I just follow up to that? Just on -- so I guess the pushback that I've heard is that basically, you've added 2 points to incremental capacity. And it's basically -- it's almost like that's almost a 0 revenue contribution. I mean, you're going to get a natural uplift in overall growth. I just like -- maybe you -- could you just frame up like why was it the right decision to add that incremental growth? I understand that there's a cost benefit. I would have thought costs would have moved down a little bit more. So just how you're balancing that in general on that decision? Andrew Watterson: Sure. I mean, first of all, it's an EBIT guide, not a RASM guide. It did imply a RASM, what you're asking about but the decision, because the tech ops team has been much more productive, we will be doing them faster. So when you do it faster, it overall costs less money and then also that lower number shifts into Q1. And then for the seats, there is incremental and the high periods during the holidays. Now we did this late in the curve, so you won't -- the non-holiday portion won't benefit that much. So it is very RASM-dilutive, but it's very EBIT accretive because that little bit of revenue plus the cost going down, make it EBIT positive to do that, which is what our guidance is about and what our objective is about is EBIT even though it will make RASM look on flattering in Q4. And so that was the decision making behind it. Operator: The next question is from Mike Linenberg with Deutsche Bank. Michael Linenberg: Just some questions maybe, Andrew or Tom, just some stats on some of the initiatives, even rough numbers. What we could see in the quarter we did see an inflection on at least connections. It looked like your enplanements outpaced passengers. And presumably, that helped your load factor, which was much better this quarter than where we were in the beginning of the year. And how -- and also on the basic economy rollout, what are you seeing on the buy-up? I think there was a point where maybe the majority of Southwest tickets were sold in the bottom fair bucket. I suspect that -- that's been moving up. Any color or stats that you can provide on some of the initiatives that you put in with respect to those? Andrew Watterson: Yes, I'd be happy to. So yes, as I mentioned in my prepared remarks, we did see, as we had predicted, that load factor would inflect positive post summer. So August, September, October had year-over-year increases in a load factor that came from the enhanced connectivity we talked about. It came from the third-party channels and also I think some of the basic rollout, which allows you to kind of have a more segmented offering, which means your highs get higher and your lows get lower. So that allows for good targeted volume. So we're on track as far as that goes. So switching from yield driving our RASM to load factor driving our RASM, which is kind of what we indicated earlier in the year. As far as the buy-up, the buy-up out of the bottom basic, we need that to inflect really positively with seats. In the interim, we have improvements that go about mid-single-digit points of increase in optional buyout, those who decide to buy-up to the second, third or fourth, we did see a good traction with that. The big step-up will come in Q1. But in the interim, it is a positive move. Tom Doxey: And from a financial standpoint, everything is on track for the initiatives. And so everything that we're seeing for assigned seats and extra legroom is very much on track to -- still relatively early for the late January start for operating that. But all the data that we have so far shows that, that's still on track. And the other suite of initiatives, as Bob said, is also on track. Robert Jordan: And if you look sort of getting into maybe granular, what Tom was saying, again, it's early, there are limited bookings in place post January '26 when the -- when bookings started for travel for the new assigned seating extra legroom. But both volume -- the mix of fair products is what Andrew was referencing -- basic, [ should ] fall further as an example. And then what we're seeing in terms of ancillary seat buy-up, all of those things are encouraging and on track. Again, it's early, but I'm really pleased with that. And then again, while we're not literally selling extra legroom for assigned seating. We're selling it for after January, but we have aircraft out there that have the extra-legroom retrofit configuration and folks flying on those aircraft, we have more than 400 converted, are giving us a 4-point higher NPS score than those without and that's without being able to book yourself into extra leg room. That's just they're flying on an aircraft that has that section reconfigured. So that's very encouraging as well from a customer experience perspective. Andrew Watterson: And I guess to put an exclamation point to that, Bob, we see literally a knife edge on January '27 in our bookings of pre and post assigned seating, we see a knife edge yield improvement. So clearly, customers are voting with their wallet as well as the surveys that they like assigned seating extra legroom. Robert Jordan: And what's great this time around versus bags where we started selling and operating on the same day, and then you were ramping up from then we've been selling the assigned seat and extra legroom since July. So when we hit the end of January will effectively be at that run rate. Operator: The next question is from Savi Syth with Raymond James. Savanthi Syth: If I might, just on the initiatives and kind of the unit revenue trends ask a little bit of a question on how we should think about as you head into 1Q. Just not assuming any kind of demand environment change just based on that initiative ramp-up and capacity plans. Like how should we think about the progression of year-over-year RASM? I'm not looking for a guide, but just trying to understand kind of the magnitude of how that moves from 4Q to 1Q? Robert Jordan: Yes. So what we have talked about is a $1 billion number for the extra legroom and the seat assignments. And as you think about the other initiatives, by and large, by the time you get to 1Q, those will be approaching run rate. There's some of them that still have some ramp that occurs during the first half of the year. The loyalty program, for example, continues to ramp along with the benefits that come with seating. . But I think you can think about it in those terms. We're not guiding 2026 yet, but that $1 billion number that we've talked about for next year and the ability for that to then grow to $1.5 billion as we move to the following year is still very much intact. Andrew Watterson: And if you look at Q1 capacity, that's already published, now we're not saying it's final, but we know that when we published, we don't move it that much. It's a modest year-over-year increase. We have not -- we will still be lapping our load factor initiatives that started really in August and beyond. So that will be -- benefit should still carry on into Q1. And as I mentioned, the knife edge improvement yield starting 127 coming from seat fees and buy-up to extra to higher fare products, those, I think, 3 combinations of low capacity growth, load factor improvements going and still tracking and extra yield mix for interesting Q1. Robert Jordan: Well, just for full year. I know we're going on a long time about this kind of a combination of what both we're talking about. If you just take the midpoint of our guide that was reaffirmed for EBIT for the year, $600 million to $800 million and then you stack on top of that the $1 billion that Tom referenced around the benefit of assigned seating and extra leg room and then you stack on top of that, the incremental value of a full annualized year of bag fees, which I think is roughly $700 million. And then we have obviously rewards improvements in a number of other initiatives that are all maturing -- just gives you an idea of kind of the EBIT stack for the -- just sort of the EBIT stack for the year, not trying -- certainly, we're not guiding 2026 today, but it just gives you an idea of how to think basically about that EBIT stack. Operator: The next question is from Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe if I could ask on -- just if you could fill in the details on the corporate growth, how you're thinking about that filtering into your sales numbers and changes on that growth formula going forward given the -- given you're selling forward into January, and you're seeing a knife edge in that yield premium coming through? Andrew Watterson: Yes. The corporate for the new year is extraordinarily low right now. So I wouldn't give a read into that, I will say, for Q3 corporate sales for future travel kind of excluding the government and inflect it up to plus 5% year-over-year. So we're seeing corporates improving. Our trip growth was down, as I said, we shrink trips where our competitors increased. So normally, since corporate is schedule-sensitive, not price sensitive, that should have led to kind of a reduction in share and we didn't necessarily see that. And so we see good solid trends with demand for Southwest business. But we expect, as you hint that in Q1 with assigned seating, that will unlock additional growth. Right now, through various different measures, we think our domestic managed business share is in the mid-teens, which is below our overall capacity share. And we think extra legroom assigned seating should give us tailwinds in our corporate share, and that is not to quantify the numbers that we just gave you. Operator: The next question is from Jamie Baker with JPMorgan. Jamie Baker: So I suppose the definition of sell-side and sanity is asking the same question over and over and expecting a different response, but here it goes. Fourth quarter RASM guide, up 2% at the midpoint. But all of the tactical improvements in the bag fees, royalties and flight credit noise, that's what, 8 points of benefit. So that suggests RASM at your core. . So excluding the good stuff, is down mid-single digits. Why is this not the right way to think about it that the core is deteriorating, but new initiatives are making up for it for now. But of course, that could prove challenging when you begin to anniversary those initiatives. Andrew Watterson: Yes, I don't know where you're getting the 8, Jamie. I apologize not following your math. You did mention the flight credits. The way the flight credit breakage works is that when customers cancel flight or it drops to a residual travel fund than those break prospectively. So the breakage rate changing is not something that you kind of will see changing until next year. So we expect 2026 to have -- to show breakage benefits from the change in policies. So that one is coming. But the bag fees, obviously, are a, let's call it, a 3-point benefit year-over-year. Sequential, it's less than one because most of the policy was already in place for Q3. We do have on a year-over-year basis, if you're doing that our stages engage is growing year-over-year, whereas our competitors, that's going down as they restore regional. So that's about a 2-point headwind for RASM, if you did normal stage length adjusting. So I'm just not getting your 8 -- kind of walk us on it, maybe we can answer it. Jamie Baker: Well, let me ask it differently. In the fourth quarter guide, how much -- what is your initiative RASM then? And if we take -- so whatever your answer is, maybe it's plus 3, maybe plus 11. I mean it's not going to be. But whatever the initiative-related RASM contribution is, shouldn't we think of the difference relative to the 2% midpoint as the core and is that deteriorating? Andrew Watterson: I think if we look at -- I'm not sure maybe Tom can help with the initiative stuff. But if you look at other domestic main cabin, which is clearly not their strongest, our -- you look at us as a proxy for a pure-play domestic main cabin, we see sequential improvement and theirs doesn't necessarily imply that either. And we see -- as far as the core, if you look at our core customers, as we mentioned, we see our credit card applications have accelerated with the new products and the new features. We're seeing Rapid Reward sign-ups accelerate and we're seeing the kind of our road warrior travel also improved. So our core customers are responding back. Our brand -- our Net Promoter Scores from our customers did dip post your conference and kind of went to the bottom in June and now have returned to where they were pre year conferences. So all the kind of tail, tail signs on the micro level show our customers increasingly engage, increasingly using Southwest Airlines, whether it's a credit card or -- are traveling with us. So we see good trends in the core. Robert Jordan: And maybe what I'd add there, Jamie, as well, is as far as where you draw the line between an initiative versus the base business is not always a clear line. We knew as we announced actually at your conference, several of these initiatives, there would be an offset. And so as we guided these things, we guided them and we gave estimates for some of them, we guided those or gave those estimates as a net. And so it's not always a clear line on where you drop between base business or the initiatives. Jamie Baker: And then a quick second one for Bob. And thank you for all that color, by the way. So in that lounge survey that you sent around, Southwest used the word hub for what I think might be the first time in history and correct me if I'm wrong. What do you consider your hubs to be? I mean, I guess I could just look at some base level of departures, but that doesn't necessarily speak to connectivity. Robert Jordan: Yes, I think that -- it's just -- it's more choice rather than intended to imply some kind of strategy change or change the way we think about cities. We have -- depending on how you count them, we have roughly 15 to 17, what we call, mega cities and they do some things that traditional hubs do. They have what we call intentional connections or banking opportunities throughout the day they are not full banks, but they also have a lot of non-banking -- banking of aircraft activity. And again, those additional connections are just to drive connectivity across the network. So I wouldn't confuse that word choice as any change in Southwest Airlines network strategy. Now back to the survey. Obviously, if we were to choose to go forward with lounges and we've been talking about where do we go next strategically to continue to widen our offering for our customers to continue to widen our offering of things that they desire in particular premium and then how do we do all that to impact the economics of the Rapid Rewards program and the co-brand card, we're looking at what would our customers want in a lounge, where would those lounges be located relative to where we have strong passenger strength and demand. So that's really what it was about. And we're hopeful to -- and again, this work is not just thinking about it. There's active work in terms of developing the next strategy. And I'm hopeful to be able to lay parts of that out early in 2026. Andrew Watterson: I think, Bob, to put a point on that. If you -- domestic RASM, if you index that to 2018, we're getting very close to our competitors here in Q3 and Q4 may close the gap. But what we have still a gap is the other revenue -- is our credit card hasn't done as well as others in recent times. . Credit cards, these days, you've probably seen from your own bank and from other newspapers that it's driven by high-end, high fee credit cards that come with lounge access. So our gap and RASM is turning into now more "other revenue" driven by high-end credit cards that is what drives us to look at it as well as the customer desires that Bob talked about. Operator: The next question is from Catherine O'Brien with Goldman Sachs. Catherine O'Brien: Maybe just a quick first one on a shareholder returns. Can you walk us through how you think about the guardrails to shareholder returns? You're within your 1 to 2.5x leverage target, 2.1x at the end of 3Q. How much headroom do you want to leave yourself on the high end of that leverage target, given there's still some uncertainty out there? I do have one quick follow-up. Tom Doxey: Yes. Thanks for the question, Catie. Yes, as we look at that, it is, I think, important to us that we do leave a little bit of headroom there, knowing that there's some uncertainty out there. And so as we look at that range of the 1 to 2 to 2.5, we continue to believe that keeps us squarely in the investment grade and strongly within investment grade. And then we've got the $3 billion plus $1.5 billion revolver liquidity target as well, which we were right on for the quarter. And so as we think of shareholder returns, it's about ensuring that we're staying within those guardrails. And then as we look at the variability that might be there within the guide that we leave room to stay within that under those different scenarios. Catherine O'Brien: Okay. Great. And then I had to laugh at Jamie's cell site insanity, but I'm going to keep going on in the past, so forgive me. But I just -- I think it just may be helpful to understand a little bit more as we think about next year and the initiative ramp this year. And so maybe just a question on the EBIT target rather than RASM super specifically. You reiterated your EBIT target from last quarter, but fuel is down a bit and capacity is a bit higher. Are you able to share the EBIT contribution from the initiatives that you already booked in the third quarter? And then what you're incorporating in fourth quarter? And how much of that fourth quarter figure is already on the books? Tom Doxey: Thanks, Catie. Yes, I don't know that we'll go into that level of detail with it. I think Bob laid it out pretty well as far as the initiatives that we have this year and the increment that we expect to see next year. Robert Jordan: Yes. I think you can think of the -- I believe the bag -- the largest, of course, right now is bag fees and that sequential incremental improvement from third quarter to the fourth quarter's contribution is about one point or maybe a little bit less than one point. Obviously, as you get into 2026, all of the EBIT associated with assigned seating extra legroom is fully -- there's nothing today. It's a fully 2026 value then wraps to $1.5 billion in 2027 as it matures. You've got some smaller things, as Andrew talked about, the Rapid Rewards optimization, flight credits, which that will come home as they break, which tends to be later. But yes, we'll lay all that out as we stack up the EBIT guide for 2026, we're just not ready to do that today. Andrew Watterson: And there's, of course, the continued cost savings as well. I think your question was a little more focused on the revenue-related initiatives, but we've got the cost initiative that will continue to ramp up and is also on track for next year. . Operator: The next question is from Brandon Oglenski with Barclays. Brandon Oglenski: And Tom, maybe I'll just follow up there. You guys did reiterate $4.3 billion, I think, in total initiatives next year, but you guys keep talking about the $1 billion from assigned seat and premium. I get that. So maybe can you talk to the totality of the $4.3 billion, is that still valid? And I want to keep it to one question, but I guess 2 parts here. Can you give us a better understanding of how the buyout process is working today in the fourth quarter? And then how that potentially changes from like a basic fare to plus fair just based on seat assignments and premium availability? Tom Doxey: Thanks, Brandon. I'll start and then Andrew will take the second part of your question. The $4.3 billion is very much still intact. We've talked about $780-or-so million in cost savings. We've talked about $1 billion that would come from bags. We've talked about $1 billion that would come from extra legroom and seat assignments, which will start operating in January. We've got the earn and burn on the frequent flyer. We've got the amendments that we've made and the enhancements that we've made to the Chase program, all of these things stack together. And what's great is we're seeing these continue to be on track as we're ramping through this year and especially as we get into the fourth quarter and into the first quarter of next year, as you see these continue to ramp. So yes, very much still intact for the $4.3 billion. Andrew Watterson: And as far as the bio process goes, right now, the buyout process is mostly about flexibility. Going from basic to choice, the primary differences or flexibility and Rapid Rewards accrual that kind of entice customers to buy up the very highest kind of entry fares are no longer basic. So if you think about a $350 fare as an entry point for flight, that's not basic because it's a pretty high fare to be basic. And so all that to say that about 80% of our tickets were Wanna Get Away last year and a little bit less than 50% are buying basic. A portion of the remainder are people who have choices like a stand-alone, that's the first entry point for them. And then you have, as I mentioned, a mid-single-digit composition increase of those who voluntary who presented with a low fare and can buy up for the additional features, those is a mid-single-digit increase right now. Now we go into next year with seat assignments, that is much bigger. The booking curve is such that people buy early or generally less elastic. As the booking growth go goes along, you have more elastic demand at the end, it's also again inelastic. And so right now, we're seeing strong buy-up in fare products in the kind of Q1 period with seat assignments. We expect, as we get into the mid of the booking curve for Q1 that we have more and more seat only sales that people add in as well. So that composition will mix a little bit. But given the different entry points customers and have into it is all about giving choice as our fair product indicates and that's led to, as I said, a quite strong increase in yields this part of the booking curve. Robert Jordan: Well, I think the other thing to note, I know we've said many, many times, is -- there are so many transformational initiatives that are underway. And between what we laid out in September, a little more than a year ago, what we laid out in March, all of that stuff is complete. The only thing that is still to come home is the operation of assigned seats, but we're selling those, and that huge change has been really, really smooth. So number one, everything that we laid out as a contributing initiative is done. Second, they're done as in high-quality, ready to go and on time and is expected to or already showing signs that is contributing the value that was expected or in the case of bags even greater. So you've got initiatives on time, they'll start as planned, and they are in line right now to deliver the value that we expect as we have high confidence in both the -- in both that total value of EBIT to be delivered through initiatives and then our EBIT guide in the fourth quarter of this year and for the full year and then our -- the EBIT guide that we'll put in front of you in 2026. But the -- I mean, the execution of all this has just been stellar. Operator: The next question is from Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: I'm going to keep it to one, I think we're struggling a little bit with that request. So anyway, I assume some of these initiatives have a learning curve associated with them from a revenue management perspective. And I wonder if you have any anecdotes about early learnings or tweaks you have made since the early rollout? Maybe some of these items were disruptive initially but are settling down as we get more fully baked into the booking curve? Andrew Watterson: Certainly, I think Tom made a good contrast of bags and basic was kind of all at once because you started selling operating right away, whereas assigned seats, we have a long run out to it. So we mentioned last time that we saw a customer reaction to back to basic, which affected the third quarter by one point. That since has been resolved, and that basically comes down to -- you have a much wider set of price points. As an earlier question implied, the number of people who buying just your lowest entry point used to be so high and now it's a lot wider. And so you did see different reactions from customers in June and July as they've learned it, we saw that stabilize by mid-July, and the customers are kind of buying life normal, if you will, for that. For -- so I consider all the revenue management stuff doing very well on that. And then for Q1, we have a long run up. And so the tweaks are small in nature as you're looking at who buys a seat only, who buys the biops, tweaking those, high-demand, low-demand flights. We have a long runway to do that. So we feel very comfortable about how that's going. Now there still is an overall ramp-up in that -- in my prepared remarks, I told you that the '26 number, the '27 number, the difference is an implied ramp-up in and the value. So to the extent we go faster, obviously, the number gets bigger next year. Robert Jordan: Yes. I think that's a really important point is that the -- Andrew, I don't want to -- sorry to just to say the same thing you just did, but I want to make sure everybody hears that, that the $1 billion contribution from assigned seat and extra legroom next year contemplates time to do exactly what you said, which is ramp up the value. Some of these things like seats are dynamically priced, learn, tweak and so the $1 billion contemplates a ramp-up time versus we've got a guide for EBIT for that initiative and there's risk because there's going to be ramp up. We've actually -- that's contemplated in the value that we've given you. Operator: The next question is from Chris Stathoulopoulos with SIG. Christopher Stathoulopoulos: I'm going to be compliant as well here and keep it to one. United gave a CASM-X algo last week over the midterm to help us think about all the moving pieces here as it relates to capacity and their investment here in the product and other areas here. So I realize you're still in your budgeting plan for next year, but any thoughts on how we should frame that, whether you want to describe that as your mid- to long-term algo versus what you've given, I guess, your guide on low single-digit capacity over the midterm. Just wanted to understand the moving pieces around that, and I think we can all do the math on the EBIT side and what that might mean for unit margins and things like RASM? Tom Doxey: You're right that we're still working through the planning process for 2026. So at our next call, we'll have more detail on next year. What you've seen from us is strong cost performance quarter after quarter, a strong beat this last quarter with or without the incremental capacity that came from operating the 700 seats, it was broad-based. There's work that we're doing on small things and discretionary spending. There's things we're doing on large things around supply chain and optimizing our retirement plan and the component maintenance work that goes along with that, the way we're looking at real estate and technology. So we're looking everywhere. And we've talked about being on track this year, next year and to the $1 billion in 2027 for the cost savings initiatives that we have, and that will roll in and again, we'll put that into the context of 2026 at our next call. Operator: The next question is from Scott Group with Wolfe Research. Scott Group: So when I think about the $1.8 billion of initiatives this year. The guide has $300 million of incremental EBIT. So call it, $1.5 billion gap. Like do you think we should contemplate something similar next year with a sizable gap between the initiatives and the actual EBIT? Or I mean, is there a reason to think the gap widen is there -- could the gap potentially go away? I guess you're not ready to give '26 guidance, but just at a high level, like how do you think about like that gap and how that develops into next year? Robert Jordan: Yes, Scott, you're right. We're not ready to guide 2026. The gap is simply the macro and what happens to the macro inflection like we talked in Q2. And we were down sort of from where we thought the beginning of the year, we would be down roughly 6 points. We've seen, obviously, some of that come back. And it's -- I think absent maybe the uncertainty of the shutdown impact, there would be more certainty that continue to macroeconomic inflection would continue. You've heard some others say that macro inflect back is going to be completely back to pre -- before the issues by the end of this year. You've heard others say close. You just don't know. And so I think that's really what the gap is. It is how much is the macro claw back the gap from where we thought we would start to -- where we thought we would be when we started this year. We got down [ 6% ]. We've come back a material piece of that, but we're not all the way back. Tom Doxey: The other piece of it too, Scott, as you think about the initiatives, what we've done is we have put everything into the initiative bucket that we're doing to counter what would be sort of typical increases in cost in the business. As we move into next year, we've talked a lot about moving more to an EPS guided range. Of course, everything nets into that number. We'll still talk about the initiatives and what they are and what they're doing. But as we guide, likely, we move more toward kind of an EPS range where everything is netted. And as we talk about these initiatives, hey, this particular cost savings initiative kind of in a year where we're not so initiative heavy with the transformation that we have, those types of things just find their way into the sort of typical efficiencies that you're -- that you're building into your budget as you're moving forward. And don't confuse my word typical of anything other than just talking about kind of standard budgeting practices. We're going to continue to be really focused on the efficiency coming out on the cost side. Operator: The next question is from David Vernon with Bernstein. David Vernon: So Andrew, I'd love to kind of narrow in on that comment around the knife edge improvement in yields with bookings for the assigned seating in January. Can you get -- is there a way to dimension it and to talk a little bit about how much of the schedule sold at this point in time whether the sell-through rate is being affected by the higher yields? Or any additional commentary you can give us on what that knife edge comment was would be great? Andrew Watterson: Yes. Well, I apologize in advance, I'm going to do my best not to because it's early -- it's early in the curve and so this is our first time doing the assigned seats and stuff like that. So we have studied others. We've scoured for good industry data. We think we have good compares. We have -- our models are trained on how we sell early burn stuff and upgrade boarding. So we think we have good context. And so I'm not going to give you the number because I don't know how long they'll persist in the booking curve. But when you do see a knife edge, it's clearly a change in customer reaction. You really see knife edges. And when you do see a knife edge, something happen. In this case, we see a disproportionate customer reaction to the ability to buy an assigned seat or upgrade to a fair product that includes it. And so that gives us confidence that we will see a revenue positive customer reaction as we go throughout the booking curve. It's just the amount being different than our business case is something where it's just too early for us to hit that. David Vernon: Okay. And then maybe just as a quick follow-up, Tom. I applaud the desire to get out of initiative jail here because the incremental math from the site is really tough to get to. But if you think about the cadence of what you guys have in your initiative plan, can you tell us kind of what quarter we hit peak initiatives, is it Q1, Q2, Q3? Like where in the way you guys have done the math around the initiatives, do we kind of get the max contribution from the initiatives? Tom Doxey: Yes. And of course, the -- and I'm not sure if your question is the quarter where most of the inflection occurs or if it's when you're hitting peak contribution from? Yes, peak from would be -- tell me your time horizon, it should be the last quarter. We should continue to build and build and build on these. The big inflection that we have as we continue to move forward, of course, is what Andrew just described, as we move into first quarter where you have that big positive inflection where we've had a full booking curve to be able to sell into that again, contrasting that to what we did with bags. But from there, it should continue to build. We have structured the amended Chase agreement around the attributes of this new program. And so as we have bags, as we have seat assignments, these are things that then you have entitlements to as you have the card. And we talked about other -- Andrew and Bob both talked about other things that we're looking at around the potential for clubs and what that might mean for the ability to buy up. And so the short answer to your question is tell me your time period, and it's going to be the last quarter of your time period, we're going to keep building. Robert Jordan: I'm going to do exactly what the Andrew and Tom probably don't want me to do. But if you just sort of speculate on that, I think if given that -- if you just know how the booking curve works, and where the meat of the booking curve [indiscernible] the booking curve for folks that are now booking the new products at assigned an extra legroom of seating, I think that would tell you somewhere around early third quarter that peak would be my guess. The only -- and I think you'll have annualized the ramp-up of the new voucher exploration policies, those kinds of things would. The only thing that I can think of that will continue to ramp, obviously, that the policy changes -- well, and then especially the changes in values of the card related to assigned seating benefits, boarding benefits, those should continue to ramp all year as that causes customers want to get the card, engaged with the card, the co-branded card, spend on the card. So I would think that initiative continues to ramp throughout the entire year. But the big one, which is assigned an extra legroom seating based on the booking curve, that would tell me at somewhere around early third quarter, you get to peak value. Operator: The next question is from Andrew Didora with Bank of America. Andrew Didora: So maybe I'll ask a non-initiatives question to close it out here. But your fuel guidance on -- in this environment was a little bit surprising. I know it's been volatile, but also West Coast crack spreads have been high for several weeks now. I guess a quick 2-parter here. I guess one, Tom, just curious if you're able to give us what your exposure is to West Coast crack spreads? And then two, Bob, what levers do you have in your business that you think could help offset potentially higher fuel from your guidance? Tom Doxey: Yes. For us, West Coast is probably somewhere around 30 or so. Gulf Coast were probably more like about half or so of the exposure. Robert Jordan: And then just on levers, and I think not just fuel I think just -- you saw was -- I think, really good work and have what I think for -- is really good cost discipline in the third quarter. And that cost discipline is not -- it's sustainable. It's not just showing cost out to the future. So we're going to work the same way in the fourth quarter and the first quarter and the second quarter to do exactly the same thing. And that is everything from just managing sort of traditional costs and departments. We have some opportunities to continue to work on fuel efficiency which obviously is material given the amount of fuel. We have efficiency work and a lot of departments that are back office, sort of the everybody is throwing AI around, but it is the ability to automate transactions, that kind of thing, and we're seeing good results there. And then we have large efficiency programs in the operation. Some of those take longer. But my point is that this cost work is really -- it's across the board. It's every discipline within the company and we'll just keep working there. To me, that's the best insurance around whether it's fuel or whether it is the macro or it's the government shutdown impact or whatever it is, the best insurance around hitting our EBIT guide is to just keep putting manic pressure on cost and efficiency and continue to beat those numbers. Julia Landrum: That wraps up the analyst portion of today's call. We appreciate everyone joining. Operator: Ladies and gentlemen, we will now transition to our media portion of today's call. Ms. Whitney Eichinger, Chief Communications Officer, will lead us off. Please go ahead, Whitney. Whitney Eichinger: Thanks, Gary. Welcome to the media on our call today. Before we begin taking your questions, Gary, can you please remind us how to queue up for a question? Operator: [Operator Instructions] Our first question comes from Robert Silk with Travel Weekly. Robert Silk: So what I wanted to ask is, during the last quarter, you talked about your check baggage, you made about $300 million -- you were estimating $350 million for this year. Is that number still on course? And in the rate of check bags, how is that weighing in compared to the industry and compared to expectations? Robert Jordan: Yes. The financials are right on top of what we have been giving you a little ahead of what we thought. So it's still -- that's right. And then puts the annualized contribution from check bags at right around $1 billion. And the reduction in lobby bags, so check bags is -- Andrew can give you better -- it's about 30%. We are seeing a modest increase in gate check bags. So gate -- bags that show up at the gates that have to be handled there. But overall, our bags are down and down materially. Robert Silk: So how does it compares to an industry standard? Andrew Watterson: It looks like our check bag revenue per passenger is right along the same lines as the big 3. So it seems like it's a very similar rate that we're getting. Operator: This concludes our question-and-answer session for media. So back over to Whitney now for some closing thoughts. Whitney Eichinger: If you have any further questions, our communications group is standing by. Their contact information and along with today's news release are all available at swamedia.com. Operator: The conference has concluded. Thank you all for attending. We'll meet here again next quarter.
Operator: Greetings, and welcome to the Kaiser Aluminum Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando with ADDO Investor Relations. Thank you. You may begin. Kimberly Orlando: Thank you. Hello, everyone, and welcome to Kaiser Aluminum's Third Quarter 2025 Earnings Conference Call. If you have not seen a copy of our earnings release, please visit the Investor Relations page on our website at kaiseraluminum.com. We have also posted a PDF version of the slide presentation for this call. Joining me on the call today are Chairman, President and Chief Executive Officer, Keith Harvey; and Executive Vice President and Chief Financial Officer, Neal West. Before we begin, I'd like to refer you to the first 4 slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward-looking statements are based on management's current expectations. For a summary of specific risk factors that could cause results to differ materially from the forward-looking statements, please refer to the company's earnings release and reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the full year ended December 31, 2024. The company undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in the company's expectations. In addition, we have included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation. Reconciliations of certain forward-looking non-GAAP financial measures to comparable GAAP financial measures are not provided because certain items required for such reconciliations are outside of our control and/or cannot be reasonably predicted or provided without unreasonable effort. Any reference to EBITDA in our discussion today means adjusted EBITDA, which excludes non-run rate items for which we have provided reconciliations in the appendix. Further, Slide 5 contains definitions of terms and measures that will be commonly used throughout today's presentation. At the conclusion of the company's presentation, we will open the call for questions. I would now like to turn the call over to Keith Harvey. Keith? Keith Harvey: Thanks, Kim, and good morning, everyone. I'll begin on Slide 7 for our third quarter update. We're pleased to report another strong quarter, marking our fourth consecutive period of performance ahead of our expectations. As a result, we're once again raising our full year EBITDA outlook. During the quarter, we incurred approximately $20 million in start-up costs tied to our two key strategic investments for aerospace and packaging, offset by the impact of metal pricing on inventory, which continued to provide a favorable tailwind. In total, we delivered 23% EBITDA margins in the third quarter and over 20% year-to-date. Now let's turn to the status of our key investments. At our Trentwood rolling mill, the installation of our Phase 7 plate capacity expansion project for aerospace and general engineering applications is nearly complete. It remains on time and on budget. As expected, the 12-week outage impacted our third quarter sales, reducing conversion revenue for aero and general engineering plate collectively by approximately $15 million to $20 million. The investment timing, however, aligns well with the short- and long-term growth expectations from our aerospace and general engineering customers. At our Warrick packaging rolling mill, the fourth coating line is steadily progressing through its qualification phase. September marked our strongest output to date on the new line with momentum continuing into October. We anticipate reaching full run rate in time to support 2026 shipments. Customer feedback has been overwhelmingly positive regarding product quality and performance, fully aligning with the expectations we set when initiating this investment nearly 3 years ago. This project remains central to our strategy of shifting the majority of the mill's output to coated products, a segment where Warrick already holds a market-leading position. As we approach full run rate, increased throughput will begin to satisfy our customers' demand needs and start-up costs will begin to taper off. Turning to our key end markets. Demand remains solid. Aerospace is trending positively, though not yet fully reflected in our results. Packaging supply remains tight with strong demand expected to continue for the foreseeable future. General engineering continues to outperform the traditional 2% CAGR, reflecting solid demand from our customers. However, month-to-month demand has shown an uneven cadence, which has made it challenging to operate with normal efficiencies. Despite this variability, the overall trajectory remains strong. Automotive rebounded meaningfully late summer after a volatile start to the year. I'll touch more on our markets in a moment when we discuss the outlook. With that market backdrop in mind, as we near the end of our major investment cycle, we have a renewed focus on managing our cost, restoring operating efficiencies and regaining our best-in-class operating metrics that have historically defined Kaiser. With that, I'll turn the call over to Neal to walk through the financials. Neal? Neal West: Thank you, Keith, and good morning, everyone. I'll now turn to Slide 9 for an overview of our shipments and conversion revenue. Conversion revenue for the third quarter was $351 million, a decline of approximately $11 million or 3% compared to the prior year period. Looking at each of our end markets in detail. Aerospace and high-strength conversion revenue totaled $100 million, down $28 million or approximately 22%. This was primarily due to a 30% decline in shipments driven by the planned 12-week partial outage we took at the Trentwood facility to finalize our Phase 7 expansion projects as well as ongoing destocking in commercial aircraft OEM production. We anticipate improved demand conditions ahead as destocking appears to be easing, along with improved shipments as we return to full production following the outage. Demand has remained strong across our other aerospace and high-strength applications, including business jet, defense and space markets. Packaging conversion revenue totaled $138 million, up $9 million or approximately 7% year-over-year on stronger pricing and mix. Shipments for the quarter, while up 2% sequentially, declined 5% over the prior year period, reflecting the mix shift in product deliveries away from bare products as we continue to ramp the new roll coat line and qualify products with customers. As discussed, the underlying demand environment is strong, and we're working closely with our customers as we ramp the new coating line to full run rate levels by year-end 2025. General engineering conversion revenue for the third quarter was $81 million, up $5 million or 6% year-over-year on a 7% increase in shipments. Reshoring activity continues to create a favorable demand backdrop, supporting both volumes and pricing. And finally, automotive conversion revenue of $32 million increased 10% year-over-year on a 5% decrease in shipments, primarily due to tariff-related customer uncertainty affecting the automotive industry. Improved pricing and product mix more than offset the lower shipments. Additional details on conversion revenue and shipments by end market applications can be found in the appendix of this presentation. Now moving to Slide 10. Reported operating income for the third quarter was $49 million, an increase of approximately $36 million from $13 million in the prior year quarter. As a reminder, the third quarter of 2024 included operating non-run rate charges of approximately $4 million, primarily related to an increase in legacy environmental reserves. After adjusting for these charges, our third quarter 2025 adjusted operating income was up $32 million from the prior year quarter, reflecting a $35 million year-over-year improvement in EBITDA, partially offset by a $3 million of higher depreciation expense, primarily associated with the commissioning of our new coating line at Warrick. Our effective tax rate for the third quarter was 17% compared to 21% in the third quarter of 2024. For the full year 2025, we expect our effective tax rate before discrete items to be in the low to mid-20% range, including the impacts related to the new tax bill recently signed into law. Additionally, we anticipate that the 2025 cash tax payments for federal, state and foreign taxes will be in the $5 million to $7 million range. Reported net income for the third quarter was $40 million or $2.38 net income per diluted share compared to net income of $9 million or $0.54 net income per diluted share in the prior year quarter. After adjusting for net pre-tax non-run rate income of approximately $11 million, primarily related to legacy land sales and insurance settlements associated with prior year claims, adjusted net income for the third quarter of 2025 was $31 million or $1.86 adjusted net income per diluted share, and this compares to adjusted net income of $5 million or $0.31 adjusted net income per diluted share in the prior year period, which excludes a net pre-tax non-run rate income of $4 million. Now turning to Slide 11. Adjusted EBITDA for the third quarter was $81 million, up approximately $35 million from the prior year period. Importantly, this result was achieved despite the 8% year-over-year reduction in our shipments. The true momentum in the business earnings power is becoming increasingly clear, driven by the stronger mix of higher value-added products and strong underlying fundamentals across our business and end markets. Additionally, during the quarter, we incurred approximately $20 million of higher operating costs and inefficiencies associated with the Trentwood Phase 7 outage and the ongoing Warrick Roll Coat ramp-up, which we don't expect to continue. These discrete costs were offset by a year-over-year increase in metal lag gains, primarily attributed to the continuing increase in metal price during the quarter. Now turning to a discussion of our balance sheet and cash flow. As of September 30, 2025, we had $577 million in total liquidity, including $17 million in cash and $560 million in availability on the revolver. Importantly, as of the end of the third quarter, our net debt leverage ratio improved to 3.6x from 4.3x at the end of 2024. Earlier this month, we announced the extension of our $575 million revolving credit facility, underscoring the continued strength of our financial position and the confidence our lending partners place in our long-term strategy. The extended facility is set to mature in October 2030, subject to certain conditions. We generated cash flow from operations of $59 million during the third quarter with our capital expenditures totaling $25 million. We expect capital expenditures for the full year 2025 to be approximately $130 million with free cash flow anticipated to be in the range of $30 million to $50 million, reflecting temporary working capital impacts tied to higher metal costs. Importantly, we remain on track to complete our major growth capital projects this year and continue funding our quarterly dividend of $0.77 per share, reinforcing our commitment to returning value to our shareholders. With that, I'll turn the call back over to Keith to discuss our outlook. Keith? Keith Harvey: Thanks, Neal. We continue to be encouraged by the momentum and visibility we're seeing across our markets. Let me now walk you through our full year outlook by end market on Slide 13. Starting with aero and high strength. Commercial aircraft recovery remained on pace throughout the third quarter with build rates strengthening and the supply chain normalization progressing, providing us with greater confidence of growing demand heading into 2026. As build rates ramp, we expect elevated aluminum inventory levels in the channel to be rapidly absorbed. Demand in defense, space and business jet remains steady at strong levels. Looking ahead, we're confident in our position as a leading global supplier of aluminum products in these end markets. Our capital investments continue to strengthen that leadership and position us well for the long term. As a result of our planned 12-week partial outage for our Phase 7 investment at Trentwood and the resulting lower sales in Q3, we now expect full year aerospace shipments and conversion revenue to be down approximately 10% year-over-year as destocking works through the system and shipments recover in the fourth quarter. Let's move on to packaging. We remain confident in the long-term outlook and the strength of our customer pipeline with the full ramp-up of our coating line on pace for late fourth quarter of 2025. North American demand continues to far outpace available supply, and we expect that dynamic to persist well beyond 2025. Our team is fully focused on accelerating capacity and throughput across our value stream to meet the growing needs of our customers. Due mainly to the previously discussed delay in the start-up of our new roll coat line, we now expect conversion revenue for the year to be up 12% to 15% as the mix shift to higher-margin coated products continues to build. Shipments are still expected to decline approximately 3% to 5% year-over-year as we finalize the ramp of our new roll coating line, ahead of fully benefiting from the mix shift in volumes. We expect a higher output from the new roll coat line in the fourth quarter as we improve line speeds and realize the full capabilities of the line. Turning to general engineering. Our strong momentum from the first half carried into the third quarter with shipments up mid-single digits and solid pricing supporting growth in conversion revenue. Looking ahead, we expect shipments to remain strong for the remainder of the year, driven by a favorable mix shift towards plate products, which will further support conversion revenue growth. We continue to expect full year shipments and conversion revenue to be up approximately 5% to 10% year-over-year. Finally, turning to automotive. Our outlook for the remainder of the year remains stable. Auto production forecast have varied throughout the year, hitting a low point post tariffs in mid-summer before expectations improved into the fall. The resilience of our portfolio and favorable mix toward SUVs and light truck ICE vehicles has kept us steady. As a result, we continue to expect our full year conversion revenue to increase approximately 3% to 5% year-over-year on approximately 5% to 7% lower shipments. Now turning to our summary outlook on Slide 14. Our end market fundamentals remain strong, and our operational execution continues to improve. Based on our year-to-date performance in 2025 and our updated expectations for aero and high strength and packaging, we're updating our full year conversion revenue guidance to be flat to up 5% year-over-year. And raising our full year EBITDA outlook by 10%, now expecting 20% to 25% year-over-year growth over our recasted 2024 EBITDA of $241 million. We remain firmly focused on our long-term objective of achieving mid- to high 20% EBITDA margins. And we see clear tangible progress toward that goal as our investments come fully online and end market demand continues to improve. With that, I will now open the call to any questions you may have. Operator? Operator: [Operator Instructions] The first question is from Bill Peterson from JPMorgan. William Peterson: On the aero and high strength, shipments down 30% quarter-on-quarter. It sounds like a lot of that was based off the Trentwood and planned maintenance. But how much -- can you help delineate between the planned maintenance versus weakness, continued weakness you've seen? Based off your revised guidance, it looks like you see more or less a recovery back to first, second quarter levels in 4Q. But I guess with your comments on destocking abating, how should we think about your aero high strength trajectory in 2026? I guess how fast can we see a recovery? Keith Harvey: Yes. Bill, first, your assessment of what we are looking at in Q4 is right on. You look at the run rate we had in the first half of the year, we expect that to come back very close to those levels. Now we're still finalizing the Phase 7 at Trentwood. So that's going to cut into the fourth quarter a little bit, but I wouldn't expect that to impact shipments any more than 5% or 10% off of the first half. With respect to destocking and where we see in 2026, we're going to be able to give you a much clearer view of that in February of next year. But I will say that as we had anticipated, we're beginning to see these ramp rates continue to increase. And when those build rates up, that expedites the condition and the inventory levels. So I think Boeing and others are on a really good pace moving forward. As you saw, we had another rate increase. And most of these rate increases generally around 5 shipsets ramp increments. And I would expect to see a couple -- 2 or 3 more of those as we go into 2026. So again, it's just expediting the situation we've had. And I think it will be continued improvement. We'll have more detailed information on that in February. William Peterson: Okay. Yes, fair enough. On packaging, it sounds like you're prioritizing more higher value add. But I guess in terms of your contract negotiations, where do the last, I guess, renegotiations stand. And when these new packaging contracts kick in, how should we think about the magnitude of the pricing uplift as we look into next year? Keith Harvey: Yes. Well, we're staying pretty firm with our 300 to 400 basis points increase on the EBITDA side of -- the EBITDA margin side of the business here, Bill. We've had great progress throughout the year with regard to putting those contracts in place. I've been very pleased with the progress there. We're down to, quite frankly, one last major customer, long-term customer with Kaiser, and that's really progressed well. I believe that will be finalized before the end of the year and you'll start to see those ramp-ups and the change in the volume. If you go look at our conversion per pound rate that's happened, you'll see some pretty significant growth over the last 4 to 5 quarters. And that's even before we put in the new capacities. So I'm expecting some pretty accelerated rates there. I'll give you some insight where people -- the other question that has been asked of us quite a good bit is will that be fully committed then? Will Warrick be at full total run rate? And I can tell you, no, we're going to actually take the measured approach next year. We're only going to put out about 75% or 80% of that capacity just to make sure that we don't get ourselves in a situation where we're not giving exemplary delivery performance back to our customer base. They've struggled a little bit with the delays we've had this year, but I believe the outcome is going to be really solid. So we're really looking forward to cranking this thing up beginning first of the year. William Peterson: Maybe just a housekeeping. You talked about the commissioning charge. How much of that was between the roll coat line versus Phase 7? And is there any more that we should expect in the fourth quarter? Keith Harvey: Well, I would say it's fair to bet. The majority of that was related to the Warrick roll coat 4 start-up, okay? As we've talked in the past, Trentwood's -- even though these start-ups are always difficult, and there's some uncertainty associated with them. For Trentwood, who's done 7 -- 6 of these prior, they managed through this very well. And so very little impact of that cost was part of that $20 million. Now I will say we do expect less cost through the balance of the year. We expect that number to be lower, as I mentioned in my comments, and then to have this well positioned to fully execute in January of next year. Operator: The next question is from Timna Tanners from Wells Fargo. Timna Tanners: Keith, nice to catch up. I wanted to hear a little bit more about the impact of tariffs. I feel like that we're getting kind of into that a couple of quarters since they've been announced. And how you -- any pushback on prices with your customers? Any ability to take more share from import or anything else you can elaborate on would be great. Keith Harvey: Yes. Nice to hear you again. Yes, the tariffs, we remain neutral to slightly positive from our perspective. As you know, all of our facilities are North America based. We do have one extrusion facility in Canada. But the impact to us is, as I said, neutral to slightly positive. And I'll explain the positives, and you mentioned those quite well, quite frankly, in your opening comments there. First of all, what we've seen is a large move on the premiums associated with the LME. And so as we know, the majority, if not all of our business has pretty straight pass-through on those costs. So we enable that, move that through to our customers. We're mindful that, that's gone up significantly and that, that could come down, but we'll see how negotiations progress with USMCA and other things. But on the positive side, what we've done in the marketplace is that it is a little more difficult for imports, and they've come into more about the same type of inability to rapidly lower their prices below us as a result of that premium. And so far, we're seeing better demand for domestic products. And because of the large portfolio of products that we provide to our service centers and other customers in the marketplace, we're seeing good pull on that demand as you can reflect in our general engineering business that throughout the year, which has held up amazingly well, not just from a demand perspective, but also on the pricing front. So we see opportunities. Again, we've got a lot of this capacity. The Trentwood capacity can -- we expect to also help us strengthen on the GE side of the business. And if we get a little bit of tailwind beginning in 2026, I expect really strong demand for GE products, and I expect opportunities for additional price enhancement of our business. So I think we're at the front of the bow wave of this, and we're riding it very well. And I'm very, very pleased with how the operations are performing and meeting this current demand. Timna Tanners: Okay. I wanted to touch base, particularly on the packaging side. I know you said that was strong, but we're hearing from our colleague who covers the space that there's some concern about cost inflation impacting demand. I wonder if maybe you're shielded from that a bit, given that you're doing more of the ends and tabs or any thoughts on the impact on packaging? Keith Harvey: Yes. Timna, this -- we're seeing still overall good demand on our products. And I think there some industry incidents can exasperate some of the supply scenario at different times. I know we had our challenges at the beginning of the year. I think others have had some challenges. But overall, I feel the demand for aluminum substrate products and packaging are very strong. I'll remind you that a good portion of our business is food related, and that's held up very strong. And we still continue to see that, quite frankly, outpace the demand for beverage. And so we may be insulated from that somewhat based on the markets that we serve. But overall, we're not seeing anyone reduce or wanting to reduce the capacities that we're contracted for. As a matter of fact, we continue to have customers asking for more. So that's really the basis behind our comments and where we see our business. Timna Tanners: Okay. That makes sense. Along those same lines, actually, one of your competitors had an outage recently that's caused some attention to the space and where there might be spare capacity. So I don't think you're a player in the auto sheet market, but do you have spare capacity if needed to fill in for can sheet? Keith Harvey: We're actually fairly full right now, Timna. I mean the -- it's really difficult for me to see when others have challenges because I've lived those before. A lot of times, we're in positions to help our customers. I think our customers have expectations that Kaiser, we want you to hit your commitments to us. And we're beginning to do those very well as our equipment ramps up. Really not in a strong pace to do anything other than that. As you know, a lot of that is probably bare product that's coming into the market. And we've been busy shifting our capacity more to the coated side. So we're really not one of the areas to help on the bare in a very big way. Timna Tanners: Okay. And I guess I'll just ask one last one, but kind of a big picture. I know you talked about 2025 guidance, and it's appreciated, but we're almost done with the year and looking ahead to 2026, how do we think about the cadence of the ramp-up of some of these -- the new facilities? Is it full run rate Q1 and straight line? Or do we kind of have some gradual improvements even as the year progresses? Keith Harvey: Yes. It's a great question. We -- look, for purposes of making sure we don't disappoint customers, there's somewhat of a ramp rate that we're going to be putting into our outlooks in the first half of the year. But those are going to be marginal with strong demand, expectations are that all the businesses, all these major growth investments will be behind us. And we're, quite frankly, ready to hit the run at rate buttons as quick as we can. Again, we'll give you more insight as to what we think the cadence of that by probably first half to second half. I think it's fair to say the second half with demand coming with, I think, ramp moving up on aero as packaging continues to show full ramp rate and especially if GE becomes on a little stronger next year, I think you'll see some -- we'll begin to see some of these rates that we had expectations for this business. And I'm going to be very thankful that we've got these growth assets in place to be able to take full advantage of those next year. So I'm pretty excited about next year. Operator: There are no further questions at this time. I would like to turn the floor back over to Keith Harvey, CEO, for closing comments. Keith Harvey: Thank you, operator. Thank you for your time and interest in Kaiser. We're excited about our future, and we look forward to sharing our full year 2025 results in February of next year. Have a good rest of your day, and thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to the Gentherm Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gregory Blanchette, Senior Director, Investor Relations. Thank you, sir. You may begin. Gregory Blanchette: Thank you, and good morning, everyone. Thanks for joining us today. Gentherm's earnings results were released earlier this morning, and a copy of the release is available at gentherm.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Gentherm's website. During this call, we will make forward-looking statements within the meaning of federal securities laws. These statements reflect our current views with respect to future events and financial performance, and actual results may differ materially. We undertake no obligation to update them, except as required by law. Please see Gentherm's earnings release and its SEC filings, including the latest 10-K and subsequent reports for discussions of our risk factors and other significant assumptions, risks and uncertainties underlying such forward-looking statements. During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and investor presentation. On the call with me today are Bill Presley, President and Chief Executive Officer; and Jon Douyard, Chief Financial Officer. During their comments, they will be referring to a presentation deck that we made available on the Investors section of Gentherm's website. After the prepared remarks, we'd be pleased to take your questions. Now I'd like to turn the call over to Bill. William Presley: Thank you, Greg, and good morning, everyone. Our third quarter results showcase improved execution across Gentherm, allowing us to deliver record quarterly revenue and strong operating cash flow. We are committed to the execution of our strategic priorities while focusing on the day-to-day actions required to drive financial results. Now let's turn to Slide 3 to discuss highlights. Third quarter Automotive new business awards of $745 million puts us at $1.8 billion year-to-date and on track to deliver a full year above $2 billion. Momentum for lumbar and massage comfort solutions continued as we secured another important strategic conquest win with Mercedes-Benz on one of their highest volume platforms, which includes the S-Class, GLS, GLE and CLS vehicles. It is important to note that this is 100% incremental revenue for us as we were able to displace a competitor for this award. The platform will include a proprietary pulsating massage system, Puls.A, marking the fourth global OEM to adopt our innovative technology since we introduced it to the market last year. Securing this award demonstrates we have innovative, highly desirable and value-added solutions that customers demand from the OEMs, driving continued market adoption, increasing take rates and revenue growth for our Automotive business. Additionally, we achieved record quarterly revenue of $387 million, driven by high demand for our products and improved third quarter light vehicle industry production versus our prior expectations. Automotive Climate and Comfort Solutions outperformed actual light vehicle production in our key markets by 160 basis points, excluding FX. And we were pleased to see improved performance in China during the quarter. In addition, our operational excellence initiatives are gaining traction, which contributed to operating cash generation of $88 million year-to-date. Before I finish this slide, I want to share my perspective on recent supply chain news. We are keeping a very close eye on the supply chain and the potential impacts across the industry. There will likely be an impact on OEM production, though it is too early to call at this time. Our teams are working with customers and suppliers to mitigate potential exposure and maintain visibility. The situation continues to evolve, and we'll keep you updated as necessary. Now turning to Slide 4. We continue our relentless focus on our strategic priorities to drive long-term shareholder value. We spoke earlier this year about our strategy of scaling our core technologies across multiple end markets to drive profitable growth. We saw success in the second quarter with wins in powersports and commercial vehicles, and we made further progress on this initiative during the third quarter. Our efforts in the past 90 days have generated a commercial funnel of over $300 million of lifetime revenue, and we are still early in our efforts. I'm excited to say that we were selected by a large global furniture brand to supply our comfort solutions and are preparing for production to start in Q1 of 2026. The product we will be supplying utilizes existing plant, property, equipment and installed capacity. We are in discussions with several other furniture brands for our thermal and pneumatic solutions and see this as an attractive adjacent market given the annual volumes, margin profile and limited incremental investment. As mentioned, we are preparing to deliver components in Q1 of 2026, demonstrating that the development cycles and time to revenue in these markets is much faster than our traditional automotive business. Moving to Medical. Our new product development is progressing, and we are on track for a significant product announcement near year-end. The refresh of the product line in Medical is a priority, and we are accelerating plans by leveraging existing automotive intellectual property. Operationally, we continue the rollout of our standardized company operating system across the globe, and we are starting to see early signs of traction. This is the type of foundational work that will maximize utilization of our existing assets, deliver expanded margins, lower CapEx requirements and generate increased cash flows. In September, we brought Gentherm's top leadership together for an in-person summit. We used this time to align on strategic initiatives and key priorities, including the standardization of global business processes. We understand that people are Gentherm's most valuable asset and ultimately drive performance of our business. The leaders left with a clear vision of how we will drive value creation and the sense of urgency at which we must move to deliver the required results. Our global strategic manufacturing footprint realignment plans remain on track to be substantially complete by the end of next year. We have made significant progress relocating and launching manufacturing processes in Tianjin, China and Tangier, Morocco. Customers have been supportive, and we are actively shipping production components from both facilities. As we think about deploying capital to achieve superior financial performance, we believe that M&A will serve an important role for the company in achieving our strategic priorities. We are cultivating a wide range of opportunities that are aligned with our core technology platforms and provide access to new markets and expand our product portfolio. We will evaluate these opportunities as a lever to accelerate our strategy. And with that, I will turn the call over to Jon to review third quarter highlights and results. Jon? Jonathan Douyard: Thanks, Bill. Now turning to Slide 5. In the third quarter, we secured $745 million of Automotive new business awards, one of the highest quarters on record for the company. As Bill discussed earlier, awards were highlighted by a significant win with Mercedes-Benz. Our team did a fantastic job securing this conquest business, which will more than double the annual lumbar and massage revenue with this customer after it goes into production in 2028, and it will also support lumbar and massage growth into the future. Additionally, we had another strategic win with GM for our ComfortScale solution, which is our patented next-generation integrated thermal and pneumatic hardware system. Last year, we secured our first ComfortScale award on the full-size GM truck platform, including the Chevrolet Silverado and GMC Sierra. And in the third quarter, GM expanded this solution to its midsize truck platform, including the Chevy Colorado and GMC Canyon through a mid-cycle change in 2026. ComfortScale is a win-win for all involved as we receive more content and value add, OEMs reduce their labor costs and end consumers get an improved in-vehicle experience. This award highlights our close partnership with General Motors and our ability to provide value-added innovative solutions to our customers. Next, I want to highlight our success in partnering with Japanese OEMs as we look to drive growth and customer diversification across Asia. We secured multiple awards in the quarter, including one for climate control seats on a Honda platform for the Indian market. Although Gentherm has not historically prioritized this market, on our hunt for strategic profitable growth, we are evaluating the broader opportunity India may present for our products, and we'll provide updates as we progress. Moving on to the third quarter launch activity. We again made progress in China as our solutions were included on several new programs with Chinese domestic OEMs, including our thermal solutions with Xiaopeng and our full suite of thermal and pneumatic solutions with Li Auto on the i6, both of which contributed to improved growth over market performance in China. Coupled with a focus on winning new business with domestic OEMs, these launches will shift our customer mix and result in our business being more closely aligned to the overall Chinese market over time. In Europe, we launched thermal and pneumatic solutions on the all-new Jeep Compass. Stellantis first introduced this vehicle to the European market in September, and we will soon launch it with our content in other regions. This vehicle will be offered in a variety of powertrain options, highlighting the powertrain-agnostic nature of our solutions. Finally, our Climate Controlled Seat solution is included on Subaru's high-volume Forester. This is another great example of the success we have had in expanding our business with Japanese OEMs. Please turn to Slide 6 for a more detailed review of the financial results. Overall, third quarter results were above expectations as revenue came in higher, driven by increased industry volumes. We also delivered sequential adjusted EBITDA improvement in the quarter. Overall, revenue of $387 million was up 4.1% compared to the same period last year. Revenues excluding foreign currency translation increased 2.4%. Automotive Climate and Comfort Solutions revenue increased 8.6% year-over-year or 7% ex-FX, which more than offset planned revenue decreases from previously discussed strategic exits. Medical revenue decreased 0.4% year-over-year or 1.6% ex-FX. Turning to profitability. We delivered $49 million of adjusted EBITDA or 12.7% of sales compared to 12.9% in the third quarter of last year. The 20-basis point decline was primarily driven by higher material costs, including a minor impact from tariffs, expenses related to our footprint realignment and higher operating expenses, partially offset by operating leverage and favorable foreign exchange. Consistent with our prior communication, the impact from tariffs has been minimal, and our team has done a nice job of working with customers to mitigate our exposure. Adjusted diluted earnings per share was $0.73 per share compared to $0.75 per share in the third quarter of last year. On cash, we have generated $88 million of operating cash flow year-to-date, further strengthening our balance sheet. Net leverage stands at 0.2x at the end of the quarter, providing us with ample access to capital to deliver on our strategic priorities. Please turn to Slide 7 for a discussion on our guidance for the remainder of the year. Based on our year-to-date performance and current visibility into OEM production schedules, we are increasing the midpoint of our revenue guidance while narrowing our EBITDA range. For the full year, we now expect revenue to be in the range of $1.47 billion to $1.49 billion, with the increase driven by improved second half light vehicle industry production versus our prior expectations. Our outlook for the fourth quarter includes the assumption of seasonally lower revenue versus Q3. This revision does not include the potential impact of supply chain disruptions that Bill discussed earlier. Year-to-date, we have delivered 12% adjusted EBITDA margin and are narrowing our adjusted EBITDA margin range to 11.9% to 12.3% for the full year. The EBITDA range primarily accounts for the impact of volume as well as the potential timing of year-end initiative spending, including expenses related to footprint transitions and new product introductions. On CapEx, we are again reducing our expected range of spend from $45 million to $55 million, which reflects an ongoing focus on optimizing current plant and equipment while also scrutinizing new projects. In closing, we are pleased with the results year-to-date, and our team is focused on finishing the year strong. With that, I will hand it back to Bill for closing remarks. William Presley: Thanks, Jon. Our third quarter results demonstrate improved execution and progress toward our long-term strategic initiatives. We delivered record revenue with strong cash flow and have made notable progress entering into adjacent markets. With innovative solutions and a strong balance sheet, we are well positioned to deliver profitable growth, margin expansion and increased levels of cash flow. We remain focused on these strategic imperatives that will result in long-term value creation for our shareholders. With that, I will turn the call back to the operator to begin the Q&A session. Operator: [Operator Instructions] Our first question comes from Matt Koranda from ROTH Capital Partners. Matt Koranda: Good to see the further conquest award with Mercedes. I'm curious if maybe you can just point to a few of the factors that are giving you momentum in winning that conquest business. Is it technology superiority? Is it sort of having the full suite of comfort and thermal? Maybe just touch base on sort of some of the factors that are at play there. William Presley: Yes, Matt, it's Bill Presley. I would start with it's certainly an innovative edge, right? Our solutions provide the OEMs with an experience that they can pass on to their customer and price for us. So there's a true value-added proposition there, and we have an innovative lead there. Our commercial relationships with our customers are very strong. So I would say our commercial model of interacting directly with the OEMs to impact their product plan versus attempting to sell through a Tier 1 gives us a position with the OEMs, I think, that maybe not a lot of our competitors share. And I think a really interesting one here is, it included Puls.A. So this is the fourth OEM to adopt our Puls.A technology globally since we introduced it to the market last year. So in order, I would say it's the innovative edge, the value proposition it provides to their end users and our customer relationships. Matt Koranda: Okay. I appreciate the clarity there. And then just on the adjacent market opportunity, good to see the $300 million funnel that you guys highlighted. Maybe curious how that breaks out between some of the opportunities that you have mentioned in prior calls, powersports, commercial vehicles, furniture, I believe. And then how do we think about that converting to commercial wins that could impact 2026 or 2027? I know you mentioned there's some shipments on furniture in the first quarter of '26, but I would imagine that it builds into '27. So maybe just level-set us on sort of how to think about that. William Presley: Yes. So that $300 million pipeline, as you mentioned, I mean, that was with just 6 months' worth of work, right? So teams moved very fast there, which is very encouraging. I would say in rough numbers, it would be roughly 1/3 what I would call the furniture, 1/3 what I would call specifically commercial vehicle and 1/3 what I would call other mobility. In order of excitement in that space, the furniture industry seems to be actually growing rapidly. So they're talking exciting adoption rates. Their speed to market is quite impressive. I anticipate further awards in that space that we'll be able to announce, but that revenue will start flowing in '26. On the commercial vehicle side, they're very interested in our fluid systems. So that's a new market that we're quoting with the valve business that came with Alfmeier. So fluid systems is gaining traction there. And steering wheel technology, specifically like heaters, hands-on detection, which we supply in the light vehicle market. And then other mobility, things that we've talked about, like 2-wheelers, construction vehicles, that's the other 1/3. That one, we'll have to see how it develops. But I would say, motion, furniture -- or sorry, furniture and commercial vehicle are really gaining traction. Jonathan Douyard: Yes, Matt, I would just add in terms of time to revenue, I think we did talk about Q1 production on the furniture award. We think that's a $3 million to $5 million opportunity just that one award as we look at 2026. And so to the extent that the team can continue to stack these up, we think it can be a meaningful growth driver, certainly a couple of points here as we get maybe later into '26 and '27. William Presley: And just piling on to that to make sure it wasn't lost in the script, that's capacity that we already have installed equipment we already have installed. So it's incremental dollars on existing assets. Operator: Our next question comes from Ryan Sigdahl with Craig-Hallum Capital Group. Ryan Sigdahl: I want to start on kind of the near-term production environment. I know there's some noise out there. You called it out in your prepared remarks, but Jaguar Land Rover, you have an aluminum supplier. I don't know if there are others, but curious if there are others beyond those 2. And then I guess the question -- second question would be, why you're not including it in guidances. One, are you not expecting it in Q4? Or is there just not visibility on kind of the magnitude to put it in numbers, but curious that decision. William Presley: Yes. I would say -- so you touched on the JLR cyber issue. That seems to be behind us now. They're ramping back up. That was more heavy for us in Q3. You touched on the Novelis fire, which impacts aluminum. I can tell you that that's heavy Ford, maybe Stellantis based on what they've said publicly. We talk to them on a daily basis. Right now, they are working to mitigate the issue. So it's difficult for us to see or say what the impact will be. Certainly, we haven't seen any meaningful impact in the schedules yet with regard to that. And then the third one, which is widely known that we're watching very closely is just the Nexperia issue going on between the Dutch government, the Chinese government and that company and the U.S. trade barriers. Nexperia for us right now, our supply chain team has done a phenomenal job of mitigating any direct Gentherm impacts. So we don't see any near-term Gentherm impacts. We've done a good job of finding alternative sources for what we need. The bigger question there will be who does it impact in the industry because they're widely used components. It's likely that somebody will be impacted, not sure who. You want to talk about the guidance piece? Jonathan Douyard: Yes. I mean I think to Bill's point, the Jaguar piece certainly impacted us. There was a headwind for us in September. There'll be a little bit of hangover from that in fourth quarter. We've contemplated that in the guidance. I think as you look at the fire as well as the Nexperia piece, we're really looking to our customer ADI schedules to adjust our forecast. So there's been a little bit of movement here, I would say, in the last week or 2 that has been contemplated, but we don't want to speculate more broadly than what we have with communication we have from our customers. And so it's really the latter of what you said in terms of just visibility that we have today and the impact on the business. So we're trying to be transparent as to what we see, but we haven't seen any significant schedule shifts to this point. Ryan Sigdahl: Helpful. Then India, I don't know that I've heard that before. I guess as you think about adjacencies, I always thought of adjacent sectors, adjacent market opportunities. Can you maybe provide a little more? I know you said you'll give more color there in the future. But are there other markets around the world, whether you want to be specific or not, but that could be potential pockets of opportunity as you hunt for profitable adjacent opportunities? William Presley: Yes. I mean the Indian market, as you heard Jon say, talk about the conquest win, that was with a Japanese OEM in the Indian market, but that's our first entry into the Indian market. And although we haven't historically looked at the India market, we're actively evaluating that. Look, it's an attractive market to us for a couple of reasons. One is scale, and we have no presence there. Number 2 is if you look at some of the proof of concepts we're developing on what we call alternative markets, 2-wheelers is a huge market in India. And there's a desire there for cooled seats. So that's a market that we're evaluating, and it looks like a very good market for us with regard to our valve technology. So it's something that we're exploring and considering, but it could certainly open up alternative streams of revenue for us. Jon, I don't know what else you want to add? Operator: [Operator Instructions] Our next question comes from Ryan Brinkman with JPMorgan. Ryan Brinkman: I thought to ask first on the strategic footprint alignment plan. Now that you are growing near its completion by the end of 2026, what is the latest in terms of how you anticipate the layering on of the incremental savings with the phaseout of the associated spending to drive those savings? How should we expect the cadence of margin to progress throughout and beyond 2026 on account of both of those factors? Jonathan Douyard: Yes. I think a couple of points there. I mean we talked about the impact in the year being about 50 basis points. I think it will come in a little bit higher than that just based on the timing of where we are. And the fact, frankly, that we've seen higher volumes in the year that's impacted some of the ability to build inventory. I think as you look at 2026, we will start to see some of the legacy costs fall off, but we'll also see the impact of sort of the inventory build that we've had this year. And so the real savings from that is probably late '26, but really more like 2027 in terms of when we see the benefit of the footprint transitions. Ryan Brinkman: That's helpful. And then with regard to the M&A pipeline, given all the traction that you're seeing expanding into nonautomotive end markets in a really capital-light way, should we think about M&A being aimed more at product expansion rather than channel diversification? Or what are the strategic priorities that you're most looking to accelerate through M&A? William Presley: Yes. I mean when we think about M&A, we look at it, I would say, through a threefold lens, right? I mean ultimately, we're trying to build a more resilient company, right? So we're looking for 2 things. We're looking for something that provides access to markets that we're interested in, and we've been very vocal about becoming more than a light vehicle producer alone. So markets are important. Number 2 is it has to fit our core strategy, which means they are products that align with our current mission. So you won't see us take any wild left turns. So product expansion is important as well, right? So more resilient company. So it has to fit the right margin profiles. It has to create value. Number 2 is access to other markets; and number 3 is broadening the product portfolio. Operator: We have reached the end of our question-and-answer session as there are no further questions, which now concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.
Operator: Welcome to WEG's Third Quarter 2025 Earnings Conference Call. I would like to highlight that simultaneous translation is available on the platform on the interpretation button via the globe icon at the bottom of the screen. We would like to inform you that this conference call is being streamed live and the audio will be available afterward on our Investor Relations website. [Operator Instructions] If we do not have time to answer all questions live, please feel free to send your questions to our email at ri@weg.net, and we will answer after completion of our conference call. We would like to emphasize that any forward-looking statements contained in this document or any statements that may be made during the conference call regarding future events, business outlook, operational and financial projections and goals and WEG's potential future growth are merely beliefs and expectations of WEG's management based on currently available information. Forward-looking statements involve risks and uncertainties and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors could affect WEG's future performance and lead to results that will be materially different from those in the forward-looking statements. Joining us today from Jaraguá do Sul are Andre Luis Rodrigues, Chief Administrative and Financial Officer; Andre Menegueti Salgueiro, Finance and Investor Relations Officer; and Felipe Scopel Hoffmann, Investor Relations Manager. Please, Mr. Andre Rodrigues, you may proceed. André Rodrigues: Good morning, everyone. It's a pleasure to be with you once again for WEG's earnings conference call. I'll begin with the highlights of the quarter on Slide 3, where net operating revenue grew 4.2% compared to the third quarter '24. In Brazil, performance was driven by solid industrial activity, continued deliveries in transmission and distribution projects and healthy demand for commercial motors and appliances. Growth was partially offset by a significant year-on-year decline in wind power generation revenue. In the external market, industrial activity remained strong in our main regions of operation, especially in Europe. In the power generation, transmission and distribution businesses, T&D operations in North America continued to show solid delivery volumes despite some fluctuations in general project deliveries. Our operating result measured by EBITDA reached BRL 2.3 billion, an increase of 2.3% compared to 3Q '24. EBITDA margin remained at a very healthy level, closing the quarter at 22.2%. Along the presentation, Andre Salgueiro will provide more details on this point. As for our return on invested capital, one of our main financial indicators remained at the high level of 32.4%, as we can see in more details on the next slide. Revenue growth and sustained high operating margins contributed to maintaining our return on invested capital at healthy levels despite the decrease compared to the same period last year. The reduction was mainly due to higher invested capital driven by investments in fixed assets and acquisitions during the period. It's important to remember that the ROIC for 3Q '25 or was positively impacted by the recognition of nonrecurring tax incentives in 4Q '23. Now I'll turn the floor over to Andre Salgueiro. André Salgueiro: Thank you, Andre. Good morning, everyone. On Slide 5, we show the evolution of net revenue by business area. In Brazil, demand for short-cycle products remained solid, particularly for low-voltage industrial motors and gearboxes across several operating segments. We also observed positive performance in long-cycle equipment deliveries such as medium voltage electric motors, especially in the oil and gas and mining sectors despite an investment environment that remains somewhat restricted. In GTD, the T&D business continued to perform well, driven by deliveries of large transformers and substations. The decline in revenue in this area was mainly due to the absence of new wind turbine deliveries as the pipeline for 2025 had already been anticipated. There was also a reduction in solar generation revenue this quarter, mainly reflecting the completion of large centralized solar generation projects executed over the last 3 quarters. In commercial motors and appliances, we continue to deliver positive results with growth in sales to key segments such as air conditioning, water pumps and compressors. In coatings and varnishes, sales of our main products remained strong with notable demand for liquid coatings used in the oil and gas segment. In the external market, short-cycle equipment benefited from continued healthy industrial activity across multiple regions with an improvement in the European market standing out. For long-cycle equipment such as high-voltage motors and automation panels, delivery volumes contributed positively, although geopolitical uncertainty continues to weigh on new investment levels. In GTD, we maintained good delivery volumes in T&D operations in North America despite a lower volume of deliveries in another key region, South Africa. Revenue moderation in this area was mainly driven by fluctuations in generation project deliveries in Europe and in India, a typical dynamic for this type of business, even with strong performance from the marathon generator operations in the United States and China. In commercial motors and appliances, demand remained positive, particularly in China and North America, along with contributions from both electric motor operations in Turkey. In coatings and varnishes, revenue growth was supported by strong performance in Mexico and the recent acquisition of the operations of Heresite in the United States. Slide 6 show EBITDA evolution, which grew 2.3%, while EBITDA margin closed the quarter at 22.2%, although slightly lower than the same period last year, mainly due to higher costs of some raw materials EBITDA margin remains strong, supported by the current project mix. Finally, on Slide 7, we show the evolution of our investments, which totaled BRL 673 million with 72% -- in 52% in Brazil and 48% abroad. In Brazil, we continue to modernize and expand production capacity at T&D while increasing capacity and productivity at our Jaraguá do Sul and Linhares sites. Internationally, we continue investments in Mexico, particularly the progress in building the new transformer factory and in the expansion of more production capacity in China. That concludes my section. And now I'll hand it back to Andre. André Rodrigues: On Slide 8, before moving on to the Q&A session, I would like to highlight a few points. First, during the quarter, we announced several important investments, including a BRL 1.1 billion plant in Santa Catarina to expand the energies unit's product portfolio and production capacity and also a USD 77 million investment in the special transformers plant in Washington, Missouri and BRL 160 million investment to further integrate and expand the electric motor production at the Linhares unit in Espírito Santo. In September, we also announced a target to address greenhouse gas emissions reduction in Scope 3. In addition to having our Scope 1, 2 and 3 targets for 2030 validated by the science-based targets initiative. More recently, we announced the acquisition of a controlling stake in Tupinamba Energia, a company with a strong presence in software and services for electric vehicle charging network management, aligned with our strategy presented at the last WEG Day to provide complete solutions for the e-mobility market. Finally, a few words on our outlook for the remainder of the year. Despite mitigation measures already underway, the geopolitical and macroeconomic environment requires close attention and brings short-term challenges. We remain focused on our investment plan to support growth in Brazil and abroad, both to strengthen our market mature businesses and to develop opportunities in new markets. Even amid a complex geopolitical backdrop, we continue to expect annual revenue growth and high operating margins, supported by our international presence and diversified product and solutions portfolio. This concludes our presentation, and we can now move on to the Q&A session. Operator: [Operator Instructions] Our first question comes from Lucas Esteves from Santander. Lucas Esteves: Congratulations on your results. I have 2 topics that I would like to approach, starting with the results acquired from Regal that you did not disclose this quarter. So I'd like you to give a bit more color on this business, how it behaved. Then I ask that because previously, you said that you were increasing capacity with generators. So I would like to understand that this is already reversing in an increasing volume and results or this is to be seen in the coming quarters? Second question, how WEG is positioning itself as a solution provider more than an equipment supplier. I ask that because when talking to stakeholders, we hear more and more that WEG is offering complete solutions, a generator instead of solar panels. So all that said, I would like to understand your strategy, if the company is going to position more and more as an OEM to product, if that can expand your market and if that somehow connects to the company's strategy to expand its footprint in the aftermarket. André Rodrigues: Lucas, this is Andre Rodrigues speaking. Thanks for your questions. It's a long question. If we forget something, please just remind us of the main points. I will start talking a bit about the integration of Regal. It is going on. It is as expected. When we talk about Regal -- Marathon, I'm sorry, when we talk about the businesses of Marathon, we are basically talking about 2 businesses, low-voltage motors and alternators. For low-voltage motors, we saw an accommodation in the market. And I think the main focus now of the entire industrial team of WEG Motors is gains synergies in the stage where we are without many investments in terms of verticalization. So optimizations of products, opportunities to reduce costs, all following as expected. The alternators business, as we mentioned on WEG Day, is a business that is developing very well. João Paulo, right after the acquisition, focused to try and increase capacity the most. We are making investments to increase capacity. This is probably to be completed at the end of this year, beginning of next year to continue developing the business giving the markets that demand this equipment and that have contributed positively for this business. So Marathon businesses have a very strong recognized brand in the U.S. market, particularly. Integration of admin areas, we are also evolving relatively well. We did have a huge challenge in terms of the carve-out of systems. We are talking about more than 150 systems. We're able to develop all the efforts before the deadline of the CSI that we had with them and also in terms of shared services that was provided, especially in the North America region by the Regal organization Rexnord, we also were able before the deadline to migrate to our shared service model, which is called WEG Business Services. So in this migration, we had especially gains in IT and to bring the business to our model. And with this, we had already a reduction of approximately $6 million in annual costs. Consequently, with this, together with all efforts in the industrial area, the good performance of alternators, Regal's margins are improving quarter-on-quarter. And we highlight that it is an integration process that will take 4 to 5 years. But the message is positive, and it is following as scheduled. André Salgueiro: This is Salgueiro speaking. As for your second question, WEG's model of becoming more and more focused on solutions. This is a reality. This was the main focus of our presentations on WEG Day, the last WEG Day that we held recently. And there, we brought 3 major topics: one, solutions for e-mobility. So WEG not only focusing on manufacturing powertrains or recharge stations or batteries for buses, but rather being more and more focused on following a complete solution, integrating it all. And this comes from the service center that we announced in São Bernardo do Campo for support and also the acquisition that we released -- recently announced of Tupinambá to complement the ecosystem. So we have been working to integrate more and more services and solutions. And the 3 main topics of WEG Day was e-mobility, microgrid and network reliability. That is to have more and more complete solutions for the market, not only focused on the product, but on the whole solutions and how we can help our clients on their journey. Operator: Moving on. Our next question comes from Gabriel Rezende from Itaú BBA. Gabriel Rezende: I have 2 questions. First, I would like to understand about the added capacity for transformers in West. I think this is going to be effected by '26, beginning of '27. And the market is more and more thinking of what '27 is going to be like for WEG. So are you selling already the additional capacity that you're going to have in transformers for '27? What is your pipeline for transformers? If you could talk about prices and volumes, that would be very good, especially about the additional capacity. And the second question, we have been monitoring yourself and the competitors and prices are going up in the U.S. because of tariffs and some inflation in the sector. I would like to know if you understand price increases in the U.S. offset loss in competitiveness or if you could have a drop in volume as price increases take place. André Rodrigues: Gabriel, I'm going to talk a bit about transformers, okay? Well, we have been announcing for some time now, 3 years, I would say, every year, a new package of investments of the business given the demand and how the market is heated in several segments, energy efficiency, generative AI. So WEG by the end of '23 made a solution. And in the beginning of the '27, we would have double global capacity for WEG in the transformer business. We are following the investment plans unchanged. Whenever we see a new opportunity, we reinforce the plan. We had a recent announcement, the modernization and increase of capacity in the special transformers plant in Missouri, an investment of $77 million. In addition, we have the new plant in Mexico, a new plant in Colombia, increasing capacity in Gravataí in Brazil to use the opportunities in the market. And when we have visibility, as we are having now of the completion of the project, we start already to have a backlog. So the answer is, yes, we are building our backlog in all the units in where we have visibility of completion. That is going to be by the first half of '26 to the end of '26 for us to seize opportunities as of '27. Of course, perhaps enjoying opportunities in the second half of '26. As for prices in the U.S., Gabriel, I think the whole process when the tariffs started to be discussed, made it clear that inflation would happen, not only for WEG, but for the whole American market as a whole. So it's just natural in our strategy to try and mitigate impacts is to use our commercial strategy in prices in the U.S. And you did say it's not only WEGs, it is WEGs and almost all the players in the market. And so this is a movement, especially the most relevant part that happened more recently that we still cannot measure in terms of details of impacts because in practice, it came into force in October. So we have to see how the activity is going to evolve from now on. So this is something that we'll have to monitor in the coming months how the market will respond to the commercial strategy. But again, it's not only motors, transformers or other products. It is the U.S. economic activity as a whole due to tariffs and price adjustments are being made throughout the industry. Operator: Our next question comes from Lucas Marquiori from BTG Pactual. Lucas Marquiori: I have just one question, but perhaps with some items. Still about tariffs, I was a bit lost in terms of times. Probably you already had an impact of the tariff this quarter. You are saying that you are having an effort of repricing of products. And then you have the waiver of what was shipped until mid-October. So perhaps the full impact in cost and margins is just going to show in Q4. I would just like to see if my understanding is correct. So the full quarter is just going to be in Q4 and how far you are in terms of passing on prices. You mentioned 10% in Q2, then we said mid-teens for the next quarter. Just to understand how long the curve is. And finally, the passing on costs to balance tariffs, this is something that the whole market changed the price dynamics. If you have a decrease in tariffs, you don't necessarily have to return that to clients. You can keep it in margin. So do you think this is standing if and if tariffs are renegotiated next year? So just the question with the same topic, tariffs. André Rodrigues: Thanks for your question, Lucas. I'll try to answer all the parts. The first point, what you mentioned is correct. We are going to have the full impact in the fourth quarter. We did have some impact in the third quarter, particularly the last month of the quarter in the month of October, we did have this impact. But throughout this moment when we had the information of tariffs, we started working on several fronts to mitigate the impact. There is not a silver bullet. You talked about recomposition or realigning prices, WEG's logistics chain to minimize that, and the company continues to work along these lines. Our expectation for the fourth quarter is to have a greater impact because of the tariffs. But again, we have lots of action plans and initiatives to mitigate the impact. In the end of the quarter, we are going to have a clearer view of whatever was possible to be mitigated and the impact. As for price realignment, well, the thing is we have to know what the market is going to be pricing. I cannot say that this is a given because if the tariffs change, if there is a change in process, a change in dynamics, we have to adjust according to the wind. Operator: Moving on. Our next question comes from Alberto Valerio from UBS. Alberto Valerio: A follow-up on tariffs because we are seeing lots of news on WEGs suiting its capacity in Mexico, United States, Brazil, Mexico. What is missing in Brazil for WEGs to eliminate 100% of its tariffs that is not producing anything in Brazil to be exported to the U.S. And second question, the exposure of BESS in WEG. There is an auction now in December, another larger auction for June next year. What should we expect from WEG for '26? André Rodrigues: Alberto, thanks for your questions. Okay. One point that is very important to reinforce is the investments that WEG is making in the U.S. along the recent years, the revenue that is produced and generated in the U.S. is increasing and WEG is doing that. In transformers alone, we expanded in the last 5 years, our 2 existing plants. We had a greenfield project. We are renovating a new one and increasing capacity. So added to everything we mentioned, restructuring, logistic chains and other initiatives that we are talking about, also the increase in capacity in the U.S. will help us to minimize the impact. André Salgueiro: Alberto, as for BESS, we did show on WEG Day our solutions for microgrid, even home use, the monogrid, industrial use, commercial agribusiness, until getting to that. So it's important to mention that WEG has a full portfolio today of products to serve the different segments, and we have been working very hard in this project of the small medium size, which is a good market demand. To give an estimate for the next year, perhaps it's too early because that depends on the development of the market from now on. And it did mention 2 important things, the auctions that are expected to happen this year and next year. And indeed, if they do happen, they may be a very interesting opportunity, much greater than we have today because today, opportunities are concentrated on mid-sized projects. We are seeing people wanting projects perhaps with a greater scale that we are having, but different from utility projects, which are the large projects that generally take place. So if the auctions happen, that can change. The market as a whole can grow, and that will depend on how much WEG is going to capture up this market along the next years. Operator: Moving on, our next question comes from Rogério Araújo from Bank of America. Rogério Araújo: I have 2 questions on my side. The first is the external GTD revenue. It did go down despite the favorable T&D movement. We did some accounts with transformers in North America, some assumptions considering the revenue of generation abroad. It may have dropped from 30% to 50% year-on-year. Does it make sense? Are our accounts correct? And if you could talk about the deliveries in the past until when this comparison basis is going to be kept? So this is my first question. Second, about margins. I do not recall if it was 1 or 2 quarters ago, you said if it weren't for the renewables mix, especially solar farms, margin would have gone up. And now the mix is down, especially solar farms and the margin did not really show the difference. I would like to know what hurt you. You did talk about tariffs affecting October. Was it this? Any other factors? But just for us to understand margins in the short term. André Salgueiro: Rogério, this is Salgueiro speaking. Thanks for your question. I'll answer the first GTD in the foreign market, and then Andre is going to talk about margins. We don't break down in our releases. What I can say is that indeed, generation did have a significant drop this quarter, especially because of somewhat weaker performance in the joint venture that we have in Europe compared to last year. And that, especially for the fact that we did have some important projects and concentration of deliveries last year that were not replicated this year and also because of reduction of revenue in generation in Asia Pacific, especially for projects that are served by the Indian operation. We did mention that in our release. I don't know if it was 100% clear, but in T&D, the quarter was slightly different. T&D had been growing in all operations in the external market this quarter. We continue with positive performance in T&D. North America continued with good performance. But in Africa, it did have a drop in revenue in the quarter. because some large transformers that we delivered last year and that these projects were not replicated this year. So there is an effect of a lower growth in GTD, the external market in generation, but also a portion of T&D in Africa. So what is doing well, positive without changes is T&D, North America and Colombia, altogether in this context. And Rogério, about margins, you were right. I think it was in the first quarter that we broke down how much margin we would have consolidated excluding that movement that started in the last quarter last year about solar farms and continued in the first and second quarters. I don't recall exactly the amount, but we can talk about that later on, but we did mention that, and it is in the transcription of our last call. I think it was the first quarter. Undoubtedly, what we see in terms of margin behavior, it is according expected. We expected a first half a bit more pressured because of the product mix. As the product mix with solar went down, the margin will improve, and it is improving. If you get year-to-date margins of WEG, it is within expectation to fluctuate between what we had in '23 and '24. Remember that when we are monitoring margins, we cannot talk about one quarter. This is very complicated because we have several business dynamics and everything. For instance, we did have the impact of the tariffs this quarter, not all action plans to mitigate that in place. And what we saw this quarter, compared to what we had last year and perhaps it is a bit of the result of the margins is that there was a bit of an increase in prices of the main raw materials, especially steel and copper, which also impacted the margin of the quarter. But again, I would like to stress that margins are improving quarter-on-quarter as expected, and we want to -- we believe that it's going to be fluctuating between what we had in the last 2 years. Operator: Our next question comes from Lucas Laghi from XP Investments. Lucas Laghi: I have 2. Thinking about the performance, I think it was the highlight of the performance this quarter. I would like to know your dynamics for external markets, especially in the U.S. Any concentrated delivery, any anticipation of purchases because of tariffs. So anything out of the ordinary? I'm thinking of industrial activity as a whole, when I take a look at the release of your competitors, you see a backlog that is very strong in the third quarter from the U.S. So in the U.S., some segments are doing very well. Others are doing poorly. I would like to understand if you could have an acceleration of revenues driven by the U.S. So try and understand how you see industrial activity as a whole, especially the U.S. And for internal GTD and perhaps that was the downside in terms of revenues, especially because of the drop in solar, as you had mentioned. So just to understand if we are already on a normal level or if you think that you can still have a decline in solar? How are things going on in [indiscernible] residential other? And do you think that 1/3 would be in T&D? I know that things are changing with solar, but how would you consider the internal GTD? So basically, external GTD and internal GTD, that's my question. André Salgueiro: Lucas, this is Salgueiro. Thanks for your questions. As for industrial electronic equipment, first, I would like to reinforce that we did see the market resuming. That's the upside. Brazil grew by 3.3%. And we do see also growth in the external market of 7.1% in reals and even stronger in dollars, almost 9%. So that shows a market and an industrial activity that's quite interesting. And that is reflected in our numbers. We did highlight the performance of Europe. I think it was the main highlight in terms of recovery because Europe was a region that was not doing well in recent quarters. And as of this quarter, we did see significant improvement. So that's an important point to highlight. And in the U.S. well, the U.S. has a bit of a different dynamic because of tariffs and everything that we have discussed before, but also the performance of industrial activity, especially with motors and projects is going on. It's happening, not at the same pace as before. We did mention in the call last year that the decision of new investment was on hold with the dynamics we still do not see a major change. But an important point that you did mention, and we can talk about that is that when you see orders coming, the performance is better than in the past, which shows that we might have for the future, an industrial activity in the external market with a more positive dynamics and here considering all regions and also the U.S. When we talk about GTD in the domestic market, you did mention 2 important points that justify the drop, the wind power, because we already knew that there was a lack of new projects and that continues. And the news this quarter that we tried to address to you in the comments of last call is that solar would be weaker in the second half of the year, especially for the fact that we no longer had the GC projects. So that was the main reason. And when we look into the performance of the third quarter compared to the second quarter, this is clear. When we compare the third quarter and third quarter, that's not so relevant because in the third quarter last year, we didn't have these projects. They started in the fourth quarter. And that's interesting, considering your question, when you look into the future, we do have a challenge for the fourth quarter, which is when we started centralized generation a bit stronger, and we don't have the projects this year. And another point is that the GTD market distributed generation is not heated either. So we do have projects. They are evolving, but at a pace that's slightly slower than in the past. So putting together the factors, we have a solar dynamics already reflected this quarter with a weaker performance and expectation because of the comparison base of centralized generation of last year, this movement can be even accelerated in the fourth quarter. Operator: Our next question comes from André Mazini from Citi. André Mazini: My question is about the competitive scenario with the acquisition of 50% of Prolec. In yesterday's call of GE Vernova, they talked about commercial synergies. Do you think that changes anything in the North American market? And also in the call, they said 20% of the orders of Prolec comes from hyperscalers and data centers. So if you would have an estimate of how much T&D orders in the foreign market comes from this type of customer? And finally, a follow-up of the last question. I don't know if you did mention that there was a prebuy. I didn't understand that. That's it. André Rodrigues: Thanks for your question. Well, the competitive scenario, what we saw yesterday, I think does not change much. It's a competitor that has already been in the market. They are just acquiring the remainder of the business. And we know that everyone is making investments to expand capacity and to enjoy demand. WEG positioned itself in the past. We believe that we started before the competition if we compare most of the competitors. And we also understand that in '26, we are going to be one of the first in the main markets to add this new capacity. As for supply to data centers, the number that you mentioned to WEG is very close to that in the U.S. So again, we do not see major changes considering the competition. I did not understand the second part of your question. Of course, it's another topic. If there was a prebuy in the third quarter in EEI given the tariffs. If there was a pre-buy people advance their orders. André Salgueiro: Mazini, this is Salgueiro. We cannot say that. The increase in tariffs started in the beginning of the year. The discussions and more concrete effect started with the 10%. Then we had the 50%. So it's important to reinforce that the 50% was specific to Brazil. And obviously, people know that WEG is a Brazilian company. It is based in Brazil, but it is very specific with its dynamics with local players. It can provide matters from different countries, Mexico, Asia. So we cannot say that this movement was relevant or if there was a significant effect on the third quarter. Operator: Our next question comes from Marcelo Motta from JPMorgan. Marcelo Motta: I have 2 questions. First, a follow-up on tariffs. We have a meeting of Trump Donald this weekend. We don't know if it's going to happen. But do you see anything, I don't know, considering information from the Ministry of Industry, what kind of a lobby is going on? Do you have backstage information for something that we should look into? And also your effective tax rate along the year, it has been going down. 15% was the top compared to the 7.5%. Do you think that this rate is going to continue to go down or it was just something that happened this quarter? So just to understand its curve because it's now below what was last year. André Rodrigues: Thanks for your questions, Motta. We would love to have some additional information. But unfortunately, we are also following the information with the same channels that you have. But when there is an opportunity to sit down and negotiate, we see it as a good time. And we hope that when it happens, when the meeting happens, it will help all of us to try and decrease tariffs to a more reasonable level. As for the effective rate, we always say that this is a number that will continue to fluctuate quarter-on-quarter. It's natural that it happens, especially because of the mix of results that are generated in Brazil compared to what is generated in other regions. So I think that's very important to say. When we compare it to last year, there are 2 effects. One, it is a better use of interest on equity for 2 reasons. We had an increase in our profit and loss. We had a capitalization this year and also an increase of PJLP, which is the rate that we use to calculate interest on equity. And in addition to that, we had the mix of growing results in the external market compared to Brazil, which also contributed to the positive fluctuation. For the future, once again, fluctuations are part of the day-to-day. But from what we understand, considered PJLP and others, we don't think we are going to have any significant change, at least in the short term. In the mid to long term, it is hard to elaborate because there are too many variables, too many discussions going on that may change assumptions. So in the future, the scenario can change. But we do not expect major changes when we consider this year, beginning of next year, so more of the short term. Operator: Moving on, our next question comes from Pedro Martin from Bradesco BBI. Daniel Federle: It's Daniel Federle from Bradesco asking. My question is about I, especially long cycles. It seems that past portfolios contributed to revenues, but sales are weaker at the front end. My question is, should we expect a drop in long-cycle products for the coming quarters? And how long does it take from weaker orders to generate weaker revenues? And the second question related to that, should we see a weakness in long-cycle products as an indicator of what's going to happen in short-cycle. That is the projects that are not happening right now would generate for the future a drop in short-cycle products? André Rodrigues: Daniel, thanks for your questions. You are correct when we look into projects, considering Brazil and also the external market. we do see an environment in which products are running at a slightly lower level than what we had in the recent past and abroad more concentrated in the U.S., because of uncertainties related to tariffs, and we did mention that in the last call, we were feeling that clients were postponing projects and in Brazil, because of higher interest rates. Some markets and remember, projects, sometimes they are connected to commodity cycles. And we had a very important cycle of investments in pulp and paper 2 or 3 years ago, and it went down. Now we are seeing some projects being resumed. But mining continues to be okay. Then we had a drop. We're seeing now some resumption. So it depends on the dynamic of each of the markets. When we talk about leading indicators, generally, the normal cycle is to see a deceleration in the demand of short cycle that will impact in long-cycle projects. And quite often when long-cycle projects is being impacted, we see a resumption in short cycle. I did mention that, that the coming of orders in short cycle gives us positive signs for Brazil and the external market. So we already see a resumption in a short cycle. Eventually, we can see a resumption of projects for the coming quarters. We cannot say that because we still do not have hard numbers on that. But perhaps the natural cycle would be like this. So let's wait and see, and we are going to give you updates as months go by to see if the demand and the long-cycle portfolio starts to respond to what we are seeing in recent quarters. Operator: We are now closing our Q&A session. Remember, if you have any more questions, you can send your questions to our e-mail ri@weg.net. I'm going to turn to Andre Rodrigues for his final remarks. Mr. Rodrigues? André Rodrigues: Well, once again, thank you so much for attending, and I wish you all an excellent day. Operator: WEG conference call is now concluded. We thank you for your attendance and wish you a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Welcome to the O'Reilly Automotive, Inc. Third Quarter 2025 Earnings Call. My name is Matthew, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin. Jeremy Fletcher: Thank you, Matthew. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our third quarter 2025 results and our outlook for the remainder of the year. After our prepared comments, we will host a question-and-answer period. Before we begin this morning, I would like to remind everyone that our comments today contain forward-looking statements, and we intend to be covered by, and we claim the protection under the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend or similar words. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest annual report on Form 10-K for the year ended December 31, 2024, and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I would like to introduce Brad Beckham. Brad Beckham: Thanks, Jeremy. Good morning, everyone, and welcome to the O'Reilly Auto Parts third quarter conference call. Participating on the call with me this morning are Brent Kirby, our President; and Jeremy Fletcher, our Chief Financial Officer; Greg Hensley, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman, are also present on the call. I'll begin our call today by expressing my appreciation to more than 93,000 team members across all in North America for the hard work they put in to deliver the third quarter results we released yesterday. . Team O'Reilly continues to win in each of our markets. In our team's dedication to excellent customer service drove the solid comparable store sales increase of 5.6% we generated in the third quarter. This performance was at the high end of our expectations, and we are pleased with the momentum our teams have been able to sustain on both sides of our business. The combination of our strong sales results with a 9% increase in operating income and a 12% increase in diluted earnings per share demonstrates our team's focus on driving profitable growth. Thank you, Team O'Reilly for your commitment to our culture, and absolute dedication to taking care of our customers. Now I'll walk through the details of our comparable store sales performance for the third quarter. Our professional business continues to be the more significant driver of our sales results with an increase in comparable store sales of just over 10%. We continue to be pleased with the strength in our Pro ticket count growth, which was the primary driver of our professional comp increase and the biggest contributor to our outperformance relative to our expectations. We also saw increased benefit in the quarter from average ticket on both sides of our business that I will detail in a minute. We remain confident that the professional sales growth our teams are delivering is the result of share gains and as we continue to be the supplier of choice for our professional customers. Our share gains have been broad-based with strong contributions from all of our market areas. The strength of our professional business is anchored in the valuable relationship we have developed with our customers who value the end-to-end partnership our team is able to provide to their business through service, availability and business tools that help them be a service provider of choice to their customers. We were also pleased to deliver DIY comparable store sales growth with this side of our business, finishing the quarter with a low single-digit comp, driven by average ticket benefits, partially offset by pressure to ticket counts. Our DIY business was in line with our expectations in July, after having experienced pressure in June as we exited the second quarter. We began to encounter modest pressure to DIY transaction counts midway through the third quarter, which we believe reflects some degree of initial short-term reaction by DIY consumers in response to rising price levels. The contribution to same SKU inflation during the third quarter, which was felt evenly on both sides of the business was just over 4%. As we've anticipated coming into the third quarter, we saw a significant ramp in tariff-driven acquisition cost increases and made appropriate adjustments to selling prices. On a category basis, the pressure to our DIY business as we moved through the quarter was primarily felt in some categories where we could be seeing some deferral in larger ticket jobs. However, we continue to see strength broadly in other DIY maintenance categories, including oil, filters and fluids that have continued the outperformance we have seen throughout the year. We want to emphasize that we are still in the early stages of the consumer response to the ramp-up in price levels. It can be difficult to parse to finally the initial response from our DIY customers, but the pressure we have seen thus far is modest and in line with consumer reactions to economic shocks we have seen in the past. As we've noted the last several quarters, we remain cautious in our outlook on the consumer and expect that we could continue to see a conservative stance from consumers and how they manage spending in this environment. However, even in this environment, our DIY consumers are still showing a willingness to invest in and maintain their vehicles and we believe any potential deferral pressure will be short term. When looking at category dynamics on the professional side of our business, we are seeing very strong performance across both failure and maintenance-related categories and are pleased with the resiliency of customer demand. The customer has taken their vehicle to a professional shop for their repair and maintenance work tends to be less economically constrained than our average DIY customer and less reactive to inflationary pressures on spend in a large -- largely nondiscretionary category of their wallet. Looking at the cadence of our sales results. In total for the quarter, we generated consistently strong comparable store sales growth as we move through the quarter with positive comps on both sides of our business in each month. We would characterize weather as neutral on balance for the quarter as we experienced normalized summer weather across most of our market areas. Now I would like to provide some color on our updated full year comparable store sales guidance. As noted in yesterday's press release, we updated our guidance from the previous range of 3% to 4.5% to a range of 4% to 5%. At the midpoint of our full year range reflects our outlook when factoring in current sales volumes as we progress through September and thus far into October. We have incorporated into our guidance range the current pricing environment. While the broader tariff landscape has the potential to remain fluid, at this stage, we believe we have seen the lion's share of the cost impacts we are expecting as they relate to the tariffs currently in effect. As a result, we anticipate a mid-single-digit same-SKU benefit in the fourth quarter, but have also factored into our guidance a continuation of the pressure to our DIY customers from the dynamics I mentioned earlier. Our industry has continued to behave rationally in response to the pressure tariffs have placed on product acquisition costs and we continue to monitor industry pricing adjustments to ensure we are competitively priced for the value proposition we provide. Our industry backdrop remains or continues to be both stable and supportive. We believe the dynamics of the consumer uncertainty and continued pressure to the DIY business are being felt industry-wide. Most importantly, we believe our teams are winning share on both sides of the business against the current macroeconomic backdrop. In times when spending decisions become more difficult for our customers, having our excellent customer service, superior product availability and professional parts people to guide them becomes an even more important piece of the value we deliver. Before I turn the call over to Brent, I would like to highlight our updated diluted earnings per share guidance. As noted in our press release, we have updated our EPS guidance to a range of $2.90 to $3. This incorporates our year-to-date performance, the revised sales outlook and our expectations for gross margin and SG&A for the fourth quarter, which Brent will discuss next. At the midpoint, our current EPS guidance is an increase of approximately 2% from the midpoint of our previous guidance and a year-over-year increase of 9%. We are pleased that the team has been able to deliver both strong sales and earnings growth even in a rapidly changing environment of economic uncertainty. As I wrap up my prepared comments, I would like to once again thank Team O'Reilly for their strong performance in the third quarter. Now I'll turn the call over to Brent. Brent Kirby: Thanks, Fred. I would like to start by thanking Team O'Reilly for their outstanding work during the quarter. Our team continues to outperform and remain steadfast in their focus on our culture and our customers to drive our success. Today, I will start by discussing our third quarter gross margin and SG&A results as well as provide an update on capital expansion and our updated outlook on these items. Starting with gross margin. For the third quarter, our gross margin of 51.9%, was up 27 basis points from the third quarter of 2024 and in line with our expectations. Our team was able to offset the gross margin headwind resulting from our customer mix from faster growth on the professional side of the business with prudent supply chain management and solid distribution productivity. . While the third quarter gross margin rate was above our full year gross margin guidance range, we expected a higher gross margin rate in the third quarter as compared to the rest of the year, which is typical for the seasonal composition of our product mix and consistent with our results in 2024. We are maintaining our full year gross margin guidance range of 51.2% to 51.7% and expect to see a similar progression of gross margin rate from the third to fourth quarter as we experienced last year. Our supply chain teams continue to work diligently, both internally and with our supplier partners to navigate the evolving tariff environment. Our ability to maintain consistent gross margins with the amount of change we have faced during the year is a true testament to their hard work and dedication. As expected, we realized significant acquisition cost pressure from tariffs in the quarter. The impact from product cost inflation in the quarter closely mirrored in timing the adjustments we made in pricing. As Brad mentioned earlier, we have now seen the biggest impacts from the current tariff environment, and our guidance for sales and gross margin does not contemplate substantial impacts from further tariffs beyond what is reflected in our product acquisition costs today. However, to the extent any future tariff revisions result in further acquisition cost increases, we will prudently navigate those in the same way that we have done to date. As the tariff landscape and cost environment has evolved in 2025, we have maintained a close eye on the pricing environment within our industry to ensure that we are making the appropriate adjustments in remaining competitive. Against this volatile backdrop, our goal remains the same. To provide the exceptional service and industry-leading availability, our customers know and expect from O'Reilly Auto Parts to continue to earn their business. Overall, we believe our supply chain is at its healthiest point since we emerged from the pandemic. With the support of a strong supplier community, we have sustained robust in-stock availability across our tiered distribution network, this strong distribution infrastructure is the foundation for our industry-leading inventory availability and a critical factor in how we serve our customers and earn additional share. Our merchandising teams work diligently to maintain our diversified supplier base in order to actively manage exposure and risk on numerous fronts. This risk can range from country of origin to diversification of supply within a single product category. Supplier health and supplier performance can often go hand in hand. So an important part of our risk management process is monitoring our supplier partner health from all angles, ranging from shipping performance, product quality, catalog support, all the way to financial stability. While these processes always involve some level of effort to mitigate risk in a small subset of our supplier base, we would again reiterate that we are pleased with the collective health of our supplier partners. Our goal is always to foster supplier partnerships that are both long-standing and deep as we repeatedly earn our status as the desired priority customer for each of our suppliers. Now I'd like to turn to SG&A and give some color on the quarter. Our SG&A per store growth of 4% was at the top end of our expectations for the quarter. Driving this spend were expenses related to our strong sales performance, coupled with continued inflationary pressures in our cost structure, again, centered around medical and casualty insurance programs. Based on our third quarter results and outlook for the remainder of the year, we expect our SG&A per store growth to come in at or slightly above the top end of our full year guide of 3.5%. We have factored in our updated expectations for comp sales and corresponding incremental SG&A dollars into our guide, and we have been pleased with how our teams are managing expenses while driving sales volumes above expectations. As a reminder, our fourth quarter SG&A per store growth is expected to be below the full year run rate as a result of comparing against the charge we took in the fourth quarter of 2024 and to adjust reserves for self-insurance liability for historic auto liability claims. Based on our SG&A expectations and projected gross margin range we continue to expect our full year operating margin to come within our guidance range of 19.2% to 19.7%. As always, our top objective in managing our expense structure is ensuring that we are meeting our high standard of customer service by supporting our team of experienced professional parts people. Turning to an update on our expansion. We opened 55 net new stores across the U.S. and Mexico during the third quarter, bringing our year-to-date store opening to 160 stores. We are on track to achieve our 2025 new store opening target of 200 to 210 net new stores by year-end, and we continue to be pleased with the performance of our new stores. New store growth remains an attractive use of capital for us, and we see ample growth opportunities spread across all of our North American footprint. In this regard, we are pleased to announce our 2026 store opening target of 225 to 235 net new stores. Just as our 2025 growth has been spread across 37 U.S. states, Puerto Rico and Mexico, we anticipate growth in all of those markets as well as in Canada in 2026. Our store growth in 2026 will continue to be concentrated in the U.S. markets but we will also continue our measured growth within our international markets as we work to develop the teams and infrastructure to support our O'Reilly operating model. Our tiered distribution network continues to help drive our stores' competitive advantage in parts availability, and we are pleased to begin servicing stores out of our new Stafford, Virginia distribution center in the fourth quarter of this year. I would like to express my gratitude to our distribution and supply chain teams for all the hard work that has gone into this state-of-the-art new greenfield distribution center in the Mid-Atlantic market. This distribution center will be an important stepping stone for us to begin adding store count within heavily populated and untapped markets for us in the Mid-Atlantic I-95 corridor. As excited as we are about this new facility, there is no pause for our dedicated supply chain teams as we are full steam ahead with distribution growth and progress at our upcoming Fort Worth, Texas facility as well as future opportunities that will further support our store growth and inventory availability. Capital expenditures supporting both store and DC growth for the first 9 months of 2025 and were $900 million and are slightly below our expectations. Based on our year-to-date spend and fourth quarter outlook, we are reducing our full year capital expenditure guidance by $100 million to a range of $1.1 billion to $1.2 billion. This reduction is primarily the result of timing of spend on store and distribution center growth projects that we now expect to incur in 2026. As I close my comments, I want to once again thank Team O'Reilly for their hard work in driving our company's success. Your commitment to providing consistent, excellent service to all of our customers is the foundation for our long-term growth. Now I will turn the call over to Jeremy. Jeremy Fletcher: Thanks, Brent. I would also like to begin today by thanking Team O'Reilly for another successful quarter. Now we will take a closer look at our third quarter results and update our guidance for the remainder of 2025. For the third quarter, sales increased $341 million, driven by a 5.6% increase in comparable store sales and a $101 million noncomp contribution from stores opened in 2024 and 2025 that have not yet entered the comp base. For 2025, we now expect our total revenues to be between $17.6 billion and $17.8 billion. Our third quarter effective tax rate was 21.4% of pretax income comprised of a base rate of 22.2%, reduced by a 0.8% benefit for share-based compensation. This compares to the third quarter of 2024 rate of 21.5% of pretax income, which was comprised of a base tax rate of 23%, reduced by a 1.5% benefit for share-based compensation. As we noted in our press release, during the third quarter, we accelerated the payment timing of transferable renewable energy tax credits that were originally planned to settle in 2026. Our full year income tax rate guidance has been revised to reflect the incremental benefits we expect from the accelerated payment. Accordingly, for the full year of 2025, we now expect an effective tax rate of 21.6% versus our prior expectation of 22.3%. The updated tax rate guidance includes an anticipated benefit of 1% for share-based compensation. We expect the fourth quarter rate to be lower than the first 9 months of the year due to the tolling of certain open tax periods. Also, variations in the tax benefit from share-based compensation can create fluctuations in our quarterly rate. Now we will move on to free cash flow and the components that drove our results. Free cash flow for the first 9 months of 2025 was $1.2 billion versus $1.7 billion for the same period in 2024. The reduction in free cash flow was primarily the result of the accelerated timing of payment for renewable energy tax credits that I previously mentioned. For the full year 2025, we have updated our expected free cash flow guidance to a range of $1.5 billion to $1.8 billion, down from our previous range of $1.6 billion to $1.9 billion. This adjustment reflects the headwind from the accelerated tax payment timing partially offset by the reduction in our capital expenditures guidance Brent discussed in his prepared remarks. Inventory per store finished the quarter at $858,000, which was up 10% from this time last year and up 7% from the end of 2024. Our inventory investments continue to generate strong returns, and we've been pleased with the overall in-stock positions of our store and distribution network. We have executed our inventory growth strategy in 2025 at a faster pace than our initial expectations and could see elevated inventory balances above our original 5% per store plan as we finish out the year. We continue to manage the timing of inventory enhancements to capitalize on current opportunities we see to drive our business and are pleased with the productivity of these investments. This incremental inventory investment has been more than offset by our AP to inventory ratio. We finished the third quarter at 126%, which was down from 128% at the end of 2024 but above our expectations. Moving on to debt. We finished the third quarter with an adjusted debt-to-EBITDA ratio of 2.4x and as compared to our end of 2024 ratio of 1.99x with an increase in adjusted debt partially offset by EBITDA growth. We continue to be below our leverage target of 2.5x and plan and prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program. And during the third quarter, we repurchased 4.3 million shares at an average share price of $98.8 and for a total investment of $420 million. We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business, and we continue to view our buyback program as an effective means of returning excess capital to our shareholders. As a reminder, our EPS guidance, Brad outlined earlier includes the impact of shares repurchased through this call but does not include any additional share repurchases. Before I open up our call for your questions, I would like once again to thank the entire O'Reilly team for their continued hard work and dedication to providing consistently high levels of service to our customers. This concludes our prepared comments. At this time, I would like to ask Matthew, the operator, to return to the line, and we will be happy to answer your questions. Operator: [Operator Instructions] Your first question is coming from Greg Melich from Evercore. Gregory Melich: I wanted to start with I think a comment you guys made on the 4% same SKU inflation that you've seen the lion's share of it. Does that -- does that mean that from here, there's none? Or is there still some residual we flow through the next couple of quarters? Jeremy Fletcher: Yes, Greg. This is Jeremy. Thanks for the question. We still think that we'll see a tailwind from same SKU as we move through fourth quarter and first quarter we talked to the mid-single-digit range. As we move through third quarter, a lot of what we saw was came along pretty early on in the quarter, but there was some ramp during the course of the third quarter. As we look at incremental changes in prices moving forward, there's always a potential for some of that. And obviously, the tariff environment is is a little bit more static now, but has the potential to move and change. But we think from what we've seen so far under the current regime, most of that cost has flowed through to us. The adjustments that we needed to make are mostly behind us, and we don't see the same level of substantial incremental changes in how we go to market to what we've seen so far in 2025. Gregory Melich: Got it. And then my follow-up is really on the price elasticity. I think you mentioned that, that can take some time to play out. What have you seen historically from price elasticity, particularly on the DIY side? Brad Beckham: This is Brad. Thanks for the question. Yes. So in the past, things can always change. But what we've always seen in our industry, at least in my years this year working for O'Reilly and in this industry is when we've seen shocks like this, there can be some deferral, failure, our hardest part categories from a failure standpoint are obviously break fix, but you do have those larger ticket jobs that can be deferred somewhat. You have -- if a great job, if the pads are metal on metal, the most likely it is what it is, and that job has to be made. If it's a chassis job, for example, and there's some more alcohol joints or control arms or something like that, that's something that can be put off normally for weeks, months, but obviously not years. And so kind of what we're seeing right now is what we -- Brent and I talked about in our prepared comments is there's a lot of movement. Generally, we feel really good about what we're seeing on both sides of the business from a repair and maintenance standpoint. But to your question on the DIY side, what we did see a little bit of that we hadn't seen thus far this year, we saw in the third quarter was what we feel like could be some deferral of those larger ticket jobs. And there's a lot of moving pieces. You have not only -- it's not always a direct line just to what we feel like is a little bit of elasticity or what could be deferred. You have different weather patterns. You have 2- and 3-year stacks on some of those categories that have been extremely strong for us the last couple of years. but we still do think that we are seeing customers that are maybe putting some things off, and we'll just have to see how that plays out in the fourth quarter. Operator: Your next question is coming from Chris Horvers from JPMorgan. Christopher Horvers: I wanted to follow up on the elasticity concerns, mid-single-digit inflation for the fourth quarter. That's basically in line with where you're implying comps are in the fourth quarter. So is like as you think about guiding based on what you've seen over the past 2 months is that elasticity function getting worse? Or I guess, why wouldn't your comp be higher than the inflation that you expect in the fourth quarter? Jeremy Fletcher: Yes. Thanks, Chris. This is Jeremy. Lots of different things, obviously go into how we think we'll finish out the full year and that pushes us into I know how you guys read an implied guide in the fourth quarter. When we think about our outlook, just to finish out the year there are a lot of moving pieces. You have to remind everyone that it's our most difficult comparison as we think about where we finished up the year last year. As we look specifically at the question around the benefit from where prices have gone to and where we see in the same SKU, it's clearly a net incremental benefit to us in the third quarter. there's nothing about a potential build within any of those pressures that might impact the DIY consumer that we're implicitly forecasting how we think about fourth quarter to directly answer the question. To Brad's earlier point, you go into the back half of the year for us, there's always a lot of different factors. There can be volatility that we see just from how weather plays out, how some of the Christmas shopping season plays out. And then we do have just, I think, a cautious view to how consumer might might continue to react. But kind of understanding all those component pieces, there's nothing about how we've at least started in the fourth quarter that that really puts us in a changing environment. We're really still early stages on some of how we're viewing where the customer is going to go at these price levels, and we're cautious but still feel good about the overall trends in the business. Christopher Horvers: Makes a lot of sense. I wanted to ask a longer-term question. Can you -- you are accelerating the unit growth next year. It looks like it will be over 4% in 2016 based on you mentioned earlier. Can you talk about your latest thoughts around the U.S. store potential? And maybe Mexico and Canada as well to the extent that you have some thoughts there? And do you think as we look out over the next few years, could international accelerate enough that you bend that 4-ish type unit growth rate higher? Brad Beckham: Yes. Great. Great question, Chris. This is Brad. So first off, we feel extremely good about our new store cohorts. We continue to be extremely pleased with the way that our field teams are opening up new stores, just from the quality of the team, professional parts people putting in place the right store managers, the right district managers that absolutely drives the quality of our new store locations. Obviously, there's a lot more that goes into it than just the teams, but that's primarily how we make those decisions is our ability store count wise to staff them with great teams. We're also extremely pleased with the way our design and development teams have continued to develop here in the corporate office, not just from a U.S. perspective, but how those teams have matured and really understanding what the machine -- how the machine runs, what it really looks like as we ramp up internationally. To your question about where we can go in the U.S. we haven't put a new fine point on that. But I would just tell you, every year that goes on, we continue to ramp that number up of what we feel like our store count could be in the U.S., not just from a really not just from the way we've always looked at it, but as consolidation continues in the industry, which we believe it will continue to do so. We feel really good about continuing to ramp up and and continue to have a higher number in the U.S. and where we feel like that could be in 5 and 10 years. We're very excited about our international opportunities, continue to look at Mexico as such a huge opportunity for us mid- to long term. We lost a little bit of time during the pandemic in terms of our ability to build the muscle that we wanted to build in-country, in Mexico and the inability to really get down there, build the muscle from a people standpoint, a structural standpoint, supply chain systems, et cetera. But we've made a lot of progress over this last couple of years. Chris, and really excited about what the future holds in virtually an untapped market for us in Mexico over the next many years. Really, same thing for Canada. We're early stages in Canada, excited to make the announcement that Brent mentioned earlier in his prepared comments that our expansion is officially going to start in the Canadian market in 2026. And while that doesn't hold the total addressable market that in Mexico or obviously the U.S. does. The car park is very similar in Canada. We feel like that is an untapped market from a retail and DIFM standpoint in terms of our scale and size and ability to build the right teams, especially off that BaaS platform that's such an amazing people platform for us in Canada. So excited about all those markets and really excited about our target for 2026. Operator: Your next question is coming from Scott Ciccarelli from Truist Securities. Scot Ciccarelli: Hopefully, 2 quickies. Any notable differences in terms of geographic performance given some of the weather patterns that we've seen? And then secondly, you did spend a little bit more time than usual talking about supplier health. So can you directly address any risk or exposure you may have to the first brand situation? Brad Beckham: Scott. Yes, I'll take the first portion of that on regional performance and kick it over to Brent brand. So actually, we didn't see a lot of material differences in our geographies and regional performance in Q3. there's always going to be some differences. But directionally, they weren't much different than what we originally had planned with our internal plan month-to-month by region. So no material differences. There was I had bit of difference in our north south and a little bit east and west, but . [Audio Gap] In terms of First Brands specifically, they're a little bit more than 3% of our COGS. So it's not a huge material thing when you think about the fact that we've got we're dual and triple and quadruple sourced on most of our lines. We do that by DC. Again, over 50% of our revenue is in our proprietary brands, which gives us a lot of ability to multisource with multi suppliers. So -- and quite frankly, a lot of the brands that First Brands has acquired over the last several years, we had long-standing relationships with those brands even before they were acquired by the parent company of First brands. And we're still working with a lot of those same teams and feel very confident that in our ability to work with them and with our -- the rest of our supplier base to manage through what we don't really see as any disruption from wherever that may land. So we feel good overall again about the overall supplier health in the industry. Scott, I'll make just follow up really quick for -- Scott, I may just a follow up really quick. We have really good engagement with the new leadership at First Brands and a lot of leaders that have been there for some time. We also have great engagement from their competitors, meaning that to Brent's point, when you think about the majority of the lines that they provide to us, we have our distribution network split up, meaning that whether it be a first brands or one of their competitors in some of these categories, we are dual and triple source, sometimes quadrupled to Brent's point, and so we have our DC split up accordingly. So we're hopeful that first brands really gets where they need to be on fill rates, which we believe they will, but we also have opportunities to fill in with backfill orders, and we also have opportunities with other existing suppliers that compete in those categories to take on another DC or 2 here and there, and we don't feel like we'll have a material impact. Operator: Your next question is coming from Simeon Gutman from Morgan Stanley. Simeon Gutman: First, a follow-up, Brad, you mentioned some of the deferral that's happening in DIY. To what extent is that just price elasticity? And is there any sense that it could be the timing of when prices are moving around in the marketplace. It sounds like you've narrowed it down, but curious if that that's 1 of the potential maybe a head fake that's happened I mean, with some of the demand. Brad Beckham: Yes. Great question. Well, the reason we want to be balanced on that, and we just -- we wanted to characterize as some categories and the potential for some deferral is because it's to Jeremy's point earlier to another question, it's still so early, and there's enough factors with weather, seasonality, the way the weeks played out in Q3. And as we get into Q4, again, just really the first time we've seen some pressure to some of those larger ticket jobs, but it wasn't across the board, Simeon. And it's not always directly tied to the exact categories lines or sublines that we're seeing the tariffs. And so that line is not direct. And where we saw some pressure to some categories, we didn't see it in others. And so really, on the professional side, we continue to have a lot of conviction, even though the DIFM consumer can be a little bit cautious that we're not seeing any pressure there. And when we look at the DIY side, the thing that gives us balance on the other side of it is just the fact that we are seeing it in some categories, not seeing it in others. And again, it's not directly tied to to tariff-driven cost pressures always by line, by category, but also we continue to see strength in a lot of our DIY categories. Like we mentioned, oil changes, oil filters, chemicals, fluids, et cetera. And so we just want to sit back a little longer and really see how the fourth quarter plays out. Our teams are always just focused, as you know, just continue to take share. and just watching that closely. The other thing we didn't say in our prepared comments, Simeon, is we're really not seeing any trade down. We're seeing some pressure to those bigger ticket categories potentially those bigger ticket jobs. But the way we look at good, better, best, we're really not seeing any material shifts. If anything, we continue to see -- while some people may be moving down, so to speak, on the price side, we continue to seek even the lower to middle income consumers on the DIY side, trading up because they're looking for value, not just the cheapest price. They're trading up in areas like batteries and things like that to get a better warranty. And so long answer, I said a lot of things there. But I think the key is we just want to continue to take a balanced look and see how the rest of the year plays out. Simeon Gutman: Okay. And my follow-up is on your investment posture. We've had SG&A per store elevated for the better part of the last, call it, 2 years, and now you're stepping up your store growth. So is there maybe a shift from per store to new stores. And then within that, any different way you're approaching the operating margin of the business, either holding it or even letting it go down to take advantage of disruption or opportunities in the market. Jeremy Fletcher: Yes, Simeon, good questions, and maybe take the second 1 first. There's not been, I think, any fundamental shift as we think about our operating margin, our profile for how we go to market. Having said that, I think it's less of a question or consideration for where we see the potential kind of competitive balance or market opportunities so much as it does how do we run and operate our business, what do we think allows us and puts us in a position to be competitive. And I think much of what you've seen over the course of the last couple of years when we think about the investment profile of how we thought about our business has been really geared around where we see opportunities to continue to strengthen our operating posture to help put our teams in the best position to also support the teams that we've got taking care of our customers within our stores. some of what we've seen candidly in the current year are just more inflation-driven cost pressures in some of the areas of our business that I think have put pressure on us that we were not maybe as anticipated as as being as significant as it was when we came into the year, ultimately, those things from time to time are going to -- are going to move in flex. We will obviously have to take a hard look at that and think about where that sits for the for the next year. But that hasn't really changed our outlook on how we think about the right way to manage the business to take care of our customers and grow our share. Brad Beckham: Simeon, the one thing I'd add to that is really just -- when I think about the controllables within our 4 walls, we're very pleased. Jeremy, Brent and I are very pleased with the way that our internal teams are managing SG&A to sales, walking the fine line between acceptable SG&A profitability and taking our service levels to the next level. . Some of the things we saw throughout the year and for sure in Q3 was just some of that inflation in some of the medical and some of the self-insurance stuff that's somewhat out of our control. There's always things we can do better and different from a safety and health and well-being of our team members, but some of that's out of the control of the team, and we feel really good about the way the teams are managing SG&A. Operator: Your next question is coming from Michael Lasser from UBS. Michael Lasser: You talked about a mid-single-digit inflation benefit in 4Q, which it sounds like that will be the peak of the inflation contribution So, a, is that right? Is that the way we should think about it? And b, overall, is this as good as it gets that O'Reilly can do a mid-single-digit comp under the right conditions. It's just a -- it's a different model than it's been in the past. Jeremy Fletcher: Yes, maybe I can address the question there, Michael. At this point in time, when we think about the current tariff and pricing environment, we would think that most of the benefit that we might expect to see moving forward would be in the fourth quarter numbers. And I think both with Brad and Brent spoke to that. it's always a little bit of a crystal ball exercise to say exactly what happens from this point forward. And we're obviously going to be very sensitive and responsive to making sure that from a market perspective, we're priced right in where we need to be. Ultimately, that -- while it's an important consideration, it's a factor that, obviously, we're all paying pretty close attention to that historically has not been what's driven our business and the ability to grow share. And we feel -- we still feel very bullish about our opportunity over the course of time. to be able to be a consolidator of the industry to pro forma model that's the best within our industry and to be able to gain share over the course of time. . And we feel good about our performance, particularly when you look at it on a 2-, 3-year stack perspective. And so ultimately, it is -- as we've talked many times, a very grinded-out business and and the long-term trajectory of what we can deliver as we consolidate the industry and gain share is dependent upon executing day in and day out and growing faster than the marketplace. We'll see ultimately where those numbers push out. But there have been -- there have been plenty of years within our history where the results that we're producing. This year have been in line with that long-term growth rate, we feel good about it. Brad Beckham: Yes. No, Michael, Well, Jeremy, I think the key is the reason we don't want to talk in absolute if we've seen everything. It's because we don't know what's going to be in the headline next week or next month. It is still fluid. We feel good about what we said about the majority being already in but we don't know what's next. What I do know and this Parley is in the kind of your second part of your question, what I do know is when I look at Brent and our merchandise teams and our pricing teams they are operating at a very high level. I feel very good about the way that they are navigating not only from a negotiation with our suppliers the way we're thinking about pricing. But the overall way that we look at the fine line between walking all those things. And just the way we can continue to compete the value proposition we provide. And we never think internally here teams, the way our supply chain runs, new DCs, hub stores, all the things we do from a culture standpoint, promote from within and supply chain, we really feel good about what we can do over the next many years. Michael Lasser: Got you. My follow-up question, what conditions would be necessary in order for O'Reilly to restore its SG&A per store growth back to the 2% range, that was consistent for a long period of time prior to the last couple of years. And as a management team, how focused are you on deploying technology or making proactive investments today in order to ease some of the pressures from health care costs and other factors in order to restore that level so you can generate the margin expansion that the market has known to from [indiscernible]. Jeremy Fletcher: Yes, Michael. I appreciate that question. It's a little bit of, I think, a challenge for us to to really address a hypothetical around kind of a lot of the other broader conditions that contribute to how we might think about SG&A moving forward. For sure, when we look at where we sit today versus other periods of time, where wage rate inflation was much more muted where we weren't seeing some of the other inflation pressures where we weren't seeing kind of rising price levels, I think more broadly around the economy. Those were some of the, I think, broader macro conditions that we would have seen during the course of time there that I think play into the consideration. I think from our perspective, we've always had, I think, a pretty intense expense control focus as a company. And ultimately, those are all things that we manage for the long-term growth rate and the success and health of our business. While we're always, I think, pushing to be more efficient and more effective, and there are always ways in which you can do that within our business. . It's also important to note that I think one of the core strengths of our business is the ability to provide a high service level in an industry where that's still, I think, a critical factor in how consumers perceive value, how they make buying decisions. And so for us, there's always going to be some level of understanding that the strength of our business is built around running the best model that ultimately our ability to grow operating profit dollars from a long-term perspective means that we're going to want to to manage our business in the right way, and we're not going to view it necessarily as just an offset [indiscernible]. Let's go find cuts and reductions that don't otherwise make sense because some other components of the business have seen inflation. So that's really from a philosophy perspective where we see it. Some of the -- where we've seen lower nominal numbers in different environments still reflected that same philosophy. And ultimately, I think that's the right way to manage the business for the long term. Brad Beckham: Yes. And Michael, I may just real quick add, Jeremy said it very well. We we have a lot of pride in our ability to lever when we have a comparable store sales level that we've had. We have a lot of pride in the operating profit rate that we've delivered over a long period of time, and that's going to continue to be our focus. That said, for the mid and long term back to the 10% share across North America, we are going to continue to invest in our business in a very disciplined way when it comes to technology, when it comes to our teams. When it comes to our supply chain, we are going to continue to play from a position of strength we continue to feel like we have a unique opportunity over the next many years to do all that within the discipline we have with our capital allocation, the discipline we have with our OpEx and we're going to continue to balance the 2 sides of what I just said as good as we possibly can over the next year. Operator: Your next question is coming from Bret Jordan from Jefferies. . Bret Jordan: If you look at the expectations for 4% same-SKU inflation, are supply chains in the industry sort of creating a delta between your expectations maybe versus a peer, I think that NAPA guys were saying maybe 2.5 million, is that because they're sourcing out of different regions and markets and have less tariff exposure? Or is it really sort of a relatively even playing field on a same SKU basis? Brent Kirby: Yes. Brett, this is Brent. I'll start and the other guys can chime in. I think we talked about supplier diversification for years now. And again, the team. Our merchandise team has done a fantastic job continuing to diversify that supplier base. And we've talked a little bit about China, what that looks like specifically for us. We're in the mid-20s. Some others may report somewhere in that range or a little bit less. But generally speaking, we feel like we're very diversified globally and the teams continue to get more diversified. That number is down hundreds of basis points from where it was a few years ago and continues to fall. What's interesting, though, when you look at some of the other countries right now in the tariff environment that we've been operating in, especially in 2025, some of the -- when you think about 25%, you look at some of those other countries, Vietnam, Thailand, India, some of the other countries that a lot of sourcing has moved to -- supply has moved to Mexico as well and some South American countries, that 25% or more is the same rate. So what I would tell you is it's less about what's that China number look like, and it's more about the blend and the ability to multisource from multiple countries of origin and to manage that dynamically and to work with suppliers that are managing that dynamically. And I feel like our team has done a great job with that. . It continues to be a challenge. And Brad mentioned earlier, and we've talked about on the call in the prepared comments about what we feel like the lion's share passed through in Q3 from tariffs, but I think we all know, we all listen to the news. I mean there's still some uncertainty about where that may go in the future with some of these countries until it's all said and done. So we feel like we're very well positioned to respond and react to whatever comes our way. The teams have done a great job with sourcing across the globe, and we're going to continue to do that and work with suppliers that are doing a great job of that. Brad Beckham: Yes, Brett, I may just jump in real quick. In terms of us directly to other competitors, we don't know. I mean we don't we don't spend near as much time frankly, looking at trying to parse the details of anybody else. That would be up to them to explain what we know is our merchandise teams and our pricing teams. Like I mentioned earlier, just doing a masterful job managing through this. We feel good about our scale, our negotiating power, our pricing power feel really good about the way that we have worked with our suppliers to mitigate all of this, I feel really good about where we're at from a pricing perspective versus our versus all our competitors, both small and big. WD independent all the way up to the other big 3, I feel really good about all that. So hard to say in differences of COGS and all those things. But -- we feel really good about where we're at, the way we've negotiated and just so proud of the teams managing through this. . Unknown Analyst: Okay. And then as sort of a follow through on that. And that 10% inventory per store growth is something maybe 4 of that is on a same SKU basis. The other 6, are you buying ahead of expected further price increases sort of getting a lower cost inventory into the DC ahead of additional expansion? Or are you adding units just from a strategic standpoint of a better fill rate and take more share? I guess, what's the growth in inventory ex the price factor? Michael Lasser: Yes, Brett. It's really more just us executing on our inventory strategies and how we think about deploying incremental inventory enhancements. Price has a little bit less of an impact on on the inventory balances just from the standpoint of being a LIFO reporter of this. You really only see inflation have an impact to the extent that you're kind of adding layers on top and there's been some of that, but not the same magnitude of what runs to the income statement. And I think conversely, no real change changes in that strategy as it relates to the broader cost environment, which we think is pretty stable. But obviously, those are decisions that we make based upon upon the objective of being the best in the industry from an availability perspective. Obviously, the cadence and timing of that can change period to period. It's not always does always roll out in the same kind of schedule as you were because we're pretty active about how we think about the right time and where we see opportunities to be able to execute that strategy. Brent Kirby: Brad, yes, just to add on to what Jeremy said too, Brett, specifically speaking we're going to continue to optimize our network. We talk all the time about our -- the strength of our tier distribution network, our regional DCs our hub stores and how we continue to optimize that network of SKU count and depth and breadth by secondary tertiary market, even the ones outside of the reach of our regional DCs. The other thing though is consider and think about for Q3 is we were stocking up our new DC in Stafford, Virginia as well, that's another component that brings more dollars into a system in a given quarter that may prove to be a little bit lumpy quarter-to-quarter with the investments in a new DC. . Operator: We've reached our allotted time for questions. I will now turn the call back over to Mr. Brad Beckham for closing remarks. . Brad Beckham: Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to our customers. I would like to thank everyone for joining our call today, and we look forward to reporting our fourth quarter and full year results in February. Thank you. . Operator: Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.