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Operator: Welcome to the Ardagh Metal Packaging S.A. Quarterly Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Stephen Lyons. Please go ahead. Stephen Lyons: Thank you, operator, and welcome, everybody. Thank you for joining today for Ardagh Metal Packaging's Third Quarter 2025 Earnings Call, which follows the earlier publication of AMP's earnings release for the third quarter. I'm joined today by Oliver Graham, AMP's Chief Executive Officer; and Stefan Schellinger, AMP's Chief Financial Officer. Before moving to your questions, we will first provide some introductory remarks around AMP's performance and outlook. AMP's earnings release and related materials for the third quarter can be found on AMP's website at ir.ardaghmetalpackaging.com. Remarks today will include certain forward-looking statements and include use of non-IFRS financial measures. Actual results could vary materially from such statements. Please review the details of AMP's forward-looking statements disclaimer and reconciliation of non-IFRS financial measures to IFRS financial measures in AMP's earnings release. I will now turn the call over to Oliver Graham. Oliver Graham: Thanks, Stephen. We delivered a strong performance in the third quarter with adjusted EBITDA growth of 6% versus the prior year quarter or 3% on a constant currency basis. Our adjusted EBITDA result of $208 million was towards the upper end of our guidance with both segments performing broadly in line with our expectations. Adjusted EBITDA growth in the quarter was supported by shipments growth in Europe and North America, lower operational and overhead costs as well as favorable category mix. Although global volumes were below our expectations in the quarter, on a year-to-date basis, they are up over 3% versus the prior year. The beverage can continue to benefit from innovation and share gains in our customers' packaging mix, underpinning our growth expectations. We continue to progress our sustainability agenda and our recently published sustainability report highlights strong progress towards our targets in 2024, including a 10% annual reduction in Scope 1 and 2 emissions and a 14% reduction in Scope 3 emissions with Scope 3 emissions now 25% below the 2020 baseline. We anticipate further good progress in 2025 and beyond. Turning to AMP's Q3 results by segment. In Europe, third quarter revenue increased by 9% to $625 million or by 3% on a constant currency basis compared with the same period in 2024, principally due to volume growth. Shipments grew by 2% for the quarter, driven by growth in energy drinks and faster-growing categories such as ciders, ready-to-drink teas and coffees, wines and water. This growth offset continued weakness in the beer category, which represents over 40% of our European portfolio. Third quarter adjusted EBITDA in Europe increased by 4% to $82 million, in line with expectation. On a constant currency basis, adjusted EBITDA reduced by 4% due to input cost recovery headwinds, partly offset by the contribution from higher volumes and favorable category mix. Given the continued softness in the beer category, we now expect full year shipment growth for Europe of low single-digit percentage for full year 2025. As we look into 2026, we continue to expect the market to grow around 3% to 4% and for our volumes to broadly match that growth. In the Americas, revenue in the third quarter increased by 8% to $803 million, which mainly reflected the pass-through of higher input costs to customers, including the impact of the higher Midwest premium in North America. Americas adjusted EBITDA for the quarter increased by 8% to $126 million, in line with expectations due to lower operational and overhead costs and favorable category mix, partly offset by the impact of lower volumes in Brazil. In North America, shipments increased by 1% for the quarter, broadly in line with the industry, following stronger-than-expected growth during the first half of the year. Year-to-date, North America shipments are up by 5%, ahead of the overall industry. The slower rate of growth during the quarter reflects some moderation in industry growth rates as well as temporary operational challenges. These included a modest impact related to aluminum can sheet supply as well as some temporary plant and network issues. We continue to monitor the metal supply situation as we progress through Q4. If the supply chain performs as currently projected, we anticipate only a modest impact to our expected Q4 North America performance. Customer demand for nonalcoholic beverages in cans in North America remains strong. And as such, we maintain our guidance for full year North America shipments of a mid-single-digit percentage growth. Looking into 2026, we expect industry growth of a low single-digit percentage. We expect a somewhat softer outlook for AMP following some volume resets largely related to specific footprint situations. We anticipate 2026 being a transition year before good growth in 2027 on the back of some contracted additional filling locations and ongoing market growth. In Brazil, third quarter beverage can shipments decreased by 17%, largely due to a weak industry backdrop across all categories, with industry beer can volumes falling by around 14% due to adverse weather and weak household consumption. Our weaker performance in Q3 follows a strong performance in the first half of the year. Year-to-date, Brazil shipments are down 1% versus a mid-single-digit percentage decline for the rest of the industry. We expect an improved volume trend for Q4 compared to Q3, and hence, full year shipments for Brazil to be broadly in line with the prior year. Looking into 2026, we expect the Brazilian industry to return to growth and for our volumes to broadly track the industry. I'll hand over now to Stefan to talk you through our financial position for the quarter before finishing with some concluding remarks. Stefan Schellinger: Thanks, Ollie, and good morning, good afternoon, everyone. We ended the quarter with a robust liquidity position of over $600 million. The net leverage of 5.2x net debt over last 12 months adjusted EBITDA represents a decline of 0.4x of leverage versus Q2 2024, reflecting adjusted EBITDA growth. It remains our expectation that the leverage ratio at year-end will be around 5x. We reiterate our expectation for adjusted free cash flow for 2025 of at least $150 million. In terms of the various components of free cash flow, our expectations are mostly in line with what we said in July. We expect maintenance CapEx of around $135 million, lease principal repayments of just over $100 million, cash interest of just over $200 million and a small outflow in working capital. We now expect cash tax to be in the range of $35 million to $40 million, growth CapEx to be around $65 million and a small cash exceptional outflow of approximately $50 million. Today, we have announced our quarterly ordinary dividend of $0.10 per share. And with that, I'll hand it back to Ollie. Oliver Graham: Thanks, Stefan. So before moving to take your questions, just to recap on AMP's performance and key messages. Firstly, adjusted EBITDA growth in the third quarter of 6% was at the upper end of our guidance range with both segments performing in line with expectations. Adjusted EBITDA growth was supported by shipments growth in both Europe and North America by lower operational and overhead costs and a favorable category mix. And the beverage can continue to outperform other substrates in our customers' packaging mix, supporting our growth. Reflecting our resilient performance, we are upgrading our full year adjusted EBITDA guidance. Full year adjusted EBITDA is now expected to be in the range of $720 million to $735 million based on current FX rates. We expect full year shipments growth for AMP to be approximately 3%. Having made these opening remarks, we'll now proceed to take any questions that you may have. Operator: [Operator Instructions] We'll take our first question from George Staphos with Bank of America. George Staphos: Congrats on the progress. I guess the first question I had, only have a couple. Can you talk, and Stefan, about what, if any, effects you're seeing from demand elasticity and higher realized or potentially realized aluminum pricing from can sheet within cans, both in North America and Brazil and then, I guess, broadly. And in that regard, with Brazil, the down, I think you said 17% on weak industry trends. Obviously, others have also put up some weaker industry volumes so far during reporting period in Brazil. Do you sense any of that is a pack shift mix back to other substrates because of, in fact, higher aluminum prices? How would you have us think about that? And along with the elasticity question, just can you talk a bit more about what's baked into your guidance for fourth quarter and realize you're not guiding on '26, just the outlook for '26 on can sheet. What operational challenges do you -- are you -- how are you going to -- we know what issues hit the supply chain? How are you managing against that and what's baked in to the extent you can comment? Oliver Graham: Yes. So yes, on the first question, I mean, I don't think we're seeing a huge amount on demand elasticity at this point. Obviously, everybody -- more or less everybody will have gone into 2025 pretty hedged, so a lot of the tariff impact won't come through in North America at this point, probably similar story for Brazil in some respects. So I don't think we're seeing it hugely impacting sales at this point. I think that there's a bit more risk for 2026 for exactly the same reason that hedges will be rolling. And so you would expect to see some higher aluminum costs come into the supply chain. And then it will be down to whether our customers pass those through or retailers pass those through and then how the consumer reacts in the overall consumer environment. So I think we're probably guiding North America for next year at a market level sort of 1% to 2%, and that's partly reflecting some of that caution about potential inflation in the can. I think in Brazil, I don't think we've seen a big reversion back into 2-way glass. I think it stayed pretty much steady the shares of cans. It just seems to be a general weakness on the volume level on the liquid level, and we see that in the reporting of the big brewers. And obviously, it was a pretty poor winter, a very cold winter that's been commented on. And obviously, there is a weak consumer backdrop in the category, particularly in beer, but actually soft drinks wasn't great either. So I think Brazil is just having a tough year. Again, as we look into '26, we'd assume that it reverts more back to its long-term trend. So maybe low to mid-singles. And as we said in the remarks, we'd be in line with that. In terms of Q4, so I think the can sheet, we're cautiously optimistic at this point. Obviously, there's been a lot of disruption in the supply chain. We were having it actually before the fire at that key facility. There was already some disruption in the supply chain, which we mentioned. And obviously, the fire didn't help. At this point, we think we're managing through. And obviously, it gets easier as the quarter progresses because alternative sources of supply can come into the mix, and we're obviously supplied from various domestic and international sources. And we also have 1 of the 2 new mills in North America now coming online, which is obviously very helpful to the situation. So at the minute, we're optimistic that we can get through that, as we said in the remarks, with relatively limited impact on North America performance. But we probably did lose 1 to 2 points of growth in Q3 across all of the operation issues that included a couple of plants that didn't perform at the level we expected and also the network was under some stress with some seismic issues. Operator: We'll take our next question from Matt Roberts with Raymond James. Matthew Roberts: First, on the 2026 growth in North America, it seems like there's a lot of innovation, potential shelf space distribution opportunities within your energy portfolio. So what's behind that transition here? And given your exposure, why in line with the market in North America? Oliver Graham: Yes. Great question. So look, I think we've talked about it on calls. It's been on other calls. There's a lot of contract reset activity in North America over the last couple of years. We're seeing that increasingly settle down now. And we're broadly very comfortable with the outcomes. We see ourselves increasingly strongly contracted through '28 and beyond. We do see some softness, as we said, in 2026, particularly on the 12-ounce side of the portfolio due to some resets within those situations. And as I said on the remarks, it's really about some specific footprint situations. So by -- what I mean by that is, for example, we had a customer with a very long freight lane out of the COVID years. We were at one point, thinking of building capacity. We decided not to with the overall volume situation. So now there is a plant much closer than our plant, and so that naturally reverts. And then another situation example is that one of our competition built a plant during this period of expansion and that plant is now closer to a customer filling location than our plant. And so we're seeing some, I think, relatively natural resets in the market. As you know, I mean, obviously, beverage cans are very susceptible to freight and footprint is critical. So yes, as I say, I think we're very comfortable with where we're coming out now. We do see '26 as a softer year in North America, where we will be behind the market. But if we take '27, we see good growth. We see we're gaining a couple of extra filling locations, and we see the market growing again. And as you say, I think if you look at the innovation that's going into the can and you look at the way energy has performed this year, that's a big part of our portfolio. We actually don't know where that's going to be. It certainly surprised us on the upside this year. I think it's got good potential next year, probably not to the same level, but it's a big part of our portfolio. So yes, we can be optimistic about those kind of categories as well. Matthew Roberts: Right, right. And then speaking of capacity and footprint, last quarter, you noted potential for adds in Europe. I believe it was Southern Europe, but recognizing these projects are long term in nature, has the volume outlook changed either the timing in regard to any potential projects? Or are you still expecting Europe to be pretty tight and needing additional lines in the future? And any early indications that how you think about CapEx in 2026? Oliver Graham: No. No, we don't see any change to the timing. So I mean, I think that the Europe market is pretty tight. We're particularly tight on certain sizes, and we'll address that. That definitely cost us some growth this year. Again, it's sort of specialty sizes in the season. We weren't completely able to follow and that cost us a bit of growth Q2 and probably persisted into Q3. So we'll do some projects around that in the off-season. And then, yes, we're running pretty tight. We've got some room for growth with continued improvement in the existing footprint, but we don't see any change to the timing of needing new capacity. Europe is a long-term growth market. It's been talked about on other calls. We're talking 3% to 4%. Some years, it's been more, some years a bit less, but it's been very consistent as per capita can penetration grows. So yes, we don't see anything. It's obviously had a bit of a weak summer, particularly in the beer category, but we're very optimistic about that market. And as we said in the remarks, we see ourselves growing in line with the market in '26. Operator: We'll go next to Stefan Diaz with Morgan Stanley. Stefan Diaz: Maybe just sticking with Europe. So obviously, the can continues to outperform underlying liquids volumes in the region. But in your opinion, how much more runway does the can have for outperformance? Like, for example, if overall liquid demand sort of remains kind of flat to down in Europe, can the can still grow in 2026, '27 and beyond? Oliver Graham: Yes, definitely. So I think if you look at the things that drive the growth, I mean, there's still significant underpenetration of cans relative to other geographies. Some of that is legacy with the German deposit scheme that took all cans out of the German market. So you still see German can growth at very high levels, obviously, a big market. You have growth out of 2-way and plastic in different parts of the region, Eastern Europe. We have the ongoing sustainability advantages of the can relative to other substrates. And obviously, you have in Europe, particularly the energy cost situation that's impacting glass. So we see a lot of runway for growth for the can in Europe. And I think that view is shared right across the industry and is backed up every quarter. If we look at our performance in the quarter, when we look at our markets that we were in, we were a touch behind, but only a touch behind. So I think there are always geographic and category mix impacts in individual company growth rates. But overall, we're happy with our performance, and we definitely see a lot of runway for can growth in Europe in the next few years, yes. Stefan Diaz: Great. That's helpful. And then maybe just can you -- if you could just touch on quarter-to-date trends by geography and maybe particularly if you could go into detail on Brazil, just given how weak this past quarter was on an industry level and just now how we're in the busy season down there. And then if I could just slip in one more. I might have missed this in the release, but can you quantify the IFRS 15 contract timing benefit? And is this potentially a headwind in 4Q? Oliver Graham: Sure. So I think -- I mean, quarter-to-date, I think trends look good, very much in line with guidance across all geographies. I think Brazil, clearly significantly better where we're guiding. If we're at the top end of the guidance, then we expect Brazil to be flat growth year-on-year, which obviously is, therefore, growth in Q4. And we already see in October significantly better performance than Q3. So we do see improvement. I think it's still a bit on the weak side, and we're still maintaining a cautious stance in our guide, but it's definitely better than Q3. And I think that Europe and North America would just say absolutely in line with where we expected. So it seems that there's a reasonable degree of forecast stability in our markets right now. I think the specific question on IFRS 15 is just a couple of million dollars, right? And maybe, Stefan, I don't know that we anticipate anything particular in Q4, but I'll hand that to you. Stefan Schellinger: No, I don't think we expect a major headwind in Q4 from IFRS. And sort of, yes, it's sort of around a couple of million dollars sort of in the Americas and then also a few more in sort of the European segment. But net-net, yes, we don't expect a major headwind from there. Operator: We'll go next to Josh Spector with UBS. Joshua Spector: I just had 2 questions. One on the cost side is within your comments, you talked about less input cost recovery in Europe. I assume that's non-metals related, but can you talk about kind of what that is and if that is something that can be recovered? And then with North America with some of the temporary network issues you've called out, I don't know if you can size that at all? And is that something that's resolved? Or is this kind of just an effect of a tighter market maybe leading to inefficiencies that persist? Oliver Graham: Sure. So taking the North American one first, I think those issues are resolved as we go into Q4. I think that they were a consequence of our strong growth in the first half, particularly on certain sizes. So we ended up with the network. We're basically pushing the shortage around different sizes across the summer. It landed on 12 ounce in Q3. And I think we mentioned in the remarks -- or I mentioned in one of my earlier replies that we probably lost 1 to 2 points of growth in North America in Q3, which was everything, including metal supply issues and some of our network and plant issues. So yes, we see those as fully resolved going into Q4. And the issue we're really very focused on is the metal supply, but as I say, cautiously optimistic at this point. And then the input cost, yes, we talked about it earlier in the year. Nothing's changed here. This is European aluminum prices. It's really a legacy of the Ukraine war and the energy spike. We managed to hold that off for several years. But in the end, there is energy and aluminum and those prices came through. And I think there has been commentary certainly at least in one of our peers on similar lines. So I think that not surprisingly, eventually, that energy shock translated through into some input cost price rises and that impact came particularly for us this year, it's different for different players depending on their supply mix. So nothing new there, exactly what we talked about earlier in the year. Operator: We'll go next to Arun Viswanathan with RBC Capital. Arun Viswanathan: I just wanted to get your thoughts on EBITDA and I guess, growth as you look into '26. So it looks like you're kind of on a $725 million or so run rate on an annualized basis. If you think about maybe low single-digit growth as you discussed for '26, it seems like you are executing relatively well. So does that translate to, say, maybe mid-single-digit growth on the EBITDA line? And then maybe is there any further leverage as you delever? Or how should we think about that progressing forward as you look at it? Oliver Graham: Yes, sure. Look, obviously, we don't guide '26 until our Q4s, and there's good reason for that. We're still rolling up the budget and all the detail. And also, there's still, at this time of the year, quite a bit of volume still under discussion or moving around. So we won't be guiding specifically. But if I just talk at the highest level, so I think I didn't say we were growing low single digits next year. I think what I said was Europe, we see growing 3% to 4% and us broadly in line. I said I think Brazil will grow low to mid, us broadly in line. And I said I think North America will grow 1% to 2% and will be softer than the market. So we don't yet have a global number. I think we definitely see earnings growth in '26 over '25. So some of those growth positions, particularly Europe, Brazil, we also see good operational cost savings. We've got a lot of opportunity in plants, in freight, in lightweighting, the usual places where can makers make operational cost savings, input costs, we're hopeful for '26 as well at this point. And obviously, we'll be keeping a tight eye as we always do on SG&A. Mix, we'd hope to be a tailwind '26. So we see a number of areas where we see earnings growth in '26, and we definitely see earnings growth over 2025, but we won't guide specifically on that until February. Arun Viswanathan: Great. And then maybe we can just discuss Europe just briefly. So in North America, we obviously saw a nice proliferation of new categories in nonalcoholic beverages. Could you just discuss maybe where we are in that trajectory within Europe? Is there maybe a tailwind that's coming? Or are we obviously already seeing it? And would you expect that to drive your results a little bit higher? Or would you be still maybe below the market because of the beer exposure? Oliver Graham: Yes. I mean we saw a bit of that in Q3, as I mentioned. So I mean, if you look where our Q3 growth came from, it came particularly out of the energy category, a bit like North America, came out of some of these faster-growing categories like ready-to-drink teas, coffees, wines, waters, we're strong in all those categories. So we definitely saw that. But I think the other piece with Europe, I think we also see general soft drinks in growth with substitution of plastic and also some 2-way systems being substituted still. So it's definitely not reliant on those more innovative categories to get growth in Europe. You can get growth fully in the core, if you like. And then I think what we're saying for 2026 is absolutely that this looks like a poor year for beer. There's no particular reason to believe that continues. So assuming beer stabilizes more into normal growth rates, then we would be in the 3% to 4% range, and that would be very good growth for all the can makers in Europe. Arun Viswanathan: If I can just squeeze in one last one. The recapitalization or the new structure -- do you see that at all impacting maybe your operations? Or does it allow for maybe a different way of thinking about capital allocation? Or is it just not really that impactful? Oliver Graham: Yes. I think too early to say anything on it. Obviously, the transaction hasn't closed. It's progressing well from what we understand, but too early to comment on anything, I think, with relation to that. Operator: We'll go next to Mike Roxland with Truist Securities. Michael Roxland: Congrats on all the progress. I just wanted to follow up on a comment you made in one of the prior questions about the growth you lost in Europe. And you mentioned also on the last quarterly call, calling out 1 or 2 points of growth in Europe because you couldn't pivot into smaller formats. You had good growth in soft drinks and energy. But given your existing beer position, which you noted is 40-plus percent in Europe, you couldn't make that transition. So can you just tell us how you expect to make that transition, how do you expect to become a little bit more nimble to target those growth categories to maybe try to minimize beer? Obviously, it didn't sound like you did that -- you didn't make much of a shift in 3Q, but can you tell us how you're going to ultimately do that, be 4Q, early 2026, how you're pivoting your mix to capture stronger growth end markets relative to beer in Europe, please? Oliver Graham: Yes, sure. So look, we're doing a couple of projects in the network, converting lines into those sizes, making lines flexible to allow us to be more agile in the season. So yes, we've got a couple of projects on the books for Q4, Q1 that will then have impact and be -- put us in a better position in Q2, Q3 next year. And then obviously, any capacity we're building out in the next few years, we'll make sure we're covering the growth sizes in the market. So we think we'll be in pretty good shape once we do these next few projects. Michael Roxland: Got it. And when you think about some of the conversions that you're doing or the flexibility that you're adding, when you add new lines, I guess, are you going to build those new lines with this functionality, with this flexibility to be able to switch sizes more easily in case market dynamics change? Oliver Graham: Yes, definitely. I mean, it costs a lot less if you do it at the beginning than when you try and retrofit, especially when you try and retrofit much older lines. So absolutely, I think it makes a lot of sense at the minute. The market is quite dynamic with different products coming to market, and we've seen in different summers, different products doing better or worse. So yes, it definitely makes sense for us as we build out new capacity to put that flexibility into the lines for sure. Michael Roxland: Got it. Okay. And then my last question is on North America. You mentioned the network issue has been resolved, and you remain optimistic on the metal supply issue resolving itself at some point. But fair to say, is there a risk to that 1% to 2% growth that you're targeting for North America next year should these metal supply issues persist into 2026? Oliver Graham: Yes. I guess, Mike, just to be clear, the 1% to 2% is the market growth, right? So we're saying we expect to be a bit softer than that. I don't see a risk to the industry or to ourselves in terms of metal supply next year. So obviously, we have 1 of the 2 new mills ramping up as we speak. That's extremely helpful to the situation. We expect the operational issues that are being suffered by Novelis to be resolved. Obviously, they're working very hard to address them. And then equally, we've all -- anybody that's in the market is sourcing other sources of aluminum and successfully doing so. So I think with the flexibility we all have in our supply chain with multiple sources of supply with the fixes they're doing and with the new mill ramping up, I don't see a risk of industry volumes or AMP volumes for metal supply in 2026. Operator: We'll go next to Anthony Pettinari with Citi. Anthony Pettinari: Ollie, I think you talked about kind of a bad year in beer in Europe, maybe not expected to repeat next year. And I'm just wondering if you can talk a little bit more about sort of the puts and takes there in terms of what you think really drove the weakness in Europe this year, whether it was consumer, weather? And then, I mean, in North America, there's been a lot of discussion around secular pressure on beer, given lifestyle changes, especially with younger consumers. Does that have a parallel in Europe? Or just wondering if you can kind of give us your big picture thoughts on beer into next year? Yes. Oliver Graham: Yes. Look, I think it's definitely too early to call a secular shift in Europe. I mean we don't have the depth of other products that we see in the North American market, other alcohol products with similar drinking characteristics that you have in North America. I think we've had a poor year. I don't think weather has really added. I think there's definitely some consumer weakness, which is hitting the category. We only generally work out later what the players did, were they promoting, not promoting. So we don't have all the data on that yet. So I think my view on this is that it's a big category. It's got some very strong players. And I think they won't be happy with this year at all and that they'll be putting in place strategies to reverse that into 2026. And as I say, I don't -- I think it's definitely too early to call any kind of secular shift in European drinking behavior. Anthony Pettinari: Got it. Got it. That's helpful. And then based on kind of an early view, do you expect that the aluminum conversion cost headwinds maybe continue in Europe next year? Or are there maybe some savings that we should kind of think about that could help you reach that sort of normalized operating leverage? Or just how should we think about that? Oliver Graham: I don't think we think there's necessarily savings, but there's no question that the step-up that we had this year moderates very significantly. So this was our step-up. I think if you look back over '23, '24, we really held it back despite the increase in energy costs that had flowed through. So this is where we took it. I mean the European market is tight on aluminum. So I don't see a huge savings opportunity there until there is more capacity put into the market, it needs that. But fortunately, there are significant import routes that are pretty competitive. And so I don't also see a major headwind, and we'll be exploiting on those routes. But yes, no savings, I think, but a definite moderating of some of the headwinds that we had this year. Operator: We'll go next to Gabe Hajde with Wells Fargo Securities. Gabe Hajde: I think earlier this week was the first time that we had heard that there might have been a little bit of movement in terms of contracts and maybe customers, maybe on the private label side. You mentioned next year that there's going to be, again, for your system, some changes and maybe underperform the market a tad. I'm just curious, as you're going through those negotiations with customers, what are their talking points as it relates to -- I mean, you already called out proximity to customer filling sites, so that makes sense to me. But just price or service levels, quality, et cetera, that's informing some of those decisions. Oliver Graham: Sure. Yes. Look, as I said in the remarks, I think that by far, the dominant factor that we've seen has been this footprint issue. As I said, we had planned back in '21, '22 to put some capacity in the north, and then we had -- people were very tight. So we had a contract that we served out of a long freight lane. And when we chose not to put the capacity in, obviously, we still have the contract for a few years. But then when it runs out, it's naturally going back to a closer can plant. And then as I said, we have the opposite effect where some of the new capacity that's come to North America obviously changes footprint dynamics for customers. So they get a plant that's actually nearer to them than they used to have and that our legacy plant is placed. And then we also had one situation with customer that halfway through the process, they had their own footprint review, which resulted in a filling location that we serve closing down. So I think if we look at the overall reason for softness in '26, its majority is down to footprint. I think the market is competitive, but I think it's normally competitive maybe after a few years where it was so tight through COVID, but I think it's in a normal competitive environment. And we don't hear anything particular on service. We generally get very high ratings on service and very good feedback for relationship management and customer support. So I think predominantly, we're talking about footprint-related changes and the fact that there is some capacity in the market for people to make moves. Gabe Hajde: Okay. Two questions on aluminum. Again, earlier this week, I think it was mentioned that all-in aluminum costs kind of crept up above, I think, all-time highs that we even saw during the pandemic. I think we were talking about maybe penny and a half or so of inflation just from raw material costs. That's maybe closer to $0.03 now if we were to mark-to-market. And again, I appreciate your customers hedge and probably roll that in 3 years in advance. So it's not going to all hit at once. But I'm just curious, when we've seen this type of inflation through the system, is it typically -- do they typically address that on an annual basis with pricing on the shelf? And then maybe relatedly, we observed a decent amount of promotional activity, especially on the carbonated soft drink and energy drink side in the first half of this year, maybe even the first 8, 9 months. Should we be mindful or thinking about anything? You mentioned volumes or sell into the channel decelerating a little bit in the second half here versus the first half. Is there any sort of dynamic in the first half of '26 that we could be mindful of maybe volumes actually -- industry volumes down in the first half and maybe growing in the second half, just given the tough comps? Oliver Graham: Yes. I think it's a good question. Look, I think you can't say there's no impact from that level of increase of aluminum pricing. So I think you have to assume there's some risk of inflation on the shelf and that, that has some impact on volumes because the categories are elastic. I think trying to predict exactly what our customers and retailers do with that is a fool's game. I think it depends a lot on where they are. They've taken a lot of price the last few years. And so they've probably got some firepower, which I think they deployed this year. I think not because of any personally, I don't think it's because of any particular sort of tariff-related insights. I think it's more that they have got that firepower in their margin structures and they can use it to drive volumes. And they are looking to balance cans versus plastic in their portfolios for all sorts of reasons. So I think predicting exactly what happens in '26 is very difficult to do. We're maintaining a 1% to 2% stance on North America growth for next year with us softer. And that's probably because we are being a little bit cautious around that issue. So yes, I think something is flowing through. You can't say it has no impact, but I think that hopefully, we see what we're expecting, which is that sort of growth rate. Gabe Hajde: Well, let's be honest, glass and other substrates are not immune, right? Like everything has embedded energy costs. So I'm curious. Oliver Graham: No -- that's really important -- sorry, Gabe, I was just going to build on that, right, which is that every quarter, we see that the can is outgrowing the other substrates. So then I think you take the sustainability piece, you take the energy cost piece, you take the fundamental cost structure of cans in North America. You look at the recapitalization that we've done as can makers and that our suppliers have done on the can sheet side, I think that the industry is very significantly more efficient than 10 years ago, and that is going to play through into overall cost structure. So yes, that's why I'm very bullish about long-term can growth rates in North America. I think there is a little bit of a headwind potentially from the tariff situation in the next 12, 18 months. Gabe Hajde: Understood. Last one, and it's just sort of digging into the supply chain a little bit. Obviously, it's been, I don't know, maybe 40 years that we've had new rolling capacity here in North America. Does that -- that does not address any sort of the ingot cost, Midwest premium cost that's embedded in. This is just more about localizing that can sheet supply. And so there's better efficiency, I guess, from a logistics standpoint. So then we got to kind of wait to see what happens politically if there's any change for cost structure for aluminum. And then in Europe, we're reading articles about they're frustrated that they're actually exporting scrap to the U.S. because maybe apparently, that's a way to circumvent some of the tariffs. Is that coming up in conversations in terms of cost of aluminum or can sheet over in Europe? Oliver Graham: Yes. So look, I think on North America, obviously, those mills are massively helpful to the industry, both in terms of supply, but also long-term cost structure, very efficient. Obviously, they had to get investment-grade returns to be built. So -- but I think those sorts of costs are built into the supply chain now. And so we don't see major changes. I think they're extremely positive for the industry to have that much domestic supply coming on and stopping a lot of the imports that were needed in North America and generally improving the quality of the industry. So that -- they're hugely positive, I think. And then in Europe, yes, look, I think the scrap situation isn't helpful as a way to avoid tariffs. Obviously, we were already hearing that the U.S. was very short scrap with issues that have gone on in Mexico and related to China, and that was impacting North American can sheet makers. So these flows will have impact, but we don't see them particularly changing what we're seeing in Europe at the moment. So nothing particular to report from that, I think. Operator: At this time, there are no further questions. I will now turn the call back to Mr. Oliver Graham for any additional or closing remarks. Oliver Graham: Thank you, and thanks to everyone on the call. So just summarizing again, adjusted EBITDA in Q3 grew by 6% at the upper end of our guidance with both segments in line with expectations. And reflecting that resilient performance, we're raising our expectations for full year adjusted EBITDA. So with that, thanks for joining the call, and we look forward to talking to you again at our Q4 results. Operator: This does conclude today's conference. We thank you for your participation.
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 Integer Holdings Corporation Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Sanjiv Arora, Senior Vice President, Strategy, Business Development and Investor Relations. Please go ahead. Sanjiv Arora: Good morning, everyone. Thank you for joining us, and welcome to Integer's Third Quarter 2025 earnings conference call. With me today are Joe Dziedzic, President and Chief Executive Officer; Payman Khales, President and CEO elect; Diron Smith, Executive Vice President and Chief Financial Officer; and Kristen Stewart, Director of Investor Relations. As a reminder, the results and data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP financial measures. For reconciliation of non-GAAP financial measures, please refer to the appendix of today's presentation, today's earnings press release and trending schedules, which are available on our website at integer.net. Please note that today's presentation includes forward-looking statements. Please refer to the company's SEC filings for a discussion of the risk factors that could cause our results to materially differ. On today's call, Joe and Payman will provide opening comments, Diron will then review our adjusted financial results for the third quarter of 2025 and provide an update for the full year 2025 outlook. Payman will then share our preliminary 2026 and 2027 outlooks and then we'll open up the call for your questions. With that, I'll turn it over to Joe. Joseph Dziedzic: Thank you, Sanjiv, and thank you to everyone for joining the call today. Today is my last call as Integer's President and CEO and my 64th and final as a public company CEO or CFO. As I reflect on the past 8 years as Integer's CEO, I am incredibly proud of what we've accomplished together. We've built a company with a clear vision, a compelling growth strategy and a strong values-based culture. When the CEO transition process began, I did not envision my last earnings call would include a reduction in our financial outlook. The recent customer forecast changes reflect the reality that not all new products achieve the level of success we expect or want. We expect this dynamic to be short-lived. Despite this news, we are still delivering strong results over the last 3 years. Our sales are up 39% from 2022 to 2025 at the midpoint of our outlook. Adjusted operating income is up 77% and adjusted EPS is up 73%. Our strategy and execution have delivered. And despite what the next few quarters hold, we remain confident in our strategy because when measured over time, it is working. I'm excited for Integer's future under Payman's leadership. He has played a pivotal role in shaping and executing our strategy and fostering our high-performance culture. As the President of our Cardio & Vascular business for 7 years, Payman delivered outstanding results, doubling sales and improving profitability. Tomorrow, Payman will become CEO and join the Integer Board. Thank you for your support of Integer during the last 8 years. I am now officially passing the baton and turning the call over to Payman to lead the remainder of the call, including the Q&A. Payman Khales: Thank you, Joe. On behalf of the entire Integer team, we extend our deepest gratitude for your exceptional leadership and strategic vision over the past 8 years. Your unwavering commitment to excellence has made Integer stronger, more innovative, better positioned to serve our customers and create value for our shareholders. The legacy you leave behind will continue to shape our future. I believe our strategy will continue to deliver for patients, customers and shareholders over the long term. I'm truly honored to step into the role of President and CEO. With great enthusiasm, I look forward to leading Integer in its next chapter of growth. We will build on the strong foundation that you've created and continue to advance our strategy with purpose and passion. We wish you well in your retirement. Now let's turn to our quarterly results and outlook. We delivered a strong third quarter in line with our expectations. Sales grew 8% on a reported basis and 7% organically, reflecting solid demand and execution. Our adjusted operating income increased 14%, driven by continued focus on operational excellence and expanding margins. Our adjusted earnings per share grew 25% year-over-year to $1.79. Despite this strong third quarter, we recently received customer updates related to the adoption of new products in the market that we expect will impact the next 3 quarters. The magnitude of these changes on multiple products at the same time is highly unusual. As a result, we are reducing the midpoint of our 2025 sales outlook by $16 million. This reflects recent changes in customer demand within our CRM&N product line primarily related to select emerging customers with PMA products. We are actively managing our costs to minimize the profit impact. As a result, we have reduced the midpoint of our adjusted operating income range by only $3 million and our adjusting EPS range by $0.02. For the full year 2025, we now expect to grow our sales between 7% and 8% or 7.6% at midpoint. We expect adjusted operating income to grow between 12% and 14% and adjusted EPS to grow between 19% and 21%. All in, this is a strong performance for the year. We usually provide our outlook for the upcoming year during our fourth quarter call in February after the completion of our annual budgeting process. However, given recent customer updates, we are providing a preliminary outlook for 2026. Based on the recent customer updates, we expect sales of 3 new products to decline in 2026, 2 electrophysiology products and 1 neuromodulation product for an emerging customer. The market adoption of these products has been slower than forecasted. We anticipate this will represent a 3% to 4% headwind to our total company sales for the next year. As a result, we expect organic sales in 2026 to be flat to up 4%. The impact of these specific products is expected to be more pronounced in the first half of 2026, leading to organic sales decline during that period. We anticipate a recovery to market growth during the second half as the new product headwinds moderate. On a reported basis, we expect sales to be down 2% to up 2%. This includes the final decline in Portable Medical as we complete the delivery of the last time buy orders in the fourth quarter of 2025, which is a headwind of approximately 2% to our total sales in 2026. While our 2026 outlook is not where we would like it to be, we remain confident in the strength of our long-term growth strategy, our portfolio and the depth of our customer relationships. Our continued focus on being designed into high-growth products early in the development process positions us well in the fastest-growing markets. Our product development pipeline continues to expand, fueled by close collaboration with our customers as they advance the next generation of medical technologies. Given the strength of this pipeline and our strategic positioning, we expect to return to above-market organic sales growth in 2027, which is consistent with our long-term financial strategic objective. I'll now turn the call over to Diron to review the quarter and the 2025 outlook in greater detail. Diron Smith: Thank you, Payman. Good morning, everyone, and thank you again for joining today's call. I'll provide more details on our third quarter 2025 financial results and provide an update on our full year 2025 outlook. In the third quarter of 2025, we delivered strong financial results. Sales totaled $468 million, reflecting 8% growth on a reported basis and 7% growth on an organic basis. Organic sales growth removes the impact of the Precision and VSI acquisitions, the strategic exit of the portable medical market and foreign currency fluctuations. We delivered $106 million of adjusted EBITDA, up $10 million compared to the prior year or an increase of 11%. Adjusted operating income grew 14% versus last year as we continue to make progress on our year-over-year margin expansion. Adjusted operating income as a percentage of sales expanded approximately 80 basis points year-over-year to 18.4% comprised of 10 basis points from gross margin and 70 basis points from operating expense leverage. Adjusted net income for the third quarter of 2025 was $63 million, up 27% year-over-year, while adjusted earnings per share totaled $1.79, up 25% from the same period last year. On a year-to-date basis, we are delivering strong results with sales up 9%, adjusted operating income up 14% and adjusted EPS up 20%. Turning to our sales performance by product line. Cardio & Vascular sales increased 15% in the third quarter 2025, driven by new product ramps in electrophysiology and incremental sales related to the Precision and VSI acquisitions as well as strong demand in neurovascular. On a trailing 4-quarter basis, C&V sales increased 18% year-over-year with strong growth from new product ramps in electrophysiology and neurovascular, as well as contribution from acquisitions. For the full year 2025, we expect C&V sales to grow in the mid-teens compared to full year 2024, which is consistent with what we shared on our July earnings call. In the fourth quarter of 2025, we expect C&V sales growth to decelerate from recent trends, reflecting a decline in the 2 new products in electrophysiology mentioned earlier. This is consistent with our prior outlook. However, we now expect this impact to continue into 2026, primarily the first half. Cardiac Rhythm Management & Neuromodulation sales increased year-over-year 2% in the third quarter 2025 and 4% on a trailing 4-quarter basis, driven by strong growth from emerging neuromodulation customers with PMA products and normalized CRM growth, partially offset by the planned decline of a neuromodulation program. For the full year 2025, we now expect CRM&N sales to grow low single digit versus 2024 compared to our previous expectation of mid-single-digit growth. This is primarily due to lower demand related to select emerging customers with PMA products. Product line detail for other markets is included in the appendix of the presentation, which can be found on our website at integer.net. In the third quarter 2025, we delivered $63 million of adjusted net income, up $13 million versus a year ago. This increase was driven mainly by operational improvements, which include higher sales volume, manufacturing efficiencies, gross margin expansion, operating expense management and acquisition performance. We also benefited from lower interest expense as a result of our convertible debt offering in March 2025 as well as a slightly lower adjusted effective tax rate. Our adjusted effective tax rate was 16.3% for the third quarter of 2025, down from 17.2% in the prior year. We now expect our full year 2025 rate to be within the range of 17% to 18%, which is 150 basis points better than our guidance in July. This improvement is primarily due to an improved outlook regarding R&D tax credits given our higher R&D investments. The year-over-year increase in adjusted weighted average shares outstanding drove approximately $0.02 reduction to our adjusted EPS. In aggregate, third quarter 2025 adjusted net income is up 27% year-over-year and adjusted earnings per share is up 25%, both growing much faster than our 8% sales growth, a very strong profit performance in the third quarter. In the third quarter of 2025, we generated $66 million of cash flow from operations, and our CapEx spend in the third quarter was $19 million. Free cash flow was $46 million in the third quarter, flat with the prior year. At the end of the third quarter, net total debt was $1.158 billion, which is a $46 million decrease compared to the second quarter 2025 ending balance. Our net total debt leverage at the end of the third quarter was 3x trailing 4-quarter adjusted EBITDA at the midpoint of our strategic target range of 2.5x to 3.5x. As Payman mentioned earlier, we are adjusting our sales and profit outlook ranges for 2025. Starting with our sales outlook. For the full year, we now expect reported sales to be in the range of $1.840 billion to $1.854 billion, reflecting growth of 7% to 8% on a reported basis. This includes inorganic growth of approximately $59 million from the Precision and VSI acquisitions, offset by an approximate $29 million decline from the previously announced Portable Medical exit, which is expected to be completed by the end of 2025. On an organic basis, we now expect sales to increase 5% to 6%. Our updated outlook represents a $16 million reduction at the midpoint compared to our July outlook, reflecting reduced expectations for our CRM&N product line. As mentioned earlier, the reduction in CRM&N sales was primarily driven by reduced customer demand for select emerging customers. For the fourth quarter, we expect reported sales growth of 2% to 5%. On an organic basis, sales are expected to be down 1% to up 2%. We have a more challenging year-over-year growth comparison as last year we benefited from new product ramps in both our C&V and CRM&N product lines. Consistent with our prior outlook, we expect lower sales in our electrophysiology business. The fourth quarter also reflects our reduced outlook for CRM&N. Even though we are adjusting our sales outlook, we continue to expect strong margin expansion driven by improvement in manufacturing efficiency and operating expense leverage. At the midpoint of our outlook, we continue to expect adjusted operating income as a percentage of sales to be 17.4% in 2025, an 85 basis point expansion compared to the full year 2024. This would result in a 13% increase in adjusted operating profit, a strong performance for the year. For adjusted operating income, we now expect a range of between $319 million to $325 million, growth of 12% to 14%, reflecting cost management actions to minimize the impact of our lower sales outlook. While still maintaining the same low end of our previous outlook range, this represents a $3 million reduction at the midpoint. For adjusted net income, we now expect a range of between $222 million and $227 million, an increase of 21% to 24% versus 2024, reflecting the strong operational performance, reduced interest expense and a lower adjusted effective tax rate. Lastly, we now expect adjusted earnings per share of between $6.29 and $6.43 which is a strong growth of 19% to 21% on a year-over-year basis. Our outlook assumes an adjusted weighted average diluted shares outstanding of 35.4 million shares for the full year 2025. Given the changes in our profit outlook, we are also updating our cash flow projections. We expect cash flow from operations to be between $230 million to $240 million, which represents a 15% year-over-year increase at the midpoint of the outlook. We now expect capital expenditures to be $95 million to $105 million. As a result, we expect to generate free cash flow between $130 million and $140 million, which represents a 35% year-over-year increase at the midpoint. We expect our 2025 year-end net total debt to be between $1.098 billion and $1.108 billion. This would result in a leverage ratio of between 2.7 and 2.8x trailing 4 quarter adjusted EBITDA, which is towards the lower end of our target range of 2.5 to 3.5x. I'll now turn the call over to Payman to discuss our preliminary outlook for 2026 and 2027. Payman Khales: Thank you, Diron. Due to the recent customer updates reducing volume of select new product in 2026 because of lower adoption in the marketplace and its expected impact on our 2026 sales. We are sharing our preliminary 2026 outlook earlier than usual. We remain confident in our long-term growth based on our robust development pipeline and the strong visibility we have to new product launches. This is why we're also providing a preliminary 2027 outlook. We expect 2026 reported sales to be down 2% to up 2% versus 2025, which includes an approximate 2% headwind from the planned portable medical exit that we will complete in 2025. On an organic sales basis, we expect to be flat to up low single digits. As I mentioned earlier, we recently received customer updates regarding 3 new products. Based on these updates, we now anticipate our sales for these 3 products to decline in 2026, which we expect to be a 3% to 4% headwind to our sales outlook. This offsets the expected 4% to 7% growth across the remaining portion of the business. The new product headwinds will be more pronounced in the first half of 2026. As a result, we expect our organic sales to decline low single digits in the first half of the year, with a recovery to market growth in the second half of the year. We expect the inorganic headwind from the portable medical exit to be similar in the first half and the second half of 2026. From a product line perspective, we expect both C&V and CRM&N to be flat to up low single digits on a reported basis as we navigate the select new product headwinds. In other markets, we expect a decline of approximately $30 million to $35 million, primarily driven by the Portable Medical exit. We're actively taking steps to align our costs with manufacturing volumes. Based on our preliminary assessment, we expect adjusted operating income in 2026 to range from a decline of 5% to an increase of 4% and adjusted EPS to range from down 6% to up 5%. As we look beyond 2026, we have a strong development pipeline with good visibility to new product introduction schedules over the next couple of years. Given the strength of this development pipeline, we expect to return to above-market growth in 2027. We continue to expand our product development pipeline with a focus on getting designed in early to new products in higher-growth markets. Since 2017, we project that by the end of 2025, our product development sales will increase by over 300%. This is up from the 270% growth that we shared at the end of 2024. Our mix continues to be approximately 80% in emerging and growth markets and 20% in more mature markets. We remain confident in our strategy and the long-term outlook for the business. The markets in which we compete are growing at a steady mid-single-digit rate in aggregate, and our approach is to secure early design wins in higher growth end markets. Approximately 70% of our sales are under multiyear agreements. In addition to driving strong organic growth, we plan to continue our tuck-in acquisition strategy while maintaining our leverage ratio within our targeted range of 2.5 to 3.5x. We have demonstrated that our strategy delivers results over the long term and remain focused on execution while we navigate the next 3 quarters. In summary, we delivered strong results for the third quarter, with sales growth of 8%, adjusted operating income growth of 14% and adjusted EPS growth of 25%. On a year-to-date basis, sales are up 9%, adjusted operating income up 14% and adjusted EPS up 20%. While we're updating our 2025 sales and profit outlook, and expect a more flattish sales performance in 2026. We are confident in our ability to return to 200 basis points above market growth in 2027, driven by our strong new product development pipeline. We will now turn the call over to our moderator for the Q&A portion of the call. Operator: [Operator Instructions] Our first question comes from the line of Brett Fishbin with KeyBanc. Brett Fishbin: Just a couple on the early 2026, if you can hit on the specific headwinds in a second. I was just curious, the green bar that related to rest of portfolio, organic growth is 4% to 7%. And I was hoping you could maybe touch on that part of the plan, given the deviation from the typical 6% to 8% when looking at it, excluding some of those new product introduction headwinds? Payman Khales: Yes, let me take that question. So what drives above-market growth of the 6% to 8% that you talked about is the new product introductions. Without new product introductions, the rest of our portfolio will grow at the rate of market. Now the headwinds that we're talking about, these 3 programs that we've highlighted that have given us headwinds in 2026, they're actually declining in 2026, which is -- which normally that would have helped us drive growth and get to that 6% to 8% range. So it's -- when you remove new products, the rest of the portfolio is expected to grow at the rate of market. Brett Fishbin: All right. Helpful. And then maybe specifically on the Cardio & Vascular items. I was hoping you could elaborate just a little bit on kind of the nature of the expected headwinds, whether it's a matter of loss of customer share of wallet for either of the 2 programs or whether it's tied to actual end market demand on both sides there? And then maybe I'll just squeeze in, like 1 quick follow-up. Just any thoughts on level of visibility into the return to market growth by 2H of next year, like how you get confident in such an improvement from, call it, like 2Q '26 into 3Q '26? Payman Khales: Yes, no problem. Thank you. So let me actually broaden your first question a little bit. I know your question was related to C&V. None of the products and customers that are talking about giving us headwinds either in 2025 or 2026 are loss products, loss of share, in-sourcing or products that are being pulled from the market. We are still the supplier for these products, and these products, all of them are still in the marketplace. Now getting specific to your Cardio & Vascular question, the headwinds that we are seeing is related to 2 electrophysiology products that had strong ramp in the first half of 2025, that we had anticipated would level out and that set down a little bit in the second half of 2025. And then we had visibility to the rate of growth kind of entering into 2026. These EP programs were scheduled to step up as we enter 2026. What we learned during the course of the third quarter is that the market adoption of these products has been less than what we had anticipated. This is new news. And as you can imagine, with the changing production plans and whatnot, we were -- we have been in discussion with our customers, since -- during the course of the third quarter, entering into the fourth quarter to kind of get our arms around it and the outlook that we're giving you right now for 2026 is as a result of this reduction in forecast. Now you talked about your second question being the level of visibility that we have. We still believe that we have very good visibility in our business. We have -- our backlog has remained steady. We entered the year at above $728 million of backlog and our backlog is still around the same number, around $730 million. That gives us good visibility. We have rolling customer forecasts from our customers for 12 months. We still have that visibility. Now what brings into question is the change that we're talking about today. And what I would like to highlight is maybe a little bit of a delineation between -- the -- some of the variability that we have in new product launches and how that can change over time as the products ramp, get into the market, get adopted at different rates and how our customers see changes that's what we're talking about. New product launches are inherently lumpy, if you will. But generally speaking, we see some do better, some do worse, Net total is that we kind of end up in the range that we had anticipated. What is unusual in this case is that we have a number of these programs having a big magnitude of change all at the same time. That is unusual. Let me just add 1 more answer to the question. I think one of the questions that you had is, in the second half of 2026, we are going to be anniversarying the big ramp, the growth that we had in the first half of 2026, which gives us also confidence in getting back to growth -- of 2025, pardon me, the first half of 2025. Operator: Next question comes from the line of Travis Steed with Bank of America. Travis Steed: I guess one, just -- is this a PSA product or an RF product that's changed in EP? And is it -- basically, it sounds like it's a customer who as of Q3 you didn't really know about it until Q3. I just want to make sure that's clear. And it sounds like it's a customer where they just have a different view of the end market demand, and that's really the only change in the EP side. Is that right? Payman Khales: Yes. So let me try to frame it in the context of 2 EP products. I can't be specific about the type of product, Travis, but it is 2 EP products. Now what you stated about the customer's learning about their demand is accurate. So what happened is that they had given us a forecast based on what they anticipated the rate of adoption in the market would be. There was a ramp period in the first half of 2025 and there was a leveling out and a little bit of a lowering as they were trying to gauge the rate of market adoption and their rate of sales. And then we had a forecast entering into 2026 that would be then stepping up. What changed is that they came to us in the third quarter effectively telling us that the rate of adoption has not been as they had anticipated as a result, 2026 is going to be impacting. Travis Steed: Okay. And you didn't know about it until Q3, it sounds like? Payman Khales: We did not know about it until the third quarter. And as I mentioned earlier, when we learned about this, obviously, we worked with them to try to understand the rate of change, the magnitude, our production plans because, obviously, you can't change your production plans very quickly. So these discussions also continued into the fourth quarter. Travis Steed: Okay. And is it a U.S. product or an international product? Or both? Payman Khales: We -- I can't be more specific than that Travis. I wish I could be. But because of the confidentiality that we have with our customers, I need to be -- I need to make sure that I can't be overly specific that the product is identifiable other than these are 2 products in the EP space. Operator: Your next question comes from the line of Joanne Wuensch with Citi. Joanne Wuensch: So it sounds -- I think I have an idea of what's going on in EP. Could you please explain if it was a similar dynamic that went on in neuromodulation, where things were supposed to ramp at a particular rate. And then in the third quarter, people came back and said, "No, no, that's not what's really going on." Is it a similar dynamic or a different dynamic? Payman Khales: We believe that it has to do with the rate of market adoption of select products in this space. So this book of business, our emerging customers with PMA product has done really well over the past many years. We've talked about the rate of growth of this book of business. And as we entered in 2025, we continue to have very strong growth. In fact, I would even say into the third quarter, that book of business was growing well in the rate of 15% to 20%, and we had anticipated the same rate of growth in the second half that we had seen in the first half. But what happened is that in the third quarter, some of these customers, we learned that the forecast that we had anticipated is not materializing for some of these customers. And we think what's happening is that the primary reason for the change is they are they're trying to align the purchases from us to match the market demand that they're seeing. Joanne Wuensch: That's in both section, sorry... Payman Khales: Yes, I apologize. So I think your question was, to make sure that I'm answering your question accurately. I think your question was related to 2025 because the impact that I talked about is specific to the fourth quarter of 2025. Was that your question? Joanne Wuensch: No. Actually, I thought you did a great explanation of EP, and I was curious if it was a similar explanation for neuromod? Payman Khales: It's similar in the sense that we believe that a handful of these customers are not seeing the rate of market adoption that they had anticipated. This is -- it's a similar dynamic from that perspective. Now the book of business of these emerging customers is still growing. It's growing in 2025, even with a decline in the fourth quarter. The rate of growth is going to be in the high single-digit rate, which is in alignment with neuromodulation. So it is -- we think there are -- we think this is just a question of a handful of these customers chewing up what they've bought from us with what they're seeing in the marketplace. Joanne Wuensch: Okay. Have you ever had an experience where you've had multiple customers, 3 in this case, sort of change their path in terms of their forecast and their ordering patterns with you? Or do you view this as sort of an aberration in your history of this business? Payman Khales: This is an aberration and is highly unusual. We see a rate of variation with new products. This is just normal. Our customers see that too. And we always take a step back and we look at what do we think the outcomes would be for each of these new products. And we kind of calculate a low case, if you will, a balanced view on the low case and a balanced view on the high case and on aggregate, we provide our guidance based on that. Some products do better than others, but usually washes out. So what we're talking about today is a number of them happening at the same time with a high level of magnitude. This is highly unusual. Operator: Next question comes from the line of Matthew O'Brien with Piper Sandler. Matthew O'Brien: Joe, best of luck in retirement. So Payman, just -- and sorry to stay on this topic on the C&V side. But as I calculated, I think it's about a $70 million reduction to your outlook for C&V for next year for those 2 EP products. I don't know if that's exactly the right number, but is that split evenly between these 2 programs? And then you say emerging customers, is that people coming along that were outside of maybe the top 3, your big 3 that are -- that make up about 45% of total sales. Is that how we should think about it? Payman Khales: So with regards to your first question, the math that you did is generally in the ballpark, but let me remind you that, that would be for 3 products, not for 2 EP products. So we have 3 products that have given us headwinds in 2026. 2 in electrophysiology, 1 in neuromodulation. Your second question is related, I think, to the emerging customers with PMA. No, these are emerging customers. That's why we put them in that bucket. These are customers that have new products, emerging therapies. We have about 39 customers that we've been working with and we have development pipeline with. Ten of those customers have products that are in the market or in different phases of launch. So these are not -- we're not necessarily talking about neuromodulation with the big customers. This is generally the grouping of customers that are newer and more emerging. Matthew O'Brien: Okay. And the same goes on the EP side. It's people that are emerging versus those that are maybe a little bit more established for you guys again, you've got customer concentration among 3 big providers out there that I think is just under half of total sales. So it's the people that are not in that top 50 for you guys, top 50%, it's other providers. Payman Khales: Yes. Our EP business is very broad. So obviously, we have a good book of business with the largest OEMs as well as others. So it's a pretty broad business that we have. And we have products across the procedure. So any ablation procedure has different steps into it from the access to body, from navigating the body, from mapping, diagnosing and, of course, doing ablation. We have product across the board with a different range of customers. Beyond that, I hope you understand that I can't be more specific. Matthew O'Brien: Got it. Okay. That's helpful. And then on the neuromod side, is it -- I guess, just kind of Joanne's question, it's an existing customer that is now seeing a little less adoption than they had expected. I mean, again, it would seem to be a pretty sizable customer. Is that a sizable amount of revenue that you hadn't been anticipating. So is that a fair assessment of kind of what's going on in the neuromod side too? Payman Khales: I think this is a question related to 2026. Is that correct? Matthew O'Brien: That's right, yes. Payman Khales: Yes. So the 1 customer that you're talking about, yes, they had a sizable growth in 2025 and they were seeing less adoption in the market that they had hoped. So they have a sizable decline in 2026. Operator: Your next question comes from the line of Nathan Treybeck with Wells Fargo. Nathan Treybeck: Can you just give color on -- so these 2 EP products and the neuromod product, how long were they in the market? I'm trying to understand, was there an inventory build in 2025 that contributed to the sales growth and then the end market demand is just not panning out? Is that what happened? Payman Khales: So these products have been launched recently, and they have been ramping. Both of them had strong ramp in -- excuse me, all 3 of them had strong ramp in 2025. The EP product specifically had strong ramp in the first half of the year, in the first 2 quarters which is typical when our customers launch -- continue launching products, there's usually a period of ramp because they want to make sure they have sufficient product in their distribution channels as they get products out. And then there was a leveling out, which was, again, expected and anticipated once our customers then kind of proceed with launch and they wait to see what the rate of adoption is. And as I mentioned earlier, they're seeing less than rate of adoption. The -- which is why they changed their forecast on us for, which is primarily 2026 impact. The neuromodulation product was a similar scenario in the sense that they had strong demand and strong growth in 2025, but they are not seeing the rate of adoption and they're seeing headwinds in the marketplace, which is why we're seeing a decline. Nathan Treybeck: Okay. And just to confirm the 2 EP products, they are from 2 separate customers? Payman Khales: I'm not at liberty to specify that again because we need to make sure that we maintain the confidentiality. So I had to be a little bit less specific in terms of how many customers, but I can tell you that there are 2 products. Nathan Treybeck: Right. Right. So at a high level, I mean, the EP market is -- the outlook is for a pretty strong growth. It sounds like these were novel products and not tied to like existing procedures because the overall outlook is pretty positive and what we're hearing from the manufacturers is pretty strong growth. So I'm just trying to understand were these kind of products that were not tied to procedure volumes as they are right now? Payman Khales: These are -- so let me start with the strength of the EP market in general, you're correct. The EP market is very strong. We have seen very strong growth in our EP business over the past 4 or 5 years, actually, including in 2025. So we -- our EP business has done really well, because, again, you're referencing some new products. But even if you take any new products out of the equation, we have a portfolio that goes into a typical ablation procedure. So as the EP market grows, our business has tailwind because of that. Now -- if we -- if then I come back to the impact of these 2 products, if I remove the impact of these 2 products, our EP business still grows at the rate of market, which is doing really well. So this is isolated to the impact of these 2 EP products. Nathan Treybeck: Okay. And just the last one for me. As we think about your prior outlook for the PMA portfolio, you're targeting 15% to 20%, 3- to 5-year CAGR. Is this kind of no longer intact. Payman Khales: No, it is still 15%, 20% CAGR over the next 3 to 5 years. We do anticipate some shorter-term headwinds, as we mentioned a little bit in the fourth quarter and during the course of 2026. Let me maybe add a little bit of color in 2026. We have -- if you take the one customer that we mentioned -- that I mentioned earlier that has headwind in 2026. If you take that out, the rest of the portfolio still grows at the rate of market, and we expect to get to above market growth in 2027 and beyond. And that's because new products that we have in the pipeline that are scheduled to launch and within that grouping of customers. We're not counting of any of the products that are giving us headwinds now to rebound in '27. It's more new product launches that we're expecting. Operator: Your next question comes from the line of Andrew Cooper with Raymond James. Andrew Cooper: I'm going to ask maybe 1 more on the EP side, similar to 1 that was already asked. I know you can't get into the specific products, but like mentioned, EP procedures aren't really inflecting away from expectations from a market perspective. So given you talk about that breadth of portfolio, is there any potential for you to recapture some of this volume elsewhere with other customers? And what would that look like? And when could we think about seeing that if or when it potentially could play out? Payman Khales: Yes. Thank you for the question. So we -- our EP business, I would reiterate, as I said earlier, is doing very well, excluding these 2 products that are giving us headwind. And then I would also add that we have new products that are scheduled to launch in the second half of 2026 and 2027. In fact, we have new product launches. I'll go a little bit more broad and then I'll come back specific to EP. We have new product launches schedule in every one of our growth markets in EP, in neurovascular, structural, heart and neuromodulation in the second half of 2026 and 2027. So we fully expect that we're going to get back to growth. Now back to EP specifically, one of the reasons why we are confident that we're going to get back to growth is because we're going to be anniversarying the strong rate of growth that we had in the first half of 2025 in the second half of 2026. We're not -- we don't have those costs anymore. And when you add the strength of our EP portfolio in general and some of the other product launches that are planned, we are confident that we're going to get to growth in the second half of 2026 and to above market growth in 2027. Andrew Cooper: Okay. Helpful. And then maybe a second one, just on margins and your ability to sort of offset the drag here looking for close to flat profitability similar to what you're expecting for revenue. So how do we think about the magnitude of potential cost out that you might be able to achieve here? Or is this, hey, we've got to be able to drive volume back to where we would expect and that's when we get back to more of that margin expansion like a typical year. Diron Smith: Yes. And Andrew, this is Diron. Just to confirm, you're referring to the 2026 margin? Andrew Cooper: 2026, correct, sorry. Correct. Diron Smith: Yes. So when we look at the '26 profit, as you know, we have put in a range of our adjusted operating income of down 5% to up 4%. That range, first of all, to note is very consistent with our sales range that we have also provided. So we're matching the sales range with that. Our profit algorithm, essentially, we rely on operating expense leverage on volume as well as our gross margin expansion primarily from an Integer Production System. As you can imagine, the volume piece of that algorithm will be a little bit more challenging in 2026. But we still have a very strong foundational process in our Integer Production System we focus on direct labor efficiency, where we reflect a focus on direct material efficiency as well. And we believe that's where we'll still be able to drive continuous improvement and see margin expansion. At the same time, with the lower volumes, we will be very disciplined in our cost management as we manage through these 3 quarters of headwind that we're facing. And so we believe next year, although down 5% to up 4% on the AOI range, we believe that we will be able to deliver on that, and we'll work to narrow that range as we get into February. Andrew Cooper: Okay. I'll stop there. And Joe, congrats and enjoy your retirement. Operator: Your next question comes from the line of Richard Newitter from Truist Security. Richard Newitter: Maybe I want to just go back to the process that you guys have for forecasting the business. I appreciate your [ CMO ], things are lumpy. You're dependent on customer orders. Historically, I think you said you have 3 months or more visibility. And usually, things work out, right, when you don't have 3 customers coalescing at once. So the puts and the takes work out. But I guess just in light of the fact that this happened this year, can you talk to us about any of the processes that need to be changed for your forecasting or how you potentially took into account the possibility for something like this happening again next year with the guidance that you're providing, where you guys are more of a [ Steady Eddie ] even with some of the quarterly variability. So I'm just trying to get a sense for how much visibility and then with the outlook that you're putting out now in '26, how we should be interpreting that from a conservatism standpoint. Payman Khales: Yes. And look, as you can imagine, we have been reflecting on this a lot. And we get customer forecast and we get purchase orders, as you correctly pointed out, and we got great visibility by our backlog, which, again, as I mentioned earlier, still in the range of $730-ish million, which gives us good visibility at least 1.5 quarters plus and then tie that to the forecasting that we get from our customers. This is highly unusual. We are looking at what our algorithm is and has been and how we calculate, if you will, our forecast has not changed. We -- for products that are in the longer term in our pipeline, we risk adjust those. Our customers tell us a certain range of outcomes. We look at that, we risk adjust those. And also, as you correctly pointed out, in sum total, they kind of wash out, and we usually end up in that range, that we expect 4 products that are longer, if you will, in the development cycle. In the shorter term, our production plan is based on what our customers tell us. If the customers tell us to build and deliver X, that's what we will do. So what's unusual is that they came to us and revised their forecast that impacted a shorter term than we would normally expect. So again, we're talking about the unusual nature of multiple customers, multiple products, large magnitude, all in a short period of time. We don't expect and anticipate that this will be a recurring thing. This is unusual. Richard Newitter: Okay. And then -- hello, can you hear me? Payman Khales: Yes, yes, of course. Richard Newitter: Sorry. Just maybe going back to the differences in the EP products, the electrophysiology projects and the neuromod projects. These are both products that were on the market and generating revenues throughout 2025 and in prior periods. These are not new and emerging PMA products where the PMA is about to get going or waiting for approval, correct? They just fall in the bucket of your PMA kind of R&D division. Is that right? Payman Khales: Both of these -- or all 3 of the products in EP and neuromod are products that have been in the market in 2025 and are still on the market and expected to be in the market in 2026. We are also the supplier for these products. In terms of the supply, nothing has changed. It just has to do with the rate of adoption of the products that our customers are seeing. Richard Newitter: Okay. And then just a follow-up on that. Are any of them finished good situations. I know you have -- you guys insert yourselves in many parts of the manufacturing processes. You can be very small slivers for different product areas. Is this -- are any of these related to finished goods where you have a bigger percentage of the overall manufacturing? Payman Khales: It's -- we have had a good portion. What I can be specific on is that we have a good portion of a bill of material beyond that, Rich, I can't be more specific. Operator: Your next question comes from the line of Suraj Kalia with Oppenheimer. Suraj Kalia: Good morning, gentlemen. Joe, congrats on your retirement. Wish you the very best. Payman, can you hear me all right? Payman Khales: Yes, I can. Suraj Kalia: So Payman, Diron, a lot of things have been thrown in this call. So forgive me if this question is long, just hopefully, I make sense here. So Payman, by definition, there are demand schedules established through which you'll come up with your backlog, right? You say your backlog is largely unchanged, but 2 EP customers are seeing softness. So I'm struggling to reconcile the contractual arrangements versus the suddenness of the demand curve moving leftward. I'm also struggling, Payman, just doing an exercise here, right? I'm trying to connect all the dots here on the EP side. So you're bullish about a new product in second half '26. Logic tells us that's [ bold ]. BSX already has -- is in the market, right? But there are 2 customers that you'll have seen the demand schedule move left. I mean, logic tells me you are implicitly telegraphing it's change in Medtronic. I know it's a long question, Payman. Help us understand because it's like suddenly a lot has been thrown in this whole story. Payman Khales: Suraj, I fully appreciate the question and what you're talking about. Yes, there are a number of moving parts, and that's what I keep referring as being highly unusual for us. So let me talk specifically about your first question, which had to do with our backlog and our visibility to orders. Yes, customers place orders. Again, if we have about $730-ish million in backlog, that is about 1.5 quarter worth of orders, right? I mean, if you want to just kind of look at it on average. So that's where we have good visibility to. Now let me highlight the following: we always work with our customers to meet their demand needs. If our customers tell us that they have purchase orders that they need us to then exceed and try to increase our capacity, we do everything that we can to do that, and we do the opposite as well. We try to work with them. If they come and tell us, look, I have more demand on you that I need, and I would like to scale that down. We work with them to do this in an orderly manner. And not necessarily look at, if you will, contracts and whatnot. We try to work with them to try to meet their demands and needs. Now let me highlight and be specific that the impact of electrophysiology products is 2026. We don't expect an impact on that in 2025, and our C&V business is still expected to grow per our previous guidance, which was in the mid-teens. So that has not changed, that is purely a 2026 impact. And let me also highlight that we are mostly sole sourced in our business. And ultimately, we see the products that end up in the marketplace even though if there are fluctuations in the shorter term and a little bit of variability, where we are sole sourcing the products, we end up seeing that demand over time. Maybe I think you had another question, Suraj, that was specific to products and customers. And of course, you understand that I can't be more specific on those. Suraj Kalia: I totally respect it, Payman and I hope you all appreciate. That's why all of us are trying to get bits and pieces here. So Payman, on the second part of my question, right, on the Q2 call, you had $5 million to $10 million, at least that was, if I remember correctly, pull-through in revenues. Payman, can you be a little more specific and tell us if it was specifically in EP? And part of the reason I ask this is if you were already -- there was already a sense of softness brewing on the EP side. Ultimately, Payman, it is hard to reconcile other company commentary in the EP space with what you all are seeing, right, the RFA softness has already been telegraphed. I cannot imagine that is the reason for the softness. So logic tells us there's something brewing in PFA. I'm just trying to connect all the dots here. Sorry for the lengthy question. Payman Khales: No, fully understand Suraj, thanks for all the questions. So let me try to address them one by one. The shift between 3Q and 2Q was multiple products. There were about 3 separate events that I had mentioned that were not specific to EP. So that was multiple products. With regards to what you're talking about the strength in the EP space, you're absolutely correct. The EP market is doing really well. And we have and in 2025, continue to do well and will do so in 2016 as well if you exclude the impact of the 2 products in question that are declining. So our portfolio in the electrophysiology continues to do really well, and we expect it to grow at the rate of market in 2026, excluding the negative impact of these 2 EP products. And once we anniversary in the second half of the year, the impact of the ramp that we had in the first half of 2025, we fully expect to get back to growth for our total business, but of course, in EP as well to the rate of market growth and then be above market growth in 2027. We see this as a 3-quarter headwind, in the fourth quarter and the first half of 2026, and we fully expect to get back to growth in the second half of '26 and above market growth in 2027. Operator: Your next question comes from the line of Andrew Cooper with Raymond James. Andrew Cooper: One more follow-up here. But -- maybe just diving into this one other way. Can you share a little bit of context on the EP side of how much of this is lapping inventory build versus truly lowering how you and your customers think about the end market demand because I think that's the question we're all trying to get to. If these customers are slower, are you telling us the end market is a little bit slower and it's not getting made up for elsewhere, it's getting made up for in other customers that you don't work with or other players that you don't work with or kind of what is the situation there? Because I think that's kind of one of the key pieces here. That all these questions are going to in terms of what's going on in the EP market versus specific customers given you are broadly exposed like you talked about. Payman Khales: Yes, I fully understand the question. And it's as an element of both. I mean our customers had a ramp. They got products from us. They're adjusting. They're getting real-time feedback as to the rate of adoption in the marketplace, what they're seeing those products doing and they're adjusting their demand on us. So it's probably an element of both. Operator: And that's all the time we have for questions. I will now turn the call back over to Payman Khales for closing remarks. Payman Khales: Okay. Thanks, everyone, and I'd like to summarize our conversation today. We're facing a 3-quarter sales headwind, and we expect to return to growth in the second half of 2026. We have a strong development pipeline and expect to get to above market growth in 2027 and as I take on the helm, I'm excited to lead our team to deliver for patients, customers and shareholders. And thank you again for your time and interest in Integer. Operator: Thank you again for joining us today. You can access the replay of this call as well as the presentation on Integer's investor website at integer.net. This concludes today's conference call. You may now disconnect.
Operator: Hello, and thank you for standing by. Welcome to Valley National Bancorp Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Andrew Jianette. Please go ahead, sir. Andrew Jianette: Good morning, and welcome to Valley's Third Quarter 2025 Earnings Conference Call. I am joined today by CEO, Ira Robbins; and CFO, Travis Lan. Our quarterly earnings release and supporting documents are available at valley.com. Reconciliations of any non-GAAP measures mentioned on the call can be found in today's earnings release. Please also note Slide 2 of our earnings presentation and remember that comments made today may include forward-looking statements about Valley National Bancorp and the banking industry. For more information on these forward-looking statements and associated risk factors, please refer to our SEC filings, including Forms 8-K, 10-Q and 10-K. With that, I'll turn the call over to Ira Robbins. Ira Robbins: Thank you, Andrew. Valley delivered strong results in the third quarter, reporting net income of approximately $163 million or $0.28 per diluted share. This is up from $133 million or $0.22 last quarter and represents our highest level of quarterly profitability since the end of 2022. This performance reflects a significant operating momentum that has been building in our organization. This quarter's results were highlighted by robust core customer deposit growth, continued momentum in net interest income and fee income, disciplined expense control and a meaningful reduction in credit costs. Our balance sheet remains extremely strong, and we have achieved many of our stated profitability goals ahead of schedule, including annualized return on average assets being above 1%. Valley is well positioned in the current environment. In 2024, we enhanced our balance sheet and are now leveraging this strength to improve our profitability and franchise value. Today, I'm thrilled to formally introduce our new commercial and consumer banking leaders who we believe will help accelerate the next phase of our evolution and success. Gino Martocci joined Valley in March as President of Commercial Banking, bringing extensive experience from M&T Bank, where he led national commercial and CRE banking efforts. Gino played a key role in M&T's growth and has already contributed his market knowledge, network and strategic insight to support our commercial franchises further development. In September, Patrick Smith joined as President of the Consumer Banking, following leadership roles at Santander, Capital One and other large financial institutions. Patrick will oversee retail, consumer and small business sectors, drawing on a notable record of growth and execution. Gino and Patrick are already making an incredible impact by enhancing our customer acquisition efforts, talent base and strategic operating model. Their expertise helps position Valley to further leverage our strong foundation and accelerate our strategic initiatives. Before passing the call to Travis, let me highlight a few of the key areas of sustained momentum. First, ongoing growth in core deposits and funding transformation. Over the past 12 months, we've added nearly 110,000 new deposit accounts, which have contributed to nearly 10% core deposit growth. Targeted investments in products, technology and talent, especially in commercial and specialty lines have driven this progress. Consequently, indirect deposits as a percent of total deposits dropped from 18% to 11%, the lowest level since the third quarter of 2022. This has been achieved alongside a 56 basis point reduction in our average cost of deposits since the third quarter of 2024. We continue to actively manage deposit pricing in the back book and expect to benefit from lower deposit costs in the fourth quarter and into 2026. Secondly, noninterest income. Excluding volatile net gains on loans sold, noninterest income has grown at an annual rate of 15% since 2017, 3x faster than publicly traded peers in our size range. We spoke last quarter about our focused efforts with respect to treasury management and tax credit advisory opportunities. These initiatives collectively contribute roughly $3 million of incremental revenue during the third quarter. The success of our treasury management demonstrates our effective combination of technology and talent. The implementation of an upgraded platform following our core conversion 2 years ago, coupled with expanding our expert sales team has resulted in nearly $16 million of incremental deposit service charge revenue on an annualized basis since the third quarter of 2024. Thirdly, the resilience of our credit performance. Consistent with our guidance, we saw a significant reduction in net charge-offs and provisions during the third quarter. We expect to sustain these levels again in the fourth quarter. At the start of 2024, Valley was notably CRE-heavy in a challenging environment. However, differentiated underwriting and credit management have limited aggregate CRE losses to just 57 basis points of average CRE loans over the last 7 quarters. Although 2024 CRE charge-off rates were beyond our internal standards, loss rates have remained far below larger banks, more pessimistic stress test forecast. From a C&I perspective, we continue to focus our growth efforts on traditional small business and middle market opportunities in our well-known geographies and established specialty verticals. As I mentioned last quarter, we have specifically targeted the health care C&I and capital call line areas, given their compelling risk-adjusted return profiles. We've been active in both verticals for some time, and we have never taken a loss on a Valley originated health care C&I or capital call loan. I am extremely proud of our organization's achievements over the past few years, and I'm highly optimistic about our future prospects. The bank continues to demonstrate exceptional momentum with respect to customer growth, talent acquisition and profitability. We have set ambitious goals for ourselves and are confident that continued execution of our strategic initiatives will deliver substantial value to our associates, shareholders and clients. With that, I will turn the call over to Travis to discuss this quarter's financial highlights. After Travis concludes his remarks, Gino, Patrick, Travis, Mark Saeger and I will be available for your questions. Travis Lan: Thank you, Ira. Slide 9 illustrates our continued core customer deposit growth momentum. We gathered about $1 billion of core deposits during the quarter, which enabled us to pay off approximately $700 million of maturing brokered deposits. Brokered deposits now comprise 11% of our total deposit base, representing the lowest level since the third quarter of 2022. Roughly 80% of the quarter's core deposit growth came from commercial clients, reflecting our proactive business development efforts and the continued success of our treasury management sales efforts. The relative stability of average deposit costs during the quarter masked a 7 basis point reduction in spot deposit costs from June 30 to September 30, which positions us well heading into the fourth quarter. Turning to Slide 12. Gross loans decreased modestly on a spot basis due to targeted runoff in transactional CRE and the C&I commodity subsegment, which was acquired from Bank Leumi USA in 2022. Commodities payoffs accelerated during the third quarter, leaving a modest $100 million of C&I loans left in this business line at September 30. CRE loans made to more holistic banking clients increased during the quarter, supported by the conversion of construction projects to permanent financing. Other C&I activity slowed from the second quarter's exceptional pace of growth. Average loans increased 0.5% during the quarter. The pipeline is rebuilt, and we anticipate solid origination activity as the fourth quarter progresses. New origination yields were stable during the quarter at around 6.8%. Average loan yields improved 7 basis points on a linked quarter basis due to the fixed rate asset repricing dynamic that we have previously discussed. As a result, our cumulative loan beta stands at 21% for the current cycle. Slide 15 illustrates the second consecutive quarter of 3% net interest income growth. NIM improved for the sixth consecutive quarter aided by asset repricing and sequential growth in average noninterest deposits. While excess cash held during the quarter weighed on our margin by an estimated 3 basis points, we are on track to achieve our above 3.1% NIM target for the fourth quarter of 2025. We expect that net interest income will grow another 3% sequentially in the fourth quarter. The current interest rate backdrop, combined with anticipated fixed rate asset repricing remains supportive of further NIM expansion in 2026. Noninterest income continued its strong momentum this quarter. Deposit service charges saw continued growth as we expanded the penetration of our commercial client base with our robust treasury management platform. Wealth management was also strong, lifted partially by our tax credit advisory business. We anticipate that fourth quarter fee income will be generally stable within the range of the last 2 quarters. Turning to Slide 18. Adjusted noninterest expenses declined modestly, driven by lower compensation, occupancy and FDIC assessments. These improvements were partially offset by higher third-party spend. Professional fees are expected to remain at this modestly elevated level, but total expenses should remain flat or only marginally higher in the fourth quarter as compared to the third quarter. Our efficiency ratio continues to improve, and we anticipate further progress as we generate additional positive operating leverage in the fourth quarter of 2025 and into 2026. Slide 19 illustrates our asset quality and reserve trends. Nonaccrual loans increased during the quarter, primarily due to the migration of a $35 million construction loan. It was in the 30- to 59-day past due bucket at June 30. We anticipate resolution of this credit with no incremental impact, but from a timing perspective, it necessitated migration to nonaccrual. On a combined basis, total past dues and nonaccrual loans as a percentage of total loans declined 9 basis points from June 30 to September 30. Net charge-offs and loan loss provisions saw meaningful declines during the quarter, consistent with our prior guidance. We foresee general stability in 4Q, implying improved 2025 guidance relative to the range of our prior expectations. Slide 20 emphasizes our cumulative commercial real estate charge-off experience since early 2024, affirming the effectiveness of Valley's distinctive underwriting and credit management practices. Despite the relative challenges of 2024, cumulative losses remained far below the adverse forecast of DFAST eligible banks. Turning to Slide 21. Tangible book value increased as a result of retained earnings and a favorable OCI impact associated with our available-for-sale portfolio. Regulatory capital ratios continue to increase, and we utilized around $12 million of capital to repurchase 1.3 million common shares during the quarter. We remain extremely well capitalized relative to our risk profile and have ample flexibility to support our strategic objectives and sustain the strong momentum that we are experiencing. With that, I will turn the call back to the operator to begin Q&A. Thank you. Operator: [Operator Instructions] Our first question comes from the line of David Smith with Truist Securities. David Smith: Could you speak to the competitive backdrop, just given the decline in C&I loans? I understand some of that was commodities driven and the increase in deposit costs for the quarter on average. I think I understood there was a decline on the spot deposit rate, but just help us unpack what's happening on a competitive basis driving some of those trends and what you -- how you're expecting them to revert in the fourth quarter and the coming year? Travis Lan: Yes. Thanks, David. This is Travis. Maybe I'll start on the deposit cost side, and Ira and Gino can chat a little bit about the competitive environment from a loan perspective. So to your point, spot balance or spot deposit cost declined from $630 million to $930 million by 6 basis points. I'll tell you, quarter-to-date, we're down another 7 basis points from a spot perspective. So when you factor all that together, I think the beta relative to the 25 basis point cut in late September is consistent with what we've modeled. I would just say quarter-to-date, since 9/30, we paid off another $500 million plus of additional brokered at a rate of $450 million. The environment for new deposit relationships remains competitive. We originated $1.4 billion of new deposits this quarter at 2.9%. That compares to $1.8 billion in the second quarter at 2.8%. So the competitive environment for new relationships is still there. I would just say we have continued opportunity on repricing the back book, which we were effective with during the quarter. So I think as we enter the fourth quarter, I mean, deposit costs will come down. And I think there's more opportunity as we head into 2026. Gino Martocci: Thanks, Travis. This is Gino Martocci. As it relates to the competitive landscape, we continue to see very strong demand both in C&I and CRE. There is ample liquidity in the marketplace. Banks are -- and nonbanks are fighting pretty hard for loans. And we have seen some decline in spreads. But our pipeline remains very strong, and we continue to add loans and then add clients. David Smith: Okay. And then just on capital, stock is barely 1x tangible right now, and you've got 11% CET1 and TCE almost 9%. Just with loan growth expectations, about 1% for the next quarter, how are you thinking about the buyback opportunity against conserving capital for longer-term organic growth ambitions? Travis Lan: Yes. I think, look, over the last couple of quarters, we've talked about a near-term CET1 target of around 11%. And the reality is, given our risk profile, we'd be very comfortable in a range below that, call it, 10.50% to 11%. Historically, we've thought about the buyback in the context of repurchasing shares that we issue for incentive purposes. But to your point, I mean, based on the progress that we've made, the outlook that we have and the incredible confidence that we have in investing in ourselves, I do think that the buyback will be an increasing source of capital deployment going forward. Operator: Our next question comes from the line of Feddie Strickland with Hovde Group. Feddie Strickland: Just wanted to ask on the geography of CRE and C&I. I think you've got a majority of C&I outside the Northeast at this point. As you look at your pipeline today, do you expect to continue to have more business coming from outside the Northeast than inside the legacy Northeast footprint? Gino Martocci: So our originations for the quarter and actually for the last year really reflected 1/3, 1/3, 1/3; 1/3 in the Southeast, 1/3 in the Northeast in 1/3 in our specialty businesses. So as it relates to CRE, Florida franchise remains very strong, and we expect to see slightly more originations down there, but it's pretty evenly split amongst the geographies. Ira Robbins: Maybe I'll just add to that, Feddie. I think as you know, we've spent a lot of time investing into the Florida footprint. We went into Florida, I think, back in 2014 with the acquisition of First United Bank. We then acquired a couple of other banks in that footprint. I think in the aggregate, it's about $4 billion to $5 billion of commercial assets that we acquired. Today, we sit with commercial assets that are well north of $15 billion, right? From a loan perspective, it's one of our largest geographies. That's $10 billion of organic growth in just a 10-year window, I think represents really the foundation and footprint that we have in that Florida area, an unbelievable set of lenders and unbelievable set of bankers there and obviously very strong markets. And we continue to really make sure that we're focusing on letting that be a more sizable piece of what our franchise is. So as we think about the growth projections that we've outlined, obviously, as Gino said, we're seeing strong contributions coming from the specialty and coming from the Northeast as well. But we feel really strong and confident in the growth numbers are largely a function of what we're seeing in the Florida footprint as well. Feddie Strickland: Ira, I appreciate that. And just one more for me. I just want to ask on the fee side. How should we think about the capital markets business and the insurance businesses in particular over the next quarter or so? It seems like capital markets has held up pretty well. Insurance maybe have some seasonality. Just within the guide, obviously, how should we think about those businesses? Travis Lan: Yes, I would anticipate general stability for the fourth quarter, general stability in both areas. I think heading into 2026, there is definitely momentum on the capital market side. So just as a reminder, for us, capital markets is 3 businesses. It's our syndications business, our FX desk and our swaps desk. The swap activity tends to be more tied to commercial real estate originations, which have picked up over the last couple of quarters and helped support revenue there. FX has been a long-term growth trend for us as we continue to expand our commercial client base and the folks that utilize that offering. So I think there's good tailwinds definitely on the capital market side. Operator: Our next question comes from the line of Anthony Elian with JPMorgan. Anthony Elian: Could you provide more color on the increase in nonaccrual loans? I know you called out the construction loan that migrated to nonaccrual but no further impacts, but I would love to hear more on the commercial real estate loans that migrated. Mark Saeger: Certainly, yes. Again, this is Mark Saeger, Anthony. The increase primarily driven by the one $35 million loan, while it's in construction bucket, I'd note that it's really a land loan. So really strong value there. The borrowers in the midst of a refinance to take us out. We don't anticipate any issues with that at all on the go forward. The other primary migration into nonaccrual is based off of updated appraisals. What I would note is that 50% of our nonaccrual portfolio is current on payment. So there's just some appraisal valuation and consistent with our [Audio Gap] to go there, but that is a much higher percentage of paying nonaccruals than we've seen in the portfolio in quite some time. Our overall view of the real estate market is we're starting to see definitely positive activity even within the office market in the real estate portfolio. I'd point to the improvement in our criticized assets for the quarter after a stable second quarter, and that improvement really came from approximately 2/3 of payoffs in refinance at par and about 1/3 upgrade. So we're definitely seeing positive movement in the real estate market. Anthony Elian: And then my follow-up, on your commercial real estate concentration fairly well below the 350% level now at 337%. Looking ahead, how low do you think you can take that level? And at some point, would you expect to actually grow CRE balances? Travis Lan: Thanks. This is Travis. So look, I think we are targeting growth in CRE. I think we're looking at low single-digit growth for 2026 and beyond. But as a result of capital growth, that ratio would continue to decline. I mean for us, the next kind of guidepost is 300%. I think you're probably there at the end of '26, early '27 and then continuing to grind lower over time. And again, that's just our own focus on ensuring that we're diversifying the balance sheet. And candidly, when you look at our peer group and the set of peers that are above us from a size perspective, I mean, we do remain somewhat of an outlier. So it's something that we've been focused on. We've made a ton of progress on. But at this point, we expect that CRE balances will stabilize and begin to grow and then allow that capital to build to drive the next leg down in the ratio. Operator: Our next question comes from the line of Manan Gosalia with Morgan Stanley. Manan Gosalia: A question for Gino. Where do you see the biggest white space for Valley? What areas are you most focused on? And which subsegments or geographies do you think you need to invest most in? I recognize that you're focused on health care, C&I and capital call, but maybe if you can talk about opportunities outside of that. And maybe same question for Patrick, although that might be an unfair question. I know you've only been there for a month now. Gino Martocci: Yes. So thanks for the question. As Ira mentioned, the Florida franchise is an incredible differentiator from my perspective. It's had sustained momentum and growth for many years now, and that growth continues. It's now a $15 billion franchise. It's largely organic. And there's considerable opportunities ahead for that. In addition to that, I think Valley has an opportunity to go upmarket in C&I. And in fact, we're adding some upmarket C&I lenders. It's more in that $150 million to $500 million revenue space than Valley traditionally played in. They're actually onboarding 5 senior bankers who're building out their teams currently. In addition, I really see a tremendous opportunity for Valley in business banking. But currently, we didn't sell it into that book as much in the deposits as we should -- as we could have. And we have a real opportunity to do that. And I think we can gain significant deposits from that book. And as part of that effort, we're going to build out a professional -- we're going to expand our professional services book to focus on law firms, accounting firms, medical and dental practices. And the deposit profile of those companies is extremely good. So we think that going upmarket C&I is a real differentiator for us as well because there's a real void left by the larger institutions and regional banks that are consolidating away. Valley's attention to the relationship, their responsiveness is frankly superior to the super regional banks and is rewarded by our customers. So as I mentioned, we're bringing on seasoned bankers. They're going to build out teams. We're doing it in every geography. We're adding business bankers as well. And we went through the efficiency exercise in order to create that capacity. So there's a number of opportunities, I think, for Valley to grow in 2026 and beyond. Patrick Smith: This is Patrick. First of all, let me say that I am incredibly enthusiastic about what I've seen so far in my first few weeks at Valley. And to your question, I'd offer up a few points. One is small business. When I -- I've been conducting an evaluation of our small business segment, and I'm excited about the opportunity we have to really grow in this segment. We've been underpenetrated in small business. And we have a real opportunity to grow organically in that segment across our footprint. So we've been adding experienced small business bankers and enhancing our product set to go after that opportunity. So I think it's a wonderful opportunity for us. We've already added 8 bakers in principally in Florida and New Jersey to take advantage of the opportunity. The other one I'd say quickly is that we have an opportunity to organically grow deposits from a retail perspective in our branches. Our branches have been positioned historically in support of our commercial business. as we pivot more toward a focus on -- or add a focus on retail, there's a real opportunity for us to grow our small business -- sorry, our retail franchise through our branches. And so we have a really good branch network across our footprint. That's an incredible opportunity. And then finally, I'd echo what Gino said, which is we are acquiring really strong talent across the retail bank, and I expect us to continue to do that. And that's going to be a core driver as it is in commercial of our retail franchise growth. Manan Gosalia: That's great. I really appreciate the thorough response here. Maybe a follow-up for Ira and Travis. So you're beating your expense guide. You're clearly investing and there's clearly some more white space to invest in. How should we think about the expenses as we go into 2026? How much of these investments are already in the run rate versus how much do you think you'll need to accelerate that spend? And I guess I'm asking from the point of view of as NIM expands further from here, should we expect that you can drop most of those benefits to the bottom line? Or are there areas where you'd want to invest as we go into next year? Travis Lan: Yes, thanks. From an expense perspective, I mean, we undertook over the last couple of months an efficiency exercise where we tried to unlock savings in some of the back office and corporate service areas that could be reinvested in the front office that Gino and Patrick have talked about. So this is all baked into the near-term expense guide that we provided for the fourth quarter. And I'd just tell you as we begin to kind of pencil out 2026, I mean, I don't think there's any reason to move ourselves off of a low single-digit expense growth rate for that year as well. So our goal is to invest in revenue-generating talent that's going to enhance franchise value and ensure that we're dropping the majority of that revenue growth to the bottom line. Ira Robbins: Maybe I'll just talk about sort of in my mind where we sit from sort of positive operating leverage. And I'll maybe take a step backwards and go where we were before the regional banking challenges that we had in 2023. But if you go back to June of '23 in that period of time, we had 3,957 associates across our entire footprint. Today, we're 3,624, so a contraction of 333 associates, about 8.5% over that period of time. Just once again, taking a step back, in 2022 at the end, we had a return on tangible common of 17.20%, right? So obviously, a lot of focus on continuing to grow the organization and delivering returns for our shareholders that we think are appropriate, and we definitely believe that we'll get back to. Obviously, we had to sort of recalibrate how we thought about investing into the organization in 2023 based on some of the external challenges that happened with SVB and Signature, et cetera. And then obviously, a refocus on commercial real estate based on what happened with NYCB and a few others at that point in time. So we feel really strongly that we've made the cuts necessary to really open up the ability for us to reinvest back into revenue in this organization. And as Gino alluded to, as Patrick alluded to, you're going to see continued hiring within the organization and really a growth trajectory that's going to get us back to return on tangible common numbers that we think we've delivered before and more in line with where the higher-performing peers are. So we don't believe we're going to need to really add on a lot of incremental expenses that we've created space for that. And we are really, really confident in the positive operating leverage that we're going to be able to generate here. Operator: Our next question comes from the line of Chris McGratty with KBW. Christopher McGratty: Travis, going back to your comment about the CRE book troughing and growing low single digit, how do you think about the impact at low rates -- lower rates will influence that, I guess, that statement? Travis Lan: Yes. Look, I think we assume, obviously, in our loan growth guide, some amount of payoffs consistent with our loan growth -- or excuse me, with our rate forecast. So it's in there and look to the degree that rates are significantly lower than we anticipate payoffs would accelerate. There's no doubt and then we'd end up kind of on the lower end of our guidance range for loan growth. But what I would say is when you look at -- we took 2024 off effectively from a CRE origination perspective, which is a period of time in which I think the highest yield in CRE loans were put on. So I don't really think that we have maybe the headwind that others do in terms of potential impact of lower rates on payoff activity. I mean we still have a fixed rate loan portfolio that's yielding in the mid-4s to 5%. And so you got to pull rates down pretty significantly before you'd see a significant acceleration of payoff activity. So I'm not saying it's not a factor, but I just think we're a little bit more insulated than maybe other lenders would have been. Gino Martocci: I would add that lower rates will also drive some transaction volume. I mean our pipeline is $3.3 billion today in total C&I and CRE. That's up from $2.1 billion in 2024. And it's much more -- so it's more like 50-50 CRE, C&I where it was more like 60-40 up until this quarter. So we're seeing good momentum in C&I and CRE and the payoffs are here, but -- and the liquidity is in the marketplace, but we're effectively building our pipeline. Christopher McGratty: That's helpful. And I guess my follow-up, Ira, is more of a strategic question. It seems very clear that buying back your stock at book value is the right move. Is there a scenario where you deviate and consider inorganic at these levels? Ira Robbins: Look, I think -- let me just start with, there really is no change in how we think about M&A across the organization. For us, I would say, being shareholder-friendly and focusing on shareholder is the primary focus of how we think about anything when it comes to capital allocation across the organization. Obviously, as you know, we've done a handful of M&A acquisitions over a period of time. And there's always been a focus on what that tangible book value dilution would look like and what the return to the shareholder is going to be. As we think about sort of capital deployment as we continue to move forward, I think as Travis has alluded to, we're sitting at a pretty significant discount to where our peers are. We feel really confident in the trajectory of where the earnings profile is. And when you're sitting at 1% on tangible book, it seems like a pretty good use of capital to me. Travis Lan: I would just add, Chris, just from an M&A perspective, I mean we -- as you can hear in Gino's voice and Patrick's voice, like we have an incredible organic opportunity set ahead of us. And so our primary focus is supporting the growth that we'll generate organically. I would say more M&A in the system is good for us, right? It creates additional disruption that we can capitalize on. And through the investments that we're making in the talent, we're working to position ourselves to capitalize on that. Operator: Our next question comes from the line of Dave Rochester with Cantor. David Rochester: You mentioned NIM expansion in 2026. That makes a lot of sense. And without trying to nail you down to a range right now, how are you thinking about what a more normalized NIM level could look like just given the forward curve and then everything you guys are doing on the remix of CRE and the other work on the funding side? Travis Lan: Yes. Look, I think, I mean, for legacy Valley, which would have been CRE-heavy and overreliance on wholesale funding, that normalized NIM probably would have been 2.90% to 3.10%. I think if you look back over time, that's where you would see them fall most of the time. Look, I think structurally, the balance sheet has already improved materially with the increase in C&I and the enhancement of the core funding base. And I would say now a more normalized margin for Valley is probably be closer to 3.20% to 3.40%. I think, as I said in my prepared remarks, I have high confidence we'll be at 3.10% or above in the fourth quarter. And I think you can pencil out another 20 basis points of expansion from the fourth quarter of '25 to the fourth quarter of '26, which gets you kind of within that more normalized range. And I think there's additional upside as we further enhance the funding base because none of what I just described includes any growth in the composition of noninterest deposits. And I think we have a real opportunity there. So look, I think we got a lot of tailwinds heading into 2026, and we look forward to executing on them. David Rochester: Great. And on the effort to go upmarket, where are you in the innings of that hiring in that effort? Are you hiring underwriters as well along with the senior bankers? And then when are you expecting to be really hitting the ground running on that effort? When will you start to see the boost in growth from that? Gino Martocci: We've had a lot of traction in hiring both senior people and underwriters thus far. We wanted to get them in here so that we can hit the ground running in January really and really all through 2026. I think you're going to see some real momentum in more upmarket C&I and in business banking, frankly, for next year. And we are -- which inning, I think we're probably only in the second or third inning at this point, but momentum has been strong. And people have a willingness to come to Valley. It's got a good perception in the marketplace and we're just excited about the opportunity. David Rochester: It seems like that boost to growth could be pretty substantial, right? I mean how are you guys quantifying that? Ira Robbins: Maybe just before we get into that, I think, look, there's obviously headwinds in different quarters. You look at this quarter, the unused line or usage changed. There was the commodity headwind that we had. So we've had strong contribution as you think about sort of what the C&I growth has looked like for an extended period of time. We do believe, obviously, as you think about sort of the new hires that are coming into the organization on the commercial side that there'll be a lot of strength there. And maybe I'll just reiterate real quickly what Patrick said also. I mean SMB has been a solid performing vertical for us. But we're really leveraging that up as you think about the people that are coming in. And these are known people to Patrick, known to the market that we've been in. So it's really across the board as to how we think about what loan growth is going to look like. Obviously, as we talked earlier, there's potential headwinds when it comes to interest rates and CRE runoff and everything like that. But as Gino said, we're sitting with a $3.3 billion pipeline today. That's like $1.2 billion more than where we were about a year ago. I mean that's unbelievable. So we think the tailwinds there for loan growth in addition to the fact that Gino is still hiring and Patrick is still hiring. Travis Lan: Yes. We're penciling out mid-single-digit loan growth expectation for 2026. So call it at a range of 4% to 6%. I think the more hirings that you get done, you'd get to the upper end of that for sure. And I think if you zoom out and think about where Valley has been, we've been a high single-digit, low double-digit loan grower in our history. Now a lot of that's been driven by high single-digit CRE growth. And to the point we've made before, we expect CRE growth will pick up, but we're not going to return to that level. And so think about low single-digit CRE growth, low double-digit C&I growth, contributions from consumer. I think that's how you begin to get to that 4% to 6%. The other thing I would add on the hires is these are not transactional lenders and we're talking about holistic bankers that are bringing deposits as well. We haven't talked yet on the call about the significant deposit growth that we saw this quarter, but core customer deposits were up $1 billion. It's a significant annualized pace. It's due to a variety of factors. It's very broad-based. But part of it was this is the first year we've incentivized our bankers more on deposit growth than loan growth. And so I think that's paid off significantly. Operator: Our next question comes from the line of David Smith with Truist Securities. David Smith: Just thinking a little bit longer term now, you did 11.6% adjusted ROTCE in the third quarter, guiding to operating leverage with cost of credit improving this coming quarter, and it sounds like pretty decent operating leverage next year as well. The cost of credit can stay controlled like you think. Can you just give us the latest on how you're thinking about profitability improvement over the next year or 2 in the context of your 15% goal? Travis Lan: Yes. So there's no change to our 15% ROTCE target. I think we're pretty confident we can effectively achieve it by late '27, early '28. If you think about where we're starting today in rough numbers, we have a 350 basis point gap to close in that period of time. 75% of that's going to come from net income expansion based on all things we're talking about mid-single-digit loan growth, margin expanding into the high 330s, continuation of high single-digit fee income growth and low single-digit operating expense growth and to your point, normalized credit costs. Under those assumptions, you get pretty close to the 15%. The delta is going to be with that backdrop, you're going to build excess capital dramatically. I think that leads into the buyback conversation we've already had today. So I think those are the factors that we think about. But again, we think that we have high confidence in the target on that time line. And I do think there's also some flexibility in the levers that we'll get there because ultimately, the environment isn't going to play out the way that we model it to, but we have flexibility to ensure that we achieve that. Operator: Our next question comes from the line of Matthew Breese with Stephens. Matthew Breese: Travis, I want to go back to a comment you had made. I just want to clarify. I thought you had said maybe kind of normalized loan growth in the 4% to 6% range. Is that accurate, did I hear that right? Is that a good bogey for 2026? Travis Lan: Yes. Matthew Breese: And then alongside that, maybe just help us out with the deposit growth alongside that and the outlook. And is there a potential we might see a further lowering of the loan-to-deposit ratio in '26? Travis Lan: Yes, I think that's part of our plan, Matt. So we would anticipate that deposit growth will exceed loan growth. The loan-to-deposit ratio today is 96.4%. I mean, over time, we'd love to get that to 90%. There's no time line on that expectation. But I think each year, we'd make progress. It doesn't mean it's a straight line down. I mean you may have quarters where it bumps around a little bit, but we've made a lot of progress and have a lot of momentum. The other thing that we think about from a funding perspective is loans to nonbrokered deposits today is 108% and that should be closer to 100% for sure. So we would need to obviously grow core deposits in excess of loans to continue to make progress there. But again, based on some of the efforts that we've undertaken, I would just add, Matt, I talked about the incentive plans with our bankers, incentivizing deposit growth. The treasury management capabilities that we have has been another key driver there. So that's been significant as well. Matthew Breese: Got it. All right. And then my last one, admittedly feels a bit out of tune given all the positive and optimism on the organic front. But it feels like the M&A deal window is open, and I heard your comments loud and clear, Ira, on focusing on organic. But I did want to get your sense on or thoughts on all strategic alternatives, including maybe a potential sale because the big bank M&A window appears open as well. I haven't seen that in a while, and just would love your thinking there. What would type -- will drive that type of outcome? Ira Robbins: I'll just go back to the one commented shareholder first, right? And I think that's how we need to think about anything that happens in this organization. Operator: Our next question comes from the line of Jared Shaw with Barclays. Jonathan Rau: This is Jon Rau on for Jared. I guess maybe looking at the CRE side of things, it sounds like there's a pretty good capacity for these borrowers to refinance away from Valley and I guess, the banking system. Is there any subset of CRE borrower that's having a little more difficulty in finding that alternative capital source? And then particularly, if there's any insight on how that would look for like rent-regulated multifamily? I know they're small there for you, but just any color would be helpful. Mark Saeger: So Jon, Mark Saeger again. As I mentioned, we're actually seeing really positive trends in the office space with stabilization there and really some rational transactions. So I think you hit the nail on the head. The only other segment that continues to be a little stagnant is that rent stabilized in New York. But as you mentioned, it's a very small part of our overall portfolio. We have just around $600 million that has more than 50% rent stabilized, very small portion of our overall portfolio, not a growth portfolio for us. We weren't competitive in that market because we offered a lower loan amount traditionally and required stronger in-place debt service coverage or our lower level and why that portfolio continues to perform for us. But it's still an area that we're watching on a go forward. Jonathan Rau: Okay. Perfect. That's helpful. And then just looking at expenses, it sounds like professional fees are still expected to remain elevated in the fourth quarter. Does that continue into 2026? And I guess what's driven the increase in the last 2 quarters? Travis Lan: Yes. I would expect it remains at the current level for the fourth quarter and into 2026, at least for the first half of the year. As part of the efficiency exercise, we've utilized consultants to help us enhance our operating model and organizational design. So those are temporary dollars that we have to spend. But again, we've offset it with the savings that we've generated in the compensation line and elsewhere. Jonathan Rau: Okay. Great. And then just last one for me, that land loan that the borrowers refying away from you. There's -- just wanted to confirm there's no loss expected on that -- through that process. Mark Saeger: No, we have more than adequate value there. No loss anticipated. Operator: Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Jon Arfstrom: Mark, maybe for you. What do you think the time line is for nonaccrual balances to start declining? I know you feel comfortable, but just curious on your thoughts on that topic. Mark Saeger: So I would point, right, it's hard to talk about a time line on resolution of some of these items other than the one that I just mentioned, which we do think has a short-term resolution. But I point kind of to the strength that we're seeing in the CRE market, the reduction in criticized. I think that will also translate in some resolution on especially that 50% of our nonaccruals that are continuing to pay current. So I don't anticipate a material inflow on a go-forward basis, but it may take some time to see some of those CRE-loans finance out. Jon Arfstrom: Yes. Okay. That's helpful. I appreciate that. Just kind of bigger picture, it looks like it's a good quarter. I'm just curious if you guys feel like this is a new floor for EPS for the company. And I'm especially curious, I guess, if you feel like this is a more normalized provision as we look forward? Travis Lan: Yes. I think that's absolutely true. So I mean, just the progress that we've made, I mean, part of the overhang coming out of the liquidity crisis is on the funding side. I think we've done a lot of work over the last years to rectify that, which has enhanced our net interest income, obviously. We still have a significant fixed rate asset repricing tailwind behind us. As we head into 2026, we have $1.7 billion of loans that are coming off from a fixed perspective at a rate of around 4.75%. That creates significant opportunity and supports the margin expansion that we've talked about. From a credit perspective, I mean, I think we all anticipate here that you need to see normalized charge-off rates in '26. So call that around 15 basis points, give or take, and a generally stable reserve. So when you factor that all together, I think you are seeing -- this provision level is effectively sustainable from my perspective within a given range. Operator: Our next question comes from the line of Janet Lee with TD Cowen. Sun Young Lee: On deposits, when I look at specialized deposit growth over the past quarter, that's about $700 million. It looks like a lot of that is going into replacing indirect deposits. You mentioned deposit growth should be picking up at a -- should be growing at a faster pace than loan and with the incentivized structure change, I guess that's going to help. If I look at the pace of deposit growth from the specialized deposits, I guess, more specifically on other commercial and small business, could -- is this the area where you expect a lot of your deposit growth to come from? Could it continue to grow at the $2 billion pace per year that you reported over the past year? Travis Lan: Thanks, Janet. This is Travis. I think, look, that it is an area of focus for sure. This quarter, we had $100 million of specialty deposit growth within the bucket you're describing came from health care clients. I mean there's still momentum there. We had $200 million between HOA, cannabis and our national deposits group. So those are kind of specialty niches that we bank. That was $300 million of growth this quarter. We look broad-based across the franchise, whether it's in the branch network, which is a combination of consumer and commercial deposits as well as the other commercial bucket that you're talking about. I mean there was significant growth in all of our markets. New Jersey was up $200 million commercial. New York up $150 million commercial. These are deposits. Florida up $150 million commercial. So there's significant tailwind and momentum across the franchise. So I think specialty deposits should grow at an above average rate, but it's not the only source of growth that we have. Sun Young Lee: Got it. And you made your point clear about that 4% to 6% loan growth over the intermediate term in 2026. So in terms of over the near term that had -- that 3Q headwinds from commodities, C&I payoffs, can I consider that as temporary? And there's -- or is there any parts of Bank Leumi or within Valley that you might want to run off? Travis Lan: No. I think that's temporary. It was a dynamic unique to this quarter. I think if you zoom out over the last 6 months, that gives you a better sense for some of the pace of growth. I think total loans are up 2.5% annualized in that time line, but that includes some additional headwinds from CRE runoff. So look, I think from a given quarter, loan growth may move around a little bit based on the timing of closings. But I think you'd see more significant momentum if you zoom out a little bit. Operator: Our next question comes from the line of Steve Moss with Raymond James. Stephen Moss: Maybe just circling back to the loan pipeline here. With the $3.3 billion pipeline, just curious what's the coupon on those new originations? Travis Lan: This is Travis. So this quarter, new origination yields were 6.8%, which was consistent with last quarter. I'd say the pipeline yield is similar, although slightly lower because benchmark rates are lower. We saw some spread tightening earlier this year. I'd way that's fairly consistent, maybe a little bit more now, but that's kind of where we sit. Stephen Moss: Okay. And then on the expansion moving upstream into larger loans, just kind of curious how do we think about pricing for those types of loans will be relatively tighter? And are you thinking about them being syndicated? Just kind of curious. Any color you can give there. Gino Martocci: Valley has always been done loans of this size. They just haven't had the focus on it. And we're just going to -- we're going to more intently focus on it and bring in talent that's done this before. The pricing tends to be a little thinner and we're building out our syndication. We continue to build out our syndications platform. We will want to originate these loans and sell some of them. The pricing, as you know, it tends to be 1.75 to 2.25, more or less. And we wouldn't play much below that amount. So -- and then the relationships tend to be fulsome, deposits, fees, opportunities for capital markets, et cetera. So we see it as a driver of profitability going forward. Stephen Moss: Okay. Great. I appreciate that color there. And then just on the criticized and classified, I think I heard that they went down. Just kind of curious if you could quantify the level of decline and also wondering if substandards declined this quarter. Mark Saeger: So yes, we had a $100 million reduction in criticized in total for the period. Again, I mentioned that was through not just upgrades, but payoffs in financing out, which is positive. And I'll have to get back on the -- specifically on that substandard component. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. And that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to Intel Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, John Pitzer, Vice President, Investor Relations. Please go ahead, sir. John Pitzer: Thank you, Jonathan, and good afternoon to everyone joining us today. By now, you should have received a copy of the Q3 earnings release and earnings presentation, both of which are available on our Investor Relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I am joined today by our CEO, Lip-Bu Tan; and our CFO, David Zinsner. Lip-Bu will open up with comments on our third quarter results as well as provide an update on our progress implementing strategic priorities. Dave will then discuss our overall financial results, including fourth quarter guidance before we transition to answer your questions. Before we begin, please note that today's discussion contains forward-looking statements based on the environment as we currently see it and as such, are subject to various risks and uncertainties. It also contains references to non-GAAP financial measures that we believe provide useful information to our investors. Our earnings release, most recent annual report on Form 10-K and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations. They also provide additional information on our non-GAAP financial measures including reconciliations where appropriate to our corresponding GAAP financial measures. With that, let me turn things over to Lip-Bu. Lip-Bu Tan: Thank you, John, and let me add my welcome this afternoon. we delivered a solid Q3 with revenue, gross margin, earnings per share above guidance. This marks the fourth consecutive quarter of improved execution delivered by the underwriting growth in our core markets and the steady progress we are making to rebuild the company. While we are still a long way to go we are taking the right steps to create sustainable shareholder value. We significantly improved our cash position and liquidity in Q3, a key focus for me since becoming CEO in March. This includes accelerated funding from the United States government, important investments from NVIDIA and SoftBank Group and monetizing portion of Altera and Mobileye. The action we took to strengthen the balance sheet give us greater operational flexibility and position us well to continue to execute our strategy with confidence. In particular, I'm honored by the trust and confidence President Trump and Secretary Lutnick has placed in me. Their support highlights Intel's strategic role as the only U.S.-based semiconductor company with leading-edge logic R&D and manufacturing. We are fully committed to advancing the Trump administration's vision to restoring semiconductor production and proudly welcome the U.S. government as our essential partners in our efforts. We also made tangible progress to improve our execution this quarter. We remain on track not only to rightsize the company by year-end but also to evolve the talent mix, reestablish the engineering-first mindset and optimize the executive and management levels across the organization. We are seeing a significant increase in day-to-day energy and collaborations as our employees return to office after a sustained period of remote and hybrid work. Let me dive deeper into our underlying business trend. Over the course of my career, I have had the privilege of contributing multiple ways of disruptive innovation. But I can't recall a time that I have been more excited about the future of computing and opportunities in front of us. We are still in the early stage of AI revolution, and I believe Intel can and will play a much more significant role as we transform the company. Let's start with our core x86 franchise, which continues to play a critical role in the age of AI. AI is clearly accelerating demand for new compute architectures, hardware models and algorithms, at the same time, is fueling renewed growth of traditional compute as the underwriting data and the resulting insights continue to rely heavily on our existing products from cloud to edge. AI is driving near-term upside to our business, and it is a strong foundation for sustainable long-term growth as we execute. In addition, with unmatched compatibility, security and flexibility by virtue of being the largest installed base of general purpose compute, x86 is well positioned to power the hybrid compute environment that AI workloads demand, particularly for inference edge workloads and agentic system. It is a great starting point from which to rebuild our market position to revitalizing and rejuvenating the x86 ISA and positioning for the new era of computing with great products and partnerships. Our collaboration with NVIDIA is a prime example. We are joining forces to create a new class of products and experience spanning multiple generation that accelerate the adoption of AI for the hyperscale, enterprise and consumer markets. By connecting our architectures to NVIDIA NVLink, we combined Intel CPU and x86 leadership with NVIDIA unmatched AI and accelerated computing strength, unlocking innovative solutions that will deliver better customer experience and provide a big hit for Intel in the leading AI platform of tomorrow. We need to continue to build on this momentum and capitalize on our position by improving our engineering and design execution. This includes hiring, promoting top architecture talent as well as reimagining our core road map to ensure it is the best-in-class features. To accelerate this effort, we recently created the Central Engineering Group, which will unify our horizontal engineering functions to drive leverage across foundational IP development, test chip design, EDA tools and design platforms. This new structure will eliminate duplications, improve time to decision-making and enhance coherence across all product development. In addition and just as important, the group will spearhead the build-out of our new ASIC and design service business to deliver purpose-built silicon for a broad range of external customers. This will not only extend the reach of our core x86 IP but also leverage our design strength to deliver an array of solutions from general purpose to fixed function computing. In client, we are on track to launch our first Panther Lake SKU by year-end, followed by additional SKUs in the first half of next year. This will help us to solidify our strong position in the notebook segment across both consumer and enterprise with cost-optimized products across our full PC stack from our entry-level offering to our mainstream core family, up through our highest-performing Core Ultra family. In high-end desktop, competition remains intense, but we are making steady progress. Arrow Lake shipments have increased throughout the year, and our next-generation Nova Lake product will bring new architecture and software upgrades to further strengthen our offerings, particularly in the PC gaming [ hollow ] space. With this lineup, we believe we will have the strongest PC portfolio in years. In traditional servers, AI workloads are driving both refresh of the installed base and capacity expansion, fueled by rapid growth in tokenization, the increased demands around data storage and processing, and a need to elevate power and space constraints. We remain the AI head nodes of choice with strong demand for Granite Rapids, including instances across every major hyperscalers. We are listening to what customers need, and strong performance per watt and TCO are top of mind, as I shared with you last quarter, the key part, including improving our multi-trading capabilities as we close existing gap and work to regain shares. Finally, on our AI accelerator strategy, I continue to believe that we can play a meaningful role in developing compute platforms for emerging inference workloads driven by agentic AI and physical AI. This will be a far larger market than that for AI training workloads. We will work to position Intel as a compute platform of choice for AI inference, and we look to partner with arrays of incumbents as well as emerging companies that are defining this new compute paradigm. This is a multiyear initiative, and we will strike partnership when we can deliver true differentiation and market-leading products. In the near term, we will continue delivering AI capabilities to Xeon, AI PCs, Arc, GPUs and our open software stack. Looking ahead, we plan to launch successive generation of inference-optimized GPUs on the annual cadence that features enhanced memory and bandwidth to meet enterprise needs. Turning to Intel Foundry. Our momentum continues. We are making steady progress on Intel 18A. We are on track to bring Panther Lake to market this year. Intel 18A yields are progressing at a predictable rate and Fab 52 in Arizona, which is dedicated to high-volume manufacturing, is now fully operational. In addition, we are advancing our work on Intel 18AP, and we continue to hit our PDK milestones. Our Intel 18A family is the foundation for at least next 3 generation of client and server products. I will work with U.S. government within the secure enclave and other committed customers. It is a critical node that will drive wafer volumes well into the next decade and generate a healthy return on our investment. On Intel 14A, the team continued to focus on technology definition, transistor architecture, process flow, design enablement and foundation IPs. We remain active, engaged with potential external customers and are encouraged by the earlier feedback which help us to drive and inform our decisions. Lastly, our advanced packaging activities continue to progress well, especially in the area like EMIB and EMIB-T, which we have 2 differentiations. Like our Intel products, my conviction in the market potential for Intel Foundry continue to grow. The rapid expansion of critical AI infrastructure is fueling unprecedented demand for wafer capacity and advanced packaging services that present a substantial opportunity demanding multiple suppliers. Intel Foundry is uniquely positioned to capitalize on this unprecedented demand as we execute. As I mentioned last quarter, our investment in foundry will be disciplined, and we will focus on capability and scalability, giving us flexibility to ramp quickly, and we will only add capacity when we have committed external demand. Building a world-class foundry is a long-term effort founded on trust. As a foundry, we need to ensure that our process can be easily used by a variety of customers, each with a unique way of building their own products. We must learn to delight our customers as they call on us to build wafers to meet all their needs for power, performance, yield, cost and schedule. This is only by doing this that they can rely on us as a true long-term partner to ensure their success. This requires a change of mindset that I'm driving across Intel Foundry as we position this business for long-term success. As we look ahead, my focus remains firmly on the long-term opportunity across every market we serve today and those we will enter tomorrow. Our strategy is crystallized around our unique strength and value proposition, supported by the accelerating and unprecedented demand for compute in the AI-driven economy. Our leadership continues to strengthen. Our culture is becoming more accountable, collaborative and execution oriented. And my confidence in the future grow stronger every day. I look forward to keep you updated as we advance our journey. I will now turn it over to Dave for detail on our current business trends and financials. David Zinsner: Thank you, Lip-Bu. In Q3, we delivered the fourth consecutive quarter of revenue above our guidance, driven by continued strength in our core markets. Although we remain vigilant regarding macroeconomic volatility, customer purchasing behavior and inventory levels are healthy and industry supply has tightened materially. Furthermore, we are increasingly confident that the rapid adoption of AI is driving growth in traditional compute and reinforcing momentum across our businesses. In client, we are 5 years post the COVID pull forward and are benefiting from the refresh of a larger installed base. Enterprises continue to migrate to Windows 11, and AI PC adoption is growing. In data center, the accelerating build-out of AI infrastructure is positive for server CPU demand from head nodes, inference, orchestration layers and storage. We are cautiously optimistic that the CPU TAM will continue to grow in 2026 even as we have work to do to improve our competitive position. Third quarter revenue was $13.7 billion, coming in above the high end of our guidance range and up 6% sequentially. Capacity constraints, especially on Intel 10 and Intel 7 limited our ability to fully meet demand in Q3 for both data center and client products. Non-GAAP gross margin was 40%, 4 percentage points better than our guidance on higher revenue, a more favorable mix and lower inventory reserves, partially offset by higher volume of Lunar Lake and the early ramp of Intel 18A. We delivered third quarter earnings per share of $0.23 versus our guidance of breakeven EPS driven by higher revenue, stronger gross margins and continued cost discipline. Q3 operating cash flow was $2.5 billion with gross CapEx of $3 billion in the quarter and positive adjusted free cash flow of $900 million. One of our top priorities for 2025 was shoring up our balance sheet. To that end, we executed on deals to secure roughly $20 billion of cash, including 3 important strategic partnerships. We exited Q3 with $30.9 billion of cash and short-term investments. In Q3, we received $5.7 billion from the U.S. government, $2 billion from SoftBank Group, $4.3 billion from the Altera closure and $900 million from the Mobileye stake sale. We expect NVIDIA's $5 billion investment to close by the end of Q4. Finally, we repaid $4.3 billion of debt in the quarter and we will continue prioritizing deleveraging by paying maturities as they come due in 2026. Moving to segment results for Q3. Intel products revenue was $12.7 billion, up 7% sequentially and above our expectations across client and server. The team executed well to support upside in the quarter given the current tight capacity environment, which we expect to persist into 2026. We are working closely with customers to maximize our available output, including adjusting pricing and mix to shift demand towards products where we have supply and they have demand. CCG revenue was $8.5 billion, up 8% quarter-over-quarter and above our expectation due to a seasonally stronger TAM, Windows 11-driven refresh and a stronger pricing mix with the ramp of Lunar Lake and Arrow Lake. Within the quarter, CCG further advanced its relationship with Microsoft through a collaboration with Windows ML and the deep integration of Intel vPro manageability with Microsoft Intune enabling secure cloud connected fleet management for businesses of all sizes. The team also met all key milestones in support of launching Core Ultra 3, code-named Panther Lake. We expect the client consumption TAM to approach 290 million units in 2025, marking 2 straight years of growth off the post-COVID bottom in 2023. This represents the fastest TAM growth since 2021, and we're prudently preparing for another year of strong demand in 2026 as Core Ultra 3 ramps into a healthy PC ecosystem. PC AI revenue was $4.1 billion, up 5% sequentially, above expectations, driven by improved product mix and higher enterprise demand. The strength in host CPUs for AI servers and storage compute continued in the quarter even as supply constraints limited additional upside. Our latest Xeon 6 processors, code-named Granite Rapids, offer significant benefits, including up to 68% TCO savings and up to 80% less power as compared to the average server installed today. It is increasingly clear that CPUs play a critical role today and will going forward within the AI data center as AI usage expands and especially as inference workloads outpaced that of training. Some data center customers are beginning to ask about longer-term strategic supply agreements to support their business goals due to the rapid expansion of AI infrastructure. This dynamic, combined with the underinvestment in traditional infrastructure over the last couple of years should enable the revenue TAM for server CPUs to comfortably grow going forward. Operating profit for Intel products was $3.7 billion, 29% of revenue and up $972 million quarter-over-quarter on stronger product margin, lower operating expenses and a favorable compare due to period costs in Q2. Before discussing Intel Foundry, I want to acknowledge the tireless effort of the NVIDIA and Intel teams. There's a lot of work in front of us, but the collaboration we announced this quarter was the culmination of almost a year of hard work with a company that cuts no corners and prioritizes engineering excellence above all. The x86 architecture has been the foundation of the digital revolution that powers the modern world. AI is the next phase of that revolution, and we're on a path to ensure x86 remains at the heart of it. Engagements like this one with NVIDIA are critical to this effort. Moving to Intel Foundry. Intel Foundry delivered revenue of $4.2 billion, down 4% sequentially. In Q3, Intel Foundry delivered Intel 10 and 7 volume above expectations, met key 18A milestones and released hardened 18A PDKs to the ecosystem. Foundry also advanced the development of Intel 14A and continues to make progress expanding its advanced packaging deal pipeline. Intel Foundry operating loss in Q3 was $2.3 billion, better by $847 million sequentially primarily on favorable comparison due to the approximately $800 million impairment charge in Q2. As Lip-Bu discussed, our confidence in the long-term foundry TAM continues to grow, bolstered by accelerating deployment and adoption of AI and the growing need for wafers and advanced packaging services. Projections are calling for a greater than 10x increase of gigawatts of AI capacity by 2030, creating significant opportunities for Intel Foundry with external customers, both for wafers and our differentiated advanced packaging capabilities like EMIB-T. We continue the work to earn the trust of our customers, and our improved balance sheet flexibility will allow us to quickly and responsibly respond to demand as it comes. Turning to all other. Revenue came in at $1 billion, of which Altera contributed $386 million and was down 6% sequentially due to the intra-quarter closure of Altera. The 3 primary components of all other in Q3 were Mobileye, Altera and IMS. Collectively, the category delivered $100 million of operating profit. Now turning to guidance. For Q4, we're forecasting a revenue range of $12.8 billion to $13.8 billion. At the midpoint, and adjusting for the Altera deconsolidation, Q4's revenue is roughly flat quarter-over-quarter. We expect Intel products up modestly sequentially but below customer demand as we continue to navigate supply environment. Within Intel products, we expect CCG to be down modestly and PC AI to be up strongly sequentially as we prioritize wafer capacity for server shipments over entry-level client parts. We expect Intel Foundry revenue up quarter-over-quarter on increased Intel 18A revenue and its external foundry revenue up due to the deconsolidation of Altera. For all other, which now excludes Altera, we expect revenue to decline consistent with Mobileye's guidance, partially offset by sequential growth in IMS. At the midpoint of $13.3 billion, we forecast a gross margin of approximately 36.5%, down sequentially due to product mix, the impact of the first shipments of Core Ultra 3, which has the typically higher cost you see in the early stages of a new product ramp and the deconsolidation of Altera. We forecast a tax rate of 12% and EPS of $0.08, all on a non-GAAP basis. We expect noncontrolled income to be approximately $350 million to $400 million in Q4 on a GAAP basis, and we forecast average fully diluted share count of roughly 5 billion shares for Q4. Moving to CapEx. We continue to anticipate 2025 gross capital investment will be approximately $18 billion, and we expect to deploy more than $27 billion of CapEx in 2025 versus $17 billion deployed in 2024. I'll wrap up by saying we exit Q3 with a significantly stronger balance sheet, solid demand in the near term and growing confidence in our core x86 franchise as well as the longer-term opportunities in foundry, ASICs and accelerators. We also recognize the work we need to reach our full potential. We continue to add external talent and unlock our workforce to improve our execution across product and process development as well as manufacturing. We will closely manage what's in our control, react quickly as the environment evolves and focus on delivering long-term shareholder value. At this time, I'll turn it back to John to start the Q&A. John Pitzer: Thank you, Dave. We will now transition to the Q&A potion of our call. [Operator Instructions] With that, Jonathan, can we take the first question, please? Operator: And our first question comes from the line of Ross Seymore from Deutsche Bank. Ross Seymore: Congratulations on the strong results. Lip-Bu, the first one for you is going to be on the foundry side. You guys announced a ton of collaborations in the quarter. You very much strengthened your balance sheet. And the tone you took in your preamble sounds much more confident on the progress you're making in foundry. Do any of these collaborative announcements or equity investments go into that increased confidence? Or are there some sort of technical merits that you're seeing that are rising your optimism in that part of your business? Lip-Bu Tan: Yes, Ross, thank you so much for the questions. So I think a couple of announcements we make is, I think, clearly more on the product side. And also, one is the SoftBank because they are building up all the infrastructure, AI infrastructure. That definitely will need more capacity on the foundry side. So I think that would be the answer. But meanwhile, I've been saying that, I think, clearly, from what I received from the 18A and 14A, we made tremendous good progress, the steady progress on 18A. And Panther Lake will depend on it. And then clearly, we see the yield in a more predictable way. And I visited fab 52 that fully in operation for the 18A. And then on the 14A, clearly, we're engaging with multiple customers in terms of milestone basis. And we're also really driving some of the yield and performance, reliability that are seeing improvement. And also more exciting, the advanced packaging, we also see important demands from some of the key customer from foundry -- from the cloud able and also enterprise side. So I think overall, I think we are looking quite excited to build this long-term trust with some of the customers and scaling it. And we also focus on hiring some of the top talent, driving some of the process technology improvement. John Pitzer: Ross, do you have a follow-up question? Ross Seymore: Yes, I do. One for Dave on the gross margin side of things. You talked through the upside in the third quarter and the sequential downside in the fourth. But could you just walk us through some of the pluses and minuses as we think about 2026, just kind of directionally? And I guess where I'm going is it seems like the biggest improvement has to come on the foundry gross margin side of things. Is that the biggest driver? What drives it? And as those gross margins go up, does that have any impact on the Intel products gross margin? David Zinsner: Yes, sure. So obviously, we're not going to guide '26, but I think I can give a little bit of color. I think, first of all, just be mindful that Altera is out of the numbers in '26. They were in the large part of the numbers for '25, so that's probably a point of margin headwind for us because they were accretive to our gross margins. So that's going to be a little bit of a challenge to overcome it. I'd say, we still believe in this 40% to 60% fall-through for margins. Of course, it's a little bit of a range. You could drive a truck through quite honestly. But a lot of it is because of mix. I mean we'll have -- obviously, Lunar Lake will be a big component in the -- at least in the first half of the year, and that is a dilutive product to us. And then Panther Lake, while, obviously, it's going to be a great cross structure for us over time given the wafers are fabbed internally -- initially, obviously, when you got a new product on a new process, they're pretty expensive products to start with. And so it's dilutive in the beginnings of the year, and then it gets better over the course of the year. I do agree. We should see gross margins improve on the foundry side for sure. Partly, that is the scale dynamic that we will see benefit from but also as we move towards more leading-edge mix, 18A for sure but also even Intel 4, 3, those products have better pricing and a better cost structure. And so those margins should be accretive. And really, the dynamic about how much it improves will largely be a function of how the mix plays out through the year. Operator: Our next question comes from the line of Joseph Moore from Morgan Stanley. Joseph Moore: I was really interested in a lot of the prepared remarks around the sort of differences to your approach to foundry, and you talked about this last quarter and this quarter that you're sort of looking for customer commitments before you make the investment. Can you just talk about how those conversations are going? And I certainly -- I can see the trade-off from a customer standpoint. They're making a commitment to you. Do they expect that capacity to be built ahead of time? Just is there a bit of a chicken and egg aspect to these investments? And just how are you approaching those conversations? Lip-Bu Tan: Yes, Joseph, thank you so much for the question. I think on the foundry side, clearly, we are engaging with multiple customers. And as the building the trust of the customer, you need to really show the yield improvement, reliability and also, you need to have all the specific IP that they require. It's a service industry. You need to have all the right IP. That's why I formed the Central Engineering to get all the right IP to matching with the customer requirement. And then I think the best way is really show the performance, the yield and then we can [ data ] test chip so that they can really work on it. And then they can starting to deploy their most important revenue wafer to depend on us so that we can drive the success for them. So I think those are very important. In terms of potential investment and collaboration, I think with a different customer, different requirements, we are working with them. But more important is to get their commitment to the foundry and the support. I think that's building the trust that's more important. David Zinsner: Yes. Maybe just to add on, I would say that I think customers understand that it takes time from the time you deploy capital to the time where you have output. And so our expectation is we will get those commitments firmed up in time to deploy the capital, in time to meet the demand. I'd also say we're in a reasonably decent position given the CapEx investments we've already made. So we have a lot of the assets on the books and in what we call assets under construction. We've made a lot of investments around the shelf space. So we do see line of sight to driving a reasonable amount of supply for our external foundry customers with our existing footprint and quite honestly, with the use of the assets under construction and reuse of equipment that we have on the books today. So I think we have flexibility. Obviously, if things go better, we may be looking to invest more into that more quickly, but we feel reasonably confident we can react to the situation. John Pitzer: Joe, do you have a follow-up question? Joseph Moore: I do, yes. Separately, the supply constraints in server CPUs and other CPUs, we see those in the market, I guess, but your growth was 5% sequentially, single-digit growth year-on-year. I guess where is the shortage coming from? Is there just better demand ahead that you're not able to meet? Is it some of the transitions that you guys have managed? Just -- and I certainly see that tightness in the marketplace, so I'm not arguing with that. I'm just curious where you see that shortage coming from and how it will get resolved. David Zinsner: Yes. I mean, shortage is pretty much across our business, I would say. We are definitely tight on Intel 10 and 7. Obviously, we're not looking to build more capacity there. And so as we get more demand, we're constrained. In some ways, we're living off of inventory. We're also trying to kind of demand shape to get customers to other products. There's also shortages even beyond our specific challenges on the foundry side. I think there's widely reported substrate shortages for example. So obviously, I think the demand -- there's a lot of caution coming into the year, I think, across the board. And it looks like things are going to be stronger this year, and probably that continues well into next year. And I think everybody is trying to manage through it. Operator: Our next question comes from the line of C.J. Muse from Cantor Fitzgerald. Christopher Muse: I guess a follow-up on the current outlook for demand outpacing supply into 2026. Curious if that's a comment largely focused on server or also including clients and I guess depending on your thoughts there. How should we be thinking about Q1 trends versus normal seasonality, which typically, I guess, would be down high single digits, low double digits? David Zinsner: Yes. It's both. Although as we said, we are yielding a bit of the small core market and client to fulfill customer requirements more broadly on the client space and more specifically in the server space. So that's how we're going to kind of manage it. As you look into Q1, obviously, again, this is something we'll probably give you a lot more color around in January. I would just say we may actually be at our peak in terms of shortages in the first quarter because we've lived through the Q3 and Q4 with a little bit of inventory to help us and just cranking the output as much as we could with the factory. We probably won't have as much of that luxury in Q1. So I'm not sure we'll buck the trend on seasonality given the fact that we're going to be really, really tight in the first quarter. After that, I think we'll start to see some improvements, and we can get ourselves caught up as we get through the rest of the year. John Pitzer: C.J., do you have a follow-up question? Christopher Muse: I do, John. I guess given the investments from the U.S. government and NVIDIA, SoftBank, et cetera, I'm curious, with that improved cash position and liquidity, how has your thinking evolved in terms of investments in either CapEx or other investments in your product businesses. David Zinsner: Yes. I mean, obviously, we're in a great position. I'd say, as we think about this cash, our first focus is to delever. I mean that's one of the things we really wanted to -- when Lip-Bu came in, he really was upset about the balance sheet. So we've done a lot to work on that and improve that for him. We took $4.3 billion of debt off the books this quarter, and all the maturities next quarter or next year should come off and we'll repay that. I think as you look at CapEx, it puts us in a position of flexibility on CapEx, but we want to be very disciplined around CapEx. So we will absolutely be looking at demand. Lip-Bu's been very direct with us on this. He wants to see the whites of the eyes of the customer that we can believe in that demand. And if that demand exists, of course, we will amp up the CapEx as necessary. As you think about investment, we still think that $16 billion of OpEx investment for next year is the right amount. Although Lip-Bu and I are constantly now looking at how we mix that $16 billion to drive the best possible growth and return for investors, and we will be making those changes. Beyond that, we'll see how things go. We want to be pretty disciplined about our OpEx as a percent of revenue and drive leverage. But we do see opportunities to make investments that can, I think, deliver great returns for shareholders, and we're not afraid to do that either. Operator: Our next question comes from the line of Blayne Curtis, Jefferies. Blayne Curtis: I had 2. Just on the CapEx, I think you reiterated $18 billion, but I think you spent, I guess, less than I was modeling in Q3. So is that really still the number? And I'm just kind of curious, as you start to ramp this 18A in Arizona, is there a way to think about the timing of when you add capacity there? David Zinsner: On the $18 billion, yes, I think that's still the number. Obviously, CapEx can be lumpy. It depends on when things get -- when all the requirements associated with paying the invoice are completed, that's when we make the payments. And so we would expect to be somewhere in that range. Obviously, there's an error bar around that. It might be a little bit less or a little bit more than that. 18A, we still have to ramp this. I wouldn't expect significant capacity increases in the near term. But I think as we said, we are not at peak supply for 18A. In fact, we don't get there until the end of the decade. And we do think that this node will be a fairly [ long-lived ] node for us. And so we will continue to make investments on 18A over time. There will be CapEx investments next year, but I wouldn't expect the supply to -- at least capacity to significantly change vis-a-vis our expectations right now. John Pitzer: Blayne, do you have a question -- follow-up? Blayne Curtis: Yes. Just I wanted to follow up on the gross margin trajectory as 18A layers in. I know comparing it to probably the prior couple nodes, not a great compare but maybe to a successful one. When you say yields are in a good spot and improving, is there a way to think about where those 18A yields are versus the successful product that you've seen in your history and kind of think about how that layers in, in the first half? David Zinsner: Yes. I would say, in general, I don't -- I'm not sure yields in older nodes has been a big focus of ours, quite honestly. So we're blazing new trail on this. Yields are -- what I would say, the yields are adequate to address the supply, but they are not where we need them to be in order to drive the appropriate level of margins. And by the end of next year, we'll probably be in that space. And certainly, the year after that, I think they'll be in what would be kind of an industry acceptable level on the yields. I would tell you, on 14A, we're off to a great start. And if you look at 14A in terms of its maturity relative to 18A at that same point of maturity, we're better in terms of performance and yield. So we're off to an even better start on 14A. We just got to kind of continue that progress. Operator: Our next question comes from the line of Stacy Rasgon from Bernstein Research. Stacy Rasgon: I wanted to go back and ask about the supply constraints again. So you talked a lot about how AI was driving a lot of demand across servers and across PCs, but at the same time, it doesn't look like customers want your AI products. In fact, they can't get enough of the older stuff. So I guess, you -- I mean, you must have plenty of supply for Granite and for Meteor and even for Lunar Lake. So how are you going to get the customers off of the older products where they haven't shown any desire to get off of them so far even given the constraints that they've been under? And I guess, how do we think about the transition of those customers? Because you're clearly -- I mean, you even said it yourself. You're not adding any more of the older capacity. In fact, you took some of it offline, right? David Zinsner: Yes. Yes, good question, Stacy. I would -- I think it's a misnomer to say AI hasn't done well. I mean it was sequentially up double digits quarter-over-quarter, and we talked about a number of about -- we would ship about 100 million units by the end of this year on AI PC, and we're going to be first order in that range. So I think it's going pretty well. Clearly, though, the older nodes have also done well, and that was probably the part that was more unexpected. We -- I think we've just got to participate in making sure that the ecosystem drives enough applications for AI in the PC space. And we work with the ISVs regularly to drive that. They're getting there. Like any market, it starts relatively immature and kind of builds out over time. But even in our company, we're starting to find uses for AI PC. In fact, IR is coming up with one here that we'll be using. So I think it's just kind of time. Now that said, what clearly is happening is the Windows refresh is happening more significantly than I think we expected. And that's not necessarily an AI PC story. And so Raptor Lake is also a product that addresses that. And so we're just seeing upside in that part of the market as well. Stacy Rasgon: Dave, I want to follow up on 2 things that I think I heard you say on 18A. I thought I heard you say, number one, the yields would not be in a great place at least until the end of next year. And then I thought I also heard you say that you were not going to be adding a lot of 18A capacity next year. Did I hear those wrong? I mean, how can such the latter one, how can how can that be true if you're ramping Panther? Or is that like a... David Zinsner: We're obviously at our infancy. What I'm saying is relative to the CapEx plan, it's not like we're going to incrementally add supply for 18A next year. But yes, of course, we're going to be ramping the volume over the course of the next year. I wouldn't say 18A yields are in a bad place. I mean, they're where we want them to be at this point. We had a goal for the end of the year, and they're going to hit that goal. But to be fully accretive in terms of the cost structure of 18A, we need the yields to be better. I mean that's like every process. That's what happens. And it's going to take all of next year, I think, to really get to a place where that's the case. Operator: Our next question comes from the line of Joshua Buchalter from TD Cowen. Joshua Buchalter: I wanted to ask about some comments Lip-Bu made in the prepared remarks about fixed function computing and potentially supporting more ASICs. Was this -- maybe could you provide more context on the scope of this? Is this for potential foundry customers? Or are these products? And if it's products, what types of applications do you expect to be supporting with custom silicon? Lip-Bu Tan: Good question. So I think, first of all, I just mentioned about the Central Engineering. We are driving the ASIC design, and that will be enhanced -- actually is a good opportunity for us to enhance, extend our reach of the core x86 IP and also drive some of the purpose-built silicon for some of our systems and cloud players and customer. And then definitely with the foundry and packaging, also they were helping us in terms of their requirement. So all in all, I think this AI will be driving a lot of growth especially in the double down, the Moore's Law, and that will help us a lot in our 86 uplift. And that's an opportunity for us to build the whole ASIC design to serve some of the customer requirement. John Pitzer: Josh, do you have a quick follow-up? Joshua Buchalter: Yes. So on the last quarter, obviously, the disclosure that you may decide to abandon 14A got a lot of attention. I just wanted to ask, given your balance sheet is in a lot different spot than it was 3 months ago, has anything changed from that regard? I don't think the Q is out, so I haven't seen if any of the language changed there. But was curious if anything had moved around since last quarter given all the changes in your balance sheet. Lip-Bu Tan: Yes. Since the last balance -- quarter, I think clearly, our engagement with the customer for 14A increase, and we are very heavily engaging with the customer in terms of defining the technology, the process, the yield and the IP requirement to serve them. And they clearly see the tremendous demand that they need to have Intel to be strong on the 14A. And so we are delighted and more confident. And meanwhile, we're also attracting some of the key talent for the process technology that can really drive success, and that's why it gives me a lot more confidence to drive that. Operator: Our next question comes from the line of Ben Reitzes from Melius. Benjamin Reitzes: Lip-Bu, anything -- can we get an update on the NVIDIA relationship timing of products? Have you gotten any feedback from customers in terms of your ability to articulate on the materiality of the relationship and in terms of timing and materiality or any other color you want to give us on that? Lip-Bu Tan: Sure. Thank you. And this is a very important collaboration with NVIDIA. It's a great company, as you guys know. And I've been known as a friend of Jensen for more than 30 years. And we are very excited about this effort of Intel CPU 86 leadership, and their unmatched AI and accelerated computing and then connecting with their NVLink and that will be -- really create a new class of product in the multigenerations. And this is something that very heavy engineering-to-engineering engagement. And that will be driving some of the new product that custom data center and PC product and that really optimize for the AI era. So I think all in all, I think this is going to be multiple years of engagement and then addressing our market that we are excited and also driving some of the requirement for the AI infrastructure. David Zinsner: And maybe just one more addition. Just what makes this really special for us is it's not attacking our existing TAM. It's an incremental opportunity for us to expand the TAM. And so these are great opportunities for us. John Pitzer: Ben, do you have a follow-up? Benjamin Reitzes: Yes. Lip-Bu, you mentioned a little bit about your AI strategy now to attack the inference market and that there's -- you see room for Intel solutions. And it sounds like you're going to partner a lot there. Is this strategy more about partnering? Is it more about -- is there a specific Intel IP for inferencing that you're excited about? Or is it more of a Switzerland approach where you could partner with a lot of the existing players out there to attack more of the TAM? Lip-Bu Tan: Yes, good question. So I think, first of all, I think with the AI driving a lot of growth, we definitely want to play in that. I think this is a very early inning. And so I think that's an opportunity for us. And I think one area that we are focused on is our revitalizing our 86 and to really tailor to purpose build CPU, GPU requirement for the new AI workload and then really addressing the power-efficient agentic and managing all the different agents. This is a new way of compute platform of choice and that we'll be also applying to the system and software. They're going to say to you, I think we're going to partnering with some of the incumbents and also the emerging companies that driving some of these changes. Operator: Our next question comes from the line of Timothy Arcuri from UBS. Timothy Arcuri: Dave, it's not that often we see high fixed cost businesses that are constrained that have gross margins less than 40%. And I certainly get that most of this is because of the wafer cost for Intel 10 and 7 and you still have low yields on 18A. But I'm wondering -- and this is probably a hard question to ask -- to answer, but I wonder if you could maybe just kind of fast forward a bit and say like what would gross margin be if you were off of 10 and 7 and you were on 18A. Is there a way you could like normalize it for us? David Zinsner: Yes. I mean obviously you may be listening in on some of my conversations with the team here because that's definitely something I've been making the point of. I would say there's 2 dynamics, 1 of which you're hitting on, and that is the high cost of older processes versus the better cost structure for the newer processes. And that's obviously meaningful. I mean we're in negative gross margin territory for foundry. That makes a meaningful improvement if you move it even into the positive territory. But the other aspect of our gross margin is a function of just the product quality. We're in reasonably decent shape on client in terms of product performance and competitiveness with a few exceptions, but we're not where we need to be on a cost basis. And so we've got to make improvements there. And we have that on the road map. The team recognizes it, but that's a multiyear process to get there. But it's more pronounced on the data center side. Not only do we not have the right cost structure, but we also don't have the right competitiveness to really get the right margins from our customers. And so we've got work to do there. And so that's what Lip-Bu and the team has pulled in, are hyper-focused on, is getting great products at the right cost structure to drive better gross margins. That to me, I think, is the linchpin in all this. The improvements on the foundry side are just going to come, I think. We're going to mix higher and higher to Intel 3, 4 and then 18A and ultimately, 14A. The cost structures of all of those are actually pretty similar. And it will just be a function of the fact that the value that's provided by those leading edge nodes is going to be significantly more, and that's going to just materially drive the gross margins up. The other thing that I would say is we are seeing a lot of start-up costs by virtue of the fact that we've jammed a whole bunch of new processes in kind of in rapid fashion. As we get into 14A, our cadence will be more normalized. And so you won't see so much start-up costs stacked on top of each other, which is affecting gross margins. And that's billions of dollars. So I think as you get beyond a few years, that rolls off and will also help. Timothy Arcuri: I do. Yes. Lip-Bu, you didn't give an update last call on Diamond Rapids launch date. I know the whole road map is under review, but you did sound -- the company sounds fairly optimistic about Coral Rapids. Can you just give us sort of an update on the data center road map a bit here? Lip-Bu Tan: Yes. Thank you. Good questions. So I think clearly, the Diamond Rapids is getting stronger hyperscale feedback. And then we also focus on the new product, the Coral Rapids, and that will be included SMT, the multithreading, and that can drive higher performance. We're in the definition stage. And then we will work out the road map and then we're going to execute that [ would be ] going forward. Operator: Our final question for today comes from the line of Aaron Rakers from Wells Fargo. Aaron Rakers: Just a couple of real quick ones. I guess going back to the NVIDIA relationship. I can appreciate that the announcement was really tied to the NVLink Fusion strategy and integrating that with the x86 ecosystem. But I think there's been some -- also some recent reports about maybe using Gaudi for some dedicated inference workloads within a stack of NVIDIA. How do you -- is this relationship a starting point? And should we expect to see more potential integration beyond NVLink going forward? Lip-Bu Tan: Yes, I think -- let me answer that. I think NVLink is kind of more the hub to connecting the 86 and GPU. In terms of the AI strategy, we clearly -- we are defining the Crescent Island that we talk about. And also, we also have a new product line in the lineup. So they're addressing the agentic and the physical AI and more in the inference side. And so I think stay tuned. We will update that. John Pitzer: Aaron, do you have a quick follow-up? Aaron Rakers: I do, and I'll make it really short. Can you just update us on how we think about the NCI, the noncontrolling interest expense, as we look through this year and think about that? I think you've given some comments in the past of how we should think about that into '26. David Zinsner: Yes. I think '26, we're looking at somewhere in the $1.2 billion to $1.4 billion range is probably a good estimate. Obviously, we're focused on that, and we'll work to minimize that as much as possible. Lip-Bu Tan: With that, I want to thank everyone for joining us today. We are on the journey of rebuild Intel, and we have a lot of works ahead of us, but we are making solid progress in Q3. I look forward seeing many of you throughout the quarter and provide you another update in January. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good morning, and welcome to the Origin Bancorp, Inc. Third Quarter Earnings Conference Call. My name is Tom, and I'll be your Evercall coordinator. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference call over to Chris Reigelman. Chris, you may proceed. Chris Reigelman: Good morning, and thank you for joining us today. We issued our earnings press release yesterday afternoon, a copy of which is available on our website, along with the slide presentation that we will refer to during this call. Please refer to Page 2 of our slide presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those joining by phone, please note the slide presentation is available on our website at www.ir.origin.bank. Please also note that our safe harbor statements are available on Page 7 of our earnings release filed with the SEC yesterday. All comments made during today's call are subject to safe harbor statements in our slide presentation and earnings release. I'm joined this morning by Origin Bancorp's Chairman, President and CEO, Drake Mills; President and CEO of Origin Bank, Lance Hall; our Chief Financial Officer, Wally Wallace; Chief Risk Officer, Jim Crotwell; our Chief Accounting Officer, Steve Brolly; and our Chief Credit and Banking Officer, Preston Moore. After the presentation, we'll be happy to address any questions you may have. Drake, the call is yours. Drake Mills: Thanks, Chris, and thanks for being with us this morning. Before we discuss our third quarter performance, I want to share my perspective on Tricolor and the related charge-off. We had a 20-year relationship with Tricolor. During that time, Origin has grown into a dynamic company that strategically builds relationships and has a strong system of risk mitigation. For Tricolor, our systems and processes included audited financials, various loan covenants, monthly borrowing base certificates and a third-party trust company as collateral custodian. However, even with the best practices of risk mitigation, losses can occur in the event of a customer fraud. As a leader, it's important to use an event like this as an opportunity to better your organization by diving deep into policies, processes and portfolios to identify lessons learned. Our decision to charge off the entire Tricolor outstanding debt is extremely conservative. We do anticipate recoveries through a combination of no collections, insurance claims and legal recourse. This isolated event does not define Origin. When I think of our long history of success, the depth of our management team, the momentum we have generated with Optimize Origin and the unprecedented opportunities within our markets due to M&A-driven disruption, I am passionate and confident we will achieve our ultimate goal of being a top-quartile performer. Now, I'll turn it over to Lance and the team. Martin Hall: Thanks, Drake, and good morning. I'm extremely proud of how we've executed on Optimize Origin and the momentum that has been created throughout our markets. We are ahead of pace on our stated plan and are creating real traction on our goal of being a top quartile ROA performer. Excluding notable items, our pretax pre-provision ROA increased 48 basis points to 1.63% for the third quarter of 2025 compared to 1.15% in the second quarter of 2024 when we began the planning stages of Optimize Origin. Over the same period, NIM has expanded 48 basis points. Total revenue, excluding notable items, is up 10% and noninterest expense, excluding notable items, is down 3%. We strongly believe the level of paydowns and payoffs that we've seen through the first 3 quarters of this year masks the high level of production we are experiencing. We continue to see positive trends in loan production with loan originations up 19.2% year-to-date compared to the same period last year. At a more granular level, business loan production under $2.5 million across our footprint is up 22.9% during that same period. Through Optimize and through insight into data gleaned from our banker profitability reports, our bankers have heightened their focus on generating ROA lift through relationship expansion. This is highlighted by treasury management fee income increasing 7% year-over-year and loan and swap fees up 62% during the same period. We've seen a strong build on the deposit side in Q3 as noninterest-bearing deposits were up $158.6 million or 8.6% quarter-over-quarter. While we've come a long way with Optimize Origin, I'm very optimistic about what we can continue to accomplish as we close out the remainder of the year and look towards 2026. The hires we have made in our DFW markets in addition to our Southeast team reaching profitability gives me great confidence in our ability to drive long-term value in the most dynamic markets in the country. Now, I'll turn it over to Jim. Jim Crotwell: Thanks, Lance. As Drake mentioned previously, in early September, we became aware of allegation of fraud related to Tricolor. As you are aware, Tricolor filed Chapter 7 bankruptcy last month. As of quarter end, our credit relationship with Tricolor totaled $30.1 million, including $1.5 million in unfunded letters of credit. We are working with a successor servicer to begin the process of not only servicing the notes, but also working closely with the bankruptcy trustee to identify duplicative and any potential fraudulent notes. Given fraud allegations and the inability to clearly establish the level of unduplicated notes supporting our loans to Tricolor, we elected to charge off the entirety of the outstanding Tricolor debt totaling $28.4 million and to fully reserve the $1.5 million in unfunded letters of credit. While we do anticipate there will be some level of recovery from the notes pledged, we are unable to determine the magnitude of the suspected fraud with 100% certainty at this time. We will aggressively pursue all available remedies to protect the bank's interest and maximize recoveries in this matter. As such, net charge-offs for Q3 came in at $31.4 million with $3 million in net charge-offs outside of Tricolor. On an annualized basis, excluding Tricolor, net charge-offs came in at 0.16% for the quarter. Loans past due 30 to 89 days and still accruing reduced from 0.16% last quarter to 0.10% as of 9/30. Classified loans increased $10.7 million and as a percentage of total loans increased to 1.84% at quarter end compared to 1.66% as of June 30, while nonperforming assets increased $1.6 million to 1.18% at quarter end compared to 1.14% as of the prior quarter. For the quarter, our allowance for credit losses increased from 1.29% to 1.35%, net of mortgage warehouse. We did not experience any significant changes in our CECL model assumptions for the quarter, and the increase was primarily driven by increases in the individually evaluated portion of the reserve associated with our nonaccruals. The level of our reserve at 1.35%, net of mortgage warehouse, compares to a level of 1.31% at year-end 2023. Lastly, as to total ADC and CRE, we continue to have ample capacity to meet the needs of our clients and grow this segment of our portfolio, reflecting funding to total risk-based capital of 47% for ADC and 235% for CRE. I'll now turn it over to Wally. William Wallace: Thanks, Jim, and good morning, everyone. Turning to the financial highlights, in Q3, we reported diluted earnings per share of $0.27. As you can see on Slide 26, the combined financial impact of notable items during the quarter equated to a net expense of $23.3 million, equivalent to $0.59 in EPS pressure. On a pretax pre-provision basis, we reported $47.8 million. Excluding $7.9 million in net benefits from notable items in Q3 and $15.6 million net pressures in Q2, pretax pre-provision earnings increased to $39.9 million from $37.1 million. On the balance sheet side, loans decreased 1.9% sequentially and decreased 0.6% when excluding mortgage warehouse. Total deposits increased 2.6% during the quarter and 2.9% excluding brokered. Importantly, noninterest-bearing deposits grew 8.6% sequentially, improving to 24% of total deposits. Both total and noninterest-bearing deposits also increased on an average basis, up 0.9% and 1.1%, respectively. As Lance mentioned, we are excited about the momentum we are seeing from our relationship managers across our markets, and we remain optimistic that loan production is accelerating, though paydowns have remained a near-term headwind to reported loan balances. While we currently are anticipating that loan growth will return in Q4, the continued declines in Q3 lead us to reduce our loan growth guidance from up low single digits to essentially flat for the year. Given the positive momentum we have seen on the deposit side of the balance sheet and the typically strong seasonal inflows in Q4, we are maintaining our deposit growth guidance of low single digits for the year. Turning to the income statement, net interest margin expanded 4 basis points during the quarter to 3.65%, in line with our expectations. Driving most of this expansion was increased interest income from our securities portfolio, in large part due to the portfolio optimization trade executed during Q2. Moving forward, as you can see in our outlook on Slide 4 and due primarily to the expectation of an additional Fed rate cut, we tightened our margin guidance range to 3.65% in Q4 '25 and 3.60% for the full year, plus or minus 3 basis points. Our modeling now considers 25 basis point rate cuts in each of October and December as opposed to only December in our prior guide. Shifting to noninterest income, we reported $26.1 million in Q3. Excluding $9 million in net benefits from notable items in Q3 and $14.6 million in net pressures in Q2, noninterest income increased to $17.1 million from $16 million in Q2, due in large part to the addition of $1.2 million of equity method investment income from increasing our ownership in Argent Financial to over 20%. Our noninterest expense was basically flat at $62 million in Q3. Excluding $1 million of notable items in both Q3 and Q2, noninterest expense increased slightly to $61.1 million from $61.0 million in Q2, in line with our expectations. We are maintaining our guidance for Q4 and lowering our guidance slightly for the full year to down low single digits from flat to down slightly. Lastly, turning to capital, we note that Q3 tangible book value grew sequentially to $33.95, the 12th consecutive quarter of growth. And the TCE ratio ended the quarter at 10.9%, flat from Q2. As shown on Slide 25, all of our regulatory capital levels remain above levels considered well capitalized. As such, we remain confident that we have the capital flexibility to take advantage of any capital deployment opportunities to drive value for our shareholders. In fact, during the quarter, we repurchased 265,248 shares at an average price of $35.85. Furthermore, we anticipate the full redemption of the remaining $74 million of subordinated debt on our balance sheet on November 1, which will allow us to save $3 million in net annual increased interest expense. With that, I will now turn it back to Drake. Drake Mills: Thanks, Wally. As you have heard throughout this call, we have a great deal of momentum heading into the fourth quarter and next year. I referenced in my opening remarks about the opportunities, particularly in our Texas markets, associated with disruption from recent M&A. This year alone, there have been 15 bank acquisitions in Texas, with selling banks totaling $37 billion in deposits. I firmly believe that we have the infrastructure and bankers to win new business and capitalize on this opportunity. Thank you for being on the call today, and thanks to our employees who remain committed to our strategic vision of optimizing origin. We'll open up for questions. Operator: [Operator Instructions]. Our first question comes from Matt with Stephens. Matt Olney: I want to dig a little bit more on credit. Can you just talk about your NBFI exposure about what this does include and maybe what it does not include? And then secondly, any more -- as you scrub the portfolio, anything you want to disclose as far as exposure to other auto lending or subprime credits that would be of interest? Jim Crotwell: Matt, it's Jim. I'll start with a little bit of recap color on subprime and then kind of move through some of the questions you asked. Our subprime portfolio at the end of the quarter was about $92 million that represented about 1.2% of total loans. The breakdown of that would be about 68% would be residential, about 15% RV and about 15% auto. And then kind of moving to your question about subprime auto, reflective, if you kind of do the math on that, it's only 0.2% of our entire portfolio and it consists of 2 relationships, both of which are performing. And on both of those, as the sole lender in both of those relationships, some of the issues that we are experiencing in Tricolor, the double pledging of collateral, is really not an issue in the situation of these 2 relationships. Moving to the total NBFI portfolio, which is excluding mortgage warehouse, our NBFI exposure is approximately 5% of total loans, 61% of that is real estate related, with 15% related to capital call lines of credit. And the remaining 25% is spread across about 6 different categories. We've done a deep dive into this entire segment of the portfolio, and these companies have experienced management teams. The underlying loans have good income and cash flow, and our long-term relationships with the bank. And we have no past dues and no performing loans in the entirety of our NBFI segment. Matt Olney: Drake, I heard you mention the Tricolor and the fraud allegations. Can you just walk us through any insurance that could offset some of these charge-offs? And what does that look like compared to the charge-offs that we just saw? And what are some thoughts on time lines around that insurance? Drake Mills: Matt, as I said, we are aggressively pursuing recovery on these loans. We believe in time that we will see some degree of recovery. But there are -- right now, there's too many variables at present for us to sit here and quantify how much that will be and when that will occur. That's why we took the charge the way we did. It's at this point, we feel very good that we have these avenues of recovery. And as I've told investors and other relationships I have, I am going to be working diligently to ensure that we have recovery, but it's unclear. That's why we took the charge away we did. We feel confident that we will have some recovery. It's just in this Chapter 7 and going through bankruptcy and understanding the timing of this is extremely difficult to quantify anything. Matt Olney: Okay. Appreciate that. And then if I could just shift gears over to the loan growth commentary. I think the updated guidance now calls for flat balances in 2025 year-over-year. If we go back to January earlier this year, I think the guidance was mid- to high single digits, and that was kind of walked down each successive quarter since then. And Origin is certainly not alone in seeing some of the slower loan growth trends this year, but it does feel more acute at Origin than maybe some of your peers. So can we just take a step back and remind us about your loan growth views throughout the year and how that evolves? And then would love to hear any kind of preliminary thoughts you may have on loan growth in 2026. Martin Hall: Matt, it's Lance. I'd be glad to go through it. I'm actually really bullish and optimistic about where loan growth is going in Q4 and next year, but we'll kind of step back and understand why I used the word earlier that I feel like our extraordinary origination and production has really been masked by paydowns and payoffs. So if you think about that, we have actually been averaging the last 4 quarters, $685 million a quarter in paydowns and payoffs, which are extraordinarily high historically for us. Combination of that is slowing things down purposely to stay under $10 billion has led to a little less than $400 million in reduction of our commercial construction and development portfolio. So that takes some time to rebuild that back up. So that is -- a big part of our originations for this year is kind of getting back active and aggressive in that space. And that's one of the reasons we're very bullish on the fundings that will come from that next year. But just to kind of give you a little color, that $685 million per quarter over the last 4 quarters is compared to a little over $500 million, which would be sort of a typical quarter for us. And so part of that is tariffs, part of that is us pushing out credits that Jim has talked about the last few quarters. But again, I think that has sort of covered up what has been pretty extraordinary on the origination side. Our originations for the first 9 months of this year are up almost 20% compared to the 9 months of the year previously. Strong pipeline for Q4. I think we're expecting about 2% growth, ex warehouse, for Q4. So if you annualize that kind of at 8% on an annualized basis, I think our guidance for 2026 would continue to be mid- to high single digits. But we're seeing really positive momentum kind of throughout each of our markets. Texas is starting to come on strong again. Louisiana has been really strong this year. We've had about 5.5% loan and deposit growth in our Louisiana market. Really like seeing what we're seeing out of Nate and the Southeast team, a good year out of Mississippi. So we are well positioned right now. And then, I'm sure later we'll talk about Optimize and kind of say how that's translating into NIM expansion and ROA expansion. And so the engine is running really well now, it's just having to kind of get past this unprecedented level of paydowns and payoffs. Operator: Our next question comes from Woody with KBW. Wood Lay: I wanted to start, I think in the opening comments, you mentioned sort of in wake of this event, you'll be evaluating sort of the processes and systems in place to avoid incidents like this in the future. Do you expect there to be any impact to the expense run rate if there's additional investments that need to be made? Drake Mills: At this point, we don't see any additional impact or an impact to expenses. We are going to be utilizing some -- actually a move with one of our executives to come in and create a new group that is internal at this point to really focus on credit management and credit audit process, looking at the components. And as I think about Tricolor and you can sit here and say what lessons were learned. This is a process that we're undergoing right now, and we've really identified several enhancements that we believe will mitigate risk going forward as we better detect fraud. As an example, we've conducted a deep dive, as Jim said, and have gone through a comprehensive review of the segment in our portfolio. We're enhancing our processes and controls for monitoring and testing our collateral. But outside of that, we're expanding the role, as I said of this executive, who will build out a team of internal resources to provide additional oversight and streamlined collateral protection, monitoring and documentation. So I don't see that creating significant or really any additional expense. Wood Lay: Got it. And then -- so you've essentially charged off the full exposure to Tricolor. Is there any indirect exposure to the company like personal loans made to Mr. Chu or any referrals from insiders in the business? Drake Mills: Yes. While we can't necessarily speak to any specific customer information, I feel very strongly that all the exposure in our portfolio has been properly identified and appropriately accounted for. We do have approximately $500,000 in mortgages with one of the executives, about a 50% LTV and performing. Outside of that, we've disclosed everything, but feel very confident in that we've addressed any type of exposure. Wood Lay: Got it. That's helpful. And then I guess just sort of excluding the impact of Tricolor, just overall thoughts on credit, were there any trends to note in criticized or classified? Drake Mills: Yes, I'm going to let Preston -- Preston and his team have worked diligently through this process to really be able to recap where we are with credit and how we feel. So Preston? Preston Moore: Yes. Clearly, we feel like the Tricolor situation was an isolated and one-off event for Origin Bank. But in terms of the credit trends to get to your question, in my opinion, we saw a normal cycle movement of credits, which in my experience can be lumpy, certainly. We saw an increase in classified loans, nonperforming loans, charge-offs and past dues in the quarter. The increase in classified loans and nonperforming loans was part of our expected credit migration for the quarter. With respect to looking at charge-offs, clearly, we had a very elevated charge-off with Tricolor. But if we exclude that, net charge-offs would have been 16 basis points for the quarter, which is very much in line with our past experiences. And then finally, while total past due loans rose modestly in the quarter, past due 30 to 89 days and still accruing loans declined from 16 basis points last quarter to 10 basis points at the end of the quarter. And I just would say, bottom line, we do not see signs of credit deterioration in our loan portfolio. Operator: [Operator Instructions]. Our next question comes from [ Evan ] with Raymond James. Unknown Analyst: I know it's been a busy year with Optimize Origin. You've added new benefits to the project each quarter. You're staying under $10 billion at year-end. But as we look towards 2026, can we expect that the heavy lifting on Optimize Origin is behind us? And is there -- will there be more balance towards balance sheet growth? Martin Hall: Evan, this is Lance. We have a tremendous amount of opportunities still in front of us around Optimize Origin. I think Drake jokingly said we're in the top of the fourth inning when it comes to opportunities. So yes, we've done a lot of heavy lift early. And you think about the tremendous progress we've made, and we commented on some of this earlier, Optimize was basically crafted in 2Q of '24. And so if you look at that period of time from 2Q '24 to now, as we noted earlier, I mean, ROA is up 48 bps, NIM is up 48 bps. Revenue is up about 10%, expenses are down about 3%. We've executed on what we said we were going to do with Argent Financial, which is a meaningful lift for us. We've recreated our mortgage business. We actually had positive contribution income out of our mortgage business this month for the first time in years. Our Southeast market hit profitability last quarter, which is a great trend for us. We're doing a lot of really cool stuff with data. The use -- and we've talked about this in the past, our banker profitability report since we started Optimize, the ROA of our banker portfolios is up 32 bps on average, and that's really through the identification and understanding of where our revenues are created, where our profits are created. But then just everything seems to be genuine in a positive way from treasury management to fee revenue. But for us, Optimize is a continuous process. There's not a stopping point to this for us. So the way that we're continuing to use third-party benchmarking company, we have actually created an internal group that we call performance optimization partners. They are digging into process improvement, revenue enhancement, expense controls, and the insights that we're getting from that group is setting what's going to be a pretty dynamic strategic planning and budget session for us here in the next 2 weeks. And so from that, I would expect continual projects that we'll be announcing on Optimize that's really going to continue to transform this company as we evolve this into a top-tier ROA producer. Unknown Analyst: Great. Great. That's helpful. And then I just had another question on capital. So you mentioned the buybacks this quarter and then I think the redemption of, I think you said $74 million in sub debt in the fourth quarter. But as we saw most capital ratios tick up, just kind of wondering what your priorities are on capital deployment at this point. William Wallace: Evan, it's Wally. As far as priorities go, I mean, I think that our #1 priority would be to deploy our capital organically through balance sheet growth. We are very focused on trying to take advantage of any and all disruption in our markets. And as you know, that disruption has been increasing as of late, we have a successful history of lifting our teams and growing our balance sheet organically. So that would be priority #1. We recognize the level of capital that we have. We've been in the market the last 2 quarters buying back our own stock, and we will continue to look for opportunities to do that if the stock price remains at levels that we believe are where it's attractive to deploy the capital in the market. And we are aware of M&A as an opportunity to deploy capital. I don't think that's our focus today, given where our stock is trading, but we would not take that off of the list. Operator: Our next question is a follow-up from Matt with Stephens. Matt Olney: Over the last year, we've talked a lot about this fixed loan repricing dynamic that will support the overall loan yields, and we're definitely seeing the benefits of that over the last few quarters. As we look at that into 2026 and 2027, how would you characterize the remaining benefits from this dynamic compared to kind of what we've seen more recently? William Wallace: Matt, it's Wally. So with our with our payoffs and paydowns being elevated, some of that benefit has been pulled forward to this year, which is great for today NIM, but it does take away from a little bit of the tailwind that we have. That said, though, we still right now, as it stands today, have over $300 million of loans that will have planned payoffs in 2026, those loans are yielding in the mid-4s. Today, we're putting on loans in the 6.9% to 7% range. So still plenty of opportunity there, and we have over $1 billion of forecasted principal and payoffs coming for the year. So it's still a tailwind, but we have pulled some of that tailwind forward. If I look at year-over-year, I think our margin is up in the 30 to 35 basis point range. I don't think we'll see that much benefit in 2026. We're putting 4 cuts in our modeling right now and still see 10 to 15 basis points of potential margin expansion from the tailwinds that I just mentioned over the next 5 quarters. Matt Olney: And then just one more point of clarification on the fee income guidance. I think there's some discussion in the deck about -- I see here, kind of a high single-digit -- I'm sorry, low double-digit growth in the fourth quarter. Can you just -- there are several nonrecurring items and some names that are nonoperating. So I'm a little confused as far as kind of what the base is. Can you -- any way you can clarify the fee income expectations in the near term and kind of the puts and takes around the components of that? William Wallace: Sure. If you take out the items that are fee income related from the notable items table at the end of the deck, you get to a third quarter base of about $17.1 million. The fourth quarter is a seasonally light quarter in both insurance and mortgage. So from a sequential basis, that's probably more in the $15.5 million or so million dollars, which is up pretty meaningfully from last year's fourth quarter where the base was about $14 million. So that's where that growth guidance is coming from year-over-year, fourth quarter over fourth quarter, excluding notable items. The benefits coming from swap fees, which have been very strong this year, we don't see the same level of swap fees in the fourth quarter that we saw in the second and third. But we also have the contribution now from Argent as another positive when you look year-over-year. Operator: [Operator Instructions]. It appears there are currently no further questions. Handing it back to Drake Mills for any final remarks. Drake Mills: Yes. I want to thank everyone for being on the call. And just from a recap of why we feel so positive about moving into '26, it's been extremely rewarding to me personally to see a deep commitment throughout our company from all our employees to deliver on Optimize Origin, which continues to build momentum. The momentum in all of our markets from Texas to the Southeast continue to build, the dislocation in the dynamic Texas market and Southeast market is significant for us. So as we add that to the acceleration of production, I love what's going on with our strong pipelines. I currently am very positive and optimistic about our opportunity to reach our ultimate goal of being the top-quartile performer. I appreciate your support. Sincerely appreciate you being on the call. I look forward to seeing each of you soon. Operator: Ladies and gentlemen, this concludes today's Evercall. Thank you, and have a great day.
Operator: " Nikolaj Sørensen: " Frederik Jarrsten: " Edward Kim: " Samir Devani: " Rx Securities Limited, Research Division Klas Palin: " DNB Carnegie Commissioned research Operator: Welcome to the conference call. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead. Nikolaj Sørensen: Thank you very much, and welcome to this third quarter call for Orexo. It has indeed been a transformative quarter in many ways for the company, in particular, in our R&D departments where we have made very good progress in 2 projects, and I will come back to that a little later. Today, I'm Nikolaj Sorensen, and I will be joined by Fredrik Jarrsten, our CFO; and this time, also Ed Kim, our Chief Medical Officer, who I believe will be new to many of you, but Ed Kim will talk a little bit more about our OX390 project and why we think this is an important project, both for Orexo, but also for the U.S. We will go through the business update. I will take that. And as I said, it will come in the -- on the products under development, focusing on OX390. Fredrik will take us through the financials before I will close out with the legal update and some approach for expansion for where we think we have some future value drivers. Starting with a brief overview of the quarter. As I said in the introduction here, we have made some great progress in our pipeline, in particular, with our GLP-1 agonist or project that we have OX472, where we showed some very promising in vivo data. And also, we received a BARDA fund, which initially is worth $8 million, but could be all the way up to $51 million, where BARDA will finance the majority of our OX390 project. During the quarter, our work with IZIPRY, formerly known as OX124 has proceeded well, and we are now starting the reliability and stability testing that was required by FDA more or less on time. With regards to OX640, we have -- during the quarter, we have manufactured the first batches of AmorphOX powder with epinephrine at commercial scale. And we have continued partner discussions, but we have also, as I wrote in the CEO comments, seen some increased uncertainty around the market in the U.S. We believe that is something that will be solved, and I will come back to that a little later. Looking at the revenues. Clearly, in the Swedish krona, the dollar-Swedish exchange rate has had a strong headwind during the quarter for the company that impacted with nearly SEK 11 million, which is kind of close to 10%. But we have also seen during the quarter that the wholesaler inventory has declined in the U.S., which explains a lot of the development compared to last year. Then on EBITDA, we have a negative EBITDA, which was not entirely according to our plans, but that is very much associated with the increased value of the share price during the quarter where we are reserving for provisions for the -- for taxes and particularly around the social securities in Sweden, which is impacting negatively in the quarter, but not from a cash flow perspective, but from a P&L perspective. Fredrik will come back to that a little later. Looking at the outlook, we reaffirm the 2025 outlook. And what's worth noting is that we still believe that it's possible for us to reach our positive EBITDA number for the full year. Moving into our U.S. commercial update. We are seeing the buprenorphine and naloxone market is picking up a little pace, getting closer to 5%, but 4% growth year-over-year. And also, over the last quarter, we saw a -- a slight increase with 1%. This is particular now which is interesting is behind the scene is that the market has really been driven by the commercial segment, which is now basically on the edge of surpassing Medicaid as the largest segment in the U.S. That is important for us because of 2 reasons. First of all, the commercial segment has a lower rebate, so it's more valuable. Each patient within the commercial segment is worth much more cost than a patient with Medicaid. But also, we have and we maintain into next year unrestricted access to nearly the entire market with 99% of the volume today sitting with payers where we have no limitations in access for Zubsolv. And we have no changes expected for next year. In the public segment, we have seen Medicaid decline. This quarter actually increased a little, but at a much slower pace than the commercial segment. And we have seen in both Medicaid and Medicare that our access is nearly unchanged. There's a small, small [flat] where we've got some restrictions for 2026, but it's not really material for the company. One thing that is interesting in this space is particularly where we see our largest account is with Humana Medicare and Humana Medicare for a Zubsolv perspective, had a significant impact of two reasons. So the one is that we have seen Humana Medicare declining because they had new restrictions for certain part of their patient populations, but also that the rebate increased for that particular account. So we [cannot] -- both at lower prices, but also we saw negative volumes, which have had an impact on the company year-over-year, which is actually the main explanation behind the year-over-year negative development. From a quarter-over-quarter perspective, we're actually from a pure demand perspective, we have no major changes. We are quite stable in both Medicaid and Open and actually grow a little in some of the segments, but we do still have some negative impact from Humana and to a less extent of the UnitedHealth Group. For those of you who are new to the companies, these were the formerly exclusive contracts where Orexo had nearly the entire volumes within these accounts. But after the introduction of generics in 2019, we have seen a steady decline in the two accounts. One thing that I have shown before is a little around the inventory and this because we have a strong expectation of a buildup here in Q4. And to validate that a little, I just want to show some more interesting data here. So one is looking at the sales to pharmacies. That means that the wholesaler sales to the pharmacies is down about 1% compared to last year. Some of that is, of course, pricing when you compare to our net sales in these numbers, we also have a 4% price increase in the start of the year, but that's also something we anticipate would happen next year. From a gross sales perspective, we are also stable despite the volatility you can see here on the dark line. And we're down about 1% year-to-date. And that is despite the destocking we have seen. And I'm just looking a little closer on the inventory levels at wholesalers. This is a new picture for all of you, I believe. You can see these two peaks that are in the picture, they're both in the end of the year 2023 and also 2024. And if you look at the level of inventory when we entered 2025, it was 60% above the inventory that we have today in the end of Q3. But even just looking into the inventory in the end of Q2, it was actually 30% higher than where we are now in the end of Q3. So there has been an inventory decline, and it follows the same pattern that we've seen in previous years. So we are now expecting to see the Q4 that there will be some inventory build, which help us when we reiterate our guidance for the year that we actually believe we can hit the sales numbers that are in here and also overall for the company, hit the positive EBITDA number. Coming in under products under development, first area I will go a little into depth with is we did show some promising data in semaglutide, where we have done a nasal administration. And for most of you should be aware, and I'm sure you're following the pharmaceutical industry that this anti-obesity medications, which kind of a collective name for these GLP-1s is growing substantially. One is within obesity and diabetes, but also looking forward, there are a lot of expectations in more neurodegenerative diseases such as Alzheimer's and Parkinson's. We also see that there are areas within addiction where these have shown promising data. So it's really, you can say in one way, a drug with a very wide range of applications and where we see some of these patient segments would have benefit from a new administration form. On top of that, we also see with our dry powder formulation, we can add a lot of stability to the products. So what are some of the reasons why we believe? It's, of course, compared -- it's a small needle today that you need to take subcutaneous for most of the GLP-1s. Most of them only have an injectable [HQM] pipeline and there are a couple who also have an oral formulation, but with very poor performance in terms of bioavailability. But taking it into the nose, it's quite easy to self-administer. It's, of course, needle-free. It's a noninvasive route of administration. It will bypass the first past metabolism where you would normally, and that's why we see this low bioavailability of GLP-1 medications when they're taken orally in the GI tract. We don't see any need for refrigeration. We have data for 6 months of semaglutide in our formulation. And during those 6 months in 40 degrees heat, we have basically not seen any degradation of the active substance. So we think there are a lot of advantages coming in with the powder formulation, both from a patient perspective, from a stability perspective, and we think that can help also with improved adherence for the patients. With the data that we presented, this is a preclinical in vivo study. So I will say this is very early stage. We think semaglutide is the perfect model substance, but this could probably be applied to other peptides used with GLP-1s. Semaglutide is a very difficult peptide in the sense it's a very large peptide, but we're still showing this quite impressive uptake when we compare to the oral formulation of semaglutide with basically up to about 7x higher bioavailability using the nasal route of administration in the studies. We -- as I said before, we have continued to do stability studies, and we see minimum degradations after 6 months. And what we're doing now is that based on the learnings from this study, we will continue working on the formulation because the study was in 7 milligram --we know that 7-milligram of Rybelsus. We know some of the obesity data that we've seen from Novo Nordisk is up at 25 milligram for obesity. So we probably have to work a little on the formulation to increase the dosing also. The aim is, of course, to take this into a human trial, but we will have to look at the timeline. So it's a little early for us to commit to a timeline, but this is, of course, the ambition that we're working towards is to show that this -- we can replicate the data we've seen in dogs also in humans with improved bioavailability over the oral formulation. Then I will invite Ed into the conference, and Ed will talk a little about our OX390 project and why we think this is so important for the U.S. So Ed, the word is yours. Edward Kim: Okay. Thank you very much, Nikolaj here, and good morning, good afternoon to everybody. For those of you who may not recall, it was in April of 2023 that the White House declared fentanyl xylazine mixtures as an emerging public health threat. So that was about 2.5 years ago. And in the latest DEA National Drug Threat Assessment, which goes back over the past 3 years, the prevalence of xylazine in illicit opioid samples that are confiscated by the DEA has increased over 4x. And it's no longer a problem just in the Northeast, but it's spreading. And certainly, if you look at this heat map, has already reached significant numbers on the West Coast and it's been identified in all 50 states. Now -- it's not just how common it is now. But what we see here is that the deaths due to xylazine fentanyl overdoses continue to rise. This is a paper that analyze CDC data, which currently only goes to 2023. Now if you recall, 2023 was the first year where the total number of overdose deaths started decreasing. What you see here, though, is that in 2023, the number of xylazine fentanyl overdose deaths continued to increase. So we're also -- we're hearing this from market research as well as informal discussions that we have with colleagues and customers in the substance use disorder space that this really is a problem. And in the last 2 to 3 years, there's been emerging animal data suggesting that while xylazine is an FDA-approved veterinary product that is safe and effective when used appropriately in animals, when xylazine and fentanyl is given to these animals, in this case, usually mice or rats, it actually increases and sometimes multiplies the lethality and the opioid-induced respiratory depression. There is a paper published in 2023. It's the title on the left, which identified -- it didn't measure respiration but identified that a moderate dose of xylazine increased the lethality of fentanyl by over 100 times. So it took 1/100th the dose to kill 50% of the animals. So we believe that this is truly a public health threat, and it is growing over time. Now the BARDA partnership that we recently announced is a true partnership with this agency that is part of the Department of Health and Human Services. They're not only contributing a substantial amount of financial support, but BARDA has technical experts in all phases of drug development and public health who are at our disposal to continue to consult with us, advise us and advocate for the continued development of OX390. You heard Nikolaj mentioned that the total value is up $51 million. The current base period is going to be dedicated to the IND-enabling toxicity studies, formulation development and in-house manufacturing capabilities, and that totals $8.5 million. Based on achieving certain regulatory, manufacturing, clinical milestones, there are 4 option periods to continue the development. And these are negotiated with BARDA at each stage so that this is a staged approach to manage the risk of this program because, as you know, drug development always carries some degree of technical risk. The goal is to develop an intranasal rescue medication for use by lay persons or first responders in the community where these overdoses are happening. It will be developed on Orexo's own AmorphOX platform that you know so much about. And it will continue to leverage the existing manufacturing supply chain that we've already developed for OX124 and OX640. Back to you. Nikolaj Sørensen: Thank you very much, Ed. And maybe worth noting also is we received -- the grant was signed in the last 2 days of September, and that's also the last few days of Q2. We have not included any effect of this grant into the Q3 numbers. So you will start to see some effect in the Q4 numbers and of course, continuing into next year. What it is, is it's a cost covering. So we will basically invoice for the expenses running the project and then BARDA will cover the majority of the expenses for the project upon invoice. And the cost coverage will be recognized as other income by the company. So going on to IZIPRY. IZIPRY is, of course, you intimately connected to the same issue Ed was just talking about. Here, we have basically proceeded according to plan with our upscaling of the manufacturing. We have had some good dialogue with FDA also around the nasal device where we can now use the new nasal device without any further studies. We would say that looking at the entire market for naloxone, it's very highly competitive, and that's something we're taking into account when we're looking at the launch strategy. So we are reviewing how we can put this to the market with the least amount of financial risk to the company based on a more competitive market in the U.S. and also the need for financing some of these other projects we just talked about. We do see that the product as such and getting it approved is something that's highly valuable for the entire value chain. Every partner we're talking to is talking about the commercialization. And for those of you in Sweden, have probably seen some of our colleagues in the industry just recently have had issues with manufacturing. So manufacturing is central and I would say, the number one cause of delays of many approval processes. So that we can have a product that has been approved on a supply chain, I think, is immensely valuable for other discussions and other projects. But actually, even also some of the exceptions that we -- unique exceptions we're using for AmorphOX is something with an approved product that is also supportive evidence for some of the other products that we have in pipeline. So in many ways, I think IZIPRY is paving the way for a lot of other products moving forward. And one of them is, of course, OX640. And with OX640, we have continued to do the upscaling. We have manufactured the first batches of powder, which are now being analyzed. We have had some partnering discussions, but I will say that the data we received from the first launch of a nasal product in the U.S. and even in Europe, that launch has gone somewhat slower than some of our partners had anticipated and that have had a negative impact on these discussions where there's a little more -- let's see how the market evolves over the next quarter or two. But from an Orexo perspective, when we look at this market, we see the first product has come out with a strong growth. And we actually see from a financial perspective, some investors are seeing it's performing above expectations. But some of the industry players, maybe based on some early expectations from the company launching the product in the U.S., U.S. pharmaceuticals they find that this is somewhat slower than what they have seen. And when we are looking into this space, we're seeing it's around physicians' hesitance to prescribe before that they see real-world data supporting that a nasal delivery as -- as effective as an injectable. We know that patients in the U.S. who have allergies have quite infrequent interactions with health care. A lot of them don't see an issue in the daily day. So it's the annual meeting with the allergists, which is the time when you can get a new product. But also, from a more market perspective and something pushback is around the first ANDA that was filed in August by Lupin Pharmaceuticals on this product. So that has created some uncertainty. But if you look at the expectations by the investors, we see that the valuations are still significant. Our competitor, AIS Pharmaceuticals, actually according to the Wall Street Journal Markets have a buy rating by all analysts. We have some of the largest investors in AIS Pharmaceuticals have just continued financing with up to $250 million in the launch of neffy in the U.S. So for those who are close to the company, there's clearly an expectation that this market will go through. And from Orexo perspective, we still believe that OX640 has significant opportunity. Looking at the naloxone market, which we know very well, we saw that it didn't really take off before after 18 months. And we saw exactly the same concerns by physicians and patients. But today, I don't think anyone in the U.S. question the benefits of a nasal administration, which is probably a lead for some of the decline we have seen a number of people dying from overdose in the U.S. And we also believe that coming in with OX640, we're actually looking competitively, and we have done some market research. We know some of our potential partners have done some market research and all of that confirms that we have a very competitive product in the U.S. We still have IP until 2044, but to continue understanding the market and to get more evidence, we have started a market research using some external experts running the study in the U.S. that will be concluded during Q4 to ensure that we’re actually focused on the right market differentiating parameters of OX640 when we proceed and to confirm the attractiveness of the market. So OX640, we continue with the development. We have seen some, you can say, delay in the partnering discussions. And also there's a concern from Orexo is the attractiveness with the uncertainty of some of these partnering opportunities where if you go a little further, get more certainty around the market, we see that could be a significant value inflection for a potential partnership. Moving into the financial section, I will invite Fredrik to talk a little bit about our financial results. Frederik Jarrsten: Thanks, Nikolaj. So on Page 22, looking at revenues, if we start looking on the top part of this page, you can see that our total Q3 revenue for the Group was SEK 119 million. And the vast majority of that SEK 114 million or 96% came from Zubsolv in our U.S. commercial business. Now that's down about SEK 17 million year-over-year, mainly driven by negative SEK 11 million FX impact. But we also had lower demand in net revenue terms, primarily from the previously exclusive contracts within UnitedHealth Group and Humana. So that was about a 3% demand reduction year-over-year. Now partly offsetting this, we had a lower destocking effect versus last year that contributed to a positive SEK 2 million. In local currency Zubsolv revenue declined 4.8% year-over-year. Looking at other revenues within HQM pipeline, Abstral royalties were higher, but that's largely because Q3 last year included the negative adjustment to historic reported royalties. Edluar royalties were stable, but Zubsolv ex U.S. revenues were lower, mainly because that didn't have any tablet sales to our partner, Core Healthcare this quarter. That's following the onetime inventory build earlier this year ahead of Accord starting manufacturing in Europe. Now if we switch to the quarter-over-quarter view for Zubsolv revenue, the waterfall chart on the bottom part of the page shows that opposite to the year-over-year trend, reported net revenues in local currency increased slightly in Q3 by approximately 2% versus reported Q2 numbers that though include the nonrecurring rebate payment we had in Q2 of SEK 9 million. In SEK terms, with a negative FX impact of SEK 1.5 million, quarter-over-quarter net revenue shows only a very marginal growth, reflecting a broadly stable demand picture in the quarter, as shown in the first three bars of the chart. And working against the gross growth was also a sizable negative inventory destocking effect of SEK 6 million during the quarter, as Nikolaj previously talked about. Moving on to the next page, the P&L. We already touched on our net revenues total of SEK 990 million. FX effect was a negative SEK 12 million year-over-year. But the weakening of the U.S. dollar year-over-year has, of course, also had a positive effect on our USD-denominated costs, which account for approximately 65% of total expenses. The decline in COGS, as you can see this quarter is driven largely by this favorable FX effect within U.S. Commercial, and that was about SEK 6 million. Also improved production costs for Zubsolv. So as a result, gross margin increased from 85% in Q3 last year to 94%. On operating expenses in Q3, which landed at SEK 133 million, we're pleased to see that's down 4% compared to last year, although about SEK 12 million is coming from the weaker U.S. dollar. But we also saw lower costs from a performance perspective with lower selling expenses in our U.S. operations in relation to staffing as well as lower marketing-related costs for IZIPRY. We also had lower admin costs, mainly from reduced legal fees. R&D costs, on the other hand, though, were higher, mostly related to high costs for OX640 upscaling of manufacturing. And then we had these costs of SEK 13 million for the long-term incentive programs. Mainly related to provision for social security fees following the sharp increase in our share price during the quarter. EBITDA was negative for the quarter by minus SEK 9.8 million. And that, though, include this SEK 13 million negative LTIP impact. So if you would exclude those costs, EBITDA would be positive SEK 3 million instead. If you look at the U.S. business specifically, EBIT was an impressive SEK 38 million for the quarter, and that's up from SEK 25 million a year ago. So that's an EBIT margin of 34% and an improvement from 19% last year. Let's move to next page, cash flow. We reported negative cash flow of negative SEK 15 million for the period. After adjusting for a negative FX effect of SEK 0.8 million that resulted in a decrease in cash and cash equivalents of SEK 16 million in the quarter. Operating cash flow was negative, and that's mainly due to negative operating earnings and interest paid on the bond. Adjustments for noncash items had a positive effect, especially from the provisions related to timing of rebate payments and also from adding back these noncash LTIP-related costs we had this quarter. So by the end of Q3, cash and cash equivalents were approximately SEK 106 million. And just a reminder, at the end of Q3, we still held SEK 20 million in our own bond, which could serve as an additional funding going forward. And then we're looking at the next page, our financial outlook for 2025. These metrics are reaffirmed and specifically, EBITDA guidance remains unchanged, driven by expectations of a positive inventory impact for Zubsolv in Q4 as well as stable demand. Continued strong cost control is also expected to have a positive effect, and then we should probably also see positive impact with the BARDA award and the covering of incurred costs in Q4. However, the EBITDA outlook is related to some increased risk due to impact from non-budgeted onetime items such as the nonrecurring rebate payment we had in Q2 of SEK 9 million. Also provisions we talked about associated with LTIP program and also significant exchange rate fluctuations. With that, back to you. Nikolaj Sørensen: Thank you. Maybe a word also on the BARDA contract and OX390 million is that the -- it's covering also our internal expenses and particularly in the first phases of the project, it's really our existing staff that is working on the project. So we will have covering of salaries that we would otherwise have to finance ourselves. Among others, Ed Kim, part of Ed Kim’s salary that you listened to him earlier today is also covered partly by this award by BARDA. So a short legal update, the one process we still have ongoing, never ending is the Department of Justice, where we have not really any material movement during the quarter. What is worth saying is the U.S. system with U.S. prosecutors, which are the one leading these processes, that's political appointers on the U.S. prosecutors are political appointees. And that process has been going on during the quarter, and that actually was a change of the appointed U.S. prosecutor in the district that we worked with. And they really need to be confirmed before we think we can make any movements here. This is of course a process that is taking unnecessary time and also money, and it's something we would like to resolve, but we would need to have a U.S. prosecutor in place to have that discussion. So looking at the future, we can say we have three buckets that we really focus on. One is our commercial assets where, of course, we have some of the revenue of royalty-generating assets like Abstral, Edluar, which are still there even though on a low level. But the most important is Zubsolv, where we are continuing to work on how can we optimize the value contribution to Zubsolv long-term. On top of that, we, of course, have IZIPRY, which we're now putting into the semi-commercial space here as we are making good progress towards a -- an approval. So where we would then look at what is the right go-to-market strategy, both looking at the market potential and the amount of expenses needed. But really value optimizing those are important to enable the next areas, which is running our own projects, which today consists of 3 projects, one is OX390 that you heard, one is OX472 and GLP-1s and the last one is OX640. On top of that, we have the AmorphOX technology and how we can apply that to other -- in partnerships and to other companies' APIs. And really with the goal to become the partner of choice in nasal powder delivery technology, we believe today, we have the world's leading nasal powder delivery. We think the powder has a lot of advantages over a liquid nasal delivery, and this is something we working to apply together to -- on partners, in particular, in large molecules where we think this can move from injectables to nasal delivery, among others to vaccines, which is in our partnership with Abera. And we also have other nondisclosed partnerships where we're testing on larger molecules using our technology. With that, I will open up for Q&A. Operator: [Operator Instructions] The next question comes from Samir Devani from Rx Securities. Samir Devani: Probably easier if I just give them to you one at a time. So I guess kicking off on a couple of the positive developments that we've seen over the quarter. On OX390, the $8 million initial period, how long will that cover? And can you make any further comment on how 390 will be differentiated from existing rescue medications? I don't think you've disclosed yet the active and maybe when we might hear about that. Nikolaj Sørensen: So I will take the first and then Ed can answer your second question around the differentiation and difference. So, the $8 million is lasting until the first gateway, and that is right now planned to be in the first half of 2027. So this will cover the expenses until the first half of 2027. With regards to the differentiation, Ed, could you give a little comment on how this is different than other naloxone and nalmefene rescue medications? Edward Kim: Sure. Thanks, Nikolaj. Thanks for the question. So what the preclinical evidence shows is that naloxone does not have a beneficial effect on the respiratory depression associated with xylazine. So there is nothing else available. This will be specifically targeted to reverse the toxic negative effects of Xylazine and drugs like it. So it will be a first-in-class. Samir Devani: And when do you think you'll be in a position to tell us what that active is? Edward Kim: I'll leave that to Nikolaj. I think he's going -- we're not prepared certainly today to disclose specifics around the API. Nikolaj Sørensen: So, Samir I think we will do that in relatively soon, but I would say, in the start of next year. It's a little around the supply chain. It's around the IP and others that we want to get control of before we will disclose the details. Samir Devani: Okay. That's totally fair enough. And then just maybe moving on to semaglutide. Obviously, this is a noncore area for you. And I'm just, again, thinking about -- obviously, you've got OX640 on the sort of partnering table. When do you think you'll have enough -- or what further investment do you need to make before you think you could be in a position to partner this? Nikolaj Sørensen: So I think [indiscernible] OX472 or semaglutide is an interesting one because it's -- we see it as a two -- I can say, two-legged opportunity. One is, of course, semaglutide as a product, where that one will -- before you can get to market will be subject to semaglutide API patents, which I believe some of the large market is in the early 30s before they go. So there is an opportunity in semaglutide. And before you get to a partnering around that, I think there could be opportunities short-term, but really to get through human data, I think, will be an important milestone to have the first human data showing that it actually works not only in vivo in animal testing, but also in humans. I think that would be a great value inflection point and I also think the expenses to take us to that level is not that high. On the other leg, which is more other GLP-1s where you know today, Novo Nordisk and Eli Lilly, they have an oral formulation. There are some of the other, but not a lot who have oral formulations, but there are basically a large number of companies who have peptides for GLP-1s, which don't have access to an oral or nasal formulation. And that could give an opportunity which is coming much faster to test whether GLP -- we could have the product tested on that GLP-1, which, of course, then in that end, you would have to decide whether you can run both legs or you will have to decide which one you're going on. But we really think from a partnering with a pharmaceutical company with semaglutide, the real value inflection point is likely to come with the first human study. The other ones could come earlier than that. Samir Devani: Okay. That's great. And then just on my final question, just on IZIPRY. I just wanted to double check that nothing has changed since we last spoke in terms of the likely time line for the FDA filing, which you've said is mid-2026. Just wanted to confirm that's your current expectation. Nikolaj Sørensen: That is still our current expectation. Operator: The next question comes from Klas Palin from DNB Carnegie. Klas Palin: The first one relates to OX390. And I wonder if you are perhaps willing to share some further details about the clinical program needed to get an approval for this, what you have had kind of discussions with the FDA and the scope of such trials perhaps? Nikolaj Sørensen: I will refer that to Ed with keeping the communication line as we have discussed, that we can't go into too much details, but on a high level, Ed, you can maybe answer this. Edward Kim: Sure. Thanks, Nikolaj. Yes, good questions. We are -- because OX390 is a new chemical entity, we are going through the IND-enabling studies currently. So our initial conversations with the FDA are going to be around getting to first in-human. So the clinical program and the pathway to developing this important rescue medication, those conversations need to be had once we're getting closer to our first-in-human studies. Klas Palin: Okay. And just to confirm, the device that you are intend to use there, is this very similar to the one for IZIPRY? Edward Kim: Yes, that's the plan. Klas Palin: Okay. Perfect. And then just jump to OX640. You are sort of downplaying the expectations of a near-term partnership, at least what I'm hearing. And just wonder, is the negotiations on pause awaiting this market research analysis or what's going on? Nikolaj Sørensen: So there's a limit to how much I can go into individual discussions, but we still have ongoing discussions with interested parties. I think some of the opportunities, there's a question mark from us whether the attractiveness of entering a partnership with that market uncertainty is attractive or we would have more value to take this a step further while monitoring the market development. So there's a little on the value that you can get from the product partnering today, but there is still companies interested in the game with different setups. So there are still opportunities for partnership in relatively short-term, but I think the company needs to decide on what level of risk are we willing to take because we think there could be more value taking this a step further if we believe the market development is in line with some of the valuation indications for AIS Pharmaceuticals and some of their larger investors believe how this will evolve. Klas Palin: Great and then my last question is about OX472 then. You talked about perhaps conducting a human trial before partnering. Is it possible to provide some sort of time frame when you perhaps could enter clinical trials with this compound? Nikolaj Sørensen: I think we -- so this has gone very, very fast for us. Of course, we've been working on the formulation and it has been even in the pattern since quite some years back, but the real work started this year. And what we are discussing internally and we are looking into the market opportunities is what is the target profile that we're looking for. For example, is the dosing that you need for obesity is likely to be higher than what you need for some of the other indications. But that also increase the risk in the study if you have to go very high in dose, then that could lead to more frequent dosing through the nose and that comes with some other potential issues that we don't know. So there's a discussion where we're leading and that comes from two sides. One is to understand the market and the clinical profile that we think is desirable. And the other one is purely formulation to say how can we work on excipients and how much can we get into one dose of the nasal spray. So there is some formulation work that we would like to conduct, probably followed up with some in vivo study before we move into humans with what you can say, a targeted formulation. So we will have to wait a little to see where that is going. But it is to run this first exploratory clinical study in humans is not a large study, and it's not something that's going to be quite -- very time consuming. So we could make a decision and we could run it relatively fast. As you might know, we have manufacturing capacity for clinical trial material internally. So we don't have to wait for slot times at a [indiscernible] manufacturer. Klas Palin: Okay thank you so much, that’s what is all for me. Nikolaj Sørensen: Thank you. And I believe we have received some questions on the telephone conference here. So I will go through those here. So have you applied or intend to apply for these FDA vouchers giving the company much shorter time line. So one to two months of approval for drugs of importance for the U.S., for example, OX390 and OX124. For OX124, we have tested to see if we could get accelerated approval. We think we came in a little late because there are other alternatives on the market. So we didn't have that pathway available. For OX390, that could be a possibility. And that, of course, is something we're exploring. What's worth noting here is, as said, BARDA is not only a financing. They are an active part in the development. BARDA is part of the HHS in the U.S., which is under the same department as the FDA. So I think even here, there are opportunities for us to work with BARDA to find the most optimal pathway to approval in the U.S. So that is something we expect. Then there's a question whether OX390 will be a single-agent product or we could combine it with naloxone together with an alpha-2 receptor antagonist. So alpha-2 is the target for xylazine for those of you who don't know that. And the use of a combination product in the U.S. is from FDA perspective, it's a hard sell. It requires quite a lot of data to combine the two products. Often, it will be easier to have some kind of combination package or you will have work with pharmacies to make a combination of the two agents. We will have to see how we would -- what is kind of the emergency steps you would take when you see someone who is potentially overdosed with an – with xylazine or similar agent and then decide what is the best distribution way. But to combine it in one nasal spray, we believe will be a very complicated process from an FDA perspective. Then we have a question here, which is around whether we think inhaled semaglutide would be a better solution than the oral products in clinical trials given -- or production in clinical trials given higher toxicology discontinuations seen in trials such as those led by Viking, which is another company just for those of you who don't know who works with a GLP-1. Do you see interest from new investors, including international investors, given potentially huge market opportunity coming from that product. We think there's a lot of advantages of using a nasal delivery of a GLP-1. Working with inhaled could be, but in my -- and here, I'm not a physician. It is, of course. So Ed, maybe I will take it to you later. But I would just say, in general, I have seen that inhaled products come with more tox stories, at least historically than what we have seen with others because you get it into the lung and the long-term toxicology effect of that is difficult to predict. And I at least have been part of withdrawing a product from the market because of late coming toxic indications when from real-world data. The nasal distribution or nasal, at least with our powder formulation with a 7x higher uptake to the nose without the issues that you have with using an oral tablet, what we've seen with Rybelsus is very low bioavailability and also high variability among the individuals who receive Rybelsus and taking it through the nose, at least in our in vivo study, we saw much more consistent data from the nasal delivery than the oral delivery. So we think there could be a great advantage from a nasal delivery over the oral on the inhaled, I'm not that sure. I don't know, Ed, if you have any thinking around inhaled semaglutide. Edward Kim: Yes, Nikolaj, I think you've stated it all that the inhaled route of administration carries some risks. And what we want to focus on is derisking as much as we can the development of novel formulations. And we believe that the intranasal derisks it the most. Nikolaj Sørensen: And then there was a second part of the question, which is around whether we have seen interest from new investors, including international investors, given potentially huge market opportunity. What I can see is that our share price have increased, even though today it probably came with some disappointment. I can understand from the commentaries, it's a lot of that is related to OX640, where we, of course, also had hoped and had some qualified expectations that we could have come to an agreement this autumn. But I would say that the quarterly data and also the patent litigation that [indiscernible] ended up with came as a surprise to both us and at least the lead potential partner that we have during the summer. But looking at what has happened after the GLP-1 announcement and also OX390, which one of them is driving, it's a little hard, but I actually think they might are very complementary with the GLP-1s having a huge market potential and OX390 actually give us some financial stability in the company by supporting a development program with a lot of the staff that we're working with, we are a small company, of course, the same people who have to work on both the GLP-1s and also on the OX390. And what we have seen is increased, significantly increased volumes. We have seen more block trades in the stock than we have seen recently. Some of the block trades are managed by international banks or banks which are at least a part of the banks not present in Sweden. And that indicates in my view that it's either some very affluent private individuals or more likely it's an institutional investor that is buying the share. We have not seen that in our statistics. And I think that is due to many international investors don't disclose their holdings. So we just see that we have an international custodian bank that hold an additional amount of shares. Then we normally would see that there are -- some of these investors will call us and ask for individual presentations. And I will say that we have had more inbound interest in the company after the GLP-1s from international investors than we have seen for quite a while. So that's maybe different indications that the hypothesis presented here in the question that we have new investors and that there has been an increasing interest is correct. And then we have another question, which is, I think, came before the conference, which is around whether Orexo is involved in Abera's long-term study for its influenza vaccine? What data was presented quite recently, which was quite promising? The short answer is no. We were not part of this long-term study. But I also think looking at how you design these studies, it would be natural for Abera to actually focus on the delivery method with the least noise, and that is probably working with an injectable or the way of delivering the product that they have done for most of their studies. That said, we still have an intimate dialogue with Abera. We have discussions about future studies that we could conduct together. So this is just supportive of Abera's vaccine that they have some great data that they could show. For us, that is very good news because it, of course, help us in the discussion with Abera for where the powder could add value to Abera's vaccine candidate. So -- but we have not been involved in the study. With that, I believe we have no further questions. And I would thank all of you that you listened in. I hope this is a new partner we work with for the conference call from our side. It seems to have been worked very well. I hope it's the same for you. So thank you so much for your time, and you're welcome to reach out to Orexo if you have any further questions. Thank you. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Nikolaj Sørensen: Thank you so much.
Operator: Welcome to the S&T Bancorp Third Quarter 2025 Conference Call. [Operator Instructions] Now I would like to turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead. Mark Kochvar: Great. Thank you, and good afternoon, everyone, and thank you for participating in today's earnings call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the third quarter 2025 earnings release as well as this earnings supplement slide deck can be obtained by clicking on the Materials button in the lower right section of your screen. This will open up the panel on the right where you can download these items. You can also obtain a copy of these materials by visiting our Investor Relations website at stbancorp.com. With me today are Chris McComish, S&T's CEO; and David Antolik, S&T's President. I'd now like to turn the call over to Chris. Christopher McComish: Mark, thank you, and good afternoon, everybody. I'm going to begin my comments on Page 3, and I welcome all of you to our call, especially our analysts, and we appreciate you being here with us and look forward to your questions. I also want to thank our employees, shareholders and others listening to the call. To our leadership team and employees, I want to thank you for all you do. These results are yours and you should be very proud. Before my remarks on our performance, I want to take a moment to congratulate and thank Christine Toretti, our former Board Chair, for her years of service at S&T. As you may be aware, Christine is our new U.S. ambassador to Sweden, a well-deserved appointment in recognition of her years of service to our country. I also want to welcome and congratulate Jeff Grube, another long-standing S&T Board member as he takes on the role of Lead Independent Director of our Board. We all look forward to working even more closely with Jeff as we move the company forward. Overall, we feel very good about the quarter as it reflects a lot of the work and strategic focus of our team over the past few years, positioning S&T for long-term success. You will see that focus in the numbers we discuss today, including, first, by strategically repositioning our balance sheet over the past couple of years to reduce asset sensitivity, we've enhanced our ability to drive consistent net interest income growth through the interest rate cycle. Second, while total deposits ended basically flat at quarter end, our continued investment in our deposit franchise delivered a solid deposit mix with noninterest-bearing deposits representing 28% of total deposits. Additionally, average DDA growth in the quarter was over $50 million versus Q2, helping to drive our net interest margin expansion, which was already at a very healthy level. Last, while we did see an increase in NPAs in the quarter, this was over a very low base, and the final numbers remain in a very manageable range. Together, these strategic initiatives have created a solid platform for current strong performance and confidence in our future. Additionally, from a capital standpoint, our earnings drove further tangible book value growth of more than 3% again this quarter, above our already robust capital levels. This capital level gives us a lot of flexibility around acquisitions as well as share buyback opportunities. I will remind everyone again, we have a very clear path to $10 billion and above through organic growth in the coming quarters. In summary, I'm very excited about how we are executing, delivering for our customers and building our company for the future. Looking at the quarter, Q3 was another quarter of strong earnings and returns. EPS of $0.91, net income of $35 million, while ROA came in at 1.42%, up 10 basis points from Q2, and PPNR at a very solid 1.89% was up 16 basis points. PPNR was aided by both NIM expansion increasing to a robust 3.93%, up 5 basis points linked quarter, while net interest income rose more than 3%. Asset growth was a little lighter than Q2 due to some higher payoffs while NPAs did increase over a very low base. Charges remained low and the ACL decreased by 1 basis point linked quarter. Dave Antolik is here with us, and he will add more color in a few minutes on asset growth and asset quality. Again, while customer deposit growth was somewhat muted, DDA balances remained an impressive 28%, while total deposits -- while contributing meaningfully to our net interest income and net interest margin improvement. Expenses were well managed, combined with our revenue growth, the efficiency ratio dropped to 54.4%, another strong number. I'm going to stop there. I don't want to take any more of Dave or Mark's thunder, but -- and I'll turn it over to them for more details, and I look forward to your questions. Dave Antolik: Great. Thank you, Chris, and good afternoon, everyone. Continuing on Slide 4. Total loan balances grew by $47 million or 2.3% annually during the quarter. This growth was largely driven by CRE activities, resulting in $133 million of increased balances in that category. Much of this growth was the result of construction loans converting to permanent commercial real estate loans as projects were completed during the quarter. As a result, commercial construction balances declined by $78 million. Looking forward, unfunded construction commitments grew by $37 million during the quarter, pointing towards continued growth in CRE for the balance of the year and beyond. Asset classes experiencing the most growth during the quarter included multifamily, flex mixed use, manufacturing and retail. Offsetting our CRE growth were declines in our C&I balances of $46 million. These declines were driven by a combination of modest seasonal utilization reductions coupled with higher-than-anticipated payoffs as Chris mentioned, and credits that we chose to exit. During Q3, total commercial loan payouts were higher than the previous 2 quarters and higher than Q3 of 2024. Turning to consumer loan activity. We saw overall growth in line with our expectations at $37 million or approximately 6% annualized. Consumer pipelines were down slightly from Q2 to Q3, but still in line with our forecast and in support of continued growth at the pace that we've seen in recent quarters. Commercial pipelines continue to grow and sit at the highest point in 5 quarters. Given our experience in Q3, and anticipated new loan and payoff activity in Q4, we are guiding to mid-single-digit loan growth in Q4. Turning to asset quality on Page 5. Our allowance for credit losses decreased by 1 basis point and remains appropriate for the level of credit risk in our loan book. Overall, criticized and classified assets were up moderately quarter-over-quarter and are in a range where we expect them to remain for the foreseeable future. During the quarter, NPAs increased to 62 basis points of total loans. It's important to note that this level of NPL follows a period of exceptionally low levels and is well within an acceptable range. I'll also note that we do not have concern with any particular asset class, geography or industry. The increase was primarily a result of 2 CRE credits and 1 C&I credit that migrated during the quarter. We have asset resolution strategies in place for several NPLs and in support of those strategies, recognized charges of $2.4 million in the quarter and established additional specific reserve of $2.7 million. Looking forward, we expect NPLs to stabilize and potentially reduce over the balance of 2025 and into the first quarter of 2026. Taking a broader look at leading credit risk indicators, we see nothing in our credit risk rating stack, credit scoring or delinquency that points to additional downward pressure on our credit results. I'll now turn it over to Mark. Mark Kochvar: Thanks, Dave. Third quarter net interest income improved by $2.6 million or 3% compared to the second quarter, and net interest margin expanded by 5 basis points, and combined with loan growth, that's a pretty good quarterly revenue growth. The net interest margin improvement came from a 1 basis point earning asset increase, combined with a 3 basis point decrease in cost of funds. That was mostly due to CD repricing than the higher average DDA balances of $50 million that Chris mentioned. Fed rate change came very late in the quarter, and we did not see any meaningful impact from that in these results. We continue to expect that our more neutral interest rate risk position and pricing discipline will mitigate any rates down impact, both what has happened so far and what is expected over the next several quarters. Next, on noninterest income. We saw a slight increase of $0.3 million during -- for Q3, with small improvements in our major customer fee categories. Our expectations for fees going forward remains at about $13 million to $14 million per quarter. On the expense side, expenses were more in line in the third quarter, declining by $1.7 million compared to the second quarter. Favorable variances were concentrated in salaries and benefits, primarily in incentives and medical. Additionally, professional services decreased by about $0.5 million, mostly due to the timing of some projects. Our quarterly expense run rate is still expected to be approximately $57 million to $58 million for the next several quarters. Capital to TCE ratio increased by 31 basis points this quarter with AOCI improvement contributing about 7 basis points. Our regulatory ratios increased by about 15 basis points due to strong retained earnings growth. Our TCE and regulatory capital ratios position us well for the environment and will enable us to take advantage of both organic or inorganic growth opportunities. We also have a share repurchase authorization in place for $50 million. Thank you. At this time, I'd like to turn the call back over to the operator to provide instructions for asking questions. Operator: [Operator Instructions] Your first question comes from the line of Justin Crowley with Piper Sandler. Justin Crowley: Wanted to start out on loan growth in the quarter and kind of looking forward. I know you went through some of this, but could you give more of a sense for the puts and takes here between origination activity? And then maybe how impactful paydowns were, which I think you called out? Dave Antolik: Yes. So paydowns were up quarter-over-quarter, and again, higher than what we experienced in Q3 of last year. So the end result was a little lighter than what we had expected. CRE activity remains strong. As I mentioned, the construction commitments grew during the quarter, pointing towards better growth in Q4 and into Q1. Consumer, we believe, will remain at somewhere in the mid-single digit, similar to the 6% that we experienced in Q3. And we're working hard to drive better C&I growth. And we talked in earlier quarters about recruiting teams, they're getting up to speed and bringing opportunities to fruition. So we feel like that mid-single-digit number is appropriate for us especially given the growth of the deposit franchise. We don't want to get too far ahead of our funding sources, but -- and we think that's an appropriate level of growth for our bank. Justin Crowley: Okay. And like taking that mid-single digit versus maybe the mid- to high that's been discussed before, is that a function of the paydowns? Is that primarily what that is? Or is it also what you're seeing on the deposit side, maybe the combination of the 2? Dave Antolik: It's a combination of all those factors, plus demand in the market. There's still a fair amount of uncertainty. If you think about the budget impasse in Washington, we have the double whammy here in Pennsylvania because we've got a state budget impasse as well. So until some of those things get settled out I think the interest rate environment is helping us, and we're hoping to tell that story to our customers around fixed rate borrowings, but there's still enough uncertainty out there that mid-single-digit growth feels more appropriate for us from both a credit and funding perspective. Justin Crowley: Okay. Got it. That's helpful. And then shifting a little bit on the margin. And I hear you on the NIM being able to hold relatively stable. But as we get into next year with more Fed cuts on the way, how do you see that playing out over more the intermediate term in terms of the effect on NIM? Maybe also just any color on flexibility with things like swaps continuing to roll off or anything else? Mark Kochvar: Yes. I mean, I think for the next several quarters, probably into -- through the first half of next year, I feel like we're pretty well positioned to handle any of the potential rate cuts just because of the funding mix that we have, our ability to reduce deposit rates, still CD repricings in the offing and then also the receive fixed swap book that we have that will continue to mature its latter over the next several quarters. Assuming the Fed kind of finishes up by mid-summer, I think that will be a little bit of a reset, and we'll need to look more closely at how customer behavior on the -- especially on the deposit side evens out, what the shape of the curve is. And those things could put some pressure on the margin just on a go-forward basis in a more stable rate environment, but I think a lot of things have to shake out before then. But for the next 3 quarters or so, we think we're in a pretty good spot to handle the rates down should it come. Justin Crowley: Okay. And then on the deposit side, as we get the -- continue to get these cuts, do you have any funding that's -- or any deposits that are indexed directly to Fed funds and would reprice right away? Mark Kochvar: Not on the deposit side. We're pretty -- we've been pretty proactive and have a decent discipline with respect to the exception pricing that we have with our customers. So we act fairly quickly on those, but we don't have any contractually indexed deposits. Justin Crowley: Okay. Helpful. Mark Kochvar: We have a small amount tied to the like a 3-month T-bill, but that's maybe $150 million, very small. Justin Crowley: Okay. And then I know we talk about it a lot, but on M&A and the higher levels of activity we're seeing, Chris, could you give us an update just on that side of things for you folks? Are a lot more conversations taking place? Or how has that all been trending from your side? Christopher McComish: Yes. The conversations in the market is still active. Pennsylvania and Ohio maybe not as much as other geographies, but there's still a good number of conversations that are going on, and it's a key part of the ongoing outreach and engagement that we have. Justin Crowley: Okay. And you hit on the geographies. And I know you've cast somewhat of a wide net in terms of what could make sense. But does that leave areas like in the Mid-Atlantic or D.C., Maryland, is that... Christopher McComish: Exactly. I would think about Mid-Atlantic, West through Ohio. Our marketplace today is Pennsylvania and Ohio, but we certainly are interested in places further south and east. Operator: Your next question comes from the line of Daniel Tamayo with Raymond James. Daniel Tamayo: Maybe first just on the deposit side. You touched on it, Mark, with your expectation for your ability to maintain the margins in the next several quarters. But just curious what you're seeing on the competition side kind of recently last few months, and what you're thinking in terms of betas for these cuts that -- the September cut and any future cuts that we have coming? Mark Kochvar: We did -- after the first cut here in September, we -- or last September, we did see a little bit more competitive pressure than we had expected particularly on the CD side. There seem to be a little bit of reluctance on the part of many competitors to reduce some of those short-term rates as much as we had expected. So we made some adjustments in how we handle some of the exception pricing there. We think that with several cuts will actually -- we'll catch up. I think there's a little bit of psychology going through the 4-handle and customers being attached to getting that 4-handle rate. And so I think that will improve assuming that Fed keeps on going with multiple cuts. On the beta side, our loan beta overall is kind of around 40%. So we're targeting right around there or a little bit better over time with the CD repricing included to be able to match that. That's an important part of getting us to have that more stable NIM. Daniel Tamayo: Great. Appreciate that. And on the $10 billion threshold, with the slower growth in the quarter, it seems like you should be able to stay under $10 billion next quarter and then, organically, if that's the way you pass, it would be sometime next year? Christopher McComish: That's correct. Yes. Daniel Tamayo: Okay. And then maybe 1 for you, Chris, on profitability. You guys have been above [ 1.40 ] were in the quarter kind of pretty regularly now for the last few quarters. It seems like that should be relatively sustainable with credit being certainly in a good place. But is that something you think you can stay above that [ 1.40 ] bogey? Christopher McComish: Yes. I think in that range is certainly the way we're targeting things. To your point, Danny, as credit continues to behave, and we stay focused on that. And then as Mark talked about, if margins hold up as we expected in this down rate environment, that's certainly a reasonable number and is something that we are staying focused on. Operator: Your next question comes from the line of David Bishop with Hovde Group. David Bishop: I appreciate the color regarding the operating expense forecast. I'm curious as you budget out into next year, any prospects or plans to recruit or add additional bankers? I'm just curious how much is baked into the numbers and how much of a lift that may influence that on an inflationary basis, if you are successful? Dave Antolik: Well, we certainly expect to add bankers and the expectation is that those bankers pay for themselves. So there's a real focus internally on improving productivity, so things like leveraging artificial intelligence, making sure that we have processes streamlined, become really important to managing operating expenses, but we certainly do expect to add in the customer-facing roles. David Bishop: Got it. And then I think you mentioned capacity for the share buyback. Just curious appetite for share repurchases at the current valuation? Mark Kochvar: Yes. I mean we think there might be some better opportunities. We've seen a downdraft in bank stocks overall, and us in particular, over the past months. So we certainly think that, that's something that we're going to look a lot closer at here as we get into the rest of the quarter. David Bishop: Got it. And 1 final sort of housekeeping question. I know there's been a lot of chatter about loans to the NDFI sector. Just curious if there's any exposure you wanted to call out? Dave Antolik: No. Mark Kochvar: Yes, nothing material. We do have some exposure to some REITs that are technically NDFIs, but nothing that looks like where the problems have surfaced in some of the larger regional banks. That's a space we don't play in. Operator: Your next question comes from the line of Kelly Motta with KBW. Kelly Motta: Most of mine have been asked and answered at this point, but I guess piggybacking on the credit question, you did have the migration, although it sounds like you feel levels are low and you feel overall good. Is there any specific areas understanding you guys don't really have exposure to NDFIs that you would direct analysts to watch more carefully either at S&T or just in the bank space more broadly? Dave Antolik: No. I think, in fact, Kelly, beyond what I mentioned relative to kind of budget crisis, credit is performing as we would have expected. And here in Western Pennsylvania, there are things like a big data center that's being built outside of Indiana here in Homer City, Pennsylvania, that should add additional opportunity for growth and improving credit health in the region as some very large investments are made. And we obviously look through our concentrations relative to commercial real estate. We're very comfortable with where we stand from a diversification perspective, both construction versus permanent, and all the asset classes. And then we are closely managing our C&I book to make sure that we're not getting too far out on our risk scale. So that's some of what led to the decline in C&I balances in Q3 where decisions that we made relative to exiting credit. So I don't know that there's any 1 thing that I would point you towards other than kind of general economic and political environment, specifically the budget impasses in Pennsylvania and at the national level. Kelly Motta: Got it. That's helpful. I guess last question for me would be on the funding side. Your loan-to-deposit ratio sits right just a touch above 100%. As you -- appreciate the color on the loan outlook. As you look ahead, where are you seeing opportunities to raise core funding and the drivers of that? Christopher McComish: Yes. Kelly, it's Chris. As we've talked about, building the growth of our deposit franchise is a key driver of our performance and the area of focus and that entails everything from incentive plans to product mix to adding staff. Dave earlier asked about bankers that includes treasury management professionals and teams. And so it's a critical part of who we are. And we feel really good about our deposit mix, and we feel very good about the process that we use around being proactive relative to exception pricing in ensuring that our bankers are able to be responsive, both in the branches with consumers as well as our commercial and business bankers. So it's a core part of what we think about and focus on every day. And we know improving that loan-to-deposit ratio is really important to us as we move forward to capitalize on our growth opportunities. As Mark talked about, we did see, with the most recent rate cut, some increase in competitive intensity, and we'll have to be able to respond to those things as well. Operator: Your next question comes from Matthew Breese with Stephens. Matthew Breese: The first 1 for me, is it fair to think that the $10 billion crossing will happen either in the first quarter of '26 or second quarter '26 without having to manage the balance sheet below that too strenuously, or is there room to kind of push even further out? Mark Kochvar: No, I don't think so. I think it will be certainly first half of next year. And I don't think there's any -- we're going to be pretty close here at the end of the year, but shouldn't -- I don't think we'll have to try very hard to stay under at the end of the year, but we're not of a mind to do that long term. So I think we just -- we go ahead after we get past '25. Christopher McComish: The other thing, Matt, that we are watching is some of the changes or the proposed changes in Washington relative to regulatory relief for changes and thresholds and that kind of thing. That won't impact the Durbin cost, which we've talked about, which is in that $6 million to $7 million range, but it certainly -- it makes us feel good about the fact that regardless, we're prepared and -- but it might give us some additional flexibility to run the company. Matthew Breese: Got it. Okay. And then I'm sorry to harp on the NIM, but it does seem like, on the back of recent cuts, we could get another 2 to 3 '25 cuts in relatively short order. I think at last count, you have something like 39% or 40% floating rate loans. How do you see the margin -- or I guess, my gut is that the margin has near-term downside before deposits start to catch up and you get some of that back. But I was curious on the timing difference between floating rate loans and your ability to act on deposits, if you could help me on the NIM? Mark Kochvar: Yes. I mean our floating has decreased some, especially when you figure in the swap exposure we have, so it's closer to 30% net. So I think that gives us a little bit of relief. So -- and we run in the models -- I mean, there is some risk if that competitive piece of the deposit side that we've talked about expands beyond CDs and really starts to bore into kind of money market and the interest-bearing demand sector. But the modeling we've done so far doesn't have that sort of air pocket that you alluded to. We think we can still maintain that fairly quickly with the Fed changes. Matthew Breese: Okay. The credits that went nonperforming, could you just give us some insight as to what business lines were behind the C&I credit and what sectors the commercial real estate credits were attached to? And any kind of underlying factor? Was it higher rates and just kind of a strain that way? Or was it more idiosyncratic? Dave Antolik: Matt, I don't want to get into specific details on these credits because they are active workouts. The C&I credit was a manufacturer. The 2 CRE credits were really a function of kind of construction-related risk. But as I mentioned, we've got asset resolution plans in place that we hope to execute on over the next couple of quarters. And again, we don't see anything generally or specifically tied to any industry, geography or asset class that gives us kind of additional heartburn in terms of more downside risk. Matthew Breese: Okay. I appreciate that. Chris, maybe last 1 for you. On M&A, you had mentioned kind of geographic preferences. I guess beyond that, what, to you, makes an attractive target? What business lines or deposit composition are you looking for? I guess I'm looking for some color on the strategy component to M&A beyond geography. Christopher McComish: Yes. So strategically, we obviously -- I mean, I'm a big believer that acquisitions are focused primarily on the deposit franchise. And that type of opportunity would help with the funding mix that we have today as well as give us a core group of customers to expand relationships around. So we think about it in a couple of ways. One, there's geographic expansion that could be into faster-growing areas than where we are today. Then you've got geographic overlaps that would create some potential efficiencies for us. Both of those things could be important to us. But kind of the key driver really is thinking about that deposit franchise. There may be a line of business that may help us expand our C&I capabilities for example, or our focus on small business. Some of that is unique to the -- to a specific transaction. So we think about the balance sheet makeup of the company first and foremost, a heavy emphasis on the deposit side of the balance sheet, understanding credit risk, and then does it represent an ability to grow the company faster. Operator: I would like to turn the call over to Chief Executive Officer, Chris McComish, for closing remarks. Christopher McComish: Okay. Well, listen, thanks, everybody, for your good questions and your engagement. We really appreciate it and your interest in our company and all you're doing to support what we're trying to do. We look forward to being with you again next quarter. In the meantime, we're going to go back to work and see what we can do to grow the bank. Have a great day. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. 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: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International First Quarter Fiscal Year 2026 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference call over to George Price, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir. George Price: Thanks, Tina, and good morning, everyone. I'm George Price, Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning. We are providing presentation slides, so let's move to Slide 2. There will be statements in this call that do not address historical fact and as such, constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night's press release and are described in the company's SEC filings. Our safe harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let's turn to Slide 3, please. To open our discussion this morning, here is John Mengucci, President and Chief Executive Officer of CACI International. John? John Mengucci: Thanks, George, and good morning, everyone. Thank you for joining us to discuss our first quarter fiscal year '26 results. With me this morning is Jeff MacLauchlan, our Chief Financial Officer. Slide 4, please. CACI's strong first quarter results are a great start to our fiscal year 2026. We delivered free cash flow of $143 million, driven by revenue growth of 11% and an EBITDA margin of 11.7%. We also won $5 billion of contract awards, which represents a book-to-bill of 2.2x for the quarter and 1.3x on a trailing 12-month basis. Over half of our awards were for new business to CACI, and we also continued our excellent track record of winning recompetes and securing sole-source extensions. Our first quarter performance gives us increased confidence in achieving both our full year guidance, which we are reaffirming and our 3-year financial targets. Jeff will provide additional details shortly. Slide 5, please. Turning to the macro environment. The federal government continues limited operations under a shutdown. However, our business remains resilient given our national security focus with most of our work funded and deemed essential. Looking beyond the shutdown, we continue to see enduring needs, good demand signals from our customers and prospects for a healthy funding environment for national security priorities. In addition, we are starting to see early indications of how reconciliation funds available to DoD and DHS may be used. For DHS, the focus is likely to include modernization and border security, which we expect will benefit programs like BEAGLE and drive demand for our Counter-UAS technology. For DoD, in addition to areas we have previously discussed, we also expect reconciliation funds, including those for Golden Dome, will benefit some of our intelligence programs as we focus on left-of-launch situational awareness. Our ability to reaffirm our guidance and deliver on our commitments even in the face of a government shutdown demonstrates the resilience of our business and as a result of deliberate choices and investments we have made over many years. Our actions have positioned CACI for success in any environment, including this one. Slide 6, please. Let me discuss some examples of awards, program performance and investments that highlight our competitive differentiation in several areas. First, in Counter-UAS escalating drone threats and increasing incursions globally are driving strong demand for our capabilities, including from our international partners. In fact, during the first quarter, we received a follow-on order from the Canadian government for additional manpack software-defined Counter-UAS systems. This follows the initial order we received in fiscal '24 as well as in order for vehicle-mounted Counter-UAS systems were received from Canada last quarter. But the threat is no longer just abroad, it is here at home as well, and the administration has made it clear that the defense of the homeland is the top national security priority. That's why CACI has been investing ahead of need to develop Merlin, our latest Counter-UAS detect and defeat system. Merlin's Counter-UAS capabilities are extremely differentiated and particularly well suited for defending the homeland for many reasons. It is based on technology that has been operationally proven across the globe for years, focused on real missions, real threats and delivering real kills with non-kinetic capabilities that include low to no collateral damage defeat modes with a detection range of up to 75 kilometers and providing industry-leading wireless capabilities that address Counter-UAS threats utilizing cellular networks. Our Merlin system has outperformed competitors in several government-sponsored demonstrations against a wide range of UAS systems utilizing our software-defined technology, tipping and queuing a third-party kinetic system to defeat a drone and also integrating with [indiscernible] platform, which was recently selected as the Army's Counter UAS fire control system. These results are what is driving strong customer interest, both in the U.S. and abroad. A second area is Counter-Space. Modernizing our nation's capabilities is crucial to address peer threats in the increasingly contested space domain. We are seeing increasing customer interest and demand for CACI's capabilities. This includes a $240 million award in the first quarter to sustain and modernize the Tactical Integrated Ground Suite (sic) [ Support ] or TIGS Counter-Space program for the Army. Additionally, a few days after quarter end, we received an initial production order from the U.S. Space Force for a Remote Modular Terminal or RMT. RMT is a broadband counter satellite electronic warfare system that leverages our existing Counter-UAS software to provide our customers with enhanced counter space capabilities. Both TIGS and RMT are great examples of how we can leverage our differentiated software-defined technology and our strong past performance to help war fighters execute critical missions across the entire electromagnetic spectrum. Slide 7, please. Third is network modernization, a foundational dependency for many critical national security priorities. Without modernized networks, DoD priorities like NGC2 and [ Gen C2 ] either won't be as effective or just won't be possible. Given this reality and the administration's focus on modernization across the government, we continue to see good demand and a strong pipeline of network modernization opportunities. For example, Air Force recently awarded CACI task orders #2 and #3, on the base infrastructure modernization program, previously known as EITaaS Wave 2. CACI will modernize networks for the U.S. Indo-Pacific Command and the U.S. Space Force, ensuring more efficient and more secure network operations. Together, these task orders represent approximately $400 million of awards this quarter. Additionally, we continue to execute on our existing network modernization programs. On our SIPRMOD program, we received NSA authorization for use of our software-defined CSfC technology, allowing for the processing to classify data through our framework. This accelerates our ability to test and field devices on the network and positions us to make the network operational in 2026. The final area is digital application modernization. Our customers were seeking greater efficiency, effectiveness and speed of delivery as they modernize software applications. CACI continues to lead the industry with our use of commercial agile software development processes and DevSecOps. For example, our BEAGEL program for Customs and Border Protection is one of the largest agile software development programs in the federal government. Our exceptional performance on this program recently yielded us our second 1-year contract expansion, a strong indication of the value we deliver to CBP and a further indication of how well positioned CACI is with our customer base. The combination of our leading agile development capabilities and strong past performance has enabled us to win the $1.6 billion JTMS award this quarter. The Joint Transportation Management System is [ TransCom's ] enterprise modernization initiative to unify end-to-end transportation and financial processes across the DoD on a commercial software platform. CACI will leverage our agile software development and AI capabilities, combined with SAP's S/4HANA off-the-shelf commercial platform to significantly improve visibility, collaboration and [ auditability ] for the command. It's yet another example of the federal government selecting CACI to modernize at scale to enable mission success, while generating long-term value for the government and taxpayers. It is also important to note that as we continue to win in the marketplace, we also continue to invest ahead of customer need and our industry-leading agile capabilities to ensure that CACI remains well positioned to win and execute these critical modernization initiatives. We are now expanding our use of AI tools to increase the speed, efficiency and scalability of our agile software development processes and continuing to innovate to stay at the forefront of utilizing commercial software development tools and processes to address critical national security priorities faster and more efficiently. These are just a few examples of the many successes we are seeing at CACI, thanks to our focus on critical national security priorities, software-defined technology, commitment to investing ahead of customer need and unwavering focus on superior execution. With that, I'll turn the call over to Jeff. Jeffrey MacLauchlan: Thank You, John. Good morning, everyone. Please turn to Slide 8. As John mentioned, we're very pleased with our first quarter performance. The continued strong performance once again underscores the deliberate positioning of the portfolio and the differentiation of our business. In the first quarter, we generated revenue of nearly $2.3 billion, representing 11.2% year-over-year growth, of which 5.5% was organic. I'd also like to call your attention to the revenue by customer disclosure in our earnings release, where we are now breaking out revenue from intelligence community customers. This additional transparency aligns our revenue disclosure with the national security focus that is a foundational element of our strategy. EBITDA margin of 11.7% in the quarter represents a year-over-year increase of 120 basis points, driven primarily by strong program execution, timing of some higher-margin software-defined technology deliveries and overall mix. First quarter adjusted diluted earnings per share of $6.85 were 16% higher than a year ago, greater operating income along with a lower share count more than offset higher interest expense and a higher income tax provision. Finally, free cash flow was $143 million for the quarter, driven by our strong profitability and increasing cash generation from working capital management. Days sales outstanding, or DSO, were 56 days. Slide 9, please. A healthy long-term cash flow characteristics of our business are modest leverage of 2.6x net debt to trailing 12-month EBITDA, and our demonstrated access to capital continued to provide us with significant optionality. We remain well positioned to continue to deploy capital in a flexible and opportunistic manner to drive long-term growth in free cash flow per share and shareholder value. Slide 10, please. We're reaffirming our fiscal '26 guidance. We continue to expect revenue between $9.2 billion and $9.4 billion, EBITDA margin in the mid-11% range adjusted net income between $605 million and $625 million; and finally, free cash flow of at least $710 million. One item I'll note is that our strong Q1 performance has helped us derisk the EBITDA margin step-up from the first half to the second half that we discussed last quarter. To help with modeling, we expect EBITDA margin in the second quarter to be about 11%. Slide 11, please. Turning to forward indicators, all metrics provide good long-term visibility into the strength of our business. Our first quarter book-to-bill of 2.2x, and our trailing 12 months book-to-bill of 1.3x reflect strong performance in the marketplace. The weighted average duration of our awards in Q1 was over 6 years. Our record backlog of $34 billion increased 4% from a year ago and represents nearly 4 years of annual revenue. And finally, our funded backlog grew nearly 26% year-over-year, some of which was likely driven by our customers preparing essential programs for the government shutdown. For fiscal year '26, we now expect more than 92% of our revenue to come from existing programs with less than 4% coming from recompetes and 4% from new business. Progress on these metrics, specifically on recompete revenue, which was 11% just last quarter, reflects our successful business development and operational performance and yields increased confidence in our expectations for the year. In fact, I'd like to point out that in the past 10 years, this is the second highest amount of revenue from existing programs that we've had at this point in the year. In terms of our pipeline, we have $6 billion of bids under evaluation, around 80% of which are for new business to CACI. We expect to submit another $13 billion in bids over the next 2 quarters with about 75% of that being for new business. In summary, we delivered outstanding first quarter results, derisked fiscal year '26 and continued to demonstrate our differentiated position in the marketplace. We are winning and executing high-value enduring work that supports long-term growth increased free cash flow per share and additional shareholder value. With that, I'll turn the call back over to John. John Mengucci: Thank you, Jeff. Let's go to Slide 12, please. CACI delivers distinctive and differentiated expertise and technology to address our nation's critical national security priorities. We help customers address their biggest challenges and their most important priorities. We help them succeed in their missions. And because of that, our customers increasingly rely on us. We are the company that consistently gets things -- gets the hardest things done when our customers need it most. Because of this, our business continues to perform well, and we continue to meet our financial commitments even in this dynamic and somewhat uncertain near-term environment. The strength of our strategy, our differentiation and our execution is borne out by our consistent performance. Our outstanding first quarter results represent a great start to fiscal year '26. We are successfully executing our strategy winning and ramping significant new work, capturing our recompetes and driving additional on-contract growth from our large contract portfolio. As a result, we are pleased to reaffirm our fiscal '26 guidance and we remain confident in achieving our 3-year financial targets. We are well positioned in the right markets with the right capabilities, and we are confident in our ability to drive long-term growth in free cash flow per share and shareholder value. As is always the case, our success is driven by our 25,000 employees who are ever vigilant and expanding the limits of national security. To everyone on the CACI team, I am proud of what you do each and every day for our company and our nation. And to our shareholders, I want to thank you for your continued support of CACI. With that, Tina, let's open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Colin Canfield with Cantor Fitzgerald. Colin Canfield: Perhaps we could shed some light on early expectations for the FY '27 request. I think we have kind of 2 camps forming up in terms of buy-side sentiment, one being that the step down from kind of reconciliation plus base implies -- it implies a step down year-on-year. And then another camp is that it's pretty insane to think that Congress would kind of imply a cut on defense budgets into a rising national security environment. So if you can shed some light on kind of where you expect kind of high-level budgets to go. John Mengucci: Yes, Colin, thanks. That's a meaty first question. Look, we're very, very focused strategically on critical national security priorities and we've always talked about those priorities have deep and enduring funding streams, and we have great bipartisan support. That bipartisan support is why we vectored this portfolio over the last decade to be 90% focused on national security. But we've also said before that we're really focused on the top line budget, budget growing. But at the end of the day, we're a $9.3 billion company in a $280 billion total addressable market. So we look at that tone as we have plenty of room to grow. And then where is the money going? So if you look across the areas like electromagnetic spectrum, software-defined tech space, Counter-UAS, border security, that's where current budget dollars and reconciliation dollars go. So I think we're in the right spot. We continue to have a great book-to-bill greater than 1 and our software-defined tech continues to deliver growth for us. So there's a lot of what-ifs as we get into '26 and into '27. But the fact is we're winning a lot of long-term business that really draws across a number of year budgets. So with the level of backlog we have with the duration of contracts, we just put into backlog right around 6 years. It does allow our company to endure and allows us to continue to grow regardless of what some of those top line numbers are. Colin Canfield: Got it. And then in terms of like Counter-UAS cyber electronic warfare contracts, I think investors have traditionally been conditioned to kind of large multiyear vehicles, but it seems like contracting officers are taking a more agile approach. So maybe if you can kind of talk about how you expect those contracts to be awarded as well as kind of the level of agility that is rewarding within folks like yourselves, [ Epirus ], AeroVironment, folks that kind of have commercially developed solutions in that domain. John Mengucci: Yes, thanks. So look, I think it's safe to say that the U.S. government has been buying capabilities in very different ways as of late. It was about 3 years back, we started to hear about OTAs. It's within the last year, we heard about how advantageous is to be a commercial company. And look, we've double the amount of OTA work that we've done in the last 2 years from the last 5. We're a company that is both [ cash ] compliant, which means we have a rate-based business like traditional government vendors, but we also have a portion of our business that's truly commercial as commercial accounting and commercial practices. So that sort of lays that groundwork that should tell everybody. CACI is a unique company within our space and that we're very well positioned to address how the government buys. Most of our software-defined technology work has actually been purchased over the last few years in a very different manner. So it is true that some of our technology is funded by large multiyear programs, but it's also more the norm that we receive our awards on purchase orders in a very commercial-like manner. You can now buy from CACI just about anything across the electromagnetic spectrum whether it's SIGINT or it's EW, and it allows us to provide an item number, a part number and a price. And so we're very used to supporting those types of ordering vehicles. At the end of the day, it's also what moves our financials around, right? I mean if we're sitting here getting purchase orders that come in, in quarter, quarter 1, and we turned that around in the first quarter, that's going to move our financials around. So true that the government is buying different. I love the fact that the government is buying different. I love the fact that we saw that coming 7, 8 years back, we positioned this company very well. And then I'll sort of end, Colin, with TLS Manpack is a perfect example. That went from an OTA to a program of record where that customer continues to buy 250, 300, 500 units. So better for us to put a program in place and that allow our customers to buy in a manner that supports their budgets. Operator: And your next question comes from the line of Scott Mikus with Melius Research. Scott Mikus: Very nice result. John, CACI was ahead of the game when it came to investing in Counter-UAS solutions, but we've seen in Ukraine, both sides are now using fiberoptic cables to prevent their drones from being jammed. So how are you thinking about that challenge when it comes to developing more Counter-UAS offerings? Is it an opportunity for you? Just wanted to get your thoughts on that. John Mengucci: Yes. Thanks a lot, Scott. Look, I'm going to sort of step back on this whole Counter-UAS story. I guess, first of all, we've been doing it for a really long time, a couple of decades. And I've covered a lot of the basis in some of my prepared remarks with the creation of Merlin that frankly allows us to quickly bring different phenomenology in, so we can better find drones. The drone threat is really unique in some ways but very much the same in other ways. Time is going to be the differentiator for this threat. Most other solutions that are out there, look at simple drones within 1 to 3-kilometer range, Merlin and other of our systems detect up to 75 kilometers away. And what that does is it gives the operator time. So in some instances, up to 15 minutes of time versus about 8 seconds of time by those who were looking at Group 1 or maybe Group 2 drones within a 1 to 3 kilometers space. We're already in the U.S. government inventory. We're already pushing at the scale, already battle hardened with hundreds of confirmed kills. So it's true that there are drones that are trailing fiber. There are drones that are operating in the cellular infrastructure. So if you look at what the homeland fight is going to be, we may have drones from people who are not our friends, flying their drones on our networks. So at the end of the day, I think we have an outstanding solution. I know we have an outstanding solution. But I'm also going to end with to most companies, Counter-UAS is like the new AI, right? Everybody does it now that it's popular and the difference between the AI stock-pop hype and the Counter-UAS stock-pop hype is if you have a Counter-UAS solution, you say it does and it does so much and it doesn't, at the end of the day, somebody dies. If you've only deployed your kit at demos around the AUSA floor, it's very telling. We've been on this market for a couple of decades with a great installed base, hundreds of systems, thousands of sensors. I would expect this threat to continually change and that's why our solutions are software-based. That's why our Merlin system brings different phenomenology in. So we're able to more than adequately not only defend this nation, but other nations out there. Scott Mikus: Okay. And then I have one for Jeff. I mean, Jeff, what really surprised me was your Fed civilian agency sales were up 17% year-over-year. So I was just wondering if you could maybe parse that out between organic versus inorganic? And then perhaps what was DHS up versus non-DHS? Jeffrey MacLauchlan: Yes. So about 10 points of that percentage basis of content is DHS. So the growth there, Scott, is in DHS and it's in the ramping on NASA NCAP, which is ramping up nicely and moving with our plan. It's really all organic. I don't think there's no inorganic in there. As I think about Azure and Applied Insight, none of those are going to be offensive. Operator: Our next question comes from the line of Gavin Parsons with UBS. Gavin Parsons: John, I know you always remind us, bookings are super lumpy, but obviously, a pretty strong booking quarter here. So I guess a 2-part question. The submitted pipeline is down, but obviously [indiscernible] those strong bookings. So as part of the question, does the simple math imply a very strong win rate on that conversion? And then second question, should we expect bookings to maybe take a breather over the next few quarters given the submitted pipeline is down a bit? John Mengucci: Yes, and potentially. Look, we -- I'm actually quite happy that the transparent information that we share is exactly what should lead to questions like this. Look, we really pride ourselves in giving you all the information we have as we run this company. We do our best to talk about bids that are going to be awarded at some time. We look at what our pipeline of submittals are and we talk about what we end up winning. So yes, there's going to be different movement of numbers out there. Very proud of our first quarter win rate. Of course, I look at where we are at the end of the year, but winning $5 billion in the first quarter, which is half of the total we won last year, it really does position us well. Jeffrey MacLauchlan: I think you also have to look, Gavin, at the whole data set because we obviously had a really good awards quarter you would expect that to probably result in a dip in the awaiting decisions number, but you also have to look at the expected to submit piece, which is up. So this -- the adequacy of the pipeline is really a little bit like a balloon. I mean any one time one piece of it may dip down and another piece dips up. I mean that's inherent in the lumpiness, right? John Mengucci: And I think your second question was around with everything going on, how could it potentially impact the second quarter. Look, I think it's unrealistic to believe that the pace of awards given we're in a shutdown mode is going to continue to the level that we have. What that number ends up being is whatever that number ends up being, I'm sure we'll talk about what the book-to-bill was at the end of the second quarter. I'm more excited about what the book-to-bill is at the end of the year and even more excited by having a trailing 12-month book-to-bill of 1.3x. So we put a lot of awards in our $34 billion backlog, funded backlog is up 26%. I think it really bodes well regardless of what gets thrown at us. Operator: Our next question comes from the line of Seth Seifman with JPMorgan. Seth Seifman: The government shutdown. It appears some awards, especially funded were accelerated ahead of the shutdown. So should that mitigate some of the near-term impact? And is there some sort of length of the shutdown that presents a risk to guidance? Jeffrey MacLauchlan: Yes. Certainly, it leaves us better positioned. I think it's important in the sense that it leaves us better positioned in terms of programs being funded, obviously, but I think it also is sort of an expression of confidence and support by customers to position us to have minimal disruption from this. So certainly, that's true. One of the reasons that we affirmed our guidance despite the fact that you can kind of see some growing momentum in the business is our approach to the guidance, which we've talked about with you before, and this left goal post, right goal post approach, really encompasses sort of a range of outcomes. And we really, at this point, don't see reasonable outcome that isn't encompassed in the guidance range we've given you. Not only is there minimal disruption, the nature of much of the work is that we would expect to make it up within the year. And we really don't see it as being a disruptive factor. I don't know if John adds here. John Mengucci: Yes. Seth, I'd also just add to Jeff's comments. Given our significant intentional exposure to national security work and as Jeff said, the level of technology work and a large level of funding backlog. And the fact that a lot of our work is essential and that -- which is not there, says that we're able to make that work up. You may not see that null any Q2 impact in quarter 2, but you'll definitely see that null any short-term impact over the full year because we have the full year to make that -- those times up. So I think we're in a really good position. Clearly, if it continues to linger for months and months, I think Jeff already covered that. It's well covered within our guidance that we have out there today. Seth Seifman: Great. And then how does the hiring environment look over the last few months? And do shutdowns tend to impact the pool of applicants, whether there's more people coming from, say, like a federal agency that are applying or people are kind of scared off from the industry? John Mengucci: Yes, [ Rocco ]. Look, we're actually seeing applicant value -- or volume, sorry, at an all-time high. Believe it or not, we had 0.5 million applicants in fiscal year 2025, and we have quite a large number of folks applying for jobs to date. It does help that we're more a technology company if we were purely a pure play government services company, when you see shutdowns that go on for 15, 20, 25, 30 days, that gives folks pause if they want to go do national security work on the expertise side. But we've got -- we're still running -- 40% of our hires are coming from referrals. We've got about -- we have well over 300-person intern program that will be kicking off here shortly. So we haven't seen any slowdown in number of applicants, and we certainly haven't stopped hiring given the level of wins we had in the first quarter. Operator: And our next question comes from the line of Tobey Sommer with Truist Securities. Henry Roberts: It's Henry on for Tobey here. Maybe just to start, I thought I go back to Counter-UAS for a second, but I'm just curious if you could roughly quantify the full opportunity set for that space over the next 12 months, let's say? And then how much of that could be related to Golden Dome on the non-kinetic C-UAS side? John Mengucci: Yes, Henry, thanks. Look, I think that the government, given the different funding buckets is still sorting through that. I'm not going to give you a direct answer on amount of Counter-UAS sales we expect in the next 12 months. But I will share that our portfolio of EW technologies, it includes Counter-UAS, and it includes a number of systems. Because if you remember, the hardware form factor is different for us, but the software baseline is the same, okay? So as we build systems, whether they're manpack, whether they're handheld, whether they're mobile, whether they're fixed, the beauty, not by accident of our solution is that software-based allows us to continually modify these with a common software baseline. Our portfolio of EW technology generates about $2 billion of revenue, each and everywhere, and we expect with newer requirements on Counter-UAS, it will experience continued growth. Some of that growth you all see on a quarterly basis when we talk about where our technology portfolio is growing in relationship to our expertise one. But administration priorities are very much focused on defense of the homeland, board security, world events, use of drones in modern warfare. European and allies are all up and we're going to have additional funding through reconciliation. Some of that growth is planned in our current FY '26 plan, and we gave you a low and a high end to our guidance range. We are very well positioned for other upcoming Counter-UAS opportunities, which do include Golden Dome. Henry Roberts: I appreciate the color there. And maybe just to follow up. The contract awarded in this past quarter. How much if any of those were due to reconciliation bill funding at this point? And a broader question, looking ahead, is [ reconciliation ] bill funding kind of one of the key difference makers that you're seeing in terms of funding priorities as the shutdown moves along, that differentiates you all from competitors? John Mengucci: Yes, I'll try to take the last comment first, and I'm sure Jeff will have some comments here as well. The Golden Dome funding and the reconciliation funding, we haven't seen that begin to be spent. So that's sort of gives us a backstop to what we're going through and we're experiencing now perhaps. Jeffrey MacLauchlan: Yes, that's right. It's -- we're seeing it in a planning sense. We're starting to see opportunities, meetings about developing alternatives, things like that. So we're starting to be able to see a little bit of where it's going to land, we believe. And of course, the heavy DHS content, along with the portions of the DoD reconciliation funding that are focused on the areas that are in our sweet spot give us some confidence about that. But none of the performance in the first quarter or the funded backlog that we talked about, we'd identified directly to reconciliation funding. Operator: Our next question comes from the line of Jonathan Siegmann with Stifel. Jonathan Siegmann: The margins were really impressive, especially in the context of your earlier outlook of lower margins to start the year. The incremental sales year-over-year were all technology, which implies the incremental margin year-over-year was over 20%. Can you comment a bit about the mix or any onetime benefits this quarter? It suggests the margins and technology maybe are trending higher than at least we were modeling. Jeffrey MacLauchlan: Yes. Thank you, Jon. Yes, I mean, I'm not going to quibble with your math. The technology margins were strong in the quarter. I would remind you that the segment is not monolithic. There are pieces of the technology portfolio that have margins north of what you mentioned, and there obviously are some that are obviously less. So when we talk about mix, it's both mix of technology and expertise but it's also a mix within the technology sector. So I would also note that it did not change our view of the year. So I would encourage you to think about that as sort of de-risking what you see -- what you've seen historically is our customary first half, second half margin step-up. We now see that increase in the second half as being a little smaller than it has been in some recent years. But you've done the math the right way. Jonathan Siegmann: That's great. And maybe just a follow-up on what John said about loving the fact the government is buying differently. Is it more the impact of these changes the more customers are embracing some of these more progressive ways to buy software, an agile software? Or is it the same customers just buying more? Jeffrey MacLauchlan: It's a little bit of both. John will want to add to this. But if -- certainly, there's been a tremendous increase in OTAs, both in their use by people that have been using them, but also customers that haven't used them before. I think also I would go back and underscore the answer to one of the first or second questions where John talked about the fact that we really are positioned deliberately by design to be able to sell commercially, to be able to sell in a traditional far [ cast ] disclosed environment. I mean we -- literally, there is no way that customers buy that we don't sell. So I think that can't be overemphasized. John Mengucci: Yes, Jon, I'll also add. Look, what customers want is a Far Part 12, Far Part 15. They want to be able to use those when they believe that one of those supports their needs over the other. The days of large development programs where you write your requirements in 2025 and you get your first case of the system in 2035 are not going to support how fast the threats are moving. So as Jeff mentioned, about a decade ago, we positioned this company to be very agile in both, right? So -- and it's why when we invest ahead of customer need, what the government is asking everybody to do is, hey, how about invest ahead of need more on your dollar than on ours, okay? Explain to us how that fits into part of our solve and then allow us to buy that as I answered earlier, from a commercial price sheet that says if you want a mobile Counter-UAS system or a handheld EW gadget then give me the part number and let me start buying that. Our software wrapper around these things is that when you buy that, you're going to find different uses for it. So there should be a quick upgrade path either from a licensing yearly fee that gets that customer additional upgrades and updates to it. Again, at the end of the day, I've been saying this for a decade. This is not the old way, where if you want a new capability, buy the new device. So you're continuously throwing devices away. So they're looking for agility, and what they're saying is they want to be able to buy in the way commercial companies buy and not be locked to long-term development contracts. And as Jeff said, we can support either and both in any other ways. Operator: Our next question comes from the line of Guatam Khanna with TD Cohen. Gautam Khanna: Great results, guys. Wanted to ask 2 questions to follow up on some earlier ones. First, has there been any impact to the business from the shutdown with respect to either revenue, cash or unusually soft awards in the first of the quarter? And then I have a follow-up. Jeffrey MacLauchlan: Yes, I can start with some of that. John will want to add to this, I'm certain. But there's been a slight amount of cash collections disruption that's primarily related to staff that's available for invoice approval and things like that. So we're feeling a little bit of administrative sluggishness, I'll call it, related to that. It's not tremendous. It's -- collections may be 10% or 15% off, it's small but noticeable. And similarly, I would say in terms of revenue, we have pockets of places where we have attenuated levels of activity. It's really de minimis. I'm going to say it's kind of single-digit millions revenue, it's activities that we expect to recover during the year. So it doesn't really affect our view of the year. But yes, it's detectable, but small and manageable. Gautam Khanna: Okay. And just wanted to ask, given the environment maybe tougher for some of the "peers" in the space relative to CACI, have you seen any intensifying price competition. Maybe talk about the bids that you didn't prevail on, is that typically a price shootout? Or anything you've changed -- you've seen in terms of competitor behavior, if any? John Mengucci: Yes. Gautum, it's John. I can answer for everybody else out there. I can tell you that if we've ever lost on price, it's not because we're in a price shootout because we gave up that part of the ecosystem about 7 to 8 years back. But I would imagine people are going to do whatever they need to do to continue to win business. I mean, we've seen a little uptick in the number of protests, which are out there. That, to me, being in this marketplace for a few decades, is usually that early sign is if you win, you win. If you don't, you protest. So I think we'll continue to watch the level of protests which are out there. But for us, I haven't seen pricing be an issue. We believe that we are fairly priced and where we invest ahead of customer need where we've gone out on risk to spend the company's money to help defend this nation in a better, better manner. We would expect to see higher margins. And thus far, that plan and that mode of running this business has served us very, very well. Operator: Next question comes from the line of Conor Walters with Jefferies. Conor Walters: Congrats on a great start to the year. Maybe just to start, it seems like the unchanged top line growth of 7% to 9% embeds stronger organic and perhaps around $40 million in lower acquired revenue. So curious, first, if I'm reading that correctly, but also if you could provide an update on the acquisition integration process. Jeffrey MacLauchlan: Yes. The acquisitions of Azure and AI are largely complete. And in fact, we're finding what we've always found, which is when it's done well, it's increasingly difficult to tell them apart. There is some Azure timing. John may want to comment some more on this related to some of the activities between the Azure legacy programs and Spectral. But they're very definitely meeting expectations and we remain convinced of their strategic and financial value where they're terrific fits, both of them. John Mengucci: I don't have anything else to add. Conor Walters: That's helpful. And then maybe just one follow-up. You guys discussed the upside you're seeing from reconciliation funding for Golden Dome. You mentioned the EW potential there. Curious if any other areas you would call out as considerable opportunities in your portfolio tied to that? And then how you're thinking about the bid process and time line now that you're starting to see that money actually being spent? John Mengucci: Yes. Talk a little bit about Golden Dome. Out in the public domain, you're going to hear a lot about sensors and effectors in command and control. But it's not just a ballistic threat, it's also threat from unmanned systems as well. So we're making it very clear that the Golden Dome concept is going to be completely reliant on early indications and warnings, meaning, as I mentioned earlier, knowing far in advance, when a threat is imminent and then giving folks who have to defend against those minutes and hours of time. We've actually coined that as left-of-launch. It's sort of our contribution to the entire Golden Dome effort. There has not been money spent on this yet. General Guetlein is taking our [ key ] responses. We've submitted our credentials on a few related proposals, but we're really looking at taking all of our sensitive activities work and all of our worldwide set of embedded sensors, which are in the thousands to give a common operating picture. And from there, let's go work on that non-kinetic low collateral defeat of those threats. Because clearly, taking a hypersonic missile on and using that to knock down the drone or other missiles over the Continental U.S. has a high collateral issue. So we're looking at non-kinetic low ones. So we would expect funding to begin to ramp up. I think we'll know better as we get to the end of the second quarter, early third, and we're very excited to be looking at that $150 billion potential spend purely focused on defending this country. Operator: Our next question comes from the line of Louie DiPalma with William Blair. Louie Dipalma: Following the positive TLS Manpack developments, is CACI also well positioned for the U.S. Army's modular mission payload plan for small drones with your Spectral Sieve and KickFlip? And related to this, how does the modular mission payload differ from how the Army is currently using Spectral Sieve on Puma or C100 drones? John Mengucci: Yes. Louie, thanks. So look, our entire -- I shouldn't say our entire, a large portion of our EW portfolio really is modular mission payloads, right? And for the rest of the audience. That's really taking common software capabilities and putting that on different form factors. It can be looking for wireless signals. It could be looking for a land-based signal, it could be looking at missile signals. There's a plethora of RF out there around the globe. The program that Louie mentioned is we already deliver a number of modular mission payloads to [indiscernible], folks who build drones and they're looking for an overall package. They have a drone that's size X that can carry weight Y. What kind of features do we have, what type of devices can we put into those unmanned systems. So we have delivered those. We have delivered to the Puma and a number of other ones, either directly to United States Army and other DoD agencies will be gone directly to a drone builder. So I believe that market will only continue to grow. It's the reason why we got into this market a number of years back. It's the reason why we positioned this company to be able to deliver either under a Far Part 12 or Far Part 15 and allows not only the U.S. government but OEMs of drones and the like to easily be able to buy our systems and have them ready and also allow us to modify those as the threat changes. So that's what we've been up to. Louie Dipalma: Makes sense. How has the Navy Spectral program been progressing? John Mengucci: Navy Spectral program is going very well. Jeff talked about Azure. Azure has the precursor program. We worked very closely with the Navy to make certain that we could time some of the Azure deliveries in a manner that then support the Spectral delivery. So on the Azure front, there were some deliveries that have been pushed out, so that can be more closely integrated with the Spectral ones. The next phase for spectral is a January, February time frame where that program will get through its [ milestone sea ] and that will freeze the design. We'll be able to begin deliveries as we've always mentioned during calendar year 2026. Operator: Our next question comes from the line of Jan Engelbrecht with Baird. Jan-Frans Engelbrecht: Congrats on the strong set of results. I wanted to talk a little bit about just the international opportunity. I think it's not something that you maybe highlight a lot. But just given where NATO budgets are going, now about the 3.5% of GDP and then there's the additional 1.5% bonus on top of that. Just sort of -- there's clearly capability gaps in the EU and in Europe and NATO as a whole. And is there anything you can highlight where maybe areas you guys are targeting in the next couple of years? John Mengucci: Yes, Jan, thanks. Look, I've said many times that the world is a dangerous, dangerous place, and I think that the Ukraine was a real wake-up call. It definitely raised the urgency level around defense and national security globally. And I would say mostly in the electronic warfare area, a war in the end market not by accident, but by a very, very, very solid planning. So as you mentioned, there's many allies they're going to be expanding their defense budgets. We deliver technology to a number of [ 5 NATO ] countries today. And I've been on this slow reveal of what we're doing in the international front solely because we want to be very cautious and very, very careful because you can spend a lot of money on the international front very, very quickly. Since we last talked, we've expanded our sales to 15 NATO countries, and we continue to assess demand signal in 7 other countries. Eastern Europe, allies are increasingly interested in our SIGINT, in our EW, in our Counter-UAS tech. I will tell you that our initial focus was on technologies with existing U.S. government and DoD sales following the FMS path. The number of countries that we have added have now gone to direct commercial sales. And I'm only tempering that -- I should say, I'm tempering that only by the fact that it's true, a lot of European nations are going to be spending far more money, but those same European nations are going to look to spend that money within their borders. So our next step is to understand what relationships do we need. So we either license or we coproduce some of our tech here and then add the applicable software baseline to those products. So still a long way to go there, but it's a market that over the last 90 days since we've last spoken, it has truly opened up to us. Jan-Frans Engelbrecht: And just a quick follow-up. If you could just comment on the slide deck talks about the M&A pipeline expanding. Just any areas that you think that would sort of be a niche capability that you could fill? Just any comments on M&A just in the environment. Jeffrey MacLauchlan: Jan-Frans, as you know, we've talked many times before, and there's no departure from this. Our process and approach is very much GAAP-driven. The opportunities that we see in the pipeline are generally a little bit more technology than they are expertise. A little bit more focused on sensors as well as, not surprisingly, software applications that go around those sensors and things that kind of fit nicely into our sweet spot. So we are seeing a little bit of life in the pipeline, and we look forward to developing a few of these ideas, very early stage at this point, but we'll -- it's an active area of interest for us. George Price: Operator, we have time for one more question. Operator: Our final question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: John, you spoke about -- or you alluded to kind of everyone at AUSA having counter UAS and it was like if you did 15 meetings, 12 had it and 10 led with it, which is pretty unusual. Is the funding coming down the pipeline that significant and can it move the needle for companies much larger than yours? And I know that you didn't want to quantify the forward on that, but can you give us the baseline of how much of the current revenue base is counter drone? John Mengucci: Yes. I'm going to stick with about $2 billion of our entire portfolio is in the EW place, which does include counter drone. And we deliver to both DoD and the intelligence community. And as I shared, a large number of NATO countries. Back to the first part, yes, I think it's a burgeoning market. I think you have to look at 2 different streams of funding, Noah, right? One is the $150 billion on Golden Dome, some portion of that. And I would tell you, it's multiples of billions that will be spent on a layered defense that's going to have to defend against unmanned systems. And frankly, uncrewed systems are a very different beast. Traditional radar is not going to find that. It's going to look like a bird, okay? So it takes new technology. And then on top of that, we're not in a war time in somebody else's zone where the U.S. is assisting. We'll be defending this nation, right? We're also going to have events like the World Cup. We're going to have the Olympics. We're going to have so many more things. And that threat vector, Noah, is up materially. And you can look at common new sources that the threat vector for other countries, potentially drug cartels and others using drones. So I think there's a market growth that we're all watching. It will be billions of dollars worth of Golden Dome funding. And then if you look at the DHS additional funding, that's going to work on the border security side. And today, there's 1 kilometer systems that find group 1 drones. Tomorrow's threats are going to be we need 75 or 100 kilometers to give us minutes of time to go defeat against that. That's going to be Class 1 through Class 5 drones. So yes, I think that the rest of the industry is waking up to this market. My only earlier comment around this hype is we went through 1.5 years period of AI hype and I feel as though we're going to go through another 1.5 years of Counter-UAS hype. So at the end of the day, the government is going to go with systems that have been deployed, where combatant commanders swear by the fact that they want one of what we have. And it's just really allowing funding to catch up to that. And then, of course, you do well know, Noah, government shutdown is going to sort of slow that down as well. So I think it's an emerging market. We've been in it for a couple of decades. I think we understand it very, very well. We have the right partnerships. And we're always looking for additional capabilities that we can add to our system. I'll end with, and we build our latest system on our own nickel, right? So we're not dependent on U.S. government IRAD dollars to advance what we have because I do think that the threat is that real and the government is asking us to look at this as harder. So very large... Noah Poponak: I Appreciate the detail there. If I could just ask one more question. Just hoping to better understand a little bit shutdown impact and shape of the year. Can you shed a little more light on how the government goes through deeming what is essential. The comments you made there at the beginning of the call are interesting. I thought it would have been more missed work in your 2Q that's just made up before the end of the year, but it sounds like that's not the case. And I think historically, you've had a 2Q that's pretty often flat sequentially versus 1Q, and then a back half that's up mid- to high single versus the first half. Is that still the shape of your '26? Jeffrey MacLauchlan: Yes, broadly -- this is Jeff. No, probably, it is with the caveat that I mentioned earlier about that step-up will be between first half and second half. We expect to be less pronounced this year than it has been in prior years given the strong first quarter, which largely was comprised of items that did not change our view of the year. So that's kind of a qualitative way to say quantitatively, the first half, second half step-up will not be as pronounced as it has been in the past. John Mengucci: Noah, I'll also throw in there. If you look at the last shutdown, right, it was '18, '19. If I remember right, some of that was December to January, right? So you had a lower level of folks because you were around with Christmas time. What's different from our company between the '18-'19 shutdown and where we are now is, and we've got far more long-term tech programs that are being developed. We have far more programs that we're investing ahead of customer need and putting enhancements into that software baseline. We're selling them on a purchase order. So that has a very different buying schedule to it. It doesn't take folks to sit around and do a down and select, they can buy these things off of a GSA-approved price list. So there are a lot of differences at least to this sort of de minimis impact. And then you also closed up with -- we can make a lot of these hours up. If we're at a help desk and nobody needs help now, they're not going to be more help later. So clearly, that doesn't get made up. That's your traditional government services work. But the vast amount of this are work that will have to be done. And every agency -- back to your initial comment, every agency is going through their own process. I wish I had that rubric that told us what was mission essential and not. But frankly, I'm sitting on the government side, that sort of changes too, right, whether we defense of the homeland different than other things that are out there going. But all in all, a really good book of business right now as Jeff and I look at the impacts how we can get those covered and we believe we're right at quarter 1 point to having an outstanding year. Operator: And at this time, I will turn the call back over to John Mengucci for closing remarks. John Mengucci: Well, thanks, Tina, and thank you for your help on today's call. I'd like to thank everyone who dialed in or listened to the webcast for their participation. We know that many of you will have follow-up questions. So Jeff MacLauchlan, George Price and Jim Sullivan are available after today's call. Please stay healthy and my best to you and your families. This concludes our call. Thank you, and have a great day.
Operator: Good morning, ladies and gentlemen, and welcome to the Third Quarter of 2025 CVB Financial Corporation and its Subsidiary Citizens Business Bank Earnings Conference Call. My name is Sherry, and I am your operator for today. [Operator Instructions] Please note this call is being recorded. I would now like to turn the presentation over to your host for today's call, Allen Nicholson, Executive Vice President and Chief Financial Officer. You may proceed. E. Nicholson: Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the third quarter of 2025. Joining me this morning is Dave Brager, President and Chief Executive Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2024, and in particular the information set forth in Item 1A, Risk Factors, therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. I will now turn the call over to Dave Brager. David Brager: Thank you, Allen. Good morning, everyone. For the third quarter of 2025, we reported net earnings of $52.6 million, or $0.38 per share, representing our 194th consecutive quarter of profitability, which equates to more than 48 years of consecutive quarters of profitability. We previously declared a $0.20 per share dividend for the third quarter of 2025, representing our 144th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 14.11% and a return on average assets of 1.35% for the third quarter of 2025. Our net earnings of $52.6 million, or $0.38 per share, compares with $50.6 million for the second quarter of 2025, or $0.37 per share, and $51.2 million, or $0.37 per share for the prior year quarter. The $2 million quarter-over-quarter increase in net income was primarily the result of growth in net interest income of $4 million that was partially offset by a $1.5 million increase in provision for credit losses and unfunded loan commitments. Pretax, preprovision income in the third quarter of 2025 was $70 million, an increase of $1.2 million, or 2% compared to the second quarter of 2025 and $2.4 million, or 3.5% higher compared to the third quarter of 2024. During the third quarter of 2025 we received a $6 million legal settlement which was more than offset by an $8.2 million loss on the sale of $65 million of low-yielding AFS securities that were reinvested at yields of approximately 5%. The growth in PPNR over the third quarter of last year was the net result of a $2 million increase in net interest income and a $1.5 million decrease in operating expenses that were partially offset by a $1.25 million increase in provision for unfunded commitments. Net interest income for the third quarter of 2025 was $4 million higher than the prior quarter and $2 million higher than the third quarter of 2024. Our average earning assets grew by $315 million between the second and third quarters of 2025, and our net interest margin increased from 3.31% to 3.33%. As a result of our deleveraging strategy that was executed during the second half of 2024, our earning assets declined by $1.1 billion from the prior-year quarter while our net interest margin increased by 28 basis points from 3.05% in the third quarter of 2024. Noninterest income was $13 million in the third quarter, which was $1.7 million lower than the second quarter. Excluding the legal settlement and loss of sale -- loss on sale of AFS, third quarter noninterest income increased by $260,000 from the prior quarter, driven primarily by higher trust and investment service fee income. Noninterest expense was $58.6 million in the third quarter, which was $1 million higher than the second quarter of 2025. Our efficiency ratio remained at 45.6% in the third quarter. At September 30, 2025, our total deposits and customer repurchase agreements totaled $12.6 billion, a $170 million increase from June 30, 2025, and $108 million higher than September 30, 2024. The quarter-over-quarters growth was driven by growth in money market and customer repurchase balances. The year-over-year growth was net $100 million decrease in time deposits. Our noninterest-bearing deposits grew by $108 million compared to the third quarter of 2024, while interest-bearing nonmaturity deposits and customer repos grew by an additional $100 million. On average, noninterest-bearing deposits were 59.8% of total deposits for the third quarter of 2025 compared to 59.1% for the third quarter of 2024. Our cost of deposits and repos was 90 basis points for the third quarter compared to 87 basis points in the second quarter of 2025 and 101 basis points for the year ago quarter. Now let's discuss loans. Total loans at September 30, 2025, were $8.47 billion, a $112 million, or 5% annualized increase from the end of the second quarter of 2025. The quarter-over-quarter increase in total loans was due to growth in nearly all loan categories. Loan growth was positively impacted by increases in line utilization for C&I and dairy and livestock lines of credit. A quarter-over-quarter increase of $27 million in C&I loans reflects an increase in line utilization from 26% at June 30, 2025, to 28% at September 30. In addition, dairy and livestock loans also grew by $47 million compared to the second quarter driven by higher line utilization from 62% at the end of the second quarter to 64% at the end of the third quarter. Agribusiness loans grew by $12 million, while commercial real estate and construction loans grew by $18 million and $12 million, respectively, from the end of the second quarter. Total loans decreased by $66 million from the end of 2024, driven by dairy and livestock loans declining by $139 million as these lines experienced their seasonal high utilization at calendar year end. Excluding small declines in SBA and municipal loans as well as decreases in dairy and livestock loans, our loans grew by $85 million from the end of 2024. We have experienced an increase in loan originations, and our loan pipelines remain strong, although rate competition for the quality of loans we focus on has continued to be intense. Loan originations in the third quarter of 2025 were approximately 55% higher than the third quarter of 2024, and year-to-date loan originations have been 57% higher than the same period in 2024. We had average yields of approximately 6.5% on new loan originations during 2025, but the third quarter average was lower at about 6.25%. We experienced $333,000 of net recoveries for the third quarter of 2025 compared to $249,000 in net charge-offs in the second quarter. Total nonperforming and delinquent loans decreased by $1.5 million to $28.5 million at September 30, 2025. Nonperforming and delinquent loans were $24.8 million lower than the $53.3 million at the end of the third quarter of 2024. Subsequent to the close of the third quarter, a $20 million nonperforming loan was paid off in full. The sale of the building collateralizing this loan resulted in the bank receiving all principal and approximately $3 million of interest which will be included in interest income in the fourth quarter of 2025. Classified loans were $78.2 million at September 30, 2025, compared to $73.4 million at June 30, 2025, and $89.5 million at December 31, 2024. Classified loans as a percentage of total loans was 0.9% at September 30, 2025. I will now turn the call over to Allen to further discuss additional aspects of our balance sheet and our net interest income -- sorry, net interest income. E. Nicholson: Thanks, Dave. Net interest income was $115.6 million in the third quarter of 2025. This compares to $111.6 million in the second quarter of 2025 and $113.6 million in the third quarter Of 2024. Interest income was $150.1 million in the third quarter of 2025 compared to $144.2 million in the second quarter and $165.8 million in the third quarter of last year. Average earning assets increased by $315 million in the third quarter when compared to the second quarter and the earning asset yield increased from 4.28% to 4.32%. Compared to the third quarter of 2024, earning assets decreased by $1.1 billion and the earning asset yield declined by 11 basis points. Interest expense was $34.5 million in the third quarter and $32.6 million in the second quarter of 2025. Our cost of funds increased from 1.03% for the second quarter of 2025 to 1.05% in third quarter of '25. The average balances of interest-bearing deposits and repos increased by $217 million over the prior quarter. Interest expense decreased from the third quarter of 2024 by $17.6 million, primarily due to $1.23 billion decline in average borrowings that resulted in approximately a $15 million decline in interest expense. Interest-bearing deposits and customer repos increased by $53 million over the third quarter of 2024, while the total cost of deposits and repos decreased by 11 basis points. With this reduction in borrowings and lower cost of deposits, our cost of funds decreased by 41 basis points from the third quarter of last year. Our allowance for credit loss was $79 million at September 30, 2025, or 0.94% of gross loans. In comparison, our allowance for credit losses at June 30, 2025, was $78 million, or 0.93% of gross loans. The increase in the ACL resulted from $1 million provision for credit loss and net recoveries of $333,000. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast with both upside and downside risks weighted among multiple forecasts. The resulting economic forecast at September 30, 2025, was modestly different from our forecast at the end of the second quarter of 2025. The comparative change from the previous economic forecast reflects lower GDP growth, a slightly lower unemployment rate, and lower commercial real estate prices. Real GDP is forecasted to stay below 1.5% until the end of 2027 and not reach 2% until 2028. The unemployment rate is forecasted to reach 5% by the beginning of 2026 and remain above 5% through 2028. Commercial real estate prices are forecasted to continue to decline through the second quarter of 2026 before experiencing growth through 2028. Switching to our investment portfolio. Available for sale, or AFS, investment securities were $2.58 billion at September 30, 2025. During the third quarter we sold $65 million of securities with an average book yield of 1.3%, realizing an $8.2 million loss, and purchased $214 million of new securities at an average book yield of 5%. The unrealized loss on AFS securities decreased by $31.6 million from $364 million at June 30, 2025, to $334 million on September 30, 2025. The net after tax impact of changes in both the fair value of our AFS securities and our derivatives resulted in a $20 million increase in other comprehensive income for the third quarter. Our held-to-maturity investments totaled $2.3 billion at September 30, 2025, which is $82 million lower than the balance at December 31, 2024. Now turning to the capital position. At September 30, 2025, our shareholders equity was $2.28 billion, a $42 million increase from the end of June 2025, including the $20 million increase in other comprehensive income. There were 290,000 shares repurchased during the third quarter of 2025 at an average price of $20.30. Year to date we have repurchased 2.4 million shares at an average share price of $18.43. The company's tangible common equity ratio was 10.1% at September 30, 2025, while our common equity Tier 1 capital ratio was 16.3% and our total risk-based capital ratio was 17.1%. I'll now turn the call back to Dave for further discussion of our expenses. David Brager: Thank you, Allen. Noninterest expense for the third quarter of 2025 was $58.6 million compared to $57.6 million in the second quarter of 2025 and $58.8 million in the third quarter of 2024. The third quarter of 2025 included a $500,000 provision for off balance sheet reserves. Excluding this $500,000 provision, operating expenses grew by $500,000 over the second quarter of 2025. This growth in operating expense was due to an $877,000 increase in salary and benefits from our annual midyear salary increases. Noninterest expense, including the provision for unfunded loan commitments, decreased from the third quarter of 2024 by approximately $1.5 million. Almost all expense categories declined, led by a $770,000 decrease in salary and benefit expense. We also experienced a $430,000 decrease in legal expense, and a $380,000 decline in occupancy and equipment expense. One area of expense growth is our continued investment in technology, infrastructure, and automation, which resulted in $440,000, or 11% growth, in software expense from the third quarter of 2024. Noninterest expense totaled 1.5% as a percentage of average assets in the third quarter of 2025 compared to 1.52% for the second quarter of 2025 and 1.40% for the third quarter of 2024. This concludes today's presentation. Now Allen and I will be happy to take any questions that you might have. Operator: [Operator Instructions] And our first question will come from the line of Matthew Clark with Piper Sandler. Matthew Clark: On your interest-bearing deposit costs up a few basis points this quarter caused your beta cycle to date to slow a little bit to, I think, 28%. How should we think about the beta through the cycle from here and maybe remind us what portion of your deposit base do you feel like you can be more aggressive with? David Brager: Yes. So obviously that last rate cut was towards the end of the third quarter. So we didn't get the benefit of -- the big benefit of what we did and had a little bit to do with some of the mix of individual accounts. And in our repurchase agreement sweep, one of our largest depositors had built his deposits pretty good. But we did reduce every rate -- every money market rate and repo rate over 1.25% -- we reduced by a full 25 basis points the day after the Fed moved. So we're just trying to match that off. Obviously it depends a little bit on the mix between some of the higher paying ones and the lower paying ones that still got reduced. But at the end of the day, our plan is to continue to match whatever the Fed funds decreases with decreases in money market rates over 1%. Do you have anything to add to that, Allen? E. Nicholson: No, I think, there's a small portion obviously of our deposit base that has higher yields and there was a little bit of an increase relative to the rest of the deposits in the quarter. But as Dave said, we'll be reducing all of them as the market -- as the Fed goes down. Matthew Clark: Since we're limited to 2, I'm just going to jump to M&A. Any increase in dialog there on the M&A front? I guess where do we stand? David Brager: Yes. A lot of dialogs. Not a lot has happened yet. I feel a little bit like Allen Iverson on the practice thing. We just keep practicing, but we're continuing conversations. I still believe that the dam is going to break here, but at this point, there's not anything imminent, and we're still having conversations. I will say one thing we did in the third quarter, and it was in our investor presentation -- excuse me, subsequent to the third quarter, we did hire a team of 4 bankers from City National Bank and are opening a de novo office in the Temecula, Murrieta area. They actually started yesterday. So we're excited about that. We feel like we got 4 really great bankers, and they all came from sort of different parts of City National, but they all live in that area. And so we're going to open a presence there. So we're excited about that. And we'll see how they do as we go forward. But at the end of the day, we're going to keep looking to bring the right bankers and/or the right opportunities from an M&A perspective. Operator: One moment for our next question, and that will come from the line of Andrew Terrell with Stephens. Andrew Terrell: I wanted to start just on loan growth. You guys had a really good quarter. Dave, it sounded like in your prepared remarks, obviously, originations are up a lot this year. It sounds like the pipeline is still pretty strong. I just wanted to get -- I know you've got a seasonal benefit in the fourth quarter, but just expectations on loan growth over the near term. Do you think you can continue at this mid-single-digit pace? David Brager: Yes. At the beginning of the year and pretty much for as long as I've been CEO, I've said kind of that low single-digit growth. And I think we can still hit that for the year. The pipelines are still strong. I feel pretty confident over the next quarter that, that should continue. We'll see how it plays out. I mean, excluding the dairy, obviously, because the dairy is the seasonal aspect of it. But we're still not back to our normal utilization rate. We still have a lot in the pipeline. We're seeing many opportunities and some larger opportunities as well. So I do feel confident. The mid-single digits might be a little aggressive for the annualized. But I do think that we're in a good spot from that perspective. And we'll see how it plays out, but I'm sticking to my low single-digit growth rate for the year. Andrew Terrell: Very good. I appreciate it. And I did want to ask about -- you referenced just pricing competition in the market. And it sounds like your new origination yields came down a little bit this quarter relative to the first half of the year and rates have obviously come down, so that will influence it. But I'm curious, are you willing to be a little more competitive on the pricing front now, just given where the market is at today? Or has your approach to new loan pricing not really changed much? David Brager: Yes. I mean, look, we're always willing to compete on price for the right relationship. So that's something we've had to do. And I think that's part of the reason why we've continued to see opportunities on the loan front. But yes, it is aggressive. I mean, I just saw a deal -- this was a pretty large equipment deal, but it had a 4 handle that we were competing with a large bank on. So people are out there pretty aggressively and we're trying to hold the line as best we can, but we are definitely willing to compete on price as long as the credit quality is where we want it to be. Operator: One moment for our next question, and that will come from the line of Gary Tenner with D.A. Davidson. Gary Tenner: I wanted to ask on the loan side, it looks like you had a little earlier than typical increase in dairy and livestock line utilization. So just as we're thinking about the fourth quarter and what's usually a pretty large spike there, is that spike muted a bit because you had some drawdown here in the third quarter? David Brager: No. We actually brought on 2 new dairy relationships in the third quarter, so that impacted it as well. It's interesting at the beginning of the year, they were doing really well. Milk prices have come down a little bit. So they're still doing okay, but not as well as they were doing in the first couple of quarters. So I think we'll still see some of that, but I wouldn't necessarily say it's going to be muted. That growth -- that small increase in utilization probably had a little bit more to do with the new relationships than just people doing things early. So we still should see kind of a normal increase in that line item in the fourth quarter. Gary Tenner: Great. And then just a question about the $700 million of interest rate swaps that you kind of updated back in May. I think the kind of outlook for short-term rates is probably points to more lowering over the next 12 months or so than maybe what was contemplated back in May. So any thoughts about that swap arrangement and making any changes there? David Brager: So Gary, you're correct. If the market and the Fed's forecast is true, it will probably become a negative drag on our net interest income next year. But we put those on and continue to look to them as a true fair value hedge and hedging really our equity, our tangible common equity ratio and our large AFS portfolio. So I don't think we have any plans on changing that. We extended them last quarter out for that same reason to be better aligned with the duration of the AFS portfolio. Operator: One moment for our next question, and that will come from the line of Liam Coohill with Raymond James. Liam Coohill: It's Liam on for David. You guys have highlighted the intense rate competition on the lending side. You called out that one regional competitor offering the 4 handle on the equipment loan. Is that who you're seeing the most competition from on both the loan and deposit side today? And how difficult is deposit gathering given this intense loan growth? David Brager: Yes. So the deposit gathering has still been relatively strong. It's not as strong as it was towards the end of -- I'd say, all of '24 and the beginning of the year. It slowed a little bit. But we're going after operating companies and it is a little more competitive, I think. But I don't think it's changed much from the perspective. We're not looking for high-rate CDs or high-rate money market accounts. It has to be a full relationship. So that hasn't changed. But I will say the loan pricing is generally coming from the larger banks and the larger regional banks. It's not as much from the banks that are our size or smaller per se. So I do think that, that will continue. And look, there's a lot of market disruption with some of the acquisitions that have been done. There's a lot of market disruption from the perspective of Wells Fargo's asset cap is removed. I mean, all these things are sort of influencing that. So there are some probably more aggressive competitors in the market. But we're really focused on the operating company and most of our new deposits -- I'd say most of the new deposit gathering, relationship gathering that includes deposits is coming on at a little bit higher percentage of noninterest-bearing than our overall portfolio. So we feel pretty good about it. This last quarter on the deposit side, like Allen and I said, it was more related to just one large customer in the bank that had a little greater mix at a higher rate. But we should start to see the benefit of that deposit cost going down as the Fed continues to lower. So there's competition on both sides, but we we're willing to compete, but we want to do it for the right relationships. Liam Coohill: I appreciate the color there. And I'm excited to hear about the team lift out. What lending verticals do you expect them to focus on? And what are some of the opportunities that you see in that particular market? David Brager: So they've been focused on more operating companies and high net worth individuals. They did not have the opportunity to do investor commercial real estate. So that's an area that they can -- instead of having to refer out or give to somebody else that they'll be able to do here within their group. They all live in that area, and they covered different parts of Southern California from Orange County to Riverside County. So they'll be able to cast a wide net in those markets. And for us, it fills in a little bit of the geography from our San Diego region to our Riverside region. So that's a good thing. And Temecula, Murrieta is really a growing market. So we're excited about the opportunities there, and they're all experienced bankers, and they've been doing it for a long time. So we're excited to see what they can do. Operator: [Operator Instructions] And one moment for our next question, that will come from the line of Charlie Driscoll with KBW. Charles Driscoll: This is Charlie on for Kelly. You guys continue to build cash balances again this quarter. Just wondering if there's any updated message there regarding any potential areas to deploy that? Are you kind of viewing it as dry powder for a seasonally strong Q4? Just any color on how you're thinking of utilizing it? E. Nicholson: A couple of quick things. One, you're right. In the fourth quarter, we'll see a fairly large increase in the dairy. We also see end of the quarter more year-end versus quarterly average impact, but we do see deposit outflows for tax reasons and bonuses, et cetera. So we prepare for that. But we will -- especially if the Fed continues to cut, we do evaluate where bond yields are. They're down from where we were buying early in the quarter. But we may put some of that to work depending on how we look at the bond market in the quarter. Charles Driscoll: Okay. And then if you guys could just touch on expenses, they've been really well controlled. Just looking forward here, if we do get a little bit of growth and with the team lift out, how are you thinking about expense management heading into 2026? E. Nicholson: Not really any change there. I mean, we continue to manage it very closely, low single-digit type of growth is our expectation. Third quarter is always when we do our annual increases. So of course, quarter-over-quarter, that it impact. But year-over-year, actually, salary expense by itself was essentially flat. The one area we'll continue to invest in, as we noted in the prepared remarks, is technology. That includes automation as well as just sort of the standard stuff to keep us safe from cyber and all the other stuff. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Brager for any closing remarks. David Brager: Thank you, Sherry. Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our 194 consecutive quarters or more than 48 years of profitability and 144 consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small- to medium-sized businesses and their owners through all economic cycles. I'd like to thank our customers and our associates for their commitment and loyalty and would like to thank all of you for joining us this quarter. We appreciate your interest and look forward to speaking with you in January for our fourth quarter 2025 earnings call. Please let Allen or I know if you have any questions. Have a great day. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Hello, everybody, and welcome to the Popular, Inc. Third Quarter 2025 Earnings Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Paul Cardillo, Senior Vice President, Investor Relations Officer. Please go ahead. Paul Cardillo: Good morning, and thank you for joining us. With us on the call today is our President and CEO, Javier Ferrer; our CFO, Jorge García; and our CRO, Lidio Soriano. They will review our results for the third quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we begin, I would like to remind you that during today's call, we may make forward-looking statements regarding Popular, such as projections of revenue, earnings, credit quality, expenses, taxes and capital structure as well as statements regarding Popular's plans and objectives. These statements are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings release and our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com. I now turn the call over to our President and CEO, Javier Ferrer. Javier Ferrer-Fernández: Thank you, Paul, and good morning, everyone. Starting on Slide 3, we share a few highlights that reflect our strong operating performance in the third quarter. We reported net income of $211 million and EPS of $3.15, an increase of $1 million and $0.06 per share, respectively. Our results were driven by higher revenues and expanding net interest margin, strong loan growth and importantly, stable customer deposit balances. Our credit metrics were impacted by 2 large commercial loans, which were related to isolated circumstances that do not reflect broader credit quality concerns. As Lidio will discuss in more detail in his remarks, I'd note that excluding these 2 relationships, credit metrics remained stable. For the second quarter in a row, we have demonstrated progress from our efforts to achieve sustainable returns above 12% this year and towards our longer-term 14% objective. Please turn to Slide 4. As of the end of the third quarter, business activity in Puerto Rico continued to be solid as reflected by favorable trends in total employment, consumer spending, tourism and other key economic data. The unemployment rate of 5.6% continues to hover around all-time lows. Consumer spending has been resilient and remains healthy. Combined credit and debit card sales for Banco Popular customers increased by approximately 5% compared to the third quarter of 2024. Home purchase activity continues to be strong as demonstrated by the $129 million increase in mortgage balances at Banco Popular during the quarter. Momentum in the construction sector has been solid with both public and private investment fueling higher employment levels and cement sales. We are optimistic that these trends will persist given the backlog of obligated federal disaster recovery funds, announced real estate and tourism development projects as well as the renewed focus on reshoring by global manufacturing companies. One example of this is Amgen's recently announced $650 million manufacturing network expansion, which is expected to create roughly 750 direct new jobs in Puerto Rico. Puerto Rico is also well positioned given its strategic geographic location considering current geopolitical focus in the Caribbean region. The tourism and hospitality sector continues to be a source of strength for the local economy. This summer, the sector benefited from Bad Bunny's 31-night concert residency at the Coliseum in San Juan, right next to our Popular center complex. This was more than just a series of concerts. The event also featured Puerto Rico as a destination, highlighting our music, natural beauties and culinary offerings. The celebration of our culture generated significant media exposure for the island globally and led to a substantial increase in tourism activity during what is normally a seasonally slow period of the year. Please turn to Slide 5. I would like to comment on our new strategic framework and transformation progress. Our strategy centers on 3 objectives: First, Be The #1 Bank For Our Customers by deepening relationships, earning trust, delivering value across all channels and providing exceptional service. Leveraging our very strong primacy and satisfaction scores in Puerto Rico, we are focused on advancing digital and payment solutions to further grow engagement. Second, Be Simple and Efficient by working collaboratively, streamlining operations and reducing costs. We are committed to making our processes simpler and more effective to deliver superior solutions for our customers. And finally, Be a Top Performing Bank by attracting and retaining top talent and converting customer and operational success into shareholder value with a commitment to generating a sustainable 14% ROTCE over the long term. This framework, simple, yet powerful, guides our transformation, which continues to show steady and notable progress. We are investing in seamless, secure banking solutions, expanding service channels and modernizing branches and digital platforms to provide our customers with the flexibility to connect with Popular through the channel that best fits their needs. We plan to extend these digital capabilities to more products to further improve online and mobile experiences and support future growth. Recent initiatives include the launch of a fully online personal and credit card loan origination process in Puerto Rico and the Virgin Islands and the expansion of digital deposit products in the U.S. Mainland. On the commercial side, we are improving cash management and credit delivery for small and midsized businesses. We are pleased with the progress we have made so far in our transformation and are convinced that these efforts will continue to unlock growth opportunities and efficiencies to drive sustained financial performance. I will now turn the call over to Jorge for more details on our financial results. Jorge? Jorge Garcia: Thank you, Javier. Good morning, and thank you all for joining the call today. As Javier mentioned, our quarterly net income increased by $1 million to $211 million. Our EPS improved by $0.06 to $3.15 per share. These results were driven by better NII and noninterest income and a lower effective tax rate, offset somewhat by a higher provision for credit losses. As we have mentioned before, our objective is to deliver sustainable financial performance. While there is some noise in the current quarter's results, we're very pleased to have once again exceeded a 13% ROTCE for the period. We continue to expect to achieve at least a 12% ROTCE in Q4 as well as for the full year. Longer term, we remain focused on achieving a sustainable 14% return on tangible common equity. Please turn to Slide 7. Our net interest income of $647 million increased by $15 million and was driven by higher average deposit balances, fixed rate asset repricing in our investment portfolio and deposit pricing discipline in both of our banks. Our net interest margin expanded by 2 basis points on a GAAP basis and by 5 basis points on a tax equivalent basis, driven by a larger balance of loans and tax-exempt investment securities. Loan growth of $502 million in the quarter was strong with both banks contributing to the increase. At BPPR, we saw loan growth of $357 million reflected across most portfolios, but driven primarily by commercial and construction lending. At Popular Bank, we saw loan growth of $145 million, also driven by the commercial and construction lending segments. Given that the underlying economic activity and demand for credit in both of our markets remain solid, we now expect consolidated loan growth in 2025 to be between 4% and 5% as compared to the original 3% to 5% guidance for the year despite the expected headwinds in our U.S. construction balances due to paydowns expected during the fourth quarter. In our investment portfolio, we continue to reinvest proceeds from bond maturities into U.S. treasury notes and bills. During the quarter, we purchased approximately $2.5 billion of treasury notes with a duration of 1.4 years and an average yield of around 3.65%. We funded the purchases by reinvesting roughly $1 billion of bond maturities, along with redeploying $1.5 billion of cash reserves. We expect to continue to invest in treasury notes to lessen our NII sensitivity to lower rates while maintaining an overall duration of 2 to 3 years in the investment portfolio. Ending deposit balances decreased by $704 million, while average balances grew by $793 million. Puerto Rico public deposits ended the quarter at $20.1 billion, a decrease of $842 million when compared to Q2. We continue to expect public deposits to be in the range of $18 billion to $20 billion. At BPPR, excluding Puerto Rico public deposits, ending deposit balances decreased by $162 million and on an average deposits decreased by $44 million, demonstrating the impact of our continued focus on deposit retention strategies. At Popular Bank, ending deposit balances increased by approximately $216 million, net of intercompany deposits. Total deposit costs increased by 1 basis point at both banks. At BPPR, the increase was mostly due to a higher average balance of public deposits. Given the results year-to-date, along with the anticipated NIM expansion in Q4 from repricing of our fixed rate earning assets, we continue to expect to see NII growth of 10% to 11% in 2025. Please turn to Slide 8. Noninterest income was $171 million, an increase of $3 million compared to Q2 and above the high end of our 2025 quarterly guidance. We continue to see solid performance across most of our fee-generating segments, including robust customer transaction activity. This quarter, we also benefited from a $5 million retroactive payment from a tenant related to an amended lease contract. Given the trends year-to-date and particularly the stability in customer transaction activity, we now expect Q4 noninterest income to be in the range of $160 million to $165 million. This will result in total noninterest income between $650 million and $655 million for the year. Please turn to Slide 9. Total operating expenses were $495 million, an increase of $3 million when compared to last quarter. The largest variance was related to a $13 million noncash goodwill impairment in our U.S.-based equipment leasing subsidiary due to lower projected earnings. Offsetting this was a $13.5 million quarter-over-quarter reduction in other operating expenses, driven by the effect of a reversal this quarter of a $5 million claims accrual recorded in Q2 and a similar reduction in operational reserves. We also saw a $3.6 million increase in personnel costs, mainly due to annual salary and merit increases effective in July, along with the impact of employee termination benefits related to cost efficiency initiatives at Popular Bank. Specifically, as part of our ongoing efforts to improve profitability, we decided to exit the U.S. residential mortgage origination business and to close 4 underperforming branches in the New York Metro area. We will remain focused on areas where we feel we can invest to achieve improved operating leverage. We continue to expect the increase in 2025 expenses to be between 4% and 5% when compared to last year. Our effective tax rate in the third quarter was 14.5% compared to 18.5% in Q2, driven by a higher proportion of exempt income. This higher exempt income, along with the impact of changes to Puerto Rico's tax code, will result in an effective tax rate for Q4 in the range of 14% to 16%, and for the year, we now expect the effective tax rate to be between 16% and 18%. Please turn to Slide 10. Regulatory capital levels remain strong. Our CET1 ratio of 15.8% decreased by 12 basis points, mainly due to loan growth and the effect of capital actions, net of our quarterly net income. Tangible book value per share at the end of the quarter was $79.12, an increase of $3.71 per share, driven by our net income and lower unrealized losses in our MBS portfolio, offset in part by our capital return activity in the quarter. During the third quarter, we declared a quarterly common stock dividend of $0.75 per share, an increase of $0.05 from Q2. Finally, we repurchased approximately $119 million in shares during Q3. And as of September 30, still have $429 million remaining on our active share repurchase authorization. With that, I turn the call over to Lidio. Lidio Soriano: Thank you, Jorge. Good morning, and thank you for joining the call. Turning to Slide #11. The ratio of NPLs to total loans held in portfolio increased to 1.3% compared to 82 basis points in the prior quarter. Credit quality metrics were impacted by 2 unrelated commercial exposures in BPPR, resulting in an increase in NPLs and net charge-offs. This impact relate to borrower-specific circumstances and do not reflect broader credit quality concerns. The first loan is a commercial and industrial facility extended to a telecommunication company in Puerto Rico, experiencing reduced revenue due to operational challenges and client attrition following the business acquisition. As of September 30, we classified this loan as nonaccrual with a carrying value of approximately $158 million and drove the increase in provision expenses in the quarter. The second loan is a commercial real estate facility secured by hotel property in Florida. This loan has also been placed on nonaccrual status and carries a value of $30 million as of September 30, which includes a $14 million charge-off recognized during the quarter. Excluding these 2 cases, credit quality metrics were stable. We continue to closely monitor the economic environment and borrower performance as economic uncertainty remains a key consideration. We are confident that the risk profile of our loan portfolios positions Popular to operate successfully under the current environment. Turning to Slide #12. Net charge-off amounted to $58 million or annualized 60 basis points compared to $42 million or 45 basis points in the prior quarter. Net charge-off in BPPR increased by $16 million, mostly due to the $4 million charge-off related to the $30 million commercial NPL inflow mentioned earlier. Consumer net charge-off increased by $4 million, mostly due to higher auto loans net charge-off by $6 million, partially offset by a $2 million reduction in credit card net charge-offs. Given our credit performance year-to-date and NPL inflows this quarter, we expect net charge-offs to be between 50 to 65 basis points for the full year. The allowance for credit losses increased by $17 million to $786 million, while the provision for credit losses increased by $29 million to $75 million. Both increases were driven by the impact of the 2 commercial exposures, offset in part by improvements in the credit quality of the consumer portfolio. The Corporation's ratio of ACL to loans held in portfolio remained stable at 2.03%, while the ratio of ACL to NPLs was 157% compared to 247% in the previous quarter. With that, I would like to turn the call over to Mr. Ferrer for his concluding remarks. [Foreign Language] Javier Ferrer-Fernández: Well, thank you, Lidio, and Jorge for your updates. We are very pleased with our financial performance in the third quarter. We increased revenues, maintain expense discipline, generated strong loan growth and benefited from stable customer deposit trends. We are determined to close out 2025 on a high note as we continue to execute on our strategy, and I am urging our teams to remain focused on deposit retention, loan generation and particularly on our expense discipline. We will continue to generate value for our shareholders and deliver our ROTCE objectives. We will achieve this by concentrating on our strategic framework, Be The #1 Bank For Our Customers, Be Simple and Efficient, and Be a Top Performing Bank. I want to give a shout out to our colleagues and recognize their hard work. I see what they do every day in our branches, call centers and centralized offices. We are pushing ourselves to deliver more for our clients every day, and I am incredibly grateful for their commitment. We are now ready to answer your questions. Operator: [Operator Instructions] First question comes from Jared Shaw with Barclays. Jared David Shaw: Maybe starting just on the margin and on asset yields. With the securities yields -- I'm sorry, with the securities purchases this quarter, should we assume that, that trend continues? And I guess, where are the new purchase yields? It looks like maybe we won't be able to see net yield expansion much more from here if we see the rate cuts? Lidio Soriano: No. I mean let me first answer the yield expansion. We do believe that we still have strong tailwinds. You can see in our appendix we provide to you kind of the upcoming maturities in the investment portfolio, those are still coming off at 1 and change, and we expect to be able to continue to get a significant spread pickup on those maturities. So while they may be priced lower as rates are coming down, remember that a large portion of our portfolio is also being financed, let's call it, money fungible, but still being financed by public deposits. And we would expect those public deposits to also benefit from the lower rate environment, giving us the opportunity to create that spread. So we do continue to expect our NIM to expand in the fourth quarter and beyond. Jared David Shaw: Okay. And then on the loan side, what about new loan yields this quarter -- sorry, go ahead. Jorge Garcia: Yes. On the -- okay, on new loan yields during the quarter, we still saw kind of the condition that we have been seeing for the last year where particularly in personal loans and auto lending, we still see some yield pickup quarter-over-quarter. I would expect, Jared, that maybe that would slow down a little bit, particularly in the auto volumes or new car sales activity is slowing down, and it's possible that it wouldn't be unreasonable to believe that, that will result in more competitive pricing to maintain demand for auto sales. But as we said in the past, there's a lot of front and back book in that auto loan portfolio in particular. And when you look back, given the average life of those loans, assuming the same type of risk profile, we still see opportunities of repricing given the current rate environment. Jared David Shaw: All right. And then maybe just shifting on the credit side, especially on the auto. There was an increase in delinquency, but it's still lower, I guess, year-over-year. How are you looking at the credit trends over the next few quarters within auto and consumer, I guess, more broadly? Lidio Soriano: I mean I would say the variation that you saw this quarter is within the seasonality of the portfolio. We continue to be very optimistic about the consumer, given the trends in Puerto Rico, given the trends in employment, liquidity of our client base. We see losses are about -- in the auto portfolio about 45 basis points below last year. So we're comfortable with our position and the outlook for the portfolio. Operator: We now turn to Timur Braziler with Wells Fargo. Timur Braziler: Sticking with the credit commentary, the large C&I loan, I guess, what are the specific reserves that you set aside for that, the timing of resolution as you see it? And I'm just wondering why it moved into nonperformers right away instead of kind of up the risk migration chain. Did they stop making payments? Or is that still accruing at this point? Maybe start there. Lidio Soriano: Okay. I mean thank you for the question. They continue to make payments. So the loans are current from a payment standpoint. So that's that. In terms of our decision to -- I mean, it has -- actually situation has been deteriorated over time, and we have been downgrading the loan over time. For us, it is a business that carries a significant amount of debt and management has indicated their intent to rightsize its capital structure, including liability management, liability structure. So that drove our decision to place it in nonaccrual status. Timur Braziler: Okay. And then I guess, in terms of specific reserve and any kind of time line around planned resolution? Lidio Soriano: I think planned resolution most likely is next year. In terms of specific reserves, we are not -- we have not provided that information at this time. So... Jorge Garcia: Yes, Timur, you can assume that the driver of the variance in the quarter in provision was related to these loans. Timur Braziler: Okay. And I mean this is a little bit of a larger credit, just maybe stack ranking the loan book. Is this one of the larger credits that you guys carry? Is this kind of typical size just given your place in the Puerto Rico economy? And maybe just talk a little bit more broadly as to the health of the economy from a business standpoint versus a consumer standpoint? And if there are any kind of signs that might be flashing yellow or any other kind of degradation? Lidio Soriano: If you look at our portfolio over the years, we shifted our portfolio from being more of an SME portfolio to a corporate credit type of portfolio. And we have seen strong trends over the last few years. And we -- actually, if you look, I think the last time we had one issue with a large bank -- a large group was in 2019. I think we will continue to focus in that segment. We think there are significant opportunities in Puerto Rico. They have done -- performed very well over the years. And that is the nature of our portfolio. Every now and then, you might see a situation. I think the important is we stick to our underwriting discipline. The performance of the portfolio has been very strong, and we feel comfortable with the exposures that we have today. Javier Ferrer-Fernández: Yes. And if I may add to that, I mean, to your question about the macro, I think in our commentary, we are clear that we are not seeing any sort of yellows or red or any insects in Puerto Rico referencing something that somebody said in the United States. It's -- we are seeing a strong economy. But as Lidio just said, it so happens that we continue to focus on large commercial opportunities. And from time to time, as happened this quarter and it hasn't happened in a long time, there may be an isolated credit event that occurs due to idiosyncratic by specific issues that are unrelated to the underlying economic backdrop. And that's exactly how we feel. So I can't really point to anything in the Puerto Rico economy that gives us any pause or worry, or contrary, as they say, across the ocean. We feel that the economy is performing well and our big customers are investing and continue to move on with their projects. Timur Braziler: That's great color. And then just lastly for me, encouraging to hear that margin expansion is going to continue here. I'm just wondering from an NII standpoint, you guys reiterated the guidance. It is a little bit wide in terms of the range just as it implies to 4Q. Should we assume that margin expansion portends to NII kind of flat to up here as we go through these rate cuts? Or just given some of the lags, maybe NII growth stalls here over the next couple of quarters? Jorge Garcia: Yes. I think first, I want to reiterate that we continue to see the benefits of fixed asset repricing, loan growth, all those things should continue to contribute to improving NII and the expansion of the margin. As you mentioned, the guidance for NII, we left it where it was. Part of that has to do with our perspective on public deposit balances in the fourth quarter. We still expect to be within the range, but maybe not at the high end of the range where we are at when we closed out Q3. We also mentioned the lag in pricing of these deposits. We continue to be slightly asset sensitive, particularly in the early stages of moves of Fed funds rate. But as we stated before, the cost of public deposits are linked to short-term market rates. And in general, they reprice on a quarterly lag. Because the -- we've never given the index, but we're going to do call a favor, and it's tied to 3-month treasuries, obviously minus a spread. And so they are in a lag. So over time, we would expect to see the effects of changes in rates be reflected in the cost of public deposits with a beta of near 1, and that pricing structure will continue to support our fixed asset repricing and the investment portfolio, making sure that we generate that improving spread on that investment. But any time there's movement in the Fed, maybe there is a little bit of a lag, not always, right? We talked about that in the past that if the market and treasuries get ahead in anticipation of Fed moves, we might be able to benefit a little quicker. But we've kind of incorporated all that into our NII guidance for the fourth quarter, but we have a high level of confidence that as that stabilizes and the passage of time into 2026 and beyond will continue our previous growth trends. Operator: Our next question comes from Ben Gerlinger with Citi. Benjamin Gerlinger: Not to belabor the point on credit because it's pretty clear that you guys are -- you're doing phenomenal relative to like the last 10 years. But I found it interesting that your guide, you kind of fine-tuned a lot, whereas the charge-off outlook, you just brought up the low end. So when you think about the 65 bps on the high end on a full year basis, that would imply something pretty draconian for the fourth quarter. I mean, is that a possibility? Or how should we think about that considering the other guidance portions were fine-tuned? Lidio Soriano: I will say as we mentioned in the remarks, we took a reserve and a provision for some of the exposure. We charge off 1 of the 2 related exposure. There is a possibility that we may have to take charge-offs in the exposure that we reserve this quarter, which did not charge off, and that is driving the results. Overall, I mean, if you exclude that, we continue to expect a very solid performance out of the rest of our book. So that's the only thing that we are caveat in terms of the range that we provided to you. Jorge Garcia: Yes. Ben, in similar word, we talked about this in the past where when we provide that spread in the guidance of net charge-off, we are trying to put in for idiosyncratic events that could happen in our portfolio at any given time. Certainly, the activity that we have seen year-to-date, as you say, don't reflect necessarily a lot of opportunities to get to the high end without it being a commercial loan. Benjamin Gerlinger: Got it. Okay. That's helpful. And I know you guys have gone through quite a bit of initiatives on the expense front. Is there anything -- I know you're not going to give me a '26 guide, but is there anything in '26 that we could potentially prepare for outside of just kind of normal cost inflation? Jorge Garcia: Yes, you're right. We're not going to give you anything '26... Lidio Soriano: Good try, good try, good try... Jorge Garcia: We're very happy with the cost discipline and a lot of initiatives that are ongoing. We talked about it last -- in the last quarter's call. There's a lot of efforts around really just focusing on execution and really what Javier says, focus on excellence. And there's a lot of efforts that are ongoing that are maybe a lot of singles and bunts, but they add up. They add up. And this quarter, we saw some of those. We saw some of the actions, we talked about the activity in the U.S. It's not easy impacting our colleagues, but we did make a decision to terminate our mortgage origination business in the U.S. We don't believe, given our funding profile and deposit franchise in the U.S., that's a business that we really want to be in at this time. And there are other things across the organization. I would say the important part is that those efforts are sustainable. They're not one-offs. And we do expect to see those benefits that would allow us to reinvest in other things. We talked to you in the past about slowing down our expense growth rate. These are all the things that allow us to do that while continuing to invest in areas that we think will add value and get us closer to that 14% ROTCE. Unknown Executive: [indiscernible] Operator: We now turn to Kelly Motta with KBW. Kelly Motta: I will pick up on that 14% ROTCE you mentioned. You've been above 13% in the next 2 quarters -- the last 2 quarters. It seems like we have 14% in sight. I appreciate the guidance around at least 12% for the year, which seems very doable. Wondering if you have any update on the timing of the 14%, one? And then two, given what you've laid out with your NII trajectory, has there been any discussion in terms of whether 14% is the right place to stop as a sustainable ROTCE or should we see that a bit higher. Jorge Garcia: I would say that of course -- yes, Kelly, for certain, we're not going to stop at 14%. It is a guiding principle, and we want to get there, but we're not going to stop there. And having said that, what we want to make sure is that sustainable performance, we said that in the past. I agree with you, we're a lot closer today than we were a year ago when we pulled back that guide for this year. A lot of effort from a lot of people, a lot of things going right, and we just want to make sure that we continue to execute, and more to come in terms of guidance and when and how we get there. But the important part is we continue to believe strongly that we get there through improving our net income performance and our operating leverage. And whatever we do on the capital side just adds to the opportunity to get there and surpass it. Kelly Motta: Okay. Got it. That's really helpful. And then on the tax rate, the reduction in guide, you called out a higher proportion of tax-exempt income as well as some changes in the tax rate. And there is some noise and appreciating you're not giving 2026 guidance. I'm just hoping if you could kind of help us out with what -- is this full year 2025 a good core run rate ahead? Or can you expand upon the Puerto Rico tax rate change and how that kind of impacts the go forward? Just any kind of color on that would be helpful given that there is a lot of moving parts here. Jorge Garcia: Yes. So I would ground on 2 things. One, this quarter, there were not any like real discrete events that impacted the effective tax rate this quarter. It was lower given the mix of taxable income and tax-exempt income. We did benefit the $5 million other operating income number, does have a tax -- preferred tax treatment. So that helped. But I say that it is a good basis to start off. And then when you look at the guidance for the fourth quarter, what we're talking about is saying we're reversing this change in the tax law in Puerto Rico will allow us to reverse the related tax expense during the year. I tell you this whole long story to say that the guide for 2025 of 16% to 18% really ends up being a fairly clean number for us for this year. That guide does not really have a lot of noise of discrete events that are not part of our normal tax strategy. You can infer from that whatever you'd like, we can confirm it in January when we give you the '26 guidance. Kelly Motta: Fair enough. Last question if I can sneak it in. Some of your competitors have noted increased competition on the deposit side. One was on government deposits. The other was some of the initiatives they're doing. Wondering if you could just expand upon the market competition you're seeing in Puerto Rico, one? And two, like has there been any news of any new entrants to the island, specifically on the depository side? Javier Ferrer-Fernández: Well, I'll take that. I'll start by saying not that we're aware of no new entrants on the depository side, Puerto Rico. Competition, yes, I mean, it's a vibrant market, and there is competition every day. We compete every day for our piece of the business and for customers. So -- but we're going to be rational while we're doing that. Yet, we won't lose any good clients on pricing and on terms. So we're seeing competition. It's normal. We have -- now you see how some of our esteemed bank competitors in Puerto Rico are sort of positioning themselves as challenger banks or whatever banks. But frankly, we like where we're at, and we like the fact that the franchise has -- it's certainly being reenergized. And we're not behaving like 132-year bank and more to come on that, quite frankly. So we -- I don't know what else to say other than we like where we're at. Operator: Our next question comes from Gerard Cassidy with RBC. Thomas Leddy: This is Thomas Leddy standing in for Gerard. Loan growth in the quarter was strong, as you mentioned. And just on the back of the increased competition on the deposit side. I'm curious, in booking new C&I and CRE loans, have you seen a similar increase in competition, maybe resulting in less rigorous underwriting standards? In other words, anything you can tell us about changes in underwriting standards on loans you're originating now versus, say, a year ago? Javier Ferrer-Fernández: I mean, I guess each one of us can answer that. But no, the answer is no. And we have a very strong credit underwriting process and Lidio leads the risk side and then our business side as well, we are not going to do anything that doesn't make any sense, frankly. We tend to be a bit conservative by nature, quite frankly. But I'm not seeing anything in originations that points to that concern. Jorge Garcia: Yes. From talking to our bankers and listening to the teams, the pushback we gather in competition is more pricing. And we're seeing maybe particularly you're hearing in some entrants in the New York market and maybe South Florida, where people being a little more aggressive in pricing. And frankly, we -- if those loans are not true relationships and they're not coming with deposits, we're not going to pursue that, particularly in the U.S. In Puerto Rico, we might have a different strategy, echoing what Javier previously said in his comments. Operator: We now turn to Arren Cyganovich with Truist Securities. Arren Cyganovich: Javier, you. Jorge Garcia: Thank you for picking up Puerto Rico Bank. Arren Cyganovich: Good to be back. Maybe we could just talk a little bit about, Javier, your commentary around investment initiatives that you have in your transformation plan or the second leg of your transformation plan. How are you thinking about all of the items that you kind of mentioned in your prepared remarks with regard to the cost in -- and would that be a step-up in cost? Or do you see some efficiencies that you'll be gaining that will help offset some of the further investment as you continue down that path? Jorge Garcia: Great. Arren, I mean, the one thing I'll reiterate, our goal here is to be able to continue to invest and generating opportunities and efficiencies to be able to then continue to reinvest at a level slowing down the overall level of expense growth. Javier Ferrer-Fernández: Yes. So there's going to be at the beginning and in certain periods, right, a disconnect, right, between initial investments and then results from those investments, which is what Jorge is referring to. And we think that's okay as long as the actual investment makes sense to us. We're not going to do something dramatic or irrational. But we have to invest in our technology to continue to compete, not only in Puerto Rico, but we compete with folks that come from the United States, you may imagine, the big players are already here, and they have the best technology. So we -- our program is rational in that way, and I think our expense base shows it. I don't perceive that we're going to go above and beyond a particular sort of threshold. Jorge Garcia: Yes. And what happens is right now, we've got over 80 projects that are ongoing. Some of them have higher levels of current investments, some are in capitalizing mode, but a lot of them are in dual expense mode. As you're developing, particularly with SaaS licensing agreements, you're paying for your new system and you're paying for your old system. So over time, as you start generating the cost avoidances and turning off old system, that allows us buffers to continue to reinvest following a business case and value-add analysis. But when we talk about being able to slow down the rate of growth, that's the kind of thing that we're talking about is how do we shift and reallocate expenses and savings to continue to improve the business and add value to our shareholders. Javier Ferrer-Fernández: So -- and then I say this and show up, that's a very important point that Jorge just made. We're not looking at this on a siloed view, right? So we're saying -- so if we are going -- if we are investing in the transformation, we want to make sure that if we can generate some savings in other parts of the bank, which will, of course, kind of fund that transformation. That's the mindset. And in many cases, we've been able to do that. And that minimizes the impact of the actual investment. So again, I mean, it's a broad-based program. We're very excited about it, and we're starting to see results. And we'll continue because, as I said, it's -- we're also creating a transformation mindset in our teams, right? It's -- we need to continue moving forward. So... Operator: This concludes our Q&A. I'll now hand back to Javier Ferrer, CEO, for any final remarks. Javier Ferrer-Fernández: Well, thank you. Thanks again, everybody, for joining us and for your questions. Really appreciate that. We look forward to updating you on our fourth quarter results in January. Thank you. Operator: Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
Operator: Welcome to XVIVO Q3 Report for 2025. [Operator Instructions] Now I will hand the conference over to CEO, Christoffer Rosenblad; and CFO, Kristoffer Nordstrom. Please go ahead. Christoffer Rosenblad: Thank you so much, and good morning and good afternoon, everyone, and especially welcome to XVIVO's earnings call for the third quarter of 2025. First, a quick introduction of today's presenters. This is me, Christoffer Rosenblad, CEO, calling in from Gothenburg, Sweden. And we also have Kristoffer Nordstrom, CFO, calling in from Philadelphia in the United States. And with that we go to the third slide, which shows Q3 financials at a glance. The Q3 shows a plus 6% top line organic growth if adjusted for the U.S. heart trial revenue compared to the same quarter last year. We can note that there was no destocking during Q3 and hence the EBITDA recovered to expected levels during the quarter. In terms of segment growth, the Thoracic sales were affected by lower heart study revenue in the U.S. and a softer Q3 lung market. The Abdominal segment shows great progress for both liver and kidney. Looking a little bit into the future. In the beginning of October, the 3 out of the 4 clinics that acquired an XPS in the United States during H1 or half year 1 are up and running now in the beginning of October, and we also held a Lung Masterclass. I will come back to that later. Yesterday, where it was noted that, that October at least started better than Q3 in terms of lung transplant and in terms of EVLPs to support for the lung transplant if you compare to what we saw in Q3. Going into our Abdominal segment, liver in Europe are now entering the majority market segments with penetrations above 15% in many European countries. The main task for us are now to support with resources for perfusion and data for improved reimbursement. Sales growth is improved in many countries by improved reimbursement, which is based on the carpet of excellent clinical data with better patient survival and more livers used, as well as hospital economic data and health economic data. Kidney, on the other hand, is still below 15% penetration in many countries, including the U.S., and the main task for us is to win account by account. What is good to note is that the feedback we get from kidney customers is that they are very pleased with the product and see that the kidneys are in better condition after being perfused with the Kidney Assist Transport compared to the available alternatives on the market today. And if we go over to Services, we have stated earlier, and we are not pleased with the progress of the U.S. service business. And we reported in the last Q2 report that the analysis was finalized for an action plan and that we see an increased interest for combined procurement and NRP service model. This would fit very well into the heart launch. During the summer it was decided to execute on this plan and invest into service segment, and I will come back later in this presentation with the actions we have taken and how we will execute during the next 5 quarters to become a preferred partner to the transplant teams in the United States. And I also want to again state, as we have said earlier that the service initiative is very strategic and the purpose is to support the future heart business in the U.S. During the year, a cost and cash reduction initiative was initiated to enable better resource allocation going forward. The CFO will come back to that during the financial part of the presentation. And to end this slide, Q3 shows again that XVIVO has a scalable business model in terms of EBITDA. We can see that the recovery of sales in Q3 versus Q2 also improved the EBITDA as a percentage if you compare to Q2 of this year. And with that, we go over to Slide #4, which is the first 9 months at a glance. And it shows a similar picture to the Q3 slide. A good and stable gross margin. We continued investing into field force and scalable production structures. We saw that sales came in at SEK 586 million with again a 6% growth if we adjust for the U.S. heart trial revenue. In terms of gross margins, I said before that we plan to improve Abdominal gross margin to 70% at the latest in '27 or when we reach economies of scale in production. You will hear more about gross margin or EBITDA levels later in the presentation. For heart the main hurdle is regulatory approval. Once the Heart Assist is used the feedback is overwhelmingly positive. We continue to build evidence and more than 500 patients have now been transplanted successfully with Heart Assist. The CAP in the U.S. is now up and running, and we have 6 patients included as of yesterday. I will come into later a little bit more on heart, but we can also see that in Australia, the heart penetration rate last year was approximately 30% and we now see that this year it has increased to 40% for DBD heart, which shows again that the need for this product in the market. We have also stated in early calls that we're running a DCD direct procurement study in the Benelux to show that we -- it's also a great product for DCD hearts. And I think with that results coming out, hopefully next year and the Australian experience, we see a great potential to truly shift the paradigm of heart transplantation. Lastly, and also important to mention is that the projects are progressing according to plan. Regulatory time lines are hard to predict, which we saw this summer for the EU heart approval. But in terms of clinical trials and development projects, they are progressing according to time lines agreed. The production capacity projects, for example, where we invest to scale up volumes 10x of the day volumes for disposables are running in line with communicated time lines. The full-scale production of disposables for heart, liver and kidney will be extremely important to capture future growth potential for all 3 products. And with that, we can go to Slide 5. And I want to remind everybody why we are here. It's a picture in front of us reminds us that Alex is one of the 500 patients that got opportunity to get a heart transplant, thanks to the innovative XVIVO heart technology. And that's why what we work on every day to make sure that those patients actually survive. If we can go into Slide 6 to the Q3 highlights and important information. If we start with the U.S. federal review, so HHS has launched a review of the organ transplant system in the United States and started to take actions towards at this stage, one, underperforming OPO, listening to the conference. And I think it was best summarized by the quote from the FDA Director, Marty Makary, that you see in the middle of the page here. I want to state that XVIVO is aware that many organs go to waste because of bad communication, underutilization of technology that improves organ utilization, patient outcome, et cetera. And this is why we work day and night to improve the situation for both transplant teams and OPOs. Our products and services correctly used will enable more organs to be used and less stress on the transplant system, which we do acknowledge there is a high level of stress right now. But we hope with longer transportation times, more evaluation opportunities and a better service model, we hope that we see us as part of the solution to release that stress and less mistakes will be made. And we can stay in the U.S. and go to Slide #7 and just have a brief view of the U.S. lung market. And as we said earlier, and you can see it also in the slide, we have gotten used to very high growth in the U.S. lung market '22 to '24, double-digit market growth. And it has been driven by improved allocation and EVLP at the ambitious programs who could safely grow their number of lung transplant using lungs that were rejected by other centers. In 2025, we still see growth, but at a lower pace than we are used to. The reasons for the slower market growth are manyfold. But at least we start to see waitlist coming back at a few of the ambitious clinics I talked to. And we have also acknowledged that the lack of resources has impacted growth rate this year compared to earlier. And I will also come back to how we want to improve our service strategy to reduce stress and lack of resources at both clinics and OPOs. And with that, we can go -- continue to stay in the U.S., but go to Slide 8 to paint the picture of what we will do specifically for lungs. As stated earlier, we have seen fantastic results from ambitious lung transplant programs that safely increased the numbers of lung transplant using EVLP with XPS system solution. For Q3, we can start to conclude that we didn't identify any destocking. We continued to see an increasing interest to start EVLP programs with XPS. And as stated earlier, 3 out of 4 of the new accounts that bought an XPS in the first half of the year is now up and running, unfortunately, not in Q3, but in early October, at least. To improve our service to lung transplant clinic and we acknowledge that there is a resource constraint, we entered into a partnership during quarter 3 with a prestigious perfusionist company. By doing so, we've got access to 175 perfusionists and we can together with our organ recovery business and communication system FlowHawk, give our customers an improved experience and support them also during shortage of resources. During the summer, we have also developed an EVLP product service model to better fit the OPO system. We will run the first pilot during Q4. And lastly, we have also recognized that we need to reorganize the commercial organization, and we have done so during the summer to have a greater footprint in the south of the country and on the West Coast of the United States. Our estimation is that the action taken during the summer will show gradual impact during the next 5 quarters. The interest for starting an EVLP program with XPS is extremely high by the most successful lung transplant clinics in the U.S., has proved that that's the way to safely increase lung transplant volumes. And we believe by increasing our support level, we will be able to better realize this interest from customers. And with that we can go over to -- I came home yesterday still running, but I came home yesterday from the -- our Lung Masterclass 2025. And it was a great pleasure for us to welcome the best of the best in lung transplantation to the 2025 edition. So we have got 100 clinicians from 19 countries that could exchange ideas through collaboration, how we can improve lung transplant practices and improve both usage of lungs and patient outcome. The key takeaway for me was that many clinics has experienced a -- or had experienced a tough 2025 with the lack of resources and in some cases lower waiting list, making matching of donor organ patients a lot harder. We see that we need to support our clinicians better. And so far, what I could -- in the conversations I had, we could see that at least the waitlist looks a lot better going into Q4 than they did up until Q3. And with that we go over to Slide 10, sorry, and just have a snapshot of the U.S. CAP study and the PRESERVE study status. We have the first patient enrolled into the study during Q3. At the end of the Q3, we had four patients enrolled still at one clinic. As of yesterday, we actually had nine patients enrolled into the continuous (sic) [ Continued ] Access Protocol still at one clinic. At the end of Q3, we activated five centers that are able to enroll patients. And the focus for Q4 will be to activate more clinics. There is a need for the product, and also support them as much as we can so they can restart enrolling patients into the continuous access protocol so we can strengthen our regulatory file that we aim to hand in to the FDA during the next year. We can also just briefly state on the PRESERVE status that we had last patient in the original trial, so not the continuous access protocol as November last year. We will have the -- go through the data analysis Q1 in 2026, and the study result is expected to be announced in Q2 2026. And with that we can go over to Slide #11 that I said earlier we should deep dive a little bit into the actions taken during the summer. Besides the footprint of our commercial team in the United States we have also taken action on the service side. To start, we've taken mainly 3 actions. One, we have doubled the surgical capacity both in terms of number of surgeons and in terms of active locations. So we've gone from end of Q2 3 to end of -- 6 end of Q3. And we expect that end of Q4 will be 7 active hubs in the -- on the East Coast or east of the Mississippi. As I stated earlier, we closed a partnership with a great partner not only to improve our EVLP capabilities with perfusionist, but also to support clinics with NRP services, which is nowadays in the United States a must to grow our service business that has been asked for and now we can finally deliver on it. At number 3, we have partnership with numerous both aviation and ground transport partners to enable a full-service offering if the clinics want that offering. Some have their own transportation partnering, and we're happy with that. But if they don't, we can offer a great network of transportation to simplify for the transplant teams. So with those actions we will improve our services. We had already best-in-class service in terms of quality, but now we can offer service tailored to customer needs as well. So we hope that we have laid the foundation for growth within this segment, and -- especially then east of the Mississippi. We are aware of the fact that we need to also grow our hubs and service offering west of the Mississippi, and we will come back to that both the progress on the actions taken and the future plan in the next quarters to come. And with that, we can go over to Slide 12, and we leave the United States and we go over to Europe, which we have concluded into one slide. And the reason is that it's slightly shorter is that the business is progressing very well. We have a stable field force. We have very good clinical data, long and strong customer relations and great interactions. But what we've seen so far in Q3 is a continued strong growth for liver in Europe. Q3 it was similar to previous quarter by plus 31%. And we continue to add new accounts every quarter. We continue to work on reimbursement, et cetera. The main hurdle for growth in liver is mainly human resources and reimbursement, which we're working on. And country-by-country, we now see that reimbursement is coming into place. And with an increasing customer-facing organization, we now have the ability to support clinics better with also resources, and especially human resources that support with perfusion services. Kidney is showing growth, 54% in Q3, and that is great. What we can note, as I said earlier, customers that are using the products are pleased with both the performance of the product and -- but especially how the kidney performed after transplant. So we -- but we have a lower market penetration rate, and we are -- it's more account-by-account base where we have to, let's say, fight a fight to increase penetration rates, and we have to convince clinic-by-clinic. But once they had tried the Kidney Assist Transport, they are very convinced of the product and actually increased usage over time. The lung business in Europe grew mainly with EVLP adoption in the U.K. and higher PERFADEX usage per case as -- the last one as a result of evidence that if you flush more with PERFADEX, you actually improve the lungs before transplantation, which potentially improve outcome after lung transplantation. And if we look going into next year and strategic areas for our European business, we are, as we stated earlier, of course, awaiting the regulatory approval for heart. If we benchmark Australia, it's clear that XVIVO Heart Assist has a very good position in the transplant system. And we expect European heart penetration to over time mimic what we have seen in Australia. We're also awaiting the -- as I said earlier, the DCD to have a full coverage in Europe once we launch. We have also acknowledged that in the U.S. as well as in Europe, there is a constraint on resources. So we have a very successful model in Italy, and we will launch that model into a few test markets where rules and legislation allows for that. And with that, we can move over to our regulatory, clinical update. It's a little bit longer than normal this time, but we can start with just the standard slide of Slide 14, which shows an overview of regulatory approval we have. So our lung and kidney portfolio has obtained regulatory approval in all key market, and liver is approved in all key markets. For heart, we are awaiting, as we know, approval for all core markets. And the time line has -- there are some shifts, and I'll come back to those later in the presentation. But the main time line has not changed besides the pending CE-mark in Europe, which we press released during the quarter. And in U.S., we are working very hard to make sure that the file is approval ready as soon as possible. For the liver, we have now obtained everything we need, but I will come back later to the decision we have taken during the quarter regarding the liver U.S. trial. And we can turn to 16, which is a little bit of a repetition, but it's good to clarify here the heart and the strong evidence we see in heart. The heart trial in Europe is not the -- not only the first trial to aiming for showing superiority, it's also the first trial to show superiority for heart. But more importantly, it's also the first trial ever to show a direct link between perfusion of a heart and patient outcome. And we can see that by using XVIVO Heart Assist, we can reduce severe PGD, which is the leading cause of early and late mortality with 76%. And what we know from before and what we've seen in the trial is that, if you get the diagnosis of severe PGD, you have approximately 40% mortality risk within 1 year. If you compare that to -- if you don't have severe PGD, you have only 5% mortality risk during the first year. So -- and this was in our trial directly translated to 6 patients more safe or life saved during -- up to 1 year, which is the first time we can see those direct links between actually perfusion of an organ and better outcome within 1 year. And if we would extrapolate this to the transplants we are doing on standard criteria heart today in the world, it will translate into more than 400 lives saved every year only for the standard criteria heart. And then we're not counting all the extra hearts that we can actually get available for heart transplant using the XVIVO Heart Assist, either if it's long distances or extended criteria heart, et cetera. And with those great results, we go over to Slide 17, where we are looking into more how we want to change the paradigm of heart preservation. And as I stated, we know that we now can increase both patient outcome and we can increase transportation time for heart. To strengthen the evidence and simplify the DCD process, we have, as I said, the Benelux DCD direct procurement study that we are now under inclusion of patients, and it's progressing fine. The study aim to include 40 patients, and it is estimated to be fully included end of this year 2025. And we are really looking forward to the result of this study. With a positive outcome of this study, the XVIVO Heart Assist would fully transform the process for DCD heart, making it safer, easier, less resource-intensive and with improved patient outcome. So then we cannot only, as we have seen in Australia, change the paradigm for DBD heart with a successful outcome, here we would also change the paradigm for DCD hearts and hence the full heart transplant process. And with that, we go over to the last slide of the clinical and regulatory update on Slide 11 or Page 11 (sic) [ Slide 18 or Page 18 ]. And as you know, we previously reported that the Liver Assist has been granted Breakthrough Device Designation by the FDA. We have an approved ID and can start the trial. We have CMS funding approved, et cetera, and we could have started the trial in Q3. However, the company has decided to temporarily pause the activities for the liver PMA process to investigate if an alternative regulatory route is possible. We hope to, as soon as possible, come back with the result from that investigation. The aim of the investigation is to see if we can get a faster route and hence enable patients in the U.S. a better product than what is currently available on the U.S. market, approved faster. And hence, we can see the fantastic results we have seen in Europe also in the U.S. And with that, I go to Slide 19 and hand over to our CFO, Kristoffer Nordstrom, who will present the financial performance of the year and the quarter. Kristoffer Nordstrom: Thank you, Christoffer. Yes. So net sales in Q3 were SEK 189 million, which represents a gradual improvement from Q2. Organic growth, minus 1%. But in reality, organic growth was plus 6% if we set aside heart trial revenue. Besides heart trial revenue, organic growth was again impacted by soft market conditions in the U.S. and lower EVLP activity among a few larger customers. As our CEO has mentioned before in this call, we do see signs of EVLP activity recovery as we have entered into the fourth quarter. Year-to-date, net sales are SEK 586 million, representing also 6% in organic growth, excluding heart trial revenue. And in the following quarters, we will continue to emphasize the impact of this trial related revenue to provide a clearer picture of the progress of our current business for you all. Total gross margin in Q3 and year-to-date were in line with last year, 75% and 74%, respectively, which we are pleased with given the unfavorable currency effect on sales in 2025 from the weakened U.S. dollar. Throughout '25, we have maintained a strong focus on operating expenses, although the organization has grown with new talent and further recruitment, the associated costs were offset by disciplined cost management. And as a result, OpEx was in Q3 this year, 2% less than last year, as an example. Adjusted EBIT in Q3 was 9% and adjusted EBITDA was 19%. Moving over to the respective business areas, starting off with Thoracic. So sales were SEK 115 million. Organic growth was negative, minus 12%, and excluding heart trial revenue, the organic growth was minus 4%. There are two main reasons for the drop in organic growth this quarter. So first of all, less machine sales, XPS sales versus last year and also lower EVLP activity, as I've mentioned, at a few higher volume customers. We have started to see signs of increased EVLP activity in September-October, and we believe in a gradual ramp-up at current customers over the next 5 quarters. Gross margin in Q3 was phenomenal, 89%, positively impacted by product mix. As an example, our global PERFADEX sales grew 17%, and this is the product with our highest margin. And we also have the positive effect of not having any XPS machine sales this year. When it comes to heart, sales were SEK 10 million in Q3 versus SEK 19 million last year. Worth repeating, last year included significant trial revenue, which makes the comparable numbers irrelevant. We will start to see more and more revenue from the CAP study as patient enrollment continues. In Q3, 4 patients were transplanted by one center, and the majority of Q3 heart sales came from Australia, very strong, SEK 8 million. I get some reports, operator, that there are some issues with the sound, especially if you are viewing this conference from the webcast. So could you please look into that? And I will continue in the meantime. Abdominal. So Abdominal performed a record quarter. It was the best quarter in history for us, showing strong performance both in liver and kidney. Net sales, SEK 55 million, translating to an organic growth of 47%. Year-to-date, the organic growth is 31%. Liver sales grew 34% in local currencies, and we're pleased to see that throughout the year, we have successfully expanded and grown our business in larger markets such as Italy, DACH and U.K., which are big markets and will be very important for us in the future. Kidney sales increased 79% versus last year and 49% excluding machine sales, and we saw double-digit growth in both Europe and the U.S. So once again, a very strong quarter for Abdominal. Services. I think most importantly, Christoffer has already shared what we have done, what actions we have taken in the quarter that will lead us to growth in 2026. But from a financial perspective, the quarter was soft. We see good contribution from FlowHawk, our latest acquisition, who added 17% of growth in the quarter. But in terms of the recovery business, we expect to see improvements starting next year. So let's switch to focus to EBITDA and cash flow. EBITDA came in at 19% in Q3 and rolling 12 months we're currently at 19% as well. As mentioned, throughout 2025 we maintained a strong focus on operating expenses. And in the following quarters, we will continue to manage our operating expenses with discipline, ensuring resources are directed towards initiatives that drive clear commercial returns in the short term. Our operations, R&D and administrative functions are well scaled for current ambitions, allowing us to invest selectively. We are a growth company. We're built on a scalable business model and strong gross margins. And as we grow, increased profitability will follow. And my final slide, cash flow, so we ended the third quarter with SEK 280 million in cash and an additional SEK 120 million available under our credit facility, bringing total available funds to SEK 400 million. Operating cash flow was positive SEK 21 million, which is encouraging given the ongoing buildup of inventory during the transition of our new Sweden-based supply chain. While our revolving credit facility remains in place to support working capital needs, our positive operating cash flow meant no additional drawdowns were needed in Q3. Cash flow from investments amounted to minus SEK 61 million, resulting in a total cash flow of SEK 44 million for the quarter. As Christoffer alluded to, during the summer, we implemented strict cost discipline in response to the temporary slowdown in lung sales and the delayed heart regulatory approval. Combined with the completion of important CapEx investments made in 2025, we now approach '26 with a cost base well in line with both our financial resources and our growth outlook. And with those final remarks on cash flow, I will hand back over to you again, Christoffer. Thank you. Christoffer Rosenblad: Thank you so much. I don't know if people hear me. I will try to continue to talk on outlook, and we turn to Page 27. So that's the outlook for this and next year. To start with, we continue to work close to competent authorities in Europe with the aim to obtain a CE-mark for heart, that is priority number one. We will also have a clear priority on -- with the recent reorganization and new partnerships in the United States, we will focus on increasing EVLP adoption through a combination of service models and staying close to customers. In parallel, we will increase our service offering to better tail customer needs, especially offering NRP procurement from an increased footprint in the United States. Liver Assist in Europe saves hundreds of lives every quarter. We will support clinicians to increase that number through this year and next year. And lastly, in the U.S., we will prepare the heart regulatory file for submission to the FDA. And in parallel, we will strengthen the U.S. field force to enable a successful heart launch and enable a strong lung and kidney business until we see that heart launch. And going over to Slide 28, which is the long-term outlook, and it's a repetition from all the quarterly calls. But we have seen a demand of 10x of today's supply. We also see a sales value of machine perfusion that is approximately 10x versus static cold perfusion. Machine perfusion and service model have proven to increase the number of organs to be used for transplantation, especially in the fast-growing DCD pool; and the main growth driver of superior clinical result for machine perfusion. And the fact that service model reduce complexity and time for the transplant clinics. Hence, machine perfusion and service models on normal and DCD growth will drive growth in the near future. And so in conclusion, we see a long-term case that is intact. XVIVO has a unique and proven product platform. We are committed to execute our strategy to one day accomplish that no one will die waiting for an organ. And with that, we turn to Page 29. We hope that you still hear us and that we can hear your question. Thank you for listening. And with that, we open up the lines for questions. Operator: [Operator Instructions] The next question comes from Simon Larsson from Danske Bank. Simon Larsson: First question from my end on the lung business and the sequential dynamic that you're describing here. If I'm understand you correctly, there was no destocking in the quarter. Should we view that as customers having fully burned through their stock at this point? That's the first question. And then the second one relates sort of to the communication around your confidence in a stronger Q4. Is this growth coming predominantly from the 3 new accounts that just went live here? Or is it something else that you're seeing for Q4 lung particularly? Christoffer Rosenblad: Thank you so much for your questions, Simon. To start with, I would say, normalized stock level is probably a better word regarding what we know is that we saw no signs of destocking this quarter. So -- and what from we heard, it's normalized stock levels that's -- that all we can conclude. In terms of going into Q4, it's anecdotal, but we -- and it's not the full picture, but what we have seen is that waitlists have started to build up and those high-performing clinics, which we've seen a higher activity in the first 3 weeks in October in some clinics than we have seen in all of September. So it's anecdotal. But we feel that it's talking to larger clinics in the U.S., we feel that they are more positive now than we have seen at the beginning or especially Q3-Q4. But we don't know where the market growth will go to be truly honest, that's something we have to see at the end of Q4. Simon Larsson: Makes sense. Maybe staying on lung for one more question. Do you expect any type of impact on the U.S. EVLP business from TransMedics and their next-generation OCS lung trial? From what I understand, the recruitment will potentially start here in Q4, and it's a pretty big scope of lungs enroll that they are aiming for anyways. So what do you hear from your customers in the U.S., are they going to participate, et cetera? And what do you hear? Christoffer Rosenblad: To be truly honest, we heard very little from customers regarding the trial. We heard more on the heart side, to be truly honest. It might have an impact. It is to be seen. We don't know that yet. Typically, what we have seen earlier is that an increased interest in machine perfusion will hopefully also lead or has historically at least led to an increased activity as well. So the market has grown further. So it's to be seen. It would be speculative. But we haven't heard -- I haven't heard from one lung customer that they will participate at this stage. Simon Larsson: Okay. Sounds reassuring. The final one from my end on liver. Obviously, you're taking sort of a strategic review here of the go-to sort of pathway forward for the liver trial in the U.S. Maybe sort of provide -- and, of course, you can't really maybe comment at this point, but maybe a 510(k) pathway could be sort of, something that you're looking into. Is that correct way of thinking about this? Christoffer Rosenblad: Yes. I mean there are three main pathways to enter the U.S. market is 510(k) -- 510(k), de novo, PMA and -- typically. So we will investigate and have a dialogue together with the FDA what is the best pathway forward, also talking to our customers what is the most preferred. If we will find that a faster process is possible, we would, in dialogue with customers, decide on way forward. We'll have to come back later when we know more. So we decided today that we owe it to ourselves, we owe it to our patients and our customers to at least investigate this before we walk ahead. Simon Larsson: Yes. So it's not possible at this point to say anything about how this could affect sort of time to market or potential pricing? It's too early, I assume. Christoffer Rosenblad: Correct. It's too early at this stage to know that. Operator: The next question comes from Ulrik Trattner from DNB Carnegie. Ulrik Trattner: And a few questions on my end and potentially starting off where we ended last question there on liver. And just assuming -- now just assuming a 510(k) route, which would be faster, obviously, for you going to market. This is a similar route of you in kidney. But are you seeing a pitfall of going down such a route with not having a sort of U.S. clinical data on the product given sort of the anecdotal evidence that patients or clinics have been reluctant to adopt your device prior to having real U.S. data? Christoffer Rosenblad: Yes. I mean the straight answer to that question is yes. I mean, we learned through experience that we need U.S. data either way. So no another pathway. We need solid U.S. data to be able to convince U.S. clinicians and OPOs. So that's correct. Ulrik Trattner: And if we were to move to the next regulatory filing of heart study results could be announced Q2 '26. And I assume you then aim to file directly and then a 90-day sort of filing process for 510 -- for approval. So that would assume the heart product on the U.S. market by Q4 of next year. Is that a fair assumption? Christoffer Rosenblad: No. And the reason is I expect there to be an expert panel meeting that would add at least 180 days because they have to call for the panel, et cetera. That is our expectation. But this is what I expect. So we don't know for sure. But I would expect this being first of kind and the groundbreaking technology we are putting into our regulatory timelines that there will be expert the panel review from -- for the heart technology. So there will probably be a longer time line than you said due to this reason. Ulrik Trattner: So similar to that of the XPS system, sort of. Christoffer Rosenblad: Yes. Which is also groundbreaking and changed the paradigm of lung transplantation and now we aim to change the paradigm of heart. So then we assume that the FDA want the second opinion. But we'll come back when we know more, Ulrik. Ulrik Trattner: And just on the Continued Access Program updates where you have activated a few centers. Just to clarify, you have approval for 60 transplantations to be performed and then you can renew that. Is your estimation that you will do 60 transplants over -- like including Q3, the next 3 quarters? Or how should we view that? Or is there some misinterpretation on my end there? Christoffer Rosenblad: We see that, that once they get started they get easily used and addicted to the heart technology. So that estimation would depend, of course, how many we get from activated to actually including patients, and we saw that we have one clinic now doing 9 in a very short time frame. But our estimation is that we will get more clinics in to be active in the continuous access protocol, and that will hence lead to a fairly fast inclusion. We knew from the original PRESERVE study that it took 9 months for the study to be up and running and fully up and running, so to say. So we don't know. And also to be clear, it's always up to the FDA if they want to prolong a continuous access protocol. But seeing the interest from our clinicians, I hope that the FDA want to accommodate, but I want to be clear that it's their choice and not our choice. Ulrik Trattner: Sure. And on TransMedics running another sort of U.S. clinical heart trial, is there any sort of competition among patients or this potentially would slow down number of patients that are actually running your heart device? Christoffer Rosenblad: The estimation we see now is no. I mean, 60 patients and hopefully prolonged are very few patients considering the potential of the XVIVO heart technology. So I would say that the cap on the number of patients will be the defining factor on how many we can include into the continuous access protocol and not so much what competition are doing or anything else. Ulrik Trattner: And just to clarify as well, are you allowed under the CAP program to combine your heart device with NRP? Christoffer Rosenblad: Yes, we were allowed also in the original PRESERVE study, including 141 patients, we were allowed to include any extended criteria heart, which is the DCD heart. So we included direct procurement, we included NRP from DCD and long preservation time and other reasons for any heart to be extended criteria. Ulrik Trattner: And last question on my end and potentially the most exciting one, at least what I think. These perfusion technicians, 170-plus, can you give us some more granularity on what this means? Where are they located? Is this a replication of what Lung Bioengineering is doing? How will you support clinics? And we've also heard comments here in the last few quarters on a lot of transplantation clinics taking the XPS program in-house and kind of builds to your comment on high interest of starting up new EVLP programs. But if you can provide us some more granularity on this, that would be great. Christoffer Rosenblad: Yes. Great. Great. No, it's not really Lung Bioengineering having a fantastic service, is not a replication of that just to be clear. But 2 things have happened this year. One is the reduction of NIH grants in the beginning of the year, which has -- there is a resource -- lack of resources in many clinics, especially academic larger hospitals. That has happened. The other thing is that TA-NRP has grown significantly this year compared to previous year, which has damaged a lot of lungs. So this has led to 2 things. One, the interest for clinicians or bigger clinics to start their own EVLP program to actually take care of those lungs that are coming from TNRP or otherwise being marginal or extended criteria. And we also see an increasing interest from OPOs that they have got the contact from their -- yes, nearby clinics and said, can you perform EVLP on all those lungs. Now we are really happy with the hearts when we do TA-NRP, but the lungs are potentially destroyed that we don't know. So those things have happened. In parallel, we have got more and more questions from our organ recovery service that we like you, but can you please include NRP into your service model? So for that reason, we scanned the market and wanted to find a great partner. And I think we found the best of the best with -- they have 175 perfusionists on the roster strategically placed, very much in line with what you saw on one of the slides when we increased our footprint from our organ recovery service. And they saw the same need as we did, but from the other side that they saw an increasing need for EVLP, they saw an increased need for NRP. But they were lacking products and surgeons. So it's really a great marriage if we get this to work. It's a perfect match where we can fulfill our customer needs with a high level of quality and a high level of customized service. So we can support both OPOs who are in need of improving their program and improving the number of allocated lungs, and we can support clinicians with NRP going out, so they don't have to take their really, really good surgeons that should actually do transplants. They don't need to send them out in the middle of the night to do NRP, et cetera. So we hope that this will be -- this is the start of something that can become great, and we hope that it will become as good as it promise right now to be over time. Ulrik Trattner: And just one follow-up there. Are these 175 perfusionists, are they lung specialized? Or are these agnostic to both Thoracic and Abdominal? Because I know sort of the most sort of pressing service here going forward will most likely be in heart in order to expand your footprint in the U.S. Christoffer Rosenblad: True. No, they are typically agnostic to organ. I mean, they are specialized in perfusion and very good in perfusion of all organs, so to say. It should be mentioned that today out of 175, I think it's 75 are fully trained on NRP. And we are, as we speaking, training as many as possible on EVLP. So we have -- so everyone should also be trained on EVLP. Operator: The next question comes from Jakob Lembke from SEB. Jakob Lembke: Yes. First question on heart and the process to get it approved in Europe. If you can give an update sort of is the file at review anywhere right now or is the ball in your court or what can you say? Christoffer Rosenblad: Right now, we are in, let's call it dialogue phase to fully understand what needs to be amended/improved in terms of evidence. So we are trying to fully understand together with regulatory authorities in Europe. So that's where we are right now. Jakob Lembke: But you still feel fine about the previously communicated time line? Christoffer Rosenblad: Yes. That has not changed. Until further knowledge it has not changed. Jakob Lembke: And then if you can also give some more details about the U.S. approval process for heart, sort of what are the milestones or sort of key dates where you need to submit to the FDA and so on in order to sort of assume the time line where you are approved in the beginning of 2027? Christoffer Rosenblad: I think we -- to start with, we need to finalize the clinical file, which will be important. In parallel, we are preparing the animal file and product file to hand in aiming in Q2 next year. Then the time line will be harder to predict from our side, and we need to come back with an update on more expected time lines after that because it depends very much on the route forward that the FDA chooses. So it's partly out of our hands. But they need to review the documents and make sure that they are on par for calling to an expert panel meeting, then they need to call for expert panel meeting and it has to go through that, et cetera. So we estimate from handing in the file that there are at least 12 months process, but that is an estimate from our side, and we need to come back with more granular data when we hear more back from the expectation on process forward from the FDA. But at this stage, it is our estimation and not something the FDA has told us. I want to be clear with that. Jakob Lembke: But you will hand everything in to them by Q2 2026? Christoffer Rosenblad: Yes. That is our aim. And I will come back if there's any change to that time line, but I will come back with more guidance if we change that. But that's our internal time line at this moment. Jakob Lembke: And then just a final question on lung and the EVLP sales in the quarter. If you just could elaborate sort of the trends across the different parts of the business, speaking of the large U.S. customer, other U.S. customers and rest of world? Christoffer Rosenblad: Especially for Q3 or more overall? Jakob Lembke: Yes. What you saw here in Q3? Christoffer Rosenblad: In Q3, we saw, in general, a quite weak quarter. We saw a few customers who had lower EVLP activities, very few of them, so to say. I think it's only 2 that dragged down the overall number. As I said earlier, going forward, we see more customers coming on board with especially the new ones from the first half of the year are now trained and at least 3 out of 4 are fully trained and up and running. So we see -- and we see that from a few that were a little bit lower in Q3, we can see that they have come back now in early October. So that's the picture we see right now at least. I see we are 1 minute past 3:00, so I don't know how many questions we have. Operator: The next question comes from Maria Vara from Stifel. Maria Vara Fernandez: I'll be very quick considering, yes, it's already a long call. All right, so maybe just a quick follow-up on the rate of enrollment and activation of the centers within the CAP program. You mentioned that it took 9 months to get up and running all the centers involved in the pivotal study. But I was wondering why it's taking in a way some time to activate the centers from the CAP? My feeling is like some of them should be part of the PRESERVE study. Could you maybe clarify if that's not the case? And if there is any hurdles that you're seeing in terms of the activation, whether these centers already have, for example, TransMedics technology? And what is the overall demand there? What's happening? Christoffer Rosenblad: Thank you. Great question. I mean many of them, yes, they were part of the PRESERVE trial. So that is correct. I think, unfortunately, the continuous access protocol is viewed as a completely new trial. And what has taken time is mainly after reduction of resources, especially going into research at the beginning of the year, it has taken longer time than we earlier anticipated to get through the red tape in each and every clinic. And everybody has been -- when I talk to surgeons, they are really eager to start. But, let's say, hospital system behind them has had a challenging time adjusting to the new level of resources, especially when it comes to research, which has hampered the uptakes, so to say. But we do expect that -- we do feel there is a great interest, and we do expect that, that will translate over time into -- everybody has to be retrained and recertified, et cetera. But over time that will translate into more and more clinics coming up and running also into the continuous access protocol. Maria Vara Fernandez: Okay. That makes sense. And in terms of the clinical data, do you plan to use this data from the CAP program into the filing of the FDA? Or that's something that is not on your mind at this moment? Christoffer Rosenblad: Yes. I mean, as far as continuous access protocol, let's say, the 1-year follow-up will not be that easy to accommodate to the FDA, but the data will absolutely be used from a safety data point. So it will be used as confirming what we saw in the original trial PRESERVE. Maria Vara Fernandez: All right, that's clear. And maybe just a last question on the liver and redesigning the regulatory pathway. I'm aware that there hasn't been any specific guidance on time to market, but obviously, this will shift things. And based on my estimates, we could have expected some kind of launch maybe in '27. However, that might seem unlikely, even though you could have another route, which could be quicker. Any thoughts here that you could share on time to market for liver? Christoffer Rosenblad: I think to start with, yes, that sounds ambitious. I agree with that. At this stage we don't know, to be very clear and honest. But as soon as we do know, we will communicate with everyone, preferably during one of those calls. And hopefully, we can conclude with the FDA or at least get some guidance from the FDA before the Q4 report in end of January when we release that one. Of course, with the U.S. administration being in shutdown mode, it's hard to predict if we can accommodate that time line, but we will do our best from our side at least. Operator: I hand the conference back to the speakers for any closing comments. Christoffer Rosenblad: Thank you so much for listening in to us today during the Q3 report, and I will just quickly go through to the last page, yes. And I hope to see you for the year-end report 2025 that we will have the conference call on January 27, 2026, and you also see the other interim reports for next year on your screen in front of you. But thank you very much for listening in. Thank you for good questions, and see you in approximately 3 months.
Operator: Good morning, and welcome to Brunswick Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's meeting will be recorded. If you have any objections you may disconnect at this time. I would now like to introduce Stephen Weiland, Senior Vice President and Deputy CFO, Brunswick Corporation. Stephen Weiland: Good morning, and thank you for joining us. With me on the call this morning is David Foulkes, Brunswick's Chairman and CEO; and Ryan Gwillim, Brunswick's CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com. During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today's results. I will now turn the call over to Dave. David Foulkes: Thanks, Steve. Brunswick delivered strong third quarter results, with each reporting segment generating revenue growth over the prior year quarter and overall financial performance exceeding expectations and guidance for the quarter. The sales growth reflected strength across all our businesses despite a challenging, albeit improving macro environment and industry backdrop. Our market-leading propulsion and boat portfolios outperformed their respective markets, and our recurring revenue, parts and accessories and other aftermarket focused businesses, along with Freedom Boat Club, continued to benefit from healthy boating activity. Brunswick's third quarter boat retail sales were flat year-over-year, a notable relative improvement from the first half of the year driven by resilience in our premium and core categories. We continue to drive forward with financial and operational efficiencies through the announced margin-accretive footprint actions in our boat business, continued enterprise-wide tariff mitigation initiatives, prudent pipeline management and excellent capital strategy execution. Our third quarter sales of $1.4 billion were up 7% versus prior year. Our adjusted earnings per share of $0.97 were impacted by the reinstatement of variable compensation and tariffs, but were up year-over-year, excluding those items, and we had another quarter of outstanding free cash flow generation, providing us with the flexibility to simultaneously invest in our business, return capital to shareholders and strengthen our balance sheet. With $111 million of free cash flow in the third quarter, we have generated $355 million year-to-date, an exceptional $348 million improvement over the first 3 quarters of last year. For the first time since the first quarter of 2022, revenue grew in all our segments. The Propulsion business delivered significant sales growth, with revenues in each of its three businesses: outboard, sterndrive and controls, rigging and propellers, up over prior year as OEM order strength continued later into the boating season. Mercury continues to be the clear U.S. outboard market share leader, with 49.4% share of outboard engines sold in the quarter. Given the volume of Mercury competitor engines shipped into the U.S. in advance of the tariffs on Japanese imports, we have not yet seen the full potential impacts of those tariffs on competitive product pricing, but we continue to be well positioned. Strong boater participation in our core markets continues to benefit our high-margin annuity Engine Parts and Accessories business, which posted strong sales growth over the prior year with sales in both the products and distribution businesses up solidly and segment operating margin also up sequentially from the second quarter, reflecting the strong operating leverage in the business. In the U.S., our market-leading distribution business gained 140 basis points of market share year-to-date over the same period last year. Navico Group reported modest sales growth and steady adjusted operating margin over prior year. Growth was led by strong performance in marine electronics product lines, but continued to benefit from investments in technology and new product introductions. While strong boating participation drove aftermarket sales that represents 60% of Navico revenue. Continued restructuring actions, a leaner, more focused organization and new product investments are bearing fruit. And Navico Group's strategic importance to the Brunswick portfolio was recently reinforced by the introduction of the Simrad AutoCaptain autonomous boating system, developed by Navico Group in collaboration with Mercury Marine and Brunswick Boat Group. Lastly, GAAP operating earnings were impacted by $323 million of noncash intangible asset charges for Navico Group. These impairment charges reflect the impact of the current trade and economic environment despite our plans for continued growth and margin improvement in this important part of our portfolio that is an increasing source of integrated solutions and differentiated innovation. Our Boat business grew both revenue and adjusted operating margin over prior year as our premium brands continue to perform well, and our aluminum boat businesses delivered a very strong quarter. Dealer inventory remains historically low, and coupled with flat retail, allowed for steady wholesale shipments. In September, we announced the strategic rationalization of our fiberglass boat manufacturing footprint, exiting our facilities in Reynosa, Mexico and Flagler Beach, Florida by the middle of 2026 and consolidating production from these facilities into existing U.S. facilities. Moving on to external factors. The U.S. Fed cut the Fed funds rate by 25 basis points in September, with expectations for several additional cuts through the balance of 2025 and/or in early 2026. Lower interest rates have a compound benefit in reducing the cost of both dealer floor plan financing and consumer retail financing, which will be a tailwind for both wholesale stocking and the 2026 main selling season. Additionally, while we're still analyzing how best to take advantage of the tax provisions of the One Big Beautiful Bill Act, the cash flow benefits will most likely be realized in 2026. We continue to actively manage our tariff exposure in what is still a dynamic situation and are slightly increasing our estimate to approximately $75 million of net tariff impact for the year, mainly as a result of the expanded scope of Section 232 tariffs. I will again highlight that because of our primarily U.S.-based vertically integrated engine and boat manufacturing base and predominantly domestic supply chain and the fact that we manufacture almost all our boats for international markets within those markets, we remain competitively well positioned in an environment of persistent tariffs. We also stand to potentially benefit from the tariffs of our engine competitors who import their engines from Japan, now subject to a 15% tariff. Dealer sentiment remained stable with historically low and fresh dealer inventory, and boating participation has increased considerably during the third quarter, benefiting our aftermarket businesses and driving Freedom Boat Club trips up 2.5% year-to-date versus prior year. OEM build rates have remained solid, and in combination with lower inventories, have supported strong wholesale engine shipments. Retail incentives remain elevated compared to historic levels, but are lower than in the same period last year. Looking now at industry retail performance, which has steadily improved in recent months after the macroeconomic shocks from early spring. As of the latest SSI reporting for August, U.S. main powerboat industry retail was down a little more than 9% year-to-date, with Brunswick boat brands continuing to outperform the industry and Brunswick's internal retail performing better than SSI. Despite the U.S. outboard engine industry that is down slightly year-to-date, Mercury market share remained stable with a 49.4% share in the third quarter, even in the face of significant competitive promotional activity. Internationally, Mercury drove strong share gains in the majority of its markets. From a global boat retail perspective, our core and premium brands outperformed the market during the quarter, and our value brands performed steadily. Overall, Brunswick's boat retail was down mid-single digits in the first half of this year compared to prior year, while this quarter, overall, we came in flat to prior year, a significant relative improvement. While still down, we saw notable strengthening in our value segment as we took actions to streamline our model lineup and improve profitability through manufacturing consolidation, which we'll discuss on the next slide. Lastly, we continue to drive healthy and very lean dealer inventory pipeline levels. Global pipelines are down over 2,200 units compared to the third quarter of 2024 and down over 1,500 units sequentially from the last quarter. In the U.S., pipelines are down over 1,200 units compared to the third quarter of 2024 and down over 700 units sequentially from the last quarter. While the performance of our fiberglass value brands improved in the third quarter, this has remained our most challenged category. Last quarter, we reported that we streamlined our value fiberglass model lineup by 25% for the 2026 model year, which began in July. And in September, we announced a strategic consolidation of our Reynosa, Mexico and Flagler Beach, Florida facilities into existing U.S. locations. This consolidation will reduce fixed costs, drive improved profitability in our Boat segment and generate a strong return on investment. The transition is expected to be complete in mid-2026, with some inefficiencies during the transition but with anticipated run rate savings of over $10 million a year after completion, even at current volumes, and with the benefits increasing when the industry rebounds and production volumes increase. This quarter, Brunswick has again delivered outstanding free cash flow. With $355 million year-to-date, we have delivered $1.6 billion of free cash flow since 2021 and a record $635 million over the last 12 months in very dynamic and challenging market conditions with a significant contribution from the recurring revenue components of our portfolio, but also with diligent focus on working capital reduction, and we expect this strong performance to continue into the fourth quarter and next year. Our investment-grade balance sheet remains very healthy, with no debt maturities until 2029 and attractive cost of debt and maturity profile and net leverage that continues to improve. We are, therefore, again, increasing our debt reduction guidance for 2025 by $25 million to $200 million for the year, up $75 million since the beginning of the year. By year-end, we are on track to retire approximately $375 million of debt since the beginning of 2023 and are committed to achieving our long-term net leverage target of below 2x EBITDA. We are accomplishing this while maintaining significant financial flexibility. And at quarter end, we have $1.3 billion in liquidity, including full access to our undrawn revolving credit facility. We also anticipate retiring $200 million or more of debt next year while continuing to return capital to shareholders. I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook. Ryan Gwillim: Thank you, Dave, and good morning, everyone. Brunswick's third quarter performance came in ahead of expectations, with sales growth in each of our segments versus the third quarter of 2024. On a consolidated basis, sales were up almost 7%, reflecting strong orders from OEMs and dealers, pricing actions taken in recent periods and steady boating participation, driving P&A and other aftermarket business strength, which was helped by favorable late season weather in many regions. Adjusted operating earnings and EPS also exceeded expectations, but were down versus the prior year due to the enterprise-wide impacts of tariffs and the reinstatement of variable compensation, which were partially offset by the positive earnings generated by the increased sales. Lastly, as Dave highlighted, we continue to drive robust free cash flow, up 166% from the prior year. On a year-to-date basis, sales are down 1%, primarily due to planned lower first half production levels in our Propulsion and Boat businesses, mostly offset by P&A and aftermarket stability throughout the year and third quarter sales growth in all of our businesses. Year-to-date adjusted operating earnings and EPS are also ahead of expectations, but remained below the prior year as expected due to the previously mentioned enterprise factors and lower first half production. Year-to-date free cash flow of $355 million remains a continued strength of the entire enterprise, reflecting the overall steady performance of our higher-margin aftermarket businesses and our focused inventory and other working capital initiatives. As noted, while sales were up 7% this quarter versus the prior year, adjusted EPS was down $0.20. However, outside the impacts of tariffs and the variable compensation reinstatement, we would have shown strong adjusted earnings growth in the quarter. The aggregate third quarter EPS impact of reinstating variable compensation back to target levels and incremental tariffs was approximately $0.70. These costs were partially offset by the earnings benefits from the higher sales and positive absorption, primarily in our Propulsion business, along with lower discounts in our Boat business. Now we'll look at each reporting segment, starting with our Propulsion business, which grew sales by 10% in the quarter, reflecting increases for each of its product categories of outboards, sterndrive and controls, rigging and props. Mercury saw strong OEM orders in a low field inventory environment, together with continued robust market share, resulting in their second straight quarter of strong sales improvement. Operating margin was down compared to prior year due to tariffs and the variable compensation reset, but benefited from improved absorption driven by higher production in the quarter. Healthy boater participation continues to drive strength in our Engine Parts and Accessories segment, with sales up 8% overall compared to the prior year. Sales were up solidly for both products and distribution, benefiting from favorable late season weather in many regions, helping to make up for a slower start earlier in the year, and market share gains in our distribution business. Operating earnings were down slightly compared to the prior year solely due to the enterprise impacts already discussed. I'm delighted to share that the Navico Group sales increased by 2% in the quarter, led by growth in its electronics portfolio, with adjusted operating margins decreasing only slightly as compared to the prior year. As Dave mentioned earlier, GAAP operating earnings were impacted by a $323 million noncash intangible asset impairment charge for the Navico Group. As we have previously discussed, driving improved performance in this segment is a key focus for management and the entire Navico team. And while we still have more work to do, we are starting to see the benefits from these efforts and our investments in new products, as reflected in Navico's consistent sales and earnings performance throughout the year. As compared to the third quarter of last year, gross margins improved significantly as we took out almost $5 million of cost from Navico facilities and continue to execute a multiyear initiative to consolidate and optimize our global network of warehouses and distribution centers. This strategic program is designed to deliver meaningful improvements across customer experience, operational performance and financial outcomes. We also continue to improve the balance sheet with lower inventory and increased turns. Lastly, our Boat segment reported sales growth of 4% over prior year, with growth in both boat sales and the business acceleration portfolio. Our aluminum boat brands, led by our premium fishing brand, Lund, had an especially strong quarter and drove strong top line and earnings performance. And Freedom Boat Club continued its growth journey, contributing approximately 13% of the segment sales. With low dealer pipelines, flat third quarter retail pulled through steady wholesale performance as we ended the quarter with lower pipeline inventories, as Dave discussed earlier. Segment adjusted operating earnings benefited from the increased sales, a lower discount environment and focused cost actions, which resulted in greatly improved segment gross margin, which more than offset the enterprise factors and flowed through into a 65% increase in adjusted operating earnings compared to the prior year. My last slide shows our full year guidance, which remains unchanged for revenue of approximately $5.2 billion, adjusted operating margins of approximately 7% and adjusted EPS of approximately $3.25. We remain comfortable with our full year EPS guidance despite the slightly increased estimated net tariff impact, as we believe we can carry forward our slight third quarter beat and continue to drive sales and earnings growth as we close out the year. Given our exceptional free cash flow generation year-to-date, we are increasing our full year free cash flow estimate to in excess of $425 million and our debt reduction target to $200 million, which will continue to progress our goal of lowering our debt leverage to under 2x. I will now pass the call back to Dave for concluding remarks. David Foulkes: Thanks, Ryan. I always like to highlight some of our exciting product launches, Freedom expansions and awards. During the quarter, we enjoyed strong momentum at the European fall boat shows, which provides positive indicators for next year's retail season and reflect the strong market position of many of our brands. In addition to Mercury's strong showing at the Cannes and Genoa Boat Shows, two of our most recently launched boats earned notable awards, with the Bayliner C21 named the 2025 MoteurBoat of the Year in the very competitive under 7 meters category and the Sea Ray SDX270 Surf collecting the MoteurBoat Magazine Innovation Award. These two prestigious new accolades add to many previous product awards this year. Amongst the many new boat models introduced this year, during the quarter, Lund introduced its all-new Explorer model lineup, which combines Lund's legendary fishability with smart functional features. Powered by Mercury and equipped with Lowrance technology, the Explorer lineup is another embodiment of the power of Brunswick synergies. Lund continues to be the leader in the premium aluminum fishing market. Navico Group's integrated and connected solutions continue to drive OEM penetration, and the team worked with several large OEMs to introduce a full turnkey cloud and mobile app solution designed to enhance the boating experience. This end-to-end platform unlocks powerful information for OEMs and their dealers by using real-time telematic data to gather valuable insights to serve their customers. In addition, Lowrance launched the all-new Ghost X Trolling Motor in September as the next evolution in the Ghost lineup. Ghost X delivers 20% more thrust with ultra-quiet operations, GPS anchoring and seamless sonar integration. FLITE debuted the FLITELab brand, which leverages the same innovative FLITE product design and technology to provide foilers with unmatched versatility to customize their ride. And finally, Freedom Boat Club recently reached 440 global locations and announced a new franchise location in Christchurch, New Zealand. Freedom continues to be a key contributor to Brunswick's growth, allowing more people to get on the water through its unique, convenient subscription-based boating model. This quarter, though, we took a genuine step forward into the future of boating with the official commercial launch of the Simrad AutoCaptain autonomous boating system. We have showcased development versions of this technology at some previous events, but formally launched the production system at the International Boat Builders' Exhibition and Conference in Tampa a few weeks ago and conducted demo rides for the media and 9 OEMs. We have scheduled additional OEM demo rides at the Fort Lauderdale Boat Show next week. At launch, AutoCaptain offers fully autonomous and dynamic docking, undocking and close quarter maneuvering, delivered with precision and reliability. The integrated sensor suite counters wind, waves and currents, and with 360-degree awareness, recognizes and reacts to its surroundings, avoiding obstacles and hazards such as passing boats to safely execute maneuvers. Post launch, we are working on expanding the capabilities and features offered by AutoCaptain, with the intention that these additional features will be delivered via software upgrades. AutoCaptain reflects innovation only possible through the combined power and capabilities of our Navico Group, Mercury Marine and Boat Group divisions working together to deliver this seamless integrated solution. It's also a milestone in representing the first commercialized solution under the Autonomy pillar of our ACES strategy, and the final pillar of ACES to be commercialized. Docking is routinely cited as one of the most stressful aspects of boating, and our comprehensive, capable and intuitive system was reported by the media and OEMs who experienced it to be clearly the most advanced and capable system available. Before wrapping up, I'd like to share some preliminary thoughts on guidance for 2026, which I know is top of mind for many investors, especially given the multiple headwinds and tailwinds. While the trade and economic environment remains extremely dynamic, we believe that we are well positioned to benefit from any industry recovery due to the operating leverage inherent in our businesses. Our tariff mitigation strategies are working to reduce our net exposure, and we believe that our substantial vertically integrated U.S. manufacturing base positions us relatively well in an environment of persistent tariffs. Interest rates are coming down, with further cuts expected, reducing the cost of financing for both end consumers and dealers as we approach the fall boat show season and the restocking cycle for what we anticipate at the moment to be a modestly stronger 2026. This is a very early look subject to change. Embedded in these initial thoughts is the assumption of a U.S. retail boat market that is flat to slightly up versus 2025, driven by relative macroeconomic stability, no material negative changes in the tariff environment and continued interest rate improvement. In this scenario, we believe that we can grow revenue by mid- to high single-digit percent, resulting in more than 25% growth in adjusted EPS, with continued significant free cash flow generation. That is the end of our prepared remarks. We'll now turn it back over to the operator for questions. Operator: [Operator Instructions] And the first question comes from the line of James Hardiman with Citi. James Hardiman: So I don't have to tell you guys that sort of over the course of the quarter, a big topic of debate was sort of how you're thinking about retail and what's showing up in the SSI numbers. I don't really care to go down that rabbit hole, I feel like we've been there before. But maybe if you could give us an indication of where you think we are now in sort of a -- from a run rate perspective, most notably as we think about how you're thinking about 2026? If the expectation is that 2026 is going to be flat to up, where are we today relative to that? And how do you see sort of the building blocks to us getting to that positive inflection? David Foulkes: James, yes, thank you for the question. Yes. We obviously had the kind of shocks in early Q2. The tariff announcements and the subsequent kind of capital market impacts that have progressively stabilized, that significantly affected early Q2, particularly. And then towards the end of Q2, we began to see some recovery and stabilization. Through this whole process, as we've noted, the kind of premium and core parts of our product lines have performed better than the value parts of our product lines. And that continues to be the case. In Q3, we're essentially flat year-over-year, with premium and core still outperforming and value catching up a bit, but still underperforming. We're obviously now in a part of the season where we're talking about hundreds of units and not multiple thousands of units, but that strength has continued through the first couple of weeks of October was slightly up through the first couple of weeks of October. So I think last year -- at the end of last year, we were commenting that we thought the shape of the year would be slightly weaker in the first half, strengthening in the back half. We did not know about tariffs at that time, but that has turned out to be the shape of the year. And with interest rates improving and impacting positively both end consumers and our dealers and obviously, their willingness to take stock, we don't see any reason why that can't -- that momentum can't continue into next season. So that's really the background. Obviously, if there are currently a noble exogenous issues, that may change. But just based on a feeling that we're kind of a bit of an inflection point at the moment in a positive way and that we do have a retail momentum, we're feeling that next season should be at least flat and most likely, at least slightly up. James Hardiman: Got it. But just to clarify, as we think about sort of flattish for 3Q, that you guys, it seems like the more relevant number might be the industry. Do you think the industry is flattening out for 3Q? And then, I think just a quick follow-up. Yes, I'm sorry, go ahead. David Foulkes: Yes, I think is the answer. SSI -- you appropriately like -- I think probably, we always have this process of reconciliation with SSI. SSI typically comes up. It typically underreports the Upper Midwest states early on, where we have strength typically because of brands like our Lund brand, which is very strong in the Upper Midwest. . So there is a process of just reconciliation because of partial reporting. I do get a sense though, since we have a broad range of brands that participate in pretty much every sector, that we should be -- our performance is probably representative of a generally improving market. Ryan Gwillim: And I would say, in some of our premium areas, including Lund, James, we are probably taking a little share as well. So you may see at the end of the year where the industry -- we may outperform the industry by a point or 2 in certain places where our share continues to be good for us. James Hardiman: Got it. And then just the inventory question. It seems like you guys are encouraged with where you are. How do we think about sort of the wholesale to retail ratio into 2026? A lot of other industry participants not only talking about maybe weaker trends, retail trends than what we're hearing today, but elevated retail level. How do you think about that heading into next year? Ryan Gwillim: Yes, James, I mean, we have the benefit of having our joint venture with Wells Fargo, our BAC venture. And we get to see a lot of good inventory debt, and we're seeing pretty much what we're reporting, which is people being thoughtful about inventory levels not increasing. And certainly, as Brunswick inventory is about as low as it's been in any non-COVID year since the GFC. So we're going to end the year somewhere about 18,000 global units and probably below 12,000 in the U.S. And again, that is when you look at kind of on a per rooftop basis, that is about as low as we want to be to make sure we have representative samples of our products in the places we need to sell retail. So we're really comfortable with our own inventory. And frankly, I'm not seeing any heavy pockets outside of ours either. David Foulkes: Yes. Inventory freshness continues to be really good. More than 80% of our inventory is less than a year old, which is a very fresh and healthy level. And just on the outboard engine side, we are -- we have been undershipping retail for a long time now and feel like our outboard pipelines are in an extremely good shape. Operator: Our next question is from the line of Craig Kennison with Baird. Craig Kennison: I just wanted to unpack the impact of U.S. tariffs on your competitors in Japan, especially on your engine franchise, of course. Have those competitors attempted to offset those tariffs with price increases? And have you heard from any boat OEMs that are interested in sourcing engines domestically? David Foulkes: Yes. I think yes to both. Yes, we are beginning to hear about some price increases, but we hear these things secondhand at the moment. So I think that's the developing situation. We'll probably hear more. If anybody intends to implement pricing at the beginning of next year, any of our competitors, then we'll likely hear about it in some way over the next few weeks or certainly, a month. I think probably with the challenge to the IEEPA tariffs in -- at the Supreme Court at the moment, there may be some of our competitors kind of wait to see what happens with that, I'm not really sure, before implementing pricing. But yes, we continue to gain share and convert OEMs, in fact. Probably in the last 6 months, we converted to European OEMs. So yes, I think Mercury continues to have very strong momentum. I would say that the Mercury product pipeline is continuing to churn, and there are going to be some really exciting new and very differentiated products coming up from Mercury over the next couple of years, which will only drive forward that momentum. We really are moving very quickly, all Mercury product development, just as we have in the past. I do think as well -- and maybe we'll talk about things like AutoCaptain later though. But that features set, which is genuinely innovative and adds a lot of value, is only available with Mercury propulsion. So we have not just on the propulsion side, but also on the integrated systems side, there are a lot of reasons to suggest that we should be converting more OEMs over time. Craig Kennison: And Ryan, you mentioned cash flow and other benefits from the new tax policy. I'm just wondering if you can help us frame or quantify some of those key drivers a little better? Ryan Gwillim: Yes. I mean, Craig, we have a lot of optionality under the new bill, obviously, in terms of bonus depreciation and some other things. And it's a bit of a P&L versus cash flow analysis that you have to take a look at as to when you take some of the goodness. I think for the end of the year, obviously, you've seen our free cash flow guidance. This year, it's extremely strong. It's guiding to the top, what, 2 or 3 years ever in Brunswick's history at 450 plus. Next year, you saw -- you've seen in our deck, that 125% free cash flow conversion would imply that we're getting some of that goodness next year, but we also have some headwinds that go along with that. So we'll see how we get there. I think we're not making any distinct decisions right now on how we're going to attack some of the benefits in the bill. A bit of it will depend on how we finish the year and the cash needs early in 2026. But it's clear that our ability to generate cash and to generate working capital has become a strength that really differentiates us really from any other company in our space. Operator: Our next question is from the line of Anna Glaessgen with B. Riley. Anna Glaessgen: I'd like to turn to Navico, shifting gears a little bit. Nice to see the top line inflection during the quarter. Understand operating earnings were impacted by tariffs and the variable comp. But could you confirm that excluding those items, you would have seen margin expansion? And if so, should we start to see more expansion as we roll over those or as we lap those headwinds towards mid next year? Ryan Gwillim: Yes. Yes, I can confirm that absent solely tariffs and variable comp reset, the Navico margins would have been up in the quarter. Anna Glaessgen: Got it. David Foulkes: Yes. And on the... Anna Glaessgen: Go ahead. David Foulkes: I just want to say that -- you go on. Anna Glaessgen: I was going to skip to the next question. So if you want to stay on this topic, please. David Foulkes: Yes. I just -- I wanted to say that we don't talk very much in these calls about technology. But over the last 3 years, we've invested a lot. But if you look at the Navico, I mean, we had the strongest gross margins in our business in the low 30s gross margin across the portfolio, but we're spending a lot on new product development. We just introduced AutoCaptain, which took us 3.5 years to develop. We introduced Fathom recently, we introduced a new connected platform that I just discussed. None of our competitors have anything like that out there at the moment. So our path here is to basically do what we did with Mercury, which is to invest in differentiated innovation in a way that other people can't follow or match. And it does take investment upfront, but we will begin to see the benefits of that as we move forward. So I just wanted to add that context. Anna Glaessgen: Got it. Thanks, Dave. Turning to both units, maybe asking the question in a different way. We've seen pretty notable outperformance year-to-date, industry running down high single digits. You guys are putting up a flat 3Q. Maybe expand upon the degree to which that outperformance is being driven by market share gains? And how we should expect you guys versus the market in 2026 and what's embedded in that guidance? Ryan Gwillim: Sure. I'll take this, Anna. Yes, I think there's some share in there. I do think that, as Dave mentioned earlier, as the end of the year comes, you'll see SSI probably get closer to where we think the end of the year will be, which is kind of down mid-single digits, but with us probably outperforming a bit in premium and in core. As we look to next year, I don't know if we believe any of those trends are changing. Our pipelines in all 3 of our segments are down. So premium, core and value pipelines are all down year-over-year as we enter 2026 with good, fresh inventory ready for the winter boat show season. I do think you could see some goodness on the value side, should we get a little interest rate help here in November, October 29, December and February. So we have an opportunity for 3 rate reductions here really before the key part of the season. That could help value, but our premium customer continues to be very strong. And I think certainly looking forward to Fort Lauderdale Boat Show next week, where we anticipate a really nice show where our premium buyer should be out and looking to get a boat for the end of the year. Operator: The next question is from the line of Xian Siew with BNP Paribas. Xian Siew Hew Sam: When you think about next year, I was wondering if you could expand a bit more about Propulsion. I think you kind of mentioned it like lapping, a bit of a destocking. So I'm just kind of curious how much do you think that could be a benefit? And how do we think about market share growth for Mercury over the next year? David Foulkes: Yes. I think a steady trajectory on market share growth. I think we are just seeing really -- we introduced the new 350 and 425-horsepower engines only in July, August, I think, something like that. So if you think about that, usually, people incorporate those things in -- at a model year changeover. So we would expect the -- some tailwinds from those new products coming through into next year and continued steady gains. We talked quite a bit, obviously, about U.S. market share, which is -- in the quarter, was very close to 50%. But the reality is the momentum for Mercury continues in pretty much all its markets. We've had a really strong year in Asia, a strong year in South America, a strong year in Europe. So we would continue to think about Mercury on a global basis, increasing share. Ryan Gwillim: And maybe, Xian, let me just order of magnitude, some of these pipeline numbers for engines. And these are U.S. numbers, which is where we have the best information. But versus the first day of 2024, so a 2-year stack. By the end of this year, under 175-horsepower pipeline is going to be down about 25%. And if you go same time period over 175 horsepower, our pipeline is going to be down 33% since January 1, 2024. So we've put ourselves in a really nice position with our dealers and our OEMs to capture the upside on growth to the market rebound like we believe it will. Xian Siew Hew Sam: Yes. That's super helpful. And maybe just on the 4Q guidance, I think it seems to imply there's a big -- a nice recovery on margins for both boats. At the same time, I think the revenue imply too much, maybe mid-single-digit growth. So I'm just trying to understand, I guess, how are you thinking about boat margins and the evolution in 4Q then maybe beyond? Ryan Gwillim: Yes. I think a bit of Q3, remember, is always saddled with some of the summer shutdowns and fewer production days. And so that often means Q3 is kind of the lowest margin quarter of the year. They're going to be producing kind of at a normal rate here in the fourth quarter. And if you remember, versus Q4 of last year, where they were really taking production days out to ensure a pipeline didn't inflate before the year, this year, they're simply just at a more steady state. So those are the two main drivers. Operator: [Operator Instructions] The next question comes from the line of Matthew Boss, JPMorgan. Amanda Douglas: It's Amanda Douglas on for Matt. So Dave, following the actions that you've taken to streamline the value boat segment, do you see the model lineup into 2026 as rightsized today? Or are there any further changes required ahead? And how would you assess dealer inventory levels across value and premium segments as we look ahead to the 2026 season? David Foulkes: Thank you for the question. Yes, I think the focus on value and kind of scaling back of the model lineup, I think we'll obviously evaluate through the balance of this season and early next season to see if we should take any additional actions. I think we still have a very comprehensive portfolio. But given volumes in that segment, we had too much complexity, and we need to take that down. I think we'll be very dynamic about it. I don't foresee a substantial additional change. At the moment, we've introduced new products, including the award-winning C21 from Bayliner this year, which is going to help us a lot, helps us focus our product development efforts to make sure that the model lineup that we do have is fresh. But of course, we could trim and make adjustments as we go forward. I don't see the same level of rationalization that I saw for this model year, though. And then in terms of inventory levels, I think we're healthy everywhere. Typically, our premium inventory levels in terms of weeks on hand are lower than kind of value. Typically, our premium inventory levels in terms of weeks on hand will be in the typically, mid-20s somewhere, and that's exactly where we are right now. So I really feel like our inventories are rightsized across all of our segments. And I believe that we're extremely well positioned for 2026. Operator: Our next question is from the line of Jaime Katz with Morningstar. Jaime Katz: I just wanted to go back to Navico. I think in the prepared remarks, it was noted that there was more work to do. And you guys have done a ton of work already. So maybe, can you elaborate if there's been maybe some new issues found that need to be remedied? And then what does the road map look like to a steady state in that segment? David Foulkes: No, thank you for the question. Yes, there are no new issues. There's just always more work to do, and we try to make sure that we prioritize our actions and make sure that we do the biggest, most impactful things as far as we can first, but there's a continued march forward in all aspects of the business. We do think about the fact that -- Navico Group is not just Navico. Navico that we acquired in 2021 was about half the business and still is about half the business. It really is the product of a lot of acquisitions over time. And so we're continuing to make sure that operationally, those previous acquisitions are all now working together on the same IT platforms, for example, making sure that we don't have excess distribution, we consolidate distribution. But we have the same systems that we can manage our SIOP processes. So yes, this is really a multiyear effort to kind of wring the last bit of operational efficiency out of the business. And we've done a lot of work, but we have more to go. There's still a good road map there of work that will help our operating margins, help revenue growth, and to be honest, free up some more cash because I think there are more turns in that business than we have right now, inventory turns in that business than we have right now. So the road map includes all of those things, and it's very detailed. Aine Denari, who runs that business now, is a very detailed and strong operator who is working extremely systematically through all of the aspects of the business, all of the processes, all of the systems and making sure that we continue to progress forward. So a lot of heavy lifting done, particularly on the product development side. It just takes a while to get that flywheel turning, but now, it really is turning with a lot of differentiated product. We have rationalized quite a few facilities. Even, I think, earlier this year, we moved European distribution to a 3PL. Those kind of actions individually might not move the needle, but collectively, can be multiple points of operating margin expansion. So yes, we're not in any way complacent on Navico now. It's great to see the business stabilized, but there is such a lot of potential in that business. We are anxious to make sure we move even further forward. Operator: The next question is from the line of Joe Altobello with Raymond James. Joseph Altobello: Just wanted to get some more clarification on 2026 and the initial outlook here. So obviously, as you mentioned, you guys have been undershipping demand significantly on the engine side and I think a little bit on the boat side as well. But as we think about the mid- to high single-digit potential revenue growth for next year, how much of that is simply lapping that destock, if you will? And how much of that is actually potentially coming from a restock? Ryan Gwillim: Joe, I'll take -- I'll go ahead and take this one. Yes, maybe there's a little bit in the first part of the year that is lapping a bit of a slower Q1, maybe half of Q2. But really, it's going to be a combination of a little bit of market, not much relying on the market, maybe a point or 2, some pricing throughout the various business units. Some share gains which continue, not only at Mercury, but in the Boat business and as Navico Group takes back share in some of their product lines. And also probably a bit of a betterment in discounting, right? The discounting environment, we've already seen come down here in the back half of the year, and we intend it's likely that, that will continue. With P&A obviously being a very stable part of the business that continues to trolley along. So you can get yourself, depending on what you assume there, from mid- to high pretty easily. But I would say the lapping of destocking is probably a small part and really just a kind of first quarter, maybe first 4, 5 months phenomenon. Operator: Our next question comes from the line of David MacGregor with Longbow Research. Joseph Nolan: This is Joe Nolan on for David. You talked about the plant consolidation and efficiencies during the transition. Just wondering if you could talk about the fourth quarter impact and maybe give us a sense of what the net impact might be for 2026 from that? David Foulkes: Yes. So fourth quarter, we're probably talking about a couple of million? Ryan Gwillim: That's right. David Foulkes: Yes, just checking with Ryan here to make sure I give you a couple of million. Essentially, we'll be operating 4 facilities and at least 2 at lower efficiency and productivity as we begin to exit them and we move towards fully consolidated by hopefully, a little bit earlier than the middle of 2026. So by the time we get the transition completed, we'll begin to see that kind of annualized run rate saving of $10 million-ish plus. So overall, I would say through next year, we'll see net positive, but it won't be the full $10 million of run rate savings. There are some elements of this transition that we can take ex items and some like just running at lower efficiency that we can and a little bit of a drag in the short term. But the price in the long term is well worth it. That $10 million or so run rate is just that current production rates. The benefit increases substantially as we move to higher production volumes. So we're anxious to get it done as fast as we can. We're very appreciative of the work of all the people who are transitioning and those who are working to help us with the transition. And yes, we'll be a much leaner production organization when we finish with a lot of benefits to the entire Boat Group. Operator: Our next question is from the line of Tristan Thomas with BMO Capital Markets. Tristan Thomas-Martin: I just wanted to look maybe a little bit past next year, just maybe get an update on how you guys are thinking about normalized boat industry retail demand and kind of how long and what's needed to get us there? David Foulkes: Normalized industry, we had -- when we think about the kind of normalized in a number of different ways, I would say -- we had a year this year that was heavily disrupted by the second quarter, which is unexpected, as -- prior to those announcements. I think otherwise, we would probably have had a year that was probably flattish. I'm not really sure. Q1 was a drag. I would say that elevated interest rates are -- have been a headwind in the past several years versus where we were before COVID when retail loan rates are in the 4% to 5%-ish, and we're currently in the 7.5% to 8% range. So that is a headwind that has been present for the last couple of years. And then we frequently also referred to replacement rates in our -- if you look at the boat park or the number of registered boats out there that are relevant to the product lines that we produce, it's in the kind of $7 million range. And if you look at a typical boat life, it implies annual replacements in the 200,000 to 250,000 range, which is obviously well above the 130 to 135 we're at the moment. So I would say a number of factors suggest that we will -- that there should be macro factors that increase both sales over time, and that's what we're anticipating. But we're obviously hesitant to take all of those things into our near-term forecast. So we think flat to slightly up is a prudent forecast at this point in time for next year. Operator: Our final question today is from the line of Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: Maybe on the tariff front, I think the expectation ticked up a little bit to $75 million for this year. So just maybe any updates on how mitigation is going? And then any early thoughts on the expected impact embedded in kind of the initial thoughts around '26 would be helpful. Ryan Gwillim: Sure. Noah, thanks. Good question. Yes, listen, the real change from our July call to today was the 232 impact on aluminum and steel, really 3 parts. The rate went from 25% to 50%. The list of applicable ACS codes expanded significantly, which really now involves us looking at any metal contact that's contained in parts or goods that are coming in. And I think most people know it was applied retroactively, meaning it applied to inventory sitting in free trade zones or other bonded warehouses, if you would. So that was really the only change from the guidance. And in fact, I would say our mitigation efforts are -- continued to outpace our expectations. We continue to do better than we thought kind of month in and month out. And so that is good and that gives us good visibility into next year. It's a bit hard to say exactly what the impact is next year. I do think the incremental over this year would be much smaller than the incremental from '24 to '25. And certainly, as we continue to get smarter on mitigation techniques, we'll continue to work that number down. So yes, we're actually pretty happy that we're able to hold EPS for the year. Obviously, it's an extra about $10 million of tariff impact that we didn't anticipate that we're going to go ahead and cover -- that we believe we can cover in the quarter. And we look forward to then moving over to '26. Operator: At this time, I would like to turn the call back to Dave for some concluding remarks. David Foulkes: Yes. Thanks for your questions, everyone. Great questions. I think in a lot of ways, this is a very encouraging quarter. We have improving retail, revenue up across all our businesses, very solid earnings and continued exceptional free cash flow generation. We do -- as a team, we -- I think this just seemed like a bit of an inflection point. There's definitely more -- a positive shift in momentum at the moment. We continue to take bold structural cost reduction actions, though, and continue to do that, which will benefit our earnings in '26, independent of the market. Our major brands and businesses are beating the market. We continue to invest a lot in very well received and award-winning new products across the portfolio. AutoCaptain was a notable highlight though, really the first fully integrated autonomous boating system in the marketplace, a real differentiator, along with a number of other platforms that we've recently launched in a way that I think only Brunswick can produce. So it's very exciting. So as we said, while many things about 2026 are normal, I think late 2025, retail trends, very lean pipelines, further interest rate cuts all suggest the opportunity for top line growth and through our strong operating leverage, meaningful margin and EPS free expansion. All right. Thank you, everyone, very much. Have a great day. Operator: This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.
Operator: Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to SouthState Bank Corporation Q3 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Will Matthews. You may begin. William Matthews: Thank you. Good morning, and welcome to SouthState's Third Quarter 2025 Earnings Call. This is Will Matthews, and I'm here with John Corbett, Steve Young and Jeremy Lucas. As always, we'll make a few brief prepared remarks and then move into questions. I'll refer you to the earnings release and investor presentation under the Investor Relations tab of our website. Before we begin our remarks, I want to remind you that comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations. Any such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in the press release and presentation for more information about our forward-looking statements and risks and uncertainties that may affect us. Now I'll turn the call over to you, John. John Corbett: Thank you, Will. Good morning, everybody. Thanks for joining us. We're pleased to report a strong third quarter for SouthState. Earnings per share are up 30% in the last year, and the company generated a return on tangible equity of 20%. If you recall, we closed on the Independent Financial transaction in January. We converted the computer systems in May, and now we're beginning to realize the full earnings power of the combined company. Loan production was up a little in the third quarter to nearly $3.4 billion, and we saw moderate growth in both loans and deposits. Payoffs were about $100 million higher in the quarter. Loan production in Texas and Colorado is up 67% since the first quarter of the year. And loan pipelines across the company continue to grow, and we feel like net loan growth will accelerate over the next few quarters. Our charge-offs were 27 basis points for the quarter, primarily due to one larger C&I credit acquired with Atlantic Capital that has been in the bank a number of years. Stepping back, however, the credit metrics in the bank are stable. Payment performance is good. Nonaccruals are down slightly, and we've only experienced 12 basis points of charge-offs year-to-date. Our credit team is forecasting that we're going to land in the neighborhood of 10 basis points of charge-offs for the year. We're currently in the middle of strategic planning this time of the year and thinking about the banking landscape, deregulation and the opportunities in front of us. Over the last 15 years, we've built the company in the best markets with good scale and an entrepreneurial business model. And we've done the heavy lifting to build out the infrastructure of the bank. We're now in a perfect position to capitalize on the disruption occurring in our markets. We've calculated that there are about $90 billion of overlapping deposits with SouthState that are in the midst of consolidation in the Southeast, Texas and Colorado. Our regional presidents understand the opportunity, and they're laser-focused on recruiting great bankers and organically growing the bank in 2026. Will, I'll turn it back to you to provide additional color on the numbers. William Matthews: Thanks, John. I'll hit a few highlights focused on our operating performance and adjusted metrics and make some explanatory comments, and then we'll move into Q&A. We had another good quarter with PPNR of $347 million and $2.58 in EPS, driven by $34 million in revenue growth and solid expense control. Our 4.06% tax equivalent margin drove net interest income of $600 million, up $22 million over Q2. $19 million of that growth was due to higher accretion. Cost of deposits of 1.91% were up 7 basis points from the prior quarter and were in line with our expectations. In addition to the cost of deposit increase, overall cost of funds was impacted by the larger amount of sub debt outstanding for much of the quarter. We redeemed $405 million in sub debt late in the quarter. Going forward, that redemption will have a net positive impact on our NIM of approximately 4 basis points, all else equal. Our loan yields of 6.48% improved by 15 basis points from Q2 and were approximately 8 basis points below our new origination rate for the second quarter. And loan yields, excluding all accretion, were up 1 basis point from Q2. Steve will give updated margin guidance in our Q&A. Noninterest income of $99 million was up $12 million, driven by performance in our correspondent Capital Markets division and deposit fees. On the expense side, NIE of $351 million was unchanged from Q2 and was at the low end of our guidance. And our third quarter efficiency ratio of 46.9% brought the 9-month year-to-date ratio to 48.7%. Credit costs remained low with a $5 million provision expense. As John noted, though, we did experience one $21 million loan charge-off during the quarter, which is an abnormally large charge-off for us. This brings our year-to-date net charge-offs to 12 basis points. Absent that loss, net charge-offs would have been 9 basis points for the quarter. Asset quality remains stable and payment performance remains good. Our capital position continues to grow with CET1 at 11.5% and TBV per share growing nicely. As you'll recall, we closed the Independent Financial acquisition on January 1 of this year. Our TBV per share of $54.48 is now more than $3 above the year-end 2024 level, even with the dilutive impact of the Independent Financial merger. Our TCE ratio is also back to its year-end '24 level. As we've noted before, our strong capital levels and healthy capital formation rate provide us with good capital optionality. Operator, we'll now take questions. Operator: [Operator Instructions] Your first question comes from the line of Michael Rose with Raymond James. Michael Rose: I guess I'll hit the margin question since you brought it up, Will. Steve, can you kind of walk us through the excess accretion this quarter? It looks like the core margin ex accretion was down kind of high single-digit basis points. Can you just give some puts and takes here as we think about the contemplation of a couple of rate cuts this quarter near term? And then if you can talk about some of the pricing dynamics, both on the loan and deposit side, new production yields, things like that. Just trying to better frame up the core versus the reported margin as we move forward. Stephen Young: Sure. Michael, yes, just maybe kind of give you some explanation of where -- where we think we're headed on margin, and maybe I can answer some of those questions in the middle of that. As you mentioned, we had higher accretion than we expected. And really, a couple of things around that. We saw the highest accretion in July and then August and September, it kind of tailed off a little bit and really due to some early payoffs of 2020 and 2021 vintage loans that had kind of 3 handle coupons with these big discounts that sold. So those are not economic decisions, but there -- I mean, there are economic decisions in the fact that they sold, but typically, you keep those coupons. Also, we had a 29% decline in PCD loans this quarter. And of course, those have larger marks. So anyway, all of that, we look at prepayments are really not outside of our scope of what we thought. It's just that some of the vintages were different than we thought and therefore, had bigger discounts. So having said all that, as we think about the guidance for NIM going forward, really not a lot of change, a little bit of change, but not a lot. We talk about the size, the assumptions of the interest-earning asset size. The second is our interest rate forecast. The third is loan accretion and the fourth is deposit beta in an environment where rates are going down. Interest-earning assets, we've been saying $59 billion for quarter 4 average. That's no change. For full year 2026, we're looking somewhere between $61 billion and $62 billion. So that's kind of a mid-single-digit growth. Rate forecast, last quarter, we had no rate cuts in our model. This quarter, we're thinking we get 3 rate cuts in '25 and quarterly rate cuts, 3 more in 2026, so that we would get 150 basis point cut in total and get the Fed funds at 3% by the end of '26. That seems to be somewhere where the market is. As it relates to the third assumption, loan accretion, based on our models, we expect loan accretion this quarter for the fourth quarter to be somewhere in the $40 million to $50 million as expected prepayments fall. Our October accretion so far is in line with these expectations. And as I mentioned, August and September came down pretty ratably. So I think -- I think that's a good run rate to use. For 2026, we did certainly pull some forward in 2025. So we expect instead of $150 million of accretion, we're looking at about $125 million based on our prepayment forecast. But of course, it can be lumpy based on these vintage loans. The last part is deposit beta. For the first 100 basis points of cuts, our deposit costs came down about 38 basis points from 2.29% to 1.91%, so 38% beta. In our 2019 to 2020 easing cycle, our deposit beta was around 27%. So our expectation is with the growth plans that our deposit beta would look a little similarly to 2019, 2020 to 27%. Maybe we get to 30% over time with a lag, but I don't think it will be as high as 38%. So based on all those assumptions, we'd expect NIM to continue to be in the 3.80% to 3.90% range with the step down in accretion this quarter in fourth quarter and for 2026 for to be in that range, 3.80% to 3.90% as we kind of move forward. But one of the questions you asked was our pricing dynamics. Our new loan production rate for the total company this quarter was 6.56%. If you look at Texas and Colorado, that new loan rate was 6.79%. So it's a little bit higher in Texas and Colorado, but it's in total, it is 6.56%.. So I know you have a few questions, a few puts and takes, but that's some guidance for you. Michael Rose: No, that's really helpful, Steve. I appreciate it. And then maybe just a broader one for John. I think you mentioned that loan production was up a little bit in the third quarter. I think there's clearly going to be some dislocation in some of your markets from some of the deals that have been announced. I know you guys are obviously leaning a little bit more into Texas and maybe Colorado as well with some of that. Can you just kind of walk us through the loan growth environment at this point, given the fact that I think a lot of banks are kind of upping the hiring plans for loan officers, the pricing dynamics and kind of maybe what we should expect as we move forward? Stephen Young: Yes. Sure, Michael. We kind of guided to mid-single-digit growth for the remainder of 2025. I think we came in at 3.4% for the quarter, so a little bit less than mid-single, but we still think mid-single-digit growth for the remainder of the year feels about right. As I said, we had about $100 million more in paydowns in the third quarter than we did in the second. If we move into 2026, it could move higher, maybe in the mid- to upper single digits, but we have a better feel for that in January. But most of the loan growth is coming in the area of C&I. For the quarter, we had 9% linked quarter annualized growth in C&I. Resi growth was about 6%. And then if you combine C&D and CRE, really, we were flat for the quarter. There was a migration of construction loans that just migrated into CRE upon completion of construction. Our biggest pipeline build is in Texas. We had an $800 million pipeline there in the second quarter. Now it's up to $1.2 billion. So we kind of got past the conversion there, and now we're starting to see the pipelines and the activity building. Florida has got a $1 billion pipeline. Atlanta has got a $900 million pipeline. So those are our 3 probably largest markets. And as I said on the call, with that dislocation in really all the states we're in, we are kind of leaning in on the hiring front, and we see opportunities to recruit bankers. Yesterday morning, I was interviewing one from another bank. So that is where a lot of our focus and effort is right now. Operator: Your next question comes from the line of Jared Shaw with Barclays. Jared David Shaw: Maybe just if we could hit on credit. You were listed as a creditor to First Brands. I'm guessing that's what the large charge was. Was there -- for that charge, was there a prior -- it looks like there was a prior reserve. Was there also a prior charge taken against that? And I guess, how do you feel about the rest of the portfolio apart from that? John Corbett: Yes, you're correct. That's what that charge was. There was not a prior reserve. I mean that news happened pretty fast. But that was our only supply chain finance credit. So as we examine the portfolio, we don't have any more of that type of lending. So unfortunate, we're going to use it as a learning lesson for our credit team and management associates. William Matthews: And I'd say, Jerry, on the reserve question, based on what John just said, we would have had a reserve release, but for that charge-off in the quarter, i.e., a negative provision just based on the underlying economic loss drivers. And just to be clear, we did charge off the full amount of that balance in the third quarter. Jared David Shaw: Okay. All right. And then I guess looking at capital, you just gave some great color on sort of really good growth opportunities over the coming years, but still seeing growth in capital and like you said, Will, just that improving backdrop on credit. Where do you feel like you would like to see CET1 optimally? And how should we think about the buyback and capital management in general from here? William Matthews: Yes, Jared, it's a good question. We're obviously 11.5% on CET1, about 10.8% if you were to incorporate AOCI. So very healthy capital ratio. Not to say we don't articulate a particular target out there, but we do like this 11% to 12% range we're in. And we do like the optionality we've got with the ratios being strong and with the formation rate being so good. So we are hopeful, as John said, to take advantage of some of the disruption in the market through growth, but we also have the ability to use some of that capital to repurchase our shares. It's sort of a quarter-to-quarter decision we'll be making. Operator: Your next question comes from the line of Catherine Mealor with KBW. Catherine Mealor: Just one follow-up back on the margin. It was helpful to have your guidance for next quarter. And is it fair to assume that -- actually, this is the way to ask the question. Is there a way to quantify how much of the accretion this quarter was just accelerated versus just helping us to kind of model what a normal kind of base level would be for accretion going forward versus how much is accelerated from paydowns? Stephen Young: Yes, Catherine, there's a couple of things that I don't want to overcomplicate your answer, but it's complicated. There's a few things that go into it. One is full payoffs. We talked about and there's partial prepayments. So based on our models, when we were looking at it and to give you that forecast in the last quarter, it was based on our expected prepayments. And our expected prepayments actually came in reasonably well. What we didn't get right was the vintage part of it as well as other partial prepayments. So the bottom line is what we saw in July and early August was a little bit outsized. What we saw in end of August, September is much more run rate type of thing. So I think this 40 to 50, that's kind of what we expected in the fourth quarter, the back half of the year. That's sort of what we're -- that's what we're seeing. So that sort of informs us going into 2026. Catherine Mealor: Okay. Got it. That's helpful. And then on fees, any outlook into how you're thinking about fees moving into the fourth quarter and then into next year, it was really nice to see another quarter of higher correspondent and service charges. Stephen Young: Sure. No, it was a really good quarter. Noninterest income was $99 million versus $87 million, so it's nice to pick up 50 basis points on average assets, a little bit higher than our guide of around 50, 55. 2/3 of that was capital markets. A couple of things happened in correspondent. Number one, we have changes in interest rates. And so when you have changes in interest rates, that business typically does a little bit better. It was sort of broad-based. A couple of million dollars was due to fixed income, maybe $3 million, $4 million with higher interest rate swaps, another $1.5 million in sort of other trading. So I think we had -- I don't see that -- that number was around $25 million. So that's a $100 million run rate. So to put it in context, our best year ever was $110 million in revenue. Last year was $70 million. So this quarter was a really good quarter. So I don't expect that to -- we'll see to continue to repeat. But clearly, we had a good quarter, we'll see with the run rate. I think we get a couple of quarters behind us, we'll have a better view. But clearly, it's higher than our run rate of $87 million. I'm not sure we're as high as $99 million. So I'd say it's probably as we kind of think about 2026, somewhere in that $370 million, $380 million run rate, that's probably not a bad place to start, and then we'll just see how it progresses is the way I would think about it. Operator: Your next question comes from the line of Janet Lee with TD Cowen. Sun Young Lee: On a core basis, I believe from your second quarter earnings call, you talked about how every 25 basis point cut would be a 1 to 2 basis point improvement overall margin. Is there any change in thoughts on that? Or was that guidance? Or what was that guidance based on the core NIM? Or was that including any accretion? Stephen Young: No. Great question, and thanks for asking it. A couple of things there. So if we get back to 6 cuts and we get 1 to 2, that would be, call it, let's just take the midpoint, that would be 9 basis points. So I think our core NIM is somewhat -- as I think about core NIM somewhere in the mid-3.80s. So what's changed there? Number one is the loan accretion forecast. So if we -- next year, we are $125 million versus $150 million just because we pulled forward that that's about 4 basis points of decrease. And then the other is just on the deposit beta and the lag there of kind of where -- like I mentioned in our other question, our deposit beta so far to the first 100 was 38%. But on the other hand, we didn't grow deposits more than, call it, 2%, 2.5%. So as we contemplate the future and we look back at history at 2019 and '20 during that easing cycle, when we were growing a little bit faster, more mid-single digit-ish our deposit beta was more like 27%. So we're taking that model back down to 27%. We hope to outperform that, call it, there's a lag to CDs and pricing and all that. But by the beginning of '27, our hope would be we'd be in that 30% range. But for right now, what we're seeing in front of us we don't see that really -- we see that more of a lag and we're modeling 27% in our numbers. John Corbett: So Steve, when you translate what you're saying there, to Janet's question about 1 to 2 basis points with each cut may take that away if the deposit beta is not as good in a way down. Stephen Young: Right. And yes, to finish that thought to your point, John, to finish that thought, if our deposit beta -- so we're guiding sort of in the midrange of 3.80% to 3.90%. And so to the extent that the end of the year next year, we go through the cuts, and we start moving our deposit beta from 27% closer to 30%, 31%, that would get us in the high 3.80%, maybe 3.90% at the end of the year of 2026. That's how we're thinking about modeling it. Sun Young Lee: Got it. And just a follow-up. If I -- I'm not making this up, hopefully, I believe that the IBTX bankers that group will start adopting SouthState's business model and in a way, what would be the implication on -- or any implication on the expenses or their incentive to bringing like prioritized lower deposit cost or loans? Or is there any sort of change that could be coming or whether an implication on growth profile there? Could you explain -- could you give us any color on what that could mean for SouthState, that transition? John Corbett: Yes, sure. Janet, it's John. So we went through this transition year in '25 when we did the conversion, and we kind of kept the incentive system at IBTX the same as it had been in prior years. In 2026, it will move to the more of the SouthState approach where we allocate P&Ls to the regional presidents. So their incentive will be based on both loan growth but predominantly on their PPNR growth. One of the things that we're contemplating, making an adjustment for to incent additional recruiting and hiring is not to penalize those regional presidents for the first year compensation of new hires to encourage recruiting efforts into 2026, both with the existing SouthState plant and the IBTX plan. A good question. Hope that helps you. Is there another question? Operator: Yes, one moment please. Mr. McDonald, your line is open. John McDonald: Sorry, I didn't hear anything. Sorry, just one more follow-up, Steve, on the margin. I think your prior outlook was to be in the 3.80%, 3.90% and then drift higher in 2026. Just want to make sure that the '26 outlook 3.80%, 3.90% includes the rate cuts and about $125 million of accretion, if I heard that right. Anything has changed from prior? What are some of the puts and takes? Stephen Young: Yes. No, I think I was trying to answer that in the prior question. It's really the accretion number that from $150 million, it was what we thought in 2026 last quarter to $125 million. That's about 4 basis points of decrease. And then the rate and then on the deposit beta, we have 38%, 2019 was 27%, we were thinking -- we think ultimately, we'll get to somewhere in the low 30s but it just is probably a bit of a lag. So it's probably not going to -- we're going to be very diligent on growing for the loan growth we think is coming. And so we think we should, in 2026, model more in the 27% range. And then hopefully, as the CD's reprice, all those kind of things through 2027, we could see an uptick. So I think back to the guidepost to how this would work is you start out in the mid-380s and then move higher into 2020 -- the end of '26, early '27. William Matthews: And John, this is Will. I would add our margin position is as neutral as we've seen it in years, just based upon the actions we took in 2025, the number one, the merger and marketing that balance sheet properly. And then two, the portfolio restructuring we did in connection with the sale leaseback. So we have a relatively stable looking margin under most reasonable scenarios. John McDonald: Got it. And the delta between having a four handle this quarter and move into 380s next quarter is really accretion going from this quarter and cutting half to 40 next quarter in your outlook? Stephen Young: Yes, that's right, yes. . William Matthews: And that's what we're currently seeing. Yes. John McDonald: Okay. And then one just follow-up again on the next quarter's average earning assets in the 59. It seems like that's kind of where you were this quarter. Are there some kind of puts and takes of what you expect in terms of growth in the fourth quarter? Stephen Young: Yes. Typically, in the fourth quarter, we had some seasonal deposit growth and some of -- depending on how we manage it, we get some of the seasonal wholesale stuff out of the bank at the same time. So we sort of manage it towards that level. But kind of year-over-year, I'd call it mid-single-digit growth is kind of how we're thinking about it from an average earning asset. Operator: Your next question comes from the line of Ben Gerlinger with Citi. Benjamin Gerlinger: I was wondering if we -- kind of stepping back to correspondent banking, I understand that a rate card or rate movement kind of sparks it. But we're looking kind of -- I don't know 3 -- you said roughly 3 to 6 cuts over the next 12-ish months. How long is the tail for that kind of tailwind, I guess, you could say. So there's 2 cuts in December -- or excuse me, 2 cuts in the fourth quarter, would the first quarter also see a benefit? Or is it fairly short-lived? Stephen Young: Yes. I was trying to explain before, as you kind of think about that business that put the highs and lows of it, back in 2020 when things went crazy on rates. I think our best year was $110 million. I think we did that in 2020, 2021. And last year was our worst when rates were the highest and sort of out there. So that was about $70 million. As I kind of think about that business, you're going to have fixed income, we'll do better in rate cuts lower because, particularly for our bank clients, they'll want to take their excess cash and buy bonds because there'll be a yield curve on the interest rate swap side depending on the shape of the yield curve, it may not be as good as it is today. Today, it's deeply inverted. That's really good for that business. So I kind of see those businesses sort of offsetting each other, but maybe trading some stability at that level. Benjamin Gerlinger: Got you. Okay. That's helpful. And then from a follow-up perspective, it seems like you have a lot of opportunity in front of you. I think that's -- that would be hard to disagree, especially with the other disruption in the markets that you operate in. Is it fair to think you're going to think organically like you're hiring individuals, obviously, and growing loans? Or could you potentially see a small bolt-on deal or something like that? John Corbett: Yes, Ben, it's John. With our particular fact pattern, kind of our view is to invest in SouthState is more interesting right now than doing an M&A deal. And that investment in SouthState comes in 2 forms. The first way is just to increase our sales force and accelerate our organic growth because of all this dislocation that's going on in the markets. The second way as Will described, is in purchasing SouthState shares through our buyback authorization. The capital formation rate is pretty strong right now and the valuation is pretty attractive. So that's kind of how we're thinking about priorities on capital. Operator: Your next question comes from the line of Gary Tenner with D.A. Davidson. Gary Tenner: I just wanted to go back to the NIM-related discussion for a minute. The big delta as I look at the average balance sheet was really the cost on the transaction and money market accounts, up 11 basis points quarter-over-quarter. Can you kind of talk about the dynamics around that? Is it an effort to bring in some new deposits with the anticipation of stronger growth over the next year? Or just maybe comment on kind of the driver there? Stephen Young: Yes. Back in July, when we had the call, Gary, we've talked about the -- our expectation of deposit costs. And we talked about the range this next quarter for the third quarter is 185 to 190. So we were -- it was 191, so we were on the higher end of the range, missed it by a basis point. But really what drove that was in our expectation was that particularly in the CD book, we -- if you look at the second quarter to the third quarter -- or excuse me, the first quarter, second quarter, our CDs went from, I don't know, 7.1 or 7.2 or something to 7.7, I think. And that was back to funding and loan growth and getting the balance sheet where it needed to be. And so those obviously transacted at a higher rate level than others. So as we kind of think about -- that's kind of what's part of our guidance. It's frankly, a tough environment right now with deposits, but we expect that as we get rate cuts and the curve gets a little bit more steady, we could continue to see better. That's why it's a little bit why we're guiding down on the guiding on the 27% deposit beta because ultimately, we need to fund the loan growth that we think is in front of us. Gary Tenner: Great. And then as a follow-up on that beta since you just mentioned as well, to be clear that 27% to 30% beta is relative to the next phase of easing as opposed to cumulative, including last year's? Stephen Young: Right, that's right. That's a great way to say it. Yes. So you're right. If we had to average them, it'd probably be somewhere in the, whatever, low to mid-30s, but yes, that's right. It's the next incremental. Yes. Gary Tenner: Okay. Great. And if I could sneak in a last question. Just on the NIE, I think you had guided previously to a bit of a step down in the fourth quarter, I think, to the $345 million, $350 million range. Any change to that outlook for the fourth quarter? William Matthews: Yes, Gary, I think our guidance for Q4 is still in that $345 million to $350 million range. There's always some variability that's hard to predict with respect to how some of the commission compensation businesses perform, loan origination volume could impact your FAS 91 cost deferral. But similar in that roughly $350 million range. We're pretty clean now in terms of recognizing the cost saves on independent. If you look at Q3 to Q2 was flat even though we had the annual merit increases for most of the company, except for executives July 1, but yes, things were flat. So we've done a good job of getting costs out, getting them out pretty early. Looking ahead to '26, we haven't talked about that, but I might as well address that. Our planning is obviously still underway. We still think for '26 that mid-single digits is a good guide. Maybe it's an inflationary sort of 3% plus another 1% or so for some of the investments in organic growth initiatives like John addressed. So maybe that's what '26 will look like. We're still, as I said, finalizing our planning there, but that's kind of what we're thinking right now. Operator: Your next question comes from the line of Gary Tenner. D.A. Davidson. Stephen Young: That was Gary we just spoke with. Operator: That concludes the Q&A session. I will now turn the call back over to John Corbett for closing remarks. John Corbett: Sorry. Thank you, Bella. Thank you all for calling in this morning. We, as always, appreciate your interest in our company and if you have any follow-up questions on your models, don't hesitate to give us a ring. Have a great day. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you for joining, and you may now disconnect. Everyone, have a great day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Third Quarter 2025 Earnings Call. [Operator Instructions] This conference call is being recorded today, Thursday, October 23, 2025. Before we begin, note the matters that the company management will be discussing today that are not statements of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the company's expectations, strategies, prospects, backlog or targets. These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected. Important factors that could cause actual results to differ materially from the company's expectations are disclosed under Risk Factors in the company's Form 10-K and other SEC filings. Forward-looking statements are made only as of the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements. In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its Form 10-Q for the quarter ended September 30, 2025. Speaking today will be Joe Hanna, Chief Executive Officer; and Keith Pratt, Chief Financial Officer. I will now turn the call over to Mr. Hanna. Go ahead, sir. Joseph Hanna: Thank you, Dave. Good afternoon, everyone. We appreciate your attendance on McGrath RentCorp's Third Quarter Earnings Call for 2025. It's a pleasure to be here today, and we're eager to share further insights into our performance. I'll begin with an overview of our third quarter results before Keith shares and financial details, and then we will open up the call for questions. For the third quarter, total company rental operations revenues rose by 4% with growth from all 3 of our rental businesses. Project activity remains steady despite ongoing market uncertainties. Mobile Modular rental revenues increased by 2%. The rental revenue growth we experienced in the quarter was primarily due to commercial activity centered around larger infrastructure projects across all our geographies. Smaller projects have been less prevalent, which is consistent with the trend we have experienced year-to-date. We had a busy education season with a good level of new shipment activity. Funding for the education business remains solid as the need for classroom modernization and growth in select areas remains consistent. With higher shipments, volumes for the quarter, we faced higher inventory center costs to prepare equipment for delivery. We used off-rent inventory rather than investing in new product, continuing to manage the fleet with a sharp focus on deploying capital efficiently. Despite challenges in the demand environment, our booked orders increased during the third quarter. This was encouraging and positive for our momentum entering the fourth quarter. Our ongoing efforts with Mobile Modular Plus and site-related services continue to go well. Both experienced healthy growth during the quarter. We continue to be pleased with our year-to-date progress. At Portable Storage, rental revenues increased by 1% year-over-year and by 2% sequentially from the prior quarter. Shipments grew and pricing remained stable. Opportunities in energy, data centers and seasonal retail offset the flat construction market. Overall, we are encouraged by these positive signs that suggest the market may be stabilizing after a challenging demand contraction in 2024. TRS-RenTelco rental revenue grew by a strong 9%. Both our general purpose and communications rental revenues saw strong growth maintaining positive momentum from the first half of the year. Utilization at a healthy 65% improved year-over-year and remained steady sequentially versus the second quarter. Rental demand pipelines remain solid as we enter the fourth quarter, indicating that the business is well positioned to continue its growth trajectory. Turning my comments to the whole company. We do not believe McGrath is currently facing any immediate headwinds due to the ongoing federal government shutdown and any potential impacts from a long shutdown are unclear at this time. With regard to the dynamic tariff environment, the impact of tariffs has been managed appropriately by our teams and has had minimal impact on our results. Looking ahead to the rest of the year, uncertain market conditions persist. Nonresidential construction indicators such as the Architectural Billing Index, or ABI remains soft. We remain focused on our strategic growth priorities dedicated to expanding our modular and portable storage businesses. Over the course of this year, we have taken steps to enter new regions, grow our Mobile Modular Plus and site-related services initiatives and increase our coverage through tuck-in acquisitions. All of these items support our efforts to become a true national modular solutions provider capable of serving our customers with storage units, single-wide units, large multi-floor and multi-story facilities and services to meet all their space needs. I want to thank all our team members for your third quarter accomplishments and steadfast commitment to delivering the highest quality service to our customers. Our culture at McGrath is a driving force behind our growth as we introduce more customers to the exceptional experience we offer. I am pleased with our progress so far in 2025, and we remain dedicated to providing value to our customers and shareholders as we finish the year. With that, I will turn the call over to Keith, who will take you through the financial details of our quarter and our updated outlook for the full year. Keith E. Pratt: Thank you, Joe, and good afternoon, everyone. Looking at the overall corporate results for the third quarter. Total revenues decreased 4% to $256 million, with rental operations increasing 4% and sales revenues decreasing 18% during the quarter. Adjusted EBITDA decreased 7% to $96.5 million. Excluding prior year items related to the terminated WillScot merger process, net income for the third quarter decreased $3.6 million or 8% to $42.3 million and diluted earnings per share decreased $0.15 to $1.72. Reviewing Mobile Modular's operating performance as compared to the third quarter of 2024, Mobile Modular total revenues decreased 5% to $181.5 million. The business saw 2% higher rental revenues and 5% higher rental-related services revenues which were offset by 21% lower sales revenues. The sales revenues decrease was primarily due to lower new equipment sales as we discussed in July, while 2024 sales were more concentrated in the third quarter. This year, we expect a more balanced contribution from sales and related gross profit across the third and fourth quarters. This quarter had higher inventory center expenses to prepare available fleet for new shipment demand, which allowed us to minimize rental equipment capital spending. We also operated with higher selling and administrative expenses to support broader sales coverage. As a result, adjusted EBITDA decreased 10% to $64.6 million. Conditions, we saw a lower average fleet utilization or 72.6% compared to 77.1% a year earlier. Despite the softer market demand, third quarter monthly revenue per unit on rent increased 6% year-over-year to $865. For new shipments over the last 12 months, the average monthly revenue per unit increased 3% to $1,192. As Joe highlighted, we continue to make progress with our modular services offerings. Global Modular Plus revenues increased to $9.7 million from $7.9 million a year earlier, and site-related services increased to $15.6 million up from $12.7 million. Overall, Mobile Modular had a solid quarter as we continue to make progress with our modular business growth strategy despite some challenging demand conditions. Turning to the review of portable storage. Rental revenues for the quarter increased 1% to $17.3 million, which is the first year-over-year growth since the first quarter of last year. We have begun to feel encouraged that market conditions for Portable Storage are showing signs of stabilization despite soft commercial construction project activity. Average utilization for the quarter was 61.4% compared to 62.8% a year ago. Adjusted EBITDA was $9.2 million, a decrease of 14% compared to the prior year. Turning now to the review of TRS-RenTelco. TRS had a strong quarter with total revenues up 6% to $36.9 million, driven by higher rental revenues. Rental revenues increased 9% as the industry continued to experience improved demand across markets. Average utilization for the quarter was 64.8%, up from 57.3% a year ago. Rental margins improved 43% from 37% a year ago. Adjusted EBITDA was $20.2 million, an increase of 7% compared to last year. The remainder of my comments will be on a total company basis. Third quarter selling and administrative expenses increased $3.2 million to $52.5 million as we operated with broader sales coverage to support long-term business growth and invested in information technology projects. Interest expense was $8.2 million a decrease of $4.5 million as a result of lower average interest rates and lower average debt levels during the quarter. The third quarter provision for income taxes based on an effective tax rate of 27.7% compared to 26.4% a year earlier. Turning to our year-to-date cash flow highlights. Net cash provided by operating activities was $175 million. Rental equipment purchases were $92 million, down from $167 million last year. Consistent with lower fleet utilization and our plans to use available fleet to satisfy customer orders. At quarter end, we had net borrowings of $552 million and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.58:1. Wrapping up the financial review. While there is still uncertainty in the demand environment, we are pleased with our year-to-date results, and we have seen some encouraging positive trends as we enter the fourth quarter. As a result, we have upwardly revised our full year financial outlook, and we currently expect total revenue between $935 million and $955 million, adjusted EBITDA between $350 million and $357 million and gross rental equipment capital expenditures between $120 million and $125 million. We are proud of McGrath's third quarter performance, and we are fully focused on solid execution for the remainder of the year. That concludes our prepared remarks. Dave, you may open the lines for questions. Operator: [Operator Instructions] We'll take our first question from Scott Schneeberger with Oppenheimer. Scott Schneeberger: I guess, guys, could you address kind of -- you foreshadowed it last quarter the lumpiness of the sales activity, could you speak a little bit about what the run rate in the business is? Keith, you did a good job outlining that it was big in the third quarter last year. It's more smooth across the year this year. But it looks like it will, over the course of '25 grow over '24 -- how -- is that right? And how should we think about it going forward outside of the lumpiness on an annual basis? Joseph Hanna: Yes, Scott, I can answer that. You're right, we did have a big sales quarter in Q3 of last year, and we did telegraph that it would be more balanced this year. So things are turning out the way that we thought they would. Our sales backlog is strong. We had a number of projects in this particular quarter that didn't close by the end of the quarter that will move into the fourth quarter. We did not lose our -- none of those projects were canceled. So overall, we're very positive on our sales outlook for the year. And as you can see from our guidance adjustment, we think that the business is going to perform well, and sales is a big part of that. So we're confident that we'll be able to hit those numbers. Scott Schneeberger: And is this a business on an upward trajectory, would you say? I'm not asking for '26 guidance, but -- this year, I believe it's going to be probably better than last year. Should we continue to anticipate that kind of trend? Or is it safer just to think about it as a flattish business and take it as it comes? Joseph Hanna: No. We anticipate that, that's going to continue to grow. It's an important part of the market. We're well positioned with resources out in the field to take advantage of these projects. And keep in mind that when we go to a customer, they may have a rental need in 1 year that very well could turn into a sales need in the following year. And so we want to be positioned to be able to take advantage of that customer need, no matter what they need. And so our folks are out there looking for those opportunities, and we feel it's an important part of the business, and it's going to grow. Scott Schneeberger: Sounds good, Joe. The -- keeping it on modular. The -- can we speak to -- I've heard you loud and clear and then it kind of echoes what another larger rental company said earlier today that there really is strong demand at the upper end of the market for larger projects. Could you speak to the education sector? And how is funding there? How do you see that as we're looking out to the next year? Joseph Hanna: Sure. We had a decent Q3 in education. We shipped more than we did last year. And we also got a number of returns this particular year that is part of the normal cadence, but muted our results there a little bit. Now having said that, the thing that makes me sleep well at night, and I've been doing this for a long time. What we realize is that each year with education is always a little bit different. Sometimes districts place orders earlier in the year. Sometimes they place orders later in the year. If there's some kind of economic uncertainty, which there was with the administration and the Department of Education and all the things that were going on there. It just makes districts a little bit nervous. Are we going to have the money for the programs? Programs equals teachers, equals classrooms. And so in this particular year, orders were placed a little bit later in the season, but we're getting orders all the way into Q4 here and we're getting orders for next year. But what really is, I think, makes me sleep well at night is the fact that the funding is very, very good. California passed a $10 billion facility bond. Texas passed another $8 billion in facilities bond. It was later in the year. So we won't see that until 2026. And then there's literally billions of dollars that have been passed at a local level that are waiting to be dispersed and used on projects. So I feel very, very good about the status and the solid nature of our education business and think that it's going to be a tailwind for us in quarters to come. Scott Schneeberger: Good, Joe. Thanks for that clarity. Across both modular and portable storage, obviously, the lower end of the market remains challenged. No big surprise there. Could you speak to the rate environment, the spot rate environment across both, please? Joseph Hanna: Sure. I would say for both businesses, our rates are holding in there pretty well. And you can see that we have this -- we're still working on this differential between our fleet average pricing and what units are going out on new contracts now. And so we do continue to have that tailwind, and that's been a positive and will continue to be a positive for a while as the fleet churns. Over in portable storage, rates are steady. And we've been really working hard to not have to lower our unit rents. We have had to give up a little bit on some of the transportation costs to stay competitive, but we'd rather do that than give up on the rental rate. And so contrary to what's happened in the industry in years past, this is a good sign, and I think we're on pretty solid ground. Scott Schneeberger: One more in storage and then just a couple of others, and I'll pass it on. I found it interesting. You mentioned, I think it was energy data centers and then seasonal retail and storage. That's not an area where you've typically competed, but we've heard recently from a competitor of yours that maybe some of the large players in the industry are changing their strategies with how they did business. Is this an area that you're going to move -- is this a onetime thing? Are you moving to this space more so? If you can just elaborate on specifically the seasonal retail. Joseph Hanna: This is not a big part of our portable storage business. I don't anticipate that it is going to be a big part of our business, but we're happy to pick up orders, and we were well positioned with some of the large retailers to get orders if they're available, and we have people out there that look for them, but it's not a strategic initiative in the business for us to really try to grow that because just for the reason, it is seasonal. Those units go out, they come back. We much rather have a much longer term with other types of customers. But any seasonal business we can pick up, we're happy to do it, and we did some this year. Scott Schneeberger: Okay. And then over in TRS, how is your visibility in the next year? 2025 has been a pretty good year for you in that business. How do you feel about heading into next year? Maybe with some discussion across the end markets? Joseph Hanna: Yes. A little bit -- it's tough to predict into next year. We're in the process of putting our plan together for next year. So I can't comment too much on that, but the encouraging thing is that our bookings have been strong. Our rental order volume has been strong. We managed the inventory appropriately. And I think even coming into Q4 here, things are looking good for the month of October. And I think that's momentum that will carry us into next year. We're not seeing anything different in the landscape that we're seeing right now that's going to indicate a big change for next year, but I think we've got momentum. But keep in mind, too, that this was a much shorter term rental business. So it is harder to see out over the hood in terms of what is coming down the pipe. But so far, we're encouraged and we'll know more and be able to share more in the Q4 call. Scott Schneeberger: Great. And last for me, you called out technology spend or investments in projects and technology. Could you elaborate on what you're doing? And is that to a sizable magnitude and what type of returns you're seeking in that investment? Joseph Hanna: Sure. The bright spot, I'm assuming you're still talking about TRS. The bright spot in that business this year is along the wired communications part of the business and the business that we're getting at data centers. That's been a real strong point for us. And that's very technology oriented. We're well positioned to serve that market. There's a ton of testing that needs to be done when you put in a data center, and we're on it, and that's been good for us this year, and I think it's going to continue. Scott Schneeberger: Love it. That's actually not what I was asking, Joe, but that's a -- what I was pitching for. Joseph Hanna: I am sorry, what did I miss there, in fact? What do you? Scott Schneeberger: I'm glad you added that in there because that was well worth hearing. I was just asking general for the total corporation, it sounded like you've been making some technology investments in McGrath itself. So that's what I was asking. I like your last answer, but if we could touch on that as well, too, please. Joseph Hanna: Sorry about that, Scott. I completely missed that. I should have asked for clarification. Yes, the technology investments that we're making are normal course. We always need to update our systems, systems come out of support in years. We need to move things to the cloud. There's just all kinds of work that we need to do to keep our systems relevant and keep them customer-friendly and customer-facing. So that's pretty much what I meant by the technology enhancements. Scott Schneeberger: Got it. I like what I was hearing about the work you're doing in data centers and TRS. Operator: We'll take our next question from Daniel Moore with CJS Securities. Dan Moore: Joe and Keith, I'll start with -- you obviously -- you mentioned some encouraging trends. Can you just speak to the cadence of inquiries as well as order rates over say the last 1, 3, 6 months, start with Mobile Modular, sequential improvement, more stable? How would you describe it? And then the same question for Portable Storage. Joseph Hanna: Sure. Yes, I'll start with Mobile Modular. Our quote volumes have been healthy, and our booked order levels have been healthy, too, and they were healthy for this particular quarter, up double digits. That was fairly consistent with the second quarter and up from the first quarter. And I would say we're seeing a similar trend in Portable Storage. I wouldn't say that the third quarter, we're not seeing any marked increase over the second quarter, but we're seeing a consistent level of inquiries and booked order flow sequentially. Dan Moore: Really helpful. Something that you've described in detail and laid out again this quarter, the shift from CapEx to OpEx over the last few quarters as you refurbish units rather than purchase new ones, dampens your GAAP margins a little, but not necessarily your cash flow. Is that something you expect to continue into next year? And what would cause you to shift back into a little bit more of a CapEx mode? Keith E. Pratt: Yes, Dan, I can help with that. I think, it all goes to fleet utilization. So if you look at the modular fleet, there are more markets where we have equipment available to meet new orders. If you go back 18 months, 2 years ago, utilization was higher. It was more common that when a new order came in, we were already highly utilized, and we would look to invest capital to meet the orders. So that's the dynamic at play. So I think to answer your question, look at where utilization is when we're entering next year. And for businesses where it's low, which is currently the case of portable storage and in many of our modular regions, we've got available equipment and that's how we'll meet demand. So there will be a trade-off there. It may mean those expenses continue to be more elevated. But from a cash flow point of view, it's the right thing to do. So that's how it's looking. I would say at TRS, where we've seen good recovery, particularly over the last 3 quarters and where utilization in the mid 60s is actually very good utilization for that business. That's an area where already, we're looking at selectively spending the capital and adding to the fleet again, to meet demand and we're very happy to do that. Dan Moore: Really helpful. Clearly, we still have a couple of months to go here, and we'll be looking to guide for a couple of months after that. I just wonder if you could maybe contrast the environment today compared to where we were, say, this time last year and whether or not you expect to get back to a more kind of normalized long-term growth in EBITDA as we look out '26, '27? Keith E. Pratt: Yes, Dan, I'll throw in a couple of comments. I'm sure Joe can add to it. I'd characterize the environment as still mixed. We've talked already about things like the Architectural Billings Index which has really bounced along below 50 for all this year and some months a little better, some months a little worse, but consistently below 50. That's a headwind for parts of the business. Smaller projects and portable storage have definitely suffered as well due to interest rate being high and really a slow journey of seeing interest rates start to come down. And then at various points in the year, a lot of it is related to just the policy and governmental topics there's that era of uncertainty. That probably means some customers have either moved with a little bit more deliberation, a little bit more caution. And we've seen examples of projects just take longer to get executed. So that's really the backdrop of how we've managed through this year. It hasn't been an easy year for us. If you then look into next year, the question is, how many of those headwinds start to ease. Do we see interest rates come down enough that people start to act more quickly on starting up new projects. And do we see some of the broader macro indicators like ABI start to move into positive territory and indicate that people are planning to execute a larger number of projects going forward. I think it's too early to tell. I think as we said in our prepared remarks, we've done a pretty good job this year of counterbalancing some of those headwinds with all of our growth initiatives, the services side of modulars getting good revenue per rental unit, which we're continuing to get and grow and in some of the regional expansion where we have been hiring and we're beginning to fund equipment purchases to support growth in some regions, but for us are relatively undeveloped and where we see longer-term opportunity. So those are the things you've got to lay on the scales as you look at the pluses and minuses that will influence next year. Joseph Hanna: So I'd like to just click on that just a minute, too, and what Keith said about the regional expansion. I mean, we hired a number of folks this year, and we're putting them into new markets and also markets that are adjacent to operating areas that we are already in. And we definitely are anticipating that to be a nice contributor to next year's results. So we're really trying to add that horsepower in there to be able to continue to grow the business despite what the market is doing. Dan Moore: That's really helpful. Last one, and I'll jump out. Maybe just talk a little about the 2 smaller acquisitions you made last quarter. I know it's still early days, but 1 in Mobile Modular, Portable Storage. How are they progressing? And more importantly, what does the pipeline of opportunities look like over the next few quarters? Joseph Hanna: Yes. We -- yes, those were relatively small acquisitions. We closed them in Q2. And there was one, was a modular business and 1 was a Portable Storage business located in the Southeast. And so they're integrated, and we're happy to have them on board and they're contributing at this point. And we'll see what the results are as the next quarter or 2 progress. It is a little bit early to really be able to talk much about how they're performing. But there's no red flags there at this point. Keith E. Pratt: And then maybe the pipeline comment. I think we can say that we're very active in our normal process. We have work going on in the field. We know markets that we have a high level of interest in. And I think the pipeline is active and encouraging and it's going to be part of our growth strategy. Operator: We'll take our next question from Marc Riddick with Sidoti. Marc Riddick: So I just wanted to sort of maybe piggyback on the prior question and line of questioning. Maybe give a bit of an update as far as kind of usage prioritization that you're sort of looking into next year and particularly around the acquisition sort of pipeline. Can you maybe talk a little bit about the valuation that you're seeing now, whether that's changed much over maybe over the last 6 months or so? And then I have a follow-up on the personnel side. Keith E. Pratt: Okay. Marc, I'll take a crack at that. In terms of usage of cash, first high-level comment I would make is, this has been a very good year from a free cash flow point of view. And if you look at us year-to-date, we've reduced our debt. We actually had slightly lower leverage than when we started the year. We've managed to pay our dividends, and we've completed 2 small acquisitions. One of the factors that has allowed us to do that in addition to just good operating performance from the business, but it's that lower CapEx that I referenced in the prepared remarks. We spent a lot less on new equipment this year than we did a year ago. So if we look into next year, and I touched on this earlier, based on fleet utilization, we're probably going to be in a position where we can meet a lot of demand from existing fleet. That's a good thing. That may be a positive, again, from a CapEx point of view. That gives us a lot more flexibility with things like M&A. And that's why the pipeline is active. It's an important part of the strategy. Briefly on valuations, it's very situationally specific what you're looking at, what there is on offer from a business that's for sale. We try to be very measured in how we look at things, fleet quality matters to us a lot and the ability to generate future cash from any business that we acquire. But there are opportunities out there. We'll always pay a fair price for a good quality business. But we'll also know what our walkaway is where it doesn't make sense for us and we'll simply approach the market from other angles. Marc Riddick: Great. And then maybe just a little bit of a follow-up on the commentary around adding folks and tech spend for some opportunities that you see. Are those kind of just sort of a short focus as far as things you're going to be executing on in the short term? Or is this something that you see opportunity sets going into next year? And are there some areas there geographically or otherwise that you're kind of targeting for the potential for new additions, both on the assuming capital side as well as the technology side? Joseph Hanna: Yes. Marc, the hires that we've made this year are definitely long term, we hope to have them be long-term resources in the company, no short-term plans there. We want those salespeople to get out into the market and really start generating some business over the next several years. Most of the hires that we made were in the Midwest area and Northeast, but we will continue to add sales people in places that we need them, where we see business potential and in places that we have resources already that we can leverage to be able to serve the market. So very much long-term strategy, very carefully thought out and implemented, and we're anticipating that's going to be very nice to help our growth. Marc Riddick: Excellent. And the last thing, I think, in your prepared remarks and maybe as a response to 1 of the questions. It really did a great job as far as bringing us up to speed on maybe how education funding has really played out through the year. Are there any valid initiatives that you kind of have an eye on or keen next month that we should be aware or should be thinking about as far as -- is there any that are top of mind at the moment? Or do you sort of feel like we kind of already have a lot of the main ones locked in already? Joseph Hanna: Yes. There's no particular valid issues that I'm aware of right now that we're concerned about concerning facilities funding at this point. So I mean I'm very pleased with the amount of funding that's in place in the markets that we operate in. It's very healthy. And that funding typically doesn't grow cobwebs. That stuff gets implemented and put out into the market as soon as districts can get themselves organized and get the projects underway, and we'll be right there with them when they do it. So we're very, very happy about that and think that it's a good positive. Operator: [Operator Instructions] We can pause for a moment to allow any further questions to queue. And ladies and gentlemen, that appeared to have been our last question. Let me now turn the call back to Mr. Hanna for any closing remarks. Joseph Hanna: I'd like to thank everyone for joining us on the call today and for your continuing interest in our company. We look forward to speaking with you again in late February to review our fourth quarter results. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.
Gerardo Lapati: Good morning, everyone, and welcome to Alsea's Third Quarter 2025 Earnings Media Conference. My name is Gerardo Lozoya, Head of Investor Relations and Corporate Affairs. Today, you will hear from our Chief Executive Officer, Christian Gurría; and Federico Rodríguez, our Chief Financial Officer. Before we continue, a friendly reminder that some of our comments today will contain forward-looking statements based on our current view of our business, and that future results may differ materially from these statements. Today's call should be considered in conjunction with disclaimers in our earnings release and our most recent Bolsa Mexicana de Valores report. The company is not obliged to update or revise any such forward-looking statements. Please note that unless specified otherwise, the earnings numbers referred to are based on the pre-IFRS 16 standards. I will now hand it over to Christian for his initial remarks. Please go ahead, Chris. Christian Dubernard: Thank you, Gerardo. Good morning, everyone, and thank you for being with us today. Thank you. Today, I'll provide an overview of our third quarter results, covering our financial earnings, regional highlights and key brand developments. I will also highlight our progress on digital transformation, ESG initiatives and expansion strategy. Federico, our CFO, will follow me with an analysis of our results, including revisions to our 2025 guidance. Before we turn to the quarterly results, I want to remind everyone of the continued focus on our strategic priorities that will guide us moving forward. As we mentioned last quarter, our first priority is to continue driving disciplined organic growth. We remain focused on expansion and innovation to drive same-store sales growth, prioritizing traffic over price increases. We will also improve our customer experience and advance our digital capabilities. In addition, we will continue rolling out successful commercial campaigns such as Menu Del Dia from Vips in Mexico and Spain, Tres para mi or three for me in Chili's in Mexico, Paradiso Italiano with Italiannis in Mexico and Gourmet Burgers from Foster's Hollywood, among others, other initiatives, which have consistently improved our product offering and reflect our commitment on innovation. Our second priority is to optimize our brand portfolio. We will prioritize return on investment by ensuring that each brand and store format is aligned with the needs of each regional market. Also, scalability and growth across all brands remain a core focus to unlock their full potential. We are also addressing and analyzing potential divestments on non-core assets to concentrate on the business with the greatest strategic and financial value. Our third priority is to enhance profitability. More value is being generated in our existing stores portfolio through consistent operational improvements by leveraging the strength of what we call high-impact operational talent. Organic growth is supported by strategic new store openings and the remodeling of key locations. As mentioned, 2 stores are being remodeled for every opening as refreshing the existing base delivers faster and more efficient returns on capital. Finally, our fourth priority consists on discipline and strategic capital allocation. We will prioritize growth and productivity initiatives with clear return thresholds. Also, vertical integration and long-term sustainability continue to be central to our strategy. Our CapEx plan is being optimized, adjusting long-term investments to become even more efficient and ensuring every peso invested aligns with our capital allocation priorities as well as different G&A efficiencies that we have been consolidating and working through the year. Now I'll provide an overview of our quarterly performance, including our financial results, regional highlights and key brand developments, along with updates on our digital advancement ESG initiatives and expansion strategy. In the third quarter, we reported a 5.7% year-over-year increase in total sales, reaching MXN 21 billion or a 6.7% increase, excluding foreign exchange effects, same-store sales grew by 4.1%. EBITDA increased 1.8% in the third quarter, reaching MXN 2.9 billion with a margin of 13.7%, decreasing by 50 basis points year-over-year. Regarding brand performance during the third quarter, Starbucks Alsea same-store sales increased by 3.9%. For Starbucks Mexico, same-store sales grew by 3.3%, demonstrating solid in-store performance backed by our loyal customer base. For Starbucks Europe, same-store sales increased by 1.6%, reflecting a challenging environment in France, offset by continued strong momentum in Spain, driven by effective commercial initiatives. Given the strong results in Spain and the importance of the brand in the country, we are very excited about the latest opening of our flagship store in the Santiago Bernabeu Stadium, Starbucks Bernabeu. Finally, in South America, same-store sales rose 9.6%, driven primarily by Argentina. Excluding Argentina, same-store sales declined 1.3%. Nonetheless, there is a sequential improvement in Chile despite lower traffic. Domino's Pizza Alsea posted 2.6% increase in same-store sales. In Mexico, Domino's same-store sales increased 1.6%, driven by our continued efforts in product innovation. In Spain, same-store sales increased by 2.9%, reflecting the ongoing effective promotional efforts and positive customer response to product innovation. In Colombia, Domino's delivered strong results. Same-store sales increased by 9.1%, supported by successful marketing initiatives. Burger King's Alsea same-store sales, excluding Argentina, decreased 1.4%. In Mexico, Burger King reported a decrease in same-store sales of 1.7%. This was driven by a shift of mix towards low price and discount items, combined with a decrease in premium innovation and digital coupon. The full-service restaurant segment delivered a 4% same-store sales growth. This segment remains strong and resilient, supported by marketing campaigns that enhance our product offering and demonstrates our commitment to innovation. Full-service restaurants in Mexico increased by 5.3%, with most brands growing at mid-single-digit pace with Chili's and Italiannis, while Chili's and Italiannis stood out by achieving high single-digit growth. The performance was driven by the strength of our value product menu offering, product innovation and launches. Same-store sales for full-service restaurants in Spain grew 2.4% with Foster Hollywood and Gino's delivering solid growth of 5.5% and 4%, respectively. We are focusing on introducing new and premium products to attract new guests, capitalize on existing traffic and strengthening our customer loyalty. Our global expansion strategy remains focused on prioritizing quality over quantity, targeting the most profitable opportunities across our key markets. We remain committed to delivering strong value to our customers, maintaining our pricing strategy and customer loyalty through our resilient brand offering. In the third quarter, we opened 46 new stores, 35 corporate units and 11 franchises with an emphasis on high traffic and high potential locations. We expect the pace of openings to pick up on the fourth quarter to meet our full year goal for net stores. This approach reflects our commitment to long-term brand positioning and disciplined strategic growth through flagship developments and selective market expansion. Given the profitability and payback of store remodeling, such as increased customer satisfaction and higher sales, we will continue prioritizing a refresh and modernized look across all our locations. Our digital platforms continue to be key drivers of growth. By the end of the quarter, loyalty sales increased 7.9%, reaching MXN 5.1 billion, representing 24.6 million orders and contributing 26.1% of total sales. We also surpassed 8 million active users across our loyalty programs, confirming the strength of our digital engagement. Additionally, we served nearly 33.6 million digital orders in the quarter, totaling MXN 7.3 billion, which represents 37.4% of our total sales. This quarter, we continue to strengthen our sustainability model by aligning our purpose with every aspect of our operations. As part of this effort, we made significant strides towards reducing CO2 emissions, installing over 215 solar panels in Europe and installing 159 kilowatt per hour of power in Europe in Spain. In Mexico, Starbucks served over 1 million beverage in reusable cups and granted 3.9 million -- 3.2 disposable cups as part of our efforts to reduce waste. We also continue to strengthen our social impact through Fundación Alsea and Movimento Va por mi Cuenta, supporting vulnerable communities and driving positive change. As we launch new fundraising campaign, we expect to surpass previous year's results, reinforcing our long-term commitment to responsible, purpose-driven growth. Let me now turn it over to Federico, our CFO, who will provide further insight and financial performance. Thank you. Federico Rodriguez: Thank you, Christian. Good morning, everyone. During the quarter, the sales increased by 5.7%, supported by the brand resilience and a strong performance in Mexico, Spain and Colombia. Excluding foreign exchange effects, sales increased 6.7%. In the third quarter, sales in Mexico were up 7.5% to MXN 11.5 billion. In Europe, sales increased by 8.2% to MXN 6.5 billion, while in euro terms, sales increased by 3.8%. Finally, South America sales fell 4.7% to MXN 3.1 billion. The EBITDA increased by 1.8% with a margin contraction of 50 basis points, mainly due to a loss of operating leverage given the lower consumer environment in the month of September. These impacts were partially offset by the resilience of the brands across most regions, disciplined revenue management and improved SG&A efficiency. In this context, we chose to limit price increases to protect traffic and sustain brand competitiveness with consumer demand slowdown. In Mexico, adjusted EBITDA remained flat as there was lower operating leverage given the softer consumer environment in the month of September. In Europe, adjusted EBITDA increased by 6.2% year-over-year, primarily due to an increase in same-store sales of 2.3%, driven by new products and campaign launches that led to improvements in all brands, offsetting higher labor costs. In South America, adjusted EBITDA decreased by 14.2%, reflecting a lower consumption environment in the region, except for Colombia. A slowdown in consumer activity weighted on operating leverage and contributed to the slow recovery in the region. The net income for the quarter increased 559% year-over-year, reaching MXN 512 million, reflecting a positive noncash effect, which reduced the cost of our U.S.-denominated debt in Mexican pesos terms. The next slide, please. The CapEx for the first 9 months of the year totaled MXN 3.8 billion. Of this total, 77% was allocated to store development initiatives, including the opening of 35 new corporate units, the renovation and remodeling of existing locations and equipment replacement across the brands. The remaining 23% was directed at the strategic projects such as the distribution center in Guadalajara, technological upgrades, process improvements and software licenses, all reinforcing the long-term competitiveness and operational efficiency. At the end of the third quarter, the pre-IFRS 16 [Foreign Language] thank you. The pre-IFRS 16 gross debt decreased by MXN 1.8 billion year-over-year, reaching MXN 51.8 billion. The company's net debt, not counting the impact of IFRS 16 was MXN 34.5 billion, which is MXN 2.5 billion more than it was at the same time last year. This increase reflects the bank loans used to settle the minority stake in the European operations, short-term debt for working capital and CapEx needs. Consolidated net debt reached MXN 47.1 billion, including lease liabilities. At the end of the quarter, 74% of the debt was long term with 67% denominated in Mexican pesos and 33% in euros. We remain focused on maintaining a healthy capital structure supported by prudent financial management. At the end of the quarter, the cash position stood at MXN 4.7 billion. Turning to financial ratios. The total debt to post-IFRS 16 EBITDA ratio closed the quarter at 2.9x, while the net debt-to-EBITDA ratio stood at 2.6x. While we are still committed, we have adjusted the 2025 guidance given the negative impact generated by a lower-than-expected consumption dynamics during the month of September and the ongoing impact of the appreciation of the Mexican peso affecting the top line. Now we expect a high single-digit top line growth and a low single-digit EBITDA growth for the year. I will now pass you over to the operator for the Q&A session. Thank you very much. Operator: [Operator Instructions] The first question is from Mr. Ben Theurer from Barclays. Benjamin Theurer: So 2 ones real quick, just following up on some of the commentary you had about the softness towards the end of the quarter in September and obviously, the guidance adjustment as you look now for slightly lower top line. If you think about the weakness, how has that potentially carried into the fourth quarter in October? And are you seeing any difference between the formats? So thinking coffee versus pizza versus burger versus food service across the board? Are there certain areas that are a little more affected versus others? So just a little more granularity as to the weakness in September, maybe over the last couple of weeks to understand what's driving the guidance revision. Christian Dubernard: Thank you for your question. No, the reality is that, as we mentioned, the third quarter was -- we saw July and August pretty balanced. And then we have an important drop in September. And this was across, in general, brands and geographies. It's not specific to a particular brand. Obviously, as we mentioned in the report, some of the South American countries, we have a slower -- a higher impact in those countries due to the deceleration of consumption. But in general, was across all geographies and markets. And as you asked going into Q4, it's too early. It's been 2 weeks in October. We see a similar trend in October. Nevertheless, we have very strong commercial initiatives in all of our brands and across all of our geographies for Q4, focusing on mainly 3 particular aspects. One is product and customer experience innovation. The second one, value. We can share some examples of some of the initiatives that have been paying off across the year regarding value like Tres para mi in Chili's in Mexico, Paradiso Italiano with Italiannis in Mexico, not just Magic Magicas or Magical Nights in Ginos in Spain and Gourmet Burgers in Fosters and many of the day in some of our brands. which have been continued driving traffic and that. Nevertheless, for Q4, we have very, very strong and powerful innovative and customer experience-driven campaigns that we are confident that will help us drive the traffic during this quarter. But something very important to highlight is always protecting this gross margin while we preserve traffic. We know that during these times of lower consumption or slowdown, the brands that remain loyal to their customers are recognized when traffic comes back. So that's what we are focusing on. Benjamin Theurer: Perfect. And then my second question is you mentioned potential asset disposal. Could you just elaborate, is that more like regions you think of not being worth maintaining? Or is it brands in particular? I mean we've seen, for example, the Burger King transaction in Spain. So is that something maybe in other regions to follow? How should we think about this? Federico Rodriguez: We have been very vocal, Ben, regarding divesting processes that we are setting in different noncore units. I would say that is one of the main priorities, not only for this year, but for the future. And we're still dealing with more than -- for potential buyers for different business units. It is not going to be relevant in terms of the contribution to the top line or to the EBITDA -- but obviously, what we want to address us to all the investors community is the focus that we want to deliver to the main brands such as Starbucks, Domino's Pizza, et cetera. We are still moving forward. Sorry, we cannot elaborate on rumors. But once we have said and we have completed this M&A activity, we'll give you more news. Operator: Our next question is from Mr. Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: I'd like to understand a little bit more the add up of the revised guidance, right? And this is on top of one very particular moving part that is FX. You cut revenue and EBITDA similarly, which could suggest as your broad expectations for margins are virtually unchanged. Obviously, we know that the stronger currency, the translation from Europe is a headwind, but gross margin could actually benefit from that going forward, right? So this is just to see if you could elaborate a little bit more on how you're seeing FX translation versus transaction FX, how your hedging positions are, how you're thinking about pricing and cost and more importantly, what is your underlying assumptions for margins going forward? Federico Rodriguez: Thank you, Thiago. I will answer the first part of the question regarding the cutoff of the guidance in top line and in EBITDA growth. Obviously, we are losing operating leverage and even what we have -- and we are having some help in terms of EBITDA margin from Europe because of the appreciation of the peso in comparison with the euro. We are losing some kind of operating leverage in Mexico, too. We had a really weird quarter. We have a good July and a strange August with one strongest week and a terrible September. So that's the reason that we are cutting up all the guidance for the rest of the year. And I would say it is only operating leverage. We are having tailwinds from the FX. You know that we delivered a guidance with a forecast of MXN 20.8 per dollar, we're having a good gross margin. And in fact, you will see a lower-than-expected loss of margin EBITDA. But having said this, obviously, we have to bring you the reality of what we saw in the quarter. And as Christian have just mentioned, with 3 quarters out of the 13 weeks of the last quarter, it is pretty early to say what is going to happen. That's the reason of the [indiscernible] of the guidance. So if you want to complement? Christian Dubernard: Yes. And also regarding gross margin, we have seen positive tailwinds regarding COGS. As you know, there was a lot of pressure on cost of goods, particularly with some commodities based on the FX -- now we are seeing that both the internal initiatives that we shared some of them last quarter are starting to pay off. There's normally 3 to 5 months of time when you start seeing the different initiatives to pay off. We are seeing that. And also, on the other hand, the initiatives that we had implemented and consolidated around productivity and labor, we have seen them to start to pay off. So in these terms, we are seeing a steady -- slow but steady margin recovery in our brands through these initiatives and still have had some increments on beef, but we are -- again, it's part of our business, we are managing every year as they come and through different platforms. Thiago Bortoluci: This is helpful. And if I may, a quick follow-up. We have been discussing on our opening remarks and now the drag in September, right? Anything you could share to help us calibrate the magnitude of the pressure that you saw particularly in that month? Federico Rodriguez: We do not disclose the transactions by brand, but obviously, there are some brands where we had a contraction of around 100 basis points in terms of the same-store sales in comparison with the previous 2 months. And that's the reason. As I said before, Thiago, it was only 1 month. Unfortunately, when we take a look at the guidance, we prefer to be really honest of what we're looking for the remaining part of the year. You know the seasonality of this business in November and December, maybe we'll have a positive news. But as of today, I cannot say that. Sorry. Operator: Our next question is from Mr. Alejandro Fuchs from Itau BBA. Our next question is from Antonio Hernandez from Actinver. Antonio Hernandez: Just I mean, very good color that you provided regarding the different performance in the 3 months. Just wanted to see if you could provide more color on September. If there were -- how much of that underperformance was because of external factors, maybe competition or anything specifically that you could provide on that, that will be very helpful. Federico Rodriguez: I would say it's really macroeconomical factors, Antonio. I cannot say that we are dealing with something different from a cost of food point of view or something internal. I would say that we are delivering the same campaigns. Obviously, most of the value coming from traffic. We have been telling you these guys. We are not doing a 100% pass-through coming from ticket. We have positive tailwinds regarding FX. Obviously, we have 30% of the food basket dollar index. And I would say that everything is not from competitors. We know that the competitors are slowing down the pace of openings, especially in coffee and pizza. But having said this, we are not dealing with something different from a commercial point of view. Do you want to add. Christian Dubernard: To avoid being repetitive, it's more -- we have seen, in general, a deceleration on consumption, particularly after the end of the summer, which had the highest peak in September. We know that normally every September slows down. Nevertheless, this was a little bit more -- the peak or the value was higher. So again, this has to do more to a macroeconomic environment. And in general, we see less thrust on the consumers in certain geographies as Europe, certain economy slowdown in South America and likewise in Mexico. But we are expecting to have, as you know, most of our -- almost 30% of our revenue EBITDA comes on the last of the quarter. So we are, as I mentioned, with strong campaigns and strong value-driven and innovation campaigns for Q4 in all of our brands and geographies. Antonio Hernandez: And just to clarify that terrible September or bad performance in September is all over the place. I mean, not only in one specific geography? Federico Rodriguez: Yes, it was in the 3 regions. Operator: Our next question is from Ms. Renata Cabral from Citi. Gerardo Lapati: You opened your camera? Renata Fonseca Cabral Sturani: Yes, I did. Christian Dubernard: No worry. Go forward with your question, Renata. Renata Fonseca Cabral Sturani: Sorry for the problem with the connection. My question is regarding Europe and the improvement that we are seeing there. 2024, we know that it was a challenging year in terms of same-store sales, and we are seeing now a stabilization in the region contributing to the company's results. So my question is, what were the main changes that you have implemented to reach to the current results and still the opportunities that you see to further improve the results on Europe. Christian Dubernard: Thank you for your question. Let me take this one. I believe what we have seen in terms of the recovery that you mentioned, particularly driven by Spain. We've seen very -- the customer reacting to the different campaigns in terms of innovation and value-driven campaigns as well as improved portfolios in terms of core offering like our brands in Starbucks, value-driven initiatives in Vips and Ginos, new very innovative campaigns around chicken and burgers in terms of -- in the case of Foster's Hollywood and particularly Domino's also the first half of the year, they were very much driven in having more, let's say, less traffic-driven and promotional activity which brought us good margins. And now we -- second half for Domino's will be more driven on achieving traffic, obviously, protecting the margin. So I would say to make the answer short, is the consolidation and the understanding and reading of the environment and looking forward of how the customer is behaving that we were able to adjust and adapt our different initiatives to respond to the customer needs. For Q4 and looking forward, as I mentioned before, innovation is going to be one of our main drivers. And likewise, as protecting value and margin for the customer -- value driven -- to protect value for the customer to drive traffic, but at the same time, in a smart way to protect our margins. So I believe understanding what is the behavior and what the customer is looking for is what's been paying off particularly driven by Spain. Federico Rodriguez: Additionally, Renata, in the bottom part of the P&L, we are implementing a lot of different strategies. In the stores, for example, we are increasing the productivity, trying to measure what are the peak hours of the day to have a better deployment of the workforce, and we are having terrific results. Additionally, in all the headquarter offices, obviously, we are stopping with doing non-core activities. We have been growing really -- we had a relevant growth during the last 10 years in Alsea. So we are going back to basis to consolidate synergies, moving different areas to where we are performing the best tasks. So we are having a lot of efficiencies in the bottom. But obviously, when we are losing the leverage as we have seen in September, it is impossible to offset only with these efficiencies, the loss of sales. Christian Dubernard: And to complement this last that you mentioned, Renata, also, we have seen this, let's say, approach where we consolidate the brands and when we are capturing opportunities like in the FSR segment where we are creating and generating a lot of synergies, it's paying off. So in a way, the strategy that we started at the beginning of the year in these terms is maturing, and we are already seeing part of the benefits of this strategy. Operator: Our next question is from Mr. Ulises Argote from Santander. Ulises Argote Bolio: I just wanted to understand a little bit better here on the pace of remodeling. Is this something we can expect going forward for the next couple of years? Or what's more or less the time line that you guys have in mind for this? And also to understand if this is focused on any specific format or region or if it's more across the board. Then a follow-up to that is if you guys have any color that you can share maybe on the sales lift that you're seeing on these remodeled stores. Christian Dubernard: Yes, I will take that one. Yes, as I mentioned in our first call, one of our main priorities is how do we make our existing portfolio more profitable. through driving same-store sales and basically driven by traffic. And remodeling is clearly a very strategic lever that allows us to drive this additional traffic, both one way through having better-looking stores, but also more efficient stores. When you have a remodel a store that has been operating for 5, 7, 10 years, you already know how the store behaves, what type of customers you get in those stores. So when we do these types of renovations or remodelings, we are just adapt to the reality of each one of the stores and the needs of each one of the stores. So as we mentioned in the first -- in our last call, we are in an average of 2: 1, 2 remodelings or renovations for each opening. That shifts between different brands, some brands or some geographies, we are 3:1. In some cases, we are 1:1. But clearly, the renovation of our existing portfolio is one of the key drivers of traffic together with having the best operational talent in each one of our stores, which is also one of our key strategies where we are focusing. Regarding payoff, where we have seen the highest impact in terms of payoff is in the FSR or casual dining segment and in Starbucks because obviously, different from Domino's or the customer doesn't necessarily stay in the store for a long period of time. In the case of Starbucks and our food service restaurant segment in both geographies, we clearly see that the customer really appreciates these types of renovation. So we've seen between mid- to high single-digit growth in some of the segments and to double -- I would say double. Low teens in the case of FSR. So it's a core -- it's part of now a clear strategy for us and a clear priority. Operator: Our next question is from Ms. Isabella Lamas from UBS. Isabella Pinheiro F. Lamas: I have 2 here. So firstly, could you discuss a little bit more about the input costs, particularly in the scenario of the peso appreciation. We were kind of wanted to get a sense of how you're thinking about your cost inflation going forward and how that compares to what you have experienced for this year? And how should we think about the margin setup for next year? And my second one is a quick one, is regarding leverage ratio. You've just reiterated your guidance for this year. So we were wondering if you have any views you could share for next year, any kind of range or what should be aiming for? That's it. Federico Rodriguez: Okay. Thank you, Isabella. Regarding the input costs, we are not having -- I'm talking only regarding Mexico and South America. We are not having more headwinds regarding FX. I would say that at this point of the year is totally comparable and in some cases, better than in 2024. That's from one side. As you know, we have 30% of the inputs dollar index in Mexico and the rest of South America brands. And additionally, for the next year, we are forecasting mid low single-digit input cost for 2026. And regarding the guidance, we changed the guidance for 2025 from a low teens in top line to high single digit and regarding EBITDA growth from a mid-single digit to a low single digit. Regarding 2026, it is too early. We are building our budget with the different variables. So we'll tell you something in the next conference in the month of February. Operator: Our next question is from Ms. Julia Rizzo from Morgan Stanley. Julia Rizzo: I have 3 actually. One, could you -- I noticed a sharp increase in the leasing expense on the cash flow from MXN 4.6 billion from MXN 3.6 billion, 26% increase actually, which is quite high compared to your sales and also to the store base. Is there anything here was a renegotiation in some regions, specific some brand? Is there something that is not perhaps recurring or it is related with some stores that you're already opening under construction and paying but not open. Can you give me a little bit of sense of how we should interpret this, especially looking forward, right? Because it increases from 6.3% of sales to 7.4% of sales in 1 year. Federico Rodriguez: Okay, Julia. Yes, Julia. We have been very vocal from December on regarding the lease change that we do from a post-IFRS 16 perspective. As you know, we manage the business on pre-IFRS 16 figures and -- but the change was because we standardized the criteria of all the leasing contracts across the geographies to have a single one company-wide. For example, we had a different policy in Europe from a bps perspective, that bps here in Mexico, while it's the same business, et cetera. So it is more an accounting perspective than a real change on the lease payment that we do on a monthly basis. This does not imply -- and just to be repetitive, an increase in the rental expense, but in the way that we account these leases. This is an effect we'll have until the last quarter of 2025. And from the first quarter of 2026, it is not going to be a relevant change. I don't know if you had another question, Julia. Julia Rizzo: Yes. Just as a follow-up. I'm not talking about the depreciation and amortization. I'm talking about the cash flow payment on the free cash flow generation. Federico Rodriguez: No changes. From a free cash flow payment, it is pretty much the same. We have around 35% of the lease contracts on a variable base totally linked to the gross revenues and the remaining 65%, 70%, depending on the region is totally fixed and increased with half of the inflation of each one of the countries. So we do not have a relevant change from a cash flow perspective into the lease part. Julia Rizzo: Okay. So we follow up later. And also on the interest expenses, also when we annualize the rate of how much you paid, again, on a cash basis, the MXN 2.9 billion was MXN 3 billion compared to the average net debt of the period. We have kind of a rate around 14% roughly, which is well above the base rate. Is there anything here that is nonrecurring? Again, looking forward, how we should expect the cost of that or interest expenses to be? Federico Rodriguez: Well, unfortunately, it was like that because even while we had -- well, we have the $500 million bonds at 7.750%, it is swap. So we pay a rate above 13% from the dollar bonds. And that's the reason, and I want to link to what are we doing with the LT with the liabilities management for 2026. We are moving forward accordingly to the plan. We are almost ending with the refinancing of the 100% of the liabilities, the financial liabilities in the balance sheet, and we'll have savings above $20 million for 2026. We're still dealing with it. That's the reason I do not want to give you more details, but we will change from bonds in dollars and in euros to bank debt, which is cheaper and that will improve the average duration that we have into the balance sheet. But you will see savings on the 2026. Julia Rizzo: Fantastic. Last one would be on the remodeling, the focus -- the increased focus of the company on the remodeling. Can you -- is there any specific brand or region that are you going to allocate resources more or less? And can you give me a rough sense of how much it costs a remodeling Starbucks versus one opening? Just we can make some calculations here of how that would be. Federico Rodriguez: Regarding the cost, it's around 1/3 of the cost of a new opening and regarding the regions and the. Christian Dubernard: Yes. Regarding the regions and the brands, as I was sharing before, Julia, we are -- the brands where we see that are -- that react most -- the best when we do a remodeling are Starbucks and all the FSR segment. So we also do remodelings in some of the other brands, but we are focusing mainly on the brands where we have the best reaction from our customers in terms of traffic, which are the casual dining segment and Starbucks. Regarding the geographies, it's a strategic approach. It depends on the aging of the portfolio in some cases, depends on the -- if there is a particular region, area, city where we see that we have an opportunity to drive additional traffic. And I can tell you that -- or in the case where we see some additional competition coming in. So there is a different -- a very strategic approach to this. And as I mentioned before, we are privileging remodeling our openings with a much more focused and disciplined growth. Julia Rizzo: So it's mostly Starbucks and casual dining. Region, you don't have a specific targeted. Christian Dubernard: It's in general, obviously, where we have a higher number of store or a bigger portfolio like we do in Mexico with more than 900 Starbucks stores, you will see a bigger number of renovations, likewise, with the FSR or casual dining segment in Mexico and Spain, where we have also an important portfolio there. So that depends more on the size of your existing portfolio. But this is a very -- it's a high priority for us and with a good ROI every time we do, as Federico was saying, it's 1/3 of what we do in a new store and the ROI is very, very good. Operator: Our next question is from Mr. Bruno Ramirez from JPMorgan. Bruno Gabriel Ramírez Fernández: So question would be regarding full-service restaurants. How sustainable is to keep seeing this performance as it has been in the past quarters? And second question would be about the run rate for CapEx levels. Federico Rodriguez: I will go with the second one regarding the CapEx. This year, we will be spending around MXN 6 billion, MXN 6.1 billion for CapEx. We are turning things into the company. So only we have non-[indiscernible] projects. As you know, we have recently opened the facility of the distribution center in Guadalajara. It was on Tuesday, and we'll have a lot of profitability and diversification to all the different routes. So for 2026, I think that the guidance, as I said before, it is too early, but should be in the range of MXN 5.5 billion, at least for 2026. And the openings should be a similar figure to what we have seen during 2025 of around 200 openings, taking into consideration not only corporate stores, but franchisees and sub franchisees too. Christian Dubernard: Yes, I'm taking this one. As you have seen in the past, I would say, 24 months, we have seen a very steady growth in the performance of our FSR segment, both in Spain and Mexico. We continue delivering with a lot of innovation and very disciplined and focused growth on each one of the brands, both our own brands like we do in Europe and with our franchisors from the other brands in our portfolio, where we are working -- we have seen clearly brands like Chili's doing an extraordinary -- with an extraordinary performance in the U.S. So we learn a lot from that. We continue holding hands with our franchisors and seeing how this is really being executed and transferred with some value-driven initiatives in Mexico, likewise with the Cheesecake Factory. So I believe the preference of the consumer of our brands. And I would say the consistency that we have been able to deliver in the last years is clearly paying us and showing us that the customer wants to be in our stores and the quality of our products has continues to be a big differentiator. We have not fallen into this attractive or sexy approach into trying to reduce costs through -- by reducing portions or things like that. We are clearly going the other way. We are very disciplined in maintaining our value-driven initiatives that have been there for more than 3 years now, and we keep refreshing them with innovation and new products. So again, this is a segment that we are very happy with the performance. At the same time, we are very -- obviously, the investment in these types of stores or restaurants is an important investment. So we are always very cautious and careful on going for the no-brainer and locations that we know we're going to do well. And as I said before, Bruno we still have an important number of stores to renovate, and we know that this is going to drive and continue driving additional traffic. And also in some cases, growing through our franchisees is a very important part of our strategy. Our franchisees are very happy and confident with the performance of this brand. So we continue getting demands on trying to continue developing the brand through franchisees, particularly in Europe and in some of our brands in Mexico. Bruno Gabriel Ramírez Fernández: And just a follow-up question in the -- regarding CapEx. So beyond 2026, what percentage of sales should we expect? Is 2026 levels a good proxy between 2026? Federico Rodriguez: I would say it should be around 1.5% as a perpetuity rate, the CapEx. But it is better to have the guidance, and I will deliver both answers what to model in 2026 and what is happening in the next 10 years. Operator: Our next question is from Mr. Nicolas Riva from Bank of America. Our next question is from Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: I don't know, but I think I'm double counted here. No further questions on my end. Operator: That was the last question. I will now hand over to Mr. Christian Gurría for final comments. Christian Dubernard: First of all, I want to thank everyone for being here today and the interest and for your questions. Thank you very much. Before we conclude, we would like to thank you for your participation and interest in our quarterly conference call. If you have any additional questions or require further information, our Investor Relations team is always available to assist you. We wish you an excellent day and look forward to having you join us for our next quarterly update and the best holidays and the best holiday season and best wishes for you for this last quarter. Thank you, everyone. Thank you. Operator: Alsea would like to thank you for participating in today's video conference. You may now disconnect.
Operator: Good afternoon, and welcome to Alfa's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would like to turn the call over to Mr. Hernan Lozano, Vice President of Investor Relations. Mr. Lozano, you may begin. Hernan Lozano: Good day, everyone, and thank you for joining us. Further details about our financial results can be found in our press release, which was distributed yesterday afternoon, together with a summarized presentation. Both are available on our website in the Investor Relations section. Let me remind you that during this call, we will share forward-looking information and statements, which are based on variables and assumptions that are uncertain at this time. It is my pleasure to participate in today's call together with Roberto Olivares, Sigma's CFO. I will provide a brief update related to Alfa, Sigma, then Roberto will discuss Sigma's third quarter results and outlook. It is exciting to report Alfa, Sigma's first complete quarter as a streamlined global branded food player. We have experienced a smooth transition into a steady-state business after years of transformational developments. To better reflect Alfa's new identity and to concentrate on growing Sigma's corporate brand equity, we are implementing a re-branding initiative. As a first step to sunset the Alfa brand, an extraordinary shareholder meeting will be convened soon to propose adopting a Sigma-related entity name at the Alfa level. We will share updates on these changes in due course. Returning value to shareholders through cash dividends will remain core to capital allocation. On October 1, the Board approved the first dividend under the company's new food-focused structure, a $35 million payment, bringing total cash dividends for the year to $119 million. This amount is aligned with distribution levels historically supported by Sigma's strong cash generating ability. With that, I will now turn the call over to Roberto to discuss Sigma's results. Roberto Olivares: Thank you, Hernan, and thank you all for joining us today. We are pleased to report another quarter of positive sequential improvement in volume, revenues and comparable EBITDA, underscoring consistent progress adapting to raw material cost pressures in a global environment of soft consumer confidence. Consumers are moving across channels, categories and brands, including varying shift between retail and food service, dairy and packaged meats as well as value and premium brands. The good news is that Sigma's diversified business platform gives us a relative advantage to maintain strong connections with consumers throughout the broad marketplace. One of the biggest industry-wide challenges we continue to face is rising raw material costs. In particular, turkey breast has experienced the sharpest price increase, reflecting supply constraints amplified by seasonal avian flu. Prices reached an all-time high of $7.10 per pound at the close of 3Q '25, which was an outstanding 244% increase from a year ago. Although we have certainly felt the effects of high turkey prices and other protein costs, Sigma's large scale and global supply chain have helped reduce their impact on our results. Looking ahead, we anticipate that current high prices, vaccination and low feed cost will be supportive of a gradual improvement in turkey supply and cost. In addition to Sigma's structural advantages, our experienced teams have done an incredible job staying on top of consumer needs and expectations. All the initiatives we have undertaken drove third quarter revenues to a record $2.4 billion, up 8% year-on-year and 5% sequentially. We have been implementing targeted price actions through a balanced approach to mitigate rising input costs while also supporting volume. EBITDA was down 9% year-on-year due to sustained raw material cost pressures and a record high comparison in 3Q '24. Adjusting for the Torrente property damage reimbursements in the second quarter, comparable EBITDA increased 3% sequentially, marking the third consecutive quarter of improvement. As a result, 9-month comparable EBITDA of $722 million is tracking in range with our full year guidance. We are confident that this upward trend will continue gaining momentum into the fourth quarter, which implies significant year-over-year growth for the first time in 2025. Moving next to key highlights by region. Mexico was once again the standout with revenues in local currency increasing both year-over-year and sequentially. Volume increased 1% quarter-on-quarter as growth from retail channels offset weaker performance in food service, which was impacted by soft hospitality demand. By product, yogurt and value branded packaged meats were key drivers in the retail channels. FX-neutral EBITDA improved 6% sequentially as ongoing revenue management and efficiency initiatives offset higher raw material costs. In the United States, revenues were flat year-on-year and quarter-on-quarter as favorable pricing was offset by lower volume in both periods. Softer demand for packaged meats in national brands was partially offset as Hispanic brands continue to gain traction in mainstream channels and new customer acquisitions. EBITDA was 17% lower quarter-on-quarter, reflecting lower volume in national brands and changes in mix involving lower dairy sales. Staying in the Americas, Latin America delivered 2% currency-neutral revenue growth in the third quarter, driven by higher volume year-on-year and sequentially. EBITDA decreased 11% versus 3Q '24 due to higher protein costs and mix effects, but increased 10% quarter-on-quarter due to operating efficiencies achieved in the Central American operations. The underlying business in Europe has maintained an upward trajectory. Adjusting for all insurance reimbursements received last quarter, EBITDA increased more than 100% sequentially as effective price actions and Torrente-related production adjustments drove a recovery trend that is expected to be amplified with seasonality effects in the fourth quarter. Lastly, Sigma's Europe capacity recovery plan continues advancing on schedule towards full restoration in 2027. Looking at our financial position and select cash flow items, we maintained a strong consolidated net debt-to-EBITDA ratio of 2.7x at the close of the third quarter with a stable net debt. CapEx represents our largest use of cash, driven by planned investments. Projects underway include capacity and distribution expansions, primarily in Mexico and the United States, plus the previously discussed capacity recovery in Spain. Next, let me briefly touch on some of the exciting steps we are actively taking to strengthen the business model for long-term success. Our growth business unit remains focused on piloting and scaling new products and ventures with disruptive growth potential. Grill House, our direct-to-consumer venture that caters to the grilling enthusiasts is ready to make its entrance into the U.S. after uninterrupted growth in Mexico for the last 5 years. At the same time, the Studio, Sigma's Global Center of Excellence for design and innovation is moving forward in its first year with developing 46 prototypes and advancing on 11 innovation commitments to boost core brands. Advancements in these areas like these will continue to set us apart from competitors in all regions. With this, let's open the call for questions. Please, operator. Operator: Our first question comes from Ricardo Alves from Morgan Stanley. Ricardo Alves: I had a question on Mexico. I think that certainly, as you mentioned in the preliminary remarks, another quite positive and resilient performance in top line in the low double digits. With that in mind, can you break that down into more details as it pertains to eventual share gains? I'm really looking forward to what has been driving the strength of you relative to other food players in Mexico. If you can talk about share gains or your revenue management initiatives or even on a channel by channel? Is it exposure to smaller purchases that is benefiting you more than others with a less diversified SKU? So just trying to get some more granularity to try and explain the strength in top line in Mexico and if that's something that should continue going forward, that would be helpful. My second question, I think that, Roberto, you did refer to the guidance. We appreciate the fact that the company is reiterating the guidance. I think that the message is pretty clear here, and it does imply to the comment that you made that the fourth quarter should be significantly stronger. I think that we're talking about almost 10% EBITDA growth on a sequential basis. So, with that in mind, can you also lay out in more details in your view, what are the key value drivers from the third quarter into the fourth quarter for this big sequential improvement? Is it -- when we look historically, the seasonality doesn't really help us to come to a conclusion that the fourth quarter is going to be significantly better. So is it something that we cannot model as well as you can, meaning your hedges may be looking better or to one of the points that you made, maybe Europe is going to be improving much faster than expected. Is there any top 2 or top 3 value drivers for us to be more confident about this sequential recovery into the fourth quarter? Roberto Olivares: Thank you, Ricardo, for the question. Let me first address the first one related to Mexico. In general, let me first explain that in Mexico, we do have the retail business and the foodservice business. We have seen different dynamics in each one of them. Foodservice first being more soft on volume, particularly due to raw material cost increase, particularly beef, but also softer hospitality trends, as I explained in my initial remarks. If you divide the business, retail is actually growing a little bit more on volume and foodservice is decreasing in volume. And in retail, we have a good presence in both the modern and traditional channel and a good presence across the different value segments across the socioeconomic spectrum. So we do have brands that whenever a consumer is trading down or trading up, we manage to catch the consumer as they move. So we have been seeing a little bit of trading down. So volume from our value brands is growing a little bit higher than the premium and the mainstream brands. And also volume in some of our dairy brands, particularly yogurt, continues to increase. I would say those are the 2 main drivers of the resilient volume that we have seen in Mexico. Then let me address your second question regarding reiterating the guidance and what we see in the fourth quarter of 2025. First, let me just make the comment that last quarter was -- fourth quarter '24, we have some extraordinary impacts, particularly in Mexico. If you see the margin that we have seen through this year in Mexico up to today, up to the third quarter, we were almost at 15% EBITDA margin. If you normalize that effect, we have close to $30 million more in Mexico in the fourth quarter versus the fourth quarter of 2024 just because of that. Additionally, we do expect to receive -- to continue receiving the reimbursement from the business interruption insurance from the Torrente incident we expect between $15 million and $20 million of business interruption coming in the fourth quarter. We actually already received a small portion of that during the month of October. We do also expect the European operation to have better results than the fourth quarter of 2024 because of higher prices and the momentum that we have seen in the operation between $5 million to $10 million in that sense. And in the case of the U.S., we see that we will move from a decrease versus last year in this third quarter to actually being able to have a similar result in the U.S. versus the fourth quarter of 2024. So those are the main key drivers for us being in range with the guidance. Ricardo Alves: Exactly what we are looking for, Roberto. Operator: Our next question comes from Renata Cabral of Citi. Renata Fonseca Cabral Sturani: So I have 2 regarding the U.S. business. One -- the first one about category trends. How would you describe the overall competitive environment right now in the U.S. in packaged meats and refrigerated food? Are private label or value play is gaining share right now? And how is Sigma positioning to defend pricing? And still on the U.S. business, in the release, it's mentioned that we have volumes in the national brands. My question is to what extent was this driven by category contraction or share loss and how the company has just seen the product mix to reaccelerate volumes in 2026? Roberto Olivares: Thank you, Renata, for your question. Regarding category trends in the U.S., we have been seeing just more competition of private label in the category, particularly, I would say, because of all of our regions, probably the U.S. is the one that has a softer consumer confidence recently. Consumers in the U.S. are managing a tighter budget. They are more cost conscious. Having said that, we -- particularly in the national brands business, we play as a smart choice, I would say, very close to the segment where private label is playing. And although we have seen that private label is penetrating more in the category, has not necessarily impacted our brands, has impacted more of the mainstream brands in the category. We try to position ourselves as a smart value brand, playing a lot with innovation on convenience on -- not only on affordability that has helped maintain our position with the consumers. And actually, we, in that sense, have been doing well. In regards to what we see going forward, definitely, the category this year, mainly in the Americas has suffered a lot because of raw material cost. We have mentioned a lot that turkey, but also pork and also other -- beef, other materials has been increasing. We do expect for 2026 for raw materials to ease, to start to recover production, particularly in turkey, that will increase the supply in the production and also impacting raw material to the downside. And hopefully, with that, we do expect a pickup in the category for next year. Operator: Our next question comes from Federico Galassi of Rohatyn Group. Unknown Analyst: I don't know if I was allowed to speak. It's [ Matteo ] here. I wanted to know if you could give us some color on how is operating leverage looking in this scenario with lower volumes. I think the picture in terms of raw material costs is very clear. Everyone understands the pressure particularly turkey has had on your results. But I wanted to see if you could provide us some guidance on what we should expect in terms of OpEx as a percentage of sales with more granularity by country, if possible? Hernan Lozano: Matteo, this is Hernan. Let me see if we understand your question correctly. So the first part refers to operating leverage and whether the decrease in volume is creating some slack in terms of the level of operation that we maintain across the different regions. Is that right? Unknown Analyst: Yes, exactly. Hernan Lozano: Okay. So the answer is no. This is not creating any slack in terms of operating leverage. What we're seeing is we are operating at pretty much capacity, especially in the Americas, in Mexico and the U.S., if you look at many of our CapEx projects, these have to do with catching up with volume that has grown at a pretty strong rate before 2025. So from an operating standpoint, the operations are normal, I would say. Roberto Olivares: I will add that -- thank you. I will add that it's not that volume is necessarily decreasing a lot. I mean, again, in the case of the U.S., was 1% this quarter is -- we do expect to continue growing in volume in the next years. Unknown Analyst: And one quick follow-up related to cost of raw materials. It should be fair to expect that particularly turkey prices stabilize towards the end of the year and that we see lower raw material prices for next year. What's your strategy, your view on pricing, if you could give us any idea on that for next year? Roberto Olivares: Sure. Thank you, Matteo. I mean, in general, we do expect, I would say, more friendly raw material environment next year. We -- let me talk about turkey. We are starting to see some indications that some recovery in the turkey production is starting to happen. There was an inflection point in July where production is starting to increase versus last year. And actually, the rate of increment or the rate of how the production has increased has been at a good rate. Having said that, there is still some uncertainty on how it's going to continue that rate in the next months, particularly because, again, we're entering the winter in this hemisphere and potentially, there could be more diseases coming along. There was a particular disease that affected a lot the Turkey this year was a pneumovirus. And they developed a vaccine for that virus that started to help. They started to vaccinate the turkeys around April and May. So we do expect that, that continues helping with the production over the next months. We are cautiously optimistic. I will say that we do expect production of Turkey to continue increasing. But again, cautious about the rate of that increase. Operator: Our next question comes from Fernando Olvera of Bank of America. Fernando Olvera Espinosa de los Monteros: Roberto, Hernan can you hear me? Roberto Olivares: Yes. Fernando Olvera Espinosa de los Monteros: Perfect. My question, just a couple of follow-ups. Regarding or linked to the cost outlook, I mean, thinking that turkey prices should start easing going forward, how are you thinking about pricing mainly in Mexico towards year-end and next year, trying to see if any additional adjustments might be needed. And also thinking about volume softness overall, how are you thinking about CapEx for next year? Roberto Olivares: Thank you, Fernando. Let me just make the comment that although we have been seeing that some indication that production of turkey started to increase, prices of turkey has not reflect that. So prices of turkey continues to be at a record level, both in turkey breast and turkey thigh. And we do expect them to decrease in the following -- particularly in the following year. I will say more as the -- probably between the first and second quarter of the next year, that is our expectations. Regarding pricing, when that happened, we have been working very closely with the revenue management teams to be able to protect both margin and volume. We try to do any price increase that we do, we try to do it very -- with a lot of analysis in regards to elasticity, how the competition is moving and also how the consumer perceives that price increase. We want to maintain the preference of our consumers. So whenever there is something that we can see that we can act both on higher raw material costs and lower raw material costs, we will act upon that to be able to protect and to continue growing volume. In regards to that, your question about CapEx in general, again, particularly Mexico and the U.S. operation, for the last couple of years, we have been working at capacity or almost at full capacity. So we have been planning and investing in some projects to increase the capacity. We also have the recovery plan in Europe to recover the capacity that we lost in the Torrente flood. So we will be working also on that on next year. So at least, we still don't have our guidance number for CapEx for next year. But what I will say directionally, we'll continue to be around the same level that this year. Fernando Olvera Espinosa de los Monteros: Okay. Roberto, regarding pricing, I mean, at this point, do you feel comfortable with the price hikes implemented so far or additional hikes might be seen going forward in that sense? I mean, thinking about the turkey price that you were saying that they might start to decline until the first and second quarter of next year. Roberto Olivares: Yes. Thank you, Fernando. I will say that unless, again, the raw materials continues to increase, which we are not expecting that. We not necessarily will do something structural on prices as of right now. There might be the need to do some particular adjustments in some particular product, but not something that will be structural for the whole company. Operator: Our next question comes from Felipe Ucros of Scotiabank. Felipe Ucros Nunez: A couple of questions on my end. So one has to do with your pricing power. Can you talk a little bit about your capacity to maintain your pricing levels when costs start coming down and margins start expanding. Historically, what has been the behavior of your competitors? Are they typically disciplined? And I guess, how does that change by region? I have an impression that perhaps Mexico and the U.S. are stronger than Europe. But any color you can give us on that would be great. And then on the second question, is there any direction you can give us about which proteins are most important to you out of the ones you use? And I know this varies because there's reformulations depending on where the costs are at given times. But even if you can't give us precise numbers, perhaps you can give us a ranking or some directional idea of which ones are the most important proteins. Roberto Olivares: Thank you, Felipe. Let me first tackle the second one. So we -- regarding protein, -- and when we have this information in our website in our corporate presentation, around 40% of our protein -- of our raw material cost of -- the raw materials is pork. Then we have close to 20% is turkey, then around 10% is chicken and then around 30% will be dairy, mainly milk, but also cheese and some other dairy proteins. We -- particularly pork ham, I would say, is our largest material that we buy, both in -- particularly in Europe, but also in Mexico. And in the case of Mexico, more turkey, turkey thigh, turkey breast and in the case of the U.S., particularly chicken. Regarding your first question, I will say we -- again, as I explained to the question that Fernando did, we try to take a very disciplined approach in terms of price management. Whenever the -- we take a look of elasticity, how the competition is moving. And whenever we see an opportunity area where we can either protect margin or protect volume, we will be taking that opportunity. In general, I will say it varies by region. But in Europe, given the competition, the penetration of private label and some excess capacity that there's in the industry, we have -- it takes us more time to increase prices between the rest of the regions. Operator: There being no further questions, I would like to return the call to management. Roberto Olivares: Thank you, everyone. On a final note, we entered the fourth quarter focused on a strong close for 2025, building upon our positive sequential momentum. Looking ahead, we're preparing to capitalize on opportunities in 2026 and advance our long-term consumer-centered growth initiatives. Thank you very much for your interest in Alfa, Sigma. Please feel free to reach out to us if you have additional questions. Have a great day. We will now disconnect. Operator: This concludes today's conference call. You may disconnect.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Rogers Communications, Inc. Third Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Paul Carpino, Vice President of Investor Relations with Rogers Communications. Please go ahead, Mr. Carpino. Paul Carpino: Thank you, Galyene, and good morning, everyone, and thank you for joining us. Today, I'm here with our President and Chief Executive Officer, Tony Staffieri; and our Chief Financial Officer, Glenn Brandt. Today's discussion will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's earnings report and in our 2024 annual report regarding the various factors, assumptions and risks that could cause our actual results to differ. With that, let me turn it over to Tony to begin. Anthony Staffieri: Thank you, Paul, and good morning, everyone. It's been quite a week for our Toronto Blue Jays, American League Champions, so I just wanted to say a few words about Canada's team. We're thrilled. The Blue Jays are in the world series, and it all starts north of the border tomorrow. As owner, our job is to give leadership the tools and resources to win. And as Canada's communications and entertainment company, we're about providing Canadians with the best sports and entertainment experiences. This is one of those moments, and this is what Rogers is all about. Let me now turn to the quarter. Q3 was another strong quarter for Rogers. We delivered industry-best combined mobile phone and Internet customer additions. We continue to grow our Cable business anchored by Canada's most reliable Internet. We again delivered the best Wireless and Cable margins in our sector, and we're seeing healthy revenue growth from our Media operations through organic growth and through now including MLSE revenue in our results. Overall, we executed with discipline and a clear focus on driving growth across our three main businesses. Let me start with Wireless. In the highly competitive Wireless market, we saw some pressure on service revenue and ARPU. Our priority continues to be on the consistent delivery of results. We added 111,000 total mobile phone net additions in Q3 and year-to-date, we added 206,000 mobile subscribers with the vast majority on the Rogers postpaid brand. We are leading the industry with innovative, transparent, feature-rich add-a-line plans. These plans meet the dual objective of providing customers with simple value-add options while targeting revenue growth opportunities to support strategic investments in our network. We are also leading the industry with satellite to mobile. This new groundbreaking technology connects Canadians in remote areas, and we now deliver 3x more coverage than any other carrier in Canada. Since launching our beta trial in July, we have seen terrific response from both our customers and Canadians. We recently extended the beta trial and will launch even more capabilities in the coming months. The launch of satellite to mobile reinforces our 65-year history of leading the industry and innovating for Canadians. Our customers are embracing the strategic approach. Our postpaid churn in the quarter was 0.99%, down 13 basis points year-on-year and the lowest churn in over two years. We are leading in innovation and delivering more value for our customers while maintaining industry-leading Wireless margins of 67%. In Cable, growth remains positive, reflecting a clear reversal of the negative trends seen in previous years. Retail Internet additions were 29,000 in the quarter, and we have delivered approximately 80,000 new Internet subscribers year-to-date across the country. This is in part driven by Rogers leading 5G home Internet technology. 5G Home Internet is one of many areas where we're leading. With the Xfinity road map, we're rolling out new features and plans that drive value and deliver new innovations on our world-class entertainment platform. We've launched Rogers Xfinity StreamSaver to bring together popular streaming services at a price point that's attractive to the consumer. We've launched more smart home devices and new features for Rogers Xfinity self-protection. We were the first Canadian Internet provider to introduce WiFi 7, the latest generation of WiFi technology. Our focus on execution, efficiency and discipline continues to drive industry-leading Cable margins of 58%. Finally, in Media, revenue growth was up 26% driven by a strong Blue Jays regular season and the consolidation of MLSE results. We are in the early stages of transforming our Sports & Entertainment business into one of the best sports businesses globally. This is our third pillar of growth beyond Wireless and Cable and will be meaningful to Rogers over time. With the acquisition of the additional stake in MLSE, we have added revenue and profitability growth to our core business. Taking a step back, in calendar 2025, we project Media revenue and adjusted EBITDA, including MLSE for the full year to be $4 billion and $250 million, respectively. Our collection of Sports and Media assets has a value in excess of $15 billion and is among the most impressive in the world. This value is not currently reflected in our share price. We are well positioned to surface this significant unrecognized value for Rogers shareholders over time. In 2026, we expect to acquire the outstanding minority state in MLSE as part of this process, so more to come on this. We are building a sports business at scale, and we are assessing multiple options to unlock additional value. We will take the time to be thoughtful, deliberate and get it right. In the meantime, we will continue to operate with financial discipline while providing team leadership with the tools and resources to build championships. Finally, on balance sheet and capital spending, we are effectively managing leverage down even as we scale up our exceptional asset base. In Q3, we continue to execute on our commitment to maintain a strong balance sheet. We reported a debt leverage ratio of 3.9x. This was achieved after completing the acquisition of the additional stake in MLSE. As you saw this morning, we now expect CapEx for the current year to come in at $3.7 billion. This is below our previous target of $3.8 billion and reflects the current regulatory environment. Free cash flow is now expected to be between $3.2 billion and $3.3 billion, higher than our previous target. In the coming quarters, we will maintain our laser-like focus on preserving a strong, investment-grade balance sheet even as we complete our transformational investments. As we pursue growth in our three core businesses, we will continue to align capital spending and free cash flow growth to the best growth opportunities and balance sheet deleveraging priorities. As we get ready for peak selling in the fourth quarter, we will remain focused on balancing execution discipline with revenue and subscriber growth. Thank you to our exceptional team for their continued commitment to drive growth long term. I will now turn the call over to Glenn. Glenn Brandt: Thank you, Tony, and good morning, everyone. Thank you for joining us. We are pleased to report that Rogers' Third Quarter results reflect another quarter of strong, disciplined and leading financial and operating performance. Once again, we have delivered industry-leading margin performance in Cable and Wireless, and our Wireless churn is the best we have seen in over two years. We have delivered positive Cable revenue and adjusted EBITDA growth, and we expect that our combined Internet and wireless loading will once again lead our peers. Media has once again delivered sector-leading growth driven by our added Warner, Discovery media content and by our Toronto Blue Jays' very strong regular season performance. As well, this is the first quarter in which MLSE results are now fully consolidated with our Rogers Sports and Media business segment. And so we are pleased to report that Rogers is delivering solid results across all three core businesses against the backdrop of a competitive environment and slower growth economy. Starting with Wireless. We continue to deliver solid market share supported by disciplined financials. Wireless service revenue was flat and adjusted EBITDA was up 1% year-over-year, primarily reflecting the ongoing competitive intensity in the marketplace, continued lower immigration and lower international roaming and wholesale revenue. Our sustained emphasis driving cost efficiencies has moved our industry-leading Wireless margin to 67%, up 60 basis points against the prior year and near our all-time high of 68%. As well, we have maintained strong market share for mobile phone net additions, adding 111,000 net new subscribers, consisting of 62,000 postpaid and 49,000 prepaid mobile customers. Across the entire sector, Wireless subscriber additions continued lower versus prior year, reflecting continued lower immigration levels. Against this lower growth backdrop, we have added a sector-leading 206,000 net new mobile phone customers year-to-date, with the majority of these subscribers added on our feature-rich Rogers premium service plans. Continued emphasis on responsive customer service and improved customer base management has lowered customer churn to a very strong 0.99%, our best churn performance in over two years. Blended mobile phone ARPU of $56.70 is down 3% from the prior year, reflecting the ongoing impact from competitive intensity, combined with lower international and wholesale roaming revenue, as mentioned earlier. Moving to Cable. Cable service revenue has once again grown 1% year-over-year, driven by retail Internet subscriber growth, combined with continued discipline in the face of ongoing market competition. Cable adjusted EBITDA is up 2% year-over-year, driven by the flow-through of modest service revenue growth combined with our ongoing cost efficiency initiatives. As a result, Cable margins have reached an industry-leading 58%, an increase of 70 basis points over the prior year. Internet net additions of 29,000 customers reflect our continued success expanding subscribers throughout our national footprint and includes our continued success with 5G Home Internet, expanding our bundled service offerings into every region from coast to coast. And finally, Rogers Sports & Media revenue of $753 million, was up by 26% over the prior year, reflecting the combined contributions of three key initiatives: Our added Warner Discovery suite of media content; stronger results for Sportsnet and the Toronto Blue Jays, particularly through September to close out the regular season and the consolidation of MLSE effective July 1. Media EBITDA was $75 million compared to $136 million last year, reflecting both the positive flow-through of Warner Discovery and the Blue Jays regular season, offset by the seasonally low third quarter EBITDA loss for MLSE, which is consolidated in 2025, but not in 2024. We expect MLSE will be substantially accretive to earnings in Q4 and for the second half of 2025. As well, the Blue Jays' very successful MLB playoffs and World Series run will provide further added growth in the fourth quarter. In terms of unlocking additional value from our Sports & Media assets, let me recap our current view on process and timing. To be clear, we remain determined and committed to delevering our balance sheet and to unlocking the significant unrecognized value in the RCI share price from these world-class sports assets. With the current estimated value of more than $15 billion for our Sports & Media properties, we continue our work to identify and execute on the best long-term strategy to surface value. And the way our Toronto Blue Jays World Series run is captivating this country is a very clear demonstration of the power of our iconic sports teams. We anticipate a transaction could occur over the next 18 months or so, likely coincident with or subsequent to us acquiring the remaining 25% minority interest in MLSE. In the meantime, as we assess multiple options, our Sports & Media operations remain highly successful. They operate at scale and are delivering sector-leading and growing financial results and investment returns. Finally, rounding out my comments on the third quarter. Our consolidated service revenue is up by 4% to $4.7 billion and adjusted EBITDA is $2.5 billion, down 1%. As mentioned earlier, the year-over-year changes in both service revenue and EBITDA reflect the flow-through of modest growth in Wireless, Cable and Media combined with consolidation of MLSE results starting this quarter. Capital expenditures were $964 million, which is relatively flat to last year, even as we absorbed some additional capital spending from consolidating MLSE. Free cash flow of $829 million was down 9%, driven by increasing taxable income and the timing of tax installment payments. We continued to delever in Q3 even as we acquired our additional stake in MLSE for $4.7 billion, roughly a 0.5 turn increase in leverage at acquisition. Immediate execution on driving operating synergies and MLSE EBITDA growth, combined with ongoing application of free cash flow and capital initiatives to delever, allowed us to close the quarter with debt leverage of 3.9x, down roughly 10 to 20 basis points in the first three months of the MLSE acquisition. Notwithstanding this notable progress, our third quarter leverage is up by 0.3x as a result of the MLSE acquisition. And so here, I will emphasize that we remain committed to strengthening our balance sheet further and to improving our investment-grade credit ratings. We are in regular contact with each of the credit rating agencies to communicate our plans and progress. This will be driven by continued prudent capital priorities together with earnings and free cash flow growth to pay down debt and lower leverage. Unlocking value from our Sports & Media Holdings is a very substantial part of that exercise. At quarter end, we maintained our very strong liquidity position with available liquidity of $6.4 billion. This included $1.5 billion in cash and cash equivalents and $4.9 billion available under our bank and other credit facilities. As you have seen in our Q3 cash flow -- free cash flow statement issued today, we are now reporting distributions paid by subsidiaries to noncontrolling interest, reflecting the distribution payment associated with the minority investment and a portion of our Wireless network infrastructure. The $14 million amount reflects the prorated timing for the transaction, which closed in late June, and so the Q3 distribution is for a partial prior quarter. In our Q4 results and going forward, the full quarterly amount of the distribution will be reflected, which we anticipate will be approximately $100 million per quarter. And as we discussed last quarter, a very substantial portion of this quarterly distribution is offset by the lower interest expense generated from using the proceeds from this transaction to pay down debt. The last piece I will touch on before we open up the call for Q&A is for affirmation and updates to our 2025 guidance, where we have improved our outlook for both capital expenditures and free cash flow for the rest of the year, reflecting our ongoing efforts to drive more efficient capital allocation and also reflecting the current regulatory environment. We now expect to end 2025 with capital expenditures of approximately $3.7 billion, which is a further $100 million reduction to our previous adjusted target of $3.8 billion and a full $300 million improvement from the previously anticipated high end of our guidance range announced in January, when we were targeting $3.8 billion to $4 billion. Notably, we are improving our targeted capital outlook even as we absorb the additional capital expenditures associated with MLSE. We have driven careful prioritization of our capital investments in 2025 and you should expect this determined prioritization to continue in 2026. As well, we now expect our 2025 free cash flow to be in the range of $3.2 billion to $3.3 billion compared to the $3.0 billion to $3.2 billion range previously estimated at the beginning of the year. As we prepare for 2026 and beyond, you should expect that we will continue to drive more efficient capital investment, improve free cash flow and further strengthen and delever the balance sheet. And so in summary, our Q3 results demonstrate that Rogers continues to successfully execute on its core Wireless and Cable strategies. We have achieved consistent strong performance for almost four years now, and we will continue to build on this track record in the quarters and years ahead. In Sports & Media, we continue to make progress on our very unique opportunity to surface significant unrecognized value from these assets for our shareholders. And in the meantime, we continue to pursue sector-leading growth and improved profitability for Rogers Sports & Media. Let me close by extending a very sincere and appreciative thank you to our employees who are the engine driving and sustaining our strong execution and who play a critical role in driving our future success. Thank you for your tremendous pride and determination. And finally, Go Jays. I will now ask Galyene to open the call for our Q&A session. Thank you. Operator: [Operator Instructions] First question is from Stephanie Price with CIBC. Stephanie Price: I was hoping you could talk a little bit more on the Wireless competitive environment as we head into the holiday season? And if you think the current pricing environment can be sustained here? Anthony Staffieri: Stephanie, thanks for the question. In terms of -- we approached back-to-school, with a view of having a very simple redefined value propositions for the customer. And so we streamlined our price offerings. We made it more clear on the differentiation amongst the plans with features that are beyond just data bucket sizes. And what we found is it resonated well. We focused on add-a-line construct so that we could increase the number of lines per customer, and that's trending well for us as well. And we recently introduced tiered hardware promotional discounts so that the amount of discount on our hardware is graduated depending on the plan that the customer comes in on Verizon, if they're in currently customers today. And what we're finding is that's resonating extremely well with customers, and you're seeing that in our subscriber performance. And that's been continuing throughout October as well. And so we think we've got the right value proposition as we head into Black Friday and to the end of the year. And so that's what you should expect to see from us. We'll see how the marketplace responds. And to the extent we need to pivot based on the market dynamics, then we'll do so. But right now, we're feeling pretty good about the pricing constructs that we have in the marketplace. Stephanie Price: And then maybe a follow-up on churn. Your churn has been down over the past 2 quarters. Great to see and hoping you can give us some thoughts on churn management and where there's further opportunities potentially. Anthony Staffieri: What you're seeing is a very concerted effort. We've always focused on base management, but we've taken a much more holistic approach to base management and employing tactics that are resonating with customers in terms of what's important to them, drilling down on customers that we think might have a propensity to churn and dealing with the issues in advance of them calling us. And so there are a number of tactics that we've been going through, and the team is executing extremely well in base management. We expect to continue to see good churn performance across our entire base. Operator: The next question is from Aravinda Galappatthige with Canaccord Genuity. Aravinda Galappatthige: I wanted to start off with Wireless. Obviously, the lag effect of the historical promotional activity, it continues to show in the service revenue numbers. But just looking at the sequential trend in service revenue growth, I wanted to sort of clarify whether that was sort of items around roaming or external customers that would have had an impact on that number? Glenn Brandt: Thanks, Aravinda. Yes, the part of that decline really is lower roaming volumes as well as a reference to some wholesale revenues that, I'll shortcut and simply say, moved to another carrier. And so you're seeing that roll through. That's a very substantial part of what you've seen in the revenue. Aravinda Galappatthige: And just maybe just a bigger picture question on operating leverage. I mean with the progress that's made on the AI side of things, the latest generation being agentic AI and so forth. Can you talk about the magnitude of the opportunities that you have to potentially deploy those technologies within the firm and potentially drive streamlining efforts within Rogers, whether it's in CX or even on the network operations side, marketing, et cetera? Just to get a sense of how material that could be from an operating leverage perspective to the company. Anthony Staffieri: Thanks for the question, Aravinda. Really good question and something we've been spending quite a bit of time on, not just historically, but as advancements in AI tools and technology continues to grow exponentially, we continue to look at ways to capitalize on it. And we see three main areas. One is the customer experience, as you indicated, combining with a completely digital experience, and that's the journey we're on. It's going to allow us to give the customer a more consistent, streamlined experience to address whatever issue they have. And we're really looking forward to that and are much more cost effective -- on a much more cost-effective basis. The second relates to efficiency and the ability of these AI tools to make us much more efficient and some of which you're seeing already in our industry-leading margins in both Wireless and Cable. And then the third really relates to security and the ability to continue to enhance security for our customers and for our own data. And so it's all three of those categories that we're very much focused on, and we'll continue to deploy. So the opportunity for this is significant for us in this sector and we'll continue to follow in many ways the large players globally and the tools that they've deployed successfully, so that we're a fast follower in many of these areas and implementing them efficiently. Operator: The next question is from Drew McReynolds with RBC. Drew McReynolds: Maybe extending the network revenue question, I think from Aravinda. Maybe, Glenn, can you talk about just, let's level set expectations about how that trends just given all the moving parts whether you want to talk about Q4 into 2026, just how are you thinking of the puts and takes and the trajectory? And then second question, obviously going to fit in a Jays one here. On the sports assets, I mean, clearly, incredible to see the whole country alive here. Maybe, Tony, you've talked about kind of how these three businesses have to stand on their own, but clearly, there's a branding and cross-promotional aspect to this all. Just wondering if we would see or have seen direct impacts on your telecom business in terms of subscriber growth or benefits that are coming your way on the telecom side that we'd see in either Q3 or Q4 or just maybe longer term? Glenn Brandt: Thanks, Drew. Let me start with the first part of that. I'm not going to take the opportunity to start guiding for '26. I will say the trends you see, I'll say, through the first 3 quarters of 2025 and the trajectory of hitting growth on the year for service revenue, we remain firmly committed to and expect. And so for the year, you'll see positive service revenue growth for Wireless. We all know the competitive framework that we operate in and the slower subscriber growth. That's why you see us leaning in on base management and churn improvement. That's a very efficient way of finding, if not revenue growth, certainly sustaining the base of operations. And so we remain committed to that. Q4, I expect, you'll see strong execution. Part of our Q3 backdrop as we are lapping a very strong Q3 in the prior year, and we have sustained and held the very fast part of that growth that you saw in '24 through the first 3 quarters of '25. So I'm pleased with that progress. So Q4 will be another strong quarter. I won't comment further on guiding for that or beyond in '26, but pleased with progress for sustaining that base management through the 3 quarters. Anthony Staffieri: Drew, with respect to your second question, as you pointed out, we're looking to each one of our pillars of growth being Wireless, Cable and now Sports & Entertainment to stand on their own and drive value, profitability and growth in their own respect. But we also look to ensure that we're capitalizing on the cross synergies amongst all our assets. And the run of the Toronto Blue Jays and heading into the World Series, you can see that in spades in terms of the ability to enhance our brand, the ability to showcase our Cable and Wireless products and services to viewers of the game, and we've seen that throughout the year. If you think about some of the key events in 2025, Four Nations, the playoff run of the Toronto Maple Leafs, and then the Toronto Blue Jays and there are others as well. But you see the power of live sports, and it's good to see, and it's been a benefit for us, as I said, in and of itself, but also in terms of helping the broader Rogers. Operator: The next question is from Vince Valentini with TD Cowen. Vince Valentini: I assume you're getting a lot of favors and requests for tickets for the World Series. I'm wondering if you can compare that. How many requests are you getting for this versus the Taylor Swift concerts. You don't have to answer that. Anthony Staffieri: These are the most World Series requests we've had in 32 years. Vince Valentini: Thanks, Glenn, a very accurate answer as always. The more serious question. Look, you've been asked this several times. I want to hit this head on. Given pricing is improving in Wireless, your front book is now above your back book. And we've seen the CPI stats showed a material improvement in September to basically flat for Wireless pricing versus double-digit declines earlier in the year. All that should mean that Q3 is the trough quarter for Wireless ARPU at minus 3.2%. Can you not confirm that, that it won't get worse than that and should gradually get better over the next 5, 6 quarters? Glenn Brandt: Succinctly, I agree with your sentiment. I think we are seeing some strong initiatives around a large number of initiatives to sustain the base, low churn and sustain revenue. And so broadly, yes, I think you are seeing us continue solid Wireless growth on a full year as well as quarter-to-quarter. You saw a dip in the third quarter, but all of the elements that you've pointed out are true Vince. Vince Valentini: If I can just sneak in one more. Wireless equipment margin was pretty positive contributor to EBITDA again this quarter. In the past, it hasn't always been a positive. Has something changed in terms of handset subsidies and the amounts you're giving out to or something changed with your deals with the vendors to allow that to be a sustainable source of positive EBITDA? Anthony Staffieri: That's -- the driver for it in the third quarter was really our shift to the tiered promotional discounting that I spoke about. Although we implemented it later in the quarter, it came out of time with higher volumes with back-to-school. And so it was extremely and continues to be very effective in reducing our net hardware costs, but also in incenting the customer to move up tier. And so when we look at our ARPU in, we're really pleased with the effect that it's happening. You see ARPU in up very nicely year-on-year. So we like what we see there. And so it is, we believe, the beginning of a trend in terms of net hardware cost for us. Operator: The next question is from Maher Yaghi with Scotiabank. Maher Yaghi: Glenn, I just wanted to double check on something. You -- in the previous question, you said in your response that you agreed with all the assumptions based on the basis of the question. But I'd just be very specific. Are you saying that you confirm that the back book of your Wireless service customers is above -- sorry, is below the current front book? Glenn Brandt: I'm answering from a general sentiment of whether or not we are troughing whether or not Wireless service revenue is growing. I'm not getting into the detail of front or back book. You've heard me answer these questions consistently, Vince, when -- or Maher, when we're asked on what's ARPU trajectory, I focus on service revenue growth and EBITDA growth. And on service revenue growth, I expect Wireless service revenue to grow each quarter and each year. We had a slight and it's a very slight decline just below 0 or flat in the third quarter. For the year we'll be positive, and I expect will be positive going forward. It's a mix of subscriber additions, pricing initiatives, service plan initiatives, simplifying our service plan offerings and trying to move customers up through premium plans. I could go on and on. So I don't want to talk about front and back book because it makes it seem like there's a difference between new and long-standing customers. It's really working with our service plans and our initiatives all around that to drive service revenue and EBITDA growth. So don't read too much into that. I'm answering from a general sentiment we expect Wireless Service revenue to grow period. Maher Yaghi: Perfect. Thank you for answering this question more precisely because I think there's still some gap left to be closed, but I agree that there's upside for next year. So I just wanted to ask you, I know it's not much visible in your results. And I'm not surprised because in Canada, we have a lag to the U.S. in terms of new product introduction, but results from AT&T yesterday and T-Mobile this morning are showing a significant increase in jump balls coming from customers looking to get their hands on the new iPhones. So I wanted to just see if you're noticing thus far in Q4, a slight pickup in jump balls in Canada yet? Or if not, why not? And how are you positioning yourself for Q4 for -- if we do see the same trend occurring in Canada, do you think handset subsidization will become a bigger factor in overall economics of floating customers in Q4 versus prior quarters? Anthony Staffieri: A couple of things that you touched on, and I'll work backwards from your question. In terms of Q4, the demand for new devices and the subsidy and cost for us, what you see in market for us is how we intend to approach the marketplace in the fourth quarter. We think we have a very good value proposition, and our promotional incentives are really going to be centered around hardware rather than rate plans. But we're also going to be very disciplined in the tiering constructs that I spoke about earlier, so that higher promotional discounts come with our more premium plans and vice versa. In terms of, to use your term, jump ball that we're seeing with the launch of the new iPhone device, we've seen good demand for it. Our bigger constraint has been supply, frankly, on that front. And so that's been a limiting factor for us, but I would say at the margin. But we're seeing the same type of industry constructs for our business that you described. Operator: The next question is from Batya Levi with UBS. Batya Levi: Can you talk a little bit about the competitive environment in terms of, if you're seeing any pickup in go-to-market strategy with converged offers? And from your perspective, can you give us a sense of maybe what percent of your broadband base takes the Rogers services as for mobile? And what are some benefits you see beyond just churn reduction? Anthony Staffieri: Thanks, Batya, for the question. Converged offering is something that we spoke about in previous calls and continues to be competitive advantage for us, frankly, given our Wireline and Wireless converged footprint. And now with FWA, we're essentially converged on 100%. And so our go-to-market strategy has been to leverage our distribution channels, which are the strongest and frankly, the best in the industry here in Canada and leverage those to offer customers a converged home solution as well as their wireless products, and we're seeing good pickup in that. In terms of the percentage, we don't disclose that, but it continues to rise rather rapidly and customers looking for that solution. And there are a number of benefits beyond. The converged offer is a bundled discount, a modest discount for it, but there are other benefits the customer sees in terms of simplified servicing, having to deal with only one provider. And the convergence of the technologies as that evolves, they see benefit in that. Batya Levi: Got it. And just a quick follow-up on the lower CapEx for this year. Can you just provide a bit more color on where it's coming from and also how we should think about capital intensity going forward? Anthony Staffieri: We've been very focused on efficiency throughout our operations. You've seen it and continue to see it in our operating margins across our Cable and Wireless businesses. And you'll see it in our Media business as well going forward at scale. But we've also continued to focus on capital efficiency. And that's what you're seeing play out there. There are projects that we decided not to invest in as a result of government decision on TPIA. Certain projects were just not viable and carried too much uncertainty and it's disappointing. We're a company that wants to invest in this country and in infrastructure. And when faced with uncertainty that those types of decisions create for us, we have no choice but to pull back on capital investment, and you see that impacting the total dollars. In terms of going forward, you should expect us to continue to look for improved efficiencies and ways of continuing to reduce our capital intensity across our businesses. Operator: The next question is from Jerome Dubreuil with Desjardins. Jerome Dubreuil: The first one, I just wanted to hear maybe more about the financing plan for the Kilmer deal, which we understand is coming. Glenn, you mentioned that there's been credit agencies discussion. I'm sure they're aware but if you can comment on the plan maybe to bridge a gap just so the market is ready, and we don't have to start over with the balance sheet questions when the Kilmer deal comes. Glenn Brandt: So the -- what we're focused -- thank you, Jerome. What we're focused on is, first, acquiring the remaining 25% minority stake, combining the operations and then proceeding with recapitalizing the combined Roger Sports & Media, including MLSE and Blue Jays entity. That could happen very shortly on the heels of acquiring the minority stake or it could happen sometime following that. And so we're guiding towards -- within the next 18 months. I do anticipate it could well be in 2026, which is just inside 18 months now that we're standing in October. But it's over a timeframe that is going to take some time to work through the acquisition of the 25% stake. And over the course of that exercise, we are working with our analysis to figure out how best to capitalize that combined entity. It's going to depend upon the arrangements that we strike with the minority shareholder on buying out their stake and just when that comes. Tremendous interest being expressed by institutional -- potential institutional investors. They are an extremely attractive set of assets. We are working with the credit rating agencies, so they are aware of our timing. You mentioned -- you heard me mention on the second quarter call, critical for us was getting our arms around the Shaw delevering at midyear before and then embarking on this MLSE consolidation with RSM and recapitalization that allows the calendar to be reset, gives us time to fill in those details. So I'll quickly draw to a conclusion then, Jerome, that I'm not going to give you the roadmap on exactly how much we're selling down into whom because we -- I don't want to pre-announce. I don't have anything to pre-announce. I do know we have assets that are worth more than $20 billion once we combine it all and tremendous interest in buying in. We have shown time and again, most recently, with the Shaw acquisition, our ability to delever. We are absolutely focused on that exercise, and we have a tremendous value of assets here to do that with. So I'm highly confident on our execution. Jerome Dubreuil: Great, Glenn, and if I can just go more specifically on this if I can summarize there is that credit agencies are aware we're not going to need any equity to bridge a gap and probably -- I know the answer to that question, but it would be great to have it out there. Glenn Brandt: The -- yes, succinctly, yes, they are aware we have time to execute. They know we are committed to executing on this. I have been managing our credit ratings and our capitalization and capital structure and funding as a primary part of my role for coming up on 34 years now, I've been working with these credit rating agencies throughout that 34-year period. They're well aware of our intentions and our capabilities. Paul Carpino: Galyene, we have time for two more questions, please. Operator: The next question is from Matthew Griffiths with Bank of America. Matthew Griffiths: Just on the Sports, in the past, if I'm not mistaken, it's been a priority to consider control of the assets following the transaction. That hasn't been brought up this morning, but I just wanted to see if that remains kind of one of the priorities that you're factoring in, in addition to the kind of shareholder return maximization from any potential deal 18 months down the road? And then separately, just on Wireless. On the cost side, in the release, it was mentioned kind of the satellite -- launch of the satellite service was one of the items called out for increased cost. And I just was curious if that was mostly a marketing-related comment or if it's related to kind of the payments to the partner or a combination of both? Just kind of what was -- what exactly is that referring to? Because I know so it's early days. So I just wanted some clarity, if it's possible. Glenn Brandt: Thank you, Matt. Let me start with the Sports side of it. I'll answer it quickly with just a reference back to the asset value within our sports holdings is, as I've said, somewhere in the range of once we own 100% of everything, Blue Jays and RSM operations today plus MLSE. We've indicated we think the value of that is over $20 billion if we were to sell a majority stake that would be raising north of $10 billion. I don't need $10 billion of equity improvement in the RCI balance sheet. And so I do expect we will maintain control simply because the exercise is not that large, and these assets are very valuable. We do anticipate we will control these assets. Anthony Staffieri: And the second part of your question, Matt, in terms of our Wireless operating costs, you're referring to the comments made in the press release. Year-on-year, we've had a very modest increase in operating costs, and you see it in the disclosures of about $8 million. It's a combination of several factors. One of those factors that is described is the satellite to mobile initiative. And as you rightly point out, it does encompass both the marketing as well as the fee paid for the service under our contract. And we are currently in the beta trial mode. We've extended the beta trial mode to allow the commercial launch to be coincident with the launch of new feature capabilities of the satellite. Right now, it is just texting, but very soon, we're pleased to announce and see that it will include data as well. And so that's the reason for extending the beta trial before we get to commercial launch. And so you don't see any of the revenue pickup in our Q3 results, and you won't see it until we move to commercial launch. Operator: The next question is from David McFadgen with Cormark Securities. David McFadgen: So maybe just following on the Rogers Satellite for a second. So right now, this texting, do you expect to add data, I guess that would be a light data plan. And then do you have any ideas when you'd be able to offer text, voice and just full data? Anthony Staffieri: Thanks for the question, David. So on launch, again, to reiterate, it was texting, including 911 texting in terms of capability. We are extremely pleased with the advancement of the roadmap. Data wasn't going to come until next year and voice was planned for the year after that. As a result of the work that our partner has been doing at a very rapid pace, we're pleased that this quarter, what we will have for our customers is the ability to use data and apps. As you describe, it will be somewhat light data. We'll see the capability in terms of bandwidth once it's into production. But we're really excited about that. And then the next to follow is voice. We don't have something we can disclose on that. But you should expect it at some point in 2026. David McFadgen: Okay. And then can you give us any idea on the number of people that have signed up for the trial so far? Anthony Staffieri: It's received terrific demand from our customers and Canadians broadly in signing up for it. As you can imagine, just given our topography and landscape here in Canada, there are significant areas that weren't covered by any wireless network, including some major highways. And so the use case for it is significant. And what we're seeing is a very good pickup. So it's a material amount. What I can tell you, it's over $1 million, but we're not disclosing the specific number because we don't want to get too far ahead of ourselves in trying to extrapolate what kind of revenue that means. Glenn Brandt: One of the real opportunities here for us, David, is that it covers the very remote regions of the country, it covers virtually every road and highway. And so there's the individual Canadians that are signing up the enablement of this for businesses is tremendous and the opportunity for us is tremendous. David McFadgen: Well, the fact that you've had over 1 million sign-ups, that's pretty very good. And then just one, if I could squeeze in one more. Just on the Wireless side. So if we don't see any change in immigration, immigration stays at the current levels, do you think your Wireless net adds would be similar next year or higher or lower? Glenn Brandt: Right. I think let me avoid guiding for next year. But I would say if I look at 2025, even with very, very low immigration our growth is in the range of 3% for the sector, for the industry and 3% growth is roughly 1 million adds for the industry. And so I would expect that to continue until immigration turns up again. It will at some point. I don't expect that in '26, would be wonderful if it did, but it will come back at some point. We will look to growing the population. Again, I expect that's a key part of economic growth for any country, but 3% growth in the base is certainly something we can still build on. Paul Carpino: Thanks, everyone for joining us. If there's any follow-up, please feel free to reach out, and have a great day. Glenn Brandt: Thank you all. Go Jays. Operator: This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good morning, and welcome to CenterPoint Energy's Third Quarter 2025 Earnings Conference Call with senior management. [Operator Instructions] I will now turn the call over to Ben Vallejo, Director of Investor Relations and Corporate Planning. Mr. Vallejo? Ben Vallejo: Good morning, and welcome to CenterPoint's Q3 2025 Earnings Conference Call. Jason Wells, our CEO; and Chris Foster, our CFO, will discuss the company's third quarter results. Management will discuss certain topics that will contain projections and other forward-looking information and statements that are currently based on management's beliefs, assumptions and information currently available to management. These forward-looking statements are subject to risks and uncertainties. Actual results could differ materially based on various factors as noted in our Form 10-Q and other SEC filings as well as our earnings materials. We undertake no obligation to revise or update publicly any forward-looking statement other than as required under applicable securities laws. We reported diluted earnings per share of $0.45 for the third quarter of 2025 on a GAAP basis. Management will be discussing certain non-GAAP measures on today's call. When providing guidance, we use the non-GAAP EPS measure of diluted adjusted earnings per share on a consolidated basis referred to as non-GAAP EPS. For information on our guidance methodology and reconciliation of the non-GAAP measures used in providing guidance, please refer to our earnings news release and presentation on our website. We use our website to announce material information. This call is being recorded. Information on how to access the replay can be found on our website. Now I'd like to turn the call over to Jason. Jason Wells: Thank you, Ben, and good morning, everyone. On today's call, I'd like to address 3 key focus areas for the quarter. First, I will briefly touch on the 10-year financial plan update we introduced just weeks ago. Second, I will walk through our strong third quarter financial results. And lastly, I'll discuss our announcement from earlier this week regarding the sale of our Ohio gas LDC. Last month, we introduced an ambitious 10-year plan focused on supporting economic development, delivering strong customer outcomes, reducing O&M through operational efficiency and driving value for our investors. Our capital investment plan of at least $65 billion is supported by some of the fastest-growing demand for energy anywhere in the country. Importantly, we also have visibility to at least $10 billion of incremental capital investment opportunities over the course of the plan, particularly in Texas, given the dramatic growth the communities we serve continue to experience. Specifically, in our Houston Electric service territory, we forecast peak load demand to increase by 10 gigawatts in 2031. This forecasted growth would represent a nearly 50% increase in peak demand over the next 6 years. Additionally, through the middle of the next decade, we estimate the electric load demand on our system will double to approximately 42 gigawatts. This level of demand will continue to support a strong investment profile. Our capital investment plan through 2030 drives a projected rate base CAGR of over 11% through the end of the decade and the potential for double-digit rate base growth through the middle of the next decade. The Greater Houston area is thriving, powered by what we believe is the most diverse set of growth drivers in the sector. It is not relying on any single industry and the results speak for themselves. This growth isn't aspirational. It's already here. Notably throughput in our Houston Electric business were up 9% year-to-date. This strong growth is anchored by our surge in industrial customer class throughput, which are up over 17% quarter-over-quarter and up over 11% year-to-date. This incredible growth provides a solid foundation for our earnings guidance. Specifically, we have strong conviction in our ability to achieve non-GAAP EPS at the mid- to high end of our 7% to 9% annual growth guidance from 2026 through 2028, and 7% to 9% annually thereafter through 2035. I continue to believe we have one of the most differentiated plans in the industry because of our unique combination of the diversity and pace of electric demand growth, a derisked regulatory and financing profile and our ability to continue investing affordably for the benefit of our customers. These attributes set us apart from our peers and enable us to continue to deliver value for all our stakeholders over the next decade and beyond. Now moving to our strong third quarter financial results. This morning, we reported non-GAAP EPS of $0.50 for the third quarter, representing a 60% increase over the same period last year. As we signaled last quarter, 2025 earnings reflect a more back-end weighted profile for the year, consistent with our return to traditional capital recovery mechanisms now that the bulk of our rate case activity is behind us. I'll let Chris cover the details in his section, but we remain well positioned to execute on our recently increased 2025 non-GAAP EPS guidance. As such, we are reiterating our full year 2025 non-GAAP EPS guidance range of $1.75 to $1.77, which would represent 9% growth over 2024 delivered results of $1.62 per share. Additionally, we are also reiterating our 2026 non-GAAP earnings guidance we initiated a few weeks ago. As a reminder, we are targeting at least the midpoint of $1.89 to $1.91 per share. At the midpoint, this range would represent an 8% increase over the midpoint of our 2025 non-GAAP EPS guidance range. Further, we continue to expect to grow non-GAAP EPS at the mid- to high end of our 7% to 9% long-term annual guidance range from 2026 through 2028 and 7% to 9% annually through 2035. As a reminder, our guidance is based on actual delivered results as we continue to execute and deliver value for our shareholders each and every year. I'd now like to discuss the recent announcement regarding the sale of our Ohio gas LDC. Earlier this week, we announced the signing of our Ohio gas LDC transaction, which is expected to generate approximately $2.6 billion in gross proceeds, representing a significant milestone in executing our 10-year financial plan. The strong valuation of approximately 1.9x 2024 rate base underscores the exceptional demand for U.S. natural gas LDCs. This outcome once again demonstrates our ability to efficiently finance our growth investments, this time by recycling the transaction proceeds of a high-quality business at nearly 2x book value and reallocating capital into our remaining portfolio at 1x book value. The after-tax net cash proceeds of approximately $2.4 billion will be redeployed into higher growth jurisdictions to efficiently fund our capital investment plan. Importantly, the proceeds should also provide additional flexibility in funding for future incremental capital investments. The transaction is expected to close in the fourth quarter of 2026. Chris will go into the details of the transaction, including its structure, which will allow us to more smoothly redeploy capital while maintaining a strong earnings profile. It has been a privilege to serve the customers and communities in our Ohio gas business, and we are committed to a smooth transition for our customers. This is a tremendous business with fantastic employees, and we know they will continue to provide great service to the 335,000 meter customers in Ohio. This transaction reflects our continued commitment to disciplined capital allocation as we seek to further enable growth, especially in Texas and long-term value creation for all stakeholders. Our growing capital investment opportunities are supported by accelerating and diverse set of load growth drivers. This, coupled with our ability to efficiently finance our plan continues to support our conviction that we have one of the most tangible long-term growth plans in the industry. And with that, I'll hand it over to Chris. Christopher Foster: Thanks, Jason. This morning, I will address 4 key areas of focus. First, I will review the details of our third quarter results. Second, I'll discuss the transaction structure of the recently announced sale of our Ohio gas LDC. Third, I'll highlight our progress on the execution of our 2025 capital investment plan. And lastly, I'll provide an update on where we ended the third quarter with respect to the balance sheet. Let's now move to the financial results shown on Slide 5. On a GAAP EPS basis, we reported $0.45 for the third quarter of 2025. On a non-GAAP EPS basis, we reported $0.50 for the third quarter of 2025 compared to $0.31 in the third quarter of 2024. Our non-GAAP results removed $0.03 of charges, primarily consisting of tax true-ups related to the sale of our Louisiana and Mississippi businesses and transaction costs in connection with our announced Ohio gas LDC sale. In addition, it removes $0.02 related to our temporary generation units as these units are no longer part of our rate-regulated business. These strong results give us confidence in meeting our positively revised 2025 non-GAAP EPS guidance of $1.75 to $1.77. Now taking a closer look at the drivers of our third quarter earnings. Growth and rate recovery when netted with depreciation and other taxes were a favorable variance of $0.07 when compared to the same quarter of last year. This positive variance underscores the strength of our interim capital tracker mechanisms, which continue to support the efficient recovery of our investments. We expect these tailwinds to continue driving earnings through the remainder of the year. During the quarter, we filed for our second set of interim capital recovery trackers at Houston Electric, the TCOS and DCRF mechanisms, which support the timely recovery of transmission and distribution investments, respectively. Our TCOS filing, which included a $15 million annual revenue requirement increase was approved and reflected in customer rates on October 10. Our DCRF filing, which includes a $55 million annual revenue increase is on the PUCT open meeting agenda for later today with updated rates expected to take effect in December. Weather and usage were $0.01 favorable when compared to the comparable quarter last year, driven by fewer outages across our Houston Electric service territory related to storm activity. O&M was $0.12 favorable compared to the third quarter of 2024. This significant improvement in O&M is primarily driven by last August vegetation management and other storm-related costs, where we spent approximately $100 million to accelerate work and improve customer outcomes. Additionally, we had $0.03 of favorability in other, which is primarily driven by an income tax remeasurement. This reflects our continued efforts to optimize our tax structure to align with the evolving composition of our portfolio, which after the closing of our Ohio transaction, will skew more heavily towards Texas. These favorable drivers were partially offset by $0.04 of higher interest expense and financing costs, primarily due to incremental debt issuances since the third quarter of 2024. Next, I'll go through the details of our recently announced Ohio gas LDC sale. As many of you may have seen earlier this week, we announced the sale of our Ohio gas LDC, which is expected to generate gross sale proceeds of approximately $2.62 billion, garnering a multiple of nearly 1.9x 2024 year-end rate base. We anticipate total net proceeds of roughly $2.4 billion after taxes and transaction costs. This is an outstanding outcome. This result exceeds what was contemplated in our financing plans, underscoring the conservative approach we take to our planning process. As such, the transaction will be accretive to both our plan and alternative financing sources. In the near term, these proceeds will serve to further strengthen our balance sheet. And over the long term, as Jason alluded to, this transaction will allow for greater financing flexibility and may enable us to fund incremental capital investments with less equity than the 47% rule of thumb we provided at our September investor update. Transaction proceeds will be redeployed into higher growth jurisdictions to support near-term capital investments in our Texas Electric and Gas businesses. Notably, after the close of this transaction, Texas will represent 70% of our investment portfolio. In connection with the transaction, we will enter into a 1-year seller's note with a 6.5% annual coupon, which will help support earnings in 2027. As a reminder, last quarter, we announced an increase to our 2025 investment plan as we continue to make targeted system enhancements. These incremental investments will help partially offset the loss of Ohio investments upon the close of the sale. The transaction is expected to close in the fourth quarter of 2026, aligning with our financing plans and long-term value creation goals. Next, I'll touch on our capital investment plan execution through the third quarter, as shown here on Slide 7. For the quarter, we are right on track to meet our positively revised 2025 capital investment target of $5.3 billion. In the third quarter, we invested $1.3 billion of base work for the benefit of our customers and communities, which, combined with the $2.4 billion we invested in the first half of the year, represents approximately 70% of our total year target. In short, we remain well positioned to achieve our investment targets for 2025. Now moving to an update on our balance sheet and credit metrics. As of the end of the quarter, our trailing 12 months adjusted FFO to debt ratio based on the Moody's rating methodology was 14% when removing transitory storm-related impacts. We anticipate these credit metrics could be further improved by early next year as we expect to issue securitization bonds in connection with Hurricane Barrel in the first quarter of 2026. We continue to target 100 to 150 basis points above our Moody's downgrade threshold of 13% as we remain laser-focused on efficiently financing our robust capital investment plan. Earlier this month, we once again illustrated our commitment to a strong balance sheet through our $700 million junior subordinated note issuance, which provides 50% equity credit. Our common equity guide through 2030 remains unchanged at $2.75 billion. As a reminder, we have derisked over $1 billion of these equity needs through the forward sales we executed earlier this year, and we do not anticipate common equity needs beyond those forward sales from now through 2027. We believe we are well positioned to execute the remainder of the year and beyond, and we are reaffirming our 2025 non-GAAP EPS guidance range of $1.75 to $1.77, which equates to 9% growth at the midpoint from our delivered 2024 non-GAAP EPS of $1.62. Additionally, we are also reiterating our 2026 non-GAAP earnings guidance we initiated a few weeks ago at our investor update from the midpoint of our new and higher 2025 range. For 2026, we are targeting at least the midpoint of $1.89 to $1.91. At the midpoint, this would represent an 8% increase over the midpoint of our 2025 non-GAAP EPS guidance range. Looking ahead, we expect to grow non-GAAP EPS at the mid- to high end of our 7% to 9% range from 2026 through 2028. After 2028, we will target growing earnings annually at 7% to 9% through 2035. We look forward to executing our plan that delivers on the most diverse growth drivers in the country, fueling economic development for years to come. And with that, I'll now turn the call back over to Jason. Jason Wells: Thank you, Chris. I'm proud of the team's continued execution over the past quarter and the results that firmly put us on track to deliver our guidance this year. This management team will work to not only execute the ambitious targets we set forth in our new industry-leading 10-year plan, but we will also work to enhance the plan for the benefit of all of our stakeholders. Ben Vallejo: Thanks, Jason. Operator, I'd now like to turn it over to Q&A. Operator: [Operator Instructions] Our first question is from Nick Campanella of Barclays. Nicholas Campanella: I just wanted to ask, Chris, you talked a little bit about it in your prepared remarks on balance sheet capacity here from the Ohio transaction. How are you kind of viewing it on like an FFO to debt improvement basis versus the plan? You mentioned financing maybe less than the 47% equity assumption. Is that now 30% or 15%? Is there any kind of way to further quantify that? Christopher Foster: Sure. Nick, if I could just maybe take a step back. And as you look at the transaction, there's really a couple of things going on. One is, over time, you've seen us continue down this path of increasing really the focus on the portfolio where we're reducing also earnings and cash lag where we can. So maybe that kind of goes to your FFO to debt point. As you look at the total outcome as we do sources and uses, you'll probably see us initially step into reducing the OpCo debt that's there. So that's roughly $800 million if you base it on a year-end '26 rate base of $1.6 billion. And then as we look at our plan overall, you're probably looking on the order of $400 million of benefit net to plan. So ultimately, what this puts us in a position to do, as you can imagine, is we'll evaluate both the improvement to the balance sheet here in the near term. And then as we go forward, it could allow us to deploy additional CapEx to the plan in an accretive way. Nicholas Campanella: Okay. Great. Appreciate it. And then just maybe on the deal, just any update on how local feedback has been on the ground and reception to the deal from state leadership since it was announced? Jason Wells: Yes. Nick, it's Jason. Reception has been great so far, very supportive. Don't anticipate any challenges and obviously going to work with our counterparty to successfully transition this business and continue the track record of great service in Ohio. Operator: Our next question is from Steve Fleishman with Wolfe Research. Steven Fleishman: Just maybe, Jason or Chris, more color on the sales growth in Texas, which obviously that's very strong. Just what sectors are driving the industrial sales so much higher this year? Jason Wells: Steve, thanks for the question. I think the throughput growth quarter-over-quarter, year-over-year really reflects the diversity of drivers that we have here in the Greater Houston area. We've already connected this year alone over 0.5 gig of data center activity. Much of that is on the transmission sort of industrial rate side. We continue to see very strong demand from energy, refining, processing and exports. And I think what we really saw as a differentiator this quarter was the increase in activity at the Port of Houston. It's the largest port by waterborne tonnage in the world. And we saw about an 18% increase quarter-over-quarter in exports. So it's really just a diversity of drivers. This isn't growth that we're anticipating coming down the line. This is growth across a number of different industries that we're experiencing today. Steven Fleishman: Okay. Great. That's helpful. And then just any update on prospects of data center activity in Indiana. And I don't know if you want to share any thoughts on how you're feeling about the regulatory environment in Indiana. I know you don't have any cases there right now, but just thoughts there. Jason Wells: Yes. We continue to actively work on data center opportunities in Indiana and feel well positioned to deliver on that. As we've talked about in the past, I think we're pretty uniquely positioned in the fact that we've got excess capacity today in the system that allows us to move quickly. It's an area that is very constructive, both from a cost of and availability of land, water, et cetera. And we've just brought online our simple cycle plant that was built to be easily converted to combined cycle that would allow us to efficiently increase the level of capacity available. So we continue to feel good about the prospects of bringing data center activity to Southwest Indiana. Stepping back on kind of a broader basis, we are all focused on affordability of our service up there. We, like many of the other Indiana utilities had a fairly significant step-up in rates last year as a result of a long-term trend of closing some very old generating facilities. As we project forward, though, we don't -- we see our rates growing in line with inflation over the remainder of this decade. We've taken some steps to help kind of mitigate the impact. We've canceled about $1 billion of renewable projects and we'll push out the retirement of our third and final coal facility a few more years. And so I think at the end of the day, we, like other utilities, are taking proactive steps to make sure that we moderate the pace of rate increases, but working constructively to bring economic development activity to the state. And I think that's very much aligned with the state leadership goals. Operator: Our next question is from Jeremy Tonet with JPMorgan Securities. Jeremy Tonet: Chris, thanks for the comments there on the asset sale. I was just wondering if you might be able to expand a little bit more. It sounds like a nice credit accretive properties to the final deal terms versus expectations. I'm just wondering if you could expand a bit more, I guess, on whether you see this being accretive to the earnings over time or any thoughts on that side? Christopher Foster: Sure. I think, Jeremy, a couple of ways to look at this. We do see it as directly beneficial to the financing plan, as I mentioned, and helpful from an earnings standpoint, too. A thing to keep in mind is, as we looked at the sale here of Ohio specifically from a -- as we reallocate spend, we're going to be in a situation where we're experiencing 25% to 30% less cash lag just on a historical basis. So I think that's certainly helpful as well. Going forward, we'll be putting those dollars to work, as Jason mentioned, certainly heavily in our Texas Gas and Electric business, including in a set of Texas gas projects that we're excited about really for years to come, where it really is a great business, as you know, coming out of the rate case last year there. So I think well positioned both financing-wise and from an earnings standpoint. Keep in mind, I alluded to this in my prepared remarks, but I would just emphasize here, too, as we're stepping into making sure that we were managing any otherwise earnings impact, we've already deployed about $500 million this year that we expressed in our plan. And keep in mind, as I mentioned earlier, this is about $1.6 billion of year-end '26 rate base. So you should assume that we're also going to accelerate another roughly $1 billion in 2026. That means that here, we're going to fully replace that rate base by the beginning of 2027. So overall, positions us well going forward. Jeremy Tonet: That's very helpful. And just one more, I guess, on the seller's note as you guys are receiving in the deal as far as how you think about how that helps facilitate the plan and what value, I guess, that brings to CenterPoint here being able to layer that in and how that allows you, I guess, to manage earnings going forward, but it sounds like the capital plan, as you said, really is a big offset there. Christopher Foster: Yes. Certainly, from a capital allocation plan, we've been prefunding thoughtfully. What I would say on the seller note is it's a pretty straightforward instrument there where we'll have that opportunity for the second year to 2027, having that 6.5% coupon associated with it on just over $1 billion. And so it allows us, again, to have good clarity. It also settles on a quarterly basis, I think, which is nice, too. So there's no real lag there. So straightforward instrument, one that it's a helpful component of the plan as well. Operator: Our last question comes from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Jason, quickly, a couple of things to follow up on. First off, I know you alluded to it a few weeks ago here, but how do you think about the AMI and rollout and the time line on that front? I mean, certainly, it seems like this is a multiyear project here. But certainly, within the scope of the 5-year plan, how do you think about the cadence of that rolling in? When do we start to get some visibility around that and contributions? Jason Wells: Yes, Julien, thanks for the question. This next generation of AMI investments really will start to fold into the plan in '26. Maybe taking a step back for a second, as we released the new $65 billion 10-year CapEx plan we identified more than $10 billion of upside. I would consider one of these projects as one of the upside opportunities to that plan. I think coming back to the timing, the most important thing that we can do is run a pilot in '26 to prove the use case and benefits for our customers. And then I would really look at that once we have that pilot in hand, making a filing with the PUCT and really starting to kind of work this project in earnest beginning in 2027 and beyond. I think there are very real benefits for our customers. As we've talked about in the past, when we experienced Winter Storm Uri, because of the generation of meters we had at the time, we could not use those meters for load shed-related activities. Instead, we had to shed load at the circuit level. This next generation of smart meters would allow us to do that at the home and I think would allow us to be much more targeted and allow for even more rolling of power if an event like Winter Storm Uri was to occur again. So a number of benefits to our customers. We need to prove those out with a pilot in '26 and then look towards more fulsome deployment beginning in '27. Julien Dumoulin-Smith: Excellent. And then if I could pivot in a slightly different direction, obviously, kudos on the transaction here. The other item, if I were to think about like what's not in terms of included in the formal guidance on cash flows is mobile gen. I perceive that the economics and price points there continue to improve as evidenced maybe by some of the folks out there like Fermi talking about this. But how would you characterize today where you are around that and the opportunities that exist more in the longer term, obviously, is that it's less committed in terms of the existing units and your exposure to some of that improved market pricing? Jason Wells: Yes. There's really 2 aspects to that, Julien. There's first, we've got what we call medium-sized units, just a little bit larger than 5 megawatts a piece, 5 units, 5 megawatts a piece that currently we have the ability to market and are actively doing that. The market for those units remains very strong and would be a potential cash flow tailwind to the plan. On a larger basis, we have 15 units that are roughly kind of call them, 30 megawatts a piece that are now actively supporting the grid outside of San Antonio until either kind of late '26, early '27 at the latest, at which time then we'll be able to remarket those units. As you said, the market remains strong. If anything, it is improving modestly. That will become a cash flow tailwind when we can release those units from the support of the ERCOT grid in San Antonio and remarket those again probably likely around spring of '27. So we continue to work with brokers, third parties to keep a pulse on the market and think about how we can kind of derisk and take advantage of this growth. But obviously, more to come here as the quarters unfold and as we get closer to those -- the release of those units. Julien Dumoulin-Smith: Excellent. Sorry, nothing to, but one final detail here. HB4384, right? So that's -- your peers in the state, your peer gas utilities in the state have been talking a good bit about this. I know that you all in the interim have talked up even more gas investments in your plan a few weeks ago. Is the scope of the contribution from that legislation fully included in the plan? And to what extent is there anything else that we should be considering here given your expanded investment in gas in recent weeks? Jason Wells: Yes. We think that was a very constructive piece of legislation to help sort of reduce regulatory lag. What I would say is the benefit of that legislation is incorporated in the plan that we released with respect to the investments that we have identified as we continue to look at enhancing the plan, and we've alluded to the $10 billion plus outside, there is opportunity as we fold gas-related capital in that the plan could be enhanced further with the benefit of that legislation. So partially in the plan has the opportunity to be improved as we fold more capital in. Ben Vallejo: Thanks, Jason. Operator, this concludes our call. Thank you all for joining. Operator: This concludes CenterPoint Energy's Third Quarter 202 Earnings Conference Call. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Altisource Portfolio Solutions Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Michelle Esterman, Chief Financial Officer. Please go ahead. Michelle Esterman: Thank you, operator. We first want to remind you that the earnings release and quarterly slides are available on our website at www.altisource.com. These provide additional information investors may find useful. Our remarks today include forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ. Please review the forward-looking statements sections in the company's earnings release and quarterly slides as well as the risk factors contained in our 2024 Form 10-K and our 2025 Form 10-Q filings. These describe some factors that may lead to different results. We undertake no obligation to update statements, financial scenarios and projections previously provided or provided herein as a result of the change in circumstances, new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. In our earnings release and quarterly slides, you will find additional disclosures regarding the non-GAAP measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix to the quarterly slides. Joining me for today's call is Bill Shepro, our Chairman and Chief Executive Officer. I'll now turn the call over to Bill. William Shepro: Thanks, Michelle, and good morning. I'll begin on Slide 4. We delivered solid third quarter performance. We grew service revenue and improved pre- and post-tax GAAP earnings, GAAP earnings per share and cash flow from operations compared to the third quarter of last year. This is largely from our focus on growing our businesses that have tailwinds, cost discipline and lower interest expense. Turning to Slide 5. Compared to the third quarter of last year, we grew total company service revenue by 4% to $39.7 million. Service revenue growth primarily reflects the ramp of the Renovation business and growth in the Lenders One, Foreclosure Trustee, Granite Construction Risk Management and Field Services businesses. The business segments generated $10.9 million of adjusted EBITDA, representing modest growth compared to the third quarter of 2024. The Corporate segment's adjusted EBITDA loss of $7.3 million was slightly higher than the third quarter of last year. Adjusted EBITDA was flat at $3.6 million, primarily from service revenue growth, offset by lower business segment margins from revenue mix. Moving to Slide 6. From a GAAP perspective, our loss before income taxes and noncontrolling interests improved by $6.8 million to a pre-tax loss of $1.7 million in the third quarter of 2025 compared to a pretax loss of $8.5 million in the same quarter of last year. This was primarily driven by lower interest expense from the new debt. For the quarter, we improved operating cash flow by $2.3 million compared to last year. We ended the quarter with $28.6 million in unrestricted cash. In addition to delivering solid financial performance, we are making progress diversifying our customer base and growing the businesses that we believe represent an outsized growth opportunity for Altisource. These businesses, which are set forth on Slides 7 and 8 include Renovation, Granite Construction Risk Management, Lenders One, Hubzu Marketplace, Foreclosure Trustee, Field Services and Title. On these slides, we provide a summary of the opportunities and the progress we are making with each. The success of these initiatives does not depend on an increase in foreclosure starts or sales nor on a growing residential loan origination market. We believe these initiatives represent a strong growth engine for the company. Moving to Slide 9 and our largely countercyclical Servicer and Real Estate segment. Third quarter 2025 service revenue of $31.2 million was 3% higher than the third quarter of '24, primarily from the ramp of the Renovation business and growth in the Foreclosure Trustee, Granite and Field Services businesses, partially offset by fewer home sales in the Marketplace business. Third quarter 2025 adjusted EBITDA of $10 million for the segment was $100,000 or 1% higher than the third quarter of '24. Adjusted EBITDA margins declined to 32.1% from 32.5% from revenue mix with higher growth in the lower-margin Renovation business. Slide 10 provides a summary of our Servicer and Real Estate sales wins and pipeline. For the third quarter, we won new business that we estimate will generate $3.2 million in annual service revenue on a stabilized basis over the next couple of years. We ended the quarter with a Servicer and Real Estate segment estimated total weighted average sales pipeline of $24.4 million of annual service revenue on a stabilized basis. The pipeline includes a few very significant foreclosure auction and REO asset management opportunities that we hope to close in the fourth quarter. Before turning to our Origination segment, I'd like to discuss the status of the Cooperative Brokerage Agreement between Altisource and Rithm, which I'll refer to as the CBA. Under the terms of the CBA, the agreement expired on August 31. At Rithm's discretion, Altisource has continued to manage the REO and receive new referrals with limited exceptions despite the expiration of this agreement. Moving to our Origination segment on Slide 11. Third quarter 2025 service revenue of $8.5 million was 9% higher than the third quarter of 2024. Adjusted EBITDA of $900,000 was flat compared to the same quarter last year, and adjusted EBITDA margins declined to 10.3% from 11.7%. The increase in service revenue primarily reflects growth in the Lenders One business, while the margin decline relates to product mix. Slide 12 provides a summary of our Origination segment sales wins and pipeline. Our focus on helping Lenders One members save money and better compete continues to drive substantial interest in our solutions. On an annualized stabilized basis, we won an estimated $11.2 million in new sales in the third quarter, primarily in our Lenders One business. On a fully stabilized basis, this new business would increase the Origination segment's annualized third quarter service revenue by 33%. We have already onboarded most of these wins and anticipate beginning to benefit from them in the fourth quarter. Our estimated weighted average sales pipeline at the end of the quarter was $13.4 million. We anticipate that our sales pipeline and recent sales wins will contribute to strong growth in our Origination segment. Turning to our Corporate segment on Slide 13. Third quarter 2025 Corporate adjusted EBITDA loss of $7.3 million was $100,000 higher than the third quarter of 2024. We believe that we can maintain relatively stable Corporate segment costs as revenue grows. Moving to Slide 14 and the business environment. Starting with the residential mortgage default market, 90-plus day mortgage delinquency rates remain near historic lows at 1.3% in August. Despite the low delinquency rates, foreclosure starts and sales are increasing. Foreclosure starts increased by 19% and foreclosure sales increased by 10% for the 8 months ended August 2025 compared to the same period in 2024. We believe the increase reflects rising FHA delinquency rates and a weakening real estate market. Borrowers may soon face additional pressure as the April FHA Mortgagee Letter extends the time between loan modifications from every 18 months to every 24 months, beginning as early as October 1. Turning to the real estate market. We believe the market is weakening as demonstrated by higher for-sale inventory, extended sales time lines and rising sale cancellation rates. As a result, we believe a lower percentage of homes are selling to third parties at the foreclosure auctions, driving higher REO inventory. This is supported by our own experience. Altisource's third quarter REO asset management referrals from Onity and Rithm were the highest since the second quarter of 2024. For the origination market, mortgage origination unit volume increased by 17% for the 9 months ended September 30, 2025, compared to the same period in '24, with purchase origination volume declining by 4% and refinance volume increasing by 103%. For the full year, the MBA's October 2025 forecast projects that there will be 5.4 million loans originated in 2025, an 18% increase compared to '24. The MBA's full year projections reflect an 87% increase in refinance activity and a 2% decline in purchase activity. Turning to Slide 15. We are pleased with our third quarter results. More importantly, we are winning new business and have a strong sales pipeline while maintaining cost discipline and significantly reducing corporate interest expense. To support longer-term growth, we are focusing our efforts on accelerating the growth of those businesses that we believe have tailwinds in what remains a close to historically low delinquency environment. Should loan delinquencies, foreclosure starts and foreclosure sales increase, we believe we are well positioned to also benefit from stronger revenue and adjusted EBITDA growth in our largest and most profitable countercyclical businesses. I'll now open up the call for questions. Operator? Operator: [Operator Instructions] And I would now like to turn the call to Michelle for additional questions. Michelle Esterman: So we received an e-mail question. I'll read that. On August 18, the company announced some customer wins for the Equator platform. Are these customer wins expected to translate to more inventory on Hubzu in the future? William Shepro: Yes. Thanks, Michelle. So in August, we announced we won four new customers for the Equator platform. Three of those customers are now live and loading properties and one is in the process of implementing the Equator system. As these customers load more assets, we should begin to generate revenue. And then historically, we've had good success in cross-selling Equator customers with the Hubzu platform and other services, which we would hope to continue to do with some of these newer customers. Operator, is there any additional questions? Operator: [Operator Instructions] And I am showing no further questions. I would now like to hand the call back to Bill for closing remarks. William Shepro: Great. Thank you, operator. We're pleased with our third quarter performance and believe we are set up well for continued growth. Thanks for joining us today. Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect.